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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2002 Commission File Number 1-15259
PXRE GROUP LTD.
(Exact name of registrant as specified in its charter)
Bermuda 98-0214719
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
Swan Building P.O. Box HM 1282
26 Victoria Street Hamilton HM FX
Hamilton HM 12 Bermuda
Bermuda
(Address, including zip code, of (Mailing address)
principal executive offices)
(441) 296-5858
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: COMMON SHARES, par
value $1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 14, 2003 computed by reference to
the closing price of such common equity as of the close of business on March 14,
2003 was $243,087,319. As of March 14, 2003, 12,184,828 of the registrant's
common shares were issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of PXRE Group Ltd.'s definitive Proxy Statement for the
Annual General Meeting of Shareholders to be held on May 28, 2003.
2
PART I
Unless the context otherwise requires, references in this Form 10-K to
"PXRE", "we", the "Company", "us" and "our" include PXRE Group Ltd., a Bermuda
company (the "Company") and its subsidiaries, which principally include PXRE
Reinsurance Company ("PXRE Reinsurance"), PXRE Corporation ("PXRE Delaware"),
PXRE Reinsurance Ltd. ("PXRE Bermuda"), PXRE Reinsurance (Barbados) Ltd. ("PXRE
Barbados"), PXRE Solutions Inc. ("PXRE Solutions") and PXRE Solutions, S.A.
("PXRE Europe"). References to GAAP refer to accounting principles generally
accepted in the United States ("GAAP"). References to SAP refer to statutory
accounting principles ("SAP") in either the State of Connecticut where PXRE
Reinsurance is domiciled or Bermuda where PXRE Bermuda is domiciled.
Cautionary Statement Regarding Forward-Looking Statements
This report contains various forward-looking statements and includes
assumptions concerning our operations, future results and prospects. Statements
included herein, as well as statements made by or on our behalf in press
releases, written statements or other documents filed with the Securities and
Exchange Commission (the "SEC"), or in our communications and discussions with
investors and analysts in the normal course of business through meetings, phone
calls and conference calls, which are not historical in nature are intended to
be, and are hereby identified as, "forward-looking statements" for purposes of
the safe harbor provided by Section 21E of the Securities Exchange Act of 1934
as amended. These forward-looking statements, identified by words such as
"intend," "believe," "anticipate," or "expects" or variations of such words or
similar expressions are based on current expectations and are subject to risk
and uncertainties. In light of the risks and uncertainties inherent in all
future projections, the inclusion of forward-looking statements in this report
should not be considered as a representation by us or any other person that our
objectives or plans will be achieved. We caution investors and analysts that
actual results or events could differ materially from those set forth or implied
by the forward-looking statements and related assumptions, depending on the
outcome of certain important factors including, but not limited to, the
following:
(i) significant catastrophe losses or losses under other
coverages, the timing and extent of which are difficult to
predict;
(ii) changes in the level of competition in the reinsurance or
primary insurance markets that impact the volume or
profitability of business (these changes include, but are not
limited to, the intensification of price competition, the
entry of new competitors, existing competitors exiting the
market and competitors' development of new products);
(iii) the lowering or loss of one of the financial or claims paying
ratings of ours or one or more of our subsidiaries;
(iv) changes in the demand for reinsurance, including changes in
the amount of risk that our clients elect to maintain for
their own account;
(v) risks associated with the termination and run-off of our
diversification initiatives;
(vi) adverse development on loss reserves related to business
written in current and prior years;
3
(vii) lower than estimated retrocessional recoveries on unpaid
losses, including the effects of losses due to a decline in
the creditworthiness of our retrocessionaires;
(viii) increases in interest rates, which cause a reduction in the
market value of our interest rate sensitive investments,
including our fixed income investment portfolio, and potential
underperformance in our finite coverages;
(ix) decreases in interest rates causing a reduction of income
earned on net cash flow from operations and the reinvestment
of the proceeds from sales, calls or maturities of existing
investments and shortfalls in cash flows necessary to pay
fixed rate amounts due to finite contract counterparties;
(x) market fluctuations in equity securities and with respect to
our portfolio of hedge funds and other privately held
securities: leverage, concentration of investments, lack of
liquidity, market fluctuations and direction (including as a
result of interest rate fluctuations and direction, with
respect to price levels and volatility thereof), currency
fluctuations, credit risk, yield curve risk, spread risk
between two or more similar securities, political risk,
counterparty risk and risks relating to settlements on foreign
exchanges;
(xi) foreign currency fluctuations resulting in exchange gains or
losses;
(xii) a contention by the United States Internal Revenue Service
that the Company or our offshore subsidiaries are subject to
U.S. taxation; and
(xiii) changes in tax laws, tax treaties, tax rules and
interpretations.
In addition to the factors outlined above that are directly related to
our business, we are also subject to general business risks, including, but not
limited to, adverse state, federal or foreign legislation and regulation,
adverse publicity or news coverage, changes in general economic factors and the
loss of key employees. The factors listed above should not be construed as
exhaustive. See "Certain Risks and Uncertainties" on page 43 of this report.
We undertake no obligation to release publicly the results of any
future revisions we may make to forward looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Item 1. Business
Overview of the Business
We provide reinsurance products and services to a worldwide marketplace
through subsidiary operations in the United States, Europe, Bermuda and
Barbados. Our primary focus is providing property catastrophe reinsurance and
retrocessional coverage to a worldwide group of clients, where we have been
among the leading franchises for two decades. Property catastrophe reinsurance
generally covers claims arising from large catastrophes such as hurricanes,
windstorms, hailstorms, earthquakes, volcanic eruptions, fires, industrial
explosions, freezes, riots, floods and other man-made or natural disasters.
Substantially all of our non-finite reinsurance products have been, and will
continue to be, offered on an excess-of-loss basis with aggregate limits on our
exposure to losses. This means that we do not begin to pay our clients' claims
until their claims exceed a certain specified amount and our obligation to pay
those claims is limited to a specified aggregate amount.
4
We also offer our clients property-per-risk, marine and aviation
reinsurance and retrocessional products. Unlike property catastrophe
reinsurance, which protects against the accumulation of a large number of
related losses arising out of one catastrophe, per-risk excess of loss
reinsurance protects our clients against a large loss arising from a single risk
or location. Substantially all of our property-per-risk and marine and aviation
business is also written on an excess-of-loss basis with aggregate limits on our
exposure to losses.
We also provide our clients with finite reinsurance products. Finite
reinsurance contracts are highly customized for each transaction. If the loss
experience with respect to the risks assumed by us is as expected or better than
expected, our finite clients may share in the profitability of the underlying
business through premium adjustments or profit commissions. If the loss
experience is worse than expected, our finite clients may participate in this
negative outcome to a certain extent. In addition, we offer finite reinsurance
products where investment returns on the funds transferred to us affect the
profitability of the contract and the magnitude of any premium or commission
adjustments.
As of December 31, 2002, we had approximately 300 clients, including
many of the leading insurance and reinsurance companies in the world. Our
clients include both primary insurance companies and other reinsurance
companies. Approximately 70% of our clients in 2002 were based outside of the
United States.
The global reinsurance market has historically been highly cyclical. In
the wake of the events of September 11, 2001, which have resulted in industry
losses estimated as high as $45 to $75 billion, reinsurance markets across the
world have hardened significantly. These developments follow on significant
pricing increases in 2000 and 2001 across sectors and geographic regions. These
market changes have dramatically impacted the specialized short tail,
high-severity sectors of the market, which represent our focus areas and in
which we are a significant and established provider.
Following a diversification effort into Lloyd's and the casualty
sectors during the soft reinsurance market of the late 1990's, we decided during
2000 and 2001 to exit these businesses, and are today focused on our traditional
core property reinsurance operations. While our core businesses are volatile due
to significant potential loss severity, we have been a successful underwriting
organization over the long term. This proven expertise in some of the most
dynamic areas of the reinsurance sector represents an opportunity to achieve
particularly strong financial results in the current favorable phase of the
underwriting cycle.
We conduct our business primarily through our principal operating
subsidiaries, PXRE Reinsurance, PXRE Bermuda, PXRE Solutions, PXRE Europe and
PXRE Barbados. PXRE Reinsurance is a broker-market reinsurer with approximately
$457.2 million of statutory capital and surplus as of December 31, 2002, which
principally underwrites treaty reinsurance for property (including marine and
aerospace) risks. PXRE Reinsurance is licensed, accredited or permitted to do
business in all states and the District of Columbia, Puerto Rico, Bermuda,
Colombia and Mexico and until December 31, 2002 operated a branch in Belgium
("PXRE's Brussels Branch").
5
PXRE Bermuda is a broker-market reinsurer with approximately $74.5
million of statutory capital and surplus as of December 31, 2002, which
principally underwrites treaty reinsurance for property (including marine and
aerospace) risks. PXRE Bermuda's reinsurance business is also supported by a
parental guarantee from the Company and an aggregate excess of loss reinsurance
treaty from PXRE Reinsurance that provides $80 million of reinsurance
protection. PXRE Bermuda is neither licensed nor admitted as an insurer in any
jurisdiction other than Bermuda.
PXRE Barbados was licensed as an insurance company in March 2001 under
Barbados' Insurance Act, 1996 and changed its name from PXRE (Barbados) Ltd. to
PXRE Reinsurance (Barbados) Ltd. It is neither licensed nor admitted as an
insurer in any jurisdiction other than Barbados. PXRE Barbados commenced
underwriting business in 2001. PXRE Barbados provides finite reinsurance
coverages to clients and provides reinsurance coverage to other PXRE entities.
PXRE Europe, a Belgian reinsurance intermediary, and PXRE Solutions, a
U.S. reinsurance intermediary, perform reinsurance intermediary activities on
behalf of PXRE Bermuda, PXRE Reinsurance and PXRE Barbados.
History
Introduction
The Company was formed in 1999 as part of the reorganization of PXRE
Delaware, a Delaware corporation. Prior to the reorganization, PXRE Delaware was
the ultimate parent holding company of the various PXRE companies and its common
shares were publicly-traded on the New York Stock Exchange. As a result of the
reorganization, the Company became the ultimate parent holding company of PXRE
Delaware and the holders of PXRE Delaware common stock automatically became
holders of the same number of the Company's common shares. The reorganization
was consummated at the close of business on October 5, 1999 and, on October 6,
1999 the Company's common shares commenced trading on the New York Stock
Exchange under the symbol "PXT". The reorganization also involved the
establishment of a Bermuda-based reinsurance subsidiary, PXRE Bermuda, and a
Barbados based reinsurance subsidiary, PXRE Barbados, and the formation of a
reinsurance intermediary, PXRE Solutions.
The Company's predecessor, PXRE Delaware, was organized in July 1986 by
Phoenix Home Life Mutual Insurance Company ("Phoenix Home Life") to succeed,
through PXRE Reinsurance, to the property and casualty reinsurance business
carried on since 1982 by Phoenix General Insurance Company, formerly a
wholly-owned subsidiary of Phoenix Home Life. As of February 28, 2003, Phoenix
Home Life owned 1.1 million of the Company's common shares.
In November 1993, PXRE Delaware sponsored the initial public offering
of Transnational Re Corporation ("TREX") to raise capital and take advantage of
favorable conditions in the worldwide retrocessional reinsurance market. PXRE
Delaware, through PXRE Reinsurance, retained a 21% ownership position in TREX
and was responsible for the day-to-day operations of TREX, including all the
reinsurance operations of TREX's subsidiary, Transnational Reinsurance Company
("Transnational Reinsurance").
On December 11, 1996, TREX merged into PXRE Delaware (the "Merger").
Following the Merger, Transnational Reinsurance became a wholly-owned subsidiary
of PXRE Reinsurance and was re-named Transnational Insurance Company
("Transnational Insurance"). The Merger was accounted for using the purchase
method of accounting; and as a result, net income of TREX (including
Transnational Reinsurance/Transnational Insurance) was included in PXRE
Delaware's consolidated results of operations from the date of the Merger.
6
In mid-1999, PXRE Reinsurance formed a finite reinsurance unit to
provide structured/finite coverages combining elements of insurance risk
transfer and finance to manage certain risks on a client's financial statements
and cash flow.
In the third quarter of 2001, we announced that we were returning our
focus to our core property catastrophe, property per-risk, marine and aerospace
reinsurance and retrocessional products. Prior to 1998, these were our only
significant lines of coverage. Beginning in 1997, the pricing and terms in our
core property reinsurance markets began to deteriorate, resulting in a soft
reinsurance market that only began to recover in late 2000. We decided to pursue
a variety of diversification efforts to enhance our competitiveness and growth
opportunities in that soft reinsurance market environment that included:
o the establishment of a Lloyd's of London ("Lloyd's")
underwriting syndicate and managing agent;
o the establishment of an excess and surplus lines operation;
o the addition of a reinsurance platform offering primarily
casualty products directly to insurance companies (rather than
through reinsurance brokers);
o the enhancement of our international broker market reinsurance
platform to include additional lines of business, including
casualty and credit risks;
o an acceleration of business offerings to one of our managed
business participants;
o the formation of a finite reinsurance unit; and
o the establishment of a direct presence in the Bermuda market.
As the reinsurance market conditions began to improve, we undertook a
significant strategic realignment in 2000 and 2001, exiting our excess and
surplus lines, Lloyd's and direct operations.
During the third quarter of 2000, we stopped underwriting new or
renewal business through our Lloyd's vehicle, PXRE Limited, the sole member of
Lloyd's Syndicate 1224 ("PXRE Lloyd's Syndicate"), which had been active in the
accident and health, property catastrophe, aerospace, facultative and casualty
reinsurance areas. This decision followed our redomestication to Bermuda and the
resulting direct access to the risks written in this market, which reduced the
benefit of a Lloyd's presence. Our Lloyd's Managing Agency, PXRE Managing Agency
Limited, ceased managing third party syndicates at Lloyd's as of January 1, 2001
and was sold in April 2001 at approximately book value. We are continuing to
run-off the business underwritten through PXRE Lloyd's Syndicate.
During the fourth quarter of 2000, Transnational Insurance, an excess
and surplus lines carrier, which prior to our withdrawal, had specialized in
non-standard and excess property insurance risks distributed substantially all
of its assets and liabilities to PXRE Reinsurance and the remaining corporate
shell was sold on December 21, 2000.
7
In September 2001, completing the return to our core business, we
exited the casualty reinsurance business that was principally underwritten by
our direct reinsurance unit. Our direct reinsurance portfolio consists primarily
of North American general liability, automobile, workers' compensation and
per-risk excess business. We had expanded into this area in an effort to
diversify during the soft period in the property catastrophe pricing cycle, and
hired a direct underwriting team to establish the operation de novo, with a
focus on small to medium-sized insurance company clients. This unit ceased
writing both new and renewal treaties in September 2001 and the unit was closed
at the end of February, 2002. We also ceased underwriting our more limited
portfolio of international pro-rata casualty reinsurance as part of the return
to our core property reinsurance focus. We remain liable for losses incurred in
these lines of business and expect that the majority of this business will be
run-off during the next five to seven years.
As a result of this strategic realignment, we have returned our focus
to our core property catastrophe, property per-risk, marine and aerospace
reinsurance and retrocessional products and have reduced the number of our
employees from a high of 103 in December 1999 to 61 at December 31, 2002.
Underwriting Operations
Through our subsidiaries, we are principally engaged in providing
treaty reinsurance to primary insurers and retrocessional coverage to other
reinsurers of commercial and personal property risks. We also provide marine and
aerospace reinsurance and retrocessional products and services. We specialize in
property reinsurance, with a strong focus on catastrophe-type products.
Operating Segments
We operate in four reportable property and casualty segments -
catastrophe and risk excess, finite business, other lines and exited lines -
based on our approach to managing the business. Commencing with the 2002
underwriting renewal season, we returned our focus to our core catastrophe and
risk excess and finite business. Businesses that were not renewed in 2002 are
reported as exited lines. The Company's segments for 2000 and 2001 were
reclassified to be comparable to the 2002 segments used for our method of
managing the business. In addition, we operate in two geographic segments -
North American representing North American based risks written by North American
based clients and International (principally the United Kingdom, Continental
Europe, Latin America, the Caribbean, Australia and Asia), representing all
other premiums written.
8
The following tables present the distribution of our net premiums
written, net premiums earned and our underwriting income (loss) for the years
ended December 31, 2002, 2001 and 2000:
Net Premiums Written (1)
Year Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000
-------------------- ------------------- --------------------
($000's, except percentages) Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 51,608 $ 27,981 $ 16,532
International 153,038 90,714 68,754
Excess of Loss Cessions (28,652) (60,485) (15,489)
--------- --------- ---------
175,994 60% 58,210 38% 69,797 40%
--------- --------- ---------
Finite Business
North American 102,754 33,651 20,245
International - - -
--------- --------- ---------
102,754 35 33,651 22 20,245 12
--------- --------- ---------
Other Lines
North American 7,822 4,086 2,720
International 83 404 1,855
--------- --------- ---------
7,905 3 4,490 3 4,575 3
--------- --------- ---------
Exited Lines
North American 8,550 33,679 29,898
International (720) 24,448 48,186
--------- --------- ---------
7,830 2 58,127 37 78,084 45
--------- --- --------- --- ---------
Total $ 294,483 100% $ 154,478 100% $ 172,701 100%
========= === ========= === ========= ===
9
Net Premiums Earned (1)
Year Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000
-------------------- ------------------- --------------------
($000's, except percentages) Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 50,436 $ 26,916 $ 16,727
International 148,650 92,407 68,038
Excess of Loss Cessions (23,052) (58,839) (19,115)
--------- --------- ---------
176,034 65% 60,484 37% 65,650 41%
--------- --------- ---------
Finite Business
North American 57,107 32,365 17,791
International - - -
--------- --------- ---------
57,107 21 32,365 20 17,791 11
--------- --------- ---------
Other Lines
North American 8,002 3,434 1,498
International 143 479 2,009
--------- --------- ---------
8,145 3 3,913 3 3,507 2
--------- --------- ---------
Exited Lines
North American 18,895 33,109 23,332
International 9,179 32,254 49,926
--------- --------- ---------
28,074 11 65,363 40 73,258 46
--------- --- --------- --- --------- ---
Total $ 269,360 100% $ 162,125 100% $ 160,206 100%
========= === ========= === ========= ===
10
Underwriting Income (Loss) (2)
Year Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000
-------------------- ------------------- --------------------
($000's, except percentages) Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 43,591 $ (31,740) $ 10,888
International 80,874 (17,639) (1,075)
Excess of Loss Cessions (16,383) 38,117 (11,265)
--------- --------- ---------
108,082 117% (11,262) 77% (1,452) 19%
--------- --------- ---------
Finite Business
North American 2,544 2,944 1,661
International - - -
--------- --------- ---------
2,544 3 2,944 (20) 1,661 (22)
--------- --------- ---------
Other Lines
North American 4,378 (385) (543)
International (58) (934) (39)
--------- --------- ---------
4,320 4 (1,319) 9 (582) 8
--------- --------- ---------
Exited Lines
North American (20,234) 2,023 (446)
International (2,075) (6,996) (6,610)
--------- --------- ---------
(22,309) (24) (4,973) 34 (7,056) 95
--------- --- --------- --- --------- ---
Total $ 92,637 100% $ (14,610) 100% $ (7,429) 100%
========= === ========= === ========= ===
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(1) Premiums written and earned are expressed on a net basis (after
deduction for ceded reinsurance premiums) in order to more accurately
reflect business written for our own account.
(2) Underwriting income (loss) includes premiums earned, losses incurred
and commission and brokerage net of management fees, but do not include
investment income, realized gains or losses, interest expense,
operating expenses, unrealized foreign exchange gains or losses on
losses incurred, or management fees for syndicate agency management.
See Note 10 of Notes to Consolidated Financial Statements.
11
Catastrophe and Risk Excess
Our catastrophe and risk excess portfolio consists principally of
property catastrophe excess of loss, property retrocessional, property risk
excess, property London Market Excess ("LMX") and marine and aerospace excess
reinsurance coverages. This portfolio can be characterized on a longer-term
basis as being comprised of coverages involving higher expected margins and
greater volatility than the other coverages that we underwrite. In 2002, $204.6
million of premiums written after reduction for quota share cessions were
attributable to the catastrophe and risk excess portfolio, or $176.0 million net
of specific excess of loss retrocessional reinsurance ceded to other reinsurers.
In 2002, this segment produced an underwriting profit of $108.1 million. In 2001
and 2000, this segment produced underwriting losses of $11.3 million and $1.5
million, respectively, largely as a result of the September 11, 2001 terrorist
attacks in 2001 and, in 2000, as a consequence of adverse development of losses
arising from severe French winter storms that occurred in the last week of 1999.
The increase in premium volume for catastrophe and risk excess coverages in 2002
was largely attributable to increases in the volume of business written and
price increases in the aftermath of the events of September 11, 2001. The
increase in premium volume for catastrophe and risk excess coverages in 2001 was
largely attributable to increases in the volume of business written in the
aftermath of the 1999 French losses.
The exposures underlying the North American portion of this segment
emanate principally from East Coast and Gulf hurricanes and Midwest and West
Coast earthquakes. The exposures underlying the International portion of this
segment emanate principally from European, Japanese and Caribbean windstorm,
flood and earthquake risks, major oil rig explosions, cruise ship disasters,
satellite failures, commercial airplane crashes and similar risks.
Finite Business
We entered the finite business in mid-1999 with products combining
elements of insurance risk transfer and finance to manage certain risks of our
clients. Due to our small size, we pursued a niche focus on smaller to
medium-sized clients. At the same time, we believe we have maintained a more
conservative underwriting approach than many competitors, eschewing riskier
transactions and opportunistically ceding business to other reinsurers to reduce
timing and investment risks where appropriate. In returning to our core property
reinsurance focus, we elected to continue our finite business, which we believe
provides significant diversification and reduces the volatility of our overall
portfolio.
Our finite business involves a relatively small number of large
reinsurance transactions. As a result, premiums in this segment are expected to
vary widely from period to period. The risks reinsured are primarily casualty
risks and are subject to some of the similar risks as our casualty coverages
included in our exited lines segment. Net premiums written of $102.8 million
were attributable to our finite business in 2002. In 2002, the finite segment
produced an underwriting profit of $2.5 million. Included in the finite segment
were net premiums written of $83.8 million and underwriting profit of $3.0
million in 2002, assumed pursuant to various finite reinsurance contracts with
one insurance company, Tower Insurance Company of New York.
Finite contracts that do not meet certain accounting requirements of
the Financial Accounting Standard Board's Statement of Financial Accounting
Standard ("SFAS") No. 113 and other accounting literature, that generally define
a reinsurance transaction, are not booked as premiums, but rather are treated as
deposits. We have entered into contracts in 2001 and 2002 that have $38.1
million of deposit liabilities to ceding companies at December 31, 2002 on this
deposit accounting basis. We also have two finite retrocessional agreements in
place with Select Reinsurance, Ltd. ("Select Re") that are accounted for as
deposit assets pursuant to SFAS No. 113 and other accounting literature,
totaling $21.4 million including investment income earned to December 31, 2002.
We believe these retrocessional agreements will enhance the long-term
profitability of the finite contracts to which they relate.
12
Other Lines
In 2002, our Other Lines segment consisted of a single property
pro-rata reinsurance treaty that generated $7.9 million in net premiums written.
Our Other Lines segment produced an underwriting profit of $4.3 million in 2002
compared to an underwriting loss of $1.3 million in 2001. With the return to our
core lines of business, we do not expect to write a significant volume of
premium in our Other Lines segment in the near future.
Exited Lines
Our Exited Lines segment consists principally of North American general
liability, commercial and personal auto liability, risk excess and other
liability coverages and International pro-rata casualty coverages. We decided to
stop underwriting new or renewal casualty business in September 2001 as part of
our strategic realignment. Other coverages include accident and health
coverages, binding and line slip authorities written through PXRE Lloyd's
Syndicate and credit coverages. During the third quarter of 2000, we ceased
accepting new and renewal risks at PXRE Lloyd's Syndicate. The Exited Lines
segment accounted for $7.8 million of net premiums written in 2002. Net premiums
written in 2002 for this segment decreased 87% from 2001. These premiums relate
to reinsurance contracts that were entered into prior to September 2001, but had
not expired before 2002. Virtually all of these contracts had expired by
December 31, 2002 and we do not expect to report a material amount of premiums
in this segment in 2003. In 2002, the Exited Lines segment produced an
underwriting loss of $22.3 million.
See Note 10 of Notes to Consolidated Financial Statements for
additional information regarding our reportable segments and geographic areas.
Underwriting
Since inception, we have pursued a core strategy of leveraging the
specialized analytical and underwriting expertise of our reinsurance
professionals in high-severity, low-frequency lines of business.
Our underwriting process emphasizes a team approach among our
underwriters, actuaries and claims staff and is strictly geared toward
profitability rather than market share, with a resulting willingness to reduce
underwriting commitments in a soft market.
Reinsurance treaties are reviewed for compliance with our general
underwriting standards and certain treaties are evaluated in part based upon our
internal actuarial analysis. We manage our risk of loss through a combination of
aggregate exposure limits, underwriting guidelines that take into account risks,
prices and coverage and retrocessional agreements. As we underwrite risks from a
large number of clients 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. We have
developed systems and software tools to monitor and manage the accumulation of
our exposure to such losses. We have 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.
13
We utilize a two-tier approach to risk management, including both a
portfolio optimization system and overall risk limits. Our portfolio
optimization system incorporates third-party catastrophe modeling software and
internally developed models. This system is used to price each reinsurance
contract based on marginal capital requirements, and enables our underwriters to
dynamically evaluate potential new business and exposures against the background
of our existing business to optimize the overall portfolio. Any new business
bound is incorporated in this analytical approach to enable a dynamic assessment
of the portfolio. Our portfolio is also subject to management-specified
probabilistic risk limits for the business as a whole, by territory and by type
of event. Our management believes that the portfolio model is a valuable tool to
supplement the experience and judgment of our underwriters.
We have traditionally maintained strict limits to departmental
underwriting authority, with approval by two, three or more members of a
seven-member underwriting committee required for all business deemed outside the
predominant risk distribution of the overall portfolio.
Marketing
We provide reinsurance for international insurance and reinsurance
companies headquartered, principally, in the United Kingdom, Continental Europe,
Latin America, the Caribbean, Australia and Asia. In the United States, we
currently reinsure both national and regional insurance and reinsurance
companies and specialty insurance companies.
Historically, we have obtained substantially all of our reinsurance
business through reinsurance intermediaries, which represent our clients in
negotiations for the purchase of reinsurance. None of the reinsurance
intermediaries through whom we obtain this business are authorized to arrange
any business in our name without our approval. We pay commissions to these
intermediaries or brokers that vary in size based on the amount of premiums and
type of business ceded. These commission payments constitute part of our total
acquisition costs and are included in our underwriting expenses. We generally
pay reinsurance brokerage commissions believed to be comparable to industry
norms.
Approximately 84% of gross premiums written in fiscal year 2002 were
arranged through brokers individually representing 10% or more of gross premiums
written including Pegasus Advisors-Towers Perrin Reinsurance (31%), the
worldwide branch offices of Guy Carpenter & Company, Inc. (a subsidiary of Marsh
& McLennan Companies, Inc.) (16%), Benfield Greig Ltd. (13%), Aon Group Ltd.
(13%), and Willis Re. Inc. (11%). The commissions we paid to these
intermediaries are generally at the same rates as those paid to other
intermediaries.
In mid-1998, we established a U.S.-based direct writing reinsurance
unit to complement our existing brokerage-based reinsurance operations. As part
of our strategic realignment, we decided in September 2001 to abandon this
initiative and to focus exclusively on the broker reinsurance market.
Approximately 97% and 3% of PXRE's 2002 gross premiums written and 88% and 12%
of PXRE's 2001 gross premiums written were written in the broker and direct
markets, respectively.
14
Competition
Competitive forces in the property and casualty reinsurance and
insurance industry are substantial. We operate in an industry that is highly
competitive and is undergoing a variety of challenging developments. The
industry has in recent years placed increased importance on size and financial
strength in the selection of reinsurers. This trend became more pronounced in
the wake of September 11, 2001, with the formation of a number of large well
capitalized reinsurance companies in Bermuda and the significant level of
additional capital raised by existing competitors. Additionally, reinsurers are
tapping new markets and complementing their range of traditional reinsurance
products with innovative new products that bring together capital markets and
reinsurance experience. We compete with numerous major reinsurance and insurance
companies. These competitors, many of which have substantially greater
financial, marketing and management resources than us, include independent
reinsurance companies, subsidiaries or affiliates of established worldwide
insurance companies, reinsurance departments of certain commercial insurance
companies and underwriting syndicates. We also may face competition from new
market entrants or from market participants that decide to devote greater
amounts of capital to the types of business written by us.
Competition in the types of reinsurance business that we underwrite is
based on many factors, including the perceived overall financial strength of a
reinsurer, premiums charged, other terms and conditions, ratings of A.M. Best
Company ("A.M. Best"), an independent insurance industry rating organization,
Standard & Poor Ratings Services ("S&P"), a division of the McGraw-Hill
Companies, Inc. and Moody's Investors Service, Inc. ("Moody's"), service
offered, speed of service (including claims payment), and perceived technical
ability and experience of staff. The number of jurisdictions in which a
reinsurer is licensed or authorized to do business is also a factor. PXRE
Reinsurance is licensed, accredited, or otherwise authorized or permitted to
conduct reinsurance business in all states and the District of Columbia, Puerto
Rico, Bermuda, Colombia and Mexico, and through to December 31, 2002, PXRE's
Brussels Branch operated from Belgium. PXRE Bermuda is licensed to do business
only in Bermuda. PXRE Barbados is licensed only in Barbados.
The property and casualty reinsurance industry experienced an extended
period of soft market conditions characterized by inadequate pricing. These
conditions began to improve as a result of loss activity in Europe and the
Caribbean region in late 1999. In the wake of the September 11, 2001 attacks on
the World Trade Center and the Pentagon, which have resulted in industry losses
estimated as high as $45 to $75 billion, representing the largest insured event
in history, reinsurance markets across the world have hardened significantly.
Even before the September 11, 2001 attacks, property catastrophe rates were
improving at a significant pace. In the wake of this loss, we experienced
significant rate increases of 20% to 100% in our core property catastrophe, risk
excess and marine and aerospace lines in 2002. The global property-catastrophe
reinsurance market has historically been very cyclical, and as a result, it is
impossible to predict how long the current favorable pricing environment will
continue.
Retrocessional Agreements
The following table sets forth certain information regarding the volume
of premiums we ceded to other reinsurers pursuant to retrocessional agreements
for the periods indicated:
15
Year Ended December 31,
------------------------------------------------
($000's) 2002 2001 2000
------------- ------------- -------------
Gross premiums written $ 366,768 $ 290,213 $ 268,990
Reinsurance premiums ceded:
Managed business participants 31,699 50,271 36,239
Finite 7,466 13,573 26,814
Catastrophe coverage, surplus reinsurance and other 33,120 71,891 33,236
------------- ------------- -------------
Total reinsurance premiums ceded 72,285 135,735 96,289
------------- ------------- -------------
Net premiums written $ 294,483 $ 154,478 $ 172,701
============= ============= =============
In 2001, we incurred significant reinstatement and additional premium
obligations to retrocessionaires as a result of the cession of losses arising
from the events of September 11, 2001.
At December 31, 2002, estimated losses recoverable (including incurred
but not reported losses ("IBNR")), from retrocessionaires were $237.1 million,
including $29.7 million of paid loss recoverables. $161.6 million, or 68%, of
our reinsurance recoverables are attributable to the terrorist attacks of
September 11, 2001. Approximately 91% of our September 11, 2001 related
reinsurance recoverables as of March 1, 2003 are either fully collateralized or
reside with entities rated "A-" or higher.
We have a committee consisting of our chief executive officer, chief
financial officer and senior underwriting executives responsible for the
selection of reinsurers as managed business participants or as participating
reinsurers in the catastrophe coverage protecting us. Proposed reinsurers are
evaluated at least annually based on consideration of a number of factors
including the management, financial statements and the historical experience of
the reinsurer. This procedure is followed whether or not a rating has been
assigned to a proposed reinsurer by any rating organization. All reinsurers,
whether obtained through direct contact or the use of reinsurance
intermediaries, are subject to our approval.
Although management carefully selects our retrocessionaires, we are
subject to credit risk with respect to our retrocessionaires because the ceding
of risk to retrocessionaires does not relieve us of our liability to clients.
In the past, we have been able to increase our underwriting commitments
and to generate management fee income by retroceding some of our underwritten
risks to other reinsurers through various retrocessional arrangements whereby we
managed business for such participants. In 2002, we were a party to a
retrocessional agreement with Select Re (as amended from time to time, the
"Select Re Quota Share Agreement"), pursuant to which we offer to cede a
proportional share of our non-casualty reinsurance business. The proportional
share of our non-casualty business ceded to Select Re under that agreement was
8.0% in 2002 and 16.5% in 2001. As a complement to the Select Re Quota Share
Agreement, we cede an additional proportional share to Select Re on certain
agreed risks under a variable quota share agreement. In connection with the
Select Re Quota Share Agreement, we have entered into an undertaking to use
commercially reasonable efforts to present Select Re with aggregate annual
premiums equal to a minimum of 20% of Select Re's shareholders' equity (as
defined in the undertaking). This undertaking was amended in November 2002 and
extended until 2005. In return, Select Re is obligated to pay us a management
fee based on the gross premiums ceded to them under these quota share
agreements.
16
In addition to the Select Re Quota Share Agreement, we have entered
into several other reinsurance transactions with Select Re during 2002 and 2001
whereby: (i) Select Re provided retrocessional support on several finite and
other lines reinsurance transactions underwritten by PXRE; (ii) Select Re
provided us with aggregate excess of loss retrocessional coverage in 2001 that
protects us against large losses arising from a single catastrophe event and
against the accumulation of aggregate losses arising from a number of events;
and (iii) we provided Select Re with catastrophe excess of loss retrocessional
coverage that protects them in the event they incur significant losses arising
from a single catastrophe event which involved premiums of $1.7 million in 2002
and $0.7 million in 2001. In 2002, we ceded reinsurance premiums of $30.5
million to Select Re and earned management fees and ceding commissions of $7.6
million.
As of December 31, 2002, net assets of $85.3 million were due in the
aggregate from Select Re, all of which are secured by way of a reinsurance
trust, or funds withheld by us. In addition to the collateralization
requirements, we have various additional protections to ensure Select Re's
performance of its obligations to us. In this regard, pursuant to the Select Re
Quota Share Agreement, among other rights, we have the right to designate one
member of Select Re's board of directors and we have the right to limit the
amount of non-PXRE reinsurance business assumed by Select Re.
Select Re is a Class 3 Bermuda reinsurance company that was formed in
1997. As of December 31, 2002, it had shareholders' equity of approximately $137
million and is privately owned by approximately 120 shareholders. In accordance
with our contractual rights under the Select Re Quota Share Agreement, we have
designated Jeffrey L. Radke, our President and Chief Operating Officer, to serve
on Select Re's board of directors. Prior to joining us in 1999, Jeffrey Radke
had served as the President of Select Re. Jeffrey Radke receives no remuneration
for serving on Select Re's board.
As of December 31, 2001, Select Re held 1.1 million of the Company's
Common Shares, but subsequently liquidated its entire position in the open
market during February 2002. Gerald Radke, Jeffrey Radke and Halbert Lindquist,
one of our directors, each individually hold Select Re shares, but each such
person holds less than 1% of Select Re's outstanding shares. Pursuant to an
agreement with shareholders of Select Re, Gerald Radke and Jeffrey Radke have
each given notice of redemption to Select Re to sell all of their Select Re
shares. The redemption of shares was effective December 31, 2002 and will be
settled by October 2003 in accordance with the terms of the agreement.
Mr. William Michaelcheck is the Chairman of the Board of Select Re and
also one of its founding shareholders. Mr. Michaelcheck is also the President
and sole shareholder of Mariner Investment Group, Inc. ("Mariner"). Mariner acts
as the investment manager for our hedge fund and alternative investment
portfolio. In 2002 and 2001, we incurred investment management fees of $0.7
million and $0.8 million, respectively, relating to services provided by
Mariner.
The Company's Board of Directors reviews the various transactions with
Select Re at each of its meetings. In addition, the Board requires the prior
approval of the Company's Chief Financial Officer for any transaction with
Select Re.
In December 2002, we entered into a catastrophe quota share reinsurance
agreement with P-1 Re Ltd., a newly formed Bermuda Class 3 reinsurer ("P-1 Re").
P-1 Re was initially capitalized with $194 million by a group of unaffiliated
private institutional investors. Under this reinsurance agreement, P-1 Re will
assume a quota share of our property catastrophe, marine, aviation, satellite
and per-risk portfolios in 2003 and 2004. This arrangement has allowed us to
increase the capacity and capital we can offer to clients. It also provides us
with additional management fee income. P-1 Re is not permitted to conduct any
reinsurance transactions other than the reinsurance agreement with PXRE.
17
The quota share ceded to P-1 Re in either calendar year is dependent on
how much exposure we underwrite in excess of specified thresholds set by PXRE.
The cession is split into two sub-portfolios, a Specialty Subportfolio and
Property Catastrophe Subportfolio. The Specialty Subportfolio includes our
aviation, satellite, marine and risk excess business. The Property Catastrophe
Subportfolio includes our North American, International and London Market
property catastrophe business. Based on the reinsurance business written during
the January 1st renewal season, the quota share cession percentages determined
for 2003 are 59% and 2.74%, for the Specialty and Property Catastrophe
Subportfolios, respectively.
The reinsurance limits available under the reinsurance agreement vary
depending upon the reinsurance exposures in force during various periods. Based
upon business written during the January 1st renewal season, P-1 Re's aggregate
limit of liability for losses attaching from January 1 to July 30, 2003 is
$119.4 million. This aggregate limit is expected to increase to $123.8 million
for losses attaching from July 1 to December 31, 2003. P-1 Re's obligations are
fully secured through a securities account pledged for the benefit of PXRE.
The following table sets forth our earned commissions from
retrocessionaires pursuant to our managed business arrangements for the periods
indicated:
Year Ended December 31,
------------------------------------------------
($000's) 2002 2001 2000
------------- ------------- -------------
Commission $ 3,540 $ 5,130 $ 4,159
Contingent profit commission (1) (108) 624 (271)
------------- ------------- -------------
Total $ 3,432 $ 5,754 $ 3,888
============= ============= =============
- -------------------------------------------------------------------------------------------------------------------
(1) Contingent profit commission is paid after a three-year period and is
subject to adjustment based on cumulative experience under the various
quota share arrangements and, prior to 1998, also under the arrangement
with Select Re.
Loss Liabilities and Claims
We establish loss and loss expense liabilities (to cover expenses
related to settling claims, including legal and other fees) to provide for the
ultimate cost of settlement and administration of claims for losses, including
claims that have been reported to us by our reinsureds and claims for losses
that have occurred but have not yet been reported to us. Under GAAP, we are not
permitted to establish loss reserves until an event that may give rise to a
claim occurs.
For reported losses, we establish liabilities when we receive notice of
the claim. It is our general policy to establish liabilities for reported losses
in an amount equal to the liability set by the reinsured. In certain instances,
we will conduct an investigation to determine if the amount established by the
reinsured is appropriate or if it should be adjusted.
For incurred but not reported losses, a variety of methods have been
developed in the insurance industry for use in determining our provision for
such liabilities. In general, these methods involve the extrapolation of
reported loss data to estimate ultimate losses. Our loss calculation methods
generally rely upon a projection of ultimate losses based upon the historical
patterns of reported loss development. Additionally, we make provision through
our liabilities for incurred but not reported losses for any identified
deficiencies in the liabilities for reported losses set by our reinsureds.
18
Management believes that our overall liability for losses and loss
expenses maintained as of December 31, 2002 is adequate. There is a risk that
our liability for losses and loss expenses could prove to be greater than
expected in any year, because of the inherent uncertainty in the reserving
process with a consequent adverse impact on future earnings and stockholders'
equity. Estimating the ultimate liability for losses and loss expenses is an
imprecise science subject to variables that are influenced by both internal and
external factors. Historically, we have focused on property related coverages.
In contrast to casualty losses, which frequently are slow to be reported and may
be determined only through the lengthy, unpredictable process of litigation,
property losses tend to be reported more promptly and usually are settled within
a shorter time period. However, the estimation of losses for catastrophe
reinsurers is inherently less reliable than for reinsurers of risks that have an
established historical pattern of losses. In addition, we are required to make
estimates of losses based on limited information from ceding companies as well
as our own underwriting data due to the significant reporting delays that
normally occur under our retrocessional book of business and with respect to
insured losses that occur near the end of a reporting period.
Historically, we have underwritten a small amount of casualty
reinsurance. In 1998, we began underwriting new casualty lines of business and,
in 1999 and 2000, we substantially expanded our casualty and finite businesses.
In September 2001, we ceased underwriting non-finite casualty business. With
respect to casualty business, significant delays, ranging up to several years or
more, can be expected between the reporting of a loss to us and settlement of
our liability for that loss. As a result, such future claim settlements could be
influenced by changing rates of inflation and other economic conditions,
changing legislative, judicial and social environments and changes in our claims
handling procedures. In addition, most of the risks reinsured in our finite
business are also casualty risks and are subject to some of the same risks as
our casualty business. While the reserving process is difficult and subjective
for ceding companies, the inherent uncertainties of estimating such reserves are
even greater for a reinsurer, due primarily to the longer time between the date
of the occurrence and the reporting of any attendant claims to the reinsurer,
the diversity of development patterns among different types of reinsurance
treaties, the necessary reliance on the ceding companies for information
regarding reported claims and differing reserving practices among ceding
companies.
Our difficulty in accurately predicting casualty losses may also be
exacerbated by the limited amount of statistically significant historical data
regarding losses on our casualty lines of business. We must therefore rely on
the inherently less reliable historical loss patterns reported by ceding
companies and industry loss standards in calculating our casualty reserves.
Thus, the actual casualty losses and loss expenses may deviate, perhaps
substantially, from estimates of liabilities reflected in our consolidated
financial statements.
The following table provides a reconciliation of beginning and ending
loss and loss expense liabilities under GAAP for the fiscal years ended December
31, 2002, 2001 and 2000. Except with respect to certain workers' compensation
liabilities, discounted by $0.8 million and $0.4 million at December 31, 2002
and 2001, respectively and the reserve maintained by PXRE Bermuda at December
31, 2001 and 2000, we do not discount our loss and loss expense liabilities;
that is, we do not calculate them on a present value basis.
19
Year Ended December 31,
------------------------------------------------
($000's) 2002 2001 2000
------------- ------------- -------------
Gross GAAP liability for losses and loss expenses at
beginning of year................................... $ 453,705 $ 251,620 $ 261,551
Add - Gross provision for losses and loss expenses:
Occurring in current year......................... 118,345 318,373 137,123
Occurring in prior years.......................... 41,352 34,339 77,330
------------- ------------- -------------
Total gross provision (1)......................... 159,697 352,712 214,453
------------- ------------- -------------
Less - Gross payments for losses and loss expenses:
Occurring in current year......................... 19,026 63,960 20,920
Occurring in prior years.......................... 149,365 85,904 210,520
------------- ------------- -------------
Total gross payments.............................. 168,391 149,864 231,440
------------- ------------- -------------
Add - Asset related to retroactive reinsurance assumed. 2,818 (763) 7,056
Gross GAAP liability for losses and loss expenses at
end of year......................................... $ 447,829 $ 453,705 $ 251,620
============= ============= =============
Ceded GAAP liability for losses and loss expenses at
end of year......................................... (207,444) (245,906) (96,117)
------------- ------------- -------------
Net GAAP liability for losses and loss expenses at end
of year............................................. $ 240,385 $ 207,799 $ 155,503
============= ============= =============
- -------------------------------------------------------------------------------------------------------------------
(1) The GAAP provision for losses and loss expenses includes net foreign
currency exchange gains (losses) of $(7,000), $981,000 and $(1,196,000)
for 2002, 2001, and 2000, respectively.
The following table presents the development of our GAAP balance sheet
liability for losses and loss expenses for the period 1992 through 2002. The top
line of the table shows the liabilities at the balance sheet date for each of
the indicated years. This reflects the estimated amount of losses and loss
expenses for claims arising in that year and all prior years that are unpaid at
the balance sheet date, including losses incurred but not yet reported to us.
The upper portion of the table shows the cumulative amounts subsequently paid as
of successive years with respect to such liabilities. The lower portion of the
table shows the re-estimated amount of previously recorded liabilities based on
experience as of the end of each succeeding year. These estimates change as more
information becomes known about the frequency and severity of claims for
individual years. A redundancy (deficiency) exists when the re-estimated
liability at each December 31 is less (greater) than the prior liability
estimate. The "cumulative redundancy (deficiency)" depicted in the table, for
any particular calendar year, represents the aggregate change in the initial
estimates over all subsequent calendar years.
Each amount in the table below includes the effects of all changes in
amounts for prior periods. For example, if a loss determined in 1995 to be
$150,000 was first reserved in 1992 at $100,000, the $50,000 deficiency (actual
loss minus original estimate) would be included in the cumulative redundancy
(deficiency) in each of the years 1993-1994 shown below. This table does not
present accident or policy year development data.
20
Year Ended December 31,
-----------------------------------------------------------------------------------------------------
($000's, except percentages) 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- ------- ------- ------- ------- ------- --------
Gross liabilities for losses
and loss expenses $447,829 $453,705 $251,620 $261,551 $102,592 $57,189 $61,389 $72,719 $81,836 $71,442 $88,668
Cumulative amount of liability
paid through:
One year later 149,365 85,904 210,519 75,814 29,108 23,708 42,698 41,601 37,820 59,773
Two years later 138,567 265,904 102,526 39,853 40,673 55,620 58,968 54,400 79,926
Three years later 293,313 112,966 47,373 46,545 67,296 67,630 60,850 89,519
Four years later 118,317 50,085 52,220 70,676 76,762 64,566 94,261
Five years later 52,117 54,144 74,533 79,433 69,414 96,895
Six years later 55,815 75,741 82,930 70,392 99,864
Seven years later 76,337 84,049 71,091 100,724
Eight years later 84,651 71,773 101,357
Nine years later 71,890 101,935
Ten years later 102,040
Liabilities reestimated as of:
One year later 497,874 285,959 338,881 135,227 57,280 66,257 83,228 87,818 78,188 101,423
Two years later 305,558 344,773 141,087 52,271 63,292 85,162 87,750 76,902 103,632
Three years later 350,451 139,220 63,151 61,178 83,178 90,409 74,683 105,165
Four years later 140,054 62,664 66,137 82,129 89,284 75,392 103,801
Five years later 63,909 65,819 85,820 88,326 74,880 104,330
Six years later 66,676 85,842 91,663 74,173 104,222
Seven years later 86,229 93,116 73,934 103,854
Eight years later 93,505 75,126 103,663
Nine years later 75,042 105,082
Ten years later 105,056
Gross reserves of TREX at date
of merger 9,589 5,242 2,067 26
Gross reserve for elimination
of one quarter lag for UK
subsidiary (1,191)
Gross retroactive accounting 2,817 2,055
Gross cumulative redundancy
(deficiency) through
December 31, 2002:
Amount (41,352) (51,883) (88,900) (38,653) (6,720) 4,302 (8,268) (9,602) (3,574) (16,388)
Percentage (9%) (21%) (34%) (38%) (12%) 6% (11%) (11%) (5%) (18%)
Retrocessional recoveries 15,945 15,768 23,646 10,287 6,056 86 8,268 4,115 1,573 3,564
Net cumulative redundancy
(deficiency) through
December 31, 2002:
Amount (25,406) (36,116) (65,253) (28,366) (665) 4,389 1 (5,487) (2,001) (12,824)
Percentage (12%) (23%) (41%) (41%) (1%) 8% 0% (11%) (5%) (36%)
21
During 2002, we incurred adverse development from prior-year losses
amounting to $25.4 million net of reinsurance, $16.9 million of which was due to
loss development in our Exited Lines segment relating primarily to the 2000 and
2001 underwriting years. Adverse development of $16.7 million was primarily
caused by larger than expected reported claims under our direct reinsurance
contracts, corroborated by revised industry data.
Conditions and trends that have affected reserve development in the
past may not necessarily occur in the future. Accordingly, it would not be
appropriate to extrapolate the future adequacy or inadequacy of our reserves
based on the foregoing.
Investments
We have established general procedures and guidelines for our
investment portfolio and oversee investment management carried out by our
investment managers. General Re-New England Asset Management, Inc ("NEAM") and
Mariner, a specialist in alternative investments, are our principal investment
managers. Our investment policies stress conservation of principal,
diversification of risk and liquidity. Our invested assets consist primarily of
bonds with fixed maturities, hedge funds, and short-term investments, but also
include limited amounts of equity securities and other non-hedge fund limited
partnership investments. Our investments are subject to market-wide risks and
fluctuations, as well as to risks inherent in particular securities.
As of December 31, 2002, we had, at fair value, $500.7 million in fixed
maturities, $133.3 million in short-term investments, $113.1 million in hedge
fund limited partnerships, and $11.5 million in other invested assets that are
comprised primarily of other limited partnerships. As at December 31, 2002,
hedge fund investments were allocated among sixteen managers, with fair values
ranging from $1.8 million to $18.1 million. Hedge funds and other limited
partnership investments are accounted for under the equity method whereby both
the investment income and any change in the fair value are recorded through the
investment income line of the income statement. Foreign denominated fixed
maturities, and in 2001, certain hedge funds are accounted for as part of a
trading portfolio, whereby both the investment income and any change in the fair
value are recorded through the investment income line of the income statement.
Included in investments in limited partnerships and the trading portfolio are
investments actively managed by Mariner. See Note 3 of Notes to Consolidated
Financial Statements. See also, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Risks and Uncertainties;
Relating to Critical Accounting Policies - Investments" for further information
regarding our investment portfolio, including our hedge fund portfolio.
22
The following table summarizes our investments at December 31, 2002 and
2001 at fair value:
Analysis of Investments
December 31, 2002 December 31, 2001
----------------------- ----------------------
($000's, except percentages) Amount Percent Amount Percent
----------- ------- ----------- -------
Fixed maturities:
United States treasury securities $ 46,165 6.1% $ 48,413 9.5%
Foreign denominated securities 21,871 2.9 - -
Foreign government securities 315 - 5,355 1.1
United States government sponsored agency debentures 38,062 5.0 45,923 9.0
United States government sponsored agency
mortgage-backed securities 42,467 5.6 8,612 1.7
Other mortgage and asset-backed securities 143,736 19.0 20,620 4.1
Municipal securities 76,522 10.1 35,070 6.9
Corporate securities 131,611 17.3 55,489 10.9
----------- ------ ----------- ------
Total fixed maturities 500,749 66.0 219,482 43.2
Short-term investments 133,318 17.6 153,503 30.2
----------- ------ ----------- ------
Total 634,067 83.6 372,985 73.4
Hedge funds 113,105 14.9 115,569 22.7
Other investments 11,529 1.5 19,791 3.9
----------- ------ ----------- ------
Total investment portfolio $ 758,701 100.0% $ 508,345 100.0%
=========== ====== =========== ======
At December 31, 2002, the fair value of our investment portfolio
exceeded its cost by $44.5 million, of which $31.6 million related to limited
partnerships and trading portfolios and $12.9 million related to unrealized
appreciation on fixed maturities. At December 31, 2001, the fair value of our
investment portfolio exceeded its cost by $39.7 million, of which $38.9 million
related to limited partnerships and trading portfolios and $0.8 million related
to unrealized appreciation on fixed maturities.
We regularly monitor the difference between the estimated fair value of
our investments and their cost or book values to identify underperforming
investments and whether declines in value are temporary in nature, or "other
than temporary". If we believe a decline in the value of a particular investment
is temporary, we record the decline as an unrealized loss, net of tax, in our
stockholders' equity. If we believe the decline is "other than temporary", we
write down the carrying value of the investment and record a realized loss on
our statement of income and comprehensive income. We formally review each
quarter the largest unrealized losses by value, and all investments that have
been in an unrealized loss position for more than six months. In assessing
whether an investment is suffering a decline in value that is other than
temporary we pay particular attention to those trading at 80% or less of face
value, and those investments that have been downgraded by any of the major
ratings agencies in the period, general market conditions, and the status of
principal and interest payments. If we conclude that a decline is other than
temporary we recognize a realized investment loss for the impairment. In 2002,
we recognized $0.7 million of impairment losses.
23
The following table indicates the composition of our fixed maturity
investments, including short-term investments, at fair value, by time to
maturity at December 31, 2002 and 2001:
Composition of Investments By Maturity
December 31, 2002 December 31, 2001
----------------------- ----------------------
($000's, except percentages) Amount Percent Amount Percent
----------- ------- ----------- -------
Maturity (1)
One year or less $ 189,805 29.9% $ 157,467 42.2%
Over 1 year through 5 years 117,241 18.5 77,335 20.7
Over 5 years through 10 years 123,334 19.5 93,969 25.2
Over 10 years through 20 years 17,484 2.7 - -
Over 20 years - - 14,982 4.0
----------- ------ ----------- ------
447,864 70.6 343,753 92.1
United States government sponsored agency mortgage-backed and
other mortgage and asset-backed securities 186,203 29.4 29,232 7.9
----------- ------ ----------- ------
Total fixed maturities $ 634,067 100.0% $ 372,985 100.0%
=========== ====== =========== ======
- -------------------------------------------------------------------------------------------------------------------
(1) Based on stated maturity dates with no prepayment assumptions.
The average yield to maturity of our long-term fixed maturities
portfolio at December 31, 2002 and 2001, was 3.3% and 4.5%, respectively.
24
The following table indicates the composition of our fixed maturities
portfolio, at fair value, excluding short-term investments, by rating at
December 31, 2002 and 2001:
Composition of
Fixed Maturities Portfolio By Rating
--------------------------------------------
December 31, 2002 December 31, 2001
------------------- --------------------
($000's, except percentages) Amount Percent Amount Percent
-------- -------- -------- --------
Ratings (1)
United States treasury securities $ 46,165 9.2% $ 48,413 22.1%
Foreign denominated securities
Aaa and/or AAA 21,871 4.4 -- --
Foreign government securities
Aa2 and/or AA 315 0.1 -- --
Ba2 and/or BB -- -- 5,355 2.4
United States government sponsored agency debentures 38,062 7.6 45,923 20.9
United States government sponsored agency mortgage-
backed securities 42,467 8.5 8,612 4.0
Other mortgage and asset-backed securities
Aaa and/or AAA 111,788 22.3 20,229 9.2
Aa2 and/or AA 7,510 1.5 -- --
A2 and/or A 23,920 4.8 -- --
Baa2 and/or BBB 343 0.1 391 0.2
Not rated or below BB 175 -- -- --
Municipal securities
Aaa and/or AAA 53,659 10.7 24,658 11.2
Aa2 and/or AA 22,863 4.6 10,412 4.7
Corporate securities
Aaa and/or AAA 7,846 1.6 687 0.3
Aa2 and/or AA 14,104 2.8 1,023 0.5
A2 and/or A 87,358 17.4 37,482 17.1
Baa2 and/or BBB 21,680 4.3 11,395 5.2
Ba2 and/or BB 623 0.1 1,192 0.5
Not rated or below BB -- -- 3,710 1.7
-------- -------- -------- --------
Total fixed maturities $500,749 100.0% $219,482 100.0%
======== ======== ======== ========
- -------------------------------------------------------------------------------------------------
(1) Ratings as assigned by Moody's and S&P, respectively. Such ratings are
generally assigned upon the issuance of the securities, subject to
revision on the basis of ongoing evaluations.
The investment committee of our Board of Directors and management
periodically evaluate the composition of the investment portfolio and reposition
the portfolio in response to market conditions in order to improve total
risk-adjusted returns while maintaining liquidity and superior credit quality.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Market Risk."
25
Ratings
PXRE Reinsurance and PXRE Bermuda are rated "A" (Excellent) by A.M.
Best. PXRE has been assigned an "A" financial strength rating by S&P.
The property catastrophe reinsurance market is highly sensitive to the
ratings assigned by the rating agencies. If either of S&P or A.M. Best were to
downgrade us, such downgrade would likely have a material negative impact on our
ability to expand our reinsurance portfolio and renew our existing reinsurance
portfolio, especially if we were to be downgraded more than one level from the
"A" rating category to the "B" rating category.
These ratings are based upon factors that may be of concern to
policyholders, agents and intermediaries, but may not reflect the considerations
applicable to an investment in a reinsurance or insurance company. A change in
any such rating is at the discretion of the respective rating agencies.
In addition, if we were downgraded below "A-" by either rating agency,
an event of default would occur under PXRE Delaware's credit agreement with
Wachovia Bank, National Association (formerly known as First Union National
Bank, "Wachovia") as agent, and the lenders thereunder (the "Wachovia Loan"). As
of December 31, 2002, the principal amount of $30 million was outstanding under
the Wachovia Loan. See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation - Financial Condition - Liquidity
and Capital Resources" for a full description of the terms and provisions of the
Wachovia Loan.
It is increasingly common for our assumed reinsurance contracts to
contain terms that would allow our clients to cancel the contract if we are
downgraded below various rating levels by one or more rating agencies. Whether a
client would exercise such rights would depend, among other things, on the
reasons for such a downgrade, the extent of the downgrade, the prevailing market
conditions, and the pricing and availability of replacement reinsurance
coverage. We cannot predict in advance whether and how many of our clients would
actually exercise such rights or what effect such cancellations would have on
our financial condition or future prospects, but such an effect could
potentially be materially adverse.
In addition, certain of our excess of loss reinsurance contracts
require us to transfer premiums currently retained by us on a funds withheld
basis into a trust for the benefit of the reinsurers if A.M. Best were to
downgrade us below "A-." If A.M. Best were to downgrade us to "B++" or below,
certain other ceded excess of loss reinsurance contracts contain provisions that
give the reinsurer the right to cancel the contract and require us to pay a
termination fee. The amount of the termination fee would be dependent upon
various factors, including level of loss activity.
Regulation
United States
The Company and PXRE Reinsurance are subject to regulation under the
insurance statutes of various U.S. states, including Connecticut, the
domiciliary state of PXRE Reinsurance. The regulation and supervision to which
PXRE Reinsurance is subject relates primarily to the standards of solvency that
must be met and maintained, licensing requirements for reinsurers, the nature of
and limitations on investments, deposits of securities for the benefit of a
reinsured, methods of accounting, periodic examinations of the financial
condition and affairs of reinsurers, the form and content of reports of
financial condition required to be filed, reserves for losses and other matters.
In general, such regulation is for the protection of the reinsureds and
policyholders, rather than investors.
26
In addition, the Company and PXRE Delaware are subject to regulation
under the insurance holding company statutes of various U.S. states, including
Connecticut. These laws and regulations vary from state to state, but generally
require an insurance holding company and reinsurers that are subsidiaries of an
insurance holding company to register with the state regulatory authorities and
to file with those authorities certain reports including information concerning
their capital structure, ownership, financial condition, and general business
operations. Moreover, PXRE Reinsurance may not enter into certain transactions,
including certain reinsurance agreements, management agreements, and service
contracts, with members of its insurance holding company system, unless it has
first notified the Connecticut Insurance Commissioner of its intention to enter
into any such transaction and the Connecticut Insurance Commissioner had not
disapproved of such transaction within the period specified by the Connecticut
insurance statute. Among other things, such related company transactions are
subject to the requirements that their terms be fair and reasonable, charges or
fees for services performed be reasonable and the interests of policyholders not
be adversely affected.
State laws also require prior notice or regulatory agency approval of
direct or indirect changes in control of an insurer, reinsurer, or its holding
company, and of certain significant inter-corporate transfers of assets within
the holding company structure. An investor who acquires or attempts to acquire
shares representing or convertible into more than 10% of the voting power of the
securities of the Company would become subject to at least some of such
regulations, would require approval by the Connecticut Insurance Commissioner
prior to acquiring such shares and would be required to file certain notices and
reports with the Connecticut Insurance Commissioner prior to such acquisition.
See "Market for Registrant's Common Equity and Related Stockholder Matters" for
a discussion of other limitations on voting and ownership of the Company's
securities contained in the Company's Bye-Laws.
The principal sources of cash for the payment of operating expenses and
income taxes, debt service obligations, and dividends by the Company are the
receipt of dividends and net tax allocation payments from PXRE Reinsurance, PXRE
Bermuda and PXRE Barbados. Under the Connecticut insurance laws, the maximum
amount of dividends or other distributions that PXRE Reinsurance may declare or
pay within any twelve-month period, without regulatory approval, is limited to
the lesser of (a) earned surplus or (b) the greater of 10% of policyholders
surplus at December 31 of the preceding year or 100% of net income for the
twelve-month period ended 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 without prior
regulatory approval, depending upon a variety of factors outside our control,
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 without regulatory approval during
2003 is limited to approximately $45.7 million. During 2002, $29.4 million in
dividends were paid by PXRE Reinsurance. See below for a discussion of dividend
restrictions applicable to PXRE Bermuda and PXRE Barbados. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
27
Additionally, Connecticut has adopted regulations respecting certain
minimum capital requirements for property and casualty companies, based upon a
model adopted by the National Association of Insurance Commissioners (the
"NAIC"). The NAIC assists state insurance supervisory officials in achieving
insurance regulatory objectives, including the maintenance and improvement of
state regulation. The risk-based capital regulations adopted provide for the use
of a formula to measure statutory capital and surplus needs based on the risk
characteristics of a company's products and investment portfolio to identify
weakly capitalized companies. As of December 31, 2002, PXRE Reinsurance's
surplus was $457.2 million and substantially exceeded its calculated risk-based
capital authorized control level which was $37.3 million.
Effective January 1, 2001, Connecticut required that insurance
companies domiciled in Connecticut prepare their statutory basis financial
statements in accordance with the NAIC Accounting Practices and Procedures
Manual - Version Effective as of January 1, 2001 ("Codification") subject to any
deviations prescribed or permitted by the Insurance Commissioner of the State of
Connecticut. Accounting changes adopted to conform to the provisions of
Codification are reported as an adjustment to unassigned surplus in the period
of the change in accounting principle. The cumulative effect is the difference
between the amount of capital and surplus at the beginning of the year and the
amount of capital and surplus that would have been reported at that date if the
new accounting had been applied retroactively for all prior periods. The effect
of the adoption was a decrease in statutory surplus of $2.5 million.
The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and is primarily intended
to assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies twelve industry ratios and specifies "usual
values" for each ratio. Departure from the usual values on four or more of the
ratios can lead to inquiries from individual state insurance commissioners as to
certain aspects of an insurer's business. For the years ended December 31, 2002,
2001 and 2000, PXRE Reinsurance's results were within the usual values for each
of the twelve ratios, except for three ratios in 2002, one ratio in 2001 and
three ratios in 2000. The three ratios that fell outside of the range in 2002
were due to (a) increases in net writings in 2002 due to the hardening market
following September 11, 2001 and the decreased net writings in 2001 due to
premiums ceded as a result of September 11, 2001, (b) decreased investment yield
associated with general market interest rate levels in 2002 and interest on
funds held, and (c) reserve deficiencies relative to surplus due to deficiencies
in PXRE's Exited Lines segment which included its direct writing unit. The one
ratio that fell outside the usual range in 2001 was due to (a) an increase in
excess of loss ceded premiums written, and (b) the statutory accounting effect
of one retroactive contract. PXRE Reinsurance's three ratios outside the usual
range in 2000 were due to (a) an increase in PXRE Reinsurance's net written
premium in 2000 as compared in 1999 due to the non-renewal in 2000 of the
intercompany pooling agreement between Transnational Insurance and PXRE
Reinsurance caused by the sale of Transnational Insurance, (b) a decrease in
investment income from certain alternative limited partnership investments in
2000 compared to 1999, and (c) the statutory accounting effect of one
retroactive reinsurance contract.
28
From time to time, various regulatory and legislative changes have been
proposed in the U.S. insurance industry, some of which could have an effect on
reinsurers and insurers. Among the proposals that have in the past been or are
at present being considered are the possible introduction of federal regulation
in addition to, or in lieu of, the current system of state regulation of
insurers, an initiative to create a federally guaranteed disaster reinsurance
pool pre-funded by insurers and proposals in various state legislatures (some of
which have been enacted) to conform portions of their insurance laws and
regulations to various model acts adopted by the NAIC. We are unable to predict
what effect, if any, the foregoing developments may have on our operations and
financial condition in the future.
Bermuda
The Insurance Act 1978 of Bermuda and related regulations
(collectively, the "Act") imposes on Bermuda insurance companies, including PXRE
Bermuda, solvency and liquidity standards and auditing and reporting
requirements, and grants to the Supervisor of Insurance powers to supervise,
investigate and intervene in the affairs of insurance companies.
The Act provides that the value of the general business assets of a
Class 3 insurer must exceed the amount of its general business liabilities by a
prescribed minimum solvency margin. PXRE Bermuda, as a Class 3 insurer, is
required to maintain a minimum solvency margin equal to the greatest of: (a) $1
million, (b) 20% of net premiums written up to $6 million, or where net premiums
are projected to exceed $6 million, $1.2 million plus 15% of net premiums
written over $6 million or (c) 15% of loss reserves. In addition, PXRE Bermuda
is prohibited from declaring or paying any dividends during any financial year
it is in breach of its minimum solvency margin or minimum liquidity ratio or if
the declaration or payment of such dividends would cause it to fail to meet such
margin or ratio. If it fails to meet its minimum solvency margin or minimum
liquidity ratio on the last day of any financial year, the insurer will be
prohibited, without the approval of the Supervisor of Insurance, from declaring
or paying any dividends during the next financial year.
As a Class 3 insurer, PXRE Bermuda also is prohibited, without the
approval of the Supervisor of Insurance, from reducing by 15% or more its total
statutory capital, as set out in its previous year's financial statements, and
if it appears to the Supervisor of Insurance that there is a risk of the insurer
becoming insolvent or that it is in breach of the Act or any conditions imposed
upon its registration, the Supervisor may, in addition to the restrictions
specified above, direct the insurer not to declare or pay any dividends or any
other distributions or may restrict it from making such payments to such extent
as the Supervisor of Insurance may think fit.
The Act provides a minimum liquidity ratio for general business. An
insurer engaged in general business is required to maintain the value of its
relevant assets at not less than 75% of the amount of its relevant liabilities.
Relevant assets include cash and time deposits, quoted investments, unquoted
bonds and debentures, first liens on real estate, investment income due and
accrued, accounts and premiums receivable and reinsurance balances receivable.
There are certain categories of assets that, unless specifically permitted by
the Supervisor of Insurance, do not automatically qualify as relevant assets
such as unquoted equity securities, investments in and advances to affiliates,
real estate and collateral loans. The relevant liabilities are total general
business insurance reserves and total other liabilities less deferred income tax
and sundry liabilities (by interpretation, those not specifically defined).
29
Under Bermuda law, PXRE Bermuda may not lawfully declare or pay a
dividend unless there are reasonable grounds for believing that it is, or will
after payment of the dividend be, able to pay its liabilities as they become
due, and that the realizable value of its assets will, after payment of the
dividend, be greater than the aggregate value of its liabilities, issued share
capital and share premium accounts.
At December 31, 2002, PXRE Bermuda's solvency and liquidity margins and
statutory capital and surplus were in excess of the minimum levels required by
the Act.
Barbados
PXRE Barbados is subject to regulation under Barbados' Insurance Act,
1996, (the "Barbados Act"). Under the Barbados Act, PXRE Barbados may only pay a
dividend out of the realized profits of the company and may not pay a dividend
unless (a) after payment of the dividend it is able to pay its liabilities as
they become due, and (b) the realizable value of its assets is greater than the
aggregate value of its liabilities and (c) the stated capital accounts are
maintained in respect of all classes of shares.
PXRE Barbados is also required to maintain assets in an amount that
permits it to meet the prescribed minimum solvency margin for the net premium
income level of its business. In respect of its general insurance business, PXRE
Barbados is required to maintain the following margin of solvency:
(i) to the extent that premium income of the preceding financial
year did not exceed US$750,000, assets must exceed liabilities
by US$125,000;
(ii) to the extent that premium income of the preceding financial
year exceeds US$750,000 but is equal to or less than US$5
million, the assets must exceed liabilities by 20% of the
premium income of the preceding financial year; and
(iii) to the extent that premium income of the preceding financial
year exceeds US$5 million, the assets must exceed liabilities
by the aggregate of US$1 million and 10% of the premium income
of the preceding financial year.
PXRE Barbados is not required at the present time to maintain any
additional statutory deposits or reserves relative to its business.
United Kingdom
PXRE Limited and PXRE Lloyd's Syndicate are subject to regulation by
Lloyd's. The form of that regulation is prescribed by the Lloyd's Act of 1982
and Lloyd's internal regulatory bye-laws and directions. The regulation and
supervision to which PXRE Limited is subject relates primarily to the
maintenance of a risk based capital requirement (by way of a deposit of
securities and a letter of credit with Lloyd's to support its underwriting) and
prescribed methods of accounting. PXRE Lloyd's Syndicate has to comply with
accounting regulation, internal reporting, and is subject to periodic
examinations of compliance. The Lloyd's market is regulated externally by the
Financial Services Authority, although the day-to-day regulation of the market
remains the responsibility of the Council of Lloyd's. All cash and invested
assets of PXRE Lloyd's Syndicate, amounting to approximately $13.6 million at
December 31, 2002, are restricted from being paid as a dividend until the run
off is completed.
30
Taxation of PXRE and its Subsidiaries
The following summary of the taxation of the Company, PXRE Bermuda,
PXRE Barbados and our U.S. subsidiaries, including PXRE Reinsurance
(collectively, the "PXRE U.S. Companies") is based upon current law.
Legislative, judicial or administrative changes may be forthcoming that could
affect this summary. See, for example, "Legislation" below. Certain subsidiaries
and branch offices of PXRE are subject to taxation related to our operations in
the United Kingdom and Belgium.
Bermuda
Under current Bermuda law, no income, withholding or capital gains
taxes are imposed on the Company or PXRE Bermuda. The Company and PXRE Bermuda
have each received an assurance from the Minister of Finance under The Exempted
Undertakings Tax Protection Act, 1966 of Bermuda, to the effect that in the
event of there being enacted in Bermuda any legislation imposing tax computed on
profits or income, or computed on any capital asset, gain or appreciation, or
any tax in the nature of estate duty or inheritance tax, then the imposition of
any such tax shall not be applicable to the Company or PXRE Bermuda or to any of
their operations or their shares, debentures or other obligations until March
28, 2016. These assurances are subject to the proviso that they are not to be
construed so as to prevent the application of any tax or duty to such persons as
are ordinarily resident in Bermuda (the Company and PXRE Bermuda are not
currently so designated) or to prevent the application of any tax payable in
accordance with the provisions of The Land Tax Act of 1967 of Bermuda or
otherwise payable in relation to the land leased to the Company or PXRE Bermuda.
The Company and PXRE Bermuda each pay annual Bermuda government fees and PXRE
Bermuda pays annual insurance license fees. In addition, all entities employing
individuals in Bermuda are required to pay a payroll tax and other sundry fees
and levies, directly or indirectly, to the Bermuda government.
Barbados
Under Barbados law, PXRE Barbados is subject to tax on its worldwide
income at the normal corporation tax rate of 40%. PXRE Barbados is allowed a tax
credit in respect of premiums from insurance business and investment income that
does not originate in Barbados ("foreign business"). To the extent that the
foreign business constitutes more than 81% of the aggregate total insurance
business and investment returns of PXRE Barbados, PXRE Barbados will be allowed
a tax credit of 93%, thereby reducing the effective tax rate in Barbados to
2.8%.
31
United States
The PXRE U.S. Companies carry on business in, and are subject to
taxation in, the United States. The Company believes that it and its
subsidiaries, other than the PXRE U.S. Companies, have operated and will
continue to operate their business in a manner that will not cause them to be
treated as engaged in a trade or business within the United States. Tax
conventions between the United States and Bermuda or Barbados may provide relief
to PXRE Bermuda and PXRE Barbados, respectively, if either such company is
deemed to be engaged in the conduct of a U.S. trade or business. Under the tax
convention between Bermuda and the United States (the "Bermuda Treaty"), a
Bermuda company predominantly engaged in the insurance business, such as PXRE
Bermuda, is subject to U.S. income tax on its insurance income found to be
effectively connected with a U.S. trade or business only if that trade or
business is conducted through a permanent establishment in the United States. As
a holding company that is not predominantly engaged directly in an insurance
business, the Company is not entitled to the benefits of the Bermuda Treaty.
Similarly, under the tax convention between Barbados and the United States (the
"Barbados Treaty"), a corporation that is a Barbados resident will not be
subject to U.S. income tax on income that is effectively connected with a U.S.
business, unless such business is conducted through a permanent establishment in
the United States. Each of the Company, PXRE Bermuda and PXRE Barbados operate
under guidelines that are intended to minimize the risk that they will be
treated as engaged in a U.S. trade or business; and each of PXRE Bermuda and
PXRE Barbados operate under guidelines that are intended to minimize the risk
that they will be found to have a U.S. permanent establishment.
On this basis, we do not expect that the Company and our subsidiaries,
other than the PXRE U.S. Companies, will be required to pay U.S. federal
corporate income taxes (other than withholding taxes on certain U.S. source
investment income and excise taxes on reinsurance premiums as described below).
However, irrespective of such guidelines, there can be no assurance that PXRE
Bermuda and PXRE Barbados will qualify for the Bermuda Treaty and the Barbados
Treaty, respectively, now or in the future, or that the Bermuda Treaty or the
Barbados Treaty will not be terminated or revised in a manner that could
adversely affect any protection from U.S. corporate tax that they currently
provide. In addition, because there is uncertainty as to the activities that
constitute being engaged in a trade or business in the United States, there can
be no assurances that the U.S. Internal Revenue Service will not contend
successfully that the Company or a non-U.S. subsidiary is engaged in a trade or
business in the United States. The maximum federal tax rates currently are 35%
for a corporation's income that is effectively connected with a trade or
business in the United States. In addition, the U.S. branch profits tax of 30%
is imposed each year on a foreign (or non-U.S.) corporation's earnings and
profits (with certain adjustments) effectively connected with its U.S. trade or
business that are deemed repatriated out of the United States, for a potential
maximum effective tax rate of approximately 55% on the net business connected
with a U.S. trade or business.
The Company and its non-U.S. subsidiaries are subject to U.S.
withholding tax at the 30% rate on certain "U.S. source investment income,"
which is not considered effectively connected with the conduct of a U.S. trade
or business. This rate is reduced under the Barbados Treaty, to 5% for dividends
paid to PXRE Barbados by our U.S. subsidiaries.
32
The United States also imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. The rate of tax applicable to reinsurance
premiums paid to PXRE Bermuda and PXRE Barbados is 1% of gross premiums.
Legislation
In March, 2002 two bills were proposed in the U.S. House of
Representatives that seek to prevent so-called "corporate inversion"
transactions. Under these bills, a foreign corporation would be taxed as a U.S.
domestic corporation under the Internal Revenue Code if it became a foreign
corporation as a result of an "inversion transaction" under the bill proposed by
Representative McInnis or "corporate expatriation transaction" under the bill
proposed by Representative Neal. As originally drafted, the McInnis bill would
only apply to transactions completed after December 31, 2001. Commencing with
the 2004 tax year, the Neal bill would apply to "corporate expatriation
transactions" that occurred prior to September 11, 2001. It is unclear whether
our 1999 reorganization would be treated as a "corporate expatriation
transaction" under the Neal bill as originally drafted. Neither bill was acted
on in 2002.
In January 2003, two bills were introduced into Senate (S.9, by Sen.
Daschle and S.135, by Sen. Dayton), which would treat certain foreign
corporations created through inversion transactions as domestic corporations. In
February 2003, Senators Reid and Levin introduced a bill into the Senate that
closely mirrors Representative Neal's 2002 bill.
We are unable to predict whether the effort to enact either of the
current legislative proposals to amend the Internal Revenue Code will be
successful, what form any legislation may ultimately take and what impact any
such legislation would have on us.
Employees
We employed 61 full-time employees at December 31, 2002. No employees
are represented by a labor union, and management considers its relationship with
our employees to be excellent.
A significant number of PXRE Bermuda employees, including senior
management of the Company and PXRE Bermuda, are employed pursuant to work
permits granted by Bermuda authorities. These permits expire at various times
over the next few years. We have no reason to believe that these permits would
not be extended at expiration upon request, although no assurance can be given
in this regard.
Available Information
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any documents we file at
the SEC's public reference room at room 1024, 450 Fifth Street, NW, Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public
reference room. The SEC maintains a website that contains annual, quarterly and
current reports, proxy statements and other information that we file
electronically with the SEC. The SEC's website is http://www.sec.gov.
33
We maintain an Internet website at http://www.pxregroup.com. We make
available free of charge on our website our annual report on Form 10-K, our
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) of the Securities
Exchange Act of 1934 as soon as practicable after we electronically file such
material with, or furnish it to, the SEC. The information on our website is not
incorporated by reference into this report.
Item 2. Properties
The Company leases office space in Bermuda where the Company's
principal executive offices are located, and in Edison, New Jersey, where PXRE
Reinsurance's principal offices are located. We also lease office space in
Brussels, Belgium. Our properties are leased on terms and for durations that are
reflective of commercial standards in the communities where these properties are
located. The Company believes the facilities it occupies are adequate for the
purposes for which they are currently used and are well maintained.
Item 3. Pending Legal Proceedings
We are subject to litigation and arbitration in the ordinary course of
business. Except as disclosed below, management does not believe that the
eventual outcome of any such pending litigation or arbitration is likely to have
a material effect on our financial condition or business. Pursuant to our
insurance and reinsurance arrangements, disputes are generally required to be
finally settled by binding arbitration.
In May 1999, PXRE Delaware entered into weather option agreements with
two counterparties. In April 2000, these counterparties submitted invoices to
PXRE Delaware in the aggregate sum of $8.3 million seeking payment under the
weather option agreements, which invoices have been paid. PXRE Delaware insured
its obligations under these weather option agreements through two Commercial
Inland Marine Weather Insurance Policies issued by Terra Nova Insurance Company
Limited ("Terra Nova"). PXRE Delaware submitted claims under these policies to
Terra Nova in April 2000. Terra Nova has denied coverage, contending that its
Managing General Agent had no authority to issue these policies.
PXRE Delaware disagreed with Terra Nova's denial and has filed suit
against Terra Nova in the United States District Court for the District of New
Jersey. On June 10, 2002, PXRE Delaware was awarded a verdict of $8.3 million
plus accumulated interest of $1.5 million by a jury at the conclusion of the
trial of this dispute. The aggregate sum of $9.8 million is included in Other
Assets. Terra Nova has appealed this verdict to the United States Court of
Appeals for the Third Circuit, but management has concluded that the sum of $9.8
million is realizable and that no valuation allowance is necessary.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of 2002.
34
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Shares
The Company's Common Shares are listed on the New York Stock Exchange
under the symbol "PXT." The following table sets forth, for the periods
indicated, the high and low closing sale prices for the Company's Common Shares
as reported by the New York Stock Exchange and cash dividends per Common Share
declared and subsequently paid:
Closing Price
---------------------------
High Low Dividends
--------- --------- ---------
2001:
First Quarter $ 19.75 $ 14.88 $ 0.06
Second Quarter 19.50 16.36 0.06
Third Quarter 19.25 10.40 0.06
Fourth Quarter 17.64 12.25 0.06
2002:
First Quarter $ 24.00 $ 16.88 $ 0.06
Second Quarter 26.65 22.73 0.06
Third Quarter 24.20 18.60 0.06
Fourth Quarter 24.50 18.86 0.06
These prices represent quotations by dealers and do not include
markups, markdowns or commissions, and do not necessarily represent actual
transactions. As of March 14, 2003, there were 12,184,828 Common Shares issued
and outstanding, which shares were held by approximately 155 shareholders of
record and, based on the Company's best information, by approximately 1,200
beneficial owners of the Common Shares. See Notes 8 and 9 of Notes to
Consolidated Financial Statements for information with respect to shares
reserved for issuance under employee benefit and stock option plans.
In April 2002, the Company issued 15,000 Convertible Voting Preferred
Shares (the "Preferred Stock"). As of December 31, 2002, there were 15,908
shares of Preferred Stock outstanding that are ultimately convertible into
10,271,076 common shares, representing approximately 46% of the Company's
outstanding Common Shares on a fully diluted basis as of March 14, 2003. See
"Market for Registrants Common Equity and Related Shareholder Matters--Preferred
Shares" below.
The payment of dividends on the Common Shares is subject to the
discretion of the Company's Board of Directors which will consider, among other
factors, our operating results, overall financial conditions, capital
requirements and general business conditions. There can be no assurance that
dividends will be paid in the future. Under the terms of the Preferred Stock,
the payment of dividends on the Company's Common Shares is subject to the
following limitations: (i) no dividend may be paid upon the Common Shares if the
dividends payable upon the Preferred Stock are overdue, (ii) the amount of
dividends paid with respect to the Common Shares may not be increased by a
cumulative annualized rate of more than 10% at any time prior to April 4, 2005
(the "Permitted Dividend Amount") without the consent of the majority of holders
of the Preferred Stock; and (iii) at any time on or after April 4, 2005, no
dividend may be paid that would result in payment of any dividend or other
distribution with respect to Common Shares or result in a redemption, offer to
purchase, tender offer or other acquisition of capital stock of the Company
involving consideration having an aggregate fair value in excess of the greater
of the Permitted Tender Offer Amount and the Permitted Dividend Amount. For this
purpose, the term "Permitted Tender Offer Amount" means an amount equal to 20%
of the cumulative amount by which our consolidated net income in any calendar
year commencing with the year ending December 31, 2002 exceeds $50 million minus
the sum of all cash and the fair value of all non-cash consideration paid in
respect of redemptions, offers to purchase, tender offers or other acquisitions
of our capital stock on or after December 10, 2001.
35
As a holding company, the Company is largely dependent upon dividend
payments from its subsidiaries, including PXRE Reinsurance and PXRE Bermuda, to
pay dividends to the Company's shareholders. PXRE Reinsurance is subject to U.S.
state laws, and PXRE Bermuda is subject to Bermuda law, which may restrict their
ability to distribute dividends. In addition, certain covenants in our bank
credit agreement may restrict our ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Business - Regulation" for further
information concerning restrictions contained in our bank credit agreement and
under U.S. and Bermuda law.
Under the Company's Bye-Laws, subject to certain exceptions and to
waiver by the Company's Board of Directors on a case by case basis, no transfer
of the Company's shares is permitted if such transfer would result in a
shareholder owning, directly or indirectly, more than 9.9% of the voting power
of the outstanding shares, including common shares, of the Company or more than
9.9% of the outstanding shares of any class of the Company's stock. Ownership is
broadly defined in the Company's Bye-Laws.
The Company may refuse to register any such transfer on the Company's
share transfer records. A transferee will be permitted to promptly dispose of
any of the Company's shares purchased that violate the restriction and as to the
transfer of which registration is refused. The transferor of such shares of the
Company will be deemed to own such shares for dividend, voting and reporting
purposes until a transfer of such shares has been so registered.
In addition, in the event that the Company becomes aware of a
shareholder owning more than 9.9% of the voting power of the Company's
outstanding shares after a transfer of shares has been registered, the Company's
Bye-Laws provide that, subject to the same exceptions and waiver procedures, the
voting rights with respect to the shares of the Company owned by any such
shareholder will be limited to a voting power of 9.9%. The Board has determined
to waive this requirement with respect to Capital Z (including, for such
purpose, certain of its affiliates), but not with respect to Rainwater or
Reservoir.
Preferred Shares
On April 4, 2002, in a private placement, the Company issued 7,500
shares of Series A Preferred Shares, allocated to two sub-series of shares,
5,000 shares allocated to sub-series Al (Al Preferred Shares) and 2,500 shares
allocated to sub-series A2 (A2 Preferred Shares); the issuance of 5,000 shares
of Series B Preferred Shares, allocated to two sub-series of shares, 3,333.333
shares allocated to Series B1 (B1 Preferred Shares) and 1,666.667 shares
allocated to Series B2 (B2 Preferred Shares); and 2,500 shares of Series C
Preferred Shares, allocated to two sub-series of shares, 1,666.667 shares
allocated to Series Cl (Cl Preferred Shares) and 833.333 shares allocated to
Series C2 (C2 Preferred Shares). The material terms and provisions of the
rights, preferences and privileges of the Preferred Shares and Convertible
Common Shares are contained in the Description of Stock for Series A Convertible
Voting Preferred Shares, Series B Convertible Voting Preferred Shares, Series C
Convertible Voting Preferred Shares, Class A Convertible Voting Common Shares,
Class B Convertible Voting Common Shares and Class C Convertible Voting Common
Shares. At December 31, 2002, there were 15,908 preferred shares outstanding.
36
For each series, each Preferred Share, in whole or in part, is
convertible at any time at the option of the holder into Convertible Common
Shares for such series. The number of Convertible Common Shares per Preferred
Share issuable upon any conversion will be determined by dividing a liquidation
preference for the series equal to the aggregate original purchase price of the
Preferred Shares plus accrued but unpaid dividends thereon, by the conversion
price then in effect. The initial conversion price was $15.69. The conversion
price is subject to adjustment to avoid dilution in the event of
recapitalization, reclassification, stock split, consolidation, merger,
amalgamation or other similar event or an issuance of additional Common Shares
in a private placement below the fair market value or in a registered public
offering below 95% of fair market value (in each case, fair market value being
the value immediately prior to the date of announcement of such issuance) or
without consideration. In addition, the conversion price is subject to
adjustment, for certain loss and loss expense development on reserves for losses
incurred on or before September 30, 2001 (and loss adjustment expenses related
thereto) and for any liability or loss arising out of pending material
litigation (other than legal fees and expenses), on an after-tax basis, equal to
an amount computed in accordance with a formula as set forth in the Description
of Stock. Adjustments occur if the development exceeds a deductible after-tax
threshold of $7 million and, with respect to all reserves other than reserves
for certain discontinued operations and the events of September 11, 2001 and
liability arising out of pending litigation, the adjustment is limited to $12
million of further development. At December 31, 2002, the Company has incurred
$2.9 million of net adverse development above this $7 million threshold
resulting in an adjusted conversion price of $15.49.
Al Preferred Shares, Bl Preferred Shares and Cl Preferred Shares will
be mandatorily convertible into Class A Common Shares, Class B Common Shares and
Class C Common Shares, respectively, on the third anniversary of the date of
issuance, and all remaining Preferred Shares will be mandatorily convertible
into Convertible Common Shares on the sixth anniversary of the date of issuance.
The conversion price used in connection with the mandatory conversion of Al
Preferred Shares, B1 Preferred Shares and Cl Preferred Shares includes price
protection. Notwithstanding the foregoing, on any conversion date, to the extent
necessary to prevent the initial Purchasers of Preferred Shares and their
affiliates from owning more than 49.9% of the capital shares of the Company
following conversion, we shall have the right (but not the obligation) to make a
cash payment in lieu of Convertible Common Shares equal to the fair market value
of the Convertible Common Shares that would have been received in excess of the
49.9% limitation in connection with any conversion, plus an additional tax
gross-up amount to take into account in appropriate circumstances the difference
between the federal income tax rate on long-term capital gains and the federal
ordinary income tax rate that might apply to the recipient on the receipt of a
cash payment in lieu of Convertible Common Shares.
37
Convertible Common Shares
Except as otherwise provided, each class of Convertible Common Shares
shall have the same rights, preferences and restrictions as Common Shares. The
Convertible Common Shares shall automatically convert into Common Shares on a
one-for-one basis upon a transfer of record ownership thereof to any person
other than the original purchasers, or any of their respective affiliates or
limited partners (including, without limitation, in connection with a public
offering of such shares), or a person approved by our Board of Directors in its
sole discretion. Convertible Common Shares may be converted at the option of the
holder thereof into Common Shares on a one-for-one basis at any time that such
holder would be entitled to vote Preferred Shares generally in the election of
directors in accordance with the Description of Stock.
The aggregate purchase price paid for the shares of Preferred Stock
issued totaled $150 million. The Company's shareholders approved the issuance on
February 12, 2002.
38
Item 6. Selected Financial Data.
Year Ended December 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
($000's except per share data and ratios) (1)(5) (1) (1) (1)(2) (1)(2)(5)
----------- ----------- ----------- ----------- ------------
Income Statement Data:
Gross premiums written $ 366,768 $ 290,213 $ 268,990 $ 221,349 $ 136,215
Premiums ceded (72,285) (135,735) (96,289) (82,504) (47,521)
----------- ----------- ----------- ----------- ------------
Net premiums written 294,483 154,478 172,701 138,845 88,694
Change in unearned premiums (25,123) 7,647 (12,495) (10,342) 3,692
----------- ----------- ----------- ----------- ------------
Net premiums earned 269,360 162,125 160,206 128,503 92,386
Net investment income 24,893 30,036 30,037 47,173 19,612
Net realized investment gains (losses) 8,981 4,023 3,191 (3,766) (5,158)
Management fees 3,432 5,786 5,483 3,590 2,172
----------- ----------- ----------- ----------- ------------
Total revenues 306,666 201,970 198,917 175,500 109,012
----------- ----------- ----------- ----------- ------------
Losses and loss expenses incurred 126,862 151,703 137,765 159,259 57,793
Commissions and brokerage 53,391 30,350 34,899 27,702 20,563
Other operating expenses 32,454 29,606 35,407 30,053 19,313
Interest expense 2,939 4,424 4,778 3,915 1,395
Minority interest in consolidated subsidiary 8,646 8,877 8,875 8,790 8,928
----------- ----------- ----------- ----------- ------------
Total losses and expenses 224,292 224,960 221,724 229,719 107,992
----------- ----------- ----------- ----------- ------------
Income (loss) before income taxes and cumulative
effect of accounting change 82,374 (22,990) (22,807) (54,219) 1,020
Income tax provision (benefit) 17,829 (4,704) (12,007) (12,775) (1,659)
----------- ----------- ----------- ----------- ------------
Income (loss) before cumulative effect of
accounting change 64,545 (18,286) (10,800) (41,444) 2,679
Cumulative effect of accounting change, net of tax - 319 - (695) -
Net income (loss) before preferred stock dividend $ 64,545 $ (17,967) $ (10,800) $ (42,139) $ 2,679
=========== =========== =========== =========== ===========
Preferred stock dividends 9,077 - - - -
----------- ----------- ----------- ----------- ------------
Net income (loss) available to common stockholders $ 55,468 $ (17,967) $ (10,800) $ (42,139) $ 2,679
=========== =========== =========== =========== ===========
39
Year Ended December 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
($000's except per share data and ratios) (1)(5) (1) (1)(2) (1)(2) (1)(2)(5)
----------- ----------- ----------- ----------- ------------
Ratio of earnings to fixed charges (3) 7.44 - - - 1.09
Ratio of earnings to combined fixed charges and
preferred dividends (3) 3.90 - - - 1.09
Basic earnings per common share:
Income (loss) before cumulative effect of
accounting change and preferred stock
dividends $ 5.47 $ (1.58) $ (0.95) $ (3.58) $ 0.20
Cumulative effect of accounting change - 0.03 - (0.06) -
Preferred stock dividends (0.77) - - - -
----------- ----------- ----------- ----------- ------------
Net income (loss) available to common
stockholders $ 4.70 $ (1.55) $ (0.95) $ (3.64) $ 0.20
=========== =========== =========== =========== ===========
Average common shares outstanding 11,802 11,578 11,394 11,568 13,339
=========== =========== =========== =========== ===========
Diluted earnings per common share:
Income (loss) before cumulative effect of
accounting change $ 3.28 $ (1.58) $ (0.95) $ (3.58) $ 0.20
Cumulative effect of accounting change - 0.03 - (0.06) -
----------- ----------- ----------- ----------- ------------
Net income (loss) $ 3.28 $ (1.55) $ (0.95) $ (3.64) $ 0.20
=========== =========== =========== =========== ===========
Average common shares outstanding 19,662 11,578 11,394 11,568 13,452
=========== =========== =========== =========== ===========
Cash dividends per common share $ 0.24 $ 0.24 $ 0.24 $ 0.64 $ 1.01
Other Operating Data:
GAAP loss ratio (4) 47.1% 93.6% 86.0% 123.9% 62.6%
GAAP underwriting expense ratio (4) 30.6 33.4 40.5 43.0 40.9
----------- ----------- ----------- ----------- ------------
GAAP combined ratio (4) 77.7% 127.0% 126.5% 166.9% 103.5%
=========== =========== =========== =========== ===========
As of December 31,
----------------------------------------------------------------
($000's except per share data) 2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Cash and investments $ 805,331 $ 531,233 $ 505,101 $ 524,303 $ 490,594
Total assets 1,237,142 1,005,938 784,747 780,180 632,691
Losses and loss expenses 447,829 453,705 251,619 261,551 102,592
Minority interest in consolidated subsidiary 94,335 99,530 99,525 99,521 99,517
Debt payable 30,000 55,000 65,000 75,000 50,000
Total stockholders' equity 453,464 239,780 259,386 263,279 334,376
Book value per common share $20.33 $20.20 $21.94 $22.54 $27.13
Statutory capital and surplus:
PXRE Reinsurance Company $ 457,217 $ 331,959 $ 348,858 $ 399,007 $ 447,229
PXRE Reinsurance Ltd. 74,500 34,332 29,982 24,598 N/A
- -------------------------------------------------------------------------------------------------------------------
(1) The Company was incorporated on June 1, 1999 as a Bermuda holding company
and a wholly owned subsidiary of PXRE Purpose Trust, a purpose trust
established under the laws of Bermuda. On October 5, 1999, PXRE Delaware
completed a reorganization pursuant to which the Company became the
ultimate parent holding company of PXRE Delaware. PXRE Delaware and its
subsidiaries provide property and casualty reinsurance and insurance
products to a national and international marketplace. In connection with
the reorganization, the Company repurchased for $1.00 per share 100% of the
common shares owned by PXRE Purpose Trust and each outstanding share of
PXRE Delaware common stock (other than shares held by PXRE Delaware and its
subsidiaries) was converted into one common share of the Company. After the
consummation of the reorganization the Company commenced carrying on the
holding company functions previously conducted by PXRE Delaware.
40
(2) In the fourth quarter of 1999, the Company changed the reporting period for
its U.K. operations from a fiscal year ending September 30 to a calendar
year ending December 31. The results of operations for the period from
October 1, 1998 to December 31, 1998, amounted to a loss of approximately
$140,000. This loss was charged to retained earnings during 1999 in order
to report only twelve months' operating results. The U.K. operations of
PXRE Limited and PXRE Managing Agency are included in the consolidated
results on a one-quarter lag basis from 1997 through the third quarter of
1999.
(3) The ratios of earnings to fixed charges were determined by dividing
consolidated earnings by total fixed charges. For purposes of these
computations, (i) earnings consist of consolidated income before
considering income taxes, fixed charges and minority interest, and (ii)
fixed charges consist of interest on indebtedness and that portion of
rentals which is deemed by the Company's management to be an appropriate
interest factor. Earnings were inadequate to cover fixed charges by $22.5
million, $22.8 million and $55.3 million for the years ended December 31,
2001, 2000, and 1999 respectively. The ratios of earnings to combined fixed
charges and preferred dividends were determined by dividing consolidated
earnings by total fixed charges and preferred dividends. Earnings were
inadequate to cover fixed charges and preferred dividends by $22.5 million,
$22.8 million and $55.3 million for the years ended December 31, 2001,
2000, and 1999 respectively.
(4) The loss, underwriting expense and combined ratios included under "Other
Operating Data" have been derived from the audited consolidated statements
of income of the Company prepared in accordance with GAAP.
(5) FASB issued Statement of Financial Accounting Standard ("FASB") No. 145,
"Rescission of FASB Statements Nos. 4 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections", on April 30, 2002, which rescinds the
requirement to present gains and losses from extinguishment of debt as an
extraordinary item. The Company has adopted the new standard effective
January 1, 2002. As a result, a gain of $1.4 million on the repurchase of
$5.2 million of Minority Interest in Consolidated Subsidiary was classified
with net realized investment gains during 2002. A loss of $1.3 million on
the repurchase of $20.4 million of PXRE's 9.75% Senior Notes in 1998 was
classified as net realized investment losses.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion and analysis of our results of operations
for the year ended December 31, 2002 compared with the years ended December 31,
2001 and 2000, and also a discussion of our financial condition at December 31,
2002. This discussion and analysis should be read in conjunction with the
audited consolidated financial statements and related notes included in this
filing. This filing contains forward-looking statements that involve risks and
uncertainties. Actual results may vary materially from the results described or
implied by these forward-looking statements.
Overview
The Company provides reinsurance products and services to a worldwide
marketplace through subsidiary operations in the United States, Europe, Bermuda
and Barbados. Our primary focus is providing property catastrophe reinsurance
and retrocessional coverage to a worldwide group of clients, where we have been
among the leading franchises for two decades. Property catastrophe reinsurance
generally covers claims arising from large catastrophes such as hurricanes,
windstorms, hailstorms, earthquakes, volcanic eruptions, fires, industrial
explosions, freezes, riots, floods and other man-made or natural disasters.
Substantially all of our reinsurance products have been, and will continue to
be, offered on an excess-of-loss basis with aggregate limits on our exposure to
losses. This means that we do not begin to pay our clients' claims until their
claims exceed a certain specified amount and our obligation to pay those claims
is limited to a specified aggregate amount.
41
We also offer our clients property per-risk, marine and aviation
reinsurance and retrocessional products. Unlike property catastrophe
reinsurance, which protects against the accumulation of a large number of
related losses arising out of one catastrophe, per-risk excess of loss
reinsurance protects our clients against a large loss arising from a single risk
or location. Substantially all of our property per-risk, marine and aerospace
business is also written on an excess-of-loss basis with aggregate limits on our
exposure to losses.
We also provide our clients with finite reinsurance products. Finite
reinsurance contracts are highly customized for each transaction. If the loss
experience with respect to the risks assumed by us is as expected or better than
expected, our finite clients may share in the profitability of the underlying
business through premium adjustments or profit commissions. If the loss
experience is worse than is expected, our finite clients may participate in this
negative outcome. In addition, we offer finite reinsurance products where
investment returns on the funds transferred to us affect the profitability of
the contract and the magnitude of any premium or commission adjustments.
The Company was formed in 1999 as part of the reorganization of PXRE
Delaware. Prior to the reorganization, PXRE Delaware was the ultimate parent
holding company of the various PXRE companies and its common shares were
publicly-traded on the New York Stock Exchange. As a result of the
reorganization, the Company became the ultimate parent holding company of PXRE
Delaware and the holders of PXRE Delaware common stock automatically became
holders of the same number of the Company's common shares. The reorganization
was consummated at the close of business on October 5, 1999 and, on October 6,
1999, the Company's common shares began to trade on the New York Stock Exchange
under the symbol "PXT". The reorganization also involved the establishment of a
Bermuda-based reinsurance company, PXRE Bermuda, operations in Barbados through
PXRE Barbados, and the formation of a reinsurance intermediary, PXRE Solutions.
Background
Following a diversification effort into Lloyd's and the casualty
sectors during the soft reinsurance market of the late 1990's, we decided to
exit these businesses during 2000 and 2001, and are today focused on our
traditional core property reinsurance operations. While our core businesses are
volatile due to significant potential loss severity, we have been a successful
underwriting organization over the long term. This proven expertise in some of
the most dynamic areas of the reinsurance sector represents an opportunity to
achieve particularly strong financial results in the current favorable phase of
the underwriting cycle.
We conduct our business primarily through our principal operating
subsidiaries, PXRE Reinsurance, PXRE Bermuda, PXRE Barbados, PXRE Solutions, and
PXRE Europe. PXRE Reinsurance is a broker-market reinsurer with approximately
$457.2 million of statutory capital and surplus as of December 31, 2002, which
principally underwrites treaty reinsurance for property (including marine and
aerospace) and casualty risks. PXRE Reinsurance is licensed, accredited or
permitted to transact business in all states and the District of Columbia,
Puerto Rico, Bermuda, Colombia and Mexico.
PXRE Bermuda is a broker-market reinsurer with approximately $74.5
million of statutory capital and surplus as of December 31, 2002, which
principally underwrites treaty reinsurance for property (including marine and
aerospace) risks. PXRE Bermuda's reinsurance business is also supported by a
parental guarantee from the Company and an aggregate excess of loss reinsurance
treaty from PXRE Reinsurance that provides $80 million of reinsurance
protection. PXRE Bermuda is not licensed nor admitted as an insurer in any
jurisdiction other than Bermuda.
42
PXRE Barbados was licensed as an insurance company under Barbados'
Insurance Act, 1996 and its name was changed from PXRE (Barbados) Ltd. to PXRE
Reinsurance (Barbados) Ltd. It is not licensed nor admitted as an insurer in any
jurisdiction other than Barbados. PXRE Barbados provides finite reinsurance
coverages to clients and provides reinsurance coverage to other PXRE entities.
PXRE Solutions and PXRE Europe perform certain limited reinsurance
intermediary activities on behalf of PXRE Reinsurance, PXRE Bermuda and PXRE
Barbados.
Certain Risks and Uncertainties
General Risks and Uncertainties
Because of exposure to catastrophes, our financial results may vary
significantly from period to period.
As a reinsurer of property catastrophe-type coverages in the worldwide
marketplace, our 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, hailstorms, earthquakes, volcanic eruptions, fires,
industrial explosions, freezes, riots and floods. While we may, depending on
market conditions, purchase catastrophe retrocessional coverage for our own
protection, the occurrence of one or more major catastrophes in any given period
could nevertheless have a material adverse impact on our results of operations
and financial condition and result in substantial liquidation of investments and
outflows of cash as losses are paid.
We may be overexposed to losses in certain geographic areas for certain
types of catastrophe events.
As we underwrite risks from a large number of insurers based on
information generally supplied by reinsurance brokers, we may develop a
concentration of exposure to loss in certain geographic areas prone to specific
types of catastrophes. We have developed systems and software tools to monitor
and manage the accumulation of our exposure to such losses and have established
guidelines for maximum tolerable losses from a single event 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.
We operate in a highly competitive environment.
The reinsurance industry has been consolidating in recent years through
mergers and other acquisitions. We compete with numerous companies, many of
which have substantially greater financial, marketing and management resources.
The level of competition has increased in the wake of the September 11, 2001
terrorist attacks with the formation of a number of large and well-capitalized
Bermuda reinsurance companies. In addition, a number of our pre-existing
competitors were successful in raising substantial levels of additional capital.
Although we increased our capital as well, we remain smaller than most of our
competitors.
43
Reinsurance prices may decline, which could affect our profitability.
Demand for reinsurance depends on numerous factors, including the
frequency and severity of catastrophic events, levels of capacity, general
economic conditions and underwriting results of primary property insurers. The
supply of reinsurance is related to prevailing prices, recent loss experience
and levels of surplus capacity. All of these factors fluctuate and may
contribute to price declines generally in the reinsurance industry. Our recent,
and anticipated, growth relates in part to improved industry pricing. Premium
rates or other terms and conditions of trade may vary in the future. If any of
these factors were to cause the demand for reinsurance to fall or the supply to
rise, our profitability could be adversely affected.
Our investment portfolio is subject to significant market and credit
risks which could result in an adverse effect on our financial results.
Our invested assets consist primarily of fixed maturities and a
diversified portfolio of hedge funds, and to a lesser extent mezzanine bond and
equity limited partnerships, and short-term investments. These investments are
subject to market-wide risks and fluctuations, as well as to risks inherent in
particular securities. Although we seek to preserve our capital, we have
invested in a portfolio of hedge funds and other privately held securities.
These investments are designed to provide diversification of risk; however, such
investments entail substantial risks. Portfolio performance may be adversely
impacted by equity and credit market conditions. There can be no assurance that
our investment objectives will be achieved, and results may vary substantially
over time. In addition, although we seek to employ investment strategies that
are not correlated with our reinsurance exposures, losses in our investment
portfolio may occur at the same time as underwriting losses and, therefore,
exacerbate such losses' adverse effect on us. To our knowledge, few other
publicly-traded reinsurers follow our strategy of investing a significant
portion of invested assets in hedge funds and other privately held securities.
See "Investments."
Our portfolio of hedge funds and other privately held securities is
subject to some or all of the following categories of risk: leverage;
concentration of investments; lack of liquidity; market fluctuations; interest
rate risk; prepayment risk; extension risk; currency fluctuations; credit risk
of the securities issuer; yield curve risk; political risk for emerging market
investments; and spread risk between two or more similar securities. In
addition, we are subject to: (a) counter-party risk, (b) the risk when
transactions settle on foreign exchanges, the protections afforded on U.S.
exchanges will be absent, (c) the risk of exchange controls and (d) the risk
that one or more of our hedge fund managers mishandle trading, hedging or
deviates from the agreed upon strategy, resulting in loss.
A decline in the rating assigned to our claim-paying ability may impact
our potential to write new and renewal business.
The property catastrophe reinsurance market is highly sensitive to the
ratings assigned by the rating agencies. If either of S&P or A.M. Best were to
downgrade us, such downgrade would likely have a material negative impact on our
ability to expand our reinsurance portfolio and renew all of our existing
reinsurance agreements, especially if we were to be downgraded more than one
level from the "A" category to the "B" category.
44
U.S. taxing authorities could contend that the Company's and its
non-U.S. subsidiaries are subject to U.S. corporate income tax.
The Company and its non-U.S. subsidiaries intend to operate their
business in a manner that will not cause them to be treated as engaged in a
trade or business in the United States (and, in the case of those non-U.S.
companies qualifying for treaty protection, in a manner that will not cause them
to be doing business through a permanent establishment in the United States)
and, thus, will not subject them to U.S. federal corporate income taxes or
branch profits tax (other than withholding taxes on certain U.S. source
investment income, dividends from PXRE Delaware to PXRE Barbados and excise
taxes on reinsurance premiums). However, because there is uncertainty as to the
activities that constitute being engaged in a trade or business within the
United States, and what constitutes a permanent establishment under the
applicable tax treaties, there can be no assurances that the U.S. Internal
Revenue Service will not contend successfully that the Company or a non-U.S.
subsidiary is engaged in a trade or business, or carrying on business through a
permanent establishment in the United States.
In March 2002, two bills were proposed in the U.S. House of
Representatives that sought to prevent so-called "corporate inversion"
transactions. Under these bills, a foreign corporation would be taxed as a U.S.
domestic corporation under the Internal Revenue Code if it became a foreign
corporation as a result of an "inversion transaction" under the bill proposed by
Representative McInnis or "corporate expatriation transaction" under the bill
proposed by Representative Neal. As originally drafted, the McInnis bill would
only apply to transactions completed after December 31, 2001. Commencing with
the 2004 tax year, the Neal bill would apply to "corporate expatriation
transactions" that occurred prior to September 11, 2001. It is unclear whether
our 1999 reorganization would be treated as a "corporate expatriation
transaction" under the Neal bill as originally drafted. Neither bill was acted
on in 2002.
In January 2003, two bills were introduced in the Senate (S.9 by Sen.
Daschle and S.135 by Sen. Dayton), which would treat certain foreign
corporations created through inversion transactions as domestic corporations. In
February 2003, Senators Reid and Levin introduced a bill into the Senate that
closely mirrors Representative Neal's 2002 bill.
We are unable to predict whether such a legislative effort would be
successful, what form any such legislation could ultimately take and what impact
any such legislation would have on us. If the Company or any of its non-U.S.
subsidiaries were subject to U.S. income tax, the Company's stockholders' equity
and earnings could be materially adversely affected.
We may be adversely effected by interest rate changes.
Our operating results and book value depend in part on the performance
of our investment portfolio. Our investment portfolio contains interest
sensitive instruments, such as bonds and mortgage-backed securities, which may
be adversely affected by changes in interest rates. Changes in interest rates
could also cause a potential underperformance in our finite coverages and
shortfalls in cash flows necessary to pay fixed rate amounts due to finite
contract counterparties.
45
Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international economic and
political conditions and other factors beyond our control. Any measures we take
that are intended to manage the risks of operating in a changing interest rate
environment may not effectively mitigate such interest rate sensitivity.
We may be adversely effected by foreign currency fluctuations.
Premium receivables and loss reserves include business denominated in
currencies other than U.S. dollars. We are exposed to the possibility of
significant claims in currencies other than U.S. dollars. While we hold
positions denominated in foreign currencies to mitigate, in part, the effects of
currency fluctuations on our results of operations, we currently do not hedge
our currency exposures before a catastrophic event that may produce a claim.
We may be unable to obtain extensions of work permits for our
employees, which may cause our business to be adversely effected.
Under Bermuda law, non-Bermudians may not engage in any gainful
occupation in Bermuda without the specific permission of the appropriate
government authority. The Bermuda government will issue a work permit for a
specific period of time, which may be extended upon showing that, after proper
public advertisements, no Bermudian (or spouse of a Bermudian) is available who
meets the minimum standards for the advertised position. A significant number of
our officers are working in Bermuda under work permits that will expire over the
next three years. The Bermuda government could refuse to extend these work
permits. If any of our senior executive officers were not permitted to remain in
Bermuda, our operations could be disrupted and our financial performance could
be adversely effected.
Because we depend on a few reinsurance brokers for a large portion of
revenue, loss of business provided by them could adversely effect us.
We market our reinsurance products worldwide exclusively through
reinsurance brokers. Five, four and four brokerage firms accounted for 84%, 60%,
and 56% of our gross premiums written for the years ended December 31, 2002,
2001, and 2000, respectively. Approximately 31%, 16%, 13%, 13%, and 11% of gross
premiums written in fiscal year 2002 were arranged through Pegasus
Advisors-Towers Perrin Reinsurance, the worldwide branch offices of Guy
Carpenter & Company, Inc. (a subsidiary of Marsh & McLennan Companies, Inc.),
Benfield Greig Ltd., Aon Group Ltd., and Willis Re. Inc., respectively. Loss of
all or a substantial portion of the business provided by these brokers could
have a material adverse effect on our business.
Our reliance on reinsurance brokers exposes us to their credit risk.
In accordance with industry practice, we frequently pay amounts owed on
claims under our policies to reinsurance brokers, and these brokers, in turn,
pay these amounts over to the insurers that have reinsured a portion of their
liabilities with us (we refer to these insurers as ceding insurers). In some
jurisdictions, if a broker failed to make such a payment, we might remain liable
to the ceding insurer for the deficiency. Conversely, in certain jurisdictions,
when the ceding insurer pays premiums for these policies to reinsurance brokers
for payment over to us, these premiums are considered to have been paid and the
ceding insurer will no longer be liable to us for those amounts, whether or not
we have actually received the premiums. Consequently, in connection with the
settlement of reinsurance balances, we assume a degree of credit risk associated
with brokers around the world.
46
Retrocessional reinsurance subjects us to credit risk and may become
unavailable on acceptable terms.
In order to limit the effect of large and multiple losses upon our
financial condition, we buy reinsurance for our own account. This type of
insurance is known as retrocessional reinsurance. From time to time, market
conditions have limited, and in some cases have prevented reinsurers from
obtaining the types and amounts of reinsurance, which they consider adequate for
their business needs. Accordingly, we may not be able to obtain our desired
amounts of retrocessional reinsurance. In addition, even if we are able to
obtain such retrocessional reinsurance, we may not be able to negotiate terms as
favorable to us as in prior years.
A retrocessionaire's insolvency or its inability or unwillingness to
make payments under the terms of a retrocessional reinsurance treaty with us
could have a material adverse effect on us. Therefore our retrocessions subject
us to credit risks because the ceding of risk to retrocessionaires does not
relieve us of our liability to our clients.
Certain Risks and Uncertainties Relating to Critical Accounting Policies
The Company's financial statements disclose in footnotes its
significant accounting policies. Certain of these policies are critical to the
portrayal of the Company's financial condition and results since they require
management to establish estimates based on complex and subjective judgments. The
Company's critical accounting policies include liabilities for loss and loss
expenses, assumed and ceded premiums and investments.
Loss and Loss Expenses
As a property catastrophe reinsurer, our estimations of losses are
inherently less reliable than for reinsurers of risks that have an established
historical pattern of losses such as casualty risks. In addition, with respect
to insured events that occur near the end of a reporting period, as well as with
respect to our retrocessional book of business, the significant delay in losses
being reported to insurance carriers, reinsurers and finally retrocessionaires
require us to make estimates of losses based on limited information from our
clients, industry loss estimates and our own underwriting data. Because of the
uncertainty in the process of estimating our losses from insured events, there
is a risk that our liabilities for losses and loss expenses could prove to be
inadequate, with a consequent adverse impact on our future earnings and
stockholders' equity. Additionally, as a consequence of our emphasis on property
reinsurance, we may forgo potential investment income because property losses
are typically settled within a shorter period of time than casualty losses.
47
In reserving for non-catastrophe losses from recent years, we are
required to make assumptions concerning the expected loss ratio usually for
broad lines of business, but sometimes by contract. We consider historical loss
ratios for each line of business and estimates provided by underwriters and
actuaries concerning the impact of pricing and coverage changes. We also utilize
information provided by our clients when we reserve heterogeneous lines by
selecting expected loss ratios based upon loss ratio projections from pricing
analyses. As experience emerges, we will revise our prior estimates concerning
pricing adequacy and non-catastrophe loss potential for our coverages and we
will eventually rely solely on our estimated development pattern in projecting
ultimate losses.
In reserving for catastrophe losses, our estimates are initially
influenced to a significant degree by industry catastrophe models and
underwriting information provided by our clients. This can cause significant
development for an accident year when events occur late in the year, as happened
in 1999. As an event matures, we rely more and more on our company development
patterns by type of event as well as contract information to project ultimate
losses for the event. This process can cause our ultimate estimates to differ
significantly from initial projections. The French Storm Martin that occurred on
December 27, 1999 presents an extreme example of these potential uncertainties.
We based our reserves to a significant degree on the average estimate of the
cost of this storm by two major catastrophe modelers, which was approximately
$1.0 billion. In 2001, the cost was estimated to be $2.5 billion by SIGMA, a
widely used industry publication. Our gross reserve loss estimate at December
31, 1999 for this event was $31.3 million. Our gross loss estimate at December
31, 2002 for this event was $66.0 million. Thus, the original industry loss
estimate increased by 150%, and our loss estimate has increased by 111%.
Excluding the extraordinary development of French Storms Martin and
Lothar in 2000, during the last 10 years, reserve development in any single year
from prior year losses, expressed as a percentage of stockholders' equity,
ranged from 15% adverse development in 1993 (primarily arising from Hurricane
Andrew) to 4% favorable development in 1996.
In addition, the risk for recent underwriting years includes the
increased casualty exposures assumed by us through our casualty and finite
business. Unlike property losses that tend to be reported more promptly and
usually are settled within a shorter time period, casualty losses are frequently
slower to be reported and may be determined only through the lengthy,
unpredictable process of litigation. Moreover, given our limited experience in
the casualty and finite business we do not have established historical loss
development patterns that can be used to establish these loss liabilities. We
must therefore rely on the inherently less reliable historical loss development
patterns reported by our clients and industry loss development data in
calculating our liabilities.
In 2002, we experienced net adverse development of $25.4 million for
prior-year loss and loss expense, $16.9 million of which was due to loss
development in our Exited Lines segment relating primarily to the 2000 and 2001
underwriting years. Adverse development of $16.7 million was primarily caused by
larger than expected reported claims under our direct reinsurance contracts and
corroborated by revised industry data. We ceased underwriting this business in
September 2001. Our current estimate of net loss and loss expense liabilities
for our Exited Lines segment is $103.3 million, which represents our best
estimate from a range of estimates provided by alternate actuarial assumptions
and methods. The low and high end of a range of reasonable loss reserves for our
Exited Lines is $10 million below and $11.1 million above our current loss and
loss expense estimate. On an overall basis, our current estimate of net loss and
loss expense liabilities for all segments as of December 31, 2002 is $240.4
million which represents our best estimate from a range of estimates provided by
alternate actuarial assumptions and methods. The low and high end of a range of
reasonable loss reserves for all segments is $16.1 million below and $17.1
million above our current loss and loss expense estimate.
48
Assumed and Ceded Premiums
Our 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. These
estimates are based on information from brokers and are 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.
The premiums on reinsurance business ceded are recorded as incurred on
a pro-rata basis over the contract period. Certain ceded reinsurance contracts
contain provisions requiring us to pay additional premiums or reinstatement
premiums in the event that losses of a significant magnitude are ceded under
such contracts. Under GAAP, we are not permitted to establish reserves for
potential additional premiums or record such amounts until a loss occurs that
would trigger the obligation to pay such additional or reinstatement premiums.
As a result, the net amount recoverable from our reinsurers in the event of a
loss may be reduced by the payment of additional premiums and reinstatement
premiums. Frequently, the impact of such premiums will be offset by additional
premiums and reinstatement premiums payable to us by our clients on our assumed
reinsurance business. No assurance can be given, however, that assumed
reinstatement and additional premiums will offset ceded reinstatement and
additional premiums. For example, in the case of the September 11, 2001
terrorist attacks, our net premiums earned during 2001 were reduced by $26.3
million as a result of net additional premiums and reinstatement premiums due to
that loss.
Investments
Fair values for our investments in hedge funds and other privately held
fixed income and equity securities generally are established on the basis of the
valuations provided monthly or quarterly by the managers of such investments.
These valuations generally are determined based upon the valuation criteria
established by the governing documents of such investments or utilized in the
normal course of such manager's business. Such valuations may differ
significantly from the values that would have been used had readily available
markets existed and the differences could be material.
49
We utilize the valuations provided to us by managers of our hedge funds
and other privately held fixed income and equity securities in preparing our
financial statements. The carrying values used in such financial statements may
not reflect the value we receive when liquidating our investment in a hedge fund
or other privately held security. If liquidity is by redemption, the valuations
supplied quarterly by the manager of the hedge fund or other privately held
security will generally be the values used by the manager to set the redemption
prices. However, to the extent a manager has discretion in pricing holdings,
should substantial redemptions occur in a limited period of time, that
discretion may be used to price at lower values than would otherwise be used,
thus reducing the redemption price. If liquidation of our investment occurs by
virtue of a liquidation of a hedge fund or other privately held securities, we
may receive substantially less than the valuation method used by the manager
because the valuation method used by the manager is unlikely to use liquidation
values. Accordingly, the estimated fair value of our hedge fund and other
privately held investments does not necessarily represent the amount that could
be realized upon future sale, including in the event we need liquidity to fund
catastrophic losses.
We regularly monitor the difference between the estimated fair value of
our investments and their cost or book values to identify underperforming
investments and whether declines in value are temporary in nature, or "other
than temporary". If we believe a decline in the value of a particular investment
is temporary, we record the decline as an unrealized loss, net of tax, in our
stockholders' equity. If we believe the decline is "other than temporary", we
write down the carrying value of the investment and record a realized loss on
our statement of income and comprehensive income. We formally review each
quarter the largest unrealized losses by value, and all investments that have
been in an unrealized loss position for more than six months. In assessing
whether an investment is suffering a decline in value that is other than
temporary we pay particular attention to those trading at 80% or less of face
value, and those investments that have been downgraded by any of the major
ratings agencies in the period, general market conditions, and the status of
principal and interest payments. If we conclude that a decline is other than
temporary we recognize a realized investment loss for the impairment. In 2002,
we recognized $0.7 million of impairment losses.
Because our investment strategy is to invest a significant portion of
our investment portfolio in hedge funds and other privately held securities,
which are accounted for under the equity method, net realized and unrealized
gains (losses) on such investments may have a greater effect on our results of
operations at the end of any reporting period than would be the case for other
insurance and/or reinsurance companies.
Comparison of 2002 with 2001
For the year ended December 31, 2002, net income was $64.5 million
compared to a net loss of $18.0 million for 2001. The diluted net income per
common share was $3.28 for 2002 compared to a diluted net loss per share of
$1.55 for 2001, based on diluted average shares outstanding of approximately
19.7 million in 2002 and 11.6 million in 2001.
50
Gross and net written premiums for 2002 and 2001 were as follows:
Year Ended December 31,
----------------------------------
% Increase
($000's) 2002 2001 (Decrease)
------------ ----------------- ----------
Gross premiums written $ 366,768 $ 290,213 26%
Reinsurance premiums ceded 72,285 135,735 (47)
------------ -----------------
Net premiums written $ 294,483 $ 154,478 91%
============ =============
The increase in gross and net written premiums for 2002 primarily
reflected growth in the Catastrophe and Risk Excess and Finite segments.
Improved pricing, increased participation with long-standing clients and
substantial amounts of new business in our core Catastrophe and Risk Excess
segments resulted in a 72% increase in net premiums written during 2002, before
the effects of excess of loss reinsurance ceded, in this key segment as compared
to the prior year. The Finite segment increased 205% during 2002 versus the
prior year on a net written basis primarily due to one large finite reinsurance
contract. With respect to our Finite segment, we take an opportunistic approach
to this business and do not believe this business is best measured by premiums
written or earned from period to period. Compared to our other lines of
business, our finite business involves a relatively small number of large
reinsurance contracts. Therefore, we expect that the Finite segment premiums
written and earned will vary widely from period to period as a result of this
strategy. The Exited Lines segment decreased 87% on a net written basis compared
to the prior year. Since we have decided to re-focus on our core Catastrophe and
Risk Excess segment and to discontinue the businesses we have classified as
Exited Lines, we do not expect to report material premiums written and earned in
the Exited Lines segment during 2003. On an overall basis, reinsurance premiums
ceded decreased in 2002 by $63.5 million or 47% as compared to 2001. If
additional reinsurance premiums ceded of $56.6 million in connection with the
September 11, 2001 terrorist attacks are excluded, the decrease is only $6.9
million or 8.7%.
Finite contracts that do not meet accounting requirements of SFAS No.
113 and other accounting literature, that generally define a reinsurance
transaction, are not booked as premiums, but rather are treated as deposits. We
have entered into contracts in 2001 and 2002 that have $38.1 million of deposit
liabilities to ceding companies at December 31, 2002 on this deposit accounting
basis. We also have two finite retrocessional agreements in place with Select Re
that are accounted for as deposits pursuant to SFAS No. 113 and other accounting
literature, totaling $21.4 million in deposit assets including investment income
earned to December 31, 2002. We believe these retrocessional agreements will
enhance the long-term profitability of the finite contracts to which they
relate.
Gross premiums earned for 2002 increased 19% to $349.3 million from
$293.4 million in 2001. Net premiums earned for 2002 increased 66% to $269.4
million from $162.1 million for 2001. The Catastrophe and Risk Excess segment
increased 67% on a net earned basis, before the effects of excess of loss
reinsurance ceded, while the Finite segment increased 76% on a net earned basis
versus the prior year. The Exited Lines segment experienced a decrease of 57% on
a net earned basis during 2002 compared to 2001.
A summary of our 2002 and 2001 net premiums written and earned by
business segment is included in Note 10 to the Consolidated Financial
Statements.
51
Management fee income from all sources for the year ended December 31,
2002 decreased 41% to $3.4 million from $5.8 million for 2001, reflecting the
reduction in the share of business ceded to quota share reinsurers, and the
effect of the September 11, 2001 terrorist attacks.
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 (including commission and brokerage and
other operating expenses, reduced by management fees, if any) by net premiums
written for purposes of SAP and net premiums earned for purposes of GAAP. The
combined ratio is the sum of the loss ratio and the underwriting expense ratio.
A combined ratio under 100% indicates underwriting profits and a combined ratio
exceeding 100% indicates underwriting losses. The combined ratio does not
reflect the effect of investment income on operating results. The ratios
discussed below have been calculated on a GAAP basis. The following table
summarizes the loss ratio, expense ratio and combined ratio for the years ended
December 31, 2002 and 2001, respectively:
(%) Year Ended December 31,
--- ------------------------------
2002 2001
------ ------
Loss ratio 47.1 93.6
Expense ratio 30.6 33.4
------ ------
Combined ratio 77.7 127.0
====== ======
Our loss ratio was 47.1% for the year ended December 31, 2002
reflecting reduced loss activity. The only significant catastrophe in 2002 was a
$17.8 million loss arising from the European floods. The year ended December 31,
2001 was impacted by the September 11, 2001 terrorist attacks and the sinking of
the Petrobras Oil Rig. Our loss ratio for the year ended December 31, 2002
reflected incurred losses in connection with significant catastrophe and risk
excess losses of $33.4 million gross and $24.1 million net for the 2002 and
prior accident years. Our loss ratio for the year ended December 31, 2001
reflected incurred losses in connection with significant catastrophe and risk
excess losses of $225.8 million gross and $56.0 million net for the 2001 and
prior accident years.
During 2002, we experienced net adverse development of $25.4 million
for prior-year loss and loss expenses, $16.9 million of which was due to loss
development on our Exited Lines segment relating primarily to the 2000 and 2001
underwriting years. Adverse development of $16.7 million was primarily caused by
larger than expected reported claims under our direct reinsurance contracts,
corroborated by revised industry data. The loss ratio for 2001 was adversely
affected by net development of $17.9 million for prior-year loss and loss
expenses primarily due to strengthening of reserves in casualty, marine and
aerospace lines of business, and development on a number of historical
catastrophe events.
52
The most significant factor affecting our results in 2001 was the
losses arising from the terrorist attacks on September 11, 2001. Our estimated
net loss after-tax arising from the September 11, 2001 terrorist attacks was
$32.6 million or $2.82 per diluted share for 2001. During 2002 the net loss
after tax decreased to $31.9 million. This loss estimate was developed through a
contract-by-contract review of our entire book of business and assumed
full-limit losses on all reinsurance contracts deemed affected except where
credibly advised to the contrary by our clients. The following table describes
the impact of the September 11, 2001 terrorist attacks on the year ended
December 31, 2001:
Results Excluding
September 11th September 11th
($000's) Results as Reported Event Event
------------------- ----------------- -----------------
Gross premiums written $ 290,213 $ 30,290 $ 259,923
Net premiums written 154,478 (26,295) 180,773
Net premiums earned 162,125 (26,295) 188,420
Management fees 5,786 856 4,930
Net losses incurred 151,703 (26,070) 125,633
Commission and brokerage 30,350 10,557 40,907
------------------- ----------------- -----------------
Underwriting results before taxes $ (14,142) $ (40,952) $ 26,810
=================== ================= =================
Gross losses and loss expenses arising from the September 11, 2001
terrorist attacks totaled $181.7 million at December 31, 2001. This gross loss
was reduced by specific and corporate retrocessional recoverables of $155.6
million. In this regard, proportional and specific excess coverages provided
recoveries of $65.3 million and our general corporate excess of loss coverages
provided a further benefit of $90.3 million. The net result of these covers
reduced our gross loss from $181.7 million to $26.1 million. Many of these
retrocessional covers on both an assumed and ceded basis have either
reinstatement or additional premiums, resulting in a net premium reduction of
$26.3 million. These additional costs are partially reduced by approximately
$11.4 million of lower commission and brokerage expense and increased management
fees, bringing the net impact to approximately $41 million before tax. As of
March 1, 2003, approximately 91% of our September 11, 2001 related reinsurance
recoverables are either fully collateralized or reside with entities rated "A-"
or higher.
The expense ratio was 30.6% for 2002 compared with 33.4% for 2001. This
decrease is largely due to an increase in premiums earned. The commission and
brokerage ratio, net of management fee income, was 18.6% for 2002, compared with
15.2% in 2001. The operating expense ratio was 12.0% for 2002 compared with
18.3% for 2001. As a result of the above, our combined ratio was 77.7% for 2002
compared with a combined ratio of 127.0% for 2001.
Other operating expenses increased 10% to $32.5 million for 2002 from
$29.6 million in 2001. The increase primarily reflects incentive compensation
expense, that varies with return on equity, to be paid under the Company's
Restated Employee Annual Incentive Bonus Plan and costs incurred in connection
with the establishment of a reinsurance facility with P-1 Re Ltd, an exempted
Bermuda Class 3 insurance company.
Underwriting operations as described in Note 10 to the Consolidated
Financial Statements include premiums earned, losses incurred and commission and
brokerage net of management fees, but do not include investment income, realized
gains or losses, interest expense, operating expenses, unrealized foreign
exchange gains or losses on losses incurred, or management fees for Lloyd's
syndicate agency management.
53
The Catastrophe and Risk Excess underwriting portfolio can be
characterized on a longer term basis as being comprised of coverages involving
higher margins and greater volatility than other coverages written by PXRE.
Interest expense decreased to $2.9 million for 2002 compared to $4.4
million in 2001. The decrease in interest expense primarily relates to repayment
of $25 million on our primary bank credit facility in 2002, on March 31, 2002 by
$10 million, April 4, 2002 by $10 million and July 1, 2002 by $5 million (as
described under "Liquidity and Capital Resources") reducing the outstanding
amount to $30 million on December 31, 2002 from $55 million as of December 31,
2001. The interest rate on the $30 million outstanding is fixed at 7.34% as a
result of a cash flow hedge interest rate swap that is part of PXRE Delaware's
Credit Agreement with a syndicate of lenders. Included in other comprehensive
income is a decrease in the fair value of the cash flow hedge at December 31,
2002 of $0.2 million, net of tax. We incurred minority interest expense
amounting to $8.6 million and $8.9 million related to our 8.85% Capital Trust
Pass-through Securitiessm (TRUPSsm) during 2002 and 2001, respectively (see
"Liquidity and Capital Resources" below for a full description of the TRUPSsm).
Net investment income for the year ended December 31, 2002 declined 17%
to $24.9 million from $30 million for 2001, primarily as a result of an increase
in interest expense related to funds held in connection with certain finite
reinsurance transactions as compared to the prior year. Investment income
related to the fixed maturity and short-term investment portfolios increased to
$24.3 million for 2002 from $19.0 million in 2001 primarily due to an increase
in invested assets attributable to the proceeds of the Preferred Stock issuance
as well as cash flow from operations. The fixed maturity portfolio book yield
for the year ended December 31, 2002 was approximately 4.5% compared to 5.8%
during 2001. Investment income related to our hedge fund portfolio decreased to
$7.2 million in 2002 from $10.4 million in 2001. Investment in hedge funds
produced a return of 7% for the year ended December 31, 2002 compared with 9% in
2001. In addition, during 2002, we recognized $3.0 million related to a special
distribution by one of our alternative investments and $1.5 million in interest
related to the judgment entered in our favor in our lawsuit against Terra Nova.
Investment income was also affected by various finite and other
reinsurance contracts where premiums payable under such contracts were retained
on a funds withheld basis. In order to reduce credit risk or to comply with
regulatory credit for reinsurance requirements, a portion of premiums paid under
such reinsurance contracts is retained by the cedent pending payment of losses
or commutation of the contract. Investment income on such withheld funds is
typically for the benefit of the reinsurer and the cedent may provide a minimum
investment return on such funds. We have both ceded and assumed reinsurance
contracts that involve the withholding of premiums by the cedent. On assumed
reinsurance contracts, cedents held premiums and accrued investment income due
to us of $24.9 million as of December 31, 2002, for which we have recognized
$1.7 million of investment income for the year ended December 31, 2002. On ceded
reinsurance contracts, we held premiums and accrued investment income of $122.2
million due to reinsurers as of December 31, 2002, for which we recognized a
charge to investment income of $9.8 million during the year ended December 31,
2002. On a net basis, this charge to investment income was only $3.2 million,
representing the difference between the stated investment return under the
contracts and the overall yield achieved on our total investment portfolio for
such period. The weighted average contractual investment return on the funds
held by PXRE is 7.8% and we expect to be obligated for this contractual
investment return for the life of the underlying liabilities, which is expected
to be 7 years on a weighted average basis.
54
Net realized investment gains for 2002 were $9.0 million compared to
gains of $4.0 million for 2001. This increase resulted primarily due to the
liquidation of bonds in 2002 to implement our decision to shorten the duration
of our fixed income portfolio. Included in the 2002 net realized investment
gains were gains of $1.4 million realized on the repurchase of $5.2 million of
our TRUPSsm Securities.
Our London operations, which are winding down, resulted in a loss
before taxes of $1.3 million for 2002 compared to a loss before taxes of $6.5
million in 2001.
We recognized a tax expense of $17.8 million in 2002 compared to a
benefit of $4.5 million in 2001. The tax expense for the year ended December 31,
2002 differed from the statutory rate primarily due to the mix of business
between the U.S. and Bermuda, as well as tax-exempt income.
Comparison of 2001 with 2000
For the year ended December 31, 2001, the net loss was $18.0 million
compared to a net loss of $10.8 million for 2000. The diluted net loss per
common share was $1.55 for 2001 compared to a diluted net loss per share of
$0.95 for 2000, based on diluted average shares outstanding of approximately
11.6 million in 2001 and 11.4 million in 2000.
The most significant factor affecting our results in 2001 was the
losses arising from the terrorist attacks on September 11, 2001. Our estimated
net loss after tax arising from the September 11, 2001 terrorist attacks was
$32.6 million or $2.82 per diluted share for the 2001 year. This loss estimate
was developed through a contract-by-contract review of our entire book of
business and assumed full-limit losses on all reinsurance contracts deemed
affected except where credibly advised to the contrary by our clients. The
following table more fully details the impact of the September 11, 2001
terrorist attacks on the year ended December 31, 2001:
Results Excluding
($000's) Results as Reported September 11th Event September 11th Event
------------------- -------------------- --------------------
Gross premiums written $ 290,213 $ 30,290 $ 259,923
Net premiums written 154,478 (26,295) 180,773
Net premiums earned 162,125 (26,295) 188,420
Management fees 5,786 856 4,930
Net losses incurred 151,703 (26,070) 125,633
Commission and brokerage 30,350 10,557 40,907
------------------- -------------------- --------------------
Underwriting results before taxes $ (14,142) $ (40,952) $ 26,810
=================== ==================== ====================
55
Gross losses and loss expenses arising from the September 11, 2001
terrorist attacks totaled $181.7 million. This gross loss was reduced by
specific and corporate retrocessional recoverables of $155.6 million.
Approximately 93% of our September 11, 2001 related reinsurance recoverables are
either fully collateralized or reside with entities rated "A" or higher. In this
regard, proportional and specific excess coverages provided recoveries of $65.3
million and our general corporate excess of loss coverages provided a further
benefit of $90.3 million. The net result of these covers reduced our gross loss
from $181.7 million to $26.1 million. Many of these retrocessional covers on
both an assumed and ceded basis have either reinstatement or additional
premiums, resulting in a net premium reduction of $26.3 million. These
additional costs are partially reduced by approximately $11.4 million of lower
commission and brokerage expense and increased management fees, bringing the net
impact to $41 million before tax.
Written premiums for 2001 and 2000 were as follows:
Year Ended December 31,
-----------------------------
% Increase
2001 2000 (Decrease)
-------------- ------------ -----------
($000's)
Gross premiums written $ 290,213 $ 268,990 7.9%
Ceded premiums:
Managed business participants 50,271 36,239 38.7
Finite 13,573 26,814 (49.4)
Catastrophe coverage, surplus
reinsurance and other 71,891 33,236 116.3
-------------- -------------
Total reinsurance premiums ceded 135,735 96,289 41.0
-------------- -------------
Net premiums written $ 154,478 $ 172,701 (10.6)
============== =============
Gross written premiums for 2001 increased 7.9% to $290.2 million from
$269.0 million for 2000, while net premiums written declined 10.6% to $154.5
million versus $172.7 million for 2000. Excluding the impact of the September
11, 2001 terrorist attacks and the Company's London operations, the Company had
gross premium written growth in the catastrophe and risk excess segment and net
premium written growth in the catastrophe and risk excess and finite segments.
Net premiums earned for 2001 increased 1.2% to $162.1 million from $160.2
million for 2000, reflecting the September 11, 2001 terrorist attacks and
cessation of London operations. Excluding the September 11, 2001 terrorist
attacks and the London operations, the Company had net premiums earned growth in
all segments except our Other Lines segment. Gross premiums written decreased by
$31 million, net premiums written decreased by $21.6 million and net premiums
earned decreased by $15.7 million in 2001 compared to 2000 as a result of the
cessation of our underwriting activities in London.
Premiums ceded to our managed business participants increased 38.7% to
$50.3 million for 2001 compared with $36.2 million for 2000. The percentage
increase in premiums ceded to these programs was higher than for gross premiums
written due primarily to increases in reinstatement premiums ceded in connection
with the September 11, 2001 terrorist attacks.
Finite contracts that do not meet certain accounting requirements of
SFAS No. 113 and other accounting literature, that generally define a
reinsurance transaction, are not booked as premiums, but rather are treated as
deposits. During the second quarter of 2001, we entered into contracts that have
expected deposits of $35.9 million from ceding companies on this deposit
accounting basis. We also have two finite retrocessional agreements in place
with Select Re that are accounted for as deposits pursuant to SFAS 113 and other
accounting literature, totaling $19.9 million. We believe these retrocessional
agreements will enhance the long-term profitability of the finite contracts to
which they relate.
56
Catastrophe coverage, surplus and other ceded premiums written
increased in 2001 from 2000 primarily due to additional premiums on
retrocessional protection following the September 11, 2001 terrorist attacks.
Management fee income from all sources for the year ended December 31,
2001 increased 5.5% to $5.8 million from $5.5 million for 2000, reflecting the
increase in business ceded to our managed business participants, including the
effects of the September 11, 2001 terrorist attacks.
Our loss ratio was 93.6% for the year ended December 31, 2001 compared
with 86% for 2000. Excluding the effects of the September 11, 2001 terrorist
attacks, our loss ratio was 66.7%. Our loss ratio for the year ended December
31, 2001 reflected incurred catastrophe and risk excess losses of $225.8 million
gross and $56 million net for the 2001 and prior accident years. Our loss ratio
for 2000 reflected incurred catastrophe and risk excess losses of $78.1 million
gross and $51.9 million net.
Significant catastrophe and risk losses affecting the year ended
December 31, 2001 loss incurred are as follows:
Amount of Losses
---------------------------------
Loss Event Gross Net
---------- ----------- -----------
($000's)
September 11, 2001 Terrorist Attacks $ 181,671 $ 26,070
Petrobras Oil Rig Disaster 16,779 11,596
Significant catastrophe and risk losses affecting the year ended
December 31, 2000 loss incurred are as follows:
Amount of Losses
---------------------------------
Loss Event Gross Net
---------- ----------- -----------
($000's)
French Storm Martin $ 33,940 $ 25,446
French Storm Lothar 27,197 17,961
The provision for losses and loss expenses and the loss ratio includes
the effect of foreign exchange movements on our liability for losses and loss
expenses, resulting in foreign currency exchange gains of $1 million for 2001
compared to losses of $1.2 million for 2000.
During 2001, we experienced adverse development of $17.9 million net
for prior-year loss and loss expenses primarily due to strengthening of reserves
in casualty, marine and aerospace lines of business, and development on a number
of historical catastrophe events. The loss ratio for 2000 was adversely affected
by development of $58.2 million net for prior-year loss and loss expenses
largely due to the French storms Lothar and Martin.
57
The underwriting expense ratio was 33.4% for 2001 compared with 40.5%
for 2000. Excluding the September 11, 2001 terrorist attacks, the expense ratio
was 34.8%. The commission and brokerage ratio, net of management fee income, was
15.2% for 2001, compared with 18.4% in 2000. Excluding the September 11, 2001
terrorist attacks, the commission and brokerage ratio, net of management fee
income, was 19.1% for 2001, compared with 18.4% for 2000. The operating expense
ratio was 18.3% for 2001 (15.7% excluding the September 11, 2001 terrorist
attacks), compared with 22.1% for 2000. The decrease largely reflected the
expense savings associated with the termination of our Lloyd's operations. As a
result of the above, our combined ratio was 127.0% for 2001 (101.5% excluding
the September 11, 2001 terrorist attacks) compared with a combined ratio of
126.5% for 2000.
Other operating expenses decreased 16.4% to $29.6 million for 2001 from
$35.4 million in 2000. The decrease was primarily related to the expense savings
associated with the termination of our Lloyd's operations. Included in other
operating expenses were foreign currency exchange losses of $0.7 million for
2001 compared to losses of $0.6 million for 2000.
During 2001, interest expense decreased to $4.4 million compared to
$4.8 million in 2000. The decrease in interest expense reflects the repayments
of $10 million on our primary credit facility at each of March 31, 2001 and 2000
(as described under "Liquidity and Capital Resources"). As of December 31, 2001,
$55 million remains outstanding under this credit facility. The interest rate on
$36.7 million of the $55 million outstanding is fixed at 6.34% as a result of a
cash flow hedge interest rate swap. The interest rate on the remaining $18.3
million outstanding is variable and was 3.59% at December 31, 2001. This is part
of PXRE Delaware's Credit Agreement with a syndicate of lenders. In addition,
the Company recorded income of $0.3 million, after tax in the first quarter of
2001, for the cumulative effect of adoption of a change of accounting principle
under SFAS No. 133. Included in other comprehensive income is a decrease in the
fair value of the cash flow hedge for the period from July 1, 2001 to December
31, 2001 of $0.7 million, net of tax. We incurred minority interest expense
amounting to $8.9 million related to our $100 million of 8.85% TRUPSsm during
2001 and in 2000 (See "Liquidity and Capital Resources" below for a full
description of the TRUPSsm).
Net investment income of $30 million for 2001 was virtually unchanged
from 2000. Our pre-tax gross annualized investment yield based on quarterly
investment balances was 6.3% for 2001 compared with 6.1% for 2000, both
calculated using amortized cost and investment income before interest expense on
funds held and investment expenses. Interest expense on funds held amounted to
$2.2 million in the fourth quarter representing an allocation of investment
income principally in relation to reinsurance recoveries arising from the
September 11, 2001 terrorist attacks. Net realized investment gains for 2001
were $4 million, compared to gains of $3.2 million for 2000, resulting from the
liquidation of bonds in 2001 to raise cash in preparation for paying claims from
the September 11, 2001 terrorist attacks. In 2000, realized gains included a
$1.5 million gain from the sale of Transnational Insurance Company.
The net effect of foreign currency exchange fluctuations were gains of
$0.3 million in 2001 compared to losses of $1.8 million for 2000.
Our London operations, which are winding down, resulted in a loss
before taxes of $6.5 million for 2001 compared to a loss before taxes of $11.1
million in 2000.
58
We recognized a tax benefit of $4.5 million in 2001 compared to a
benefit of $12 million in 2000.
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company relies primarily on dividend payments and net tax
allocation payments from its subsidiaries, including PXRE Reinsurance and PXRE
Bermuda, to pay its operating expenses and income taxes, to meet its debt
service obligations and to pay dividends. The payment of dividends by PXRE
Reinsurance to PXRE Delaware is subject to limits imposed under the insurance
laws and regulations of Connecticut, the state of incorporation and domicile of
PXRE Reinsurance, as well as certain restrictions arising in connection with our
indebtedness discussed below. Under the Connecticut insurance law, the maximum
amount of dividends or other distributions that PXRE Reinsurance may declare or
pay, within any twelve-month period, without regulatory approval, is limited to
the lesser of (a) earned surplus or (b) the greater of 10% of policyholders'
surplus at December 31 of the preceding year or 100% of net income for the
twelve-month period ending December 31 of the preceding year, all determined in
accordance with SAP. Accordingly, the Connecticut insurance laws could limit the
amount of dividends available for distribution by PXRE Reinsurance without prior
regulatory approval, depending upon a variety of factors outside our control,
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 2003, without regulatory
approval, is $45.7 million. During 2002, $29.4 million in dividends were paid by
PXRE Reinsurance.
Under Bermuda law, PXRE Bermuda is prohibited from declaring or paying
any dividends during any financial year it is in breach of its minimum solvency
margin or minimum liquidity ratio or if the declaration or payment of such
dividends would cause it to fail to meet such margin or ratio. If it fails to
meet its minimum solvency margin or minimum liquidity ratio on the last day of
any financial year, the insurer will be prohibited, without the approval of the
Supervisor of Insurance, from declaring or paying any dividends during the next
financial year.
As a Class 3 insurer, PXRE Bermuda also is prohibited, without the
approval of the Supervisor of Insurance, from reducing by 15% or more its total
statutory capital, as set out in its previous year's financial statements. If it
appears to the Supervisor of Insurance that there is a risk of the insurer
becoming insolvent or that it is in breach of the Act or any conditions imposed
upon its registration, the Supervisor may, in addition to the restrictions
specified above, direct the insurer not to declare or pay any dividends or any
other distributions or may restrict it from making such payments to such extent
as the Supervisor of Insurance may think fit. At December 31, 2002, the
statutory capital and surplus of PXRE Bermuda was estimated to be $74.5 million
and the amount required to be maintained was estimated to be $12.4 million.
Under Barbados law, PXRE Barbados may only pay a dividend out of the
realized profits. PXRE Barbados may not pay a dividend unless (a) after payment
of the dividend it is able to pay its liabilities as they become due, and (b)
the realizable value of its assets is greater than the aggregate value of its
liabilities, and the stated capital accounts maintained in respect of all
classes of shares.
59
Dividends and other permitted payments from PXRE Delaware to PXRE
Barbados are expected to be subject to U.S. withholding taxes at the rate of 5%
(reduced from 30% under the tax convention between the United States and
Barbados) and (based on source of insurance business) an effective corporate
income tax rate of 2.8% after giving effect to a 93% tax credit.
In the event the amount of dividends available, together with other
sources of funds, is not sufficient to permit us to meet our debt service and
other obligations and to pay cash dividends, it would be necessary to obtain the
approval of the Connecticut Insurance Commissioner prior to the payment of
additional dividends by PXRE Reinsurance or the approval of the Bermuda
Supervisor of Insurance prior to the payment of additional dividends by PXRE
Bermuda. If such approvals were not obtained, we would have to adopt one or more
alternatives, such as refinancing or restructuring our 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 we were unable
to generate sufficient cash flow and were otherwise unable to obtain funds
necessary to meet required payments of principal and interest on our
indebtedness, we 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 April 4, 2002, the Company raised $150 million of additional capital
through the issuance of 15,000 Convertible Voting Preferred Shares (the
"Preferred Share Investment"). The Preferred Share Investment occurred pursuant
to a Share Purchase Agreement, dated as of December 10, 2001, between the
Company and Capital Z Financial Services Fund II, L.P., Capital Z Financial
Services Private Fund II, L.P. (together with Capital Z Financial Services Fund
II, L.P., "Capital Z"), Reservoir Capital Master Fund, L.P., Reservoir Capital
Partners, L.P. (together with Reservoir Capital Master Fund, L.P., "Reservoir")
and Richard E. Rainwater ("Rainwater") (each of Capital Z, Reservoir and
Rainwater, a "Purchaser", and together, the "Purchasers"). The Preferred Share
Investment involved the issuance of 7,500 shares of Series A Preferred Shares,
allocated to two sub-series of shares, 5,000 shares allocated to sub-series A1
(A1 Preferred Shares) and 2,500 shares allocated to sub-series A2 (A2 Preferred
Shares); the issuance of 5,000 shares of Series B Preferred Shares, allocated to
two sub-series of shares, 3,333.333 shares allocated to Series B1 (B1 Preferred
Shares) and 1,666.667 shares allocated to Series B2 (B2 Preferred Shares); and
2,500 shares of Series C Preferred Shares, allocated to two sub-series of
shares, 1,666.667 shares allocated to Series C1 (C1 Preferred Shares) and
833.333 shares allocated to Series C2 (C2 Preferred Shares). The Company's
common shareholders approved the transaction on February 12, 2002.
The issuance of the Preferred Shares is not expected to have a material
effect on our liquidity during the three-year period following the issuance. In
this regard, the Preferred Shares will be entitled to receive, when, as and if
declared by our Board of Directors and to the extent of funds legally available
for the payment of dividends, cumulative dividends per share at the rate per
annum of 8% of the sum of the stated value on each share plus any accrued and
unpaid dividends thereon, payable on a quarterly basis. To the extent such
dividends are not paid when due, dividends shall be payable and accrue at the
rate of 10% per annum compounded quarterly until paid. Such dividends, if
declared by our Board of Directors, shall be payable in additional Preferred
Shares prior to the third anniversary of the closing and cash thereafter. We, at
our sole election, may decide, in substitution in whole or in part for dividends
payable in shares, to pay dividends in cash to the extent of any dividends that,
if paid in additional shares of Preferred Shares, would otherwise cause the
Purchasers and their affiliates to own more than 49.9% of the capital stock of
the Company on a fully-diluted and fully-converted basis.
60
The A1 Preferred Shares, B1 Preferred Shares and C1 Preferred Shares
will be mandatorily convertible into Class A Common Shares, Class B Common
Shares and Class C Common Shares, respectively, on the third anniversary of the
date of issuance, and all remaining Preferred Shares will be mandatorily
convertible into Convertible Common Shares on the sixth anniversary of the date
of issuance. Notwithstanding the foregoing, on any conversion date, to the
extent necessary to prevent the initial purchasers of Preferred Shares and their
affiliates from owning more than 49.9% of the capital shares of the Company
following conversion, we shall have the right (but not the obligation) to make a
cash payment in lieu of Convertible Common Shares equal to the fair market value
of the Convertible Common Shares that would have been received in excess of the
49.9% limitation in connection with any conversion, plus an additional tax gross
up amount to take into account in appropriate circumstances the difference
between the federal income tax rate on long-term capital gains and the federal
ordinary income tax rate that might apply to the recipient on the receipt of a
cash payment in lieu of Convertible Common Shares. If the A2 Preferred Shares,
B2 Preferred Shares and C2 Preferred Shares are not voluntarily converted on or
prior to the third anniversary of their issuance, an annual 8% dividend, payable
in cash, will accrue until these Preferred Shares are converted.
PXRE Delaware entered into a Credit Agreement dated as of December 30,
1998 (as amended and restated, the "Credit Agreement") with Wachovia as Agent
and as a Lender, pursuant to which Wachovia agreed to make available to PXRE
Delaware a $75 million revolving credit facility. On May 18, 1999, pursuant to
various Joinder Agreements and Assignment and Acceptance Agreements, Wachovia
syndicated the revolving credit facility, joining Fleet National Bank, Credit
Lyonnais New York Branch and Bank One (formerly, The First National Bank of
Chicago) as additional lenders (collectively with Wachovia, the "Lenders"). At
December 31, 1998, PXRE Delaware had outstanding borrowings under the Credit
Agreement of $50 million, and in October 1999, the remaining $25 million was
borrowed. On each of March 31, 2000, 2001, 2002 and April 4, 2002 PXRE Delaware
fulfilled its commitment and made principal payments of $10 million and made an
additional $5 million payment on July 1, 2002, reducing the outstanding loan to
$30 million, at December 31, 2002.
In connection with the Credit Agreement, PXRE Delaware and Wachovia
entered into a cash flow hedge interest rate swap that has the intended effect
of converting the $30 million borrowings by PXRE Delaware into a fixed rate
borrowing at an annual interest rate of 7.34%.
The Preferred Stock Investment would have triggered an event of default
under the Credit Agreement if the transaction were consummated without the
consent of the Lenders. As a condition to the Lenders' consent to the Preferred
Stock Investment, the Credit Agreement was amended pursuant to the Restated
Second Amendment to the First Amended and Restated Credit Agreement, dated April
4, 2002, between PXRE Delaware and the Lenders (the "Second Amendment" and
together with the Credit Agreement, as amended by the Second Amendment, the
"Amended Credit Agreement"). The Second Amendment was effective upon the closing
of the Preferred Stock Investment on April 4, 2002.
61
Commitments under the Credit Agreement terminate on March 31, 2004 and
are subject to annual reductions and, unless due or paid sooner, the aggregate
principal of the loans are due and payable in full on March 31, 2004. Under the
Second Amendment, the reduction of the outstanding commitments has been
accelerated. As amended, the outstanding commitment was reduced by $10 million
on April 4, 2002 and an additional reduction of $5 million was made on July 1,
2002. The remaining commitment will be reduced by $20 million on March 31, 2003
and by $10 million on March 31, 2004. In addition, commencing on June 30, 2003,
50% of Excess Cash Flow (as defined in the Second Amendment) shall be used to
reduce the outstanding commitment. Effective April 4, 2002, the variable
interest rate under the Amended Credit Agreement was increased by 100 basis
points.
The Amended Credit Agreement contains covenants that, among other
things, limit the ability of the Company and its subsidiaries and affiliates:
(a) to incur additional Indebtedness (other than certain permitted
Indebtedness); (b) to create Liens upon their properties or assets (other than
Permitted Liens); (c) to sell, transfer or otherwise dispose of their assets,
business or properties (other than certain permitted dispositions); (d) to make
additional Investments (other than certain permitted Investments, including
Permitted Acquisitions and other Investments in compliance with, among other
things, applicable law and the limitations set forth in the companies'
investment policies and not exceeding specified limits); (e) to pay dividends or
repurchase stock if after giving effect thereto a Default or Event of Default
exists or the Fixed Charge Coverage Ratio would be less than 1.5 to 1.0 as
defined in the Credit Agreement; (f) to enter into certain transactions with
Affiliates; (g) to engage in any unrelated business; (h) to enter into or remain
a party to certain ceded reinsurance agreements; or (i) to consolidate, merge or
otherwise combine (or agree to do any of the foregoing) unless, among other
things, (1) the Company is the surviving entity in such merger or consolidation,
(2) such merger or consolidation constitutes a Permitted Acquisition and the
conditions and requirements of the Credit Agreement are complied with and (3)
immediately thereafter no Default or Event of Default exists. The Credit
Agreement also requires compliance with a Leverage Ratio, a Fixed Charge
Coverage Ratio, a Risk-Based Capital Ratio and Combined Statutory Surplus
requirements.
In September, 2002, we reported to Wachovia that we had inadvertently
failed to provide certain projections to the Lenders prior to increasing the
quota share on a certain inter-company reinsurance agreement between PXRE
Reinsurance and PXRE Bermuda as required pursuant to the terms of the Amended
Credit Agreement. We also sought the Lenders' consent to the Company providing a
parental guarantee to PXRE Bermuda for the benefit of PXRE Bermuda's reinsurance
clients and the Lenders' agreement to relax certain covenants limiting the scope
of inter-company transactions between the Company, our U.S. subsidiaries and
PXRE Bermuda. Accordingly, we entered into the Third Amendment to the First
Amended and Restated Credit Agreement, Consent and Waiver between PXRE Delaware
and the Lenders, dated as of November 8, 2002, pursuant to which the Lenders
waived our non-compliance and consented to the parental guarantee and certain
amendments to the covenants concerning inter-company transactions (the "Third
Amendment"). As a condition to the Third Amendment, PXRE Bermuda issued a credit
enhancement insurance policy to the Lenders, as insureds, pursuant to which it
agreed, subject to the terms of such policy, to pay any amounts due to Lenders
under the Amended Credit Agreement if PXRE Delaware fails to pay such amounts
when due.
62
As of December 31, 2001, PXRE Reinsurance held an investment whose
value exceeded the applicable limit under the Credit Agreement, which absent a
waiver, would have resulted in an Event of Default under the Credit Agreement.
In the Second Amendment, the Lenders agreed to waive this violation until May 1,
2002 in order to allow PXRE Reinsurance an opportunity to cure this violation.
In this regard, PXRE Reinsurance owns certain fixed rate secured notes, due
September 10, 2010, issued by FSL Funding Ltd. As of December 31, 2002, the
value of these notes was $21 million. Under the amended Credit Agreement, the
aggregate investment in any single non-U.S. Government guaranteed investment
that may be held by PXRE Reinsurance is limited to 5% of its Average Combined
Invested Assets (as defined in the Credit Agreement), which was $25.3 million at
December 31, 2002.
Under the Amended Credit Agreement, the definition of Fixed Charge
Coverage Ratio has been amended to provide credit for the capital infusion
resulting from the Preferred Stock Investment and the Fixed Charge Coverage
Ratio is reduced from 1.5 to 1, to 1.25 to 1 at March 31, 2002 and June 30, 2002
and 1.3 to 1 at September 30, 2002 and thereafter.
The Amended Credit Agreement enumerates various Events of Default,
including but not limited to, if: (1) any Person or group becomes the
"beneficial owner" of securities of the Company representing 20% or more of the
combined voting power of the then outstanding securities of the Company
ordinarily having the right to vote in the election of directors; or (2) the
Board of Directors of the Company ceases to consist of a majority of the
individuals who constituted the Board as of the date of the Credit Agreement or
who subsequently become members after having been nominated, or otherwise
approved in writing, by at least a majority of individuals who constituted the
Board as of the date of the Credit Agreement (or their approved replacements).
On January 29, 1997, PXRE Capital Trust I ("PXRE Capital Trust"), a
Delaware statutory trust and a wholly-owned subsidiary of PXRE Delaware, issued
$100 million principal amount of its 8.85% TRUPS(SM) due February 1, 2027 in an
institutional private placement. Proceeds from the sale of these securities were
used to purchase PXRE Delaware's 8.85% Junior Subordinated Deferrable Interest
Debentures due February 1, 2027 (the "Subordinated Debt Securities"). On April
23, 1997, PXRE Delaware and PXRE Capital Trust completed the registration with
the SEC 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 2002 in respect of
the Capital Securities (and related Subordinated Debt Securities) amounted to
$8.6 million. On or after February 1, 2007, PXRE Delaware has the right to
redeem the Subordinated Debt Securities, in whole at any time or in part from
time to time, subject to certain conditions, at call prices of 104.180% at
February 1, 2007, declining to 100.418% at February 1, 2016, and 100%
thereafter. PXRE Delaware has the right, at any time, subject to certain
conditions, to defer payments of interest on the Subordinated Debt Securities
for Extension Periods (as defined in the applicable indenture), each not
exceeding 10 consecutive semi-annual periods; provided that no Extension Period
may extend beyond the maturity date of the Subordinated Debt Securities. As a
consequence of PXRE Delaware's extension of any interest payment period on the
Subordinated Debt Securities, distributions on the Capital Securities would be
deferred (though such distributions would continue to accrue interest at a rate
of 8.85% per annum compounded semi-annually). In the event that PXRE Delaware
exercises its right to extend an interest payment period, then during any
Extension Period, subject to certain exceptions, (i) PXRE Delaware may not
declare or pay any dividend on, make any distributions with respect to, or
redeem, purchase, acquire or make a liquidation payment with respect to, any of
its capital stock or rights to acquire such capital stock or make any guarantee
payments (subject to specified exceptions) with respect to the foregoing, and
(ii) PXRE Delaware may not make any payment of interest on, or principal of (or
premium, if any, on), or repay, repurchase or redeem, any debt securities issued
by PXRE Delaware which rank pari passu with or junior to the Subordinated Debt
Securities. Upon the termination of any Extension Period and the payment of all
amounts then due, PXRE Delaware may commence a new Extension Period, subject to
certain requirements.
63
We believe that the TRUPS(SM) are currently trading at an under-valued
price. In order to take advantage of this opportunity, we may cause one or more
of our subsidiaries to purchase some of the outstanding TRUPS(SM) and to hold
them for investment purposes. If consummated, such a purchase is not expected to
be treated as a redemption. During 2002 we purchased $5.2 million TRUPS(SM) and
recognized a gain of $1.4 million.
PXRE Delaware files U.S. income tax returns for itself and all of its
direct or indirect subsidiaries that satisfy the stock ownership requirements
for consolidation (collectively, the "Subsidiaries"). PXRE Delaware is party to
an Agreement Concerning Filing of Consolidated Federal Income Tax Returns (the
"Tax Allocation Agreement") pursuant to which each U.S. Subsidiary makes tax
payments to PXRE Delaware in an amount equal to the federal income tax payment
that would have been payable by such Subsidiary for such year if it had filed a
separate income tax return for such year. PXRE Delaware is required to provide
for payment of the consolidated federal income tax liability for the entire
group. If the aggregate amount of tax payments made in any tax year by a U.S.
Subsidiary is less than (or greater than) the annual tax liability for such
Subsidiary on a stand-alone basis for such year, such Subsidiary will be
required to make up such deficiency to PXRE Delaware (or will be entitled to
receive a credit if payments exceed the separate return tax liability of the
Subsidiary).
Investments
As of December 31, 2002, our investment portfolio, at fair value,
consisted of 83.6% in bonds and short-term investments, 14.9% in hedge funds and
1.5% in other investments.
At December 31, 2002, 96.4% of the fair value of our fixed maturity
portfolio was in obligations rated "A1" or "A" or better by Moody's or S&P,
respectively. Mortgage and asset-backed securities accounted for 29.4% of fixed
maturities based on fair value at December 31, 2002. The average yield to
maturity on our fixed maturity portfolio at December 31, 2002 and 2001, was 3.3%
and 4.5%, respectively.
64
In April 2002, the $140.9 million Preferred Share Investment net
proceeds were received. $10 million was repaid under the Amended Credit
Agreement, and the remainder was primarily invested in our fixed maturity
portfolio.
We had no direct investments in real estate or commercial mortgage
loans as of December 31, 2002.
Fixed maturity investments, other than trading securities, are reported
at fair value, with the net unrealized gain or loss, net of tax, reported as a
separate component of stockholders' equity. Fixed maturity investments
classified as trading securities are reported at fair value, with the net
unrealized gain or loss reported as investment income. At December 31, 2002, an
after-tax unrealized gain of $8.1 million (gain of $0.36 per share, after
considering convertible preferred shares) was included in stockholders' equity.
Short-term investments are carried at amortized cost, which
approximates fair value. Our short-term investments, principally term deposits
and short-term agencies were $133.3 million at December 31, 2002, compared to
$153.5 million at December 31, 2001.
A principal component of our investment strategy is investing a
significant portion of our invested assets in a diversified portfolio of hedge
funds. At December 31, 2002, total hedge fund investments amounted to $113.1
million, representing 14.9% of the total investment portfolio. For the year
ended December 31, 2002, our hedge funds yielded a return of 7.0% as compared to
9.0% in 2001. As of December 31, 2002, hedge fund investments with fair values
ranging from $1.8 to $18.1 million were administered by sixteen managers. Four
of the hedge funds are affiliated with Mariner.
Our hedge fund managers invest in a variety of markets utilizing a
variety of strategies, generally through the medium of private investment
companies or other entities. Criteria for the selection of hedge fund managers
include, among other factors, the historical performance and/or recognizable
prospects of the particular manager and a substantial personal investment by the
manager in the investment program. However, managers without past trading
histories or substantial personal investment may also be considered. Generally,
our hedge fund managers may be compensated on terms that may include fixed
and/or performance-based fees or profit participations.
Through our hedge fund managers, we may invest or trade in any
securities or instruments including, but not limited to, U.S. and non-U.S.
equities and equity-related instruments, currencies, commodities and
fixed-income and other debt-related instruments and derivative instruments.
Hedge fund managers may use both over-the-counter and exchange traded
instruments (including derivative instruments such as swaps, futures and forward
agreements), trade on margin and engage in short sales. Substantially all hedge
fund managers are expected to employ leverage, to varying degrees, which
magnifies both the potential for gain and the exposure to loss, which may be
substantial. Leverage may be obtained through margin arrangements, as well as
repurchase, reverse repurchase, securities lending and other techniques. Trades
may be on or off exchanges and may be in thinly traded securities or
instruments, which creates the risk that attempted purchases or sales may
adversely affect the price of a particular investment or its liquidation and may
increase the difficulty of valuing particular positions.
65
While we seek capital appreciation with respect to our hedge fund
investments, we are also concerned with preservation of capital. Therefore, our
hedge fund portfolio is designed to take advantage of broad market opportunities
and diversify risk. Nevertheless, our investment policies with respect to our
hedge fund investments generally do not restrict us from participating in
particular markets, strategies or investments. Further, our hedge fund
investments may generally be deployed and redeployed in whatever investment
strategies are deemed appropriate under prevailing economic and market
conditions in an attempt to achieve capital appreciation, including, if
appropriate, a concentration of investments in a relatively small group of
strategies or hedge fund managers. Accordingly, the identity and number of hedge
fund managers are likely to change over time.
Mariner, as investment advisor, allocates assets to the hedge fund
managers. Mariner monitors hedge fund performance and periodically reallocates
assets in its discretion. Mariner is familiar with a number of hedge fund
investment strategies utilized by our hedge fund managers. Mariner has invested
in some of these strategies and has a varying level of knowledge of others. New
strategies, or strategies not currently known to Mariner, may come to Mariner's
attention and may be adopted from time to time.
As of December 31, 2002, our investment portfolio also included $11.5
million of other invested assets of which 97% is in two mezzanine bond funds.
The remaining aggregate cash call commitments in respect of such investments are
$1.1 million.
Hedge funds and other limited partnership investments are accounted for
under the equity method or as part of a trading portfolio. Total investment
income for 2002, included $9.3 million attributable to hedge funds and other
investments.
Our hedge fund and other privately held securities program should be
viewed as exposing us to the risk of substantial losses, which we seek to reduce
through our multi-asset and multi-management strategy. There can be no
assurance, however, that this strategy will prove to be successful.
Liquidity
The primary sources of liquidity for our principal operating
subsidiaries are net cash flows from operating activities (including interest
income from investments), the maturity or sale of investments, borrowings,
capital contributions and advances. Funds are applied primarily to the payment
of claims, operating expenses, income taxes and to the purchase of investments.
Premiums are typically received in advance of related claim payments.
Net cash flows provided by operations were $139.4 million in 2002
compared to $28.5 million in 2001 primarily due to the effects of timing of
collection of receivables and reinsurance recoverables and payments of losses.
Because of the nature of the coverages we provide, which typically can produce
infrequent losses of high severity, it is not possible to accurately predict our
future cash flows from operating activities. As a consequence, cash flows from
operating activities may fluctuate, perhaps significantly, between years.
Dividends declared to shareholders were $2.9 million in both 2002 and
2001.
66
Book value per common share was $20.33 at December 31, 2002 after
considering convertible preferred shares.
We may be subject to gains and losses resulting from currency
fluctuations because substantially all of our investments are denominated in
U.S. dollars, while some of our net liability exposure is in currencies other
than U.S. dollars. We hold, and expect to continue to hold, currency positions
and have made, and expect to continue to make, investments denominated in
foreign currencies to mitigate, in part, the effects of currency fluctuations on
our results of operations. Investments in foreign denominated securities held as
part of our trading securities amount to 2.9% of our investment portfolio and,
in our opinion are sufficiently liquid for our needs.
In connection with the capitalization of PXRE Lloyd's Syndicate 1224,
PXRE Reinsurance has placed on deposit a $35.6 million par value U.S. Treasury
security as collateral for Lloyd's. Cash and invested assets amounting to $13.6
million at December 31, 2002, are restricted from being paid as a dividend until
the run-off has been completed.
Other commitments and pledged assets include: (a) letters of credit
amounting to $14.7 million, which are secured by cash and securities amounting
to $15.3 million, (b) securities with a par value of $9.1 million on deposit
with various state insurance departments in order to comply with insurance laws,
(c) securities with a fair value of $33.8 million deposited into a trust for the
benefit of a cedent in connection with a finite reinsurance transaction, (d)
funding commitments to certain limited partnerships of $1.1 million, (e) a
commitment to lend up to $7.0 million to finance the construction of an office
building that we intend to use as our headquarters in Bermuda, (f) a contingent
liability amounting to $1.2 million under the 1992 Restated Employee Annual
Incentive Bonus Plan plus interest; and (g) commitments under the credit
agreement discussed above.
We entered into a joint venture agreement, dated June 2001 (the "JV
Agreement"), with BF&M Properties Limited to form a Bermuda corporation, Barr's
Bay Properties Limited ("Barr's Bay"). Barr's Bay was formed to construct an
office building in Hamilton, Bermuda, in which we will have the option to lease
office space for three consecutive five-year terms. We own 40% of the
outstanding shares of Barr's Bay. Pursuant to the JV Agreement, we have agreed
to lend up to $7 million to Barr's Bay to finance the construction of the
subject office building. Such loans will be secured by a first mortgage on the
property.
For other future commitments that affect liquidity, see the Credit
Agreement and cash call commitments discussed above.
All amounts classified as reinsurance recoverable at December 31, 2002
are considered by our management to be collectible in all material respects.
Market Risk
We are exposed to certain market risks, including interest rate and
credit risks. The potential for losses from changes in interest rates with
respect to our investments, borrowings, and a related interest rate swap exists.
We are exposed to potential losses from changes in probability of default with
respect to our investments. However, we believe our exposure to foreign exchange
risk is not material with respect to our fixed income portfolio.
67
Our risk management strategy is to accept certain levels of market
risks, principally through our investment activities, in order to offset our
insurance exposures that may be considered actuarial rather than financial. The
objectives of our investment activities are to generate the required return from
selected market sectors, that do not correlate with underwriting risk, and limit
our exposures to market risks that may prevent us from servicing our insurance
obligations. Our Board of Directors approves investment guidelines and the
selection of external investment advisers who manage our portfolios. The
investment managers make tactical investment decisions within the established
guidelines. Management monitors the external advisers through written reports
that are reviewed and approved by our Board of Directors or committee thereof.
Management also manages diversification strategies across the portfolios in
order to limit our potential loss from any single market risk. The performance
and risk profiles of the portfolio are reported in various forms throughout the
fiscal year to management, our Board of Directors, rating agencies, regulators,
and to stockholders.
Our investment portfolio is summarized in Item 1, Business, Item 14,
Notes to the Financial Statements and in this Item 7 under the heading
"Investments".
Interest Rate Risk
Our principal fixed maturity market risk exposure is to changes in U.S.
interest rates. Changes in interest rates may affect the fair value of our fixed
maturity portfolio, borrowings (bank debt and trust preferred) and a related
interest rate swap. Our holdings subject us to exposures in the treasury,
municipal, and various asset-backed sectors. These sectors consist primarily of
investment grade securities whose fair value is subject to interest rate,
credit, prepayment and extension risk. All fixed maturity investment positions
are long with no "short" or derivative positions.
We believe that reinsurance recoverables and payables do not expose us
to significant interest rate risk and are excluded from the analysis below.
In order to measure our exposure to changes in interest rates a
sensitivity analysis was performed. Potential loss is measured as a change in
fair value, net of applicable taxes. The fair value of the fixed maturity
portfolio, borrowings and related interest rate swap at year-end was remeasured
from the fair values reported in the financial statements assuming a 100 basis
point increase in interest rates using various analytics and models. The
potential loss in fair value measured as a proportion of total stockholders'
equity, due to interest rate exposure was estimated at 1.6% at December 31, 2002
and 1.1% at December 31, 2001. There was no significant change in net exposure
during the year.
The estimated potential loss is net of prepayment risk associated with
the mortgage-related securities. The mortgage sector represents 9% of the
portfolio at year-end. The estimate assumes a similar change in fair value
across security sectors with no adjustment for change in value due to credit
risk. The interest rate risk related to the short-term investments is not
material. The average maturity of these investments is under one year.
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Credit Risk
As of December 31, 2002, 83.6% of our investment portfolio, at fair
value, consisted of fixed maturities and short-term investments. At December 31,
2002, 96.4% of the fair value of our long-term fixed maturities portfolio was in
obligations rated "A1" or "A" or better by Moody's or S&P, respectively. The
average fair value of each fixed maturity investment decreased 47% to $1.9
million at year end 2002 from $3.6 million at year end 2001. Non-agency mortgage
and asset-backed securities accounted for 19% of our investment portfolio based
on fair value at December 31, 2002. At December 31, 2002, we had $35.0 million
at fair value of privately held fixed maturities that are not traded on a
recognized exchange. The largest such security was a $23.9 million
collateralized debt obligation ("FSL CDO") issued by FSL Funding Limited and
guaranteed by Royal & Sun Alliance Insurance PLC. As of March 14, 2003, the FSL
CDO was rated "A-" by S&P.
Foreign Exchange Risk
Our exposure to foreign exchange risk from our foreign denominated
securities is not material. Only a small portion of our investment portfolio is
denominated in currencies other than U.S. dollars. Additionally, the carrying
value of certain receivables and payables denominated in foreign currencies are
carried at fair value. For these reasons, these items have been excluded from
the market risk disclosure. We may, however, be exposed to material foreign
exchange risks in the event that a significant non-U.S. catastrophe event
occurs.
Equity Price Risk
We are not materially exposed to equity price risk other than through
our hedge fund investments.
Diversification Benefit
Our risk management strategy includes investments that are expected to
reflect offsetting changes in fair value in response to various changes in
market risks.
We also hold other investments that are excluded from this disclosure
that are expected to provide positive returns under most market conditions
representing adverse changes in interest rates and other market factors (See
Note 3 of Notes to Consolidated Financial Statements).
Income Taxes
We recognized a tax expense of $17.8 million in 2002 compared to a
benefit of $4.5 million in 2001. The tax expense in 2002 differed from the
statutory rate primarily due to the mix of business between the U.S. and
Bermuda, as well as tax-exempt income. The tax benefit reported in 2001 differed
from the statutory rate for similar reasons as in 2002.
Contingencies
In May 1999, PXRE Delaware entered into weather option agreements with
two counterparties. In April 2000, these counterparties submitted invoices to
PXRE Delaware in the aggregate sum of $8.3 million seeking payment under the
weather option agreements, which invoices have been paid. PXRE Delaware insured
its obligations under these weather option agreements through two Commercial
Inland Marine Weather Insurance Policies issued by Terra Nova. PXRE Delaware
submitted claims under these policies to Terra Nova in April 2000. Terra Nova
had denied coverage, contending that its Managing General Agent had no authority
to issue these policies.
69
PXRE Delaware disagreed with Terra Nova's denial and filed suit against
Terra Nova in the United States District Court for the District of New Jersey.
On June 10, 2002, PXRE Delaware was awarded a verdict of $8.3 million plus
accumulated interest of $1.5 million by a jury at the conclusion of the trial of
this dispute. The aggregate sum of $9.8 million is included in Other Assets.
Terra Nova has appealed this verdict to the United States Court of Appeals for
the Third Circuit, but management has concluded that the sum of $9.8 million is
realizable and that no valuation allowance is necessary.
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as part of this Form 10-K:
Page
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PXRE Group Ltd.:
Independent Auditor's Report for the years ended December 31, 2002 and 2001 F-1
Independent Auditor's Report for the year ended December 31, 2000 F-2
Consolidated Balance Sheets at December 31, 2002 and 2001 F-3
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flow for the years ended December 31, 2002, 2001 and
2000 F-6
Notes to Consolidated Financial Statements F-7
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Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On April 3, 2001, we retained KPMG LLP to serve as the Company's
independent auditors subject to the approval of the Company's shareholders at
the Company's Annual General Meeting on June 12, 2001. The retention of KPMG was
recommended by the Audit Committee of the Board of Directors, approved by our
Board of Directors on April 3, 2001 and approved by our shareholders on June 12,
2001.
KPMG replaced our prior auditor, PriceWaterhouseCoopers ("PWC"), who
notified us on March 12, 2001, that it would not stand for re-appointment as our
auditor for fiscal year 2001. PWC's decision followed the recommendation of the
Audit Committee of the Company's Board of Directors, and our Board of Directors'
determination on February 13, 2001, to conduct a review of auditing services and
to invite PWC, KPMG and another "Big Five" firm of independent auditors to make
proposals to the Audit Committee for the provision of auditing services at the
Audit Committee's April 2, 2001 meeting. PWC's election not to stand for
re-appointment was reported by the Company on Form 8-K filed on March 16, 2001.
During the two fiscal years prior to their appointment, the Company had
no consultations with KPMG concerning: (a) the application of accounting
principles to a specific transaction or the type of opinion that might be
rendered on our financial statements as to which a written report was provided
to us or as to which we received oral advice that was an important factor in
reaching a decision on any accounting, auditing or financial reporting issue; or
(b) any matter that was either the subject of disagreements or a reportable
event within the meaning of Item 304(a)(1) of Regulation S-K.
PART III
Item 10. Directors and Executive Officers of the Registrant
PXRE has adopted a written code of ethics that applies to the
registrant's Chief Executive Officer, senior financial officers and persons
performing similar functions, which Code has been filed as Exhibit 14 hereto.
PXRE intends to disclose any amendments to, or waivers from, its code of ethics
on its website, www.pxregroup.com.
The other information required by this Item 10 is contained in the
Company's Proxy Statement, which information is incorporated herein by reference
and which Proxy Statement will be filed within 120 days of the end of the
Company's 2002 fiscal year.
Item 11. Executive Compensation
The information required by this Item 11 is contained in the Company's
Proxy Statement, which information is incorporated herein by reference and which
Proxy Statement will be filed within 120 days of the end of the Company's 2002
fiscal year.
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Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is contained in the Company's
Proxy Statement, which information is incorporated herein by reference and which
Proxy Statement will be filed within 120 days of the end of the Company's 2002
fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is contained in the Company's
Proxy Statement, which information is incorporated herein by reference and which
Proxy Statement will be filed within 120 days of the end of the Company's 2002
fiscal year.
Item 14. Controls and Procedures
Within 90 days of the filing of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in periodic SEC
filings.
There were no significant changes in our internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date of our most recent evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements.
Page
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PXRE Group Ltd.:
Independent Auditor's Report for the years ended December 31, 2002 and 2001 F-1
Independent Auditor's Report for the year ended December 31, 2000 F-2
Consolidated Balance Sheets at December 31, 2002 and 2001 F-3
Consolidated Statements of Income and Comprehensive Income for the years ended December 31,
2002, 2001 and 2000 F-4
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Page
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Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002,
2001 and 2000 F-5
Consolidated Statements of Cash Flow for the years ended December 31, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7
(2) Financial Statements Schedules.
Page
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Schedule I - Summary of Investments (The information required by this
Schedule is presented in the financial statements and the notes thereto
included in this Form 10-K.) --
Schedule II - Condensed Financial Information of Registrant F-34
Schedule III - Supplementary Insurance Information F-35
Schedule IV - Reinsurance (The information required by this Schedule is presented
in the financial statements and the notes thereto included in this Form 10-K.) --
Schedule V - Valuation and Qualifying Accounts and Reserves F-36
Schedule VI - Supplementary Information Concerning Property/Casualty Insurance
Operations F-37
Independent Auditors' Report on the Financial Statement Schedules
and Independent Auditors' Consent F-38
Report of Independent Accountants on the Financial Statement Schedules and Consent
of Independent Accountants F-39
All other financial statement schedules have been omitted as inapplicable.
(3) Exhibits.
Certain of the following exhibits, as indicated parenthetically, were
previously filed as exhibits to registration statements filed by PXRE Group Ltd.
or its predecessor companies under the Securities Act of 1933, as amended, or to
reports or registration statements filed by PXRE Group Ltd. or its predecessor
companies under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), respectively, and are hereby incorporated by reference to such statements
or reports. PXRE Group Ltd.'s Exchange Act file number is 1-15259. Prior to the
Merger, PXRE Group Ltd.'s Exchange Act file numbers were 1-12595 and 0-15428.
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3.1 Memorandum of Association and Bye-laws of PXRE Group Ltd. (Exhibits
3.1 and 3.2, respectively, to PXRE Group Ltd.'s Form S-4 Registration Statement
dated August 18, 1999 (File No. 333-85451)).
3.2 Description of Stock of PXRE Group Ltd. (Appendix II to PXRE Group
Ltd.'s Proxy Statement for the February 12, 2002 Special Meeting of
Shareholders).
(4) Instruments Defining the Rights of Security Holders.
4.1 Form of Specimen Common Share certificate, par value $1.00 per
share, of PXRE Group Ltd. (Exhibit 4.1 to PXRE Group Ltd.'s Form S-4
Registration Statement dated August 18, 1999 (File No. 333-85451)).
4.2 Credit Agreement dated as of December 30, 1998, among PXRE
Corporation, the banks and financial institutions listed on the signature pages
thereto or that subsequently become parties thereto (collectively, the
"Lenders") and First Union National Bank as agent for the Lenders (Exhibit 4.8
to PXRE Corporation's Form 8-K dated January 8, 1999).
4.3 First Amendment and Waiver to Credit Agreement, dated as of May 18,
1999, among PXRE Corporation, the Lenders and First Union National Bank, Joinder
Agreements dated May 18, 1999 by Fleet National Bank and Credit Lyonnais New
York Branch, Assignments and Acceptances dated May 18, 1999 between First Union
National Bank and Fleet National Bank and between First Union National Bank and
The First National Bank of Chicago, respectively (Exhibit 4.9 to PXRE
Corporation's Form 10-Q for the quarterly period ended June 30, 1999).
4.4 Second Amendment and Waiver to Credit Agreement, dated as of June
25, 1999, among PXRE Corporation, the Lenders and First Union National Bank,
(Exhibit 4.9 to PXRE Corporation's Form 10-Q for the quarterly period ended June
30, 1999).
4.5 First Amended and Restated Credit Agreement, dated as of August 31,
1999, among PXRE Corporation, as Borrower, PXRE Group Ltd. and PXRE (Barbados)
Ltd., as Guarantors, the Lenders named therein and First Union as agent (Exhibit
4.5 to PXRE Group Ltd.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
4.6 First Amendment to First Amended and Restated Credit Agreement,
dated as of March 29, 2000, among PXRE Corporation, as borrower, PXRE Group Ltd.
and PXRE (Barbados) Ltd., as Guarantors, the Lenders named therein and First
Union National Bank as agent (Exhibit 4.6 to the Annual Report on Form 10-K of
PXRE Group Ltd. for the fiscal year ended December 31, 2000).
4.7 Second Amendment To First Amended and Restated Credit Agreement and
Consent, dated as of the 12 day of March, 2002, among PXRE Corporation, PXRE
Group Ltd., and PXRE Reinsurance (Barbados) Ltd., and the Lenders named therein
and First Union National Bank, as agent. (Exhibit 4.7 to the Annual Report on
Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 2001).
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4.8 Restated Second Amendment and Restated Credit Agreement, dated
April 4, 2002 between PXRE Corporation and the Lenders named therein. (Exhibit
10.1 to PXRE Group Ltd.'s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002).
4.9 Third Amendment to First Amended and Restated Credit Agreement,
Consent, and Waiver dated as of the 8th day of November, 2002 between PXRE
Corporation, PXRE GROUP LTD., PXRE REINSURANCE (BARBADOS) LTD., and WACHOVIA
BANK, NATIONAL ASSOCIATION (formerly First Union Bank). (Exhibit 10.3 to PXRE
Group Ltd.'s Quarterly Report on Form 10-Q for the quarter ended September 30,
2002).
4.10 Deed Poll Guarantee of PXRE Group Ltd. in respect of PXRE
Reinsurance Ltd. as of September 2002 (Exhibit 10.3a to PXRE Group Ltd's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
4.11 Credit Enhancement Policy of PXRE Reinsurance Ltd. for the Lenders
and Wachovia Bank, National Association, as agent for the Lenders as insureds
dated November 8, 2002 (Exhibit 10.3b to PXRE Group Ltd.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002).
4.12 Indenture, dated as of January 29, 1997, between PXRE Corporation
and First Union National Bank, as Trustee (Exhibit 4.3 to PXRE Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
4.13 First Supplemental Indenture, dated as of January 29, 1997,
between PXRE Corporation and First Union National Bank, as Trustee, in respect
of PXRE Corporation's 8.85% Junior Subordinated Deferrable Interest Debentures
due 2027 (Exhibit 4.4 to the Annual Report on Form 10-K of PXRE Corporation for
the fiscal year ended December 31, 1996).
4.14 Amended and Restated Declaration of Trust of PXRE Capital Trust I,
dated as of January 29, 1997, among PXRE Corporation, as sponsor, the
Administrators thereof, First Union Bank of Delaware, as Delaware Trustee, First
Union National Bank, as Institutional Trustee, and the holders from time to time
of undivided interests in the assets of PXRE Capital Trust I (Exhibit 4.5 to the
Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1996).
4.15 Capital Securities Guarantee Agreement, dated as of January 29,
1997, between PXRE Corporation and First Union National Bank, as Guarantee
Trustee (Exhibit 4.6 to the Annual Report on Form 10-K of PXRE Corporation for
the fiscal year ended December 31, 1996).
4.16 Common Securities Guarantee Agreement, dated as of January 29,
1997, executed by PXRE Corporation (Exhibit 4.7 to the Annual Report on Form
10-K of PXRE Corporation for the fiscal year ended December 31, 1996).
4.17 Registration Rights Agreement, dated January 29, 1997, among PXRE
Corporation, PXRE Capital Trust I and Salomon Brothers Inc, as Representative of
the Initial Purchasers (Exhibit 10.1 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1996).
4.18 Purchase Agreement among PXRE Corporation, PXRE Capital Trust I
and Salomon Brothers Inc, as Representative of the Initial Purchasers, dated
January 24, 1997 (Exhibit 10.2 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1996).
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4.19 Share Purchase Agreement, dated as of December 10, 2001, between
PXRE Group Ltd. and certain Purchasers named therein (Appendix I to PXRE Group
Ltd.'s Proxy Statement for the February 12, 2002 Special Meeting of
Shareholders).
(10) Material Contracts.
The material contracts of PXRE are as follows:
10.1 PXRE Reinsurance Company Management Agreement, dated as of January
1, 1990, among PXRE Reinsurance Company and, among others, Merrimack Mutual Fire
Insurance Company ("Merrimack"), Pennsylvania Lumbermens Mutual Insurance
Company ("Pennsylvania Lumbermens"), and NRMA Insurance Limited ("NRMA")
(Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1991); letter dated November 28, 1990 from
Pennsylvania Lumbermens confirming reduced participation (Exhibit 10.7 to PXRE
Corporation's Form S-2 Registration Statement dated February 21, 1992, as
amended by Amendment No. 1 thereto dated April 1, 1992 and by Amendment No. 2
thereto dated April 13, 1992 and by Amendment No. 3 thereto dated April 23, 1992
(File No. 33-45893)), cover notes respecting January 1997 renewals by Merrimack,
Pennsylvania Lumbermens and NRMA and cover note respecting participation
commencing January 1, 1997 by Auto-Owners Insurance Company ("Auto-Owners")
(Exhibit 10.3 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1996; cover notes respecting January 1999
renewals by NRMA, Pennsylvania Lumbermens, Auto-Owners and The Andover Companies
(a Merrimack company) (Exhibit 10.3 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1998); cover note respecting
participation commencing January 1, 1999 by the Kyoei Mutual Fire & Marine
Insurance Company. (Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Group
Ltd. for the fiscal year ended December 31, 1999); cover note from Pennsylvania
Lumbermans reflecting the amendment effective January 1, 1996 to put a maximum
limit on cessions and the amendment to the Profit Commission Calculation
effective January 1, 1997 (Exhibit 10.1 to the Annual Report on Form 10-K of
PXRE Group Ltd. for the fiscal year ended December 31, 2000); cover note from
Auto-Owners reflecting a change in participation effective January 1, 1999
(Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Group Ltd. for the
fiscal year ended December 31, 2000); cover note from The Andover Companies
reflecting a change in participation effective January 1, 1999 (Exhibit 10.1 to
the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 2000; and cover note from NRMA reflecting a change in participation
effective January 1, 2001 (Exhibit 10.1 to the Annual Report on Form 10-K of
PXRE Group Ltd. for the fiscal year ended December 31, 2000).
10.2 Quota Share Retrocessional Agreement, dated as of January 1, 1994,
between PXRE Reinsurance Company and Trenwick America Reinsurance Corporation
("Trenwick Group") (Exhibit 10.21 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1993); cover note respecting
January 1999 renewal by Trenwick Group (Exhibit 10.17 to the Annual Report on
Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1998).
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10.3 Undertaking, dated September 1, 1998, between PXRE Reinsurance
Company and Select Reinsurance Ltd., Amended and Restated Facultative Obligatory
Quota Share Retrocessional Agreement between PXRE Reinsurance Company and Select
Reinsurance Ltd. and Variable Quota Share Retrocessional Agreement between PXRE
Reinsurance Company and Select Reinsurance Ltd. (Exhibit 10.36 to the Annual
Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31,
1998); letter dated November 1, 1999 regarding Undertaking extension; and
endorsement regarding Select Reinsurance Ltd. participation for 2000 (Exhibit
10.3 to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year
ended December 31, 1999); and endorsement, dated January 1, 2001, regarding
Select Reinsurance Ltd. participation for 2001 (Exhibit 10.3 to the Annual
Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31,
2000); and endorsement dated March 21, 2002, regarding Select Reinsurance Ltd.'s
participation for 2002 (Exhibit 10.3 to the Annual Report on Form 10-K of PXRE
Group Ltd. for the fiscal year ended December 31, 2001), Amendment to the
Amended and Restated Facultative Obligatory Quota Share Retrocessional Agreement
between Select Reinsurance Ltd. and PXRE Reinsurance company dated November 20,
2002* and letter to Select Reinsurance Ltd. from PXRE Reinsurance Company dated
November 20, 2002*.
10.4 Facultative Obligatory Quota Share Retrocessional Agreement,
effective October 1, 1999 between PXRE Reinsurance Company and PXRE Reinsurance
Ltd. and Aggregate Excess of Loss Agreement effective October 1, 1999 between
PXRE Reinsurance Ltd. and PXRE Reinsurance Company (Exhibit 10.25 to the Annual
Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31,
1999).
10.5 First Amendment to Facultative Obligatory Quota Share
Retrocessional Agreement, dated as of December 1, 2000, between PXRE Reinsurance
Ltd. and PXRE Reinsurance Company (Exhibit 10.22 to the Annual Report on Form
10-K of PXRE Group Ltd. for the fiscal year ended December 31, 2000).
10.6 Facultative Obligatory Quota Share Retrocessional Agreement,
effective as of January 1, 2003, between PXRE Reinsurance Ltd. and PXRE
Reinsurance Company*; Aggregate Excess of Loss Agreement effective as of January
1, 2003 between PXRE Reinsurance Company and PXRE Reinsurance Ltd*.
10.7 Catastrophe Quota Share Reinsurance Agreement dated December 23,
2002 among PXRE REINSURANCE COMPANY, PXRE REINSURANCE LTD. and P-1 Re LTD.
(Exhibit 10.1 to PXRE Group Ltd.'s 8-K filed December 23, 2002).
10.8 Reinsurance Agreement, effective January 1, 2001, between PXRE
Reinsurance Ltd. and Select Reinsurance Ltd. (Exhibit 10.33 to the Annual Report
on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 2001).
10.9 Trust Agreement "The Patriot 2002 Trust" among Select Reinsurance
Ltd., Capital G Trust Limited and PXRE Reinsurance Ltd. dated May 15, 2002*.
*Filed herewith.
77
10.10 Swap Confirmation, effective as of June 29, 2001, between PXRE
Reinsurance Ltd. and Select Reinsurance Ltd. (Exhibit 10.34 to the Annual Report
on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 2001).
10.11 Accident Year Aggregate Excess of Loss Reinsurance Agreement,
effective as of July 1, 2001, between PXRE Reinsurance Company and Select
Reinsurance Ltd. (Exhibit 10.32 to the Annual Report on Form 10-K of PXRE Group
Ltd. for the fiscal year ended December 31, 2001).
10.12 Tax Settlement Agreement, dated June 21, 1991, between PXRE
Corporation, PXRE Reinsurance Company and PM Holdings, Inc. (Exhibit 10.2 to the
Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1991).
10.13 Amended and Restated Agreement Concerning Filing of Consolidated
Federal Income Tax Returns, dated as of August 23, 1993, between PXRE
Corporation and PXRE Reinsurance Company (Exhibit 10.8 to the Annual Report on
Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1993);
Addendum No. 2, dated November 10, 1994 to the PXRE Corporation Amended and
Restated Agreement Concerning Filing of Consolidated Federal Income Tax Returns
(Exhibit 10.22 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1994); Addendum No. 3, dated as of December 11,
1996 to the PXRE Corporation Amended and Restated Agreement Concerning Filing of
Consolidated Federal Income Tax Returns (Exhibit 10.22 to the Annual Report on
Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996); and
Addendum No. 4 to the PXRE Group Amended and Restated Agreement Concerning
Filing of Consolidated Federal Income Tax Return between PXRE Corporation and
Transnational Insurance Company (Exhibit 10.9 to the Annual Report on Form 10-K
of PXRE Group Ltd. for the fiscal year ended December 31, 2000).
10.14 Investment Advisory Agreement between PXRE Reinsurance Company
and Phoenix Investment Counsel, Inc., dated February 25, 1987 and effective as
of January 1, 1987 (Exhibit 10.10 to Amendment No. 1, dated February 19, 1987 to
PXRE Corporation's Form S-1 Registration Statement dated August 29, 1986, as
subsequently amended by Amendment No. 2 thereto dated March 25, 1987 (File No.
33-8406), and incorporated herein by reference); Amendment to Investment
Advisory Agreement between PXRE Reinsurance Company and Phoenix Investment
Counsel, Inc., effective retroactively as of January 1, 1987 (Exhibit 10.3 to
the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1991); Amendment No. 2 to Investment Advisory Agreement between
PXRE Reinsurance Company and Phoenix Investment Counsel, Inc., effective as of
November 1, 1989 (Exhibit 10.4 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1991); Amendment No. 3 to
Investment Advisory Agreement between PXRE Reinsurance Company and Phoenix
Investment Counsel, Inc. effective June 1, 1995 (Exhibit 10.26 to the Annual
Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31,
1995); Amendment No. 4 to Investment Advisory Agreement between PXRE Reinsurance
Company and Phoenix Investment Counsel, Inc., dated July 7, 2000 (Exhibit 10.5
to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 2001).
78
10.15 Investment Management Agreement, effective January 29, 1997,
between PXRE Corporation and Phoenix Investment Counsel, Inc. (Exhibit 10.29 to
the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1996).
10.16 Investment Accounting Service Agreement, dated January 1, 1999,
by and between Phoenix Home Life Mutual Insurance Company and PXRE Corporation
(Exhibit 10.30 1to the Annual Report on Form 10-K of PXRE Group Ltd. for the
fiscal year ended December 31, 2001).
10.17 Investment Management Agreement, effective October 15, 1999,
between PXRE Reinsurance Ltd. and Phoenix Investment Counsel, Inc. (Exhibit 10.9
to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 1999).
10.18 Investment Management Agreement, effective October 15, 1999,
between PXRE Group Ltd. and Phoenix Investment Counsel, Inc. (Exhibit 10.9 to
the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 1999).
10.19 SVO Filings Agreement, dated July 7, 2000, between PXRE
Corporation and Phoenix Investment Partners, Ltd. (Exhibit 10.8 to the Annual
Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31,
2001).
10.20 Investment Advisory Services Agreement between PXRE Reinsurance
Ltd. and Mariner Investment Group, Inc., dated October 1, 1999 (Exhibit 10.10 to
the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 1999).
10.21 Investment Advisory Services Agreement, dated March 14, 2000,
between PXRE Corporation and Mariner Investment Group, Inc., (Exhibit 10.34 to
the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 1999).
10.22 NEAM Investment Management Agreement, dated April 8, 2002,
between GENERAL RE-NEW ENGLAND ASSET MANAGEMENT, INC., AND PXRE REINSURANCE
COMPANY; Investment Management Agreement, dated April 8, 2002, between NEAM and
PXRE GROUP LTD; Investment Management Agreement, dated April 8, 2002 between
NEAM and PXRE REINSURANCE LTD. (Exhibit 10.1 to PXRE Group Ltd.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002).
10.23 Employee Stock Purchase Plan as amended (Appendix C to the
Company's Proxy Statement for the 2000 Annual General Meeting of Shareholders
(File No. 33-08405)).(M)
10.24 Employee Stock Purchase Plan as amended (Appendix B to PXRE Group
Ltd.'s Proxy Statement for the 2002 Annual General Meeting of Shareholders (File
No. 33-08406)). (M)
10.25 Executive Severance Plan (Exhibit 10.10 to PXRE Group Ltd.'s Form
S-4 Registration Statement dated August 18, 1999 (File No. 333-85451)).(M)
- -----------------------
(M) Indicates a management contract or compensation plan or arrangement in which
the directors and/or executive officers of PXRE participate.
79
10.26 1988 Stock Option Plan as amended (Exhibit A to the first
Prospectus forming part of PXRE Corporation's Form S-8 and S-3 Registration
Statement dated June 21, 1990 (File No. 33-35521)).(M)
10.27 Restated Employee Annual Incentive Bonus Plan, as amended
(Appendix A to PXRE Group Ltd.'s Proxy Statement for the 2000 Annual General
Meeting of Shareholders (File No. 33-08406)).(M)
10.28 1992 Officer Incentive Plan as amended (Appendix B to PXRE Group
Ltd.'s Proxy Statement for the 2000 Annual General Meeting of Shareholders (File
No. 33-08406)).(M)
10.29 2002 Officer Incentive Plan as amended (Appendix A to PXRE Group
Ltd.'s Proxy Statement for the 2002 Annual Meeting of Shareholders (File No.
33-08406)). (M)
10.30 Director Stock Plan (Appendix D to PXRE Group Ltd.'s Proxy
Statement for the 2000 Annual General Meeting of Shareholders (File No.
33-08406)).(M)
10.31 Director Equity and Deferred Compensation Plan (Appendix E to
PXRE Group Ltd's Proxy Statement for the 2000 Annual General Meeting of
Shareholders (File No. 33-08406)).(M)
10.32 Non-Employee Director Deferred Stock Plan (Exhibit 10.17 to the
Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December
31, 2000). (M)
10.33 Agreement and Plan of Merger, dated as of August 22, 1996,
between PXRE Corporation and Transnational Re Corporation, as amended by
Amendment No. 1 dated as of September 27, 1996 and Amendment No. 2 dated as of
October 24, 1996 (Annex A to PXRE Corporation's Form S-4 Registration Statement
dated October 30, 1996 (File No. 333-15087)).
10.34 Agreement and Plan of Merger, dated as of July 7, 1999, among
PXRE Corporation, PXRE Group Ltd. and PXRE Merger Corp. (Annex A to PXRE Group
Ltd.'s Form S-4 Registration Statement dated August 18, 1999 (File No.
333-85451)).
10.35 Quota Share Reinsurance Agreement, dated as of November 30, 2000,
between Transnational Insurance Company and PXRE Reinsurance Company and
Assumption Agreement, dated as of November 30, 2000, between Transnational
Insurance Company and PXRE Reinsurance Company (Exhibit 10.19 to the Annual
Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31,
2000).
10.36 Lease, dated May 9, 1994, between Thornall Associates, L.P. and
PXRE Corporation (Exhibit 10.24 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1994); Lease, dated November
1, 1999, between Thornall Associates, L.P. and PXRE Corporation (Exhibit 10.26
to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 1999); and Sublease, dated July 1, 2000, between I-many, Inc. and
PXRE Corporation. (Exhibit 10.23 to the Annual Report on Form 10-K of PXRE Group
Ltd. for the fiscal year ended December 31, 2000).
- -----------------------
(M) Indicates a management contract or compensation plan or arrangement in which
the directors and/or executive officers of PXRE participate.
80
10.37 Lloyd's Deposit Trust Deed (Third Party Deposit) dated November
29, 1996 between PXRE Limited and PXRE Reinsurance Company (Exhibit 10.32 to the
Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1997).
10.38 Lloyd's Security Trust Deed (Letter of Credit and Bank
Guarantee), dated November 29, 1997, between PXRE Limited and Lloyd's of London
(Exhibit 10.34 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1997).
10.39 Operating Agreement of Cat Bond Investors L.L.C., effective as of
June 9, 1997, among Cat Bond Investors, Phoenix Home Life Mutual Insurance
Company and PXRE Corporation (Exhibit 10.35 to the Annual Report on Form 10-K of
PXRE Corporation for the fiscal year ended December 31, 1997).
10.40 Joint Venture Agreement, dated June 20, 2001, between BF&M
Properties Limited and PXRE Group Ltd. (Exhibit 10.31 to the Annual Report on
Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31, 2001).
10.41 Retention Bonus Letter Agreements, dated December 12, 2001,
between PXRE Reinsurance Company and each of Michael Bleisnick, Gordon Forsyth
III, Gerald L. Radke, Jeffrey L. Radke and James F. Dore (Exhibit 10.35 to the
Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December
31, 2001) and Bruce J. Byrnes*. (M)
10.42 Employment Contract, dated as of August 6, 2002, between PXRE
Group Ltd. and Guy D. Hengesbaugh (Exhibit 10.1 to PXRE Group Ltd.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002). (M)
10.43 Consulting and Separation Agreement, dated as of July 23, 2002,
between PXRE Group Ltd. and James F. Dore (Exhibit 10.2 to PXRE Group Ltd.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
10.44 Demand Note, dated June 19, 2001 between PXRE Reinsurance
(Barbados) Ltd. and PXRE Group Ltd. for $100 million*.
10.45 Promissory note, dated April 4, 2002 between PXRE Reinsurance
(Barbados) Ltd. and PXRE Corporation for $128 million*.
(11) Statement setting forth computation of earnings per
share. The information required by this Exhibit is presented in the financial
statements and the notes thereto included in this Form 10-K.
- -----------------------
*Filed herewith.
(M) Indicates a management contract or compensation plan or arrangement in which
the directors and/or executive officers of PXRE participate.
81
(12) Statement setting forth computation of ratios. Attached
hereto as Exhibit 12.
(21) List of Subsidiaries. At December 31, 2002, PXRE Group
Ltd. had the following subsidiaries: PXRE Reinsurance Ltd., a Bermuda insurance
company; PXRE Reinsurance (Barbados) Ltd., a Barbados company; PXRE Corporation,
a Delaware corporation; PXRE Reinsurance Company, a Connecticut insurance
company; PXRE Capital Trust I, a Delaware statutory business trust; PXRE
Limited, an English company (the sole member of Syndicate 1224 at Lloyd's of
London); Cat Bond Investors L.L.C. (of which PXRE Corporation and Phoenix Home
Life Mutual Insurance Company are the only members); PXRE Solutions Inc., a
Connecticut corporation; PXRE Solutions S.A., a Belgium Corporation. (See the
discussion in this Form 10-K under the captions "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
(23) Consents of Experts and Counsel. The consents of
PriceWaterhouseCoopers LLP and KPMG LLP, independent accountants to the Company,
are included as part of Item 14(a)(2) of this Form 10-K.
(24) Power of Attorney. Copies of the powers of attorney
executed by each of F. Sedgwick Browne, Robert W. Fiondella, Franklin D. Haftl,
Halbert D. Lindquist, Wendy Luscombe, Philip R. McLoughlin and Bradley E.
Cooper, Susan S. Fleming, Craig A. Huff and Robert M. Stavis are attached hereto
as Exhibit 24.
(b) Reports on Form 8-K.
Current Reports on Form 8-K filed with the Securities and Exchange
Commission on December 23, 2002; Catastrophe Quota Share Reinsurance Agreement
dated December 23, 2002 among PXRE REINSURANCE COMPANY, PXRE REINSURANCE LTD.
and P-1 Re LTD, (Exhibit 10.1 to PXRE Group Ltd.'s 8-K filed December 23, 2002).
(c) Exhibits
See Item 15(a)(3) above.
(d) Financial Statements
See Item 15(a)(2) above.
(99) Certifications of the Chief Executive Officer and
Chief Financial Officer. The Certification pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 are
attached.
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, PXRE Group Ltd. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PXRE GROUP LTD.
By: /s/Gerald L. Radke
Gerald L. Radke
Its Chairman of the Board
and Chief Executive Officer
Date: March 19, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of PXRE
Group Ltd. and in the capacity and on the dates indicated:
By: /s/ Gerald L. Radke By: /s/ John M. Modin
------------------------ ------------------------
Gerald L. Radke John M. Modin
Chairman of the Board Senior Vice President
and Chief Executive Officer and Chief Financial Officer
(Principal Executive (Principal Financial Officer
Officer) and Director and Principal Accounting
Officer)
Date: March 19, 2003 Date: March 19, 2003
By /s/ F. Sedgwick Browne By /s/ Franklin D. Haftl
------------------------ ------------------------
F. Sedgwick Browne Franklin D. Haftl
Director Director
Date: March 19, 2003 Date: March 19, 2003
By /s/ Robert W. Fiondella By /s/ Wendy Luscombe
------------------------ ------------------------
Robert W. Fiondella Wendy Luscombe
Director Director
Date: March 19, 2003 Date: March 19, 2003
By /s/ Halbert D. Lindquist By /s/ Philip R. McLoughlin
------------------------ ------------------------
Halbert D. Lindquist Philip R. McLoughlin
Director Director
Date: March 19, 2003 Date: March 19, 2003
By /s/ Bradley E. Cooper By /s/ Susan S. Fleming
------------------------ ------------------------
Bradley E. Cooper Susan S. Fleming
Director Director
Date: March 19, 2003 Date: March 19, 2003
By /s/ Craig A. Huff By /s/ Robert M. Stavis
------------------------ ------------------------
Craig A. Huff Robert M. Stavis
Director Director
Date: March 19, 2003 Date: March 19, 2003
*By /s/Gerald L. Radke
------------------
Gerald L. Radke
Attorney-in-Fact
83
Independent Auditors' Report
The Board of Directors and Stockholders
PXRE Group Ltd.
We have audited the accompanying consolidated balance sheets of PXRE Group Ltd.,
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of income and comprehensive income, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
accompanying financial statements of PXRE Group Ltd., for the year ended
December 31, 2000, were audited by other auditors whose report thereon dated
February 12, 2001 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 and 2001 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of PXRE
Group Ltd., and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, PXRE Group Ltd.
adopted the provisions of FAS 133 "Accounting For Derivative Instruments and
Hedging Activities," during 2001.
KPMG LLP
New York, New York
February 11, 2003
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders of
PXRE Group Ltd. (Successor Registrant of PXRE Corporation):
In our opinion, the consolidated statements of operations and comprehensive
income, of stockholders' equity and of cash flows for the year ended December
31, 2000 present fairly, in all material respects, the results of operations and
cash flows of PXRE Group Ltd. (Successor Registrant of PXRE Corporation) and its
subsidiaries for the year ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
PricewaterhouseCoopers
Hamilton, Bermuda
February 12, 2001, except for Note 10
as to which the date is February 11, 2003
F-2
PXRE Consolidated Balance Sheets
Group Ltd. (Dollars in thousands, except par value per share)
- ------------------------------------------------------------------------------
December 31,
2002 2001
----------- -----------
Assets Investments:
Fixed maturities:
Available-for-sale (amortized cost $465,963 and $218,635, respectively) $ 478,878 $ 219,482
Trading (cost $19,521 and $0, respectively) 21,871 --
Short-term investments 133,318 153,503
Hedge funds (cost $84,915 and $79,454, respectively) 113,105 115,569
Other invested assets (cost $10,522 and $17,080, respectively) 11,529 19,791
----------- -----------
Total investments 758,701 508,345
Cash 46,630 22,888
Accrued investment income 5,788 4,149
Premiums receivable, net 81,813 93,603
Other receivables 31,606 20,176
Reinsurance recoverable on paid losses 29,653 16,208
Reinsurance recoverable on unpaid losses 207,444 245,907
Ceded unearned premiums 10,496 18,163
Deferred acquisition costs 22,721 7,312
Income tax recoverable -- 25,118
Other assets 42,290 44,069
----------- -----------
Total assets $ 1,237,142 $ 1,005,938
=========== ===========
Liabilities Losses and loss expenses $ 447,829 $ 453,705
Unearned premiums 63,756 46,335
Debt payable 30,000 55,000
Reinsurance balances payable 81,090 78,178
Deposit liabilities 38,114 14,710
Income tax payable 2,486 --
Other liabilities 26,068 18,700
----------- -----------
Total liabilities 689,343 666,628
----------- -----------
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 94,335 99,530
----------- -----------
Stockholders' Serial convertible preferred stock, $1.00 par value, $10,000 stated
Equity value -- 10 million shares authorized, 0.02 million and 0 shares
issued and outstanding, respectively 159,077 --
Common stock, $1.00 par value -- 50 million shares
authorized, 12.0 million and 11.9 million shares
issued and outstanding, respectively 12,030 11,873
Additional paid-in capital 168,866 175,405
Accumulated other comprehensive income (loss) net of deferred income
tax (expense) benefit of $(2,866) and $37, respectively 7,142 (299)
Retained earnings 108,062 55,473
Restricted stock at cost (0.2 million and 0.2 million shares, respectively) (1,713) (2,672)
----------- -----------
Total stockholders' equity 453,464 239,780
----------- -----------
Total liabilities and stockholders' equity $ 1,237,142 $ 1,005,938
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
PXRE Consolidated Statements of Income and Comprehensive Income
Group Ltd. (Dollars in thousands, except per share amounts)
- -------------------------------------------------------------------------------
Years Ended December 31,
2002 2001 2000
--------- --------- ---------
Revenues Net premiums earned $ 269,360 $ 162,125 $ 160,206
Net investment income 24,893 30,036 30,037
Net realized investment gains 8,981 4,023 3,191
Management fees 3,432 5,786 5,483
--------- --------- ---------
306,666 201,970 198,917
--------- --------- ---------
Losses and Losses and loss expenses incurred 126,862 151,703 137,765
Expenses Commissions and brokerage 53,391 30,350 34,899
Other operating expenses 32,454 29,606 35,407
Interest expense 2,939 4,424 4,778
Minority interest in consolidated subsidiary 8,646 8,877 8,875
--------- --------- ---------
224,292 224,960 221,724
--------- --------- ---------
Income (loss) before income taxes and cumulative
effect of accounting change 82,374 (22,990) (22,807)
Income tax provision (benefit) 17,829 (4,704) (12,007)
--------- --------- ---------
Income (loss) before cumulative effect of accounting change 64,545 (18,286) (10,800)
Cumulative effect of accounting change, net of $172
tax expense -- 319 --
--------- --------- ---------
Net income (loss) before preferred stock dividends $ 64,545 $ (17,967) $ (10,800)
========= ========= =========
Preferred stock dividends 9,077 -- --
--------- --------- ---------
Net income (loss) available to common stockholders $ 55,468 $ (17,967) $ (10,800)
========= ========= =========
Comprehensive Net income (loss) before preferred stock dividends $ 64,545 $ (17,967) $ (10,800)
Income, Net of Net unrealized appreciation on investments 7,664 493 6,683
Tax Net unrealized depreciation on cash flow hedge (223) (722) --
--------- --------- ---------
Comprehensive income (loss) $ 71,986 $ (18,196) $ (4,117)
========= ========= =========
Per Share Basic:
Net income (loss) before cumulative effect of
accounting change and preferred stock dividends $ 5.47 $ (1.58) $ (0.95)
Cumulative effect of accounting change -- 0.03 --
Preferred stock dividends (0.77) -- --
--------- --------- ---------
Net income (loss) available to common stockholders $ 4.70 $ (1.55) $ (0.95)
========= ========= =========
Average shares outstanding (000's) 11,802 11,578 11,394
========= ========= =========
Diluted:
Net income (loss) before cumulative effect of accounting change $ 3.28 $ (1.58) $ (0.95)
Cumulative effect of accounting change -- 0.03 --
--------- --------- ---------
Net income (loss) $ 3.28 $ (1.55) $ (0.95)
========= ========= =========
Average shares outstanding (000's) 19,662 11,578 11,394
========= ========= =========
The accompanying notes are an integral part of these statements.
F-4
PXRE Consolidated Statements of Stockholders' Equity
Group Ltd. (Dollars in thousands)
- --------------------------------------------------------------------------
Years Ended December 31, 2002, 2001 and 2000
----------------------------------------------------------------------
Additional
Preferred Common Paid-in Treasury
Stock Stock Capital Stock
---------- -------- ---------- ---------
Balance at December 31, 1999 $ - $ 11,680 $ 173,683 $ -
Net loss
Unrealized appreciation on investments, net
Issuance of common stock 140 1,803
Repurchase/cancellation of common stock (517)
Issuance of restricted stock
Amortization of restricted stock
Dividends paid to common stockholders
Other 45
----------------------------------------------------------------------------
Balance at December 31, 2000 - 11,820 175,014 -
Net loss
Unrealized appreciation on investments, net
Unrealized depreciation on cash flow hedge, net
Issuance of common stock 53 3,368
Repurchase/cancellation of common stock (2,937)
Issuance of restricted stock
Amortization of restricted stock
Dividends paid to common stockholders
Other (40)
----------------------------------------------------------------------------
Balance at December 31, 2001 - 11,873 175,405 -
Net income before preferred stock dividends
Unrealized appreciation on investments, net
Unrealized depreciation on cash flow hedge, net
Issuance of preferred stock 150,000 (9,112)
Issuance of common stock 157 3,000
Repurchase/cancellation of common stock (671)
Issuance of restricted stock
Amortization of restricted stock
Dividends to preferred stockholders 9,077
Dividends paid to common stockholders
Other 244
----------------------------------------------------------------------------
Balance at December 31, 2002 $ 159,077 $ 12,030 $ 168,866 $ -
============================================================================
Years Ended December 31, 2002, 2001 and 2000
----------------------------------------------------------------------
Accumulated
Other Total
Comprehensive Retained Restricted Stockholders'
Income Earnings Stock Equity
--------- --------- ------ ------
Balance at December 31, 1999 $ (6,752) $ 89,933 $ (5,264) $ 263,280
Net loss (10,800) (10,800)
Unrealized appreciation on investments, net 6,683 6,683
Issuance of common stock 1,943
Repurchase/cancellation of common stock (517)
Issuance of restricted stock (1,276) (1,276)
Amortization of restricted stock 2,632 2,632
Dividends paid to common stockholders (2,831) (2,831)
Other 228 273
------------------------------------------------------------------------
Balance at December 31, 2000 (69) 76,302 (3,680) 259,387
Net loss (17,967) (17,967)
Unrealized appreciation on investments, net 492 492
Unrealized depreciation on cash flow hedge, net (722) (722)
Issuance of common stock 3,421
Repurchase/cancellation of common stock (2,937)
Issuance of restricted stock (1,642) (1,642)
Amortization of restricted stock 2,404 2,404
Dividends paid to common stockholders (2,862) (2,862)
Other 246 206
------------------------------------------------------------------------
Balance at December 31, 2001 (299) 55,473 (2,672) 239,780
Net income before preferred stock dividends 64,545 64,545
Unrealized appreciation on investments, net 7,664 7,664
Unrealized depreciation on cash flow hedge, net (223) (223)
Issuance of preferred stock 140,888
Issuance of common stock 3,157
Repurchase/cancellation of common stock (671)
Issuance of restricted stock (886) (886)
Amortization of restricted stock 1,845 1,845
Dividends to preferred stockholders (9,077) -
Dividends paid to common stockholders (2,879) (2,879)
Other 244
------------------------------------------------------------------------
Balance at December 31, 2002 $ 7,142 $ 108,062 $ (1,713) $ 453,464
========================================================================
The accompanying notes are an integral part of these statements.
F-5
PXRE
Group Ltd. Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------
Years Ended December 31,
2002 2001 2000
--------- --------- ---------
Cash Flows Net income (loss) before preferred stock dividends $ 64,545 $ (17,967) $ (10,800)
from Operating Adjustments to reconcile net income to net cash
Activities provided (used) by operating activities:
Losses and loss expenses (5,876) 202,086 (9,932)
Unearned premiums 25,088 (7,612) 13,147
Deferred acquisition costs (15,409) 2,385 (1,887)
Receivables 4,054 (19,025) (10,581)
Reinsurance balances payable 2,913 43,866 14,262
Reinsurance recoverable 25,018 (144,918) (10,494)
Income tax recoverable 25,017 (5,285) 7,959
Equity in earnings of limited partnerships (9,323) (10,629) (9,495)
Trading portfolio fixed maturities and hedge funds acquired (30,886) -- --
Trading portfolio fixed maturities and hedge funds disposed 38,123 3,367 --
Other 16,118 (17,804) (6,511)
--------- --------- ---------
Net cash provided (used) by operating activities 139,382 28,464 (24,332)
--------- --------- ---------
Cash Flows Cost of fixed maturity investments (430,722) (215,454) (143,347)
from Investing Fixed maturity investments matured/disposed 189,969 282,218 189,268
Activities Payable for securities (82) 105 (2,076)
Cost of equity securities -- (3,834) (24,235)
Equity securities disposed 275 18,154 36,623
Net change in short-term investments 20,185 (96,400) (18,295)
Hedge funds and other invested assets disposed 24,548 28,527 23,770
Hedge funds and other invested assets purchased (30,649) (24,968) (20,642)
--------- --------- ---------
Net cash (used) provided by investing activities (226,476) (11,652) 41,066
--------- --------- ---------
Cash Flows Proceeds from issuance of preferred stock 140,888 -- --
from Financing Proceeds from issuance of common stock 2,128 1,104 687
Activities Cash dividends paid to common stockholders (2,879) (2,862) (2,831)
Repayment of debt (25,000) (10,000) (10,000)
Repurchase of minority interest in consolidated subsidiary (3,773) -- --
Cost of stock repurchased (528) (1,173) (316)
--------- --------- ---------
Net cash (used) provided by financing activities 110,836 (12,931) (12,460)
--------- --------- ---------
Net change in cash 23,742 3,879 4,274
Cash, beginning of period 22,888 19,009 14,735
--------- --------- ---------
Cash, end of period $ 46,630 $ 22,888 $ 19,009
========= ========= =========
F-6
PXRE Notes to Consolidated Financial Statements
Group Ltd. Years Ended December 31, 2002, 2001 and 2000
- -------------------------------------------------------------------------------
1. Significant Accounting Policies
Basis of Presentation and Consolidation
The consolidated financial statements have been prepared in U.S.
dollars in conformity with accounting principles generally accepted ("GAAP") in
the United States of America. These statements reflect the consolidated
operations of PXRE Group Ltd. (the "Company" or collectively with its various
subsidiaries, "PXRE") and its wholly-owned subsidiaries, including PXRE
Corporation ("PXRE Delaware"), PXRE Reinsurance Company ("PXRE Reinsurance"),
PXRE Reinsurance Ltd. ("PXRE Bermuda"), PXRE Reinsurance (Barbados) Ltd. ("PXRE
Barbados"), PXRE Solutions Inc. ("PXRE Solutions"), PXRE Solutions, S.A. ("PXRE
Europe"), Cat Fund L.P., PXRE Capital Trust I and PXRE Limited. All material
intercompany transactions have been eliminated in preparing these consolidated
financial statements.
The Company was formed in 1999 as part of the reorganization of PXRE
Delaware, a Delaware corporation. Prior to the reorganization, PXRE Delaware was
the ultimate parent holding company of the various PXRE companies and its common
shares were publicly traded on the New York Stock Exchange. As a result of the
reorganization, the Company became the ultimate parent holding company of PXRE
Delaware and the holders of PXRE Delaware common stock automatically became
holders of the same number of the Company's common shares. The reorganization
was consummated at the close of business on October 5, 1999 and, on October 6,
1999, the Company's common shares began to trade on the New York Stock Exchange
under the symbol PXT. The reorganization also involved the establishment of a
Bermuda-based reinsurance subsidiary, PXRE Bermuda, operations in Barbados
through PXRE Barbados and the formation of a reinsurance intermediary, PXRE
Solutions.
During the fourth quarter of 2000, Transnational Insurance Company
("Transnational Insurance"), an excess and surplus lines carrier which had
specialized in non-standard and excess property insurance risks, distributed
substantially all of its assets and liabilities to PXRE Reinsurance and the
remaining corporate shell was sold on December 21, 2000. The sale followed
PXRE's withdrawal from the excess and surplus lines market in the first quarter
of 2000.
GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Certain reclassifications have been made for 2001 and 2000 to conform
to the 2002 presentation.
F-7
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.
Assumed reinsurance and retrocessional contracts that do not both
transfer significant insurance risk and result in the reasonable possibility
that the Company or its retrocessionaires may realize a significant loss from
the insurance risk assumed are accounted for as deposits with interest income or
expense credited or charged to the contract deposits. These contract deposits
are included in other assets and deposit liabilities in the Consolidated Balance
Sheets.
Deferred Acquisition Costs
Acquisition costs consist of commission and brokerage expenses incurred
in connection with contract issuance, net of acquisition costs ceded and
management fees. These costs are deferred and amortized over the period in which
the related premiums are earned. Deferred acquisition costs are reviewed to
determine that they do not exceed recoverable amounts, after considering
investment income.
Management Fees
Management fees are recorded as earned on a pro-rata basis over the
contract period under various arrangements whereby PXRE 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.
Liabilities for Losses and Loss Expenses
Liabilities for losses and loss expenses are established in amounts
estimated to settle incurred losses. These 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
represents 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.
In 2000, PXRE commenced assuming finite contracts in PXRE Bermuda,
which was a new line of business for PXRE. Such contracts may be recorded on a
discounted basis. At December 31, 2002, all reserves for PXRE Bermuda were
recorded on an undiscounted basis. At December 31, 2001, reserves related to
these contracts amounting to $3.9 million were discounted by $0.3 million at a
rate of 5.1% over 18 years.
F-8
Premiums on assumed retroactive contracts are earned when written with
a corresponding liability established for the estimated loss the Company
ultimately expects to payout. The initial loss is deferred and amortized into
expense over the expected pay-out period using the interest method. Premiums on
ceded retroactive contracts are earned when written with a corresponding
reinsurance recoverable established for the amount of reserves ceded. The
initial gain is deferred and amortized into income over the expected pay-out
period using the interest method.
Investments
Fixed maturity investments are considered available-for-sale or trading
and are reported at fair value. Unrealized gains and losses associated with the
available-for-sale portfolio, 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 deemed other than temporary
are charged to operations. Unrealized gains and losses associated with the
trading portfolio, as a result of temporary changes in fair value during the
period such investments are held, are recognized in investment income.
Short-term investments, which have an original maturity of one year or
less, are carried at amortized cost, which approximates fair value.
Investments in limited partnership hedge funds and other limited
partnerships are reported under the equity method, which includes the cost of
the investment and subsequent proportional share of the partnership earnings.
Under the equity method earnings are recorded in investment income.
Realized gains or losses on disposition of investments are determined
on the basis of specific identification. The amortization of premiums and
accretion of discounts for fixed maturity investments are computed utilizing the
interest method. The effective yield under the interest method is adjusted for
anticipated prepayments.
Fair Value of Financial Instruments
Fair values of certain assets and liabilities are based on published
market values, if available, or estimates based upon fair values of similar
issues. Fair values are reported in Notes 3 and 4.
Debt Issuance Costs
Debt issuance costs associated with the issuance of $100 million 8.85%
Capital Trust Pass-through Securities `sm' (TRUPS(SM)) and the issuance of a
note under a $75 million Credit Agreement are being amortized over the term of
the related outstanding debt using the interest method.
F-9
Foreign Exchange
Foreign currency assets and liabilities are translated at the exchange
rate in effect at the balance sheet date. Resulting gains and losses are
reflected in income for the period.
Federal Income Taxes
Deferred tax assets and liabilities reflect the expected future tax
consequences of temporary differences between carrying amounts and the tax bases
of PXRE's assets and liabilities.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive
income. Other comprehensive income consists of the change in the net unrealized
appreciation or depreciation of investments and a cash flow hedge, net of tax.
Earnings Per Share
Basic earnings per share is determined by dividing net earnings 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.
Stock-Based Compensation
At December 31, 2002 PXRE has stock option plans, which are more fully
described in Note 9. PXRE accounts for those plans under the recognition and
measurement principles of the Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if PXRE had applied the fair
value recognition provisions of the Financial Accounting Standards Board
("FASB") in the Statement of Financial Accounting Standard ("SFAS") Accounting
for Stock-Based Compensation to stock-based employee compensation.
($000's, except per share data) 2002 2001 2000
---------- ----------- -----------
Net income (loss)
As reported $ 64,545 $ (17,967) $ (10,800)
Deduct:
Total stock-based
compensation expense
determined under fair value
based methods for all awards,
net of related tax effects (3,480) (2,159) (1,339)
---------- ---------- ----------
Pro forma $ 61,065 $ (20,126) $ (12,139)
========== ========== ==========
Basic income (loss) per share
As reported $ 4.70 $ (1.55) $ (0.95)
Pro forma $ 4.41 $ (1.74) $ (1.07)
Diluted income (loss) per share
As reported $ 3.28 $ (1.55) $ (0.95)
Pro forma $ 3.11 $ (1.74) $ (1.07)
Accounting for Derivative Instruments and Hedging Activities
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which establishes accounting and reporting standards for
derivative instruments, including certain instruments embedded in other
contracts. Accordingly, all derivatives are recognized as either assets or
liabilities in the balance sheet and measured at fair value. Gains or losses
from changes in the derivative values are accounted for based on how the
derivative was used and whether it qualifies for hedge accounting.
During the first quarter of 2001, PXRE adopted SFAS No. 133. The
cumulative effect of adoption was income of $0.3 million, net of tax.
F-10
Accounting for Extinguishment of Debt
FASB issued SFAS No. 145, "Rescission of FASB Statements Nos. 4 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections", on April 30,
2002, which rescinds the requirement to present gains and losses from
extinguishment of debt as an extraordinary item. The Company has adopted the new
standard effective January 1, 2002. As a result, a gain of $1.4 million on the
repurchase of $5.2 million of Minority Interest in Consolidated Subsidiary was
classified with net realized investment gains during 2002.
2. Underwriting
Premiums written and earned for the years ended December 31, 2002, 2001
and 2000 are as follows:
($000's) 2002 2001 2000
--------- --------- ---------
Premiums written
Gross premiums written $ 366,768 $ 290,213 $ 268,990
Ceded premiums written (72,285) (135,735) (96,289)
--------- --------- ---------
Net premiums written $ 294,483 $ 154,478 $ 172,701
========= ========= =========
Premiums earned
Gross premiums earned $ 349,312 $ 293,442 $ 261,288
Ceded premiums earned (79,952) (131,317) (101,082)
--------- --------- ---------
Net premiums earned $ 269,360 $ 162,125 $ 160,206
========= ========= =========
Premiums written were assumed principally through reinsurance brokers
or intermediaries. In 2002, 2001 and 2000 five, four and four reinsurance
intermediaries respectively, individually accounted for more than 10% of gross
premiums written, and collectively accounted for approximately 84%, 60% and 56%
of gross premiums written, respectively.
Included in ceded premiums written are $30.5 million, $58.0 million and
$48.9 million of premiums ceded in 2002, 2001 and 2000, respectively to a
reinsurer, Select Reinsurance Ltd. ("Select Re"). In accordance with PXRE's
contractual rights under the retrocessional agreement with Select Re, PXRE
designated its President and Chief Operating Officer to serve on Select Re's
board of directors. Net assets due from the reinsurer at December 31, 2002, are
$85.3 million, all of which are secured by a trust agreement and funds held.
PXRE also purchases retrocessional coverage for its own protection, depending on
market conditions. In the event that retrocessionaires are unable to meet their
contractual obligations, PXRE would be liable for such defaulted amounts. At
December 31, 2002, PXRE had balances with an insurer, Legion Insurance Company,
which is in rehabilitation, amounting to $8.6 million of premiums receivable net
of contingent commission. PXRE also had losses and loss expense liabilities due
to Legion of $13.4 million at December 31, 2002. PXRE's reinsurance contracts
with Legion contained offset clauses whose enforceability is subject to
Pennsylvania law.
F-11
Activity in the net losses and loss expense liability for the years
ended December 31, 2002, 2001 and 2000 is as follows:
($000's) 2002 2001 2000
--------- --------- ---------
Net balance at January 1 $ 207,798 $ 155,503 $ 160,516
Incurred related to:
Current year 101,456 133,852 79,534
Prior years 25,406 17,851 58,231
--------- --------- ---------
Total incurred 126,862 151,703 137,765
--------- --------- ---------
Paid related to:
Current year (17,890) (46,961) (14,709)
Prior years (79,361) (52,505) (131,643)
--------- --------- ---------
Total paid (97,251) (99,466) (146,352)
--------- --------- ---------
Net asset related to retroactive reinsurance
assumed 2,976 58 3,574
Net balance at December 31 240,385 207,798 155,503
Reinsurance recoverable on unpaid losses and
loss expenses 207,444 245,907 96,117
--------- --------- ---------
Gross balance at December 31 $ 447,829 $ 453,705 $ 251,620
========= ========= =========
During 2002, we experienced net adverse development of $25.4 million
for prior-year loss and loss expenses, $16.9 million of which was due to loss
development on our Exited Lines segment relating primarily to the 2000 and 2001
underwriting years. Adverse development of $16.7 million was primarily caused by
larger than expected reported claims under our direct reinsurance contracts,
corroborated by revised industry data. Net losses and loss expenses were
unfavorably affected by an increase to reserves of $17.9 million in 2001
primarily due to strengthening of reserves in casualty, marine and aerospace
lines of business and development on a number of historical catastrophe events.
Net losses and loss expenses were unfavorably affected by an increase to
reserves of $58.2 million in 2000 primarily due to the French Storms Lothar and
Martin.
F-12
3. Investments
The book value, gross unrealized gains, gross unrealized losses and
estimated fair value of investments in fixed maturities as of December 31, 2002
and 2001 are shown below:
Gross Gross Estimated
Book Unrealized Unrealized Fair
($000's) Value Gains Losses Value
-------- -------- -------- --------
2002
Available for sale:
United States government securities $ 45,640 $ 525 $ -- $ 46,165
Foreign government securities 310 5 -- 315
United States government sponsored
agency debentures 35,524 2,538 -- 38,062
United States government sponsored
agency mortgage-backed securities 40,161 2,306 -- 42,467
Other mortgage and asset-backed
securities 144,378 2,011 2,653 143,736
Obligations of states and political
subdivisions 72,983 3,617 78 76,522
Public utilities and industrial and
miscellaneous securities 126,967 4,956 312 131,611
-------- -------- -------- --------
465,963 15,958 3,043 478,878
-------- -------- -------- --------
Trading:
Foreign denominated securities 21,871 -- -- 21,871
-------- -------- -------- --------
Total fixed maturities $487,834 $ 15,958 $ 3,043 $500,749
======== ======== ======== ========
Gross Gross Estimated
Book Unrealized Unrealized Fair
($000's) Value Gains Losses Value
-------- -------- -------- --------
2001
Available for sale:
United States government securities $ 48,557 $ 51 $ 195 $ 48,413
Foreign government securities 5,611 -- 256 5,355
United States government sponsored
agency debentures 45,006 916 -- 45,922
United States government sponsored
agency mortgage-backed securities 8,558 54 -- 8,612
Other mortgage and asset-backed
securities 20,590 112 82 20,620
Obligations of states and political
subdivisions 33,235 1,842 6 35,071
Public utilities and industrial and
miscellaneous securities 57,078 127 1,716 55,489
-------- -------- -------- --------
Total fixed maturities $218,635 $ 3,102 $ 2,255 $219,482
======== ======== ======== ========
F-13
There was one investment, other than in the U.S. government and agency
sectors, which exceeded 10% of stockholders' equity at December 31, 2001,
amounting to 10.4%. No such investments exceeded 10% of stockholders' equity at
December 31, 2002.
Included in other comprehensive income in 2002 is $7.7 million of net
unrealized appreciation on investments which includes $16.7 million of
unrealized net gains arising during the year less $9.0 million of
reclassification adjustments for net gains, included in net income.
Proceeds, gross realized gains, and gross realized losses from sales of
fixed maturity investments before maturity date or securities that prepay and
from sales of equity securities were as follows:
($000's) 2002 2001 2000
--------- --------- ---------
Proceeds from sales
Fixed maturities $ 206,537 $ 279,218 $ 186,380
--------- --------- ---------
Equity securities $ 275 $ 18,154 $ 36,623
--------- --------- ---------
Gross gains
Fixed maturities $ 10,566 $ 7,307 $ 223
Equity securities -- 101 4,999
Other -- 211 405
--------- --------- ---------
10,566 7,619 5,627
--------- --------- ---------
Gross losses
Fixed maturities (1,352) (1,815) (1,505)
Equity securities (123) (1,201) (930)
Other (110) (580) (1)
--------- --------- ---------
(1,585) (3,596) (2,436)
--------- --------- ---------
Net realized gains $ 8,981 $ 4,023 $ 3,191
========= ========= =========
Included in gross losses is the realized loss on the other than
temporary write down of a fixed maturity bond in 2002 of $0.7 million, and an
equity security and a fixed maturity bond in 2001 in the amount of $0.8 million
and $1.6 million, respectively.
The components of net investment income were as follows:
($000's) 2002 2001 2000
-------- -------- --------
Fixed maturity investments $ 22,397 $ 16,331 $ 18,207
Hedge funds and other limited
partnerships 9,343 10,629 9,630
Equity securities -- 269 1,055
Cash, short-term and other 4,653 6,737 3,155
-------- -------- --------
36,393 33,966 32,047
Less investment expenses (1,954) (1,710) (2,010)
Less interest expenses on
funds held (9,546) (2,220) --
-------- -------- --------
Net investment income $ 24,893 $ 30,036 $ 30,037
======== ======== ========
F-14
Investment expenses principally represent fees paid to General Re-New
England Asset Management, Inc ("NEAM") as well as fees paid to Mariner
Investment Group ("Mariner"). The sole shareholder of Mariner is the Chairman
and a founding shareholder of Select Re, which owned approximately 9.4% of the
outstanding common stock of PXRE at December 31, 2001. During February 2002,
Select Re liquidated its position in the open market.
Investment Maturity Distributions
The book value and estimated fair value of fixed maturity investments
at December 31, 2002 by contractual maturity date are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
Book Fair
($000's) Value Value
-------- --------
Fixed Maturity:
One year or less $ 56,013 $ 56,487
Over 1 through 5 years 112,115 117,241
Over 5 through 10 years 117,826 123,334
Over 10 through 20 years 17,341 17,484
United States government agency mortgage backed
and other mortgage and asset-backed securities 184,539 186,203
-------- --------
Total fixed maturities $487,834 $500,749
======== ========
In addition to fixed maturities, PXRE held $133.3 million and $153.5
million of short-term investments at December 31, 2002 and 2001, respectively,
comprised principally of agencies and high-grade commercial paper.
PXRE also held $113.1 million and $115.6 million of limited partnership
hedge funds and trading portfolio assets including funds managed by Mariner at
December 31, 2002 and 2001, respectively, that are accounted for under the
equity method or at fair value, as follows:
2002 2001
----------------------------- ----------------------------
($000's) $ Ownership % $ Ownership %
----------- ------------ ---------- -------------
Mariner Partners, L.P. $ 18,105 11.0 $ 16,737 11.2
Mariner Select, L.P. 15,685 12.1 14,914 19.9
Caspian Capital Partners, L.P. (a Mariner 8,400 3.3 7,746 4.1
fund)
Mariner Opportunities, L.P. 8,350 14.3 7,292 15.7
Mariner Atlantic, Ltd. -- -- 3,956 2.4
Other 62,565 0.2 to 7.1 64,924 0.2 to 11.9
---------- -----------
Total hedge funds $ 113,105 $ 115,569
========== ===========
F-15
Restricted Assets
Under the terms of certain reinsurance agreements, irrevocable letters
of credit in the amount of $14.7 million were issued at December 31, 2002, in
respect of reported loss reserves and unearned premiums. Investments with a par
value of $15.3 million have been pledged as collateral with issuing banks. In
addition, securities with a par value of $9.1 million at December 31, 2002 were
on deposit with various state insurance departments in order to comply with
insurance laws.
PXRE, in connection with the capitalization of PXRE's Lloyd's Syndicate
1224, had placed on deposit a $35.6 million par value U.S. Treasury security as
collateral for Lloyd's. Cash and invested assets of PXRE's Lloyd's Syndicate
1224 amounting to $13.6 million at December 31, 2002 are restricted from being
paid as a dividend until the run-off is completed.
PXRE has outstanding commitments for funding certain investments in
certain limited partnerships of $1.1 million at December 31, 2002.
PXRE has deposited securities with a fair value of $33.8 million at
December 31, 2002 into a trust for the benefit of a cedent in connection with a
finite reinsurance transaction.
4. Notes Payable and Credit Arrangements
In January 1997, PXRE Delaware issued $100 million of 8.85% TRUPS(SM).
The fair value of the TRUPS(SM) is $69.2 million and $49.4 million at December
31, 2002 and 2001, respectively. Interest is payable on the TRUPS(SM)
semi-annually. The notes are redeemable on or after February 1, 2007 at the
option of PXRE Delaware, initially at 104.180% declining to 100.418% at February
1, 2016, and 100% thereafter. During 2002, PXRE repurchased $5.2 million of the
TRUPS(SM) in the open market and recognized a realized investment gain of $1.4
million.
On December 30, 1998, PXRE Delaware entered into a Credit Agreement
with Wachovia Bank, National Association (formerly known as First Union National
Bank), ("Wachovia") to arrange and syndicate for it a revolving credit facility
of up to $75 million. Subsequently this agreement has been the subject of
various amendments, such as the inclusion of the Company and PXRE Barbados as
guarantors, collectively referred to as the Credit Agreement. Wachovia
syndicated the $75 million revolving credit facility, joining Fleet National
Bank, Credit Lyonnais, New York Branch and Bank One (formerly, The First
National Bank of Chicago) as additional lenders (collectively with Wachovia, the
"Lenders"). The borrowings under the Credit Agreement bear interest at
Wachovia's base rate or at the financial institution's LIBOR rate for periods of
30, 60, 90 or 180 days plus a 2% credit margin. The interest rate charged at
December 31, 2002 and 2001 was 3.80% and 3.59%, respectively. In addition, the
Credit Agreement requires PXRE and certain subsidiaries, where applicable, to
maintain certain financial ratios including minimum fixed charge coverage,
maximum consolidated debt to total capitalization, minimum statutory capital and
surplus, and minimum risk based capital ratios. Commitments under this Credit
Agreement terminate on or before March 31, 2004 and are subject to reductions of
$20 million on March 31, 2003 and $10 million on March 31, 2004. At December 31,
2002 and 2001, $30 million and $55 million were outstanding under this Credit
Agreement.
F-16
During 2002 the Credit Agreement was amended in April and September to
obtain a consent to the issuance of the Preferred Share Investment, to rectify
the late submission of projections to Wachovia, and consent to the holding of an
investment. See Note 6 regarding the Preferred Share Investment and the
amendments to the Credit Agreement.
PXRE Delaware entered into a cash flow hedge interest rate swap
agreement with Wachovia that has the intended effect of converting the $30
million borrowings by PXRE Delaware to a fixed rate borrowing at an annual rate
of 7.34%. The fair value of the loan and the interest rate swap agreement at
December 31, 2002 and 2001 was approximately $31.6 million and $53.7 million,
respectively. At December 31, 2002, the amount of the cash flow hedge, net of
tax, in accumulated other comprehensive income was depreciation of $0.9 million.
Interest paid, including the minority interest in consolidated
subsidiary, was $11.6 million, $13.3 million and $13.7 million for 2002, 2001
and 2000, respectively.
5. Income Taxes
PXRE is incorporated under the laws of Bermuda and, under current
Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or
capital gains. PXRE has received an undertaking from the Supervisor of Insurance
in Bermuda pursuant to the provisions of the Exempted Undertakings Tax
Protection Act, 1966, which exempts PXRE, from any Bermuda taxes computed on
profits, income or any capital asset, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, at least until the year 2016.
PXRE does not consider itself to be engaged in a trade or business in
the United States and accordingly does not expect to be subject to direct United
States income taxation.
The United States subsidiaries of PXRE file a consolidated U.S. Federal
income tax return.
Pre-tax income (loss) from operations before cumulative effect of
accounting change for the years ended December 31, under the following
jurisdictions was as follows:
($000's) 2002 2001 2000
-------- -------- ---------
U.S. $ 50,619 $(14,351) $(27,713)
Bermuda 31,553 (5,005) 4,730
Barbados 202 (3,634) 176
-------- -------- ---------
Total $ 82,374 $(22,990) $(22,807)
======== ======== =========
F-17
The components of the provision (benefit) for income taxes for the
years ended December 31, 2002, 2001 and 2000 are as follows:
($000's) 2002 2001 2000
---------- --------- ---------
Current
U.S. $ (867) $ 44 $ (3,891)
Foreign 389 1,103 137
---------- --------- ---------
Subtotal (478) 1,147 (3,754)
Deferred U.S. 18,307 (5,851) (8,253)
---------- --------- ---------
Income tax provision (benefit)
before change in accounting 17,829 (4,704) (12,007)
Income tax provision from change in
accounting -- 172 --
---------- --------- ---------
Income tax provision (benefit) $ 17,829 $ (4,532) $(12,007)
---------- --------- ---------
Income taxes paid (received), net $ (7,584) $ 3,103 $ 637
========== ========= =========
In March 2002, Congress passed the Job Creation and Worker Assistance
Act of 2002 (H.R. 3090) which affords greater opportunity to use net operating
losses. The legislation allowed an extension of the carryback period (pursuant
to Section 172) from two to five years. PXRE availed itself of this legislation
by electing to carryback its 2001 tax loss for 5 years. This enabled PXRE to
recoup $10.7 million of taxes paid in the prior year on 1996 taxable income. The
remaining losses were utilized in 2002.
F-18
The significant components of the net deferred income tax asset
(liability) are as follows:
($000's) 2002 2001
-------- --------
Deferred income tax asset:
Discounted reserves and unearned premiums $ 12,062 $ 7,297
Deferred compensation and benefits 2,071 2,488
Cash flow hedge 631 389
Allowance for doubtful accounts 525 385
Excess tax over book basis in invested assets -- 869
NOL carryforwards -- 16,701
Other, net 350 243
-------- --------
Total deferred income tax asset $ 15,639 $ 28,372
-------- --------
Deferred income tax liability:
Deferred acquisition costs (7,633) (1,966)
Investments and unrealized foreign exchange (3,450) (557)
Excess book over tax basis in limited partnerships (1,571) (1,068)
Retroactive reinsurance contracts (1,327) (2,202)
Market discount (1,305) (1,369)
Other, net (633) (172)
-------- --------
Total deferred income tax liability (15,919) (7,334)
-------- --------
Net deferred income tax (liability) asset $ (280) $ 21,038
======== ========
Income tax (payable) recoverable consists of the following:
($000's) 2002 2001
-------- --------
Current tax (liability) asset $ (2,206) $ 4,080
Deferred tax (liability) asset (280) 21,038
-------- --------
Net income tax (liability) asset $ (2,486) $ 25,118
======== ========
The provision (benefit) for income taxes differs from the amount of
income tax determined by applying the applicable U.S. statutory Federal income
tax rate of 35% to pretax income from operations as a result of the following
differences.
($000's) 2002 2001 2000
-------- -------- --------
Statutory U.S. rate $ 28,831 $ (8,047) $ (7,982)
Tax exempt interest (619) (781) (1,316)
Foreign tax credit recoverable -- (339) (670)
Bermuda (income) loss (11,044) 1,752 (1,655)
Foreign income - Barbados (71) 1,272 (62)
Barbados tax 389 1,103 137
Other, net 343 508 (459)
-------- -------- --------
Total provision (benefit) $ 17,829 $ (4,532) $(12,007)
======== ======== ========
F-19
6. Stockholders' Equity and Dividend Restrictions
Stockholders' Equity
On August 9, 1999 PXRE's Board of Directors unanimously approved a
resolution to increase the number of authorized shares from 12,000 to 60,000,000
consisting of 50,000,000 common shares and 10,000,000 preferred shares. In
addition, PXRE's Board of Directors authorized an increase in par value of its
common shares from $0.01 per share to $1.00 per share.
Absent a specific waiver by PXRE's Board of Directors, the Company's
Bye-Laws restrict the ownership and voting rights of any shareholder who
directly or indirectly would own more than 9.9% of the outstanding common shares
of the Company. The restriction requires the prompt disposition of any shares
held in violation of the provision and limits the voting power of a shareholder
with more than 9.9% of the outstanding shares to the voting power of a
shareholder with 9.9% or less of the outstanding common shares.
On April 4, 2002, the Company raised $150 million of additional capital
through the issuance of 15,000 Convertible Voting Preferred Shares (the
"Preferred Share Investment"). Proceeds, net of offering expenses of $9.1
million, amounted to $140.9 million. The Preferred Share Investment occurred
pursuant to a Share Purchase Agreement, dated as of December 10, 2001, between
the Company and Capital Z Financial Services Fund II, L.P., Capital Z Financial
Services Private Fund II, L.P., Reservoir Capital Master Fund, L.P., Reservoir
Capital Partners, L.P. and Richard E. Rainwater. The capital infusion from the
Preferred Share Investment is enabling PXRE to increase underwriting capacity
and therefore maximize participation in the hardening reinsurance market
following the September 11, 2001 terrorist attacks. On February 12, 2002, the
stockholders approved the sale and issuance of three series of convertible
preferred shares pursuant to the Share Purchase Agreement, including 7,500
Series A Convertible Preferred Shares, 5,000 Series B Convertible Preferred
Shares, and 2,500 Series C Convertible Preferred Shares. These shares accrue
cumulative dividends per share at the rate per annum of 8% of the sum of the
stated value of each share plus any accrued and unpaid dividend thereon, payable
on a quarterly basis. The stockholders also voted to approve the division of 20
million of PXRE's 50 million authorized common shares into three new classes of
convertible common shares including 10 million Class A Convertible Voting Common
Shares ("Class A Common Shares"), 6,666.667 Class B Convertible Voting Common
Shares ("Class B Common Shares"), and 3,333.333 Class C Convertible Voting
Common Shares ("Class C Common Shares"). Preferred shares are convertible into
convertible common shares at the option of the holder at any time equal to the
original purchase cost plus accrued but unpaid dividends at a conversion price
equal to $15.69 provided that such conversion price is subject to adjustment if
the Company experiences adverse loss development in excess of a $7 million
after-tax threshold. As of December 31, 2002, the Company has incurred $2.9
million of net adverse development above this $7 million threshold resulting in
an adjusted conversion price of $15.49. Preferred shares mandatorily convert at
the third anniversary of the issuance for two thirds of the shares issued, and
the balance at the sixth anniversary. Preferred shares vote on a fully converted
basis on all matters other than the election of directors.
F-20
The Preferred Share Investment would have triggered an event of default
under the Credit Agreement if the transaction were consummated without the
consent of the Lenders. As a condition to the Lenders' consent to the Preferred
Stock Investment, the Credit Agreement was amended pursuant to the Second
Amendment to the First Amended and Restated Credit Agreement, dated March 12,
2002, between PXRE Delaware and the Lenders. As amended, the outstanding
commitment was reduced by $20 million on March 31, 2002, and by $5 million on
July 1, 2002. The commitment will be reduced by $20 million on March 31, 2003
and by the remaining $10 million on March 31, 2004. In addition, commencing on
June 30, 2003, 50% of Excess Cash Flow (as defined in the Second Amendment)
shall be used to reduce the outstanding commitment. In addition, the variable
interest rate under the Amended Credit Agreement was increased by 100 basis
points.
Dividend Restrictions
Under the terms of the Preferred Stock, the payment of dividends on the
Company's Common Shares is subject to the following limitations: (i) no dividend
may be paid upon the Common Shares if the dividends payable upon the Preferred
Stock are overdue, (ii) the amount of dividends paid with respect to the Common
Shares may not be increased by a cumulative annualized rate of more than 10% at
any time prior to April 4, 2005 (the "Permitted Dividend Amount") without the
consent of the majority of holders of the Preferred Stock; and (iii) at any time
on or after April 4, 2005, no dividend may be paid that would result in payment
of any dividend or other distribution with respect to Common Shares or result in
a redemption, offer to purchase, tender offer or other acquisition of capital
stock of the Company involving consideration having an aggregate fair value in
excess of the greater of the Permitted Tender Offer Amount and the Permitted
Dividend Amount. For this purpose, the term "Permitted Tender Offer Amount"
means an amount equal to 20% of the cumulative amount by which our consolidated
net income in any calendar year commencing with the year ending December 31,
2002 exceeds $50 million minus the sum of all cash and the fair value of all
non-cash consideration paid in respect of redemptions, offers to purchase,
tender offers or other acquisitions of our capital stock on or after December
10, 2001. Under the terms of the Credit Agreement, dividends to PXRE
shareholders in any year are limited as described in Note 4 with respect to the
financial covenants.
The Insurance Department of the State of Connecticut, by which PXRE
Reinsurance is regulated, recognizes as net income and surplus those amounts
determined in conformity with statutory accounting principles ("SAP") prescribed
or permitted by the department, which differ in certain respects from U.S. GAAP.
The amounts of statutory capital and surplus at December 31 and statutory net
income of PXRE Reinsurance for the years then ended, as filed with insurance
regulatory authorities are as follows:
($000's) 2002 2001 2000
--------- -------- ---------
(Unaudited)
PXRE Reinsurance
Statutory capital
and surplus $ 457,217 $ 331,959 $ 348,858
Statutory net
income (loss) $ 39,517 $ (28,171) $ (14,569)
PXRE Reinsurance is subject to state regulatory restrictions, which
limit the maximum amount of annual dividends or other distributions, including
loans or cash advances, available to stockholders without prior approval of the
Insurance Commissioner of the State of Connecticut.
As of December 31, 2002, the maximum amount of dividends and other
distributions, which may be made by PXRE Reinsurance during 2003 without prior
approval, is limited to approximately $45.7 million. Accordingly, the remaining
amount of its capital and surplus is considered restricted.
The payment of dividends by PXRE Bermuda is limited under Bermuda
insurance laws, which require PXRE Bermuda to maintain certain measures of
solvency and liquidity. As of December 31, 2002, the statutory capital and
surplus of PXRE Bermuda was estimated to be $74.5 million and the amount
required to be maintained was estimated to be $12.4 million.
Under Barbados law, PXRE Barbados may only pay a dividend out of the
realized profits of the company. PXRE Barbados may not pay a dividend unless (a)
it is able to pay its liabilities as they become due after payment of the
dividend, and (b) the realizable value of its assets is greater than the
aggregate value of its liabilities, and (c) the stated capital accounts are
maintained in respect of all classes of shares.
F-21
PXRE Reinsurance prepares its statutory financial statements in
conformity with accounting practices prescribed or permitted by the State of
Connecticut. Effective January 1, 2001, the State of Connecticut required that
insurance companies domiciled in the State of Connecticut prepare their
statutory basis financial statements in accordance with the NAIC Accounting
Practices and Procedures Manual - Version effective January 1, 2001 subject to
any deviations prescribed or permitted by the State of Connecticut Insurance
Commissioner. Accounting changes adopted to conform to the provisions of the
NAIC Accounting Practices and Procedures Manual - Version effective January 1,
2001 are reported as changes in accounting principles. The cumulative effect of
changes in accounting principles is reported as an adjustment to unassigned
funds (surplus) in the period of the change in accounting principle. The
cumulative effect, which decreased the surplus by $2.5 million, is the
difference between the amount of capital and surplus at the beginning of the
year and the amount of capital and surplus that would have been reported at that
date if the new accounting principles had been applied retroactively for all
prior periods.
7. Earnings Per Share
A reconciliation of income (loss) before cumulative effect of change in
accounting to earnings, and shares, which affect basic and diluted earnings per
share, is as follows:
($000's) 2002 2001 2000
-------- -------- --------
Income (loss) available to common stockholders:
Income (loss) before cumulative effect of
accounting change $ 64,545 $(18,286) $(10,800)
Cumulative effect of accounting change, net of tax -- 319 --
-------- -------- --------
Net income (loss) before preferred stock dividends $ 64,545 $(17,967) $(10,800)
======== ======== ========
Preferred stock dividends 9,077 -- --
-------- -------- --------
Net income (loss) available to common stockholders $ 55,468 $(17,967) $(10,800)
======== ======== ========
Weighted average shares of common stock outstanding:
Weighted average common shares outstanding (basic) 11,802 11,578 11,394
Equivalent shares of stock options 308 133 77
Equivalent shares of restricted stock 143 341 263
Equivalent shares of preferred stock 7,409 -- --
-------- -------- --------
Weighted average common equivalent shares (diluted) 19,662 12,052 11,734
======== ======== ========
Weighted average common equivalent shares when
antidilutive -- 11,578 11,394
======== ======== ========
Per share amounts:
Basic
Income (loss) before cumulative effect of accounting
change and preferred stock dividends $ 5.47 $ (1.58) $ (0.95)
Net income (loss) available to common stockholders $ 4.70 $ (1.55) $ (0.95)
Diluted
Income (loss) before cumulative effect of accounting change $ 3.28 $ (1.58) $ (0.95)
Net income (loss) $ 3.28 $ (1.55) $ (0.95)
F-22
8. Employee Benefits
Benefit Plans
PXRE adopted a non-contributory defined benefit pension plan covering
all U.S. employees with one year or more of service and who had attained age 21.
Benefits are generally based on years of service and compensation. PXRE funds
the plan in amounts not less than the minimum statutory funding requirement nor
more than the maximum amount that can be deducted for U.S. income tax purposes.
PXRE also sponsors a supplemental executive retirement plan. This plan
is non-qualified and provides certain key employees with benefits in excess of
normal pension benefits.
The components of net pension expense for the company-sponsored plans
for the years ended December 31, are as follows:
($000's) 2002 2001 2000
------- ------- -------
Components of net periodic cost:
Service cost $ 984 $ 1,040 $ 681
Interest cost 648 640 468
Expected return on assets (197) (152) (79)
Amortization of prior service costs 212 212 212
Recognized net actuarial costs -- 77 30
------- ------- -------
Net periodic benefit costs $ 1,647 $ 1,817 $ 1,312
======= ======= =======
F-23
The following table sets forth the funded status of the plans and
amounts recognized in the Consolidated Balance Sheets:
($000's) 2002 2001
-------- --------
Reconciliation of benefit obligation
Benefit obligation January 1 $(10,610) $ (7,688)
Service cost (984) (1,040)
Interest cost (648) (640)
Amendments (80) --
Actuarial gain (loss) 1,302 (1,242)
-------- --------
Benefit obligation December 31 $(11,020) $(10,610)
======== ========
Reconciliation of plan assets
Fair value of plan assets as of January 1 $ 2,217 $ 1,562
Return on plan assets 6 (131)
Employer contributions 2,517 787
-------- --------
Fair value of plan assets December 31 $ 4,740 $ 2,218
======== ========
Reconciliation of funded status
Funded status $ (6,280) $ (8,392)
Unrecognized prior service cost 1,691 1,813
Unrecognized net loss 957 2,079
-------- --------
Accrued cost $ (3,632) $ (4,500)
======== ========
Weighted average assumptions as of December 31:
Discount rate 6.75% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 5.00% 5.00%
Employee Stock Purchase Plan
PXRE maintains an Employee Stock Purchase Plan under which it has
reserved 140,423 common shares for issuance to PXRE personnel. The price per
share is the lesser of 85% of the fair market value at either the date granted
or the date exercised.
9. Stock Options and Restricted Stock
Under the Restated Employee Annual Incentive Bonus Plan, incentive
compensation to employees is based in part on return on equity compared to a
target return on equity and in part at the discretion of the Restated Bonus Plan
Committee. The maximum compensation paid in any year occurs at a 15.5% return on
equity. Amounts incurred above a 15.5% return on equity up to a maximum award at
a 20% return on equity represent contingent incentive compensation, which will
be awarded in whole or part in a future year if return on equity is below a 13%
return on equity. At December 31, 2002, the amount of the contingent liability
was $1.2 million, and will accrue interest at a rate equal to prime plus 2%.
F-24
The Officer Incentive Plan provides for the grant of incentive stock
options, non-qualified stock options and awards of shares subject to certain
restrictions. Options granted under the plan have a term of 10 years and
generally become exercisable in four equal annual installments commencing one
year from the date of grant. The exercise price for the incentive share options
must be equal to or exceed the fair market value of the common shares on the
date the option is granted. The exercise price for the non-qualified options may
not be less than the fair market value of the common stock on the date of grant.
At December 31, 2002 and 2001, options for 754,155 and 414,478 shares
respectively, were exercisable under this plan.
In 2002, 2001 and 2000, $6.3 million, $2.0 million and $3.8 million,
respectively was incurred under these plans, including bonuses granted to
certain levels of employees paid in restricted shares, which vest in 36 months
or pro rata over 48 months.
Information regarding the option plans described above is as follows:
Number of Range - Option Price per
Shares Share
-------------- ------------------------
Outstanding at December 31, 1999 452,474 $8.75 - $32.94
Options granted 900,450 $12.50
Options exercised (37,057) $8.75
Options cancelled (65,643) $12.50 - $32.94
---------
Outstanding at December 31, 2000 1,250,224
Options granted 907,400 $15.95 - $19.80
Options exercised (72,658) $10.88 - $12.50
Options cancelled (442,357) $12.50 - $32.94
---------
Outstanding at December 31, 2001 1,642,609
Options granted 538,238 $17.45 - $24.17
Options exercised (126,214) $10.88 - $19.80
Options cancelled (73,934) $12.50 - $32.94
---------
Outstanding at December 31, 2002 1,980,699
=========
PXRE has adopted a non-employee Director Stock Option Plan, which
provides for an annual grant of 5,000 options and 1,000 restricted shares per
director from 2000 to 2005 inclusive as amended. Options granted under the plan
have a term of 10 years from the date of grant and are vested and exercisable in
three equal annual installments commencing one year from the date of grant. The
exercise price of the options is the fair market value on the date of grant. As
of December 31, 2002, options for 250,000 shares were authorized and 134,400
were exercisable, at exercise prices between $14.79 and $31.11.
PXRE allows its directors to elect to convert their Board of Directors
retainer fee to options under the Directors Equity and Deferred Compensation
Plan. At December 31, 2002, options for 250,000 shares were authorized and
ten-year options for 126,103 shares were outstanding at prices ranging from
$12.81 to $33.46 which are 100% vested and immediately exercisable.
As of December 31, 2002 total authorized common shares reserved for
grants of employee and director stock options and restricted stock under the
above plans are 3,971,225 shares. Total shares of 1,014,658 relate to stock
options which are vested and exercisable at December 31, 2002, at exercise
prices between $12.50 and $33.46. All options become exercisable upon a change
of control of PXRE as defined by the plans.
F-25
As permitted by SFAS No. 123, PXRE has elected to continue to account
for its stock option plans under the accounting rules prescribed by APB 25,
under which no compensation costs are recognized as an expense. Had compensation
costs for the stock options been determined using the fair value method of
accounting as recommended by SFAS No. 123, net income (loss) and earnings per
share for 2002, 2001 and 2000 would have been reduced to the following pro-forma
amounts:
($000's, except per share data) 2002 2001 2000
-------- --------- ---------
Net income (loss)
As reported $ 64,545 $ (17,967) $(10,800)
Pro forma $ 61,065 $ (20,126) $(12,139)
Basic income (loss) per share
As reported $ 4.70 $ (1.55) $ (0.95)
Pro forma $ 4.41 $ (1.74) $ (1.07)
Diluted income (loss) per share
As reported $ 3.28 $ (1.55) $ (0.95)
Pro forma $ 3.11 $ (1.74) $ (1.07)
The fair value of each option granted in 2002, 2001 and 2000 was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
2002 2001 2000
------- ------- -------
Risk-free rate 4.18% 5.41% 5.23%
Dividend yield 0.98% 1.36% 1.42%
Volatility factor 40.55% 37.18% 30.65%
Weighted average expected life 5 5 5
A summary of the status of the employee and director stock option plans
at December 31, 2002 and 2001 and changes during the years then ended is
presented below:
2002 2001
------------------------------ ------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------- -------------- ---------- ---------------
Options outstanding at beginning of year 1,935,620 $18.06 1,485,416 $17.27
Options granted 614,841 18.64 965,219 17.77
Options exercised (140,725) 12.67 (72,658) 11.91
Options cancelled (89,934) 19.40 (442,357) 15.71
--------- ---------
Options outstanding at end of year 2,319,802 18.49 1,935,620 18.06
--------- ---------
Options exercisable at end of year 1,014,658 20.48 646,701 22.37
--------- ---------
Weighted average fair value per share of
options granted 9.69 8.98
F-26
Options outstanding at December 31, 2002 included:
Number Number
Outstanding at Weighted Weighted Exercisable at Weighted
Range of December 31, Average Average December 31, Average
Exercise Prices 2002 Remaining Life Exercise Price 2002 Exercise Price
- --------------------- --------------- -------------- --------------- ------------------ ----------------
$12.50 to $19.88 1,791,715 8.33 $16.22 584,309 $15.72
$20.23 to $33.46 528,087 4.66 $26.18 430,349 $26.94
---------- ----------
2,319,802 1,014,658
========== ==========
PXRE also has adopted a non-employee Director Deferred Stock Plan
granting 2,000 shares to each non-employee Board member at the time specified in
the plan. At December 31, 2002, the 16,000 shares granted to eligible
non-employee Board members will be issued to Board members at or after their
termination, depending on whether such director elected to defer receipt of such
shares following termination.
10. Segment Information
PXRE operates in four reportable property and casualty segments -
catastrophe and risk excess, finite business, other lines and exited lines -
based on PXRE's approach to managing the business. Commencing with the 2002
underwriting renewal season, PXRE returned its focus to its core catastrophe and
risk excess and finite businesses. Businesses that were not renewed in 2002 are
reported as exited lines. PXRE's segments for 2000 and 2001 were reclassified to
be comparable to the 2002 segments used for PXRE's method of managing the
business. In addition, we operate in two geographic segments - North American
representing North American based risks written by North American based clients
and International (principally the United Kingdom, Continental Europe, Latin
America, the Caribbean, Australia and Asia) representing all other premiums
written. There are no significant differences among the accounting policies of
the segments as compared to PXRE's consolidated financial statements.
PXRE does not maintain separate balance sheet data for each of its
operating segments nor does it allocate net investment income, net realized
investment gains, operating expenses, and financing costs to these segments.
Accordingly, PXRE does not review and evaluate the financial results of its
operating segments based upon balance sheet data and these other income
statement items.
F-27
Net Premiums Written
Year Ended December 31,
---------------------------------------------------------------------------
2002 2001 2000
------------------------ -------------------- ------------------------
($000's, except percentages) Amount Percent Amount Percent Amount Percent
------------ -------- ----------- --------- ----------- ---------
Catastrophe and Risk Excess
North American $ 51,608 $ 27,981 $ 16,532
International 153,038 90,714 68,754
Excess of Loss Cessions (28,652) (60,485) (15,489)
----------- ----------- -----------
175,994 60% 58,210 38% 69,797 40%
----------- ----------- -----------
Finite Business
North American 102,754 33,651 20,245
International - - -
----------- ----------- -----------
102,754 35 33,651 22 20,245 12
----------- ----------- -----------
Other Lines
North American 7,822 4,086 2,720
International 83 404 1,855
----------- ----------- -----------
7,905 3 4,490 3 4,575 3
----------- ----------- -----------
Exited Lines
North American 8,550 33,679 29,898
International (720) 24,448 48,186
----------- ----------- -----------
7,830 2 58,127 37 78,084 45
----------- ---- ----------- ---- ----------- ----
Total $ 294,483 100% $ 154,478 100% $ 172,701 100%
=========== ==== =========== ==== =========== ====
F-28
Net Premiums Earned
Year Ended December 31,
---------------------------------------------------------------------------
2002 2001 2000
------------------------ -------------------- ------------------------
($000's, except percentages) Amount Percent Amount Percent Amount Percent
------------ -------- ----------- --------- ----------- ---------
Catastrophe and Risk Excess
North American $ 50,436 $ 26,916 $ 16,727
International 148,650 92,407 68,038
Excess of Loss Cessions (23,052) (58,839) (19,115)
----------- ----------- -----------
176,034 65% 60,484 37% 65,650 41%
Finite Business
North American 57,107 32,365 17,791
International - - -
----------- ----------- -----------
57,107 21 32,365 20 17,791 11
----------- ----------- -----------
Other Lines
North American 8,002 3,434 1,498
International 143 479 2,009
----------- ----------- -----------
8,145 3 3,913 3 3,507 2
----------- ----------- -----------
Exited Lines
North American 18,895 33,109 23,332
International 9,179 32,254 49,926
----------- ----------- -----------
28,074 11 65,363 40 73,258 46
----------- ---- ----------- ---- ----------- ----
Total $ 269,360 100% $ 162,125 100% $ 160,206 100%
=========== ==== =========== ==== =========== ====
F-29
Underwriting Income (Loss)
Year Ended December 31,
---------------------------------------------------------------------------
2002 2001 2000
------------------------ -------------------- ------------------------
($000's, except percentages) Amount Percent Amount Percent Amount Percent
------------ -------- ----------- --------- ----------- ---------
Catastrophe and Risk Excess
North American $ 43,591 $ (31,740) $ 10,888
International 80,874 (17,639) (1,075)
Excess of Loss Cessions (16,383) 38,117 (11,265)
----------- ----------- -----------
108,082 117% (11,262) 77% (1,452) 19%
----------- ----------- -----------
Finite Business
North American 2,544 2,944 1,661
International - - -
----------- ----------- -----------
2,544 3 2,944 (20) 1,661 (22)
----------- ----------- -----------
Other Lines
North American 4,378 (385) (543)
International (58) (934) (39)
----------- ----------- -----------
4,320 4 (1,319) 9 (582) 8
----------- ----------- -----------
Exited Lines
North American (20,234) 2,023 (446)
International (2,075) (6,996) (6,610)
(22,309) (24) (4,973) 34 (7,056) 95
----------- --- ----------- ---- ----------- ----
Total $ 92,637 100% $ (14,610) 100% $ (7,429) 100%
=========== ==== =========== ==== =========== ----
Included in the finite segment, was net premiums written of $83.8
million and underwriting profit of $3.0 million in 2002, assumed pursuant to
various finite reinsurance contracts with one insurance company, Tower Insurance
Company of New York.
The following table reconciles the underwriting income (loss) for the
operating segments to income before tax as reported in the Consolidated
Statements of Income and Comprehensive Income:
($000's) 2002 2001 2000
-------- -------- --------
Net underwriting income (loss) $ 92,637 $(14,610) $ (7,429)
Net investment income 24,893 30,036 30,037
Net realized investment gains 8,981 4,023 3,191
Interest expense (2,939) (4,424) (4,778)
Minority interest in consolidated subsidiary (8,646) (8,877) (8,875)
Other operating expenses (32,454) (29,606) (35,407)
Unrealized foreign exchange on losses incurred (7) 981 (1,196)
Other (loss) income (91) (513) 1,650
-------- -------- --------
Income (loss) before income taxes and
cumulative effect of accounting change $ 82,374 $(22,990) $(22,807)
======== ======== ========
F-30
11. Quarterly Consolidated Results of Operations (Unaudited)
The following are unaudited quarterly results of operations on a
consolidated basis for the years ended December 31, 2002 and 2001. Quarterly
results necessarily rely heavily on estimates. This and certain other factors,
such as catastrophic losses, call for caution in drawing specific conclusions
from quarterly results. Due to changes in the number of average shares
outstanding, quarterly earnings per share may not add to the total for the year.
Three Months Ended
--------------------------------------------------
($000's, except per share data) March 31 June 30 September 30 December 31
-------- -------- -------- --------
2002
Net premiums written $103,661 $ 20,723 $ 66,809 $103,290
-------- -------- -------- --------
Revenues:
Net premiums earned $ 59,156 $ 45,763 $ 75,741 $ 88,700
Net investment income 4,087 8,445 5,011 7,350
Net realized investment gains 489 514 4,782 3,196
Management fees 1,253 586 928 665
-------- -------- -------- --------
Total revenues 64,985 55,308 86,462 99,911
-------- -------- -------- --------
Losses and expenses:
Losses and loss expenses
incurred 17,223 18,863 48,264 42,512
Commissions and brokerage 12,443 5,276 13,489 22,183
Other operating expenses 8,870 6,223 6,696 10,664
Interest expense 745 754 698 742
Minority interest in
consolidated subsidiary 2,224 2,199 2,127 2,095
-------- -------- -------- --------
Total losses and expenses 41,505 33,315 71,274 78,196
-------- -------- -------- --------
Income before income taxes 23,480 21,993 15,188 21,715
Income tax provision 5,247 2,949 4,179 5,454
-------- -------- -------- --------
Net income before preferred stock
dividend $ 18,233 $ 19,044 $ 11,009 $ 16,261
======== ======== ======== ========
Preferred stock dividend -- 2,900 3,058 3,119
-------- -------- -------- --------
Net income available to common
stockholders $ 18,233 $ 16,144 $ 7,951 $ 13,142
======== ======== ======== ========
Basic earnings per common share:
Net income available to
common stockholders $ 1.56 $ 1.37 $ 0.67 $ 1.11
======== ======== ======== ========
Average shares outstanding 11,710 11,768 11,817 11,863
======== ======== ======== ========
Diluted earnings per common
share:
Net income $ 1.51 $ 0.88 $ 0.50 $ 0.73
======== ======== ======== ========
Average shares outstanding 12,037 21,655 22,137 22,420
======== ======== ======== ========
Dividends paid per common share $ 0.06 $ 0.06 $ 0.06 $ 0.06
F-31
Three Months Ended
---------------------------------------------------
($000's, except per share data) March 31 June 30 September 30 December 31
-------- -------- -------- --------
2001
Net premiums written $ 56,172 $ 36,971 $ 19,076 $ 42,259
======== ======== ======== ========
Revenues:
Net premiums earned $ 47,940 $ 43,326 $ 17,543 $ 53,316
Net investment income 9,883 8,238 5,767 6,148
Net realized investment gains
(losses) 386 429 3,426 (217)
Management fees 1,961 772 2,335 717
-------- -------- -------- --------
Total revenues 60,170 52,765 29,071 59,964
-------- -------- -------- --------
Losses and expenses:
Losses and loss expenses
incurred 29,433 28,207 64,134 29,929
Commissions and brokerage 13,468 9,562 (3,958) 11,278
Other operating expenses 8,888 7,496 7,005 6,217
Interest expense 1,972 767 855 830
Minority interest in
consolidated subsidiary 2,219 2,219 2,219 2,220
-------- -------- -------- --------
Total losses and expenses 55,980 48,251 70,255 50,474
-------- -------- -------- --------
Income (loss) before income taxes
and cumulative effect of 4,190 4,514 (41,184) 9,490
accounting change
Income tax provision (benefit) 694 792 (7,338) 1,148
-------- -------- -------- --------
Income (loss) before cumulative
effect of accounting change 3,496 3,722 (33,846) 8,342
Cumulative effect of accounting
change, net of $172 tax benefit 319 -- -- --
-------- -------- -------- --------
Net income (loss) $ 3,815 $ 3,722 $(33,846) $ 8,342
======== ======== ======== ========
Basic earnings (loss) per common
share:
Net income (loss) $ 0.33 $ 0.32 $ (2.94) $ 0.72
======== ======== ======== ========
Average shares outstanding 11,482 11,470 11,501 11,632
======== ======== ======== ========
Diluted earnings (loss) per
common share:
Net income (loss) $ 0.32 $ 0.31 $ (2.94) $ 0.70
======== ======== ======== ========
Average shares outstanding 11,890 11,878 11,501 11,962
======== ======== ======== ========
Dividends paid per common share $ 0.06 $ 0.06 $ 0.06 $ 0.06
F-32
12. Commitments and Contingencies
In May 1999, PXRE Delaware entered into weather option agreements with
two counterparties. In April 2000, these counterparties submitted invoices to
PXRE Delaware in the aggregate sum of $8.3 million seeking payment under the
weather option agreements, which invoices have been paid. PXRE Delaware insured
its obligations under these weather option agreements through two Commercial
Inland Marine Weather Insurance Policies issued by Terra Nova Insurance Company
Limited ("Terra Nova"). PXRE Delaware submitted claims under these policies to
Terra Nova in April 2000. Terra Nova has denied coverage, contending that its
Managing General Agent had no authority to issue these policies.
PXRE Delaware disagreed with Terra Nova's denial and filed suit against
Terra Nova in the United States District Court for the District of New Jersey.
On June 10, 2002, PXRE Delaware was awarded a verdict of $8.3 million plus
accumulated interest of $1.5 million by a jury at the conclusion of the trial of
this dispute. The aggregate sum of $9.8 million is included in Other Assets.
Terra Nova has appealed this verdict to the United States Court of Appeals for
the Third Circuit, but management has concluded that the sum of $9.8 million is
realizable and that no valuation allowance is necessary.
In June 2001, the Company entered into a joint venture agreement to
form a Bermuda corporation, Barr's Bay Properties Limited, which will construct
an office building in Hamilton, Bermuda, in which the Company will have the
option to lease office space for three consecutive five-year terms. The Company
owns 40% of the outstanding shares of the joint venture. Under the joint venture
agreement, the Company agreed to lend up to $7 million to finance the
construction of the office space, secured by a first mortgage on the property.
F-33
PARENT COMPANY INFORMATION Schedule II
PXRE Group Ltd.'s summarized financial information
(parent company only) is as follows:
December 31, December 31,
($000's) 2002 2001
----------- ------------
BALANCE SHEET
- -------------
Assets:
Cash $ 340 $ 316
Short-term investments 3,273 --
Fixed maturities 460 480
Receivable from subsidiaries 3,040 --
Note receivable from subsidiary 94,756 96,352
Equity in subsidiaries 351,992 141,318
Other assets 779 2,563
-------- --------
Total assets $454,640 $241,029
======== ========
Liabilities:
Liabilities to subsidiary $ -- $ 592
Other liabilities 1,176 657
-------- --------
Total liabilities $ 1,176 $ 1,249
-------- --------
Stockholders' equity 453,464 239,780
-------- --------
Total liabilities and stockholders' equity $454,640 $241,029
======== ========
Years Ended December 31,
-----------------------------------------
($000's) 2002 2001 2000
--------- --------- ---------
INCOME STATEMENT
- ----------------
Investment income $ 6,614 $ 3,861 $ 8
Management fees 94 144 169
Other operating expenses (4,201) (2,482) (1,892)
--------- --------- ---------
Income (loss) before equity in earnings of
subsidiary 2,507 1,523 (1,715)
Equity in earnings of subsidiary 62,039 (19,490) (9,085)
--------- --------- ---------
Net income (loss) $ 64,546 $ (17,967) $ (10,800)
========= ========= =========
CASH FLOW STATEMENT
- -------------------
Cash flow from operating activities:
Net income (loss) $ 64,546 $ (17,967) $ (10,800)
Adjustments to reconcile net income (loss)
to cash (used) provided by operating
activities:
Equity in earnings of subsidiaries (62,039) 19,490 9,085
Cash dividends from subsidiaries -- 12,568 2,013
Contribution of capital to subsidiaries (140,000) (14,809) --
Loan from subsidiary -- (1,000) --
Notes to subsidiaries 1,596 3,648 --
Inter-company accounts (3,631) 1,243 415
Other 3,216 (1,062) 3,005
--------- --------- ---------
Net cash (used) provided by operating activities (136,312) 2,111 3,718
--------- --------- ---------
Cash flow from investing activities:
Net change in short-term investments (3,273) -- --
Cost of fixed maturities acquired -- (515) --
--------- --------- ---------
Net cash used by investing activities (3,273) (515) --
--------- --------- ---------
Cash flow from financing activities:
Proceeds from issuance of common stock $ 2,129 $ 1,104 $ 687
Proceeds from issuance of preferred stock 140,888 -- --
Cash dividends to common stockholders (2,879) (2,862) (2,831)
Cost of stock repurchased (529) (1,172) (316)
--------- --------- ---------
Net cash provided (used) by financing activities 139,609 (2,930) (2,460)
--------- --------- ---------
Net change in cash 24 (1,334) 1,258
Cash, beginning of period 316 1,650 392
--------- --------- ---------
Cash, end of period $ 340 $ 316 $ 1,650
========= ========= =========
Supplemental disclosure of cash flow
information:
Non cash activities:
Reduction of investment in subsidiary and
increase in note receivable from subsidiary $ -- $ 100,000 $ --
========= ========= =========
Preferred stock dividend $ 9,077 $ -- $ --
========= ========= =========
F-34
Schedule III
PXRE GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
($000's)
Column A Column B Column C Column D Column E Column F Column G
-------- -------- -------- -------- -------- -------- --------
Future
policy
benefits, Other
losses, policy
Segment- Deferred claims and Assumed claims and
property policy loss unearned benefits Net
and acquisition expenses premiums payable Premium investment
casualty cost (caption (caption (caption revenue income
insurance (caption 7) 13-a-1) 13-a-2) 13-a-3) (caption 1) (caption 2)
--------- ----------- ------- ------- ------- ----------- -----------
2002 North American $ 134,440
International 157,972
Corporate Wide (23,052)
-----------------------------------------------------------------------------------------
Total $ 22,721 $ 447,829 $ 63,756 $ - $ 269,360 $ 24,893
2001 North American $ 95,824
International 125,140
Corporate Wide (58,839)
-----------------------------------------------------------------------------------------
Total $ 7,312 $ 453,705 $ 46,335 $ - $ 162,125 $ 30,036
2000 North American $ 59,347
International 119,973
Corporate Wide (19,115)
-----------------------------------------------------------------------------------------
Total $ 9,697 $251,620 $ 49,548 $ - $ 160,205 $ 30,037
($000's)
Column A Column H Column I Column J Column K
-------- -------- -------- -------- --------
Benefits, Amortization
Segment- claims, of
property losses and deferred
and settlement policy Other
casualty expenses acquisition operating Premiums
insurance (caption 4) costs expense written
--------- ----------- ----- ------- -------
2002 North American $ 68,663 $ 36,618 $ 170,736
International 61,094 20,563 152,399
Corporate Wide (2,895) (3,790) (28,652)
--------------------------------------------------------------
Total $ 126,862 $ 53,391 $ 32,454 $ 294,483
2001 North American $ 104,903 $ 19,390 $ 99,397
International 134,539 19,826 115,566
Corporate Wide (87,739) (8,866) (60,485)
--------------------------------------------------------------
Total $ 151,703 $ 30,350 $ 29,606 $ 154,478
2000 North American $ 38,395 $ 9,910 $ 69,395
International 106,610 24,009 118,795
Corporate Wide (7,240) 980 (15,489)
--------------------------------------------------------------
Total $ 137,765 $ 34,899 $ 35,407 $ 172,701
F-35
Schedule V
PXRE GROUP LTD. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
($000's)
Column A Column B Column C Column D Column E
Additions
--------------------------------------------
Balance at (1) (2) Balance at
beginning of Charged to costs Charged to other Deductions end of
Description year and expenses accounts - describe - describe year
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for
doubtful accounts
2002 $ 1,200 $ 400 $ - $ - $ 1,600
2001 $ 700 $ 500 $ - $ - $ 1,200
2000 $ 300 $ 400 $ - $ - $ 700
F-36
Schedule VI
PXRE GROUP LTD. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
($000's)
Column A Column B Column C Column D Column E Column F Column G
-------- -------- -------- -------- -------- -------- --------
Reserves
for
unpaid
Deferred claims Discount,
Affiliation policy and claim if any Assumed Net
with acquisition adjustment deducted in unearned Earned investment
registrant costs expenses Column C premiums premiums Income
---------- ----- -------- -------- -------- -------- ------
2002 Consolidated $ 22,721 $447,829 $ - $63,756 $269,360 $ 24,893
2001 Consolidated 7,312 453,705 (325) 46,335 162,125 30,036
2000 Consolidated 9,697 251,620 (849) 49,548 160,205 30,037
($000's)
Column A Column H Column I Column J Column K
-------- -------- -------- -------- --------
Claims and claim Amortization
adjustment expenses of Paid
incurred related to deferred claims
Affiliation (1) (2) policy and claim
with Current Prior acquisition adjustment Premiums
registrant year years costs expenses written
---------- ---- ----- ----- -------- -------
2002 Consolidated $101,456 $25,406 $53,391 $ 97,251 $ 294,483
2001 Consolidated 133,852 17,851 30,350 99,466 154,478
2000 Consolidated 79,534 58,231 34,899 146,352 172,701
F-37
INDEPENDENT AUDITORS' REPORT
ON THE FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders,
PXRE Group Ltd.
Our audit of the consolidated financial statements referred to in our report
dated February 11, 2003 appearing on page F-1 of PXRE Group Ltd.'s Annual Report
on Form 10-K for the year ended December 31, 2002, also included an audit of the
Financial Statement Schedules listed in Item 15(a)(2) of this Form 10-K. In our
opinion, these Financial Statement Schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
As discussed in Note 1 to the consolidated financial statements, PXRE Group Ltd.
adopted the provisions of FAS 133 "Accounting For Derivative Instruments and
Hedging Activities," during 2001.
KPMG LLP
New York, New York
February 11, 2003
Independent Auditors' Consent
The Board of Directors
PXRE Group Ltd.:
We consent to the incorporation by reference in the registration statement (No.
333-85451) on Form S-4 of PXRE Group Ltd. of our report dated February 11, 2003,
with respect to the consolidated balance sheets of PXRE Group Ltd. as of
December 31, 2002 and 2001, and the related consolidated statements of income
and comprehensive income, stockholders' equity and cash flows, for each of the
years then ended, and all related financial statement schedules, which report
appears in the December 31, 2002, annual report on Form 10-K of PXRE Group Ltd.
As discussed in Note 1 to the consolidated financial statements, PXRE Group Ltd.
adopted the provisions of FAS 133 "Accounting For Derivative Instruments and
Hedging Activities," during 2001.
KPMG LLP
New York, New York
March 21, 2003
F-38
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
PXRE Group Ltd. (Successor Registrant of PXRE Corporation):
Our audit of the consolidated financial statements referred to in our report
dated February 12, 2001, except for Note 10 as to which the date is February
11, 2003, appearing in PXRE Group Ltd.'s (Successor Registrant of PXRE
Corporation) Annual Report on Form 10-K for the year ended December 31, 2002,
also included an audit of the financial statement schedules as of December 31,
2000 and for the year then as listed in Item 15(a)(2) of this Form 10-K. In
our opinion, these financial statement schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers
Hamilton, Bermuda
February 12, 2001, except for Note 10
as to which the date is February 11, 2003
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-4 (No. 333-85451) of PXRE Group Ltd. (Successor Registrant
of PXRE Corporation) of our report dated February 12, 2001, except for Note 10
as to which the date is February 11, 2003, relating to the financial statements
as of December 31, 2000 and for the year then ended, which appears in this Form
10-K. We also consent to the incorporation by reference of our report dated
February 12, 2001, except for Note 10 as to which the date is February 11, 2003,
relating to the financial statement schedules, which appears in this Form 10-K.
PricewaterhouseCoopers
Hamilton, Bermuda
March 19, 2003
F-39