________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-15428
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PXRE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 06-1183996
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
399 THORNALL STREET, 14TH FLOOR
EDISON, NJ 08837
TELEPHONE: (732) 906-8100
(ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, par value $0.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of March 20, 1998 computed by reference
to the closing price of such common equity as of the close of business on March
20, 1998 was $414,767,713. As of March 20, 1998, 13,796,847 shares of the
registrant's common stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of PXRE Corporation's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on June 4, 1998.
Part IV Portions of PXRE Corporation's Proxy Statement dated April 30, 1997.
Part IV Portions of PXRE Corporation's Proxy Statement dated May 3, 1995.
Part IV Portions of PXRE Corporation's Proxy Statement dated April 23, 1993
Part IV Portions of PXRE Corporation's Proxy Statement dated April 12, 1991.
Part IV Portions of PXRE Corporation's Proxy Statement dated April 13, 1990.
PART I
ITEM 1. BUSINESS
INTRODUCTION
PXRE Corporation ('PXRE'), through its wholly-owned subsidiary PXRE
Reinsurance Company ('PXRE Reinsurance'), provides reinsurance products and
services to a national 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 solicits its treaty
and facultative reinsurance business from the worldwide brokerage market. PXRE
also employs its property reinsurance underwriting expertise and generates
management fee income by managing business for other insurers and reinsurers.
See 'Business -- Retrocession Agreements.'
PXRE was organized in July 1986 as a Delaware corporation by Phoenix Home
Life Mutual Insurance Company ('Phoenix Home Life') to succeed, through PXRE
Reinsurance, to the property and casualty reinsurance business carried on since
1982 by Phoenix General Insurance Company, formerly a wholly-owned subsidiary of
Phoenix Home Life. As of March 20, 1998, Phoenix Home Life owned less than 5% of
the outstanding common stock of PXRE.
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, 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'). TREX and Transnational Reinsurance had no paid
employees.
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 were 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 operations from the date of the Merger.
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 has an initial capacity to underwrite `L'35 million in annual
premiums ($57.4 million at December 31, 1997 exchange rates). Underwriting
premium volume and loss experience related to Syndicate 1224's
different mix of business is included in the consolidated results on a one
quarter lag basis, commencing in the quarter ended June 30, 1997. See
'Business -- Lloyd's Syndicate 1224.'
In September 1997, PXRE and Phoenix Home Life completed the formation of a
joint venture, Cat Bond Investors L.L.C. ('Cat Bond Investors'), with an initial
committed capital of $20 million. The joint venture specializes in investing in
instruments the returns on which are determined, in whole or in part, by the
nature, magnitude and/or effect of certain catastrophic events or meteorological
conditions.
In November 1997, PXRE announced the formation of an excess and surplus
lines operation which will specialize in short-tail property type risks to be
written as insurance in Transnational Insurance Company ('Transnational
Insurance'), formerly Transnational Reinsurance. This new venture, with initial
capital of approximately $100 million, is expected to commence its operations
during the first quarter of 1998.
INDUSTRY BACKGROUND
Primary insurers and certain reinsurers (also known as ceding companies)
purchase reinsurance principally to reduce their liability on individual risks,
to protect themselves against catastrophic losses and to enhance their ratio of
total net liabilities to capital and surplus. In consideration for providing
reinsurance, PXRE receives a share of the premiums written by the ceding
company. In certain instances, PXRE in turn purchases reinsurance protection
from other reinsurers pursuant to retrocession agreements and surrenders to
such reinsurers a portion of the premiums it receives from ceding companies.
There are two principal types of reinsurance: facultative reinsurance and
treaty reinsurance. In facultative reinsurance, the reinsurer separately
underwrites each individual risk. In treaty reinsurance, the reinsurer and the
ceding company negotiate a contractual arrangement which reinsures a specified
portion of a type or category of risk. In the underwriting of treaty
reinsurance, the reinsurer does not separately evaluate each individual risk
assumed, as it must in the underwriting of facultative reinsurance, and in
general depends on the original underwriting decisions made by the ceding
company.
Treaty reinsurance can be written on either a pro rata or an excess of loss
basis. In pro rata reinsurance, the reinsurer agrees, in return for a percentage
of the premiums, to share in a proportional amount of the losses up to the
limit, if any, of the reinsurance agreement. Premiums that the ceding company
pays to the reinsurer are proportional to the premiums that the ceding company
receives, and the reinsurer generally pays the ceding company a ceding
commission to reimburse the ceding company for the expenses incurred in
obtaining the business. In excess of loss treaty reinsurance, the reinsurer
indemnifies the ceding company for a portion of the losses on underlying
policies which exceed a specified loss retention amount up to an amount
specified in the reinsurance agreement. Premiums paid by the ceding company for
excess of loss coverage may not
2
be directly proportional to the premiums on the underlying policies because
the reinsurer does not assume a proportional share of the underlying risk.
Excess of loss treaty reinsurance can, in turn, be written on a per risk or
catastrophe basis. Per risk excess of loss reinsurance protects the ceding
company against a loss resulting from a single risk or location. Catastrophe
excess of loss reinsurance protects a ceding company from an accumulation of a
large number of related losses resulting from a variety of risks which may occur
in a given catastrophe, and hence is a highly volatile business.
Retrocessional reinsurance is reinsurance provided by one reinsurer (the
retrocessionaire) to another reinsurer (the ceding company or retrocedent) who
purchases retrocessional reinsurance for reasons similar to those that cause a
primary insurer to purchase reinsurance: principally to reduce its liability on
individual risks, to protect itself against catastrophic losses and to maintain
acceptable regulatory ratios. In consideration for providing reinsurance, a
retrocessionaire receives a share of the premiums written by the ceding company.
While PXRE's retrocessional coverage focuses on the property market, PXRE also
writes marine and aerospace retrocessional reinsurance.
CORPORATE STRATEGY
PXRE's strategy is to commit and withhold its underwriting capacity and to
alter its mix of business to concentrate its underwriting capacity at any given
point in time on those types of business where management believes that above
average underwriting results can be achieved, and to supplement its underwriting
commitments and generate management fee income by managing business for other
insurers and reinsurers.
PXRE has been pursuing a strategy of focusing on catastrophe-related
coverages in both the national and international markets. Catastrophe-related
coverages include catastrophe coverage provided to ceding insurance companies
and retrocessional catastrophe coverage provided to other reinsurers.
Catastrophe-related coverages have represented approximately 68% of PXRE's gross
premiums written as reported during the past three fiscal years. Gross premiums
written are considered domestic (or national) when they represent U.S. based
risks written by U.S. based reinsureds. All other gross premiums written are
considered international (principally the United Kingdom, Continental Europe,
Australia and Asia). Domestic gross premiums written represented approximately
27%, 29% and 29% of total gross premiums written for 1997, 1996 and 1995,
respectively, while international gross premiums written represented 73%, 71%
and 71% of total gross premiums written for those respective periods. See Note
12 of Notes to Consolidated Financial Statements.
PXRE has also been diversifying its sources of business and the types of
risks it underwrites. PXRE's new Lloyd's Syndicate 1224 has an initial capacity
to underwrite `L'35 million in annual premiums ($57.4 million at December 31,
1997 exchange rates), although in the current competitive environment the
syndicate is not expected to utilize its full underwriting capacity.
Syndicate 1224 writes short-tail excess of loss medical coverages and personal
accident business as well as
3
catastrophe-related coverages, marine and aerospace reinsurance and facultative
reinsurance. Transnational Insurance, PXRE's new excess and surplus lines
operation, is expected to commence operations during the first quarter of 1998,
specializing in short-tail property type risks to be written as insurance.
In addition, PXRE has been utilizing its experience with traditional
reinsurance products to evaluate, and where appropriate invest in, through Cat
Bond Investors and otherwise, innovative new products which bring together
capital markets and reinsurance experience.
PXRE's strategy also encompasses repositioning its investment portfolio in
response to market conditions. Consistent with the foregoing, and in light of
the increasingly competitive reinsurance environment, PXRE has been
repositioning its investment portfolio out of U.S. Treasury, GNMA and short-term
investments into new sectors believed by management to possess greater total
return potential.
BUSINESS WRITTEN
Substantially all of the reinsurance that PXRE currently writes is on
property risks, both commercial and personal, and marine and aerospace risks.
(Although PXRE has written some casualty reinsurance in the past, it
substantially reduced its writing of such reinsurance in 1986 and currently
confines its casualty reinsurance activities to the marine and aerospace
business.) Catastrophe coverage by its nature protects both commercial and
personal property risks since such coverage protects a ceding company from an
accumulation of individual losses (commercial and personal) arising from a
catastrophic event. The majority of PXRE's pro rata and risk excess business is
written on commercial property risks.
Treaty reinsurance represents the major portion of PXRE's reinsurance
portfolio. PXRE typically participates in treaties with other reinsurers. PXRE
occasionally will underwrite 100% of a treaty, but it usually underwrites a
substantially smaller percentage. PXRE believes that underwriting treaty
reinsurance on this basis potentially involves less risk in the long-term than
underwriting facultative reinsurance on the basis of an independent re-analysis
of underwritten risks, due to the fact that the risks which generally are
available for facultative reinsurance are usually more difficult to assess and
often protect against more hazardous exposures than those available for treaty
reinsurance. Emphasis on treaty reinsurance also allows PXRE to maintain a
smaller staff than would be necessary to write the same volume of facultative
reinsurance.
4
PXRE's mix of business on a gross premiums written basis is set forth in
the following table for the periods indicated:
DISTRIBUTION OF GROSS PREMIUMS WRITTEN
YEAR ENDED DECEMBER 31,
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AS REPORTED PRO FORMA(1) AS REPORTED
---------------------------------------- ------------------ ------------------
1997 1996 1996 1995
------------------ ------------------ ------------------ ------------------
TYPE OF BUSINESS AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------- -------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Reinsurance:
Treaty:
Catastrophe-Related........... $ 85,285 67.6% $ 78,013 68.2% $100,589 69.8% $105,985 68.2%
Marine & Aerospace............ 11,408 9.0 15,619 13.7 19,644 13.6 26,155 16.8
Risk Excess................... 11,592 9.2 9,278 8.1 12,316 8.6 10,894 7.0
Medical and Other............. 4,328 3.4 -- -- -- -- -- --
Pro Rata...................... 3,305 2.6 3,126 2.7 3,126 2.2 3,427 2.2
Facultative....................... 10,314 8.2 8,312 7.3 8,312 5.8 8.919 5.8
-------- ------- -------- ------- -------- ------- -------- -------
Total................... $126,232 100.0% $114,348 100.0% $143,987 100.0% $155,380 100.0%
-------- ------- -------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- ------- -------- -------
- ------------
(1) As previously reported, PXRE and TREX merged on December 11, 1996. Results
for 1997 therefore reflect the consolidated operations and business of PXRE
and TREX combined, whereas the 1996 results under purchase accounting
reflect the historical results of PXRE as reported, excluding TREX prior to
December 11, 1996. For comparative purposes the distribution of gross
premiums written is also presented for 1996 as if PXRE and TREX had merged
at January 1, 1996.
Although catastrophe-related coverages experienced substantial improvements
in pricing and other terms following high levels of catastrophic loss activity
experienced by the worldwide reinsurance industry, coverage terms have been
deteriorating since the beginning of 1995. In response, PXRE has been moving to
layers of risk that are less affected by competitive pressures, or reducing
commitments when necessary, which has resulted in the contraction in premium
volume for catastrophe-related coverages since 1995.
PXRE also writes marine and aerospace reinsurance, although its premium
volume for these coverages has been contracting since 1995 in response to
increasing competition.
Medical and other constitutes a new line of business derived from PXRE's
Lloyd's Syndicate. Medical consists of short tail excess of loss coverage,
providing protection primarily to U.S. based employer trusts against large
individual claims or an abnormal frequency of claims. "Other" is personal
accident policies sold primarily to individuals or groups in white-collar
occupations, but could include occupational accident carveout reinsurance.
Management has decided to deemphasize pro rata and risk excess business
because competition among reinsurers for such business and the levels of premium
rates charged by primary insurers for property insurance have adversely impacted
the profitability of such business.
5
In addition, pro rata and risk excess business incurred substantial losses from
Hurricane Andrew, reflecting the vulnerability of these lines of business to a
major catastrophic event.
Facultative reinsurance premium volume has not changed significantly during
the period and represented approximately 8% of PXRE's gross premiums written for
1997, compared to 7% (6% on a pro forma basis) in 1996 and 6% in 1995, due to
increased premium volume in 1997 from PXRE's new Lloyd's Syndicate and to the
contraction in premium volumes of other types of business.
RETROCESSIONAL AGREEMENTS
The following table sets forth certain information regarding the volume of
premiums PXRE has ceded to other reinsurers pursuant to retrocessional
agreements for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
AS REPORTED PRO FORMA(1) AS REPORTED
-------------------- ------------ -----------
1997 1996 1996 1995
-------- -------- ------------ -----------
(IN THOUSANDS)
Gross premiums written...................................... $126,232 $114,348 $143,987 $155,380
Reinsurance premiums ceded:
Managed business participants.......................... 16,534 21,238 21,238 26,774
Catastrophe coverage................................... 9,643 5,427 6,145 6,180
TREX Management Agreement(2)........................... 0 19,965 0 24,790
-------- -------- ------------ -----------
Total reinsurance premiums ceded.................. 26,177 46,630 27,383 57,744
-------- -------- ------------ -----------
Net premiums written........................................ $100,055 $ 67,718 $116,604 $ 97,636
-------- -------- ------------ -----------
-------- -------- ------------ -----------
- ------------
(1) As previously reported, PXRE and TREX merged on December 11, 1996. Results
for 1997 therefore reflect the consolidated operations and business of PXRE
and TREX combined, whereas the 1996 results under purchase accounting
reflect the historical results of PXRE as reported, excluding TREX prior to
December 11, 1996. For comparative purposes the volume of premiums PXRE
ceded to other reinsurers is also presented for 1996 as if PXRE and TREX had
merged at January 1, 1996.
(2) Consists of premiums written by PXRE and retroceded to Transnational
Reinsurance as required by the management agreement to which such companies
were parties prior to the Merger. See 'Business -- TREX Management
Agreement.'
---------------------------
PXRE has been able to increase its underwriting commitments and to generate
management fee income by retroceding some of its underwritten risks to other
reinsurers through various retrocessional arrangements whereby it manages
business for such participants. In 1997, PXRE was a party to three such
arrangements. The first such arrangement, which is subject to renewal each
January 1 and which has been renewed effective January 1, 1998, is referred to
as the AMA. The AMA is a pool consisting of a number of insurance companies
(the 'Pool'), for which PXRE
6
acts as reinsurance manager. In 1997, the Pool was comprised of Merrimack
Mutual Fire Insurance Company, Pennsylvania Lumbermens Mutual Insurance Company,
NRMA Insurance Limited and Auto-Owners Insurance Company. It is PXRE's policy
that in order to join the Pool, companies must have a rating by A.M. Best
Company, Inc. ('A.M. Best') of 'A-' or better, other than foreign companies,
most of which (including the foreign participant in the AMA) are not rated by
A.M. Best, an independent insurance industry rating organization which rates
insurance companies upon factors of concern to policyholders. Under the terms of
the agreements governing the Pool, if a participating company's rating falls
below 'A-', it generally will be required to withdraw from the Pool in the
following year. PXRE receives, as reinsurance manager, a commission of 5% of
premiums ceded, as well as a contingent profit commission equal to a percentage
of any ultimate underwriting profits in connection with the reinsurance ceded.
The contingent profit commission is paid over a three-year period and is subject
to adjustment based on cumulative experience.
The second such retrocessional arrangement, which was renewed effective
January 1, 1998, is with Trenwick America Reinsurance Corporation ('Trenwick
Group'). PXRE receives, as reinsurance manager, a management fee of 5% of
premiums ceded, as well as a contingent profit commission equal to a percentage
of any ultimate underwriting profits in connection with the reinsurance ceded.
The contingent profit commission is paid over a three-year period and is subject
to adjustment based on cumulative experience. Trenwick Group is currently rated
'A+ (Superior)' by A.M. Best.
The third such retrocessional arrangement is with Select Reinsurance Ltd.,
a Bermuda reinsurer, formerly Investors Reinsurance Ltd., a Barbados reinsurer
('Select Re'), pursuant to which PXRE has agreed to offer to cede to Select Re a
quota share of PXRE's business and may offer to cede to Select Re additional
risks underwritten by PXRE. Pursuant to this arrangement, PXRE receives an
override commission of 4.2% (5% commencing in 1998) of premiums ceded as well as
a profit commission equal to a percentage of the net profits in respect of the
reinsurance ceded. Because Select Re is not licensed in any jurisdiction in the
United States, the retrocessional arrangement provides that a trust fund,
letters of credit and other security arrangements satisfactory to PXRE be
established by Select Re for the benefit of PXRE to secure Select Re's
obligations.
7
The following table sets forth PXRE's earned commissions from
retrocessionaires pursuant to its three managed business arrangements (not
including Transnational Reinsurance) for the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
Commission................................................................. $ 879 $1,043 $1,376
Contingent profit commission(1)............................................ 2,127 2,477 1,515
------ ------ ------
Total................................................................. $3,006 $3,520 $2,891
------ ------ ------
------ ------ ------
- ------------
(1) Contingent profit commission is paid over a three-year period and is subject
to adjustment based on cumulative experience under the AMA and Trenwick
Group arrangements and is paid annually under the arrangement with Select
Re.
------------------------
PXRE also purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. PXRE increased its purchases of such
coverage in 1997 in light of the continued general deterioration in catastrophe
reinsurance pricing and the opportunity to buy protection at more favorable
terms than in prior years.
PXRE has a committee consisting of its chief executive officer and senior
underwriting executives responsible for the selection of reinsurers as managed
business participants or as participating reinsurers in the catastrophe coverage
protecting PXRE. Proposed reinsurers are evaluated at least annually based on
consideration of a number of factors including the management, financial
statements and the historical experience of the reinsurer. This procedure is
followed whether or not a rating has been assigned to a proposed reinsurer by
any rating organization. All reinsurers, whether obtained through direct
contact or the use of reinsurance intermediaries, are subject to approval by
PXRE.
At December 31, 1997, estimated losses recoverable (including incurred but
not reported losses) from retrocessionaires were $14,242,000 including
$1,509,000 of paid loss recoverables. Since its inception, PXRE has had minimal
amounts of uncollectible reinsurance. It may not be appropriate to extrapolate
future experience from such historical experience. In the event that
retrocessionaires are unable to meet their contractual obligations, PXRE would
be liable for such defaulted amounts.
LLOYD'S SYNDICATE 1224
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 has an initial capacity to underwrite `L'35 million in annual
premiums ($57.4 million at December 31, 1997 exchange rates). Syndicate 1224 has
its own underwriting team and writes short-tail excess of loss medical coverages
and personal accident business as well as catastrophe-related coverages, marine
8
and aerospace reinsurance and facultative reinsurance. PXRE Managing Agency
Limited ('PXRE Managing Agency') the managing agent of PXRE Limited, which
carries on business as a corporate member of Lloyds and sole member of Syndicate
1224, has contracted with third party vendors to provide corporate management
and investment services. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources.'
TREX MANAGEMENT AGREEMENT
From November 8, 1993 until the Merger, PXRE Reinsurance was party to a
management agreement (the 'TREX Management Agreement') with TREX and
Transnational Reinsurance.
Under the terms of the TREX Management Agreement, PXRE Reinsurance had
responsibility for the day-to-day operations of TREX and Transnational
Reinsurance, including all the reinsurance operations of Transnational
Reinsurance. TREX and Transnational Reinsurance had no paid employees.
Under the terms of the TREX Management Agreement, Transnational Reinsurance
shared in certain specified business of PXRE classified as property
retrocessional reinsurance business, marine and aerospace retrocessional
reinsurance or marine and aerospace reinsurance and facultative reinsurance.
Transnational Reinsurance paid PXRE Reinsurance an annual basic management
fee under the TREX Management Agreement equal to 5% of gross premiums written
(including reinstatement premiums less return premiums) of Transnational
Reinsurance 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. PXRE's earned
management fees from Transnational Reinsurance pursuant to the TREX Management
Agreement were $2,512,000 and $3,526,000 for 1996 and 1995, respectively.
LOSS LIABILITIES AND CLAIMS
PXRE establishes losses and loss expense liabilities (to cover expenses
related to settling claims, including legal and other fees) to provide for the
ultimate cost of settlement and administration of claims for losses, including
claims that have been reported to it by its reinsureds and claims for losses
that have occurred but have not yet been reported to PXRE. Under United States
generally accepted accounting principles ('GAAP'), PXRE is not permitted to
establish loss reserves until an event which may give rise to a claim occurs.
For reported losses, PXRE first establishes liabilities when it receives
notice of the claim. It is PXRE's general policy to establish liabilities for
reported losses in an amount equal to the
9
liability set by the reinsured. In certain instances, PXRE will conduct an
investigation to determine if the amount established by the reinsured is
appropriate or if it should be adjusted.
For incurred but not reported losses, a variety of methods have been
developed in the insurance industry for use in determining such liabilities. In
general, these methods involve the extrapolation of reported loss data to
estimate ultimate losses. PXRE's loss calculation methods generally rely upon a
projection of ultimate losses based upon the historical patterns of reported
loss development. Additionally, PXRE makes provision through its liabilities for
incurred but not reported losses for any identified deficiencies in the
liabilities for reported losses set by its reinsureds.
10
The following table provides a reconciliation of beginning and ending loss
and loss expense liabilities under GAAP for the fiscal years ended December 31,
1997, 1996 and 1995. PXRE does not discount such liabilities; that is, it does
not calculate them on a present value basis.
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Gross GAAP liability for losses and loss expenses at beginning of year........... $70,978 $72,719 $81,836
Add: Gross provision for losses and loss expenses --
Occurring in current year................................................... 19,344 27,327 43,388
Occurring in prior years.................................................... (4,721) 10,510 5,982
------- ------- -------
Total gross provision(1)............................................... 14,623 37,837 49,370
------- ------- -------
Less: Gross payments for losses and loss expenses --
Occurring in current year................................................... 4,705 6,469 16,886
Occurring in prior years.................................................... 23,707 42,698 41,601
------- ------- -------
Total gross payments................................................... 28,412 49,167 58,487
------- ------- -------
Gross GAAP liability for losses and loss expenses at end of year................. $57,189 $61,389 $72,719
Add: Gross reserves of TREX at date of Merger(2)................................. -- 9,589 --
------- ------- -------
Total gross liability.................................................. $57,189 $70,978 $72,719
------- ------- -------
------- ------- -------
Ceded GAAP liability for losses and loss expenses at end of year................. (12,734) (27,154) (28,295)
------- ------- -------
Net GAAP liability for losses and loss expenses at end of year................... $44,455 $43,824 $44,424
------- ------- -------
------- ------- -------
Foreign currency adjustment...................................................... 482 (145) (86)
------- ------- -------
------- ------- -------
Gross SAP liability for losses and loss expenses at end of year.................. $57,671 $70,833 $72,633
------- ------- -------
------- ------- -------
- ------------
(1) The GAAP provision for losses and loss expenses includes net foreign
currency exchange gains (losses) of $627,000, ($41,000) and $39,000 for
1997, 1996 and 1995, respectively.
(2) Liabilities assumed from TREX at December 11, 1996.
---------------------------
The following table presents the development of PXRE's GAAP balance sheet
liability for losses and loss expenses for the period 1987 through 1997 for PXRE
and its predecessor. The top line of the table shows the liabilities at the
balance sheet date for each of the indicated years. This reflects the estimated
amounts of losses and loss expenses for claims arising in that year and all
prior years that are unpaid at the balance sheet date, including losses incurred
but not yet reported to PXRE. The upper portion of the table shows the
cumulative amounts subsequently paid as of successive years with respect to the
liability. The lower portion of the table shows the reestimated amount of
previously recorded liability based on experience as of the end of each
succeeding year. The estimates change as more information becomes known about
the frequency and severity of claims for individual years. A redundancy
(deficiency) exists when the reestimated liability at each December 31 is less
(greater) than the prior liability estimate. The 'cumulative redundancy
11
(deficiency)' depicted in the table, for any particular calendar year,
represents the aggregate change in the initial estimates over all subsequent
calendar years.
Each amount in the table below includes the effects of all changes in
amounts for prior periods. For example, if a loss determined in 1991 to be
$150,000 was first reserved in 1988 at $100,000, the $50,000 deficiency (actual
loss minus original estimate) would be included in the cumulative redundancy
(deficiency) in each of the years 1988-1990 shown below. This table does not
present accident or policy year development data.
Loss and loss expense liabilities for fiscal years 1991 through 1997 are
presented on a gross basis (excluding the effects of losses recoverable from
retrocessionaires). Loss and loss expense liabilities for December 31, 1990 and
prior periods are stated on a net basis (after deduction for losses recoverable
from retrocessionaires) because gross incurred but not reported liability data
were not developed by PXRE at any date prior to December 31, 1991 as it was not
required for statutory reporting purposes. Furthermore, it is not practicable
for PXRE currently to reconstruct this information.
12
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Liabilities for losses
and loss expenses...... $57,189 $61,389 $72,719 $81,836 $71,442 $ 88,668 $62,664 $31,632 $37,963 $34,627 $30,301
Cumulative amount of
liability paid through:
One year later....... 23,708 42,698 41,601 37,820 59,773 35,575 15,688 18,421 16,183 11,416
Two years later...... 55,620 58,968 54,400 79,926 48,393 25,466 28,178 21,597 19,107
Three years later.... 67,630 60,850 89,519 52,301 29,066 31,852 23,779 20,673
Four years later..... 64,566 94,261 55,022 30,117 33,980 24,689 21,280
Five years later..... 96,895 56,976 31,528 34,434 25,980 21,783
Six years later...... 58,822 32,137 35,408 26,085 22,632
Seven years later.... 33,202 36,003 26,531 22,724
Eight years later.... 36,980 27,167 22,955
Nine years later..... 27,378 23,435
Ten years later...... 23,466
Liabilities reestimated
as of:
One year later....... 66,257 83,228 87,818 78,188 101,423 67,165 33,874 37,211 31,863 28,663
Two years later...... 85,162 87,750 76,902 103,632 62,262 33,726 37,800 29,506 26,765
Three years later.... 90,409 74,683 105,165 62,827 33,488 36,588 27,944 25,354
Four years later..... 75,392 103,801 63,032 33,682 36,881 27,480 23,829
Five years later..... 104,330 62,593 34,310 37,023 27,751 23,604
Six years later...... 63,632 33,777 37,667 27,878 23,874
Seven years later.... 34,714 37,166 28,063 23,898
Eight years later.... 37,998 27,959 24,018
Nine years later..... 28,065 23,954
Ten years later...... 23,946
Gross reserves of TREX at
date of merger......... 9,589 5,242 2,067 26
Gross cumulative
redundancy (deficiency)
through December 31,
1997:
Amount............... 4,721 (7,201) (6,506) (3,924) (15,662) (968) NA NA NA NA
Percentage........... 7% (9%) (8%) (5%) (18%) (2%) NA NA NA NA
Retrocessional
recoveries......... (804) 6,715 2,220 1,650 3,179 (1,720) NA NA NA NA
Net cumulative redundancy
(deficiency) through
December 31, 1997:
------- ------- ------- ------- ------- -------- ------- ------- ------- ------- -------
Amount............... 3,917 (486) (4,286) (2,274) (12,483) (2,688) (3,082) (35) 6,562 6,355
Percentage........... 7% (1%) (8%) (5%) (35%) (7%) (10%) 0% 19% 21%
13
During 1997, PXRE experienced savings of $3,917,000 net, for prior-year
loss and loss expenses primarily related to the Eurotunnel fire and Hurricane
Fran where redundant reserves were recognized in 1997 of approximately
$1,644,000 and $1,440,000, respectively. In addition, included in the savings of
$3,917,000 were prior-year losses originally thought to have triggered market
loss coverage thresholds which have proven to be redundant by approximately
$1,800,000 offset, in part, by development on prior-year facultative losses.
During 1996, PXRE incurred development from prior year losses amounting to
$3,249,000 primarily due to Hurricanes Marilyn and Luis. During 1995, PXRE
incurred development from prior year losses amounting to $4,311,000 primarily as
a result of losses from the Northridge earthquake. During 1994, PXRE incurred
development from prior year losses amounting to $3,261,000 primarily as a result
of marine pro rata losses and 1993 Midwest flood activity. During 1993, PXRE's
management strengthened the liability for incurred but not reported losses
occurring in prior years by $10,499,000, of which approximately $5,394,000 was
the result of additional information received with respect to Hurricanes Andrew
and Iniki and approximately $3,330,000 was the result of losses under a number
of pro rata reinsurance treaties. During 1992, PXRE's management strengthened
the liability for incurred but not reported losses occurring in prior years by
$2,355,000 of which $2,036,000 was the result of additional information received
with respect to losses under a number of pro rata reinsurance treaties. In 1991,
PXRE's management strengthened the liability for losses and loss expenses
occurring in prior years by $2,242,000, of which $1,196,000 was due to
unfavorable development experienced on PXRE's marine and aerospace reinsurance
business. PXRE commenced writing marine and aerospace reinsurance in 1988 and
estimated the amounts of losses and loss expenses for claims on such business
during 1988 and subsequent periods based on cumulative experience as of such
time. As more information became available, prior estimates were revised.
Approximately $740,000 of the balance of the liability strengthening in 1991 was
attributable to changes in 1991 in the loss amounts applicable to catastrophes
which occurred in 1989 and 1990, years impacted by high levels of catastrophe
loss activity.
Management of PXRE believes that the cumulative reserve redundancy in 1997
demonstrated by the above table, and that the strengthening of reserves in
fiscal years 1991 through 1996, is attributable to the factors described above
and not to any material changes in reserving methods or assumptions. Management
of PXRE further believes that the cumulative reserve redundancies in 1987 and
1988 demonstrated by the above table was attributable principally to significant
changes in primary insurance rates commencing in 1986 and a favorable change in
loss activity during the period.
PXRE's management believes that its overall liability for losses and loss
expenses at December 31, 1997 is adequate. In contrast to casualty losses, which
frequently are slow to be reported and may be determined only through the
lengthy, unpredictable process of litigation, property losses tend to be
reported more promptly and usually are settled within a shorter time period.
However, the estimation of losses for catastrophe reinsurers is inherently less
reliable than for reinsurers of risks which have an established historical
pattern of losses. In addition, insured
14
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
inherent uncertainty in the reserving process, as well as PXRE's writings of a
small amount of casualty reinsurance, there is a risk that PXRE's liability for
losses and loss expenses could prove to be inadequate in any year, with a
consequent adverse impact on future earnings and stockholders' equity. Moreover,
such risk could be exacerbated to the extent management of PXRE forgoes
catastrophe retrocessional coverage. Also, conditions and trends that have
affected reserve development in the past may not necessarily occur in the
future. Accordingly, it would not be appropriate to extrapolate future
redundancies or deficiencies based on the foregoing.
INVESTMENTS
PXRE's management has established general procedures and guidelines for its
investment portfolio and oversees investment management carried out primarily by
Phoenix Duff & Phelps Corporation ('Phoenix Duff & Phelps'), a public
majority-owned subsidiary of Phoenix Home Life. Although these investment
guidelines stress conservation of principal, diversification of risk, and
liquidity, PXRE's invested assets include equities and investments in limited
partnerships, and PXRE's investments are subject to market-wide risks and
fluctuations, as well as to risk inherent in particular securities. As at
December 31, 1997, PXRE's investment portfolio consisted primarily of fixed
maturities and short-term investments. In 1994, PXRE's Board of Directors
approved a resolution allowing PXRE to invest up to 15% of its consolidated
net worth in equities. As at December 31, 1997, PXRE had invested $21,049,000
in equity securities. PXRE also held $42,857,000 of other invested assets at
December 31, 1997 comprised of investments in various limited partnerships
accounted for under the equity method. The investment policies and all
investments of PXRE are approved by its Board of Directors.
15
The following table summarizes the investments of PXRE at December 31, 1997
and 1996:
ANALYSIS OF INVESTMENTS
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Fixed maturities (at amortized cost):
United States government securities.............................. $165,576 32.2% $180,519 39.2%
Foreign government securities.................................... 28,112 5.5 -- --
United States government agency mortgage and asset-backed
securities..................................................... 24,095 4.7 87,861 19.1
Other mortgage and asset-backed securities....................... 72,200 14.1 55,314 12.0
Obligations of states and political subdivisions................. 104,001 20.2 70,268 15.2
Public utilities, industrial and miscellaneous securities........ 5,161 1.0 -- --
-------- ------- -------- -------
Total fixed maturities...................................... 399,145 77.7 393,962 85.5
Equity securities (at cost)........................................... 21,049 4.1 6,850 1.5
Short-term investments (at cost)...................................... 51,049 9.9 59,792 13.0
Other invested assets (at cost)....................................... 42,375 8.3 -- --
-------- ------- -------- -------
Total investments........................................... $513,618 100.0% $460,604 100.0%
-------- ------- -------- -------
-------- ------- -------- -------
16
The following table indicates the composition of PXRE's fixed maturity
investments (at amortized cost), including short-term investments, by time to
maturity at December 31, 1997 and 1996:
COMPOSITION OF INVESTMENTS BY MATURITY
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
MATURITY(1) AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------------------------------------------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
One year or less...................................................... $100,892 22.4% $ 89,868 19.8%
Over 1 year through 5 years........................................... 149,944 33.3 151,500 33.4
Over 5 years through 10 years......................................... 57,660 12.8 58,449 12.9
Over 10 years through 20 years........................................ 20,223 4.5 10,762 2.4
Over 20 years......................................................... 25,180 5.6 -- --
-------- ------- -------- -------
353,899 78.6 310,579 68.5
United States government agency and other mortgage and asset-backed
securities.......................................................... 96,295 21.4 143,175 31.5
-------- ------- -------- -------
Total....................................................... $450,194 100.0% $453,754 100.0%
-------- ------- -------- -------
-------- ------- -------- -------
- ------------
(1) Based on stated maturity dates with no prepayment assumptions.
The average market yield to maturity of PXRE's fixed maturities portfolio
at December 31, 1997 and December 31, 1996 was 6.1% and 5.7%, respectively. At
December 31, 1997, the fair value of PXRE's fixed maturities portfolio exceeded
its amortized cost by $6,805,000. At December 31, 1996, the fair value of PXRE's
fixed maturities portfolio exceeded its amortized cost by $589,000.
17
The following table indicates the composition of PXRE's fixed maturities
portfolio (at amortized cost), excluding short-term investments, by rating at
December 31, 1997 and 1996:
COMPOSITION OF FIXED MATURITIES PORTFOLIO BY RATING
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
RATINGS(1) AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------------------------------------------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
United States government securities................................... $165,576 41.5% $180,519 45.8%
United States government agency mortgage and asset-backed
securities.......................................................... 24,095 6.0 87,861 22.3
Other mortgage and asset-backed securities
Aaa and/or AAA................................................... 57,245 14.4 50,318 12.8
Aa and/or AA..................................................... 12,955 3.2 -- --
Baa2 and/or BBB.................................................. -- -- 4,996 1.3
Ba2 and/or BB.................................................... 2,000 0.5 -- --
Obligations of states and political subdivisions
Aaa and/or AAA................................................... 61,521 15.4 30,726 7.8
Aa and/or AA..................................................... 40,470 10.2 37,511 9.5
A1 and/or A...................................................... 2,010 0.5 2,031 0.5
Public utilities and industrial and miscellaneous securities
Ba2 and/or BB.................................................... 5,161 1.3 -- --
Foreign government securities
Baa1 and/or BBB.................................................. 3,787 0.9 -- --
Ba1 and/or BB.................................................... 16,458 4.1 -- --
B2 and/or B...................................................... 7,867 2.0 -- --
-------- ------- -------- -------
Total....................................................... $399,145 100.0% $393,962 100.0%
-------- ------- -------- -------
-------- ------- -------- -------
- ------------
(1) Ratings as assigned by Moody's Investors Service, Inc. ('Moody's') and
Standard & Poor's Corporation ('S&P'), respectively. Such ratings are
generally assigned upon the issuance of the securities, subject to revision
on the basis of ongoing evaluations.
---------------------------
PXRE's management continually evaluates the composition of the investment
portfolio and repositions the portfolio in response to market conditions in
order to improve returns while maintaining liquidity and superior credit
quality. Consistent with the foregoing, during the first quarter of 1997, PXRE
repositioned a portion of its portfolio out of U.S. 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. During the second and third quarters of 1997,
PXRE further repositioned the portfolio into a number of limited partnership
investments and to a lesser extent equity investments.
18
MARKETING
In the United States, PXRE currently reinsures both national and regional
insurance and reinsurance companies headquartered mainly in the Northeast and
Midwest. PXRE also provides reinsurance for international insurance and
reinsurance companies principally headquartered in the United Kingdom,
Continental Europe, Australia, and Asia.
PXRE obtains most of its facultative business and substantially all of its
treaty business through reinsurance intermediaries which represent reinsureds in
negotiations for the purchase of reinsurance. None of the reinsurance
intermediaries through which PXRE obtains business are authorized to arrange
any business in the name of PXRE without PXRE's approval. PXRE pays such
intermediaries or brokers commissions based on the amount of premiums and type
of business ceded. These payments constitute part of PXRE's total acquisition
costs and are included in its underwriting expenses. PXRE generally pays
reinsurance brokerage fees believed to be comparable to industry norms.
Approximately 26.0%, 17.8% and 11.2% of gross premiums written in fiscal
year 1997 were arranged through the worldwide branch offices of Aon Group Ltd.,
Guy Carpenter & Company, Inc. (subsidiary of Marsh & McLennan Companies, Inc.)
and Benfield Greig Ltd., respectively. The commissions paid by PXRE to these
intermediaries are generally at the same rates as those paid to other
intermediaries.
COMPETITION
The reinsurance industry is highly competitive and is undergoing a variety
of challenging developments. The industry has in recent years moved toward
greater consolidation as ceding companies have placed increased importance on
size and financial strength in the selection of reinsurers. Additionally,
reinsurers are tapping new markets and complementing their range of traditional
reinsurance products with innovative new products which bring together capital
markets and reinsurance experience. PXRE competes with numerous major national
and international reinsurance and insurance companies. These competitors, many
of which have substantially greater financial, marketing and management
resources than PXRE, include independent reinsurance companies, subsidiaries or
affiliates of established worldwide insurance companies, reinsurance departments
of certain commercial insurance companies, and underwriting syndicates. PXRE
also may face competition from new market entrants or from market participants
that determine to devote greater amounts of capital to the types of business
written by PXRE.
Although PXRE obtains most of its facultative business and substantially
all of its treaty business through reinsurance intermediaries or brokers, it
competes indirectly with reinsurers who obtain business directly from primary
insurers because PXRE's brokers must compete with direct reinsurers for business
to be forwarded to PXRE. PXRE therefore competes both with reinsurers that
obtain business directly from reinsureds and with reinsurers that obtain their
business through intermediaries and brokers.
19
Competition in the types of reinsurance business which PXRE underwrites is
based on many factors, including the perceived overall financial strength of the
reinsurers, premiums charged, other terms and conditions, A.M. Best rating,
service offered, speed of service (including claims payment), and perceived
technical ability and experience of staff. The number of jurisdictions in which
a reinsurer is licensed or authorized to do business is also a factor. PXRE
Reinsurance is licensed, accredited, or otherwise authorized or permitted to
conduct reinsurance business in all states (except Arkansas, Hawaii, Kansas,
Minnesota, Missouri, Nebraska, Oklahoma, Tennessee, Vermont and Washington) and
Puerto Rico.
PXRE Reinsurance is rated 'A (Excellent)' by A.M. Best. Management believes
that this rating enhances the competitive position of PXRE Reinsurance. A.M.
Best is an independent insurance rating organization whose ratings are based on
an analysis of the financial condition and operating performance of an insurance
or reinsurance company as they relate to the industry in general. These ratings
represent an independent opinion of a company's financial strength and ability
to meet its obligations to policyholders, although such ratings may not reflect
the considerations applicable to an investment in an insurance or reinsurance
company. A.M. Best reviews its ratings at least annually and there can be no
assurance that this rating will be maintained in the future.
OTHER OPERATIONS
In March 1995, PXRE and TREX entered into a joint venture arrangement to
trade in catastrophe futures and option contracts on the Chicago Board of Trade
(the 'CBOT'). As a result of the Merger, this venture is now wholly-owned by
PXRE, which has committed $5 million to it. Although the venture has developed a
number of trading strategies, the low level of activity in the CBOT market for
catastrophe futures has kept trade volume to a minimum through December 31,
1997.
REGULATION
PXRE, PXRE Reinsurance and Transnational Insurance are subject to
regulation under the insurance statutes of various states, including
Connecticut, the domiciliary state of PXRE Reinsurance and Transnational
Insurance. The regulation and supervision to which PXRE Reinsurance and
Transnational Insurance are subject relate primarily to the standards of
solvency that must be met and maintained, licensing requirements for reinsurers
and insurers, the nature of and limitations on investments, restrictions on the
size of risks which may be insured, deposits of securities for the benefit of a
reinsured or insured, methods of accounting, periodic examinations of the
financial condition and affairs of reinsurers and insurers, the form and content
of reports of financial condition required to be filed, and reserves for losses,
and other purposes. In general, such regulation is for the protection of the
reinsureds and policyholders, rather than investors.
20
In addition, PXRE, PXRE Reinsurance and Transnational Insurance are subject
to regulation by state insurance authorities under the insurance statutes and
insurance holding company statutes of various states, including Connecticut.
These laws and regulations vary from state to state, but generally require an
insurance holding company and insurers and reinsurers that are subsidiaries of
an insurance holding company to register with the state regulatory authorities
and to file with those authorities certain reports including information
concerning their capital structure, ownership, financial condition, and general
business operations. Moreover, PXRE Reinsurance and Transnational Insurance may
not enter into certain transactions, including certain reinsurance agreements,
management agreements, and service contracts, with members of its insurance
holding company system, unless it has first notified the Connecticut Insurance
Commissioner of its intention to enter into any such transaction and the
Connecticut Insurance Commissioner has not disapproved of such transaction
within the period specified by the Connecticut insurance statute. Among other
things, such transactions are subject to the requirements that their terms be
fair and reasonable, charges or fees for services performed be reasonable and
the interests of policyholders not be adversely affected.
State laws also require prior notice or regulatory agency approval of
direct or indirect changes in control of an insurer, reinsurer, or its holding
company, and of certain significant intercorporate transfers of assets within
the holding company structure. An investor who acquires shares representing or
convertible into more than 10% of the voting power of the securities of PXRE
would become subject to at least some of such regulations, would be subject to
approval by the Connecticut Insurance Commissioner prior to acquiring such
shares, and would be required to file certain notices and reports with the
Commissioner prior to such acquisition.
The principal sources of cash for the payment of operating expenses and
income taxes, debt service obligations, and dividends by PXRE are the receipt of
dividends and net tax allocation payments from PXRE Reinsurance and
Transnational Insurance. Under the Connecticut insurance laws, the maximum
amount of dividends or other distributions that PXRE Reinsurance may declare or
pay to PXRE, and that Transnational Insurance 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
policyholder surplus at December 31 of the preceding year, or 100% of net income
for the twelve-month period ended December 31 of the preceding year, all
determined in accordance with statutory accounting principles ('SAP').
Accordingly, the Connecticut insurance laws could limit the amount of dividends
available for distribution by PXRE Reinsurance or Transnational Insurance
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
1998, without regulatory approval, is $57,388,000. During 1997, no dividends
were paid by PXRE Reinsurance to PXRE. During 1997, $58,877,000, including an
extraordinary dividend approved by the Insurance Department of the State of
Connecticut, was paid by Transnational Reinsurance to PXRE Reinsurance with the
objective that Transnational Insurance commence 1998 with
21
approximately $100 million of surplus. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.'
Additionally, Connecticut has adopted regulations respecting certain
minimum capital requirements for property and casualty companies, based upon a
model adopted by the National Association of Insurance Commissioners (the
'NAIC'). The risk-based capital regulations provide for the use of a formula to
measure statutory capital and surplus needs based on the risk characteristics of
a company's products and investment portfolio to identify weakly capitalized
companies. As at December 31, 1997, PXRE Reinsurance's surplus and Transnational
Insurance's surplus substantially exceeded their respective calculated
risk-based capital.
In addition, from time to time various regulatory and legislative changes
have been proposed in the U.S. insurance industry, some of which could have an
effect on reinsurers and insurers. Among the proposals that have in the past
been or are at present being considered are the possible introduction of federal
regulation in addition to, or in lieu of, the current system of state regulation
of insurers, the initiative to create a federally guaranteed disaster
reinsurance pool prefunded by insurers, and proposals in various state
legislatures (some of which proposals have been enacted) to conform portions of
their insurance laws and regulations to various model acts adopted by the NAIC.
Furthermore, the NAIC has commenced a project to codify statutory accounting
practices, the result of which is expected to constitute the only source of
'prescribed' statutory accounting practices. Accordingly, that project, which is
expected to be completed in 1999, will likely change the definitions of what
constitutes prescribed versus permitted statutory accounting practices and will
likely result in changes to the accounting policies that insurance enterprises
use to prepare their statutory financial statements. The NAIC is an organization
which assists state insurance supervisory officials in achieving insurance
regulatory objectives, including the maintenance and improvement of state
regulation. PXRE is unable to predict what effect, if any, the foregoing
developments may have on its operations and financial condition in the future.
The NAIC's Insurance Regulatory Information System ('IRIS') was developed
by a committee of state insurance regulators and is primarily intended to assist
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies eleven industry ratios and specifies 'usual values' for each
ratio. Departure from the usual values on four or more of the ratios can lead to
inquiries from individual state insurance commissioners as to certain aspects of
an insurer's business. For the years ended December 31, 1997, 1996 and 1995,
PXRE Reinsurance's results were within the usual values for each of the 11
ratios, except for one ratio in 1996. PXRE's management believes this ratio fell
outside the usual range in 1996 due to the increase in surplus after
Transnational Reinsurance became a wholly-owned subsidiary of PXRE Reinsurance.
During this period, Transnational Reinsurance's results were within the usual
values for each of the 11 ratios except for 2 ratios in 1997, when Transnational
Reinsurance did not write any business and paid a dividend, including an
extraordinary dividend, of $58,877,000 to PXRE Reinsurance, affecting the change
in net writings ratio and change in surplus ratio.
22
PXRE Limited, PXRE Managing Agency and Syndicate 1224 are subject to
regulation by Lloyd's of London. The form of that regulation is prescribed by
the Lloyd's Act of 1982 and Lloyd's internal regulatory by-laws and directions.
The regulation and supervision to which PXRE Limited is subject relates
primarily to the maintenance of a risk based capital requirement (by way of a
deposit of securities and a letter of credit with Lloyd's to support its
underwriting) and methods of accounting. PXRE Managing Agency must satisfy a
solvency requirement, methods of accounting and periodic examinations of
compliance with Lloyd's by-laws and other purposes. Syndicate 1224 has to comply
with accounting regulation, internal reporting and periodic examinations of
compliance. The U.K. Government has recently announced that the Lloyd's market
will be regulated externally by the Financial Services Authority, although the
day to day regulation of the market will remain the jurisdiction of the Council
of Lloyd's.
EMPLOYEES
PXRE employs 58 full-time employees. None of PXRE's employees is
represented by a labor union, and management considers its relationship with its
employees to be excellent.
ITEM 2. PROPERTIES
PXRE leases a total of approximately 28,400 square feet of office space in
Edison, New Jersey (PXRE's corporate headquarters), New York, New York (a
satellite office), London, England and Brussels, Belgium. The Edison, New Jersey
lease, which covers approximately 24,000 square feet of office space, was signed
in 1994 and is for a term of 15 years at a fixed annual rent of approximately
$370,000 (inclusive of basic electricity) and additional rents on account of
PXRE's proportionate share of increases in building operating expenses and
property taxes over calendar year 1994.
ITEM 3. PENDING LEGAL PROCEEDINGS
PXRE is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of PXRE's 1997 fiscal year.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since December 31, 1996, PXRE's common stock has been listed on the New
York Stock Exchange under the symbol 'PXT'. Prior to December 31, 1996, PXRE's
common stock was traded on The NASDAQ Stock Market under the symbol 'PXRE'. The
following table sets forth for the periods indicated the high and low bid
quotations for PXRE's common stock as reported by the New York Stock Exchange
since December 31, 1996 and NASDAQ prior to December 31, 1996 and cash dividends
per share of common stock declared and subsequently paid:
BID PRICE
----------------
HIGH LOW DIVIDENDS
------ ------ ---------
1996:
First Quarter....................................................... $ 28.00 $ 24.00 $0.18
Second Quarter...................................................... 27.00 23.75 0.18
Third Quarter....................................................... 24.50 22.25 0.18
Fourth Quarter...................................................... 25.50 22.875 0.21
1997:
First Quarter....................................................... 26.875 24.50 0.21
Second Quarter...................................................... 31.438 24.75 0.21
Third Quarter....................................................... 31.688 29.50 0.21
Fourth Quarter...................................................... 34.00 29.563 0.25
These prices represent quotations by dealers and do not include markups,
markdowns, or commissions, and do not necessarily represent actual transactions.
As of March 20, 1998, there were 13,796,847 shares of the common stock issued
and outstanding, which shares were held by approximately 160 shareholders of
record and, based on PXRE's best information, approximately 2,000 beneficial
owners of the common stock. See Notes 10 and 11 of Notes to Consolidated
Financial Statements for information with respect to shares reserved for
issuance under employee benefit and stock option plans.
Beginning in the fourth quarter of 1989, PXRE has each quarter declared and
subsequently paid cash dividends on its common stock. The dividend rate, which
initially was $0.05 per share, was increased in the fourth quarter of 1993 to
$0.075 per share, in the fourth quarter of 1994 to $0.15 per share, in the
fourth quarter of 1995 to $0.18 per share, in the fourth quarter of 1996 to
$0.21 per share and in the fourth quarter of 1997 to $0.25 per share.
The payment of dividends on the common stock is subject to the discretion
of the Board of Directors which will consider, among other factors, PXRE's
operating results, overall financial
24
condition, capital requirements and general business conditions. There can be
no assurance that dividends will be paid in the future.
As a holding company, PXRE is largely dependent upon dividends and net tax
allocation payments from PXRE Reinsurance and Transnational Insurance to pay
dividends to PXRE's shareholders. PXRE Reinsurance and Transnational Insurance
are subject to state laws that may restrict their ability to distribute
dividends. In addition, certain covenants in the indenture governing PXRE's
Senior Notes may restrict PXRE's ability to pay dividends. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources' and 'Business -- Regulation' for
further information concerning restrictions contained in the indenture governing
PXRE's Senior Notes and under state insurance law.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997(1) 1996(1) 1995 1994 1993(2)(3)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
Income Statement Data:
Gross premiums written.......................... $126,232 $114,348 $155,380 $179,684 $116,975
Premiums ceded.................................. (26,177) (46,630) (57,744) (71,166) (39,469)
-------- -------- -------- -------- --------
Net premiums written............................ 100,055 67,718 97,636 108,518 77,506
Change in unearned premiums..................... (8,640) 5,078 (494) 2,083 1,422
-------- -------- -------- -------- --------
Net premiums earned............................. 91,415 72,796 97,142 110,601 78,928
Net investment income........................... 31,191 16,782 14,730 13,786 8,011
Net realized investment gains (losses).......... 2,467 94 85 (1,164) (1,526)
Gain on sale of subsidiary(2)................... -- -- -- -- 10,564
Management fee(1)............................... 3,006 6,032 6,417 6,992 3,158
-------- -------- -------- -------- --------
Total revenues............................. 128,079 95,704 118,374 130,215 99,135
-------- -------- -------- -------- --------
Losses and loss expenses incurred............... 12,491 18,564 34,716 52,647 40,570
Commissions and brokerage....................... 19,138 12,874 13,251 15,026 13,339
Other operating expenses........................ 15,716 12,262 11,237 8,365 8,917
Interest expense................................ 3,325 6,957 7,143 7,789 2,740
Minority interest in consolidated subsidiary.... 8,184 -- -- -- --
-------- -------- -------- -------- --------
Total losses and expenses.................. 58,854 50,657 66,347 83,827 65,566
-------- -------- -------- -------- --------
Income before income taxes, extraordinary item
and equity in net earnings of TREX............ 69,225 45,047 52,027 46,388 33,569
Equity in net earnings of TREX(2)............... 0 3,898 5,948 4,141 84
Income tax provision............................ 22,198 15,644 18,189 15,700 11,008
-------- -------- -------- -------- --------
Net income (before extraordinary loss).......... 47,027 33,301 39,786 34,829 22,645
Extraordinary loss on debt redemption, net of
tax........................................... 2,774 -- -- -- --
-------- -------- -------- -------- --------
Net income...................................... $ 44,253 $ 33,301 $ 39,786 $ 34,829 $ 22,645
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Preferred stock dividend(4)..................... 0 0 599 2,005 2,056
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income available to common stockholders..... $ 44,253 $ 33,301 $ 39,187 $ 32,824 $ 20,589
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
(table continued on next page)
25
(table continued from previous page)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997(1) 1996(1) 1995 1994 1993(2)(3)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
Ratio of earnings to fixed charges(5)........... 6.59 7.15 7.90 6.73 12.12
Ratio of earnings to combined fixed charges and
preferred dividends(5)........................ 6.59 7.15 7.04 4.90 6.02
Basic earnings per common share:
Net income (before extraordinary item)..... $ 3.41 $ 3.73 $ 4.81 $ 4.99 $ 3.47
Extraordinary loss......................... 0.20 -- -- -- --
-------- -------- -------- -------- --------
Net income................................. $ 3.21 $ 3.73 $ 4.81 $ 4.99 $ 3.47
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Average common shares outstanding(4)....... 13,776 8,922 8,150 6,580 5,940
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted earnings per common share:
Net income (before extraordinary item)..... $ 3.39 $ 3.69 $ 4.52 $ 3.99 $ 2.75
Extraordinary loss......................... 0.20 -- -- -- --
-------- -------- -------- -------- --------
Net income................................. $ 3.19 $ 3.69 $ 4.52 $ 3.99 $ 2.75
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Average common shares outstanding(1)....... 13,893 9,020 8,812 8,719 8,240
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Cash dividends per common share................. $ 0.88 $ 0.75 $ 0.63 $ 0.375 $ 0.225
Other Operating Data:
GAAP loss ratio(6).............................. 13.7% 25.5% 35.7% 47.6% 51.4%
GAAP underwriting expense ratio(6).............. 34.8% 26.2% 18.6% 14.8% 24.21%
-------- -------- -------- -------- --------
GAAP combined ratio(6).......................... 48.5% 51.7% 54.3% 62.4% 75.6%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
AS OF DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
Balance Sheet Data:
Cash and investments............................ $527,738 $467,078 $269,089 $231,789 $248,949
Total assets.................................... 608,952 543,324 393,465 353,794 349,251
Losses and loss expenses........................ 57,189 70,977 72,719 81,836 71,442
Minority interest in consolidated subsidiary.... 99,513 -- -- -- --
Notes payable................................... 21,414 64,725 67,775 69,700 75,000
Total stockholders' equity...................... 386,688 357,678 211,162 166,771 142,690
Book value per common share..................... $ 28.10 $ 25.63 $ 24.15 $ 21.27 $ 18.06
Statutory capital and surplus of PXRE
Reinsurance................................... $451,321 $400,133 $250,231 $211,988 $185,844
- ------------
(1) On December 11, 1996, PXRE merged with TREX. The Merger has been accounted
for as a purchase. Accordingly, TREX has been included in PXRE's
consolidated results of operations from the date of acquisition, which
resulted in incremental earnings of $1,253,000 in 1996. For the period from
January 1, 1996 until December 11, 1996, PXRE
(footnotes continued on next page)
26
(footnotes continued from previous page)
recorded equity in net earnings of TREX amounting to $3,898,000. Diluted
average shares outstanding reflects the 5,680,256 weighted shares issued
to holders of TREX common shares in connection with the Merger. Included
in management fee was $2,512,000, $3,526,000 and $3,364,000 in 1996, 1995
and 1994, respectively, earned from TREX prior to the Merger. If the Merger
had taken place at the beginning of 1996 and 1995, consolidated revenues
would have been $153,410,000 and $193,972,000 for 1996 and 1995,
respectively. Consolidated pro forma net income and diluted net income per
share would have been $49,161,000 and $3.42 in 1996 and $60,755,000 and
$4.19 in 1995. Such pro forma amounts are not necessarily indicative of
what the actual consolidated results might have been if the Merger had been
effected prior to December 11, 1996.
(2) Until the fourth quarter of 1993, Transnational Reinsurance was a
wholly-owned subsidiary of PXRE Reinsurance. On November 1, 1993, a
registration statement relating to an initial public offering (the
'Offering') by TREX was declared effective. In conjunction with the
formation of TREX, all of the outstanding capital stock of Transnational
Reinsurance was contributed by PXRE Reinsurance to TREX in exchange for the
issuance of 1,535,848 shares of TREX's Class B common stock which caused
PXRE Reinsurance's holdings of TREX's Class B common stock to constitute
approximately 21% of all of the outstanding common stock of TREX immediately
after the Offering. As a result of this transaction, PXRE recorded a gain on
sale in the fourth quarter of 1993 amounting to $10,564,000 on a pre-tax
basis, representing the difference between PXRE Reinsurance's interest in
the net assets of Transnational Reinsurance immediately after the Offering
and the historical book value of its investment in Transnational
Reinsurance. Subsequent to the Offering until December 11, 1996, PXRE
accounted for its investment in TREX on the equity method as described in
Note 1.
(3) During the second quarter of 1992, PXRE completed an offering of 1,059,800
depository shares, each representing 1/100 of a share of PXRE's Series A
Cumulative Convertible Preferred Stock. The net proceeds of $24,403,000 were
contributed to PXRE Reinsurance's surplus. During the first quarter of 1993,
PXRE completed an offering of 2,300,000 shares of common stock. The net
proceeds of $46,942,000 (except for $5,000,000 which was retained by PXRE
for general corporate purposes) were contributed to PXRE Reinsurance's
surplus. During the third quarter of 1993, PXRE completed an offering of
$75,000,000 principal amount of 9.75% Senior Notes due 2003. The net
proceeds of $72,150,000 (except for approximately $3,938,000 which was used
by PXRE to repay all amounts outstanding under and retire a term loan
facility and $15,000,000 which was retained by PXRE to provide support for
debt service on the Senior Notes) were contributed to PXRE Reinsurance's
surplus.
(4) During 1995, all of the outstanding shares of Series A Preferred Stock were
converted into shares of PXRE's common stock. To 1995, these convertible
preferred shares were the principal reason for the difference between basic
and diluted earnings per share.
(5) The historical ratios of earnings to fixed charges were determined by
dividing consolidated earnings by total fixed charges. For purposes of these
computations (i) earnings consist of consolidated income before considering
income taxes, fixed charges and minority interest and (ii) fixed charges
consist of interest on indebtedness and that portion of rentals which is
deemed by PXRE's management to be an appropriate interest factor. The
historical ratios of earnings to combined fixed charges and preferred
dividends were determined by dividing consolidated earnings by total fixed
charges and preferred dividends.
(6) The loss, underwriting expense and combined ratios included under 'Other
Operating Data' have been derived from the audited consolidated statements
of income of PXRE prepared in accordance with GAAP.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
PXRE provides reinsurance products and services to a national 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 business 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
national and international 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 December 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 Group; and a third arrangement
is with Select Re. 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 Select Re prior to 1998) 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.
PXRE also purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. PXRE has increased its purchases of
such coverage in light of the continued general deterioration in catastrophe
reinsurance pricing and the opportunity to buy protection at more favorable
terms than in recent years.
28
In November 1993, PXRE sponsored the initial public offering of TREX to
raise capital and take advantage of favorable conditions in the worldwide
retrocessional reinsurance market. PXRE, through PXRE Reinsurance, retained a
21% ownership position in TREX and had responsibility for the day-to-day
operations of TREX, including all the reinsurance operations of its subsidiary,
Transnational Reinsurance, under the TREX Management Agreement. TREX and
Transnational Reinsurance had no paid employees.
Under the terms of the TREX Management Agreement, Transnational Reinsurance
shared in certain specified business of PXRE 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 TREX Management Agreement equal to 5% of gross premiums written (including
reinstatement premiums less return premiums) by Transnational Reinsurance 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 were 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 the Merger.
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.
Underwriting premium volume and loss experience related to Syndicate 1224's
different business mix is included in the consolidated results on a one quarter
lag basis, commencing in the quarter ended June 30, 1997. See 'Liquidity and
Capital Resources.'
In November 1997, PXRE announced the formation of an excess and surplus
lines operation which will specialize in short-tail property type risks to be
written as insurance in Transnational Insurance Company ('Transnational
Insurance'), formerly Transnational Reinsurance. Its operations are expected to
commence during the first quarter of 1998.
29
CERTAIN RISKS AND UNCERTAINTIES
As a reinsurer principally of property catastrophe-related coverages in
both the national and international 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. While PXRE may, depending
on market conditions, purchase catastrophe retrocessional coverage for its own
protection, the occurrence of one or more major catastrophes in any given period
could nevertheless have a material adverse impact on PXRE's results of
operations and financial condition and result in substantial liquidation of
investments and outflows of cash as losses are paid.
The estimation of losses for catastrophe reinsurers is inherently less
reliable than for reinsurers of risks which have an established historical
pattern of losses. In addition, insured events which occur near the end of a
reporting period, as well as with respect to PXRE's retrocessional book of
business, the significant delay in losses being reported to insurance carriers,
reinsurers and finally retrocessionaires require PXRE to make estimates of
losses based on limited information from ceding companies and based on its own
underwriting data. Because of the uncertainty in the process of estimating its
losses from insured events, there is a risk that PXRE's liabilities for losses
and loss expenses could prove to be inadequate, with a consequent adverse impact
on future earnings and stockholders' equity. Additionally, as a consequence of
its emphasis on property reinsurance, PXRE may forgo potential investment income
because property losses are typically settled within a shorter period of time
than casualty losses.
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(s) 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.
30
Although PXRE's investment guidelines stress conservation of principal,
diversification of risk and liquidity, PXRE's invested assets include equities
and investments in limited partnerships, and PXRE's 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.
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 Insurance 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 Insurance 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 Insurance, 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, its 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 Insurance). 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 national and international reinsurance and insurance companies, many of
which have substantially greater financial, marketing and management resources
than PXRE.
COMPARISON OF 1997 WITH 1996
As reported previously, PXRE and TREX merged on December 11, 1996. Results
for 1997 therefore reflect the consolidated operations and business of PXRE and
TREX combined, whereas the 1996 results under purchase accounting reflect the
historical results of PXRE as reported,
31
excluding TREX. For comparative purposes, certain selected pro forma results
are also presented for 1996 as if PXRE and TREX had merged at January 1, 1996.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
AS REPORTED PRO FORMA
-------------------- ----------------------
INCREASE INCREASE
1997 1996 (DECREASE) 1996 (DECREASE)
-------- -------- ---------- -------- ----------
(000'S) % (000'S) %
Gross premiums written.............................. $126,232 $114,348 10.4 $143,987 (12.3)
Ceded premiums:
Managed business participants.................. 16,534 21,238 (22.1) 21,238 (22.1)
TREX Management Agreement...................... 0 19,965 N/A 0 N/A
Catastrophe coverage........................... 9,643 5,427 77.7 6,145 56.9
-------- -------- --------
Total reinsurance premiums ceded.......... 26,177 46,630 (43.9) 27,383 (4.4)
-------- -------- --------
Net premiums written................................ $100,055 $ 67,718 47.8 $116,604 (14.2)
-------- -------- --------
-------- -------- --------
Earned premiums..................................... $ 91,415 $ 72,796 25.6 $123,042 (25.7)
Revenues............................................ 128,079 95,704 33.8 153,410 (16.5)
Income before extraordinary loss.................... 47,027 33,301 41.2 49,161 (4.3)
Net income.......................................... 44,253 33,301 32.9 49,161 (10.0)
Per share diluted:
Before extraordinary loss...................... $ 3.39 $ 3.69 (8.1) $ 3.42 (0.9)
Net income..................................... $ 3.19 $ 3.69 (13.6) $ 3.42 (6.7)
Diluted average shares outstanding.................. 13,893 9,020 14,389
Gross premiums written for 1997 increased 10.4% to $126,232,000 from
$114,348,000 for the corresponding period of 1996 as reported and decreased
12.3% from $143,987,000 on a pro forma basis in the corresponding period of
1996. Net premiums earned for the year ended December 31, 1997, increased 25.6%
to $91,415,000 from $72,796,000 for the comparable period of 1996 as reported,
and decreased 25.7% from $123,042,000 on a pro forma basis in the corresponding
period of 1996. Net premiums written for the year ended December 31, 1997,
increased 47.8% to $100,055,000 from $67,718,000 for the corresponding period of
1996 as reported, and decreased 14.2% from $116,604,000 in the corresponding
period of 1996 on a pro forma basis. Gross written, net written and net earned
premium for 1997 declined from prior-year levels on a pro forma basis reflecting
a continuation of the increasingly competitive business environment which has
marked recent renewal seasons. Lower reinstatement premiums as a result of
reduced losses and additional reinsurance purchased at favorable rates
contributed to these declines. PXRE continued its planned
32
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 1998, although
business written by PXRE's newly-established Lloyd's syndicate (PG Butler
Syndicate 1224) has partially cushioned reductions elsewhere in PXRE's business.
Underwriting premium volume and loss experience related to Syndicate 1224 is
included in the consolidated results on a one quarter lag basis, commencing in
the second quarter of 1997.
Premiums ceded by PXRE to its managed business participants decreased 22.1%
to $16,534,000 for 1997 compared with $21,238,000 for the corresponding period
of 1996. The decrease in premiums ceded to these programs was due to reduced
amounts of premiums written by PXRE and a change in the percentage ceded as
agreed with the participants. During 1996, before the Merger, PXRE ceded
$19,965,000 of premiums to Transnational Reinsurance in lieu of direct
reinsurance writings by Transnational Reinsurance. During 1997 PXRE increased
its purchases of catastrophe retrocessional coverage for its own protection in
light of the continued general deterioration in catastrophe reinsurance pricing
and the opportunity to buy protection at more favorable terms than in recent
years.
Management fee income from all sources for 1997 decreased to $3,006,000
from $6,032,000 for the corresponding period of 1996 as reported, reflecting a
decline of premiums ceded to managed business participants, as well as
management fee income of $2,512,000 earned by PXRE from TREX, before the Merger,
in 1996. Management fee income decreased to $3,006,000 for 1997 from $3,520,000
for the corresponding period of 1996 on a pro forma basis, reflecting the
decreased amount of ceded premium, offset in part by more profitable business.
The underwriting results of a property and casualty insurer are discussed
frequently by reference to its loss ratio, underwriting expense ratio and
combined ratio. The loss ratio is the result of dividing losses and loss
expenses incurred by net premiums earned. The underwriting expense ratio is the
result of dividing underwriting expenses (reduced by management fees, if any) by
net premiums written for purposes of 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.
The loss ratio was 13.7% for 1997 compared with 25.5% for 1996 as reported,
and 28.8% for 1996 on a pro forma basis. The loss ratio for 1997 reflected a
reversal of catastrophe losses of $1,457,000 gross and $964,000 net for 1997 and
prior accident years, after taking into account, among other things, the German,
Poland and Czech flood losses referred to below. In comparison, the loss ratio
for 1996 reflected incurred catastrophe losses of $18,487,000 gross and
$9,166,000 net for 1996 and prior accident years as reported, and $27,522,000
gross and $17,689,000 net for 1996 and prior accident years on a pro forma
basis.
33
Significant catastrophe and risk losses affecting the year ended December
31, 1997 loss ratio are as follows:
AMOUNT OF LOSSES
------------------
LOSS EVENT GROSS NET
- ---------------------------------------------------------------------------------- ------ ------
(IN THOUSANDS)
German, Poland and Czech floods................................................... $1,739 $1,457
Significant catastrophe and risk losses affecting the year ended December
31, 1996 loss ratio are as follows:
AS REPORTED PRO FORMA
---------------- -----------------
AMOUNT OF LOSSES
-------------------------------------
LOSS EVENT GROSS NET GROSS NET
- ---------------------------------------------------------------- ------ ------ ------- ------
(IN THOUSANDS)
Hurricanes Marilyn and Luis..................................... $8,064 $2,995 $11,978 $6,876
Hurricane Fran.................................................. 4,218 2,827 5,621 3,980
Northridge earthquake........................................... 1,646 1,438 1,198 1,083
Eurotunnel fire................................................. 1,260 1,022 2,238 2,000
Credit Lyonnais fire............................................ 2,669 723 4,606 2,647
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 $627,000 for 1997
compared to a loss of $41,000 for 1996 as reported, and a loss of $56,000 for
the corresponding period of 1996 on a pro forma basis.
During 1997, PXRE experienced savings of $3,917,000 net for prior-year loss
and loss expenses primarily related to the Eurotunnel fire and Hurricane Fran
where redundant reserves were recognized in 1997 of approximately $1,644,000 and
$1,440,000, respectively. In addition, included in the savings of $3,917,000
were prior-year losses originally thought to have triggered market loss coverage
thresholds which have proven to be redundant by approximately $1,800,000, offset
in part by development on prior year facultative losses. The loss ratio for 1996
was unfavorably affected by increases to reserves of $3,249,000 net for
prior-year losses and loss expenses, as reported, and $8,986,000 net for
prior-year losses and loss expenses on a pro forma basis, related principally to
Hurricanes Marilyn and Luis.
34
The underwriting expense ratio was 34.8% for 1997 compared with 26.2% for
the comparable period of 1996 as reported, and 27.6% for the corresponding
period of 1996 on a pro forma basis. As a result of the above, the combined
ratio was 48.5% for 1997 compared with 51.7% for the corresponding period of
1996 as reported, and 56.4% for the corresponding period of 1996 on a pro forma
basis. The increase in underwriting expense ratio was substantially due to the
Lloyd's syndicate operations, the decline in premiums earned on a pro forma
basis, the decline in management fee income and the foreign exchange losses
discussed below.
Other operating expenses increased to $15,716,000 for 1997 from $12,262,000
in the comparable period of 1996 as reported, and $15,195,000 for the
corresponding period of 1996 on a pro forma basis. Included in other operating
expenses were foreign currency exchange losses of $1,221,000 for 1997 compared
to gains of $143,000 for the corresponding period of 1996 as reported, and gains
of $210,000 for the corresponding period of 1996 on a pro forma basis. Operating
expenses were $17,191,000 excluding foreign exchange losses and amortization of
negative goodwill of $2,696,000 in 1997 compared with $18,101,000 in 1996 pro
forma results excluding the same items. This decrease was primarily due to the
non recurring costs related to the TREX merger in 1996.
During 1997, interest expense decreased to $3,325,000 as compared to
$6,957,000 in the corresponding period in the prior-year as reported due to the
effect of the repurchase of $43.3 million of PXRE's 9.75% Senior Notes in open
market purchases through the end of the third quarter of 1997. In addition in
1997, PXRE incurred minority interest expense amounting to $8,184,000 related to
the $100 million of newly-issued 8.85% Capital Trust Pass-through Securities'sm'
(TRUPS'sm') (as described below under 'Liquidity and Capital Resources').
In 1997, PXRE recorded an extraordinary loss of $2,774,000, net of tax, in
connection with the purchase of $43.3 million of PXRE's 9.75% Senior Notes and
the associated write-off of the pro rata share of the unamortized debt issuance
costs.
Net investment income for 1997 increased 85.9% to $31,191,000 from
$16,782,000 for the comparable period of 1996 as reported. The increase in net
investment income was caused primarily by $9,201,000 of investment income from
Transnational Reinsurance, $2,213,000 from incremental total return income
(including unrealized gains and losses) from higher yielding limited partnership
investments from the planned repositioning of the investment portfolio and the
remainder from increased average assets, which in part was due to proceeds of
the 8.85% TRUPS'sm' in excess of Senior Notes repurchased in 1997. PXRE's pre-
tax investment yield was 6.3% for 1997 compared with 6.4% for the corresponding
period in 1996 as reported, both calculated using amortized cost and investment
income before investment expenses. Net realized investment gains for 1997 were
$2,467,000 compared to gains of $94,000 for the corresponding period of 1996
reflecting the active management of the portfolio. During 1997, PXRE recorded
directly to equity an after-tax unrealized gain of $2,605,000 in the value of
its investment portfolio ($0.19 book value per share), reflecting the effect of
decreasing interest rates during the period.
35
The net effects of foreign currency exchange fluctuations were losses of
$594,000 in 1997 and gains of $102,000 for 1996. See 'Liquidity and Capital
Resources.'
Net income for the year ended December 31, 1996 included $3,898,000 which
represented PXRE's approximately 22.1% equity share of TREX's net earnings
before the Merger.
For the reasons discussed above, net income was $44,253,000 for 1997
compared to $33,301,000 for the comparable period of 1996 as reported, and
$49,161,000 for the corresponding period of 1996 on a pro forma basis. Diluted
income per common share before extraordinary loss was $3.39 for 1997 compared to
$3.69 for the prior comparable period as reported, and $3.42 on a pro forma
basis. Diluted net income per common share was $3.19 for 1997 compared to $3.69
for the corresponding period of 1996 as reported, and $3.42 for the
corresponding period of 1996 on a pro forma basis based on average shares
outstanding of approximately 13,893,000 in 1997, 9,020,000 in the comparable
period of 1996 as reported, and 14,389,000 in the corresponding period of 1996
on a pro forma basis.
COMPARISON OF 1996 AND 1995
YEAR ENDED
DECEMBER 31,
---------------------
1996 1995 DECREASE
-------- -------- --------
(IN THOUSANDS) %
Gross premiums written.................................................... $114,348 $155,380 (26.4)
Ceded premiums:
Managed business participants........................................ 21,238 26,774 (20.7)
TREX Management Agreement............................................ 19,965 24,790 (19.5)
Catastrophe coverage................................................. 5,427 6,180 (12.2)
-------- --------
Total reinsurance premiums ceded................................ 46,630 57,744 (19.2)
-------- --------
Net premiums written...................................................... $ 67,718 $ 97,636 (30.6)
-------- --------
-------- --------
Gross premiums written for 1996 decreased 26.4% to $114,348,000 from
$155,380,000 for 1995. Net premiums earned for the year ended December 31, 1996
decreased 25.1% to $72,796,000 from $97,142,000 in the year-earlier period. Net
premiums written for the year ended December 31, 1996 decreased 30.6% to
$67,718,000 from $97,636,000 for the corresponding period of 1995. Gross
written, net written and net earned premium for 1996 declined from prior-year
levels reflecting the increasingly competitive business environment. PXRE
continued its planned response to this situation by withdrawing capacity from
areas of coverage not offering appropriate compensation for the exposure. Net
premiums written and earned were also adversely
36
affected by a $3,798,000 reduction in reinstatement premiums resulting from a
reduced level of loss activity in 1996, as well as by $2,522,000 of cessions
related to a retrocessional arrangement with the predecessor of Select Re.
Premiums ceded by PXRE to its managed business participants decreased 20.7%
to $21,238,000 for 1996 compared with $26,774,000 for 1995. The decrease in
premiums ceded to these programs was due to the decrease in the amount of
premiums written by PXRE. During 1996, prior to the Merger, PXRE ceded
$19,965,000 of premiums, compared to $24,790,000 during the twelve months of
1995, to Transnational Reinsurance in lieu of direct reinsurance writings by
Transnational Reinsurance. Ceded premiums for catastrophe programs for 1996
decreased 12.2% to $5,427,000 from $6,180,000 for the comparable period of 1995
primarily because of the lower cost of coverage purchased.
Management fee income from all sources for 1996 decreased to $6,032,000
from $6,417,000 in 1995. The decrease reflected lower premium volume, offset, in
part, by an improvement in the profitability of business ceded to managed
business participants. Included in management fee income was $2,512,000 earned
from TREX in 1996 prior to the Merger and $3,526,000 in 1995.
The loss ratio was 25.5% for 1996 compared with 35.7% for 1995. Catastrophe
losses were $18,487,000 gross and $9,166,000 net for 1996 and prior accident
years as compared with $28,439,000 gross and $20,073,000 net for 1995 and prior
accident years.
Significant catastrophe and risk losses affecting the year ended December
31, 1996 loss ratio are as follows:
AMOUNT OF LOSSES
------------------
LOSS EVENT GROSS NET
- ------------------------------------------------------------------------ ------ ------
(IN THOUSANDS)
Hurricanes Marilyn and Luis............................................. $8,064 $2,995
Hurricane Fran.......................................................... 4,218 2,827
Northridge earthquake................................................... 1,646 1,438
Eurotunnel fire......................................................... 1,260 1,022
Credit Lyonnais fire.................................................... 2,669 723
37
Significant catastrophe and risk losses affecting the year ended December
31, 1995 loss ratio are as follows:
AMOUNT OF LOSSES
----------------------
LOSS EVENT GROSS NET
- ----------------------------------------------------------------------------- ------- ------
(IN THOUSANDS)
Hurricane Marilyn............................................................ $13,463 $9,886
Northridge earthquake........................................................ 8,899 6,030
Hurricane Luis............................................................... 5,119 3,710
Milliken factory fire........................................................ 7,314 5,932
The provision for losses and loss expenses includes the effect of foreign
exchange movements on PXRE's liability for losses and loss expenses, resulting
in a foreign currency exchange loss of $41,000 for 1996 compared to a gain of
$39,000 for 1995.
During 1996, PXRE experienced a deficiency of $3,249,000, net, for prior
year losses and loss expenses primarily due to Hurricanes Marilyn and Luis. The
loss ratio for 1995 was unfavorably affected by increases to reserves of
$4,311,000, net, for prior year losses and loss expenses primarily from the 1994
Northridge earthquake.
The underwriting expense ratio was 26.2% for 1996 compared with 18.6% for
1995. The increase was substantially due to the increased operating expenses
discussed below and the decline in premiums earned. As a result of the above,
the combined ratio was 51.7% for 1996 compared with 54.3% for 1995.
Other operating expenses increased to $12,262,000 for 1996 from $11,237,000
in 1995. The operating expense increase for 1996 primarily reflected an increase
of $301,000 related to changes in benefit plans, additional staff salaries,
increased incentive compensation and other related benefits. Included in other
operating expenses were foreign currency exchange gains of $143,000 for 1996
compared to gains of $196,000 for 1995.
Interest expense decreased to $6,957,000 in 1996 from $7,143,000 in 1995
due to the purchase of approximately $3.1 million of PXRE's 9.75% Senior Notes
during the second and third quarters of 1996 at an average price of 106.1%.
Net investment income for 1996 increased 13.9% to $16,782,000 from
$14,730,000 for 1995. The increase in net investment income was caused by an
increase in average investments for 1996 compared with the previous year, as
well as an increase in PXRE's pre-tax investment yield to 6.4% for 1996 compared
to 5.9% for 1995, both calculated using amortized cost and investment
38
income before investment expenses. The increase in pre-tax investment yield
primarily reflected the redeployment of PXRE's tax-exempt investment portfolio
into taxable securities, including some higher yielding mortgage and
asset-backed securities, in the fourth quarter of 1995 and throughout 1996. Net
realized investment gains for 1996 were $94,000 compared with net realized gains
of $85,000 for 1995. PXRE recorded directly to equity a $3,214,000 after-tax
unrealized decrease in the value of its investment portfolio during 1996,
reflecting the effect of an increase in interest rates during the first half of
1996.
The net effects of foreign currency exchange fluctuations were gains of
$102,000 in 1996 and gains of $235,000 for 1995. See 'Liquidity and Capital
Resources' below.
Net income for the year ended December 31, 1996 included $3,898,000 which
represented PXRE's approximately 22.1% equity share of TREX's net earnings
through December 11, 1996 as compared with $5,948,000 representing PXRE's
approximately 21.9% share of TREX's net earnings in 1995. Net income for 1996
also reflected $1,253,000 attributable to 100% of incremental earnings following
the Merger on December 11, 1996 through the end of the year.
For the reasons discussed above, net income was $33,301,000 for the year
ended December 31, 1996 compared to $39,786,000 for the year ended December 31,
1995. Basic net income per common share was $3.73 for 1996 compared to $4.81 for
1995 (after provision for cumulative dividends of $598,900 on the Series A
Preferred Stock) based on average shares outstanding of 8,922,000 in 1996 and
8,150,000 in 1995. The change in the number of basic shares outstanding relates
to the conversion of the preferred shares outstanding to common shares in the
second quarter of 1995. Diluted net income per common share was $3.69 for 1996
compared to $4.52 for 1995 based on average shares outstanding of 9,020,000 in
1996 and 8,812,000 in 1995. The change in the number of diluted shares
outstanding relates to the 1.0575 shares of PXRE common stock exchanged for each
share of common stock of TREX in connection with the Merger.
LIQUIDITY AND CAPITAL RESOURCES
PXRE relies primarily on cash dividends and net tax allocation payments
from its subsidiaries PXRE Reinsurance and Transnational Insurance 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 Insurance 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 Insurance, 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 Insurance 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
39
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 Insurance 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 1998, without
regulatory approval, is $57,388,000. During 1997, no dividends were paid by PXRE
Reinsurance to PXRE. During 1997, $58,877,000, including an extraordinary
dividend approved by the Insurance Department of the State of Connecticut, was
paid by Transnational Reinsurance to PXRE Reinsurance with the objective that
Transnational Insurance commence 1998 with approximately $100 million of
surplus.
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 Insurance.
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 Insurance). 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.
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% TRUPS'sm' due February 1, 2027 in an
institutional private placement. Proceeds from the sale of these securities were
used to purchase 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 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 1997 in respect of
the Capital Securities (and related Subordinated Debt Securities) amounted to
approximately $8,184,000. 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,
40
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 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'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.
PXRE has used, and expects to use, the net proceeds from the sale of the
Capital Securities for general corporate purposes, including 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 1997 in respect of the Senior Notes amounted to
approximately $3,325,000. In addition, PXRE incurred an extraordinary loss of
$2,774,000, net of tax, associated with the premium paid to acquire $43.3
million of the Senior Notes and the pro rata share of the debt offering costs
during 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
41
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 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 issuances of the Capital Securities.
PXRE's Board of Directors has authorized the purchase of Senior Notes in
negotiated or open market transactions. During 1997, PXRE or PXRE Reinsurance
purchased $43.3 million principal amount of Senior Notes at an average price of
107.4%. The principal amount of Senior Notes outstanding at December 31, 1997
was $21,414,000.
PXRE files federal income tax returns for itself and all of its direct or
indirect 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 domestic 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 domestic 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 Insurance. 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 $19,626,000 during 1997 compared
with net cash flow provided by operations of $28,033,000 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.
42
PXRE's management has established general procedures and guidelines for its
investment portfolio and oversees investment management carried out by Phoenix
Duff & Phelps, a public majority-owned subsidiary of Phoenix Home Life. 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 December
31, 1997, PXRE's investment portfolio consisted primarily of fixed maturities
and short-term investments. As at December 31, 1997, 88.0% of PXRE's investment
portfolio, at fair value, consisted of fixed maturities and short-term
investments, while the balance was in equity securities and other invested
assets primarily in the form of investments in various mutual funds and limited
partnerships. The investment policies and all investments of PXRE are approved
by its Board of Directors.
Of PXRE's fixed maturities portfolio at December 31, 1997, 91.1% of the
fair value was in obligations rated 'A1' or 'A' or better by Moody's or S&P's,
respectively. Mortgage and asset-backed securities accounted for 23.9% of fixed
maturities based on fair value at December 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 December 31, 1997 and 1996,
as reported, was 6.1% and 5.7%, respectively. During the first quarter of 1997,
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. During the second and third quarters of 1997,
PXRE further repositioned the portfolio into a number of limited partnership
investments and to a lesser extent equity investments.
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
stockholders' equity. PXRE recorded directly to stockholders' equity a
$2,605,000 after-tax unrealized gain in the value of its investment portfolio
($0.19 book value per share) at December 31, 1997 including an after-tax
unrealized loss of $1,475,000 ($0.11 book value per share) during the three
months ended December 31, 1997, the latter reflecting principally the value of
its equity portfolio, market volatility in debt and equity securities in Asia,
and the effect of an increase in interest rates during the quarter. Short-term
investments are carried at amortized cost, which approximates fair value. PXRE's
short-term investments, principally high-grade commercial paper, U.S. Treasury
bills and investments in limited partnerships which invest primarily in U.S.
Treasury bills, were $52,905,000 at December 31, 1997 compared to $59,792,000 at
December 31, 1996. The decrease at December 31, 1997 was principally due to the
redeployment of cash flow into new sectors. Other invested assets amounting to
$42,857,000 at December 31, 1997, which were comprised of limited partnerships,
were accounted for under the equity method. The amount of equity income included
in short-term investments and other invested assets in 1997 amounted to
$2,298,000.
Dividends incurred in 1997 were $12,209,000 compared to $6,479,000 in the
corresponding period 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
43
TREX. The expected annual dividend based on shares outstanding at December 31,
1997 will be approximately $13,764,000 reflecting a dividend increase to $0.25
per quarter commencing in the fourth quarter of 1997.
Book value per common share was $28.10 at December 31, 1997.
As announced in April 1997, PXRE's Board of Directors authorized a new
stock repurchase program and 1.7 million of the authorization remains. There
were no repurchases of common stock since the second quarter of 1997.
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 has an initial capacity to underwrite 'L'35 million in annual
premiums ($57.4 million at December 31, 1997 exchange rates). In connection with
the capitalization of the syndicate, PXRE has placed on deposit $43,175,000 par
value 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
($8,200,000 at December 31, 1997 exchange rates) line of credit to PXRE Managing
Agency for liquidity purposes. There has been no drawdown of these amounts.
In September 1997, PXRE and Phoenix Home Life completed the formation of a
joint venture, Cat Bond Investors, with initial committed capital of $20
million. The joint venture specializes in investing in instruments the returns
on which are determined, in whole or in part, by the nature, magnitude and/or
effects of certain catastrophic events or meteorological conditions.
In November 1997 PXRE announced the formation of an excess and surplus
lines operation, using Transnational Insurance. Consistent with the PXRE
underwriting philosophy, this new venture, with initial capital of approximately
$100 million, will specialize in short-tail property type risks to be written as
insurance. PXRE is obtaining the necessary state and regulatory approvals,
designing a reinsurance program and identifying potential sources of business
for this operation. Its operations are expected to commence during the first
quarter 1998.
All amounts classified as reinsurance recoverable at December 31, 1997 are
considered by management of PXRE to be collectible in all material respects.
44
PXRE is in the process of evaluating the impact of the Year 2000 problem on
its operations. PXRE plans to either upgrade or rewrite two existing software
systems during 1998, the cost of which is not expected to be material. PXRE
continues to seek assurances from third parties on whose systems and services it
relies to a significant extent that such third parties' systems are or will be
Year 2000 compliant. There can be no assurance that the systems of such third
parties will be Year 2000 compliant or that any third party's failure to have
Year 2000 compliant systems would not have a material adverse effect on PXRE's
systems or operations.
INCOME TAXES
PXRE's effective tax rate for 1997, 1996, and 1995 was 32.1%, 32.0%, and
31.4%, respectively, which differs from the statutory rate principally due to
negative goodwill amortization, state and local taxes and tax-exempt income and
in 1996 and 1995 tax on undistributed earnings of unconsolidated affiliates.
45
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K 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 Exchange Act. 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; (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; (viii) market fluctuations in equity
securities and securities underlying limited partnership investments; and (ix)
changes in management's evaluation of the impact of the Year 2000 problem on its
operations.
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.
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are filed as part of this Form 10-K:
PAGE
-----
PXRE Corporation:
Report of Independent Accountants..................................................................... F-1
Consolidated Balance Sheets at December 31, 1997 and 1996............................................. F-2
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995................ F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and
1995................................................................................................. F-4
Consolidated Statements of Cash Flow for the years ended December 31, 1997, 1996 and 1995............. F-5
Notes to Consolidated Financial Statements............................................................ F-6
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No disclosure hereunder is required as PXRE has not changed its accountants
during the 24 months preceding December 31, 1997.
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is contained in PXRE's Proxy
Statement, which information is incorporated herein by reference and which Proxy
Statement will be filed within 120 days of the end of PXRE's 1997 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is contained in PXRE's Proxy
Statement, which information is incorporated herein by reference and which Proxy
Statement will be filed within 120 days of the end of PXRE's 1997 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is contained in PXRE's Proxy
Statement, which information is incorporated herein by reference and which Proxy
Statement will be filed within 120 days of the end of PXRE's 1997 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is contained in PXRE's Proxy
Statement, which information is incorporated herein by reference and which Proxy
Statement will be filed within 120 days of the end of PXRE's 1997 fiscal year.
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
PAGE
----
(1) Financial Statements
PXRE Corporation:
Report of Independent Accountants..................................................................... F-1
Consolidated Balance Sheets at December 31, 1997 and 1996............................................. F-2
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995................ F-3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and
1995................................................................................................. F-4
Consolidated Statements of Cash Flow for the years ended December 31, 1997, 1996 and 1995............. F-5
Notes to Consolidated Financial Statements............................................................ F-6
(2) Financial Statements Schedules
Schedule I -- Summary of Investments (The information required by this Schedule is presented in the
financial statements and the notes thereto included in this Form 10-K.).............................. --
Schedule II -- Condensed Financial Information of Registrant.......................................... F-26
Schedule III -- Supplementary Insurance Information................................................... F-27
49
PAGE
----
Schedule IV -- Reinsurance (The information required by this Schedule is presented in the financial
statements and the notes thereto included in this Form 10-K.)........................................ --
Schedule VI -- Supplemental Information Concerning Property/Casualty Insurance Operations............ F-27
Report of Independent Accountants on the Financial Statement Schedules and Consent of Independent
Accountants.......................................................................................... F-28
All other financial statement schedules have been omitted as inapplicable.
(3) Exhibits
(3) Certificate of Incorporation and By-laws of PXRE Corporation. The
Restated Certificate of Incorporation and By-laws of PXRE Corporation were
previously filed with PXRE's Registration Statement on Form S-1 dated August 29,
1986, as amended by Amendment No. 1 thereto dated February 19, 1987 and by
Amendment No. 2 thereto dated March 25, 1987 (File No. 33-8406), as Exhibits 3.1
and 3.2 thereto, and are incorporated herein by reference. The Certificate of
Designations designating the Series A Cumulative Convertible Preferred Stock of
PXRE Corporation was previously filed with PXRE's Registration Statement on Form
S-2 dated February 21, 1992, as amended by Amendment No. 1 thereto dated April
1, 1992 and by Amendment No. 2 thereto dated April 13, 1992 and by Amendment No.
3 thereto dated April 23, 1992 (File No. 33-45893) as Exhibit 4.5 thereto, and
is incorporated herein by reference. The Certificate of Amendment dated May 20,
1993 to PXRE's Restated Certificate of Incorporation was previously filed with
PXRE's Registration Statement on Forms S-8 and S-3 dated June 3, 1993 (File No.
33-63768) as Exhibit 4.3 thereto, and is incorporated herein by reference. The
Certificate of Amendment dated May 19, 1994 to PXRE's Restated Certificate of
Incorporation was previously filed as Exhibit 3 to the Annual Report on Form
10-K of PXRE for the fiscal year ended December 31, 1994 (File No. 0-15428), and
is incorporated herein by reference. The Certificate of Amendment dated December
9, 1996 to PXRE's Restated Certificate of Incorporation was previously filed
with PXRE's Registration Statement on Form S-3 dated January 3, 1997 (File No.
333-19207), and is incorporated herein by reference. The Certificate of Merger
of Transnational Re Corporation into PXRE Corporation, dated December 11, 1996,
was previously filed as Exhibit 3 to the Annual Report on Form 10-K of PXRE for
the fiscal year ended December 31, 1996 (File No. 0-15428), and is incorporated
herein by reference. Article IV, Section 1 of the By-laws of PXRE Corporation,
as amended on June 8, 1995, was previously filed as Exhibit 3 to the Annual
Report on Form 10-K of PXRE for the fiscal year ended December 31, 1995 (File
No. 0-15428), and
50
is incorporated herein by reference. Article IV, Sections 8, 9, 10, 11 and 12
of the By-laws of PXRE Corporation was amended on October 16, 1997 and is
attached hereto as Exhibit 3.
(4) Instruments Defining the Rights of Security Holders.
4.1 Trust Indenture, dated as of August 31, 1993, between PXRE, as
issuer, and The First National Bank of Boston, as trustee, relating to
$75,000,000 principal amount of 9.75% Senior Notes of PXRE due 2003
(Exhibit 4.1 to PXRE's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993 (File No. 0-15428), and incorporated herein by
reference).
4.2 Supplemental Indenture, dated as of January 24, 1997, between PXRE
and State Street Bank and Trust Company, as Successor Trustee, relating to
$75,000,000 original principal amount of 9.75% Senior Notes of PXRE due
2003 (Exhibit 4.2 to PXRE's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0-15428), and incorporated herein by
reference).
4.3 Indenture, dated as of January 29, 1997, between PXRE and First
Union National Bank, as Trustee (Exhibit 4.3 to PXRE's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-15428),
and incorporated herein by reference).
4.4 First Supplemental Indenture, dated as of January 29, 1997,
between PXRE and First Union National Bank, as Trustee, in respect of
PXRE's 8.85% Junior Subordinated Deferrable Interest Debentures due 2027
(Exhibit 4.4 to PXRE's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (File No. 0-15428), and incorporated herein by
reference).
4.5 Amended and Restated Declaration of Trust of PXRE Capital Trust I,
dated as of January 29, 1997, among PXRE, as sponsor, the Administrators
thereof, First Union Bank of Delaware, as Delaware Trustee, First Union
National Bank, as Institutional Trustee, and the holders from time to time
of undivided interests in the assets of PXRE Capital Trust I (Exhibit 4.5
to PXRE's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 (File No. 0-15428), and incorporated herein by reference).
4.6 Capital Securities Guarantee Agreement, dated as of January 29,
1997, between PXRE and First Union National Bank, as Guarantee Trustee
(Exhibit 4.6 to PXRE's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (File No.0-15428), and incorporated herein by reference).
4.7 Common Securities Guarantee Agreement, dated as of January 29,
1997, executed by PXRE (Exhibit 4.7 to PXRE's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (File No. 0-15428), and
incorporated herein by reference).
51
(10) Material Contracts. The material contracts of PXRE are as follows:
10.1 Registration Rights Agreement, dated January 29, 1997, among
PXRE, PXRE Capital Trust I and Salomon Brothers Inc, as Representative of
the Initial Purchasers (Exhibit 10.1 to PXRE's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (File No. 0-15428), and
incorporated herein by reference).
10.2 Purchase Agreement among PXRE, PXRE Capital Trust I and Salomon
Brothers Inc, as Representative of the Initial Purchasers, dated January
24, 1997 (Exhibit 10.2 to PXRE's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 (File No. 0-15428), and incorporated herein by
reference).
10.3 PXRE Reinsurance Company Management Agreement among PXRE
Reinsurance and, among others, Merrimack Mutual Fire Insurance Company
('Merrimack'), Pennsylvania Lumbermens Mutual Insurance Company
('Pennsylvania Lumbermens'), and NRMA Insurance Limited ('NRMA') (Exhibit
10.1 to PXRE's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 (File No. 0-15428), and incorporated herein by
reference); letter dated November 28, 1990 from Pennsylvania Lumbermens
confirming reduced participation (Exhibit 10.7 to PXRE's Form S-2
Registration Statement dated February 21, 1992, as amended by Amendment No.
1 thereto dated April 1, 1992 and by Amendment No. 2 thereto dated April
13, 1992 and by Amendment No. 3 thereto dated April 23, 1992 (File No.
33-45893), and incorporated herein by reference); cover notes respecting
January 1997 renewals by Merrimack, Pennsylvania Lumbermens and NRMA and
cover note respecting participation commencing January 1, 1997 by Auto-
Owners Insurance Company ('Auto-Owners') (Exhibit 10.3 to PXRE's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 (File
No. 0-15428), and incorporated herein by reference).
10.4 Tax Settlement Agreement dated June 21, 1991 between PXRE
Corporation, PXRE Reinsurance Company and PM Holdings, Inc. (Exhibit 10.2
to the Annual Report on Form 10-K of PXRE for the fiscal year ended
December 31, 1991 (File No. 0-15428), and incorporated herein by
reference).
10.5 Investment Advisory Agreement between PXRE Reinsurance Company
and Phoenix Investment Counsel, Inc., dated February 25, 1987 and effective
as of January 1, 1987 (Exhibit 10.10 to Amendment No. 1 dated February 19,
1987 to PXRE's Form S-1 Registration Statement dated August 29, 1986, as
subsequently amended by Amendment No. 2 thereto dated March 25, 1987 (File
No. 33-8406), and incorporated herein by reference).
10.6 Amendment to Investment Advisory Agreement between PXRE
Reinsurance Company and Phoenix Investment Counsel, Inc., effective
retroactively as of January 1, 1987 (Exhibit 10.3 to the Annual Report on
Form 10-K of PXRE for the fiscal year ended December 31, 1991 (File No.
0-15428), and incorporated herein by reference).
52
10.7 Amendment No. 2 to Investment Advisory Agreement between PXRE
Reinsurance Company and Phoenix Investment Counsel, Inc., effective as of
November 1, 1989. (Exhibit 10.4 to the Annual Report on Form 10-K of PXRE
for the fiscal year ended December 31, 1991 (File No. 0-15428), and
incorporated herein by reference).
10.8 Amended and Restated Agreement Concerning Filing of Consolidated
Federal Income Tax Returns dated as of August 23, 1993 between PXRE and
PXRE Reinsurance (Exhibit 10.8 to the Annual Report on Form 10-K of PXRE
for the fiscal year ended December 31, 1993 (File No. 0-15428), and
incorporated herein by reference).
10.9 Employee Stock Purchase Plan, as amended (Appendix A to PXRE's
Proxy Statement dated April 23, 1993, and incorporated herein by
reference).(M)
10.10 Executive Long-Term Bonus Plan (Exhibit 10.6 to PXRE's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991 (File No.
0-15428), and incorporated herein by reference) and Amendment thereto made
as of August 22, 1991 (Exhibit 10.14 to PXRE's Form S-2 Registration
Statement dated February 21, 1992, as amended by Amendment No. 1 thereto
dated April 1, 1992 and by Amendment No. 2 thereto dated April 13, 1992 and
by Amendment No. 3 thereto dated April 23, 1992 (File No. 33-45893), and
incorporated herein by reference).(M)
10.11 Executive Severance Plan (Exhibit 10.1 to the Annual Report on
Form 10-K of PXRE for the fiscal year ended December 31, 1989 (File No.
0-15428), and incorporated herein by reference).(M)
10.12 1988 Stock Option Plan, as amended (Exhibit A to the first
Prospectus forming part of PXRE's Form S-8 and S-3 Registration Statement
dated June 21, 1990 (File No. 33-35521), and incorporated herein by
reference).(M)
10.13 1987 Stock Option Plan, as amended (Appendix B to PXRE's Proxy
Statement dated April 13, 1990, and incorporated herein by reference).(M)
10.14 Non-Employee Director Deferred Stock Plan (Appendix A to PXRE's
Proxy Statement dated April 12, 1991, and incorporated herein by
reference).(M)
10.15 Restated Employee Annual Incentive Bonus Plan, as amended
(Appendix A to PXRE's Proxy Statement dated April 30, 1997, and
incorporated herein by reference).(M)
- ------------
(M) Indicates a management contract or compensatory plan or arrangement in
which the directors and/or executive officers of PXRE participate.
53
10.16 1992 Officer Incentive Plan, as amended (Appendix B to PXRE's
Proxy Statement dated April 30, 1997 and incorporated herein by
reference).(M)
10.17 Quota Share Retrocessional Agreement between PXRE Reinsurance
and Trenwick America Reinsurance Corporation (Exhibit 10.21 to the Annual
Report on Form 10-K of PXRE for the fiscal year ended December 31, 1993
(File No. 0-15428), and incorporated herein by reference).
10.18 Management Agreement dated as of November 8, 1993 among PXRE
Reinsurance, Transnational Re Corporation and Transnational Reinsurance
Company (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE for the
fiscal year ended December 31, 1993 (File No. 0-15428), and incorporated
herein by reference), as amended by Amendment No. 1 thereto, dated December
1, 1994 (Exhibit 10.21 to the Annual Report on Form 10-K of PXRE for the
fiscal year ended December 31, 1994 (File No. 0-15428), and incorporated
herein by reference).
10.19 Aggregate Excess of Loss Reinsurance Agreement dated as of
November 8, 1993 between PXRE Reinsurance, as reinsurer, and Transnational
Reinsurance Company, as reinsured (Exhibit 10.23 to the Annual Report on
Form 10-K of PXRE for the fiscal year ended December 31, 1993 (File No.
0-15428), and incorporated herein by reference).
10.20 Services Agreement dated as of December 11, 1996 between PXRE
Reinsurance Company and Transnational Reinsurance Company (Exhibit 10.20 to
PXRE's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 (File No. 0-15428), and incorporated herein by reference).
10.21 Addendum No. 2 dated November 10, 1994 to the PXRE Group Amended
and Restated Agreement Concerning Filing of Consolidated Federal Income Tax
Returns (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE for the
fiscal year ended December 31, 1994 (File No. 0-15428), and incorporated
herein by reference).
10.22 Addendum No. 3 dated as of December 11, 1996 to the PXRE Group
Amended and Restated Agreement Concerning Filing of Consolidated Federal
Income Tax Returns (Exhibit 10.22 to PXRE's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-15428), and
incorporated herein by reference).
- ------------
(M) Indicates a management contract or compensatory plan or arrangement in which
the directors and/or executive officers of PXRE participate.
54
10.23 Amendment dated August 1994 to the Severance Plan for Certain
Executives of PXRE Corporation (Exhibit 10.23 to the Annual Report on Form
10-K of PXRE for the fiscal year ended December 31, 1994 (File No.
0-15428), and incorporated herein by reference).(M)
10.24 Lease dated May 9, 1994 between Thornall Associates and PXRE
Corporation (Exhibit 10.24 to the Annual Report on Form 10-K of PXRE for
the fiscal year ended December 31, 1994 (File No. 0-15428), and
incorporated herein by reference).
10.25 Director Stock Option Plan (Appendix A to PXRE's Proxy Statement
dated May 3, 1995, and incorporated herein by reference) and Amendment
thereto made as of April 17, 1997 (attached hereto as Exhibit 10.25).(M)
10.26 Amendment No. 3 to Investment Advisory Agreement between PXRE
Reinsurance Company and Phoenix Investment Counsel, Inc. effective June 1,
1995 (Exhibit 10.26 to the Annual Report on Form 10-K of PXRE for the
fiscal year ended December 31, 1995 (File No. 0-15428), and incorporated
herein by reference).
10.27 Agreement and Plan of Merger dated as of August 22, 1996 between
PXRE and Transnational Re Corporation, as amended by Amendment No. 1 dated
as of September 27, 1996 and Amendment No. 2 dated as of October 24, 1996
(Annex A to PXRE's Form S-4 Registration Statement dated October 30, 1996
(File No. 333-15087), and incorporated herein by reference).
10.28 Amended and Restated Investment Advisory Agreement between
Transnational Reinsurance Company and Phoenix Investment Counsel, Inc.,
dated November 8, 1993 (Exhibit 10.4 to Transnational Re Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993
(File No. 0-22376) and incorporated herein by reference), as amended by the
Amendment thereto, effective June 1, 1995 (Exhibit 10.11 to Transnational
Re Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 (File No. 0-22376) and incorporated herein by reference).
10.29 Investment Management Agreement, effective January 29, 1997
between PXRE Corporation and Phoenix Investment Counsel, Inc. (Exhibit
10.29 to PXRE's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (File No. 0-15428), and incorporated herein by
reference).
10.30 Director Equity and Deferred Compensation Plan (Appendix C to
PXRE's Proxy Statement dated April 30, 1997, and incorporated herein by
reference).(M)
- ------------
(M) Indicates a management contract or compensatory plan or arrangement in which
the directors and/or executive officers of PXRE participate.
55
10.31 Management Agreement dated September 16, 1997 between PXRE
Managing Agency and Whittington Insurance Services Limited (attached hereto
as Exhibit 10.31).
10.32 Lloyd's Deposit Trust Deed (Third Party Deposit) dated November
29, 1996 between PXRE Limited and PXRE Reinsurance (attached hereto as
Exhibit 10.32).
10.33 Letter of Credit dated November 22, 1996 issued by The Chase
Manhattan Bank by order of PXRE Reinsurance for the benefit of Lloyd's
(attached hereto as Exhibit 10.33).
10.34 Lloyd's Security Trust Deed (Letter of Credit and Bank
Guarantee) dated November 29, 1997 between PXRE Limited and Lloyds'
(attached hereto as Exhibit 10.34).
10.35 Operating Agreement of Cat Bond Investors, effective as of June
9, 1997 among Cat Bond Investors, Phoenix Home Life and PXRE (attached
hereto as Exhibit 10.35).
(11) Statement re computation of earnings per share (The information
required by this Exhibit is presented in the financial statements and the notes
thereto included in this Form 10-K.)
(12) Statement re computation of ratios (attached hereto as Exhibit 12).
(21) List of Subsidiaries. At December 31, 1997, PXRE had the following
subsidiaries: PXRE Reinsurance Company, a Connecticut insurance company;
Transnational Insurance Company, a Connecticut insurance company; PXRE Capital
Trust I, a Delaware statutory business trust; PXRE Ltd., an English company (the
sole member of PG Butler Syndicate 1224 at Lloyd's); PXRE Managing Agency
Limited (the managing agency for PG Butler Syndicate 1224 at Lloyd's); PXRE
Trading Corporation, a Delaware corporation; TREX Trading Corporation, a
Delaware corporation; PX/TX Associates, a Delaware general partnership (of which
PXRE Trading and TREX Trading are the only partners); CAT Fund, L.P., a
Delaware limited partnership (of which PX/TX Associates is the sole general
partner and PXRE Trading and TREX Trading are the only limited partners); and
Cat Bond Investors L.L.C. (of which PXRE and Phoenix Home Life are the only
members). (See the discussion in this Form 10-K under the captions 'Business --
Introduction,' ' -- Lloyd's Syndicate 1224,' ' -- TREX Management Agreement' and
' -- Other Operations' and 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.')
(23) Consents of Experts and Counsel. The consent of Price Waterhouse LLP,
independent accountants to PXRE, is included as part of Item 14(a)(2) of this
Form 10-K.
(24) Power of Attorney. Copies of the powers of attorney executed by each
of Robert W. Fiondella, Franklin D. Haftl, Bernard Kelly, Wendy Luscombe, Edward
P. Lyons, Philip R.
56
McLoughlin, David W. Searfoss, Donald H. Trautlein and Wilson Wilde are attached
hereto as Exhibit 24.
(27) Financial Data Schedule. Exhibit 27 included in electronic filing
only.
(28) Information from reports furnished to state insurance regulatory
authorities. Filed in paper under cover of Form SE.
(b) Current Reports.
None.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, PXRE Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PXRE CORPORATION
By /s/ GERALD L. RADKE
..........................................
GERALD L. RADKE, ITS CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of PXRE
Corporation and in the capacity and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
/S/ GERALD L. RADKE Its Chairman of the Board, President and March 25, 1998
......................................... Chief Executive Officer (Principal
(GERALD L. RADKE) Executive Officer) and Director
/S/ SANFORD M. KIMMEL Its Senior Vice President, Treasurer and March 25, 1998
......................................... Chief Financial Officer (Principal
(SANFORD M. KIMMEL) Financial Officer and Principal Accounting
Officer)
* Director March 25, 1998
.........................................
(ROBERT W. FIONDELLA)
* Director March 25, 1998
.........................................
(FRANKLIN D. HAFTL)
* Director March 25, 1998
.........................................
(BERNARD KELLY)
* Director March 25, 1998
.........................................
(WENDY LUSCOMBE)
* Director March 25, 1998
.........................................
(EDWARD LYONS)
* Director March 25, 1998
.........................................
(PHILIP R. MCLOUGHLIN)
* Director March 25, 1998
.........................................
(DAVID W. SEARFOSS)
* Director March 25, 1998
.........................................
(DONALD H. TRAUTLEIN)
* Director March 25, 1998
.........................................
(WILSON WILDE)
*By: /S/ GERALD L. RADKE
.........................................
(GERALD L. RADKE)
ATTORNEY-IN-FACT
58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
PXRE CORPORATION
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of cash
flow present fairly, in all material respects, the financial position of PXRE
Corporation and its subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flow for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
New York, New York
February 12, 1998
F-1
PXRE CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
ASSETS
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost
$399,145,000 and $393,962,000, respectively)................................. $405,949,411 $394,551,703
Equity securities, at fair value (cost $21,049,000 and $6,850,000)............. 19,748,877 7,796,392
Short-term investments......................................................... 52,904,819 59,791,879
Other invested assets, at fair value (cost $42,375,000)........................ 42,857,341 0
------------ ------------
Total investments........................................................... 521,460,448 462,139,974
Cash............................................................................. 6,277,876 4,938,481
Accrued investment income........................................................ 6,257,162 5,046,899
Receivables:
Unreported premiums............................................................ 14,131,034 16,849,578
Balances due from intermediaries and brokers................................... 5,978,439 6,279,368
Other receivables.............................................................. 20,575,692 9,281,392
Reinsurance recoverable.......................................................... 14,242,278 18,065,126
Ceded unearned premiums.......................................................... 2,531,453 3,728,424
Deferred acquisition costs....................................................... 2,965,741 1,449,050
Other assets..................................................................... 14,531,423 15,545,914
------------ ------------
Total assets........................................................... $608,951,546 $543,324,206
------------ ------------
------------ ------------
LIABILITIES
Losses and loss expenses......................................................... $ 57,189,454 $ 70,977,449
Unearned premiums................................................................ 18,485,042 11,042,260
Notes payable.................................................................... 21,414,000 64,725,000
Other liabilities................................................................ 25,661,460 38,901,719
------------ ------------
Total liabilities...................................................... 122,749,956 185,646,428
------------ ------------
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........................................................... 99,513,194 0
STOCKHOLDERS' EQUITY
Serial preferred stock, $.01 par value -- 500,000 shares authorized; 0
shares issued and outstanding.................................................. 0 0
Common stock, $.01 par value -- 40,000,000 shares authorized; 14,806,347 and
14,705,782 shares issued, respectively......................................... 148,063 147,058
Additional paid-in capital....................................................... 255,060,792 252,978,182
Net unrealized appreciation on investments, net of deferred income tax
expense of $1,940,000 and $306,000............................................. 3,173,006 568,405
Retained earnings................................................................ 150,749,451 118,705,257
Treasury stock at cost (1,042,752 and 750,876 shares)............................ (21,660,108) (14,090,289)
Restricted stock at cost (64,403 and 53,279 shares).............................. (782,808) (630,835)
------------ ------------
Total stockholders' equity............................................. 386,688,396 357,677,778
------------ ------------
Total liabilities and stockholders' equity........................ $608,951,546 $543,324,206
------------ ------------
------------ ------------
The accompanying notes are an integral part of these statements.
F-2
PXRE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------ ----------- ------------
Revenues
Net premiums earned............................................ $ 91,415,240 $72,795,454 $ 97,141,693
Net investment income.......................................... 31,190,625 16,782,371 14,729,566
Net realized investment gains.................................. 2,467,338 94,158 85,302
Management fees: Non-affiliate................................. 3,005,657 3,519,703 2,891,128
TREX.......................................... 0 2,512,303 3,526,213
------------ ----------- ------------
128,078,860 95,703,989 118,373,902
------------ ----------- ------------
Losses and expenses
Losses and loss expenses incurred.............................. 12,491,324 18,563,608 34,716,270
Commissions and brokerage...................................... 19,137,822 12,873,668 13,251,070
Other operating expenses....................................... 15,716,150 12,261,949 11,236,843
Interest expense............................................... 3,324,900 6,957,057 7,143,097
Minority interest in consolidated subsidiary................... 8,183,514 0 0
------------ ----------- ------------
58,853,710 50,656,282 66,347,280
------------ ----------- ------------
Income before income taxes, extraordinary item and equity in net
earnings of TREX............................................... 69,225,150 45,047,707 52,026,622
Equity in net earnings of TREX................................... 0 3,897,568 5,947,956
Income tax provision............................................. 22,198,000 15,644,000 18,189,000
------------ ----------- ------------
Income before extraordinary loss................................. 47,027,150 33,301,275 39,785,578
Extraordinary loss on debt redemption, net of $1,493,000 income
tax benefit.................................................... 2,773,690 0 0
------------ ----------- ------------
Net income....................................................... $ 44,253,460 $33,301,275 $ 39,785,578
------------ ----------- ------------
------------ ----------- ------------
Preferred stock dividend......................................... $ 0 $ 0 $ 598,928
------------ ----------- ------------
------------ ----------- ------------
Net income available to common stockholders...................... $ 44,253,460 $33,301,275 $ 39,186,650
------------ ----------- ------------
------------ ----------- ------------
Per share
Basic:
Income before extraordinary item............................. $3.41 $3.73 $4.81
------------ ----------- ------------
Extraordinary loss........................................... 0.20 0.00 0.00
------------ ----------- ------------
------------ ----------- ------------
Net income................................................... $3.21 $3.73 $4.81
------------ ----------- ------------
------------ ----------- ------------
Average shares outstanding................................... 13,775,844 8,921,886 8,149,833
------------ ----------- ------------
------------ ----------- ------------
Diluted:
Income before extraordinary item............................. $3.39 $3.69 $4.52
Extraordinary loss........................................... 0.20 0.00 0.00
------------ ----------- ------------
Net income................................................... $3.19 $3.69 $4.52
------------ ----------- ------------
------------ ----------- ------------
Average shares outstanding................................... 13,892,760 9,019,655 8,811,504
------------ ----------- ------------
------------ ----------- ------------
The accompanying notes are an integral part of these statements.
F-3
PXRE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
UNREALIZED
ADDITIONAL APPRECIATION
PREFERRED COMMON PAID-IN (DEPRECIATION) RETAINED TREASURY
STOCK STOCK CAPITAL ON INVESTMENTS EARNINGS STOCK
--------- -------- ------------ -------------- ------------ ------------
Balance at January 1, 1995........... $ 100 $ 69,216 $116,888,369 $ (5,976,354) $ 57,933,848 $ (1,860,687)
Net income........................... 39,785,578
Conversion of preferred stock........ (100) (20,260)
Issuance of common stock............. 20,623 692,869
Issuance of treasury stock........... 141,228
Issuance of restricted stock.........
Amortization of restricted stock.....
Dividends:
Preferred stock.................. (598,928)
Common stock..................... (5,237,664)
Change in fair value for the year,
net................................ 8,488,420
Equity in net change in TREX
appreciation....................... 1,270,434
Other................................ 107,070
--------- -------- ------------ -------------- ------------ ------------
Balance at December 31, 1995......... 0 89,839 117,668,048 3,782,500 91,882,834 (1,719,459)
Net income........................... 33,301,275
Issuance of common stock............. 417 823,192
Issuance of common stock in TREX
merger............................. 56,802 134,304,932
Issuance of treasury stock........... 166,745
Repurchase of treasury stock......... (12,537,575)
Issuance of restricted stock.........
Amortization of restricted stock.....
Dividends paid to common
stockholders....................... (6,478,852)
Change in fair value for the year,
net................................ (2,799,292)
Equity in net change in TREX
depreciation....................... (414,803)
Other................................ 182,010
--------- -------- ------------ -------------- ------------ ------------
Balance at December 31, 1996......... 0 147,058 252,978,182 568,405 118,705,257 (14,090,289)
Net income........................... 44,253,460
Issuance of common stock............. 1,005 1,748,520
Repurchase of treasury stock......... (7,464,583)
Issuance of restricted stock.........
Amortization of restricted stock.....
Dividends paid to common
stockholders....................... (12,209,266)
Change in fair value for the year,
net................................ 2,604,601
Other................................ 334,090 (105,236)
--------- -------- ------------ -------------- ------------ ------------
Balance at December 31, 1997......... $ 0 $148,063 $255,060,792 $ 3,173,006 $150,749,451 $(21,660,108)
--------- -------- ------------ -------------- ------------ ------------
--------- -------- ------------ -------------- ------------ ------------
TOTAL
RESTRICTED STOCKHOLDERS'
STOCK EQUITY
---------- -------------
Balance at January 1, 1995................. $ (283,550) $ 166,770,942
Net income................................. 39,785,578
Conversion of preferred stock.............. (20,360)
Issuance of common stock................... 713,492
Issuance of treasury stock................. 141,228
Issuance of restricted stock............... (499,005) (499,005)
Amortization of restricted stock........... 240,969 240,969
Dividends:
Preferred stock........................ (598,928)
Common stock........................... (5,237,664)
Change in fair value for the year, net..... 8,488,420
Equity in net change in TREX appreciation.. 1,270,434
Other...................................... 107,070
---------- -------------
Balance at December 31, 1995............... (541,586) 211,162,176
Net income................................. 33,301,275
Issuance of common stock................... 823,609
Issuance of common stock in TREX merger.... 134,361,734
Issuance of treasury stock................. 166,745
Repurchase of treasury stock............... (12,537,575)
Issuance of restricted stock............... (501,027) (501,027)
Amortization of restricted stock........... 411,778 411,778
Dividends paid to common stockholders...... (6,478,852)
Change in fair value for the year, net..... (2,799,292)
Equity in net change in TREX depreciation.. (414,803)
Other...................................... 182,010
---------- -------------
Balance at December 31, 1996............... (630,835) 357,677,778
Net income................................. 44,253,460
Issuance of common stock................... 1,749,525
Repurchase of treasury stock............... (7,464,583)
Issuance of restricted stock............... (741,988) (741,988)
Amortization of restricted stock........... 585,263 585,263
Dividends paid to common
stockholders............................. (12,209,266)
Change in fair value for the year, net..... 2,604,601
Other...................................... 4,752 233,606
---------- -------------
Balance at December 31, 1997............... $ (782,808) $ 386,688,396
---------- -------------
---------- -------------
The accompanying notes are an integral part of these statements.
F-4
PXRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------- ------------ -------------
Cash flow from operating activities
Net income................................................ $ 44,253,460 $ 33,301,275 $ 39,785,578
Adjustments to reconcile net income to net cash provided
by operating activities:
Losses and loss expenses............................. (13,787,994) (12,964,561) (9,116,644)
Unearned premiums.................................... 8,639,753 (5,077,857) 691,911
Deferred acquisition costs........................... (1,516,691) 1,284,615 (701,788)
Receivables.......................................... (12,764,637) 14,313,128 (3,177,725)
Reinsurance balances payable......................... (5,082,885) (3,431,682) (18,467)
Reinsurance recoverable.............................. 3,822,847 4,511,644 11,306,688
Income tax recoverable.................................... (3,139,559) 1,126,162 477,805
Equity in net earnings of TREX............................ 0 (3,574,171) (5,849,161)
Other..................................................... (797,805) (1,455,299) (985,918)
------------- ------------ -------------
Net cash provided by operating activities....... 19,626,489 28,033,254 32,412,279
------------- ------------ -------------
Cash flow from investing activities
Cost of fixed maturity investments........................ (294,637,213) (83,760,831) (176,462,916)
Fixed maturity investments matured/disposed............... 290,013,188 62,189,176 171,764,371
Payable for securities.................................... 0 (2,496,232) 2,496,232
Cost of equity securities................................. (17,372,574) (1,849,539) (5,000,000)
Equity securities disposed................................ 3,172,678 0 0
Investment in joint venture............................... 0 0 (2,000,000)
Cash acquired from merger with TREX....................... 0 1,260,611 0
Net change in short-term investments...................... 8,742,789 22,485,844 (14,909,109)
Net change in other invested assets....................... (42,375,000) 0 0
------------- ------------ -------------
Net cash used by investing activities........... (52,456,132) (2,170,971) (24,111,422)
------------- ------------ -------------
Cash flow from financing activities
Proceeds from issuance of common stock.................... 855,570 489,327 335,355
Cash dividends paid to preferred stockholders............. 0 0 (933,061)
Cash dividends paid to common stockholders................ (12,209,266) (6,478,852) (5,237,664)
Issuance of minority interest in consolidated
subsidiary.............................................. 99,509,000 0 0
Repurchase of debt........................................ (46,521,683) (3,235,250) (2,016,188)
Cost of treasury stock.................................... (7,464,583) (12,537,575) 0
------------- ------------ -------------
Net cash provided (used) by financing
activities.................................... 34,169,038 (21,762,350) (7,851,558)
------------- ------------ -------------
Net change in cash........................................ 1,339,395 4,099,933 449,299
Cash, beginning of period................................. 4,938,481 838,548 389,249
------------- ------------ -------------
Cash, end of period....................................... $ 6,277,876 $ 4,938,481 $ 838,548
------------- ------------ -------------
------------- ------------ -------------
Supplemental disclosure of cash flow information
Non cash investing and financing activities:
Fair value of assets acquired........................ $ 0 $161,130,734 $ 0
Liabilities assumed.................................. 0 28,496,767 0
------------- ------------ -------------
Stock issued in merger with TREX................ $ 0 $132,633,967 $ 0
------------- ------------ -------------
------------- ------------ -------------
The accompanying notes are an integral part of these statements.
F-5
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying 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'), Cat Fund L.P.,
PXRE Capital Trust I, PXRE Ltd. and PXRE Managing Agency Limited. The U.K.
operations of PXRE Ltd. and PXRE Managing Agency Limited are included in the
consolidated results on a one quarter lag period. In addition, following the
merger of PXRE and Transnational Re Corporation ('TREX') as described further in
Note 2, the consolidated operations include Transnational Insurance Company
('Transnational Insurance'), formerly Transnational Reinsurance Company and TREX
Trading Corporation ('TREX Trading') since December 11, 1996. During the year
ended December 31, 1995 and the period up to December 11, 1996, PXRE owned
approximately 21% of TREX, which in turn owned 100% of Transnational Insurance,
and accounted for this investment under the equity method. Following the merger,
Transnational Insurance became a wholly-owned subsidiary of PXRE Reinsurance.
All material transactions between the consolidated companies have been
eliminated in preparing these consolidated financial statements.
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain reclassifications have been made for 1996 and 1995 to conform with
the 1997 presentation.
INVESTMENT AT EQUITY
Investments in affiliated companies which are less than majority 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 subject premium are recorded once ascertained. The
portion of premiums written relating to unexpired coverages at the end of the
period is recorded as unearned premiums. Reinsurance premiums ceded are recorded
as incurred on a pro rata basis over the contract period.
DEFERRED ACQUISITION COSTS
Acquisition costs consist of 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.
F-6
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 the merger, as discussed in Note 2. 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 during 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. Short term investments
also include limited partnerships which invest primarily in Treasury securities
and provide for fund withdrawals upon 30 days notice; these are reported under
the equity method. Other invested assets include investments in limited
partnerships reported under the equity method which includes the cost of the
investment and subsequent proportional share of the partnership earnings.
Realized gains or losses on disposition of investments are determined on the
basis of specific identification. The amortization of premiums and accretion of
discount for fixed maturity investments is computed utilizing the interest
method. The effective yield under the interest method is adjusted for
anticipated prepayments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of certain assets and liabilities are based on published market
values, if available, or estimates based upon fair values of similar issues.
Fair values are reported in Notes 5 and 6.
F-7
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
DEBT ISSUANCE COSTS
Debt issuance costs associated with the issuance of Senior Notes and the
issuance of $100 million 8.85% Capital Trust Pass-through Securities'sm'
(TRUPS'sm') are being amortized over the term of the related outstanding debt
on a straight-line method.
EXCESS OF FAIR MARKET VALUE OF NET ASSETS OF BUSINESS ACQUIRED OVER COST
The excess of fair market value of net assets of TREX business acquired
over cost is included in other liabilities and 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.
The effect of the translation adjustments for the Lloyd's of London
operations will be recorded as a cumulative translation adjustment in a separate
component of stockholders' equity, net of applicable deferred income taxes; the
translation adjustment at December 31, 1997 was not material.
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
Effective December 31, 1997, PXRE adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share ('SFAS No. 128') which requires replacing
primary earnings per share with basic earnings per share disclosure and fully
diluted earnings per share with diluted earnings per share disclosure. Basic
earnings per share are determined by dividing net earnings (after deducting
cumulative preferred stock dividends) by the weighted average number of common
shares outstanding. On a diluted basis both net earnings and shares outstanding
are adjusted to reflect the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity, unless the effect of the assumed conversion is
anti-dilutive. SFAS No. 128 requires restatement of all prior period earning per
share data presented.
STOCK-BASED COMPENSATION
PXRE accounts for its stock options in accordance with the provisions of
Accounting Principles Board Opinion No. 25 ('APB'). The effect of SFAS No. 123,
Accounting for Stock-Based compensation is not material on net income and
earnings per share.
F-8
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. ACQUISITION
On December 11, 1996, PXRE acquired TREX. The acquisition was accounted for
using the purchase method of accounting, and, accordingly, the purchase price
has been allocated to the assets purchased and the liabilities assumed based
upon the fair values at the date of merger. The excess of the fair value of the
net assets acquired over the purchase price, amounting to approximately
$8,087,000, has been recorded as negative goodwill in other liabilities and is
being amortized on a straight-line basis over 3 years.
The net income of TREX included in PXRE's consolidated results of
operations from the date of acquisition amounted to $1,253,000 in 1996. On the
basis of unaudited pro forma consolidation of the results of operations as if
the acquisition had taken place at the beginning of 1996 and 1995, consolidated
net revenues would have been $153,410,000 and $193,972,000 for 1996 and 1995
respectively. Consolidated unaudited pro forma net income and diluted net income
per share would have been $49,161,000 and $3.42 in 1996 and $60,755,000 and
$4.19 in 1995. Such unaudited pro forma amounts are not necessarily indicative
of what the actual consolidated results of net income might have been if the
merger had been effective at the beginning of 1995.
MANAGEMENT AGREEMENT
Under the Management Agreement between TREX, Transnational Insurance and
PXRE Reinsurance, Transnational Insurance paid PXRE Reinsurance an annual basic
management fee equal to 5% of Transnational Insurance's gross written premiums.
TREX was also required to reimburse PXRE for all expenses directly attributable
to it. This agreement terminated upon the acquisition.
3. BUSINESS, RISKS AND OTHER MATTERS
PXRE, through its wholly-owned subsidiaries PXRE Reinsurance and
Transnational Insurance provides treaty and facultative reinsurance to primary
insurers and reinsurers on commercial and personal property risks, and marine
and aerospace risks. Its London-based managing agency oversees the operations of
PXRE's underwriting syndicate at Lloyd's-PG Butler Syndicate 1224, which
commenced operations in 1997, extending PXRE's underwriting opportunities in
these and other similar short-tail lines of business. PXRE's newly formed excess
and surplus lines operation will specialize in short-tail property type risks to
be written as insurance commencing in 1998.
F-9
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
PXRE solicits its treaty and facultative reinsurance business from the
worldwide reinsurance brokerage market, committing and withholding its
underwriting capacity and altering its mix of business to focus on business
where management believes that above average underwriting results can be
achieved. To supplement its underwriting capacity and generate management fee
income, PXRE manages business for other insurers and reinsurers through
retrocessional agreements and management agreements. In recent years, PXRE has
been pursuing a strategy of focusing on catastrophe-related coverages and
diversifying its exposures by writing a substantial amount of international
reinsurance. See 'Certain Risks and Uncertainties' in Management's Discussion
and Analysis of Financial Condition and Results of Operations for further
information regarding PXRE's business and risks affecting these consolidated
financial statements.
4. UNDERWRITING PROGRAMS
Premiums written and earned for the years ended December 31, 1997, 1996 and
1995 are as follows:
1997 1996 1995
------------ ------------ ------------
Premiums written
Assumed.......................................... $126,231,727 $114,347,965 $155,380,180
------------ ------------ ------------
Ceded: Managed business participants............. (16,533,918) (21,237,657) (26,773,867)
Catastrophe coverage...................... (9,642,815) (5,427,393) (6,180,126)
TREX management agreement................. 0 (19,965,317) (24,790,377)
------------ ------------ ------------
Total reinsurance premiums ceded................. (26,176,733) (46,630,367) (57,744,370)
------------ ------------ ------------
Net premiums written............................. $100,054,994 $ 67,717,598 $ 97,635,810
------------ ------------ ------------
------------ ------------ ------------
Premiums earned
Assumed.......................................... $119,609,970 $120,727,383 $154,155,712
Ceded............................................ (28,194,730) (47,931,929) (57,014,019)
------------ ------------ ------------
Net premiums earned.............................. $ 91,415,240 $ 72,795,454 $ 97,141,693
------------ ------------ ------------
------------ ------------ ------------
Substantially all premiums written were assumed through reinsurance brokers
or intermediaries. In 1997, 1996 and 1995, three, two and two reinsurance
intermediaries, respectively, individually accounted for more than 10% of gross
premiums written, and collectively accounted for approximately 55%, 36% and 34%
of gross premiums written, respectively.
Under the terms of the management agreement described in Note 2, PXRE
retroceded $19,965,000 and $24,790,000 of premiums written to Transnational
Insurance in 1996 and 1995, respectively.
PXRE also purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. PXRE has increased its purchases of
such coverage in light of the continued general deterioration in catastrophe
reinsurance pricing and the opportunity to buy protection at more favorable
terms than in recent years. In the event that retrocessionaires are unable to
meet their contractual obligations, PXRE would be liable for such defaulted
amounts.
F-10
The components of reinsurance recoverable as stated in the December 31,
1997 and 1996 consolidated balance sheets are as follows:
1997 1996
----------- -----------
Losses and loss expense liabilities............................ $12,733,457 $15,633,287
Loss payments.................................................. 1,508,821 2,431,839
----------- -----------
$14,242,278 $18,065,126
----------- -----------
----------- -----------
The components of losses and loss expenses incurred as shown in the
December 31, 1997, 1996 and 1995 consolidated statements of income are as
follows:
1997 1996 1995
----------- ----------- -----------
Assumed................................................... $14,622,683 $37,837,120 $49,370,127
Ceded..................................................... (2,131,359) (19,273,512) (14,653,857)
----------- ----------- -----------
Net....................................................... $12,491,324 $18,563,608 $34,716,270
----------- ----------- -----------
----------- ----------- -----------
Activity in the losses and loss expense liability for the years ended
December 31, 1997, 1996 and 1995 is summarized as follows:
1997 1996 1995
----------- ----------- -----------
Net balance January 1..................................... $55,309,304 $44,424,388 $46,044,699
Plus reinsurance recoverables........................ 15,668,145 28,294,526 35,790,859
----------- ----------- -----------
Gross balance at January 1................................ 70,977,449 72,718,914 81,835,558
----------- ----------- -----------
Gross reserves of TREX at date of acquisition............. 0 9,588,507 0
Incurred related to:
Current year......................................... 19,343,536 27,327,387 43,388,163
Prior years.......................................... (4,720,853) 10,509,733 5,981,969
----------- ----------- -----------
Total incurred.................................. 14,622,683 37,837,120 49,370,132
----------- ----------- -----------
Paid related to:
Current year......................................... 4,703,497 6,468,736 16,885,840
Prior years.......................................... 23,707,181 42,698,356 41,600,936
----------- ----------- -----------
Total paid...................................... 28,410,678 49,167,092 58,486,776
----------- ----------- -----------
Gross balance at December 31.............................. $57,189,454 $70,977,449 $72,718,914
----------- ----------- -----------
----------- ----------- -----------
As a result of changes in estimates of insured events in prior years, the
net provision for losses and loss expenses experienced savings of $3,917,000 in
1997 primarily related to the Eurotunnel fire and Hurricane Fran where redundant
reserves were recognized of approximately $1,644,000 and $1,440,000,
respectively. In addition, prior-year losses originally thought to have
triggered market loss coverage thresholds have now proven to be redundant by
approximately $1,800,000 resulting in the reversal of recorded losses in the
first quarter of 1997. The loss ratio was unfavorably affected by increase to
reserves of $3,249,000 in 1996 due primarily to Hurricanes Marilyn and Luis and
$4,311,000 in 1995 primarily due to the Northridge earthquake.
F-11
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5. INVESTMENTS
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of investments in fixed maturities and equity securities as
of December 31, 1997 and 1996 are shown below:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
1997
United States government securities................. $165,575,920 $1,921,776 $ 49,670 $167,448,026
Foreign government securities....................... 28,112,102 1,238,962 258,908 29,092,156
United States government agency mortgage and
asset-backed securities........................... 24,095,423 716,453 1,205,225 23,606,651
Other mortgage and asset-backed securities.......... 72,199,621 1,203,520 43,839 73,359,302
Obligations of states and political subdivisions.... 104,000,786 3,487,315 32,925 107,455,176
Public utilities and industrial and miscellaneous
securities........................................ 5,160,680 83,662 256,242 4,988,100
------------ ---------- ---------- ------------
Total fixed maturities......................... $399,144,532 $8,651,688 $1,846,809 $405,949,411
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
Equity securities................................... $ 21,049,420 $1,162,275 $2,462,818 $ 19,748,877
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
1996
United States government securities................. $180,519,485 $1,570,671 $ 876,482 $181,213,674
United States government agency mortgage and
asset-backed securities........................... 87,861,645 1,515,801 2,743,510 86,633,936
Other mortgage and asset-backed securities.......... 55,313,776 645,089 252,128 55,706,737
Obligations of states and political subdivisions.... 70,267,795 810,409 80,848 70,997,356
------------ ---------- ---------- ------------
Total fixed maturities......................... $393,962,701 $4,541,970 $3,952,968 $394,551,703
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
Equity securities................................... $ 6,849,538 $ 946,854 $ 0 $ 7,796,392
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
F-12
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Proceeds, gross realized gains, and gross realized losses from sales of
fixed maturity investments before maturity date or securities that prepay and
from sales of equity securities were as follows:
1997 1996 1995
------------ ----------- ------------
Proceeds
Fixed maturities........................ $281,200,500 $54,359,191 $126,497,804
------------ ----------- ------------
------------ ----------- ------------
Equity securities....................... $ 3,883,703 $ 1,532,961 $ 0
------------ ----------- ------------
------------ ----------- ------------
Gross gains
Fixed maturities........................ $ 3,443,425 $ 540,687 $ 2,303,300
Equity securities....................... 807,238 85,711 0
------------ ----------- ------------
4,250,663 626,398 2,303,300
Gross losses
Fixed maturities........................ (1,621,134) (532,240) (2,217,998)
Other................................... (162,191) 0 0
------------ ----------- ------------
(1,783,325) (532,240) (2,217,998)
Net realized gains........................... $ 2,467,338 $ 94,158 $ 85,302
------------ ----------- ------------
------------ ----------- ------------
The components of net investment income were as follows:
1997 1996 1995
------------ ----------- ------------
Fixed maturity investments................... $25,835,051 $15,642,139 $12,896,608
Equity securities............................ 180,956 42,062 76,704
Short-term investments....................... 5,646,704 1,744,703 2,019,693
Other invested assets........................ 442,504 0 0
------------ ----------- ------------
32,105,215 17,428,904 14,993,005
Less investment expenses..................... 914,590 646,533 263,439
------------ ----------- ------------
Net investment income........................ $31,190,625 $16,782,371 $14,729,566
------------ ----------- ------------
------------ ----------- ------------
Investment expenses primarily represent fees paid to Phoenix Duff & Phelps
Corporation, a public majority-owned subsidiary of Phoenix Home Life Mutual
Insurance Company which owned 4.6% of the outstanding common stock of PXRE at
December 31, 1997.
F-13
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INVESTMENT MATURITY DISTRIBUTIONS
The amortized cost and estimated fair value of fixed maturity investments
at December 31, 1997 by contractual maturity date is shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
ESTIMATED
AMORTIZED FAIR
MATURITY COST % VALUE %
- -------------------------------------------------- ------------ ----- ------------ -----
One year or less.................................. $ 49,842,981 12.5% $ 49,945,841 12.3%
Over 1 through 5 years............................ 149,943,785 37.6 151,624,989 37.4
Over 5 through 10 years........................... 57,659,423 14.5 59,703,791 14.7
Over 10 through 20 years.......................... 20,223,270 5.0 20,752,816 5.1
Over 20 years..................................... 25,180,029 6.3 26,956,021 6.6
------------ ----- ------------ -----
302,849,488 75.9 308,983,458 76.1
United States government agency and other mortgage
and asset-backed securities..................... 96,295,044 24.1 96,965,953 23.9
------------ ----- ------------ -----
Total........................................ $399,144,532 100.0% $405,949,411 100.0%
------------ ----- ------------ -----
------------ ----- ------------ -----
In addition to fixed maturities, PXRE held $52,905,000 and $59,792,000 of
short-term investments at December 31, 1997 and 1996, respectively, comprised
principally of high-grade commercial paper, U.S. Treasury bills and other
investments with original maturities of one year or less. PXRE also held
$42,857,000 of other invested assets at December 31, 1997 comprised of
investments in various limited partnerships accounted for under the equity
method.
RESTRICTED ASSETS
Under the terms of certain reinsurance agreements, irrevocable letters of
credit in the amount of $1,595,000 were issued at December 31, 1997, in respect
of reported loss reserves and unearned premiums. Investments with a par value of
$4,000,000 have been pledged as collateral with issuing banks. In addition,
securities with a par value of $11,126,000 at December 31, 1997 were on deposit
with various state insurance departments in order to comply with insurance laws.
PXRE, in connection with the startup of PXRE Ltd.'s Syndicate No. 1224, has
placed on deposit $43,175,000 par value of United States government securities
as collateral for Lloyd's of London. In addition, PXRE issued a letter of credit
for the benefit of Lloyd's of London in the amount of $15,355,000. The letter of
credit is collateralized by United States government securities of approximately
the same amount. All invested assets of Syndicate 1224 amounting to $2,846,000
at December 31, 1997 are restricted from being paid as a dividend for three
years.
F-14
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. NOTES PAYABLE AND CREDIT ARRANGEMENTS
In January 1997, PXRE issued $100,000,000 of 8.85% Company-Obligated
Mandatorily Redeemable Capital Trust Pass-through Securities of Subsidiary Trust
holding solely a Company-Guaranteed Related Subordinated Debt ('TRUPS'). The
fair value of the TRUPS is $105,194,000 at December 31, 1997. Interest is
payable on the TRUPS semi-annually. The notes are redeemable on or after
February 1, 2007 at the option of PXRE, initially at 104.180% declining to
100.418% at February 1, 2016, and 100% thereafter.
PXRE has 9.75% Senior Notes with a net balance outstanding at December 31,
1997 of $21,414,000 which approximates fair value. Interest is payable on the
Senior Notes semi-annually. The notes are due August 15, 2003 and are redeemable
on or after August 15, 1998 at the option of PXRE, initially at 103.656%,
declining to 100% at August 15, 2001 and thereafter, plus accrued and unpaid
interest. The notes contain certain restrictions on the ability to incur
additional indebtedness, issue stock, pay dividends, repurchase stock, sell or
transfer assets and certain other matters.
Interest paid was $8,707,000, $6,469,000 and $6,728,000 for 1997, 1996 and
1995, respectively.
7. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
----------- ----------- -----------
Current
Federal.............................................. $18,014,000 $14,310,000 $15,265,000
State and local...................................... 515,000 319,000 374,000
Foreign.............................................. 706,000 539,000 2,109,000
----------- ----------- -----------
19,235,000 15,168,000 17,748,000
Deferred.................................................. 2,963,000 476,000 441,000
----------- ----------- -----------
Income tax provision before extraordinary loss............ 22,198,000 15,644,000 18,189,000
Income tax benefit from extraordinary loss................ 1,493,000 0 0
----------- ----------- -----------
Income tax provision...................................... $20,705,000 $15,644,000 $18,189,000
----------- ----------- -----------
----------- ----------- -----------
Income taxes paid......................................... $23,460,000 $15,730,000 $16,507,000
----------- ----------- -----------
----------- ----------- -----------
F-15
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The income tax provision for each of the years presented differs from the
amounts determined by applying the applicable U.S. statutory federal income tax
rate to pre-tax income as a result of the following:
1997 1996 1995
----------- ----------- -----------
Income taxes at statutory rates........................... $22,735,000 $15,767,000 $18,209,000
Tax-exempt interest income................................ (1,284,000) (48,000) (1,086,000)
Foreign tax provision..................................... 706,000 1,022,000 2,109,000
Foreign tax credit utilized............................... (706,000) (1,105,000) (2,284,000)
Other, net................................................ (746,000) 8,000 1,241,000
----------- ----------- -----------
Total income tax provision........................... $20,705,000 $15,644,000 $18,189,000
----------- ----------- -----------
----------- ----------- -----------
The significant components of the net deferred tax provision (benefit) for
the years ended December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
---------- --------- ----------
Discounted reserves and unearned premiums...................... $ 127,000 $ 607,000 $ 46,000
Deferred acquisition costs..................................... 537,000 (213,000) 220,000
Deferred compensation and benefits............................. 740,000 (75,000) (266,000)
Credit carryforwards........................................... 384,000 (110,000) (893,000)
Investment and unrealized foreign exchange..................... 1,180,000 246,000 1,306,000
Other, net..................................................... (5,000) 21,000 28,000
---------- --------- ----------
Total deferred tax provision.............................. $2,963,000 $ 476,000 $ 441,000
---------- --------- ----------
---------- --------- ----------
The significant components of the net deferred income tax asset (liability)
are as follows:
1997 1996
----------- -----------
Deferred tax asset:
Discounted reserves and unearned premiums............................ $ 2,576,000 $ 2,703,000
Deferred compensation and benefits................................... 694,000 1,434,000
Credit carryforwards................................................. 1,022,000 1,406,000
Other, net........................................................... 293,000 248,000
----------- -----------
Total deferred income tax asset................................. 4,585,000 5,791,000
----------- -----------
Deferred income tax liability:
Deferred acquisition costs........................................... (1,038,000) (501,000)
Tax effect of net unrealized appreciation on investments............. (1,940,000) (538,000)
Investments and unrealized foreign exchange.......................... (2,273,000) (1,093,000)
Other, net........................................................... (113,000) (72,000)
----------- -----------
Total deferred income tax liability............................. (5,364,000) (2,204,000)
----------- -----------
Net deferred income tax asset (liability)................................. $ (779,000) $ 3,587,000
----------- -----------
----------- -----------
F-16
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8. STOCKHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS
STOCKHOLDERS' EQUITY
Authorized and issued common stock (1 cent par value) of PXRE consisted of
40,000,000 and 14,806,347 shares as of December 31, 1997 and 40,000,000 and
14,705,782 as of December 31, 1996, respectively.
In addition, at December 31, 1997, there were 500,000 shares of serial
preferred stock (1 cent par value) authorized and none outstanding. The Board of
Directors is authorized to determine the terms of each series of preferred stock
which may be issued. During the second quarter of 1992, PXRE completed an
offering of 1,059,800 depositary shares, each representing 1/100 of a share of
PXRE's Series A Cumulative Preferred Stock. All outstanding shares were redeemed
by PXRE on May 1, 1995.
DIVIDEND RESTRICTIONS
The Insurance Department of the State of Connecticut, in which PXRE
Reinsurance is domiciled, recognizes as net income and surplus (stockholders'
equity) those amounts determined in conformity with statutory accounting
practices ('SAP') prescribed or permitted by the department, which differ in
certain respects from GAAP. The amount of statutory capital and surplus at
December 31 and statutory net income of PXRE Reinsurance for the periods then
ended, as filed with insurance regulatory authorities are as follows:
1997 1996 1995
------------ ------------ ------------
PXRE Reinsurance
Statutory capital and surplus.................... $451,321,000 $400,133,000 $250,231,000
Statutory net income............................. $ 57,388,000 $ 51,177,000 $ 37,996,000
PXRE Reinsurance is subject to state regulatory restrictions which limit
the maximum amount of annual dividends or other distributions, including loans
or cash advances, available to stockholders without prior approval of the
Insurance Commissioner of the State of Connecticut.
As of December 31, 1997, the maximum amount of dividends and other
distributions which may be made by PXRE Reinsurance during 1998 without prior
approval is limited to approximately $57,388,000. Accordingly, the remaining
amount of its capital and surplus is considered restricted.
Under the terms of the Senior Notes, dividends to PXRE stockholders in any
year are limited as referred to in Note 6.
F-17
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
9. EARNINGS PER SHARE
A reconciliation of income before extraordinary item and shares which
affect basic and diluted earnings per share is as follows:
1997 1996 1995
----------- ----------- -----------
Income available to common stockholders:
Income before extraordinary loss..................... $47,027,150 $33,301,275 $39,785,578
Extraordinary loss................................... 2,773,690 0 0
----------- ----------- -----------
Net income........................................... 44,253,460 33,301,275 39,785,578
Preferred stock dividend............................. 0 0 598,928
----------- ----------- -----------
Net income available to stockholders................. $44,253,460 $33,301,275 $39,186,650
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares of common stock outstanding:
Weighted average common shares outstanding (basic)... 13,775,844 8,921,886 8,149,833
Preferred conversions................................ 0 0 569,872
Equivalent shares of stock options................... 70,770 63,677 77,898
Equivalent shares of restricted stock................ 46,146 34,092 13,901
----------- ----------- -----------
Weighted average common equivalent shares
(diluted).......................................... 13,892,760 9,019,655 8,811,504
----------- ----------- -----------
----------- ----------- -----------
Per share amounts:
Basic
Income before extraordinary loss................ $3.41 $3.73 $4.81
Net income...................................... $3.21 $3.73 $4.81
Diluted
Income before extraordinary loss................ $3.39 $3.69 $4.52
Net income...................................... $3.19 $3.69 $4.52
10. EMPLOYEE BENEFITS
BENEFIT PLANS
Effective January 1, 1993, PXRE adopted a non-contributory defined benefit
pension plan covering all U.S. employees with one year or more of service and
who had attained age 21. Benefits are generally based on years of service and
compensation. PXRE funds the plan in amounts not less than the minimum statutory
funding requirement nor more than the maximum amount that can be deducted for
Federal income tax purposes.
PXRE also sponsors a supplemental executive retirement plan. This plan is
non-qualified and provides certain key employees benefits in excess of normal
pension benefits.
The net pension expenses for the company-sponsored plans included the
following components at December 31, based on a January 1, valuation date (the
latest actuarial estimate):
F-18
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------- -------- --------
Service cost of benefits earned.................................... $265,216 $254,748 $185,584
Interest cost on projected benefit obligations..................... 220,404 194,999 268,173
Return on plan assets.............................................. (7,989) (747) (633)
Net amortization of deferred prior service cost.................... 92,904 112,338 166,318
-------- -------- --------
Pension expense.................................................... $570,535 $561,338 $619,442
-------- -------- --------
-------- -------- --------
The following table sets forth the funded status of the plans and amounts
recognized in the consolidated balance sheets:
1997 1996
----------- -----------
Actuarial present value of benefit obligations:
Vested benefits...................................................... $ 1,648,861 $ 1,229,468
Non vested........................................................... 325,640 176,466
----------- -----------
Accumulated benefit obligation............................................ 1,974,501 1,405,934
Effect of future salary increases......................................... 1,810,231 1,512,094
----------- -----------
Projected benefit obligation.............................................. 3,784,732 2,918,028
Plan assets at fair value................................................. 315,222 26,076
----------- -----------
Funded status............................................................. (3,469,510) (2,891,952)
Unrecognized net gain..................................................... 542,413 159,862
Unrecognized prior service cost........................................... 1,261,493 1,355,864
----------- -----------
Accrued pension liability................................................. $(1,665,604) $(1,376,226)
----------- -----------
----------- -----------
The assumptions used in computing the information above were as follows:
1997 1996
---- ----
Discount rate-pension expense................................................... 7.0 % 7.5 %
Expected long-term rate of return............................................... 8.0 % 8.0 %
Future compensation growth rate................................................. 5.0 % 5.0 %
EMPLOYEE STOCK PURCHASE PLAN
PXRE maintains an Employee Stock Purchase Plan under which it has reserved
32,086 shares of its common stock for issuance to PXRE personnel. The price per
share is the lesser of 85% of the fair market value at either the date granted
or the date exercised.
11. STOCK OPTIONS AND GRANTS
PXRE adopted in 1988, a plan which provides for the grant of incentive
stock options and non-qualified stock options to officers and key employees.
Options granted under the 1988 Stock Option Plan have a term of 10 years and
become exercisable in four equal annual installments. The exercise price for
options granted pursuant to the plan must be equal to or exceed the fair market
value of the common stock on the date the option is granted. At December 31,
1997, 320,146 options had been exercised under the 1988 Stock Option Plan. In
1992, the Board of Directors resolved to freeze the 1988 Stock Option Plan as of
December 31, 1992, so that no further options could be granted thereafter under
this plan.
F-19
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
In 1992, a Restated Employee Annual Incentive Bonus Plan was approved.
Incentive compensation is based in part on return on equity compared to a target
return on equity and in part on the discretion of the Restated Bonus Plan
Committee. In 1997 and 1996, $1,553,000 and $1,673,000, respectively, was
incurred under this plan. In addition, 30% of any bonus granted to certain
levels of employees is paid in restricted shares of common stock. As of December
31, 1997, 70,727 restricted shares had been granted under this plan.
In 1992, PXRE adopted a 1992 Officer Incentive Plan which provides for the
grant of incentive stock options, non-qualified stock options and awards of
shares of common stock subject to certain restrictions. Options granted under
the plan have a term of 10 years and generally become exercisable in four equal
annual installments commencing one year from the date of grant. The exercise
price for the incentive stock options must be equal to or exceed the fair market
value of the common stock on the date the option is granted. The exercise price
for the non-qualified options may be less than, equal to, or greater than the
fair market value of the common stock on the date of grant, but not less than
50% of such fair market value. As of December 31, 1997, 318,082 options and
11,579 shares of restricted stock had been granted under this plan.
Information regarding the option plans described above is as follows:
NUMBER OPTION PRICE
OF SHARES PER SHARE RANGE
--------- ------------------
Outstanding at December 31, 1994......................................... 301,396 $8.00 - $25.00
Options granted..................................................... 64,621 $24.875
Options exercised................................................... 22,528 $8.75 - $25.00
Options canceled................................................... 589 $23.875 - $25.00
---------
Outstanding at December 31, 1995......................................... 342,900 $8.00 - $25.00
Options granted..................................................... 73,748 $24.75
Options exercised................................................... 36,659 $8.75 - $25.00
Options canceled.................................................... 6,966 $23.875 - $25.00
---------
Outstanding at December 31, 1996......................................... 373,023 $8.00 - $25.00
Options granted..................................................... 82,169 $26.688
Options exercised................................................... 64,504 $8.00 - $25.00
---------
Outstanding at December 31, 1997......................................... 390,688
---------
---------
Total authorized common stock reserved for grants of stock options and
restricted stock under the above plans is 767,375 shares. Total shares of
210,040 relate to stock options which are vested and exercisable at December 31,
1997, at exercise prices between $8.75 and $26.688. All options become
exercisable upon a change of control of PXRE as defined by the plans.
F-20
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
In 1995, PXRE adopted a non-employee Director Stock Option Plan which
provides for an annual grant of 1,000 options per director from 1995 to 1996 and
3,000 options per director from 1997 to 2005 inclusive as amended. Options
granted under the plan have a term of 10 years from the date of grant and are
vested and exercisable in three equal annual installments commencing one year
from the date of grant. The exercise price of the options is the fair market
value on the date of grant. As of December 31, 1997, 43,000 options were granted
and 8,000 were exercisable.
As discussed in Note 1, PXRE adopted SFAS No. 123 as of January 1, 1996. As
permitted by SFAS No. 123, PXRE has elected to continue to account for its stock
option plans under the accounting rules prescribed by APB 25, under which no
compensation costs are recognized as an expense. Had compensation costs for the
stock options been determined using the fair value method of accounting as
recommended by SFAS No. 123, net income and earnings per share for 1997 and 1996
would have been reduced to the following pro forma amounts:
1997 1996
----------- -----------
Net income
As reported............................................... $44,253,460 $33,301,275
Pro forma................................................. 43,789,779 33,028,582
Basic income per share
As reported............................................... $3.21 $3.73
Pro forma................................................. 3.18 3.70
Diluted income per share
As reported............................................... $3.19 $3.69
Pro forma................................................. 3.15 3.66
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option granted in 1997 and 1996 was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest of 5.89% for 1997 and 5.94% for
1996; expected lives of 5 years for 1997 and 1996; expected volatility of 30.70%
for 1997 and 36.25% for 1996; and expected dividend yield of 2.63% for 1997 and
3.03% for 1996.
F-21
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
A summary of the status of the employee and director stock option plans at
December 31, 1997, 1996 and 1995 and changes during the years then ended is
presented below:
1997 1996
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- ------- --------------
Options outstanding at beginning of year.......... 389,023 19.04 350,900 16.93
Options granted................................... 109,169 27.05 81,748 24.77
Options exercised................................. 64,504 12.17 36,659 10.52
Options canceled.................................. 0 0 6,966 24.58
------- -------
Options outstanding at end of year................ 433,688 20.49 389,023 19.04
------- -------
Options exercisable at end of year................ 217,960 18.65 217,069 14.62
------- -------
Weighted average fair value per share of options
granted......................................... 9.92 9.45
Options outstanding at December 31, 1997 included 88,174 options with
exercise prices ranging from $8.75 to $11.50 per share and a weighted average
remaining contractual life of 3.34 years and 345,511 options with exercise
prices ranging from $23.25 to $28.14 per share and a weighted average remaining
contractual life of 6.61 years. Options exercisable at December 31, 1997
included 88,174 options with a weighted average remaining contractual life of
3.34 years and 129,786 options with a weighted average remaining contractual
life of 6.03 years.
In 1990, PXRE adopted a non-employee Director Deferred Stock Plan granting
2,000 shares of its common stock to each non-employee Board member at the time
specified in the plan. The 12,000 shares of stock granted to Board members who
are not employees of PXRE or Phoenix Home Life Mutual Insurance Company will be
issued to Board members at or after their retirement according to the option
selected from those defined in the Plan. The 6,000 shares granted to Board
members who are employees of Phoenix Home Life Mutual Insurance Company were
issued on August 24, 1993.
12. SEGMENT INFORMATION
PXRE operates in one significant industry segment: property and casualty
reinsurance. Domestic gross premiums written represent U.S. based risks written
by U.S. based reinsureds. All other gross premiums written are considered
international (principally the United Kingdom, Continental Europe, Australia and
Asia).
1997 % 1996 % 1995 %
------------ --- ------------ --- ------------ ---
Gross premiums written:
Domestic............................... $ 33,982,000 27% $ 32,594,000 29% $ 44,824,000 29%
International.......................... 92,250,000 73 81,754,000 71 110,556,000 71
------------ --- ------------ --- ------------ ---
$126,232,000 100% $114,348,000 100% $155,380,000 100%
------------ --- ------------ --- ------------ ---
------------ --- ------------ --- ------------ ---
F-22
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
PXRE has offices in the United States, Belgium and beginning in 1997 the
United Kingdom. The following table shows net premiums earned, operating profit
and the aggregate carrying amount of identifiable assets by operational area:
U.S. FOREIGN
OPERATIONS OPERATIONS CONSOLIDATED
------------ ----------- ------------
1997
Net premiums earned.................................... $ 77,019,775 $14,395,465 $ 91,415,240
Operating profit before interest expense, income taxes
and corporate expenses............................... $ 77,711,786 $ 2,867,023 $ 80,578,809
Identifiable assets.................................... $550,130,183 $58,821,363 $608,951,546
1996
Net premiums earned.................................... $ 65,276,931 $ 7,518,523 $ 72,795,454
Operating profit before interest expense, income taxes
and corporate expenses............................... $49,036,857.. $ 3,435,216 $ 52,472,073
Identifiable assets.................................... $501,902,023 $41,422,183 $543,324,206
13. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
The following are unaudited quarterly results of operations on a
consolidated basis for the years ended December 31, 1997 and 1996. Quarterly
results necessarily rely heavily on estimates. This and certain other factors,
such as catastrophic losses, call for caution in drawing specific conclusions
from quarterly results. Due to changes in the number of average shares
outstanding, quarterly earnings per share may not add to the total for the year.
The common stock price ranges are bid quotations as reported by the New
York Stock Exchange after December 31, 1996, and by the NASDAQ National Market
System in prior periods.
F-23
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
----------- ----------- ------------- -----------
Net premiums written................................ $36,003,000 $18,838,000 $27,758,000 $17,456,000
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Revenues:
Net premiums earned............................ $22,299,903 $24,383,433 $20,099,586 $24,632,318
Net investment income.......................... 8,954,051 7,760,235 8,144,342 6,331,997
Realized investment (losses) gains............. (439,208) 299,607 955,190 1,651,749
Management fees: Non-affiliate................. 915,296 812,958 726,083 551,320
----------- ----------- ------------- -----------
Total revenues............................ 31,730,042 33,256,233 29,925,201 33,167,384
----------- ----------- ------------- -----------
Losses and expenses:
Losses and loss expenses incurred.............. 2,115,805 3,169,267 1,156,652 6,049,600
Commissions and brokerage...................... 4,696,511 3,439,413 4,153,134 6,848,764
Other operating expenses....................... 3,881,875 4,404,873 3,561,247 3,868,155
Interest expense............................... 1,562,039 795,132 433,218 534,511
Minority interest in consolidated subsidiary... 1,488,502 2,230,534 2,231,444 2,233,034
----------- ----------- ------------- -----------
Total expenses............................ 13,744,732 14,039,219 11,535,695 19,534,064
----------- ----------- ------------- -----------
Income before income taxes and extraordinary item... 17,985,310 19,217,014 18,389,506 13,633,320
Income tax provision................................ 5,939,450 6,301,550 6,007,000 3,950,000
----------- ----------- ------------- -----------
Income before extraordinary loss.................... 12,045,860 12,915,464 12,382,506 9,683,320
----------- ----------- ------------- -----------
Extraordinary loss on debt redemption net of income
tax benefit....................................... 1,633,200 955,740 184,750 0
----------- ----------- ------------- -----------
Net income.......................................... $10,412,660 $11,959,724 $12,197,756 $ 9,683,320
----------- ----------- ------------- -----------
Basic earnings per common share:
Income before extraordinary item............... $0.86 $0.94 $0.90 $0.71
Extraordinary loss............................. 0.12 0.07 0.01 0.00
----------- ----------- ------------- -----------
Net income..................................... $0.74 $0.87 $0.89 $0.71
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Average shares outstanding..................... 13,926,340 13,808,230 13,727,284 13,734,243
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Diluted earnings per common share:
Income before extraordinary item............... $0.86 $0.93 $0.89 $0.70
Extraordinary loss............................. 0.12 0.07 0.01 0.00
----------- ----------- ------------- -----------
Net income..................................... $0.74 $0.86 $0.88 $0.70
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Average shares outstanding..................... 14,008,651 13,908,221 13,855,874 13,866,724
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Dividends paid per common share..................... $ 0.21 $ 0.21 $ 0.21 $ 0.25
Price range of common stock:
High........................................... $26.875 $31.438 $31.688 $34.00
Low............................................ $24.50 $24.75 $29.50 $29.563
F-24
PXRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
----------- ----------- ------------- -----------
Net premiums written................................ $25,346,471 $10,740,389 $21,783,058 $ 9,847,680
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Revenues:
Net premiums earned............................ $19,420,401 $17,099,362 $17,793,201 $18,482,490
Net investment income.......................... 3,911,470 4,198,688 4,065,756 4,606,457
Realized investment (losses) gains............. (74,937) (100,752) (44,575) 314,422
Management fees: Non-affiliate................. 1,765,398 632,341 868,581 253,382
TREX.......................... 706,828 634,933 674,342 496,200
----------- ----------- ------------- -----------
Total revenues............................ 25,729,160 22,464,572 23,357,305 24,152,951
----------- ----------- ------------- -----------
Losses and expenses:
Losses and loss expenses incurred.............. 4,939,674 4,160,747 6,072,159 3,391,028
Commissions and brokerage...................... 3,555,589 3,083,632 3,015,707 3,218,740
Other operating expenses....................... 3,184,722 3,341,610 2,623,326 3,112,290
Interest expense............................... 1,717,123 1,887,115 1,713,471 1,639,348
----------- ----------- ------------- -----------
Total expenses............................ 13,397,108 12,473,104 13,424,663 11,361,406
----------- ----------- ------------- -----------
Income before income taxes and equity in net
earnings of TREX.................................. 12,332,052 9,991,468 9,932,642 12,791,545
Equity in net earnings of TREX...................... 1,293,188 690,932 1,159,611 753,837
Income tax provision................................ 4,316,000 3,497,000 3,477,000 4,354,000
----------- ----------- ------------- -----------
Net income.......................................... $ 9,309,240 $ 7,185,400 $ 7,615,253 $ 9,191,382
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Basic earnings per common share:
Net income..................................... $1.07 $0.82 $0.88 $0.97
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Average shares outstanding..................... 8,724,061 8,747,772 8,699,027 9,509,538
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Diluted earnings per common share:
Net income..................................... $1.05 $.81 $0.87 $0.96
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Average shares outstanding..................... 8,831,438 8,841,846 8,789,112 9,603,675
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Dividends paid per common share..................... $ 0.18 $ 0.18 $ 0.18 $ 0.21
Price range of common stock:
High........................................... $28.00 $27.00 $24.50 $25.50
Low............................................ $24.00 $23.75 $22.25 $22.875
F-25
SCHEDULE II
PARENT COMPANY INFORMATION
PXRE Corporation's summarized financial information (parent company only)
is as follows:
BALANCE SHEET
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
ASSETS
Fixed maturities, at amortized cost.............................................. $ 16,996,151 $ 0
Short-term investments........................................................... 5,126,828 18,499,162
Equity securities................................................................ 3,023,866 0
Other invested assets............................................................ 14,684,287 0
Cash............................................................................. 445,647 448,154
Investment income receivable..................................................... 377,245 0
Other receivables................................................................ 213,194 167,656
Receivable from subsidiaries..................................................... 2,020,325 0
Income tax recoverable........................................................... 8,494,980 3,420,931
Equity in subsidiaries........................................................... 460,780,439 409,691,515
Deferred income tax benefits..................................................... 5,106,561 940,912
Other assets..................................................................... 7,171,828 7,411,113
------------ ------------
Total assets................................................................ $524,441,351 $440,579,443
------------ ------------
------------ ------------
LIABILITIES
Note payable..................................................................... $ 27,689,000 $ 69,700,000
Payable to subsidiaries.......................................................... 0 293,977
Excess of fair market value over cost............................................ 5,246,522 7,942,374
Other liabilities................................................................ 5,304,239 4,965,314
------------ ------------
Total liabilities........................................................... 38,239,761 82,901,665
------------ ------------
Minority interest in consolidated subsidiary..................................... 99,513,194 0
Stockholders' equity............................................................. 386,688,396 357,677,778
------------ ------------
Total liabilities and stockholders' equity.................................. $524,441,351 $440,579,443
------------ ------------
------------ ------------
INCOME STATEMENT
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Interest earned.................................................. $ 2,799,937 $ 131,928 $ 1,102,447
Realized gain on investment...................................... 433,966 0 0
Interest expense................................................. (12,005,863) (7,063,730) (7,063,857)
Other operating expenses......................................... 154,757 (1,671,164) (872,681)
------------ ------------ ------------
Loss before tax benefit.......................................... (8,617,203) (8,602,966) (6,834,091)
Income tax benefit............................................... 4,713,952 3,146,456 2,432,000
------------ ------------ ------------
(3,903,251) (5,456,510) (4,402,091)
Equity in earnings of subsidiary................................. 50,930,401 38,757,785 44,187,669
------------ ------------ ------------
Net income before extraordinary loss............................. 47,027,150 33,301,275 39,785,578
Extraordinary loss............................................... 2,773,690 0 0
------------ ------------ ------------
Net income....................................................... $ 44,253,460 $ 33,301,275 $ 39,785,578
------------ ------------ ------------
------------ ------------ ------------
CASH FLOW STATEMENT
Cash from operating activities:
Net income.................................................. $ 44,253,460 $ 33,301,275 $ 39,785,578
Adjustments to reconcile net income to cash provided by
operating acitvities:
Equity in earnings of subsidiaries..................... (50,930,401) (38,757,785) (44,187,669)
Cash dividends from subsidiaries....................... 0 21,000,000 6,000,000
Receivable from TREX................................... 0 (334,422) (55,630)
Investment income receivable........................... (377,245) 0 0
Intercompany accounts.................................. (2,314,302) 5,421,549 2,214,333
Deferred income taxes.................................. (4,165,649) (741,980) 0
Income tax (recoverable) payable....................... (5,074,049) (3,218,458) (2,566,935)
Other.................................................. 4,459,559 2,030,968 (2,024,244)
------------ ------------ ------------
Net cash provided (used) by operating
activities...................................... (14,148,627) 18,701,147 (834,567)
------------ ------------ ------------
Cash flow from investing activities:
Investment in equity of PXRE Trading Corporation............ 0 0 (2,500,000)
Net change in short-term investments........................ 13,372,334 205,160 (8,202,595)
Cost of fixed maturity investments.......................... (32,981,953)
Cost of equity securities................................... (3,023,866) 0 0
Fixed maturity investments matured/disposed................. 15,994,850 0 17,626,750
Net change in other invested assets......................... (14,684,287) 0 0
------------ ------------ ------------
Net cash provided (used) by investing
activities...................................... (21,322,922) 205,160 6,924,155
------------ ------------ ------------
Cash flow from financing activities:
Proceeds from issuance of common stock...................... 855,570 489,327 335,355
Cash dividends paid to common stockholders.................. (12,209,262) (6,478,852) (5,237,664)
Cash dividends paid to preferred stockholders............... 0 0 (933,061)
Repurchase from issuance of debt............................ (45,221,683) 0 0
Cost of treasury stock...................................... (7,464,583) (12,537,575) 0
Issuance of minority interest in consolidated subsidiary.... 99,509,000 0 0
------------ ------------ ------------
Net cash used by financing activities............. 35,469,042 (18,527,100) (5,835,370)
------------ ------------ ------------
Net change in cash............................................... (2,507) 379,207 254,218
Cash, begining of period......................................... 448,154 68,947 (185,271)
------------ ------------ ------------
Cash, end of period.............................................. $ 445,647 $ 448,154 $ 68,947
------------ ------------ ------------
------------ ------------ ------------
F-26
SCHEDULE III
PXRE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
------------ ----------- ---------------- ---------------- ---------------- ------------
FUTURE
POLICY
BENEFITS, OTHER
DEFERRED LOSSES, POLICY
SEGMENT- POLICY CLAIMS AND CLAIMS AND
PROPERTY AND ACQUISITION LOSS UNEARNED BENEFITS PREMIUM
CASUALTY COST EXPENSES PREMIUMS PAYABLE REVENUE
INSURANCE (CAPTION 7) (CAPTION 13-A-1) (CAPTION 13-A-2) (CAPTION 13-A-3) (CAPTION 1)
------------ ----------- ---------------- ---------------- ---------------- -----------
1997... $ 2,966,000 $ 57,189,000 $ 18,485,000 $0 $91,415,000
1996... 1,449,000 70,977,000 11,042,000 0 72,796,000
1995... 1,565,000 72,719,000 13,685,000 0 97,142,000
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
----------- ----------- --------------- ----------- ------------
BENEFITS
CLAIMS, AMORTIZATION OF
NET LOSSES AND DEFERRED
INVESTMENT SETTLEMENT POLICY OTHER
INCOME EXPENSES ACQUISITION OPERATING PREMIUMS
(CAPTION 2) (CAPTION 4) COSTS EXPENSE WRITTEN
----------- ----------- --------------- ----------- ------------
1997.. $31,191,000 $12,491,000 $19,138,000 $15,716,000 $100,055,000
1996.. 16,782,000 18,564,000 12,874,000 12,262,000 67,718,000
1995.. 14,730,000 34,716,000 13,251,000 11,237,000 97,636,000
SCHEDULE VI
PXRE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
------------- ----------- ------------ ----------- ----------- -----------
RESERVES FOR
UNPAID
DEFERRED CLAIMS AND DISCOUNT,
AFFILIATION POLICY CLAIM IF ANY
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS
------------- ----------- ------------ ----------- ----------- -----------
Consolidated
1997... Property $ 2,966,000 $ 57,189,000 $ 0 $18,485,000 $91,415,000
1996... Casualty 1,449,000 70,977,000 0 11,042,000 72,796,000
1995... Entities 1,565,000 72,719,000 0 13,685,000 97,142,000
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
----------- -------------------------- --------------- ----------- ------------
CLAIMS AND CLAIM
ADJUSTMENT EXPENSES
INCURRED RELATED TO AMORTIZATION OF PAID
-------------------------- DEFERRED CLAIMS AND
NET (1) (2) POLICY CLAIM
INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
INCOME YEAR YEARS COSTS EXPENSES WRITTEN
----------- ----------- ----------- --------------- ----------- ------------
1997.. $31,191,000 $16,408,000 $(3,917,000) $19,138,000 $23,379,000 $100,055,000
1996.. 16,782,000 15,315,000 3,249,000 12,874,000 28,753,000 67,718,000
1995.. 14,730,000 30,405,000 4,311,000 13,251,000 36,337,000 97,636,000
F-27
REPORT OF INDEPENDENT ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
PXRE CORPORATION
Our audits of the consolidated financial statements referred to in our
report dated February 12, 1998 appearing on page F-1 of PXRE Corporation's
Annual Report on Form 10-K for the year ended December 31, 1997, also included
an audit of the Financial Statement Schedules listed in Item 14(a) of this Form
10-K. In our opinion, these Financial Statement Schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PRICE WATERHOUSE LLP
New York, New York
February 12, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8/S-3 (Nos. 33-35521
and 33-63768) and Forms S-8 (Nos. 33-82908, 333-4897, 333-31817, 333-31819 and
333-31821) of PXRE Corporation of our report dated February 12, 1998 appearing
on page F-1 of this Form 10-K. We also consent to the incorporation by reference
of our report on the Financial Statement Schedules, which appears above.
PRICE WATERHOUSE LLP
New York, New York
March 23, 1998
F-28
STATEMENT OF DIFFERENCES
------------------------
The service mark symbol shall be expressed as......................... 'sm'
The section symbol shall be expressed as.............................. 'SS'
The British pound sterling sign shall be expressed as................. 'L'