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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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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 November 10, 1998, 13,316,504 shares of common stock, $.01 par value
per share, of the Registrant were outstanding.
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PXRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 3
Consolidated Statements of Income for the three and
nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Stockholders' Equity for the three
and nine months ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flow for the three and
nine months ended September 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 28
2
PXRE Consolidated Balance Sheets
Corporation (Unaudited)
- --------------------------------------------------------------------------------
September 30, December 31,
1998 1997
---- ----
Assets Investments:
Fixed maturities, available-for-sale, at fair value (amortized
cost $307,723,000 and $399,145,000, respectively) $ 299,619,682 $ 405,949,411
Equity securities, at fair value (cost $27,669,000 and $21,049,000) 23,224,811 19,748,877
Short-term investments 57,039,019 52,904,819
Other invested assets, at fair value (cost $71,775,000 and $42,375,000) 64,992,424 42,857,341
------------- -------------
Total investments 444,875,936 521,460,448
Cash 6,474,531 6,277,876
Accrued investment income 6,207,760 6,257,162
Receivables:
Unreported premiums 22,059,992 14,131,034
Balances due from intermediaries and brokers 21,068,153 5,978,439
Other receivables 25,567,901 20,575,692
Reinsurance recoverable 37,586,037 14,242,278
Ceded unearned premiums 11,638,878 2,531,453
Deferred acquisition costs 4,101,028 2,965,741
Other assets 29,891,322 14,531,423
------------- -------------
Total assets $ 609,471,538 $ 608,951,546
============= =============
Liabilities Losses and loss expenses $ 96,134,904 $ 57,189,454
Unearned premiums 27,225,311 18,485,042
Notes payable 0 21,414,000
Other liabilities 31,565,787 25,661,460
------------- -------------
Total liabilities 154,926,002 122,749,956
------------- -------------
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 99,515,968 99,513,194
Stockholders' Serial preferred stock, $.01 par value -- 500,000 shares authorized;
Equity no shares issued and outstanding 0 0
Common stock, $.01 par value -- 40,000,000 shares authorized;
14,936,392 and 14,806,347 shares issued, respectively 149,363 148,063
Additional paid-in capital 259,106,784 255,060,792
Net unrealized (depreciation) appreciation on investments, net of
deferred income tax (benefit) expense of ($4,385,000) and $1,940,000 (8,575,026) 3,173,006
Retained earnings 146,185,219 150,749,451
Treasury stock at cost (1,621,798 and 1,042,752 shares) (38,081,738) (21,660,108)
Restricted stock at cost (167,832 and 64,403 shares) (3,755,034) (782,808)
------------- -------------
Total stockholders' equity 355,029,568 386,688,396
------------- -------------
Total liabilities and stockholders' equity $ 609,471,538 $ 608,951,546
============= =============
The accompanying notes are an integral part of these statements.
3
PXRE Consolidated Statements of Income
Corporation (Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues Net premiums earned $ 27,644,965 $ 20,099,586 $ 68,737,319 $ 66,782,922
Net investment (loss)income (851,792) 8,144,342 11,145,988 24,858,629
Net realized investment gains 1,328,034 955,190 2,980,132 815,589
Management fees (33,227) 726,083 1,471,401 2,454,337
----------- ------------ ------------ ------------
28,087,980 29,925,201 84,334,840 94,911,477
----------- ------------ ------------ ------------
Losses and Losses and loss expenses incurred 32,936,993 1,156,652 39,459,454 6,441,725
Expenses Commissions and brokerage 7,376,058 4,153,134 15,656,171 12,289,058
Other operating expenses 5,414,708 3,561,247 13,365,429 11,847,996
Interest expense 248,641 433,218 1,394,811 2,790,388
Minority interest in consolidated subsidiary 2,232,051 2,231,444 6,695,858 5,950,480
------------ ------------ ----------- ------------
48,208,451 11,535,695 76,571,723 39,319,647
------------ ------------ ----------- ------------
(Loss) income before income taxes and extraordinary item (20,120,471) 18,389,506 7,763,117 55,591,830
Income tax (benefit) provision (7,484,000) 6,007,000 1,224,000 18,248,000
------------ ------------ ----------- ------------
(Loss) income before extraordinary loss (12,636,471) 12,382,506 6,539,117 37,343,830
Extraordinary loss on debt redemption, net of $454,000
income tax benefit (843,000) (184,750) (843,000) (2,773,690)
------------ ------------ ----------- ------------
Net (loss) income $(13,479,471) $ 12,197,756 $ 5,696,117 $ 34,570,140
============ ============ =========== ============
Per Share Basic:
(Loss) income before extraordinary item $ (0.93) $ 0.90 $ 0.48 $ 2.71
Extraordinary loss (0.06) (0.01) (0.06) (0.20)
------------ ------------ ----------- ------------
Net (loss) income $ (0.99) $ 0.89 $ 0.42 $ 2.51
============ ============ =========== ============
Average shares outstanding 13,596,222 13,727,284 13,599,922 13,799,581
============ ============ =========== ============
Diluted:
(Loss) income before extraordinary item $ (0.93) $ 0.89 $ 0.48 $ 2.69
Extraordinary loss (0.06) (0.01) (0.06) (0.20)
------------ ------------ ----------- ------------
Net (loss) income $ (0.99) $ 0.88 $ 0.42 $ 2.49
============ ============ =========== ============
Average shares outstanding 13,596,222 13,855,874 13,706,155 13,907,417
============ ============ =========== ============
The accompanying notes are an integral part of these statements.
4
PXRE Consolidated Statements of Stockholders' Equity
Corporation (Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- -----
Common Stock: Balance at beginning of period $ 149,345 $ 147,912 $ 148,063 $ 147,058
Issuance of shares 18 67 1,300 921
------------ ------------ ------------ ------------
Balance at end of period $ 149,363 $ 147,979 $ 149,363 $ 147,979
============ ============ ============ ============
Additional Balance at beginning of period $259,062,191 $254,809,413 $255,060,792 $252,978,182
Paid-in Capital: Issuance of common shares 44,593 118,959 4,029,170 1,677,021
Other 0 9,339 16,822 282,508
------------ ------------ ------------ ------------
Balance at end of period $259,106,784 $254,937,711 $259,106,784 $254,937,711
============ ============ ============ ============
Unrealized
Appreciation Balance at beginning of period $ 560,841 $ 1,980,343 $ 3,173,006 $ 568,405
(Depreciation) Change in fair value for the period (9,135,867) 2,667,942 (11,748,032) 4,079,880
------------ ------------ ------------ ------------
on Investments: Balance at end of period $ (8,575,026) $ 4,648,285 $ (8,575,026) $ 4,648,285
============ ============ ============ ============
Retained Balance at beginning of period $163,056,187 $135,203,189 $150,749,451 $118,705,257
Earnings: Net (loss) income (13,479,471) 12,197,756 5,696,117 34,570,140
Dividends paid to common stockholders (3,391,497) (2,890,332) (10,260,349) (8,764,784)
------------ ------------ ------------ ------------
Balance at end of period $146,185,219 $144,510,613 $146,185,219 $144,510,613
============ ============ ============ ============
Treasury Stock: Balance at beginning of period $(26,003,590) $(21,660,108) $(21,660,108) $(14,090,289)
Repurchase of common stock (12,078,148) 0 (16,390,277) (7,464,583)
Other 0 0 (31,353) (105,236)
------------ ------------ ------------ ------------
Balance at end of period $(38,081,738) $(21,660,108) $(38,081,738) $(21,660,108)
============ ============ ============ ============
Restricted Stock: Balance at beginning of period $ (4,159,471) $ (1,041,472) $ (782,808) $ (630,835)
Issuance of restricted stock 0 0 (3,838,227) (741,988)
Amortization of restricted stock 404,437 119,818 834,648 446,417
Other 0 0 31,353 4,752
------------ ------------ ------------ ------------
Balance at end of period $ (3,755,034) $ (921,654) $ (3,755,034) $ (921,654)
============ ============ ============= =============
Total Balance at beginning of period $392,665,503 $369,439,277 $386,688,396 $357,677,778
Stockholders' Issuance of common shares 44,611 119,026 4,030,470 1,677,942
Equity: Repurchase of common stock (12,078,148) 0 (16,390,277) (7,464,583)
Restricted stock, net 404,437 119,818 (3,003,579) (295,571)
Unrealized (depreciation) appreciation on
investments net of deferred income tax (9,135,867) 2,667,942 (11,748,032) 4,079,880
Net (loss) income (13,479,471) 12,197,756 5,696,117 34,570,140
Dividends (3,391,497) (2,890,332) (10,260,349) (8,764,784)
Other 0 9,339 16,822 182,024
------------ ------------ ------------ ------------
Balance at end of period $355,029,568 $381,662,826 $355,029,568 $381,662,826
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
5
PXRE Consolidated Statements of Cash Flow
Corporation (Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Cash Flow Net (loss) income $(13,479,471) $ 12,197,756 $ 5,696,117 $ 34,570,140
from Operating Adjustments to reconcile net (loss) income to net
Activities cash provided by operating activities:
Losses and loss expenses 49,725,415 (3,794,773) 38,945,450 (15,268,193)
Unearned premiums (3,049,148) 7,658,211 (367,155) 15,815,281
Deferred acquisition costs (429,939) (751,211) (1,135,288) (1,616,606)
Receivables (15,160,219) (14,823,392) (27,159,209) (23,075,792)
Reinsurance balances payable 3,363,007 (2,786,171) 10,490,639 (3,614,569)
Reinsurance recoverable (23,156,450) 1,166,908 (23,343,759) 4,361,255
Income tax recoverable (7,318,944) (110,387) (6,124,404) 118,693
Other 2,680,368 (5,727,021) 815,297 (5,733,206)
------------ ----------- ----------- ------------
Net cash (used) provided by operating activities (6,825,381) (6,970,080) (2,182,312) 5,557,003
------------ ----------- ----------- ------------
Cash Flow Cost of fixed maturity investments (2,735,569) (46,803,002) (96,848,837) (229,218,396)
from Investing Fixed maturity investments matured/disposed 53,126,927 77,113,933 186,572,930 226,391,890
Activities Payable for securities (2,893,162) (5,445,407) 1,326,425 2,026,351
Cost of equity securities (1,885,732) (8,961,661) (8,097,692) (12,909,176)
Equity securities disposed 1,293,245 648,313 1,478,073 2,675,320
Net change in short-term investments (2,098,106) 24,309,251 (4,209,808) 9,304,707
Net change in other invested assets (687,351) (41,500,000) (28,855,884) (41,500,000)
------------ ----------- ------------ ------------
Net cash provided (used) by investing activities 44,120,252 (638,573) 51,365,207 (43,229,304)
------------ ----------- ------------ ------------
Cash Flow Proceeds from issuance of common stock 44,611 119,031 192,246 783,992
from Financing Cash dividends paid to common stockholders (3,391,497) (2,890,332) (10,260,349) (8,764,784)
Activities Issuance of minority interest in consolidated subsidiary 0 0 0 99,509,000
Repurchase of debt (21,487,690) (1,806,950) (22,527,860) (46,521,683)
Cost of treasury stock (12,078,148) 0 (16,390,277) (7,464,583)
------------ ----------- ----------- -----------
Net cash (used) provided by financing activities (36,912,724) (4,578,251) (48,986,240) 37,541,942
------------ ------------ ------------ -----------
Net change in cash 382,147 (12,186,904) 196,655 (130,359)
Cash, beginning of period 6,092,384 16,995,026 6,277,876 4,938,481
------------ ------------ ------------ -----------
Cash, end of period $ 6,474,531 $ 4,808,122 $ 6,474,531 $ 4,808,122
============ ============ ============ ===========
The accompanying notes are an integral part of these statements.
6
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
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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.
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
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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. Investments in
affiliated companies which are less than majority owned are accounted for under
the equity method. 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
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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 September 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
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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 September 30, 1998, PXRE was a party to retrocessional arrangements
with a number of insurers and reinsurers. 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.
Another arrangement with Select Reinsurance Ltd. ("Select Re"), a Bermuda
reinsurer, formerly Investors Reinsurance Ltd, was renegotiated in 1998, and
involves a five-year fee based undertaking to produce and underwrite business
with Select Re.
PXRE also purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. PXRE has significantly 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, providing PXRE 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 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 consequence of
its emphasis to date on property reinsurance, PXRE may forgo potential
11
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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, 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. Also, PXRE has recently
made significant commitments to build an excess and surplus lines operation,
expand the distribution systems used by PXRE and position PXRE to underwrite
certain casualty business, markets in which PXRE has not had a significant
presence. 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 THIRD QUARTER RESULTS FOR
1998 WITH 1997
Three Months Ended
September 30,
------------------------------
Increase
1998 1997 (Decrease)
---- ---- ----------
(000's) %
GROSS PREMIUMS WRITTEN $43,608 $35,186 23.9
CEDED PREMIUMS:
Managed business participants 5,637 4,613 22.2
Catastrophe coverage and surplus reinsurance 13,970 2,815 396.3
------- -------
Total reinsurance premiums ceded 19,607 7,428 164.0
------- -------
NET PREMIUMS WRITTEN $24,001 $27,758 (13.5)
======= =======
Gross premiums written for the three months ended September 30, 1998,
increased 23.9% to $43,608,000 from $35,186,000 for the corresponding period of
1997. Net premiums written for the third quarter of 1998, decreased 13.5% to
$24,001,000 from $27,758,000 for the corresponding period of 1997. Net premiums
earned for the third quarter of 1998, increased 37.5% to $27,645,000 from
$20,100,000 for the comparable period of 1997. The increased contribution of
13
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 with the new excess and surplus lines
written by Transnational Insurance and new international facultative business
lines and reinstatement premiums associated with the third quarter 1998
catastrophes, discussed below, 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 and net premiums earned during the third
quarter of 1998. Because of competitive conditions and new operations, however,
PXRE significantly increased its purchase of reinsurance and retrocessional
coverage, which resulted in a decline in net premiums written for the period.
Premiums ceded by PXRE to its managed business participants increased
22.2% to $5,637,000 for the third quarter of 1998 compared with $4,613,000 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
September 30, 1998 decreased by $759,000 to $(33,000) from $726,000 for the
corresponding period of 1997, reflecting a reduced profit commission due to
Hurricane Georges and two aerospace catastrophes discussed below and 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 119.1% for the third quarter of 1998 compared with
5.7% for the comparable period of 1997 largely due to Hurricane Georges, two
aerospace catastrophes and the higher average loss ratio from PXRE's Lloyd's
operation, the new excess and surplus business and new international facultative
operations. The loss ratio for the third quarter of 1998 reflected incurred
catastrophe losses of $43,333,000 gross and $22,286,000 net for 1998 and prior
accident years. In comparison, the loss ratio for the third quarter of 1997
reflected a reversal of previously recorded catastrophe losses of $1,157,000
gross and $950,000 net for 1997 and prior accident years. PXRE experienced the
following new significant catastrophe losses for the third quarter of 1998:
14
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
(in thousands)
Hurricane Georges $43,616 $22,729
Two aerospace losses 3,485 2,766
In the third quarter of 1997 significant catastrophe losses affecting
the loss ratio were the German, Poland and Czech floods amounting to $2,798,000
gross and $2,343,000 net.
It should be noted that results from PXRE's Lloyd's Syndicate are
recorded on a one quarter lag basis. Therefore, losses of the Lloyd's Syndicate
from Hurricane Georges and the above aerospace losses amounting to $2,962,000
(net of reinstatment premiums) are not reflected in the third quarter 1998
results.
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 $399,000 for the
three months ended September 30, 1998 compared to a loss of $22,000 for the
corresponding period of 1997.
During the third quarter of 1998, PXRE experienced a deficiency of
$104,000 net for prior-year loss and loss expenses. The loss ratio for the
comparable period of 1997 was favorably affected by savings of $4,022,000 net
for prior-year losses and loss expenses from a number of previously recorded
catastrophes and facultative losses.
The underwriting expense ratio was 46.4% for the third quarter of 1998
compared with 34.8% for the comparable period of 1997. The increase in
underwriting expense ratio was substantially due to higher commission rates and
overhead associated with the newer operations and contingent commissions on
certain business.
As a result of the above, the combined ratio was 165.5% for the third
quarter of 1998 compared with 40.5% for the corresponding period of 1997.
Other operating expenses increased to $5,415,000 for the three months
ended September 30, 1998 from $3,561,000 in the comparable period of 1997. The
increase was mainly due to expenses associated with salary and benefits from new
operations. Included in other operating expenses were foreign currency exchange
gains of $301,000 for the three months ended September 30, 1998 compared to
losses of $323,000 for the corresponding period of 1997.
During the third quarter of 1998, interest expense decreased to
$249,000 as compared to $433,000 in the corresponding period of 1997 due to the
effect of repurchases of PXRE's 9.75% Senior Notes in open market purchases and
the redemption of the Senior Notes on August 15, 1998 (see "Liquidity and
Capital Resources"). In addition, in the third quarter of 1998 and 1997,
15
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 third quarter of 1998, PXRE recorded an extraordinary loss of
$843,000, net of tax, in connection with the redemption of the remaining $20.4
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 September 30, 1998
decreased by $8,996,000 from $8,144,000 for the comparable period of 1997. The
decrease in net investment income was caused primarily by an unrealized loss of
$6,790,000 from investments in limited partnerships, accounted for using the
equity method, reflecting unrealized losses in certain underlying investments
due to the stock market decline experienced in the third quarter of 1998.
Additionally, investment income declined from the usage of funds for the
redemption of the Company's remaining 9.75% Senior Notes and the redeployment of
funds to equities and other invested assets. PXRE's pre-tax annualized
investment yield was (0.7)% for the third quarter of 1998 compared with 6.7% for
the corresponding period in 1997, both calculated using amortized cost and
investment income before investment expenses. Net realized investment gains for
the third quarter of 1998 were $1,328,000 compared to gains of $955,000 for the
corresponding period of 1997 which results included trading in investment
products having characteristics similar to the types of reinsurance PXRE
traditionally assumes.
The net effects of foreign currency exchange fluctuations were losses
of $98,000 in the third quarter of 1998 and losses of $345,000 for the
comparable quarter of 1997. See "Liquidity and Capital Resources."
For the reasons discussed above, net loss was $13,479,000 or $0.99 per
diluted share for the three months ended September 30, 1998 compared to net
income of $12,198,000 or $0.88 per diluted share for the comparable period of
1997. Diluted income per common share before extraordinary loss was a loss of
$0.93 for the third quarter of 1998 compared to income of $0.89 for the prior
comparable period. The diluted average shares outstanding were approximately
13,596,000 in 1998 and 13,856,000 in the corresponding period of 1997.
16
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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COMPARISON OF YEAR-TO-DATE RESULTS FOR
1998 WITH 1997
Nine Months Ended September 30,
-------------------------------------
Increase
1998 1997 (Decrease)
---- ---- ----------
(000's) %
GROSS PREMIUMS WRITTEN $108,871 $102,842 5.9
CEDED PREMIUMS:
Managed business participants 15,544 14,382 8.1
Catastrophe coverage and surplus
Reinsurance 25,601 5,862 336.7
-------- --------
Total reinsurance premiums ceded 41,145 20,244 103.2
-------- --------
NET PREMIUMS WRITTEN $ 67,726 $ 82,598 (18.0)
======== ========
Gross premiums written for the first nine months of 1998 increased 5.9%
to $108,871,000 from $102,842,000 for the comparable period of 1997. Net
premiums written for the nine months ended September 30, 1998 decreased 18.0% to
$67,726,000 from $82,598,000 for the corresponding period of 1997. Net premiums
earned for the first nine months of 1998 increased 2.9% to $68,737,000 from
$66,783,000 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 and new international facultative
business and reinstatement premiums associated with the third quarter 1998
catastrophes offset the continued impact of an intensely competitive market on
PXRE's other business lines. Because of competitive conditions and new
operations, however, PXRE increased its purchase of reinsurance and
retrocessional coverage, which resulted in a decline in net premiums written for
the period.
Premiums ceded by PXRE to its managed business participants increased
8.1% to $15,544,000 for the first nine months of 1998 compared with $14,382,000
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 from new operations offset in part by the effect of declines in gross
premiums written in PXRE's traditional operations.
Management fee income from all sources for the nine months ended
September 30, 1998 decreased to $1,471,000 from $2,454,000 for the corresponding
period of 1997 reflecting a reduced profit commission primarily associated with
Hurricane Georges and two aerospace catastrophes offset, in part, by an increase
in management fee income earned from Select Re.
The loss ratio was 57.4% for the nine months ended September 30, 1998
compared with 9.6% for the corresponding period of 1997 largely due to Hurricane
Georges, two
17
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
aerospace catastrophes and the higher average loss ratio from PXRE's Lloyd's
operation, the new excess and surplus business and new international facultative
operations. The loss ratio for the first nine months of 1998 reflected recorded
catastrophe losses of $43,253,000 gross and $21,040,000 net for 1998 and prior
accident years. In comparison, the loss ratio for the first nine months of 1997
reflected a reversal of previously recorded catastrophe losses of $865,000 gross
and $541,000 net for 1997 and prior accident years.
Significant catastrophe losses which occurred in the nine months ended
September, 1998 were:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
(in thousands)
Hurricane Georges $43,616 $22,729
Two aerospace losses 3,485 2,766
Significant catastrophe losses affecting the nine months ended
September 30, 1997 loss ratio were as follows:
Amount of Losses
----------------
Loss Event Gross Net
- ---------- ----- ---
(in thousands)
German, Poland and Czech Floods $4,220 $3,534
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 $766,000 for the
first nine months of 1998 compared to a gain of $728,000 for the corresponding
period of 1997.
During 1998, PXRE experienced savings of $1,592,000 net for prior-year
loss and loss expenses primarily related to the triggering of a recovery on the
1994 aviation loss offset in part by adverse development in the first quarter of
1998 due to the German, Poland and Czech floods. The loss ratio for the
comparable period of 1997 experienced savings of $5,185,000 net for prior-year
losses and loss expenses primarily related to the Eurotunnel fire and Hurricane
Fran where redundant reserves were recognized in the nine months of 1997 of
approximately $1,579,000 and $1,473,000 respectively. 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 40.1% for the nine months ended
September 30, 1998 compared with 32.5% for the comparable period of 1997. The
increase in underwriting expense ratio was substantially due to higher
commission rates and overhead associated with newer operations and contingent
commissions on certain business.
18
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
As a result of the above, the combined ratio was 97.5% for the first
nine months of 1998 compared with 42.1% for the corresponding period of 1997.
Other operating expenses increased to $13,365,000 for the nine months
ended September 30, 1998 from $11,848,000 in the comparable period of 1997. The
increase was mainly due to expenses associated with salary and benefits from new
operations. Included in other operating expenses were foreign currency exchange
gains of $254,000 for the first nine months of 1998 compared to losses of
$1,173,000 for the corresponding period of 1997.
During the first nine months of 1998, interest expense decreased to
$1,395,000 as compared to $2,790,000 in the corresponding period in 1997 due to
the effect of repurchases of PXRE's 9.75% Senior Notes in open market purchases
and the redemption of the remaining Senior Notes on August 15, 1998 (see
"Liquidity and Capital Resources"). In addition, in the first nine months of
1998, PXRE incurred minority interest expense amounting to $6,696,000 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
$5,950,000 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 nine months of 1998, PXRE recorded an extraordinary loss
of $843,000, net of tax, in connection with the redemption of $20.4 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 nine months ended September 30, 1998
decreased 55.2% to $11,146,000 from $24,859,000 for the same period of 1997. The
decrease in net investment income was caused primarily by the same factors which
caused a decline in third quarter 1998 investment income discussed earlier.
PXRE's pre-tax annualized investment yield was 3.23% for the third quarter of
1998 compared with 6.6% for the corresponding period in 1997, both calculated
using amortized cost and investment income before investment expenses. Net
realized investment gains for the first nine months of 1998 were $2,980,000
compared to losses of $816,000 for the corresponding period of 1997, which
results included trading in investment products having characteristics similar
to the types of reinsurance PXRE traditionally assumes.
The net effects of foreign currency exchange fluctuations were losses
of $512,000 in the nine months ended September 30, 1998, as compared to losses
of $445,000 for the comparable period of 1997.
For the reasons discussed above, net income was $5,696,000 for the nine
months ended September 30, 1998 compared to net income of $34,570,000 for the
corresponding period of 1997. Diluted income per common share before
extraordinary loss was $0.48 for the first nine months of 1998 compared to $2.69
for the prior comparable period. Diluted net income per common share was $0.42
for the nine months ended September 30, 1998 compared to $2.49 for the
corresponding period
19
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
of 1997 based on diluted average shares outstanding of approximately 13,706,000
in the first nine months of 1998 and 13,907,000 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 first nine months of 1998, $49,400,000 in dividends were paid by PXRE
Reinsurance to PXRE. In October 1998, an additional $7,988,000 in dividends were
paid by PXRE Reinsurance to PXRE.
PXRE is currently negotiating a $75 million to $100 million syndicated
loan with commercial banks to enhance the capital of PXRE Reinsurance and to
provide additional liquidity at the holding company level. Although PXRE expects
to have the loan in place before year end, there can be no assurance that such
loan can be effected on satisfactory terms, if at all.
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
20
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 third
quarter of 1998 in respect of the Capital Securities (and related Subordinated
Debt Securities) amounted to $2,232,000. 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 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
21
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 expense,
including amortization of debt offering costs, for the first nine months of 1998
in respect of the Senior Notes amounted to approximately $1,395,000. As
previously announced, the Company 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 were 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 recorded 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 received in advance of
related claim payments.
Net cash flow used by operations was $6,825,000 during the third
quarter of 1998 compared with net cash flow used by operations of $6,970,000
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, and by selected other
22
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
investment managers. 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 September 30, 1998, PXRE's investment portfolio consisted
primarily of fixed maturities and short-term investments. As at September 30,
1998, 80.2% 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 September 30, 1998, 83.7% of
the fair value was in obligations rated "A3" or "A" or better by Moody's
Investors Service Inc. or Standard & Poor's Corporation, respectively. Mortgage
and asset-backed securities accounted for 25.8% of fixed maturities based on
fair value at September 30, 1998. At September 30, 1998 PXRE had no investments
in real estate or commercial mortgage loans; however subsequent to September 30,
1998, PXRE invested approximately $5 million in common shares of publicly traded
real estate investment trusts. The average market yield to maturity of PXRE's
fixed maturities portfolio at September 30, 1998 and 1997, was 6.5% and 6.1%,
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
$11,748,000 after-tax unrealized loss in the value of its investment portfolio
($0.88 book value per share) for the nine months ended September 30,1998
primarily from its emerging market debt and from its overall bond and common
stock portfolio reflecting volatile market conditions during the third quarter
of 1998. 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 $57,039,000 at September 30,
1998 compared to $52,905,000 at December 31, 1997. Other invested assets
amounting to $64,992,000 at September 30, 1998, which were comprised of limited
partnerships, were accounted for under the equity method. The amount of
cumulative equity loss included in short-term investments and other invested
assets as of September 30, 1998 amounted to $5,020,000.
Dividends incurred in the nine months ended September 30, 1998 were
$10,260,000 compared to $8,765,000 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 September 30, 1998 will be approximately
23
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
$13,847,000 reflecting an increase in the quarterly dividend from $0.25 to $0.26
in the fourth quarter of 1998.
Book value per common share was $26.66 at September 30, 1998.
As announced in April 1997, PXRE's Board of Directors authorized a new
stock repurchase program and at September 30, 1998 1.1 million shares of the
authorization remained. In the third quarter of 1998 PXRE repurchased 431,500
shares of common stock for $12,078,000 in open market purchases. From September
30, 1998 until November 12, 1998 PXRE repurchased an additional 538,000 shares
for $12,834,000, reducing the remaining authorization at November 12, 1998 to
604,000 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 ($59.5 million at September 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 ($8.5 million at September 30, 1998 exchange rates) line of
credit to PXRE Managing Agency Limited for liquidity purposes. There has been no
drawdown of these amounts through September 30, 1998.
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 September 30, 1998
are considered by management of PXRE to be collectible in all material respects.
24
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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YEAR 2000 UPDATE
PXRE's Year 2000 Project is proceeding on schedule. The Project is
addressing the issue of computer progams and embedded computer chips being
unable to distinguish between the year 1900 and the year 2000. PXRE believes
that the impact of Year 2000 issues on its internal computer systems will not be
material. PXRE wrote and upgraded most of its software over the last four years
in an Oracle based software environment that has been certified as Year 2000
compliant. It has been PXRE's internal standard to develop all internally based
systems using 4 digit date fields for all calculations.
Two older legacy systems have been identified as not being year 2000 compliant.
One is a vendor provided general ledger system, which is being replaced with a
new, Year 2000 certified general ledger system. This system is expected to be in
production in the fourth quarter of 1998. Another system, which was internally
developed, is being upgraded and rewritten in the Oracle compliant environment
and is expected to be completed in the first quarter of 1999.
PXRE has replaced or upgraded, as part of its normal upgrade of hardware and
software, most of its mission critical servers, personal computers and related
desktop or network software to Year 2000 compliant versions. The cost of
replacing any remaining non-compliant equipment is not expected to be material.
The Company budgeted and expended $300,000 in 1998 for the upgrade and
replacement of software systems and hardware for this purpose.
PXRE has been in contact with its other material business partners to determine
their state of readiness with regard to the Year 2000 issue and the potential
impact on PXRE. PXRE has identified the following categories of business
partners as material to PXRE's ability to conduct its operations: banks and
investment advisors, reinsurance intermediaries, major reinsurance clients,
telecommunications providers and utilities.
Where PXRE has determined that the relationship with a business partner is
material to its ability to conduct normal operations, PXRE has sent letters to
its business partner requesting an update on the status of its Year 2000
initiative. Where deemed necessary, PXRE is following up with the business
partner to obtain additional information. Based on the assurances of these
business partners and PXRE's internal reviews of the information provided, PXRE
has not currently identified a material business partner that will not be
compliant. However, there can be no assurance that all material business
partners will be compliant and such non-compliance could have a material
effect on PXRE's financial position and results of operations. PXRE expects
to complete its
25
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
review of material business partners by March 31, 1999.
PXRE has made the decision to evaluate the potential Year 2000 exposures
emanating from its reinsurance business by conducting an analysis of each
individual customer's risk exposures. Where appropriate, PXRE intends to require
that an exclusion be added to the reinsurance contract. PXRE began adding
exclusions to reinsurance contracts in early 1998. Additionally, it is PXRE's
position that Year 2000 exposures are not fortuitous losses and thus are not
covered under reinsurance contracts even without specific exclusions. For these
reasons, PXRE believes that its exposures to Year 2000 claims will not be
material. However, as was the case with environmental exposures, changing
social and legal trends may create unintended coverage for exposures by
reinterpreting reinsurance contracts and related exclusions. It is
impossible to predict what, if any, exposure reinsurance companies may
ultimately have for Year 2000 claims whether coverage for the issue is
specifically excluded or included.
Formal contingency plans will not be formulated until PXRE has identified
specific areas where there is a substantial risk of Year 2000 problems
occurring, and no such areas are identified as of this date.
Readers are cautioned that forward-looking statements contained in this Year
2000 Update should be read in conjunction with the Company's disclosures under
the heading: "CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS."
INCOME TAXES
PXRE's effective tax rate for the nine months ended September 30, 1998
and 1997 was an 11.9% and 32.6% charge, respectively, which differs from the
statutory rate principally due to the relative proportion of underwriting and
taxable investments versus tax exempt investments, particularly in the third
quarter of 1998. For the third quarter of 1998 and 1997 the effective tax rate
was a 37.1% benefit and 32.6% charge, respectively, which differs from the
statutory rate in 1998 principally due to third quarter catastrophe underwriting
losses and in 1998 and 1997 due to negative 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, as well as statements made by or on behalf of PXRE
in press releases, written statements or other documents filed with the
Securities and Exchange Commission, or in its communications and discussions
with investors and analysts in the normal course of business through meetings,
phone calls and conference calls, which are not historical in nature are
intended to be, and are hereby identified as, "forward-looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934 as amended. These forward-looking statements are based on current
expectations and are subject to risk and uncertainties. PXRE cautions investors
and analysts that actual results or events could differ materially from those
set forth or implied by the forward-looking statements and related assumptions,
depending on the outcome of certain important factors including, but not limited
to, the following: (i) the frequency and severity of catastrophic events; (ii)
changes in the level of competition in the reinsurance or primary insurance
markets that impact the volume or profitability of the
26
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
property-casualty reinsurance business (these changes include, but are not
limited to, the intensity 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 and changes in
the demand for excess and surplus lines insurance coverages; (iv) the ability of
PXRE to execute its diversification initiatives in markets in which PXRE has not
had a significant presence; (v) adverse development on loss reserves related to
business written in prior years; (vi) lower than estimated retrocessional
recoveries on unpaid losses, including the effects of losses due to a decline in
the creditworthiness of PXRE's retrocessionaires; (vii) increases in interest
rates, which cause a reduction in the market value of PXRE's interest rate
sensitive investments, including its fixed income investment portfolio; (viii)
decreases in interest rates causing a reduction of income earned on new cash
flow from operations and the reinvestment of the proceeds from sales, calls or
maturities of existing investments; (ix) market fluctuations in equity
securities and securities underlying limited partnership investments, (x)
changes in the composition of PXRE's investment portfolio; and (xi) 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.
27
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
28
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
November 12, 1998 By:/s/ Sanford M. Kimmel
---------------------
Sanford M. Kimmel
Senior Vice President, Treasurer
and Chief Financial Officer
29
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'