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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
['ch'] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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 001-12595
PXRE CORPORATION
(FORMERLY PHOENIX RE CORPORATION)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1183996
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
399 THORNALL STREET
EDISON, NEW JERSEY 08837
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(908) 906-8100
(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 'ch' No
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As of May 9, 1997, 13,917,527 shares of common stock, $.01 par value per
share, of the Registrant were outstanding.
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PXRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 3
Consolidated Statements of Income for the three months
ended March 31, 1997 and 1996 4
Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flow for the three months
ended March 31, 1997 and 1996 6
Notes to Consolidated Interim Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION 26
2
PXRE Consolidated Balance Sheets
Corporation (Unaudited)
- - --------------------------------------------------------------------------------
March 31, December 31,
1997 1996
---- ----
Assets Investments:
Fixed maturities, available-for-sale, at fair value (amortized
cost $430,892,000 and $393,962,000, respectively) $ 425,462,083 $ 394,551,703
Equity securities, at fair value (cost $6,636,000 and $6,850,000) 7,289,367 7,796,392
Short-term investments 95,591,971 59,791,879
------------- -------------
Total investments 528,343,421 462,139,974
Cash 11,921,319 4,938,481
Accrued investment income 6,201,725 5,046,899
Receivables:
Unreported premiums 16,203,504 16,849,578
Balances due from intermediaries and brokers 7,291,518 6,279,368
Other receivables 13,357,496 9,281,392
Reinsurance recoverable 16,768,993 18,065,126
Ceded unearned premiums 5,523,643 3,728,424
Deferred acquisition costs 2,525,019 1,449,050
Income tax recoverable 0 2,204,026
Deferred income tax asset 6,032,999 3,586,489
Other assets 10,684,265 9,755,399
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Total assets $ 624,853,902 $ 543,324,206
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------------- -------------
Liabilities Losses and loss expenses $ 62,023,457 $ 70,977,449
Unearned premiums 26,540,441 11,042,260
Reinsurance balances payable 6,877,492 4,635,449
Notes payable 39,825,000 64,725,000
Income tax payable 4,262,762 0
Payable for securities 6,487,760 0
Contingent commission payable 3,048,696 12,772,478
Excess of fair market value of net assets of TREX 7,268,411 7,942,374
Other liabilities 9,462,035 13,551,418
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Total liabilities 165,796,054 185,646,428
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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 99,511,728 0
Stockholders' Serial preferred stock, $.01 par value -- 500,000 shares authorized;
Equity 0 shares issued and outstanding 0 0
Common stock, $.01 par value -- 40,000,000 shares authorized;
14,773,180 and 14,705,782 shares issued, respectively 147,732 147,058
Additional paid-in capital 254,524,144 252,978,182
Net unrealized (depreciation) appreciation on investments, net of
deferred income tax (benefit) expense of ($1,672,000) and
$306,000 (3,534,972) 568,405
Retained earnings 126,173,809 118,705,257
Treasury stock at cost (848,396 and 750,876 shares) (16,550,982) (14,090,289)
Restricted stock at cost (66,809 and 53,279 shares) (1,213,611) (630,835)
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Total stockholders' equity 359,546,120 357,677,778
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Total liabilities and stockholders' equity $ 624,853,902 $ 543,324,206
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The accompanying notes are an integral part of these statements.
3
PXRE Consolidated Statements of Income
Corporation (Unaudited)
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Three Months Ended
March 31,
1997 1996
---- ----
Revenues Net premiums earned $ 22,299,903 $ 19,420,401
Net investment income 8,954,051 3,911,470
Net realized investment losses (439,208) (74,937)
Management fees : Non-affiliate 915,296 1,765,398
TREX 0 706,828
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31,730,042 25,729,160
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Losses and Losses and loss expenses incurred 2,115,805 4,939,674
Expenses Commissions and brokerage 4,696,511 3,555,589
Other operating expenses 3,881,875 3,184,722
Interest expense 3,050,541 1,717,123
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13,744,732 13,397,108
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Income before income taxes, extraordinary item and
equity in net earnings of TREX 17,985,310 12,332,052
Equity in net earnings of TREX 0 1,293,188
Income tax provision 5,939,450 4,316,000
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Income before extraordinary item 12,045,860 9,309,240
Extraordinary loss on debt redemption,
net of $879,450 income tax benefit 1,633,200 0
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Net income $ 10,412,660 $ 9,309,240
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Per Share Primary:
Income before extraordinary item $ 0.86 $ 1.05
Extraordinary loss 0.12 0
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Net income $ 0.74 $ 1.05
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Average shares outstanding 14,066,463 8,862,762
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Fully diluted:
Income before extraordinary item $ 0.86 $ 1.05
Extraordinary loss 0.12 0
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Net income $ 0.74 $ 1.05
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Average shares outstanding 14,097,320 8,881,863
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The accompanying notes are an integral part of these statements.
4
PXRE Consolidated Statements of Stockholders' Equity
Corporation (Unaudited)
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Three Months Ended
March 31,
1997 1996
---- ----
Common Stock: Balance at beginning of period $ 147,058 $ 89,839
Issuance of shares 674 312
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Balance at end of period $ 147,732 $ 90,151
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Additional Balance at beginning of period $ 252,978,182 $117,668,048
Paid-in Capital: Issuance of common shares 1,368,350 301,014
Other 177,612 157,127
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Balance at end of period $ 254,524,144 $118,126,189
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Unrealized Balance at beginning of period $ $ 568,405 $ 3,782,500
Depreciation Change in fair value for the period (4,103,377) (3,188,942)
on Investments: Equity in net change in TREX depreciation 0 (311,441)
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Balance at end of period $ (3,534,972) $ $282,117
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Retained Balance at beginning of period $ 118,705,257 $ 91,882,834
Earnings: Net income 10,412,660 9,309,240
Dividends paid to common stockholders (2,944,108) (1,574,335)
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Balance at end of period $ 126,173,809 $ 99,617,739
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Treasury Stock: Balance at beginning of period $ (14,090,289) $ (1,719,459)
Repurchase of common stock (2,360,209) (625,000)
Other (100,484) 0
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Balance at end of period $ (16,550,982) $ (2,344,459)
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Restricted Stock: Balance at beginning of period $ (630,835) $ (541,586)
Issuance of restricted stock (741,988) 0
Amortization of restricted stock 159,212 69,912
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Balance at end of period $ (1,213,611) $ (471,674)
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Total Balance at beginning of period $ 357,677,778 $211,162,176
Stockholders' Issuance of common shares 1,369,024 301,326
Equity: Repurchase of common stock (2,360,209) (625,000)
Restricted stock, net (582,776) 69,912
Unrealized depreciation on investments
net of deferred income tax (4,103,377) (3,500,383)
Net income 10,412,660 9,309,240
Dividends (2,944,108) (1,574,335)
Other 77,128 157,127
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Balance at end of period $ 359,546,120 $215,300,063
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The accompanying notes are an integral part of these statements.
5
PXRE Consolidated Statements of Cash Flow
Corporation (Unaudited)
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Three Months Ended
March 31,
1997 1996
---- ----
Cash Flow Net income $10,412,660 $9,309,240
from Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities:
Losses and loss expenses (8,953,992) (7,807,778)
Unearned premiums 13,702,962 5,926,070
Deferred acquisition costs (1,075,969) (387,999)
Receivables (15,422,025) (2,227,317)
Reinsurance balances payable 2,242,043 3,994,147
Reinsurance recoverable 1,296,136 3,277,271
Income tax recoverable 6,644,394 4,980,390
Equity in net earnings of TREX 0 (1,135,966)
Other (3,818,849) (5,280,446)
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Net cash provided by operating activities 5,027,360 10,647,612
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Cash Flow Cost of fixed maturity investments (188,986,480) (19,578,598)
from Investing Fixed maturity investments matured/disposed 152,156,266 5,871,758
Activities Payable for securities 6,487,760 4,863,688
Cost of equity securities (1,641,334) 0
Equity securities disposed 1,855,232 0
Net change in short-term investments (35,800,092) 3,078,031
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Net cash used by investing activities (65,928,648) (5,765,121)
------------ ----------
Cash Flow Proceeds from issuance of common stock 475,068 301,326
from Financing Cash dividends paid to common stockholders (2,944,108) (1,574,335)
Activities Issuance of minority interest in consolidated subsidiary 99,509,000 0
Repurchase of debt (26,795,625) 0
Cost of treasury stock (2,360,209) (625,000)
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Net cash provided (used) by financing activities 67,884,126 (1,898,009)
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Net change in cash 6,982,838 2,984,482
Cash, beginning of period 4,938,481 838,548
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Cash, end of period $ 11,921,319 $3,823,030
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The accompanying notes are an integral part of these statements.
6
PXRE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
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1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying interim consolidated financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP").
These statements reflect the consolidated operations of PXRE Corporation and its
subsidiaries (collectively referred to as "PXRE"), PXRE Reinsurance Company
("PXRE Reinsurance"), PXRE Trading Corporation ("PXRE Trading"), PXRE Capital
Trust I, PXRE Ltd. and PXRE Managing Agency Limited. Operations of PXRE Ltd. and
PXRE Managing Agency Limited will be included in the consolidated results on a
one quarter lag period. In addition, following the merger of PXRE and
Transnational Re Corporation ("TREX"), the consolidated operations include
Transnational Reinsurance Company ("Transnational Reinsurance") and TREX Trading
Corporation ("TREX Trading") since December 11, 1996. During the two years ended
December 31, 1995 and 1994 and the period up to December 11, 1996, PXRE owned
approximately 21% of TREX, which in turn owned 100% of Transnational
Reinsurance, and accounted for this investment under the equity method.
Following the merger, Transnational Reinsurance became a wholly-owned subsidiary
of PXRE Reinsurance. All material transactions between the consolidated
companies have been eliminated in preparing these consolidated financial
statements.
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 period. These
interim statements should be read in conjunction with the 1996 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.
INVESTMENT AT EQUITY
Investments in affiliated companies (20% to 50% owned) are accounted for
under the equity method.
PREMIUMS ASSUMED AND CEDED
Premiums on reinsurance business assumed are recorded as earned on a
pro rata basis over the contract period based on estimated subject premiums.
Adjustments based on actual and subject premium are recorded once ascertained.
The portion of premiums written relating to unexpired coverages at the end of
the period is recorded as unearned premiums. Reinsurance premiums ceded are
recorded as incurred on a pro rata basis over the contract period.
7
PXRE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
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DEFERRED ACQUISITION COSTS
Acquisition costs consist of commissions and brokerage expenses incurred
in connection with contract issuance, net of acquisition costs ceded. These
costs are deferred and amortized over the period in which the related premiums
are earned. Deferred acquisition costs are reviewed periodically to determine
that they do not exceed recoverable amounts after allowing for anticipated
investment income.
MANAGEMENT FEES
Management fees are recorded as earned under various arrangements,
whereby PXRE Reinsurance acts as underwriting manager for other insurers and
reinsurers including TREX, up to the date of its merger with PXRE. These
fees are initially based on premium volume, but are adjusted through contingent
profit commissions related to underwriting results measured over a period of
years.
LOSSES AND LOSS EXPENSE LIABILITIES
Liabilities for losses and loss expenses are established in amounts
estimated to settle incurred losses. Losses and loss expense liabilities are
based on individual case estimates provided for reported losses for known events
and estimates of incurred but not reported losses. Losses and loss expense
liabilities are necessarily based on estimates and the ultimate liabilities may
vary from such estimates. Any adjustments to these estimates are reflected in
income when known. Reinsurance recoverable on paid losses and reinsurance
recoverable on unpaid losses are reported as assets. Reinsurance recoverable on
paid losses represent amounts recoverable from retrocessionaires at the end of
the period for gross losses previously paid. Provisions are established for all
reinsurance recoveries which are considered doubtful.
INVESTMENTS
Fixed maturity investments and unaffiliated equity securities are
considered available-for-sale and are reported at fair value. Unrealized gains
and losses as a result of temporary changes in fair value over the period such
investments are held, are reflected net of income taxes in stockholders' equity.
Unrealized losses which are not temporary are charged to operations. Short-term
investments, which have an original maturity of one year or less are carried at
amortized cost which approximates fair value. Realized gains or losses on
disposition of investments are determined on the basis of specific
identification. The amortization of premiums and accretion of discounts for
fixed maturity investments are computed utilizing the interest method. The
effective yield under the interest method is adjusted for anticipated
prepayments.
8
PXRE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
- - --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of certain assets and liabilities are based on published
market values, if available, or estimates based upon fair values of similar
issues.
LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT AND OTHER ASSETS
Leasehold improvements, furniture and equipment, included in other
assets, are carried at depreciated cost. Depreciation and amortization are
calculated on a straight-line method principally over 15 years. Acquired
insurance licenses are carried at amortized cost.
DEBT ISSUANCE COSTS
Debt issuance costs of $2,850,000 associated with the August 1993
issuance of Senior Notes are being amortized over the term of the related debt
on a straight-line method. Debt issuance costs of $1,940,000 associated with the
January 1997 issuance of $100 million 8.85% Capital Trust Pass-through
Securities'sm' (TRUPS'sm') are being amortized over the term of the related
debt on a straight-line method.
EXCESS OF FAIR MARKET VALUE OF NET ASSETS OF BUSINESS ACQUIRED OVER COST
The excess of fair value of net assets of TREX business acquired over
cost is amortized on a straight-line basis over three years.
FOREIGN EXCHANGE
Foreign currency assets and liabilities are translated at the exchange
rate in effect at the balance sheet date. Resulting gains and losses are
reflected in income for the period.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities reflect the expected future tax
consequences of temporary differences between carrying amounts and the tax bases
of PXRE's assets and liabilities.
EARNINGS PER SHARE
Earnings per share are determined by dividing net earnings by the
weighted average number of shares outstanding of common stock and common stock
equivalents.
9
PXRE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
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STOCK-BASED COMPENSATION
Effective January 1, 1996, PXRE adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"). SFAS No. 123 establishes a "fair value based method" of accounting for
all stock options, but allows for the continued application of the intrinsic
value concept under existing accounting rules prescribed by Accounting
Principles Board Opinion No. 25 ("APB"). PXRE will continue to value its stock
options using the guidance of APB 25, as permitted by SFAS No. 123, but
discloses net income and earnings per share had PXRE valued its stock options
using the fair value based method.
10
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
GENERAL
PXRE Corporation ("PXRE") provides reinsurance products and services to
a domestic and international marketplace, with principal emphasis on commercial
and personal property risks and marine and aerospace risks, and with a
particular focus on catastrophe-related coverages.
PXRE exercises discipline in committing and withholding its underwriting
capacity and altering its mix of business to concentrate its underwriting
capacity at any given point in time on those types of businesses where
management believes that above average underwriting results can be achieved.
PXRE has been pursuing a strategy of focusing on catastrophe-related coverages
in both the international and domestic markets.
PXRE also generates management fee income by managing business for other
insurers and reinsurers, either by accepting additional amounts of coverage on
underwritten risks and retroceding such additional amounts to participants
through various retrocessional arrangements or, in one case, until the merger
with TREX described below, by managing the underwriting and other day-to-day
operations of a publicly-owned reinsurance group.
At March 31, 1997, PXRE was a party to three such retrocessional
arrangements. One such arrangement is with a group of insurers and reinsurers
referred to as the AMA; another is with Trenwick America Reinsurance Corporation
("Trenwick Group"); and a third arrangement is with Investors Reinsurance Ltd.
("Investors Re"), a Barbados reinsurer. Under these arrangements, PXRE cedes
some of its underwritten risks to the participants, subject to maximum aggregate
liabilities per reinsurance program. PXRE receives a management fee or
commission of 5% of premiums ceded (4.2% for Investors Re) and a percentage of
any ultimate underwriting profits in connection with the reinsurance ceded.
Under the arrangements with these participants, such percentage of ultimate
underwriting profits is subject to adjustment based on cumulative experience.
Future management fee income is dependent upon the amount of business ceded to
the participants and the profitability of that business.
In the past, PXRE has entered into other retrocessional arrangements
providing catastrophic protection. In recent years, PXRE has reduced, upon
renewal, its own catastrophe retrocessional facilities and has borne the
associated increase in net exposures. As the cost of catastrophe retrocessional
facilities has declined since 1995, PXRE has again commenced selectively
purchasing such coverage, although PXRE did not purchase any significant
catastrophe retrocessional coverage in the first quarter of 1997.
11
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
In November 1993, PXRE sponsored the initial public offering of
Transnational Re Corporation ("TREX") to raise capital and take advantage of
favorable conditions in the worldwide retrocessional reinsurance market. PXRE,
through PXRE Reinsurance Company ("PXRE Reinsurance"), retained a 21% ownership
position in TREX and had responsibility for the day-to-day operations of TREX,
including all the reinsurance operations of its subsidiary, Transnational
Reinsurance Company ("Transnational Reinsurance") under a management agreement
(the "Management Agreement"). TREX and Transnational Reinsurance had no paid
employees.
Under the terms of the Management Agreement, Transnational Reinsurance
shared in certain specified business of PXRE that is classified as property
retrocessional reinsurance business, marine and aerospace retrocessional
reinsurance or marine and aerospace reinsurance and facultative reinsurance.
Transnational Reinsurance paid PXRE an annual basic management fee under
the Management Agreement equal to 5% of gross premiums written (including
reinstatement premiums less return premiums) of Transnational Reinsurance and
its consolidated subsidiaries (if any) as reflected in Transnational
Reinsurance's statutory quarterly and annual statements filed with state
insurance authorities. TREX and Transnational Reinsurance also paid all expenses
directly attributable to them.
On December 11, 1996, PXRE completed the merger of TREX with and into
PXRE (the "Merger"), pursuant to which each share of common stock of TREX was
converted into the right to receive 1.0575 shares of PXRE common stock. The
Merger resulted from the realization by the management and Boards of Directors
of both PXRE and TREX that conditions had become more competitive in the
retrocessional reinsurance marketplace, and that the reinsurance markets, rating
agencies and the capital markets are placing increased importance on the size
and financial strength of reinsurance companies, which size and financial
strength would be augmented by the Merger. Following the Merger, Transnational
Reinsurance became a wholly-owned subsidiary of PXRE Reinsurance. The Merger has
been accounted for using the purchase method of accounting; therefore net income
of TREX (including Transnational Reinsurance) has been included in PXRE's
consolidated results of operation from the date of acquisition.
CERTAIN RISKS AND UNCERTAINTIES
As a reinsurer principally of property and catastrophe-related coverages
in both the international and domestic markets, PXRE's operating results in any
given period depend to a large extent on the number and magnitude of natural and
man-made catastrophes such as hurricanes, windstorms, floods, earthquakes,
spells of severely cold weather, fires and explosions.
12
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
The estimation of losses for catastrophe reinsurers is inherently less
reliable than for reinsurers of risks which have an established historical
pattern of losses. In addition, insured events which occur near the end of a
reporting period, as well as with respect to PXRE's retrocessional book of
business, the significant delay in losses being reported to insurance carriers,
reinsurers and finally retrocessionaires, require PXRE to make estimates of
losses based on limited information from ceding companies and based on its own
underwriting data. Because of the uncertainty in the process of estimating its
losses from insured events, there is a risk that PXRE's liabilities for losses
and loss expenses could prove to be inadequate, with a consequent adverse impact
on future earnings and stockholders' equity. Additionally, as a consequence of
its emphasis on property reinsurance, PXRE may forgo potential investment income
because property losses are typically settled within a shorter period of time
than casualty losses.
PXRE maintains only minimal catastrophe retrocessional coverage. In view
of the increased underwritings of catastrophe-related reinsurance and the net
exposure being retained by PXRE, the occurrence of one or more major
catastrophes in any given period (such as Hurricanes Andrew and Iniki in 1992
and the Northridge earthquake in 1994) could have a material adverse impact on
PXRE's results of operations and financial condition and result in substantial
liquidation of investments and outflows of cash as losses are paid.
As PXRE underwrites risks from a large number of insurers based on
information generally supplied by reinsurance brokers, there is a risk of
developing a concentration of exposure to loss in certain geographic areas prone
to specific types of catastrophes. PXRE has developed systems and software tools
to monitor and manage the accumulation of its exposure to such losses.
Management has established guidelines for maximum tolerable losses from a single
or multiple catastrophic event based on historical data; however, no assurance
can be given that these maximums will not be exceeded in some future
catastrophe.
Premiums on reinsurance business assumed are recorded as earned on a pro
rata basis over the contract period based upon estimated subject premiums.
Management must estimate the subject premiums associated with the treaties in
order to determine the level of earned premiums for a reporting period. Such
estimates are based on information from brokers which can be subject to change
as new information becomes available. Because of the inherent uncertainty in
this process, there is the risk that premiums and related receivable balances
may turn out to be higher or lower than reported.
Although PXRE's investment guidelines stress conservation of principal,
diversification of risk, and liquidity, investments are subject to market-wide
risks and fluctuations, as well as to risk inherent in particular securities.
Accordingly, the estimated fair value of PXRE's investments does not necessarily
represent the amount which could be realized upon future sale particularly if
PXRE were required to liquidate a substantial portion of its portfolio to fund
catastrophic losses.
13
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
Premium receivables and loss reserves include business denominated in
currencies other than U.S. dollars. PXRE is exposed to the possibility of
significant claims in currencies other than U.S. dollars. While PXRE holds
positions denominated in foreign currencies to mitigate, in part, the effects of
currency fluctuations on its results of operations, it currently does not hedge
its currency exposures before a catastrophic event which may produce a claim.
PXRE relies primarily on cash dividends and net tax allocation payments
from its subsidiaries PXRE Reinsurance and Transnational Reinsurance to pay its
operating expenses, to meet its debt service obligations and to pay dividends to
PXRE's stockholders. The payment of dividends by PXRE Reinsurance to PXRE, and
by Transnational Reinsurance to PXRE Reinsurance, is subject to limits imposed
under the insurance laws and regulations of Connecticut, the state of
incorporation and domicile of PXRE Reinsurance and Transnational Reinsurance, as
well as certain restrictions arising in connection with PXRE's outstanding
indebtedness.
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,
other obligations and to pay cash dividends, it would be necessary to obtain the
approval of the Connecticut Insurance Commissioner prior to the payment of
additional dividends by PXRE Reinsurance (or Transnational Reinsurance). 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.
The reinsurance business is increasingly competitive and is undergoing a
variety of challenging developments. The industry has in recent years moved
toward greater consolidation as ceding companies have placed increased
importance on size and financial strength in the selection of reinsurers.
Additionally, reinsurers are tapping new markets and complementing their range
of traditional reinsurance products with innovative new products which bring
together capital markets and reinsurance experience. PXRE competes with numerous
major international and domestic reinsurance and insurance companies, many of
which have substantially greater financial, marketing and management resources
than PXRE.
14
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
COMPARISON OF FIRST QUARTER RESULTS FOR
1997 WITH 1996
As reported previously, PXRE and TREX merged on December 11, 1996.
Results for the first quarter 1997 therefore reflect the consolidated operations
and business of PXRE and TREX combined, whereas the first quarter 1996 results
under purchase accounting reflect the historical results of PXRE as reported.
For comparative purposes, certain selected pro forma results are also presented
for the first quarter of 1996 as if PXRE and TREX had merged at January 1, 1996.
Three Months Ended March 31,
--------------------------------------------
As Reported Pro Forma
---------------------------------- --------------------
Increase Increase
1997 1996 (Decrease) 1996 (Decrease)
---- ---- --------- ---- ----------
(000's) % (000's) %
Gross premiums written $44,980 $41,854 7.5 $ 55,573 (19.1)
Ceded premiums:
Managed business participants 6,921 8,255 (16.2) 8,255 (16.2)
TREX Management Agreement -0- 7,123 N/A -0- N/A
Catastrophe coverage 2,056 1,130 81.9 1,154 78.2
------- -------- -------
Total reinsurance premiums
ceded 8,977 16,508 (45.6) 9,409 (4.6)
------- ------- -------
Net premiums written $36,003 $25,346 42.0 $46,164 (22.0)
------- ------- -------
------- ------- -------
Earned premiums $22,300 $19,420 14.8 $33,343 (33.1)
Revenues 31,730 25,729 23.3 41,465 (23.5)
Income before extraordinary item 12,046 9,309 29.4 14,653 (17.8)
Net income 10,413 9,309 11.9 14,653 (28.9)
Per share fully diluted:
Before extraordinary item $0.86 $1.05 (18.1) $1.01 (14.9)
Net income $0.74 $1.05 (29.5) $1.01 (26.7)
Fully diluted average shares 14,097 8,882 14,565
outstanding
Net premiums written for the three months ended March 31, 1997 increased
42.0% to $36,003,000 from $25,346,000 for the corresponding period of 1996 as
reported, and decreased 22.0% from $46,164,000 on a pro forma basis in the
corresponding period of 1996. Gross premiums written for the first quarter of
1997 increased 7.5% to $44,980,000 from $41,854,000 for the comparable period of
1996 as reported, and decreased 19.1% from $55,573,000 on a pro forma basis in
the comparable period of 1996. Net premiums earned for the first quarter of 1997
increased 14.8% to $22,300,000 from $19,420,000 in the corresponding period of
1996 as reported, and decreased 33.1% from $33,343,000 in the corresponding
period of 1996 on a pro
15
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
forma basis. Gross written, net written and net earned premiums for the first
quarter of 1997 declined from prior-year levels on a pro forma basis reflecting
a continuation of the increasingly competitive business environment which marked
the past two renewal seasons. Lower reinstatement premiums as a result of
reduced losses, some shift in the mix of retained premiums from quarterly to
semi-annual premium mode, and the accounting effects of experience related
contracts also contributed to these declines. PXRE continued its planned
response to this increasingly competitive environment by withdrawing capacity
from areas of coverage not offering appropriate compensation for the exposure.
Management anticipates that this trend will continue during 1997, although
business written by PXRE's newly established Lloyd's of London syndicate,
PG Butler Syndicate 1224, is expected to partially cushion reductions
elsewhere in PXRE's business. Premium volume and loss experience related
to Syndicate 1224 will be included in the consolidated results on a one
quarter lag basis, commencing with the second quarter of 1997.
Premiums ceded by PXRE to its managed business participants decreased
16.2% to $6,921,000 for the first quarter of 1997 compared with $8,255,000 for
the corresponding period of 1996. The decrease in premiums ceded to these
programs was due to a change in the percentage ceded as agreed with the
participants. During the first quarter of 1996, before the Merger, PXRE ceded
$7,123,000 of premiums to Transnational Reinsurance in lieu of direct
reinsurance writings by Transnational Reinsurance. Management fee income from
all sources for the first quarter of 1997 decreased to $915,000 from $2,472,000
for the corresponding period of 1996 as reported, and from $1,765,000 for the
corresponding period of 1996 on a pro forma basis, reflecting a decline of
premiums ceded to managed business participants, as well as management fee
income of $707,000 earned by PXRE from TREX, before the Merger, in the first
quarter of 1996.
Ceded premiums for catastrophe programs for the first quarter of 1997
increased by approximately $900,000 from the corresponding period of 1996
reflecting PXRE's selective purchases of such coverage because of the attractive
pricing of the coverage purchased.
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 statutory accounting practices ("SAP") and
net premiums earned for purposes of 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 GAAP basis.
16
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
The loss ratio was 9.5% for the first quarter of 1997 compared with
25.4% for the comparable quarter in 1996 as reported, and 25.8% for the
comparable quarter of 1996 on a pro forma basis. The loss ratio for the first
quarter of 1997 reflected a reversal of previously recorded catastrophe losses
of $881,000 gross and $333,000 net for 1997 and prior accident years. In
comparison, the loss ratio for the first quarter of 1996 reflected incurred
catastrophe losses of $1,534,000 gross and $689,000 net for 1996 and prior
accident years as reported. There were no significant catastrophic losses for
the first quarters of 1997 and 1996. However, prior year losses originally
thought to have triggered market loss coverage thresholds have now proven to
be redundant by approximately $1.8 million resulting in the reversal of
recorded losses in the first quarter of 1997.
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 $617,000 for the
first quarter of 1997 compared to a gain of $59,000 for the first quarter of
1996 as reported, and $63,000 on a pro forma basis.
The underwriting expense ratio was 34.4% for the first quarter of 1997
compared with 22.0% for the comparable quarter of 1996 as reported, and 22.6%
for the corresponding period of 1996 on a pro forma basis. The increase was
substantially due to the foreign exchange losses discussed below and, on a pro
forma basis, the decline in premiums earned. As a result of the above, the
combined ratio was 43.9% for the first quarter of 1997 compared with 47.4% for
the corresponding period of 1996 as reported, and 48.4% for the corresponding
period of 1996 on a pro forma basis.
Other operating expenses increased to $3,882,000 for the first quarter
of 1997 from $3,185,000 in the comparable period of 1996 as reported, and
$3,581,000 for the comparable period of 1996 on a pro forma basis. Included in
other operating expenses were foreign currency exchange losses of $729,000 for
the first quarter of 1997 compared to losses of $36,000 for the corresponding
period of 1996 as reported, and $176,000 for the corresponding period of 1996 on
a pro forma basis. Operating expenses were $3,827,000 excluding foreign exchange
losses and amortization of negative goodwill of $674,000 in the first quarter of
1997 compared with $4,079,000 in the first quarter 1996 pro forma results
excluding the same items. This decrease was primarily due to the expiration of
the lease of PXRE's previous corporate headquarters in New York City.
During the first quarter of 1997, interest expense increased to
$3,050,000 as compared to $1,717,000 in the corresponding period in the prior
year as reported. The interest expense is composed of interest on $100 million
of newly-issued 8.85% Capital Trust Pass-through Securities'sm' (TRUPS'sm') (as
described below under "Liquidity and Capital Resources"), resulting in an
additional $1,488,000 of interest expense for the quarter and the effect of the
repurchase of $24.9 million of the PXRE's 9.75% Senior Notes in open market
purchases through the end of the first quarter of 1997, reducing interest
expense on the Senior Notes to $1,562,000 for the quarter.
17
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
Net investment income for the first quarter of 1997 increased 128.9% to
$8,954,000 from $3,911,000 for the same period of 1996. The increase in net
investment income was caused primarily by $2,465,000 of investment income from
TREX, $905,000 from the investment of the net proceeds from the issuance of the
Capital Trust Pass-through Securities and the remainder from increased average
assets and investment in higher yielding investments from the planned
repositioning of the investment portfolio. PXRE's pre-tax investment yield was
6.8% for the first quarter of 1997 compared with 6.1% for the corresponding
period in 1996 as reported, both calculated using amortized cost and investment
income before investment expenses. Net realized investment losses for the
first quarter of 1997 were $439,000 compared to losses of $75,000 for the
corresponding period of 1996. During the first quarter of 1997, PXRE recorded
directly to equity an after-tax unrealized decline of $4,103,000 in value of its
investment portfolio ($0.29 book value per share), reflecting principally the
effect of increasing interest rates during the period.
The net effects of foreign currency exchange fluctuations were losses of
$112,000 in the first quarter of 1997 and gains of $23,000 for the comparable
quarter of 1996. See "Liquidity and Capital Resources."
In the first quarter of 1997, PXRE recorded an extraordinary loss of
$1,633,000, net of tax, in connection with the repurchase of $24.9 million of
PXRE's 9.75% Senior Notes.
Net income for the three months ended March 31, 1996 included $1,293,000
which represented PXRE's approximately 22% equity share of TREX's net earnings
before the Merger.
For the reasons discussed above, net income was $10,413,000 for the
first quarter of 1997 compared to net income of $9,309,000 for the corresponding
quarter of 1996 as reported, and $14,653,000 for the corresponding quarter of
1996 on a pro forma basis. Primary net income per common share was $0.74 for the
first quarter of 1997 compared to net income per common share of $1.05 for the
corresponding quarter of 1996 as reported. Average shares outstanding were
approximately 14,066,500 in the first quarter of 1997, as a result of the
Merger, compared to 8,862,800 in the corresponding quarter of 1996. Fully
diluted net income per common share was $0.74 for the first quarter of 1997
compared to net income per common share of $1.05 for the corresponding quarter
of 1996 as reported, and $1.01 for the corresponding quarter of 1996 on a pro
forma basis based on average shares outstanding of approximately 14,097,300 in
the first quarter of 1997, as a result of the Merger, 8,881,900 in the
comparable quarter of 1996 as reported, and 14,565,300 in the comparable quarter
of 1996 on a pro forma basis.
18
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
PXRE relies primarily on cash dividends and net tax allocation payments
from its subsidiaries PXRE Reinsurance and Transnational Reinsurance to pay its
operating expenses and income taxes, to meet its debt service obligations and to
pay dividends to PXRE stockholders. The payment of dividends by PXRE Reinsurance
to PXRE and by Transnational Reinsurance to PXRE Reinsurance is subject to
limits imposed under the insurance laws and regulations of Connecticut, the
state of incorporation and domicile of PXRE Reinsurance and Transnational
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 to PXRE, and that Transnational Reinsurance may declare or pay to PXRE
Reinsurance, within any twelve-month period, without regulatory approval, is
limited to the lesser of (a) earned surplus or (b) the greater of 10% of
policyholders' surplus at December 31 of the preceding year or 100% of net
income for the twelve-month period ending December 31 of the preceding year, all
determined in accordance with SAP. Accordingly, the Connecticut insurance laws
could limit the amount of dividends available for distribution by PXRE
Reinsurance or Transnational 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 in 1997, without regulatory approval, is
$40,013,000. The maximum amount of dividends or distributions that Transnational
Reinsurance may declare and pay in 1997, without regulatory approval, is
$21,874,000. During the first quarter of 1997, no dividend was approved and paid
by PXRE Reinsurance to PXRE or by Transnational Reinsurance to PXRE Reinsurance.
Other sources of funds available to PXRE include proceeds of financings
not contributed to PXRE Reinsurance and not otherwise utilized and net tax
allocation payments by PXRE Reinsurance and Transnational Reinsurance.
In the event the amount of dividends available, together with other
sources of funds, are not sufficient to permit PXRE to meet its debt service and
other obligations and to pay cash dividends, it would be necessary to obtain the
approval of the Connecticut Insurance Commissioner prior to the payment of
additional dividends by PXRE Reinsurance (or Transnational Reinsurance). 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
19
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
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.
On January 29, 1997, PXRE Capital Trust I, a Delaware statutory business
trust and a wholly-owned subsidiary of PXRE ("PXRE Capital Trust") issued
$100,000,000 principal amount of its 8.85% Capital Trust Pass-through
Securities'sm' (TRUPS'sm') due February 1, 2027 (the "Capital Securities") in
an institutional private placement. Proceeds from the sale of the Capital
Securities were used to purchased PXRE's 8.85% Junior Subordinated Deferrable
Interest Debentures due February 1, 2027 (the "Subordinated Debt Securities").
On April 23, 1997, PXRE and PXRE Capital Trust completed the registration with
the Securities and Exchange Commission of an exchange offer for these
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. Interest expense,
including amortization of debt offering costs, for the first quarter of 1997 in
respect of the Capital Securities (and related Subordinated Debt Securities)
amounted to approximately $1,488,000. Interest expense, including amortization
of offering costs for the institutional private placement, associated with the
Capital Securities (and related Subordinated Debt Securities) will amount to
approximately $8,187,000 in 1997. On or after February 1, 2007, PXRE 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 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), 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's extension of the
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 exercises its right to extend an interest
payment period, then during any Extension Period, subject to certain exceptions,
(i) PXRE shall 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 shall 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 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 may commence a new Extension Period,
subject to certain requirements.
20
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
PXRE expects to use the net proceeds from the sale of the Capital
Securities for general corporate purposes, which may include, from time-to-time,
the redemption or the purchase, from time to time, in the open market or in
privately negotiated transactions or otherwise, of outstanding indebtedness and
common stock of PXRE.
In August 1993, PXRE completed a public offering of $75,000,000
principal amount of 9.75% Senior Notes due August 15, 2003. Interest is payable
on the Senior Notes semi-annually. Interest expense, including amortization of
debt offering costs, for the first quarter of 1997 in respect of the Senior
Notes amounted to approximately $1,562,000. In addition, PXRE incurred an
extraordinary loss of $1,633,000, net of tax, associated with the premium paid
to acquire $24.9 million of the Senior Notes and the pro rata share of the debt
offering costs during the first quarter of 1997. Interest expense, including
amortization of debt offering costs, associated with the Senior Notes will
amount to approximately $4,588,000 for 1997 based on interest expense in the
first quarter of 1997, as well as the Senior Notes outstanding at March 31,
1997. On and after August 15, 1998, the Senior Notes may be redeemed at the
option of PXRE, in whole or in part, at redemption prices (expressed as
percentages of the principal amount), plus accrued and unpaid interest to the
date fixed for redemption, of 103.656% at August 15, 1998, declining to 100% at
August 15, 2001 and thereafter. The Indenture governing the Senior Notes
contains covenants which, among other things, limit the ability of PXRE and its
Restricted Subsidiaries (including PXRE Reinsurance): (a) to incur additional
indebtedness (except for the incurrence of Permitted Indebtedness and the
incurrence of other Indebtedness by PXRE in circumstances where no Default or
Event of Default exists and the Consolidated Fixed Charge Coverage Ratio of PXRE
would be greater than 2:1 after giving effect to the incurrence) and, in the
case of the Restricted Subsidiaries, to issue preferred stock; (b) to pay
dividends, repurchase stock and to make certain other Restricted Payments (other
than, among other things, if no Default or Event of Default exists (x)
Restricted Payments after August 31, 1993, not exceeding in the aggregate the
sum of $3,000,000 plus 50% of Consolidated Net Income (or minus 100% of any
loss) from such date (with certain adjustments), plus the amounts of certain
equity proceeds and certain reductions in Investments in Unrestricted
Subsidiaries, provided, that at the time of such Restricted Payment the
Consolidated Fixed Charge Coverage Ratio is greater than 2.0, and (y) in
addition to permitted Restricted Payments referred to in clause (x), the payment
of cash dividends on Qualified Capital Stock after August 31, 1993 of up to an
aggregate of $6,000,000, provided, that such dividends on common stock do not
exceed $0.25 per share in any year); (c) to sell or permit the issuance of any
stock of PXRE Reinsurance or any other Principal Insurance Subsidiary; (d) to
sell or transfer other assets (other than for at least Fair Market Value and
generally for not less than 75% in cash or Cash Equivalents); (e) to create
liens upon the properties or assets of PXRE or its Restricted Subsidiaries; or
(f) to engage in any business other than the insurance and reinsurance
businesses and other businesses incidental and related thereto. The Indenture
also provides that within 30 days after a Change of Control (as defined) of
PXRE, PXRE will offer to purchase all the Senior Notes then outstanding at a
purchase price equal to 101% of the principal amount thereof, plus
21
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
accrued and unpaid interest, if any, to the date of such purchase. The consent
of holders of PXRE's Senior Notes to certain amendments to the Indenture
governing the Senior Notes was obtained in connection with the private placement
of the Capital Securities.
PXRE's Board of Directors has authorized the repurchase of Senior Notes
in negotiated or open market transactions. During the first quarter of 1997,
PXRE or PXRE Reinsurance had purchased $24.9 million principal amount of Senior
Notes at an average price of 107.6%. From March 31, 1997 until May 9, 1997, PXRE
purchased an additional $16,721,000 principal amount of Senior Notes at an
average price of 107.2%. The principal amount of Senior Notes outstanding at May
9, 1997 was $23,104,000.
PXRE files federal income tax returns for itself and all of its direct
or indirect domestic subsidiaries that satisfy the stock ownership requirements
for consolidation for federal income tax purposes (collectively, the
"Subsidiaries"). PXRE is party to an Agreement Concerning Filing of Consolidated
Federal Income Tax Returns (the "Tax Allocation Agreement") pursuant to which
each Subsidiary makes tax payments to PXRE 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 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
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 (or receive a credit if payments exceed the
separate return tax liability) to PXRE.
The primary sources of liquidity for PXRE Reinsurance are net cash flow
from operating activities (including interest income from investments), the
maturity or sale of investments, borrowings, capital contributions and advances
from PXRE and dividends from Transnational Reinsurance. 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 $5,027,000 during the first
quarter of 1997 compared with net cash flow provided by operations of
$10,648,000 during the corresponding period of 1996 as reported, due to the
effects of timing of collection of receivables and reinsurance recoverables and
payments of losses.
PXRE's management has established general procedures and guidelines for
its investment portfolio and oversees investment management carried out by
Phoenix Duff & Phelps Corporation, a public majority-owned subsidiary of Phoenix
Home Life Mutual Insurance Company. Although these investment guidelines stress
conservation of principal, diversification of risk and liquidity, investments
are subject to market-wide risks and fluctuations, as well as to risk inherent
in particular securities. At March 31, 1997, PXRE's
22
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
investment portfolio consisted primarily of fixed maturities and short-term
investments. As at March 31, 1997, 98.6% of PXRE's investment portfolio, at fair
value, consisted of fixed maturities and short-term investments, while the
balance was in equity securities. The investment policies and all investments of
PXRE are approved by its Board of Directors.
Of PXRE's fixed maturities portfolio at March 31, 1997, 91.2% of the
fair value was in obligations rated "A1" or "A" or better by Moody's Investors
Service Inc. or S&P, respectively. Mortgage and asset-backed securities
(principally GNMAs) accounted for 28.3% of fixed maturities based on fair value
at March 31, 1997. PXRE has no investments in real estate or commercial mortgage
loans. The average market yield to maturity of PXRE's fixed maturities portfolio
at March 31, 1997 and 1996, as reported, was 6.1% and 5.7%, respectively and
5.4% on a pro forma basis. During the first quarter, PXRE repositioned a portion
of its portfolio out of Treasury, GNMA and short-term investments into new
sectors including asset and corporate mortgage-backed securities, emerging
markets securities, tax-free municipals and investment grade Yankee bonds.
Fixed maturity investments are reported at fair value, with the net
unrealized gain or loss, net of tax, reported as a separate component of
stockholders' equity. PXRE recorded directly to equity a $4,103,000 after-tax
unrealized decline in the value of its investment portfolio ($0.29 book value
per share) during the first quarter of 1997 reflecting principally an increase
in interest rates during the period. Short-term investments are carried at
amortized cost, which approximates fair value. PXRE's short-term investments,
principally high-grade commercial paper, were $95,592,000 at March 31, 1997
compared to $59,792,000 at December 31, 1996. The increase at March 31, 1997 was
principally due to the cash inflow arising from the temporary investment of the
proceeds from the issuance of the Capital Securities, which is being redeployed
for general corporate purposes, which may include, from time to time, the
redemption or the purchase in the open market or in privately negotiated
transactions or otherwise, of outstanding indebtedness and common stock of PXRE.
Dividends incurred in the first quarter of 1997 were $2,944,000 compared
to $1,574,000 in the first quarter of 1996, as a result of the increased
quarterly dividend from $0.18 to $0.21 in the fourth quarter of 1996, as well as
the increased number of outstanding shares following the Merger with TREX. The
expected annual dividend based on shares outstanding at March 31, 1997 will be
approximately $11,697,000.
Book value per common share was $25.82 at March 31, 1997.
23
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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As announced in April 1997, PXRE's Board of Directors authorized a new
stock repurchase program for a maximum of 1.9 million of PXRE's outstanding
shares. The share repurchases contemplated by this new program are in addition
to PXRE's previous stock repurchase program, under which PXRE purchased a total
of 632,400 shares of its common stock in the open market. PXRE has not
repurchased any shares to date under the new share repurchase program. At March
31, 1997, PXRE had 13,924,784 common shares outstanding.
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 December 1996, PXRE completed an investment in Lloyd's of London,
forming a new syndicate, PG Butler Syndicate 1224, and a presence in London. The
new syndicate will have an initial capacity to underwrite 'L'35 million in
annual premiums ($57.4 million at March 31, 1997 exchange rates) commencing with
the 1997 renewal season. In connection with the capitalization of the syndicate,
PXRE has placed on deposit $42,975,000 of U.S. government securities 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 U.S.
government securities in approximately the same amount. In addition, PXRE has
provided a 'L'5,000,000 line of credit to PXRE Managing Agency Limited for
liquidity purposes at a cost of 25 basis points.
All amounts classified as reinsurance recoverable at March 31, 1997 are
considered by management of PXRE to be collectible in all material respects.
INCOME TAXES
PXRE's effective tax rate for the first quarter of 1997 and 1996 was
32.7% and 31.8% as reported, respectively, which differs from the statutory rate
principally due to negative goodwill amortization, state and local taxes and
tax-exempt income and in 1996 tax on undistributed earnings of unconsolidated
affiliates.
24
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains various forward-looking statements and
includes assumptions concerning PXRE's operations, future results and prospects.
Statements included herein 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 are based on current expectations
and are subject to risk and uncertainties. PXRE cautions the reader 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 the following: (i) significant catastrophe
losses, 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 the property-casualty reinsurance 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 the development of new products by new and existing competitors);
(iii) changes in the demand for reinsurance, including changes in the amount of
ceding companies' retentions; (iv) adverse development on loss reserves related
to business written in prior years; (v) lower than estimated retrocessional
recoveries on unpaid losses, including the effects of losses due to a decline in
the creditworthiness of PXRE's retrocessionaires; (vi) 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
(vii) 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.
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.
25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
None
26
PART II. OTHER INFORMATION
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 CORPORATION
May 13, 1997 By:/s/ Sanford M. Kimmel
------------------------
Sanford M. Kimmel
Senior Vice President, Treasurer
and Chief Financial Officer
STATEMENT OF DIFFERENCES
------------------------
The checkmark shall be expressed as ..................... 'ch'
The service mark symbol shall be expressed as ............'sm'
The British pound sterling sign shall be expressed as.....'L'