SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ___________________
Commission File Number 001-12595
PXRE CORPORATION
(Formerly Phoenix Re Corporation)
(Exact name of registrant as specified in its charter)
Delaware 06-1183996
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
399 Thornall Street
Edison, New Jersey 08837
(Address of principal executive offices) (Zip Code)
(732) 906-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 13, 1998, 13,571,054 shares of common stock, $.01 par value
per share, of the Registrant were outstanding.
PXRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 3
Consolidated Statements of Income for the three and
six months ended June 30, 1998 and 1997 4
Consolidated Statements of Stockholders' Equity for the three
and six months ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flow for the three and
six months ended June 30, 1998 and 1997 6
Notes to Consolidated Interim Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION 25
2
PXRE CONSOLIDATED BALANCE SHEETS
CORPORATION (Unaudited)
- -------------------------------------------------------------------------------
June 30, December 31,
1998 1997
---- ----
Assets Investments:
Fixed maturities, available-for-sale, at fair value (amortized
cost $358,739,000 and $399,145,000, respectively) $361,288,379 $405,949,411
Equity securities, at fair value
(cost $27,077,000 and $21,049,000) 26,022,161 19,748,877
Short-term investments 55,885,337 52,904,819
Other invested assets, at fair value
(cost $70,443,000 and $42,375,000) 69,451,901 42,857,341
------------ ------------
Total investments 512,647,778 521,460,448
Cash 6,092,384 6,277,876
Accrued investment income 5,901,027 6,257,162
Receivables:
Unreported premiums 13,371,320 14,131,034
Balances due from intermediaries and brokers 21,627,819 5,978,439
Other receivables 19,144,761 20,575,692
Reinsurance recoverable 14,429,588 14,242,278
Ceded unearned premiums 7,498,430 2,531,453
Deferred acquisition costs 3,671,089 2,965,741
Other assets 14,791,187 14,531,423
------------ ------------
Total assets $619,175,383 $608,951,546
============ ============
Liabilities Losses and loss expenses $ 46,409,489 $ 57,189,454
Unearned premiums 26,134,012 18,485,042
Notes payable 20,414,000 21,414,000
Other liabilities 34,037,340 25,661,460
------------ ------------
Total liabilities 126,994,841 122,749,956
------------ ------------
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 99,515,039 99,513,194
Stockholders' Serial preferred stock, $.01 par value -- 500,000 shares authorized;
Equity 0 shares issued and outstanding 0 0
Common stock, $.01 par value -- 40,000,000 shares authorized;
14,934,595 and 14,806,347 shares issued, respectively 149,345 148,063
Additional paid-in capital 259,062,191 255,060,792
Net unrealized appreciation on investments, net of
deferred income tax expense of $779,000 and $1,940,000 560,841 3,173,006
Retained earnings 163,056,187 150,749,451
Treasury stock at cost (1,190,298 and 1,042,752 shares) (26,003,590) (21,660,108)
Restricted stock at cost (167,832 and 64,403 shares) (4,159,471) (782,808)
------------ ------------
Total stockholders' equity 392,665,503 386,688,396
------------ ------------
Total liabilities and stockholders' equity $619,175,383 $608,951,546
============ ============
The accompanying notes are an integral part of these statements.
3
PXRE CONSOLIDATED STATEMENTS OF INCOME
CORPORATION (Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues Net premiums earned $21,378,386 $24,383,433 $41,092,354 $46,683,336
Net investment income 4,436,722 7,760,235 11,997,781 16,714,287
Net realized investment gains (losses) 427,454 299,607 1,652,097 (139,601)
Management fees 678,947 812,958 1,504,628 1,728,254
----------- ----------- ----------- -----------
26,921,509 33,256,233 56,246,860 64,986,276
----------- ----------- ----------- -----------
Losses and Losses and loss expenses incurred 2,951,664 3,169,267 6,522,461 5,285,073
Expenses Commissions and brokerage 4,288,096 3,439,413 8,280,112 8,135,924
Other operating expenses 3,600,868 4,404,873 7,950,721 8,286,749
Interest expense 601,890 795,132 1,146,171 2,357,170
Minority interest in consolidated subsidiary 2,231,923 2,230,534 4,463,807 3,719,036
----------- ----------- ----------- -----------
13,674,441 14,039,219 28,363,272 27,783,952
----------- ----------- ----------- -----------
Income before income taxes and extraordinary item 13,247,068 19,217,014 27,883,588 37,202,324
Income tax provision 4,058,000 6,301,550 8,708,000 12,241,000
----------- ----------- ----------- -----------
Income before extraordinary loss 9,189,068 12,915,464 19,175,588 24,961,324
Extraordinary loss on debt redemption, net of $515,000
and $1,394,000 income tax benefit, respectively 0 955,740 0 2,588,940
----------- ----------- ----------- -----------
Net income $ 9,189,068 $11,959,724 $19,175,588 $22,372,384
=========== =========== =========== ===========
Per Share Basic:
Income before extraordinary item $0.67 $0.94 $1.40 $1.80
Extraordinary loss 0.00 0.07 0.00 0.19
----------- ----------- ----------- -----------
Net income $0.67 $0.87 $1.40 $1.61
=========== =========== =========== ===========
Average shares outstanding 13,650,563 13,808,230 13,676,914 13,853,537
=========== =========== =========== ===========
Diluted:
Income before extraordinary item $0.67 $0.93 $1.39 $1.79
Extraordinary loss 0.00 0.07 0.00 0.19
----------- ----------- ----------- -----------
Net income $0.67 $0.86 $1.39 $1.60
=========== =========== =========== ===========
Average shares outstanding 13,722,006 13,908,221 13,755,041 13,946,806
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
4
PXRE CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CORPORATION (Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
Common Stock: Balance at beginning of period $ 148,453 $ 147,732 $ 148,063 $ 147,058
Issuance of shares 892 180 1,282 854
------------ ------------ ------------ ------------
Balance at end of period $ 149,345 $ 147,912 $ 149,345 $ 147,912
============ ============ ============ ============
Additional Balance at beginning of period $256,322,483 $254,524,144 $255,060,792 $252,978,182
Paid-in Issuance of common shares 2,726,588 189,712 3,984,577 1,558,062
Capital: Other 13,120 95,557 16,822 273,169
------------ ------------ ------------ ------------
Balance at end of period $259,062,191 $254,809,413 $259,062,191 $254,809,413
============ ============ ============ ============
Unrealized Balance at beginning of period $ 3,524,028 $ (3,534,972) $ 3,173,006 $ 568,405
Appreciation Change in fair value for the period (2,963,187) 5,515,315 (2,612,165) 1,411,938
(Depreciation) ------------ ------------ ------------ ------------
on Investments: Balance at end of period $ 560,841 $ 1,980,343 $ 560,841 $ 1,980,343
============ ============ ============ ============
Retained Balance at beginning of period $157,286,353 $126,173,809 $150,749,451 $118,705,257
Earnings: Net income 9,189,068 11,959,724 19,175,588 22,372,384
Dividends paid to common stockholders (3,419,234) (2,930,344) (6,868,852) (5,874,452)
------------ ------------ ------------ ------------
Balance at end of period $163,056,187 $135,203,189 $163,056,187 $135,203,189
============ ============ ============ ============
Treasury Stock: Balance at beginning of period $(21,884,586) $(16,550,982) $(21,660,108) $(14,090,289)
Repurchase of common stock (4,119,004) (5,104,374) (4,312,129) (7,464,583)
Other 0 (4,752) (31,353) (105,236)
------------ ------------ ------------ ------------
Balance at end of period $(26,003,590) $(21,660,108) $(26,003,590) $(21,660,108)
============ ============ ============ ============
Restricted Balance at beginning of period $ (1,726,709) $ (1,213,611) $ (782,808) $ (630,835)
Stock: Issuance of restricted stock (2,646,987) 0 (3,838,227) (741,988)
Amortization of restricted stock 214,225 167,387 430,211 326,599
Other 0 4,752 31,353 4,752
------------ ------------ ------------ ------------
Balance at end of period $ (4,159,471) $ (1,041,472) $ (4,159,471) $ (1,041,472)
============ ============ ============ ============
Total Balance at beginning of period $393,670,022 $359,546,120 $386,688,396 $357,677,778
Stockholders' Issuance of common shares 2,727,480 189,892 3,985,859 1,558,916
Equity: Repurchase of common stock (4,119,004) (5,104,374) (4,312,129) (7,464,583)
Restricted stock, net (2,432,762) 167,387 (3,408,016) (415,389)
Unrealized (depreciation) appreciation on
investments net of deferred income tax (2,963,187) 5,515,315 (2,612,165) 1,411,938
Net income 9,189,068 11,959,724 19,175,588 22,372,384
Dividends (3,419,234) (2,930,344) (6,868,852) (5,874,452)
Other 13,120 95,557 16,822 172,685
------------ ------------ ------------ ------------
Balance at end of period $392,665,503 $369,439,277 $392,665,503 $369,439,277
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
5
PXRE CONSOLIDATED STATEMENTS OF CASH FLOW
CORPORATION (Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
Cash Flow Net income $ 9,189,068 $ 11,959,724 $ 19,175,588 $ 22,372,384
from Adjustments to reconcile net income to net cash
Operating provided by operating activities:
Activities Losses and loss expenses (3,990,538) (2,519,428) (10,779,965) (11,473,420)
Unearned premiums (6,010,999) (5,545,892) 2,681,993 8,157,070
Deferred acquisition costs 225,956 210,574 (705,348) (865,395)
Receivables 3,832,037 7,169,625 (11,998,990) (8,252,400)
Reinsurance balances payable (1,737,627) (3,070,441) 7,127,631 (828,398)
Reinsurance recoverable (547,941) 1,898,211 (187,310) 3,194,347
Income tax recoverable (4,493,338) (6,415,314) 1,194,540 229,080
Other 4,268,712 3,812,664 (1,865,069) (6,185)
------------ ------------ ------------ ------------
Net cash provided by operating activities 735,330 7,499,723 4,643,070 12,527,083
------------ ------------ ------------ ------------
Cash Flow Cost of fixed maturity investments (47,398,419) (18,827,039) (94,113,268) (182,415,394)
from Fixed maturity investments matured/disposed 62,938,849 22,519,816 133,446,003 149,277,957
Investing Payable for securities 4,219,586 983,998 4,219,586 7,471,758
Activities Cost of equity securities (4,163,718) (2,306,181) (6,211,960) (3,947,515)
Equity securities disposed 104,838 171,775 184,828 2,027,007
Net change in short-term investments 12,981,219 20,795,548 (2,111,703) (15,004,544)
Net change in other invested assets (24,285,774) 0 (28,168,532) 0
------------ ------------ ------------ ------------
Net cash provided (used) by investing
activities 4,396,581 23,337,917 7,244,954 (42,590,731)
------------ ------------ ------------ ------------
Cash Flow Proceeds from issuance of common stock 80,496 189,893 147,635 664,961
from Cash dividends paid to common stockholders (3,419,234) (2,930,344) (6,868,852) (5,874,452)
Financing Issuance of minority interest
Activities in consolidated subsidiary 0 0 0 99,509,000
Repurchase of debt (1,040,170) (17,919,108) (1,040,170) (44,714,733)
Cost of treasury stock (4,119,004) (5,104,374) (4,312,129) (7,464,583)
------------ ------------ ------------ ------------
Net cash (used) provided by financing
activities (8,497,912) (25,763,933) (12,073,516) 42,120,193
------------ ------------ ------------ ------------
Net change in cash (3,366,001) 5,073,707 (185,492) 12,056,545
Cash, beginning of period 9,458,385 11,921,319 6,277,876 4,938,481
------------ ------------ ------------ ------------
Cash, end of period $ 6,092,384 $ 16,995,026 $ 6,092,384 $ 16,995,026
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
6
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
- -------------------------------------------------------------------------------
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., PXRE Managing Agency Limited, Transnational
Insurance Company and TREX Trading Corporation. The U.K. operations of PXRE Ltd.
and PXRE Managing Agency Limited are included in the consolidated results on a
one quarter lag period. 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.
The interim consolidated financial statements are unaudited; however,
in the opinion of management, the foregoing consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. These
interim statements should be read in conjunction with the 1997 audited
consolidated financial statements and related notes. The preparation of interim
consolidated financial statements relies significantly upon estimates. Use of
such estimates, and the seasonal nature of a portion of the reinsurance
business, necessitates caution in drawing specific conclusions from interim
results.
Certain amounts in 1997 were reclassified to be consistent with the
1998 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.
7
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
- -------------------------------------------------------------------------------
MANAGEMENT FEES
Management fees are recorded as earned under various arrangements
whereby PXRE Reinsurance acts as underwriting manager for other insurers and
reinsurers. These fees are initially based on premium volume, but are adjusted
in some cases 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.
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.
8
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
- -------------------------------------------------------------------------------
EXCESS OF FAIR MARKET VALUE OF NET ASSETS OF BUSINESS ACQUIRED OVER COST
The excess of fair market value of net assets of Transnational Re
Corporation 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 and June 30, 1998 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 earnings
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.
9
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
PXRE Corporation ("PXRE") provides reinsurance products and services to a
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, by accepting additional amounts of coverage on
underwritten risks and retroceding such additional amounts to participants
through various retrocessional arrangements.
At June 30, 1998, PXRE was a party to three such retrocessional
arrangements. One such arrangement is with a group of insurers and reinsurers
referred to as the AMA; another is with Trenwick America Reinsurance Corporation
("Trenwick Group"); and a third arrangement is with Select Reinsurance Ltd.
("Select Re"), a Bermuda reinsurer, formerly Investors Reinsurance Ltd. 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, initially based on premium volume,
adjusted in some cases through contingent profit commissions related to
underwriting results measured over a period of years. Future management fee
income is dependent upon the amount of business ceded to the participants and
the profitability of that business.
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.
10
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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
business 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 specializes in short-tail property type risks to be
written as insurance in Transnational Insurance Company ("Transnational
Insurance"), formerly Transnational Reinsurance Company. Its operations
commenced during the first quarter of 1998.
In June 1998 PXRE announced the first steps in a plan to diversify its
business and position itself for renewed growth in a market that has continued
to experience intense competitive conditions. The actions announced will add new
reinsurance lines and expand the Company's capabilities in existing areas
primarily commencing with January 1999 renewals. In addition, these steps are
expected over time to reduce the volatility associated with PXRE's catastrophe
coverages. To achieve these growth objectives, PXRE has employed two teams of
specialists involving a total of 11 executives, to expand the distribution
systems used by the Company, strengthen its international business and provide
the expertise needed to underwrite certain casualty business. Heretofore, PXRE
has not had a significant presence in any casualty markets.
CERTAIN RISKS AND UNCERTAINTIES
As a reinsurer principally of property catastrophe-related coverages to
date 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
11
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
consequence of its emphasis to date 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 events based on historical data; however, no assurance
can be given that these maximums will not be exceeded in some future
catastrophe.
Premiums on reinsurance business assumed are recorded as earned on a pro
rata basis over the contract period based upon estimated subject premiums.
Management must estimate the subject premiums associated with the treaties in
order to determine the level of earned premiums for a reporting period. Such
estimates are based on information from brokers which can be subject to change
as new information becomes available. Because of the inherent uncertainty in
this process, there is the risk that premiums and related receivable balances
may turn out to be higher or lower than reported.
Although PXRE's investment guidelines stress conservation of principal,
diversification of risk and liquidity, PXRE's invested assets include equities,
investments in limited partnerships and emerging market debt, and 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.
12
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 SECOND QUARTER RESULTS FOR
1998 WITH 1997
Three Months Ended June 30,
--------------------------
Increase
1998 1997 (Decrease)
---- ---- ----------
(000's) %
GROSS PREMIUMS WRITTEN $ 24,624 $22,676 8.6
CEDED PREMIUMS:
Managed business participants 3,767 2,848 32.3
Catastrophe coverage and surplus reinsurance 5,489 990 454.4
------- ------
Total reinsurance premiums ceded 9,256 3,838 141.2
------- -------
NET PREMIUMS WRITTEN $15,368 $18,838 (18.4)
======= =======
Gross premiums written for the three months ended June 30, 1998, increased
8.6% to $24,624,000 from $22,676,000 for the corresponding period of 1997. Net
premiums written for the second quarter of 1998, decreased 18.4% to $15,368,000
from $18,838,000 for the corresponding period of 1997. Net premiums earned for
the second quarter of 1998, decreased 12.3% to $21,378,000 from $24,383,000 for
the comparable period of 1997. The increased contribution of PXRE's Lloyd's
Syndicate operation over the year-earlier period, which is included in the
consolidated results on a one quarter lag basis, commencing in the second
quarter of 1997, together
13
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
with the new excess and surplus lines written by Transnational Insurance Company
and new international facultative business lines more than offset the continued
impact of an intensely competitive market on PXRE's other business lines and
helped PXRE increase its gross premiums written during the second quarter of
1998. Because of competitive conditions and new operations, however, PXRE
increased its purchase of reinsurance and retrocessional coverage, contributing
to declines in net written and net earned premium.
Premiums ceded by PXRE to its managed business participants increased 32.3%
to $3,767,000 for the second quarter of 1998 compared with $2,848,000 for the
corresponding period of 1997. The increase in premiums ceded to these programs
was due to an increase in the cession rate to Select Re and an increase in gross
premiums written resulting from new operations.
Management fee income from all sources for the three months ended June 30,
1998 decreased to $679,000 from $813,000 for the corresponding period of 1997,
reflecting a reduced profit commission from a higher combined ratio on the
change in business mix reflected in the higher gross premiums written offset in
part by an increase in management fee income earned from Select Re.
The underwriting results of a property and casualty insurer are discussed
frequently by reference to its loss ratio, underwriting expense ratio and
combined ratio. The loss ratio is the result of dividing losses and loss
expenses incurred by net premiums earned. The underwriting expense ratio is the
result of dividing underwriting expenses (reduced by management fees, if any) by
net premiums written for purposes of statutory accounting practices ("SAP") and
net premiums earned for purposes of GAAP. The combined ratio is the sum of the
loss ratio and the underwriting expense ratio. A combined ratio under 100%
indicates underwriting profits and a combined ratio exceeding 100% indicates
underwriting losses. The combined ratio does not reflect the effect of
investment income on operating results. The ratios discussed below have been
calculated on a GAAP basis
The loss ratio was 13.8% for the second quarter of 1998 compared with 13.0%
for the comparable period of 1997 largely due to the higher average loss ratio
from PXRE's Lloyd's operation, the new excess and surplus business and new
international facultative operations offset in part by the triggering of a
retrocessional recovery on a 1994 aviation loss. The loss ratio for the second
quarter of 1998 reflected incurred catastrophe losses of $79,000 gross and the
reversal of catastrophe losses of $1,182,000 net for 1998 and prior accident
years. The reversal of the net catastrophe losses is primarily due to the 1994
aviation retrocessional recovery. In comparison, the loss ratio for the second
quarter of 1997 reflected a reversal of previously recorded catastrophe losses
of $1,144,000 gross and $1,158,000 net for 1997 and prior accident years. PXRE
did not experience any new significant catastrophic losses for the second
quarter of 1998. In the second quarter of 1997 significant catastrophe losses
affecting the loss ratio were the German, Poland and Czech floods amounting to
$1,422,000 gross and $1,191,000 net.
14
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The provision for losses and loss expenses and the loss ratio includes the
effect of foreign exchange movements on PXRE's liability for losses and loss
expenses, resulting in a foreign currency exchange loss of $339,000 for the
three months ended June 30, 1998 compared to a gain of $134,000 for the
corresponding period of 1997.
During the second quarter of 1998, PXRE experienced savings of $2,441,000
net for prior-year loss and loss expenses primarily related to the triggering of
the retrocessional recovery on a 1994 aviation loss referred to above. The loss
ratio for the comparable period of 1997 was favorably affected by savings of
$820,000 net for prior-year losses and loss expenses related principally to the
1996 Eurotunnel fire.
The underwriting expense ratio was 33.7% for the second quarter of 1998
compared with 28.8% for the comparable period of 1997. The increase in
underwriting expense ratio was substantially due to lower premiums earned,
higher commission rates and overhead associated with the newer operations.
As a result of the above, the combined ratio was 47.5% for the second
quarter of 1998 compared with 41.8% for the corresponding period of 1997.
Other operating expenses decreased to $3,601,000 for the three months ended
June 30, 1998 from $4,405,000 in the comparable period of 1997. The decrease was
mainly due to non-recurring consulting fees in the year earlier period
associated with the start-up of the PXRE's Lloyd's Syndicate 1224. Included in
other operating expenses were foreign currency exchange gains of $26,000 for the
three months ended June 30, 1998 compared to losses of $121,000 for the
corresponding period of 1997.
During the second quarter of 1998, interest expense decreased to $602,000
as compared to $795,000 in the corresponding period of 1997 due to the effect
of the repurchases of PXRE's 9.75% Senior Notes in open market purchases. PXRE
has announced its intention to redeem the Senior Notes; see "Liquidity and
Capital Resources". In addition, in the second quarter of 1998 and 1997, PXRE
incurred minority interest expense amounting to $2,231,000 related to the $100
million of 8.85% Capital Trust Pass-through Securities `sm' (TRUPS `sm') (as
described below under "Liquidity and Capital Resources").
In the second quarter of 1997, PXRE recorded an extraordinary loss of
$956,000, net of tax, in connection with the purchase of $16.7 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 the three months ended June 30, 1998 decreased
42.8% to $4,437,000 from $7,760,000 for the comparable period of 1997. The
decrease in net investment income was caused primarily by a decrease in average
assets, due in part to the purchase of $43.3 million of PXRE's Senior Notes
during the second and third quarters of 1997 with proceeds from the $100 million
TRUPS securities issued in January,1997; the redeployment of funds to lower
15
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
yielding equities and other invested assets, and the market decline of certain
limited partnership investments (which are carried on the equity method) during
the period. PXRE's pre-tax annualized investment yield was 3.7% for the second
quarter of 1998 compared with 6.3% for the corresponding period in 1997, both
calculated using amortized cost and investment income before investment
expenses. Net realized investment gains for the second quarter of 1998 were
$427,000 compared to gains of $300,000 for the corresponding period of 1997.
The net effects of foreign currency exchange fluctuations were losses of
$313,000 in the second quarter of 1998 and gains of $13,000 for the comparable
quarter of 1997. See "Liquidity and Capital Resources".
For the reasons discussed above, net income was $9,189,000 for the three
months ended June 30, 1998 compared to $11,960,000 for the comparable period of
1997. Diluted income per common share before extraordinary loss was $0.67 for
the second quarter of 1998 compared to $0.93 for the prior comparable period.
Diluted income per common share was $0.67 for the second quarter of 1998
compared to $0.86 for the prior comparable period based on diluted average
shares outstanding of approximately 13,722,000 in 1998 and 13,908,000 in the
corresponding period of 1997.
COMPARISON OF YEAR-TO-DATE RESULTS FOR
1998 WITH 1997
Six Months Ended June 30,
---------------------------------------
Increase
1998 1997 (Decrease)
---- ---- ----------
(000's) %
GROSS PREMIUMS WRITTEN $65,262 $67,656 (3.5)
CEDED PREMIUMS:
Managed business participants 9,907 9,769 1.4
Catastrophe coverage and
surplus reinsurance 11,630 3,047 281.7
------- --------
Total reinsurance premiums ceded 21,537 12,816 68.0
------- --------
NET PREMIUMS WRITTEN $43,725 $54,840 (20.3)
======= =======
Gross premiums written for the first six months of 1998 decreased 3.5% to
$65,262,000 from $67,656,000 for the comparable period of 1997. Net premiums
written for the six months ended June 30, 1998 decreased 20.3% to $43,725,000
from $54,840,000 for the corresponding period of 1997. Net premiums earned for
the first six months of 1998 decreased 12.0% to $41,092,000 from $46,683,000 in
the corresponding period of 1997. The increased contribution of PXRE's Lloyd's
Syndicate operation, together with the new excess and surplus lines written by
Transnational Insurance Company and new international facultative business only
partly offset the continued impact of an intensely competitive market
16
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
on PXRE's other business lines. Because of competitive conditions and new
operations, PXRE increased its purchase of reinsurance and retrocessional
coverage, contributing to further declines in net written and net earned
premium.
Premiums ceded by PXRE to its managed business participants increased 1.4%
to $9,907,000 for the first six months of 1998 compared with $9,769,000 for the
corresponding period of 1997. The increase in premiums ceded to these programs
was due primarily to an increased cession rate to Select Re and cessions of new
operations offset in part by the effect of declines in gross premiums written of
PXRE's traditional operations.
Management fee income from all sources for the six months ended June 30,
1998 decreased to $1,505,000 from $1,728,000 for the corresponding period of
1997 reflecting a reduced profit commission from a higher combined ratio on the
change in business mix for newer operations offset, in part, by an increase in
management fee income earned from Select Re.
The loss ratio was 15.9% for the six months ended June 30, 1998 compared
with 11.3% for the corresponding period of 1997 largely due to the higher
average loss ratio from PXRE's Lloyd's operation, the new excess and surplus
business and new international facultative operations offset in part by the
triggering of the recovery on the 1994 aviation loss. The loss ratio for the
first six months of 1998 reflected a reversal of previously recorded
catastrophe losses of $81,000 gross and $1,247,000 net for 1998 and prior
accident years. The reversal of the net catastrophe losses was primarily due to
the retrocessional recovery on the 1994 aviation loss. In comparison, the loss
ratio for the first six months of 1997 reflected a reversal of previously
recorded catastrophe losses of $2,022,000 gross and $1,491,000 net for 1997
and prior accident years.
There were no significant catastrophe losses which occurred in the first half of
1998. Significant catastrophe losses affecting the six months ended June 30,
1997 loss ratio are as follows:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
(in thousands)
German, Poland and Czech Floods $1,422 $1,191
The provision for losses and loss expenses and the loss ratio includes the
effect of foreign exchange movements on PXRE's liability for losses and loss
expenses, resulting in a foreign currency exchange loss of $366,000 for the
first six months of 1998 compared to a gain of $751,000 for the corresponding
period of 1997.
During 1998, PXRE experienced savings of $1,697,000 net for prior-year loss
and loss expenses primarily related to the triggering of a recovery on the 1994
aviation loss discussed earlier offset in part by adverse development in the
first quarter of 1998 due to the German,
17
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Poland and Czech floods. The loss ratio for the comparable period of 1997
experienced savings of $1,163,000 net for prior-year losses and loss expenses
primarily related to the 1996 Eurotunnel fire where redundant reserves were
recognized in the second quarter of 1997 of approximately $1,372,000. In
addition, prior-year losses originally thought to have triggered market loss
coverage thresholds proved to be redundant by approximately $1,800,000 resulting
in the reversal of recorded losses in the first quarter of 1997.
The underwriting expense ratio was 35.8% for the six months ended June 30,
1998 compared with 31.5% for the comparable quarter of 1997. The increase in
underwriting expense ratio was substantially due to lower premiums earned,
higher commission rates and overhead associated with newer operations and
unrealized foreign exchange losses in the first half of 1998.
As a result of the above, the combined ratio was 51.7% for the first six
months of 1998 compared with 42.8% for the corresponding period of 1997.
Other operating expenses decreased to $7,951,000 for the six months ended
June 30, 1998 from $8,287,000 in the comparable period of 1997. Included in
other operating expenses were foreign currency exchange losses of $48,000 for
the first six months of 1998 compared to losses of $850,000 for the
corresponding period of 1997. Operating expenses were $9,251,000 excluding
foreign exchange losses and amortization of negative goodwill of $1,348,000 in
the first six months of 1998 compared with $8,785,000 in the first six months of
1997.
During the first six months of 1998, interest expense decreased to
$1,146,000 as compared to $2,357,000 in the corresponding period in 1997 due to
the effect of the repurchase of $43.3 million of PXRE's 9.75% Senior Notes in
open market purchases. PXRE has announced its intention to redeem the Senior
Notes; see "Liquidity and Capital Resources". In addition in the first six
months of 1998, PXRE incurred minority interest expense amounting to $4,464,000
related to the $100 million of 8.85% Capital Trust Pass-through Securities `sm'
(TRUPS `sm') (as described below under "Liquidity and Capital Resources")
compared to $3,719,000 in the similar period of 1997. The increase in 1998
reflects the fact that the obligation was only outstanding during a portion
of the prior period.
In the first six months of 1997, PXRE recorded an extraordinary loss of
$2,589,000, net of tax, in connection with the repurchase of $41.6 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 the six months ended June 30, 1998 decreased
28.2% to $11,998,000 from $16,714,000 for the same period of 1997. The decrease
in net investment income was caused primarily by a decrease in average assets,
due in part to the purchase of $43.3 million of PXRE's Senior Notes during the
second and third quarters of 1997 with proceeds from the TRUPS Securities issued
in January 1997, the redeployment of funds to lower yielding equities and other
invested assets and the market decline of certain limited partnership
investments (which are carried on the equity method) during the period. PXRE's
pre-tax annualized investment yield
18
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
was 5.0% for the second quarter of 1998 compared with 6.5% for the corresponding
period in 1997, both calculated using amortized cost and investment income
before investment expenses. Net realized investment gains for the first six
months of 1998 were $1,652,000 compared to losses of $140,000 for the
corresponding period of 1997 reflecting the active management of the portfolio.
The net effects of foreign currency exchange fluctuations were losses of
$414,000 in the six months ended June 30, 1998, as compared to losses of $99,000
for the comparable period of 1997.
For the reasons discussed above, net income was $19,176,000 for the six
months ended June 30, 1998 compared to net income of $22,372,000 for the
corresponding period of 1997. Diluted income per common share before
extraordinary loss was $1.39 for the first six months of 1998 compared to $1.79
for the prior comparable period. Diluted net income per common share was $1.39
for the six months ended June 30, 1998 compared to $1.60 for the corresponding
period of 1997 based on diluted average shares outstanding of approximately
13,755,000 in the first six months of 1998 and 13,947,000 in the comparable
period of 1997.
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 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. Transnational Insurance may
not pay any dividends to PXRE Reinsurance in 1998, without regulatory approval.
During the second quarter of 1998, $3,800,000 in dividends were paid by PXRE
Reinsurance to PXRE.
19
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 the second quarter
of 1998 in respect of the Capital Securities (and related Subordinated Debt
Securities) amounted to approximately $2,231,000. 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, 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
20
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 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 the first six months of 1998 in respect of the Senior Notes
amounted to approximately $602,000. As previously announced, the Company has
elected to redeem on August 15, 1998, all of the outstanding 9.75% Senior Notes
due August 15, 2003, issued under the Indenture dated August 31, 1993. The Notes
will be redeemed at a price of 103.656% of the principal amount, plus accrued
interest thereon to August 15, 1998, and, as a result, the Company will record
an extraordinary loss of $843,000, net of tax, in the third quarter of 1998,
including the remaining unamortized offering costs.
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 to PXRE (or will be
entitled to receive a credit if payments exceed the separate return tax
liability) of the subsidiary.
The primary sources of liquidity for PXRE 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 and, income taxes and to
the purchase of investments. Premiums are typically
21
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
received in advance of related claim payments.
Net cash flow provided by operations was $735,000 during the second quarter
of 1998 compared with net cash flow provided by operations of $7,500,000 during
the corresponding period of 1997, due to the effects of timing of collection of
receivables and reinsurance recoverables and payments of losses.
PXRE's management has established general procedures and guidelines for its
investment portfolio and oversees investment management carried out by Phoenix
Investment Partners, Limited, (formerly Phoenix Duff & Phelps Corporation), a
public majority-owned subsidiary of Phoenix Home Life Mutual Insurance Company.
Although these investment guidelines stress conservation of principal,
diversification of risk and liquidity, investments are subject to market-wide
risks and fluctuations, as well as to risk inherent in particular securities. At
June 30, 1998, PXRE's investment portfolio consisted primarily of fixed
maturities and short-term investments. As at June 30, 1998, 81.4% 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 June 30, 1998, 80.6% of the fair
value was in obligations rated "A2" or "A" or better by Moody's Investors
Service Inc. or Standard & Poor's Corporation, respectively. Mortgage and
asset-backed securities accounted for 24.0% of fixed maturities based on fair
value at June 30, 1998. PXRE has no investments in real estate or commercial
mortgage loans. The average market yield to maturity of PXRE's fixed maturities
portfolio at June 30, 1998 and 1997, was 6.6% and 5.8%, respectively. Starting
in 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, 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
$2,612,000 after-tax unrealized loss in the value of its investment portfolio
($0.19 book value per share) for the six months ended June 30,1998 reflecting
principally the value of its emerging market bonds. 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 US Treasury bills,
were $55,885,000 at June 30, 1998 compared to $52,905,000 at December 31, 1997.
Other invested assets amounting to $69,452,000 at June 30, 1998, 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 as of June 30, 1998 amounted to $1,703,000.
22
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Dividends incurred in the six months ended June 30, 1998 were $6,869,000
compared to $5,874,000 in the corresponding period of 1997, as a result of the
increase in the per share quarterly dividend from $0.21 to $0.25 in the fourth
quarter of 1997. The expected annual dividend based on shares outstanding at
June 30, 1998 will be approximately $13,744,000.
Book value per common share was $28.57 at June 30, 1998.
As announced in April 1997, PXRE's Board of Directors authorized a new
stock repurchase program and at June 30, 1998 1.6 million of the authorization
remained. In April, 1998 PXRE repurchased 141,800 shares of common stock in open
market purchases. From June 30, 1998 until August 7, 1998 PXRE repurchased an
additional 175,000 shares.
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 ($58.5 million at June 30, 1998 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 municipal bonds and U.S. government
securities in approximately the same amount. In addition, PXRE has provided a
'L'5,000,000 ($8,350,000 at June 30, 1998 exchange rates) line of credit to
PXRE Managing Agency Limited 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 L.L.C., with initial committed capital of $20
million. The joint venture specializes in investing in instruments, the returns
on which are determined, in whole or in part, by the nature, magnitude and/or
effects of certain catastrophic events or meteorological conditions.
All amounts classified as reinsurance recoverable at June 30, 1998 are
considered by management of PXRE to be collectible in all material respects.
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
23
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 the second quarter of 1998 and 1997 was 30.6%
and 32.8%, respectively, which differs from the statutory rate principally due
to negative goodwill amortization, tax-exempt income and state and local taxes.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains various forward-looking statements and includes
assumptions concerning PXRE's operations, future results and prospects.
Statements included herein which are not historical in nature are intended to
be, and are hereby identified as, "forward-looking statements" for purposes of
the safe harbor provided by Section 21E of the Securities Exchange Act of 1934
as amended. These forward-looking statements are based on current expectations
and are subject to risk and uncertainties. PXRE cautions the reader that actual
results or events could differ materially from those set forth or implied by the
forward-looking statements and related assumptions, depending on the outcome of
certain important factors including the following: (i) significant catastrophe
losses, the timing and extent of which are difficult to predict; (ii) changes in
the level of competition in the reinsurance or primary insurance markets that
impact the volume or profitability of the property-casualty reinsurance business
(these changes include, but are not limited to, the intensification of price
competition, the entry of new competitors, existing competitors exiting the
market and the development of new products by new and existing competitors);
(iii) changes in the demand for reinsurance, including changes in the amount of
ceding companies' retentions; (iv) adverse development on loss reserves related
to business written in prior years; (v) lower than estimated retrocessional
recoveries on unpaid losses, including the effects of losses due to a decline in
the creditworthiness of PXRE's retrocessionaires; (vi) increases in interest
rates, which cause a reduction in the market value of PXRE's interest rate
sensitive investments, including its fixed income investment portfolio; (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.
24
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At PXRE's Annual Meeting of Shareholders held on June 4, 1998, the holders
of Common Stock of PXRE approved the following (in each case, with no broker
non-votes):
(i) the election of three Class III directors to serve
until the 2001 Annual Meeting of Shareholders and
until their successors have been elected and have
qualified:
Nominee Votes For Votes Withheld
-------- ----------- --------------
Bernard Kelly 12,883,087 232,782
Edward P. Lyons 12,883,087 232,782
David W. Searfoss 12,883,087 232,782
(ii) The appointment of Price Waterhouse LLP as PXRE's
independent public accountants for the fiscal year
ending December 31, 1998, by the vote of 13,077,222
votes for, 29,747 votes against and 8,900
abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report or amendment thereto to be signed on
its behalf by the undersigned thereunto duly authorized.
PXRE CORPORATION
August 13, 1998 By: /s/ Sanford M. Kimmel
-------------------------------
Sanford M. Kimmel
Senior Vice President, Treasurer
and Chief Financial Officer
26
STATEMENT OF DIFFERENCES
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The service mark symbol shall be expressed as.......................... 'sm'
The British pound sterling sign shall be expressed as.................. 'L'