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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to _______________
Commission File Number 1-15259
PXRE GROUP LTD.
(Exact name of registrant as specified in its charter)
Bermuda 98-0214719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Swan Building P.O. Box HM 1282
26 Victoria Street Hamilton HM FX
Hamilton HM 12 Bermuda
Bermuda
(Address, including zip code,
of principal executive offices) (Mailing address)
(441) 296-5858
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of November 12, 2003 12,195,201 common shares, $1.00 par value per
share, of the Registrant were outstanding.
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PXRE GROUP LTD.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002...............................3
Consolidated Statements of Income and Comprehensive Income for the three and nine months ended
September 30, 2003 and 2002.....................................................................4
Consolidated Statements of Shareholders' Equity for the three and nine months ended September
30, 2003 and 2002...............................................................................5
Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2003
and 2002........................................................................................6
Notes to Consolidated Financial Statements...............................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................38
Item 4. Controls and Procedures............................................................................39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................39
Item 2. Changes in Securities and Use of Proceeds..........................................................40
Item 3. Defaults Upon Senior Securities....................................................................41
Item 4. Submission of Matters to a Vote of Security Holders................................................41
Item 5. Other Information..................................................................................41
Item 6. Exhibits and Reports on Form 8-K...................................................................41
2
PXRE Consolidated Balance Sheets
Group Ltd. (Dollars in thousands, except par value per share)
- -------------------------------------------------------------------------------
September 30, December 31,
2003 2002
------------- ------------
(Unaudited)
Assets Investments:
Fixed maturities:
Available-for-sale (amortized cost $581,883 and $465,963, respectively), $ 592,128 $ 478,878
Trading (cost $18,323 and $19,521, respectively) 21,006 21,871
Short-term investments 232,646 133,318
Hedge funds (cost $81,927 and $84,915, respectively) 115,065 113,105
Other invested assets (cost $9,295 and $10,522, respectively) 9,939 11,529
----------- -----------
Total investments 970,784 758,701
Cash 40,515 46,630
Accrued investment income 6,348 5,788
Premiums receivable, net 67,857 77,290
Other receivables 46,121 27,052
Reinsurance recoverable on paid losses 26,717 29,653
Reinsurance recoverable on unpaid losses 146,533 207,444
Ceded unearned premiums 18,848 10,496
Deferred acquisition costs 7,781 22,721
Income tax recoverable 7,676 -
Other assets 48,911 51,367
----------- -----------
Total assets $ 1,388,091 $ 1,237,142
=========== ===========
Liabilities Losses and loss expenses $ 437,310 $ 447,829
Unearned premiums 55,668 63,756
Debt payable - 30,000
Reinsurance balances payable 60,002 81,090
Deposit liabilities 75,817 35,149
Income tax payable - 2,486
Payable for securities purchased 82,940 22
Other liabilities 29,383 29,011
----------- -----------
Total liabilities 741,120 689,343
----------- -----------
Minority interest in consolidated subsidiary:
Company-obligated mandatorily redeemable capital trust
pass-through securities of subsidiary trusts holding solely a
company-guaranteed related subordinated debt 126,839 94,335
----------- -----------
Shareholders' Serial convertible preferred shares, $1.00 par value, $10,000
Equity stated value -- 10 million shares authorized, 0.02 million shares
issued and outstanding 168,814 159,077
Common shares, $1.00 par value -- 50 million shares
authorized, 12.2 million and 12.0 million shares issued
and outstanding, respectively 12,177 12,030
Additional paid-in capital 172,214 168,866
Accumulated other comprehensive income net of deferred income
tax expense of $2,795 and $2,866, respectively 5,826 7,142
Retained earnings 164,939 108,062
Restricted shares at cost (0.3 million and 0.2 million shares, respectively) (3,838) (1,713)
----------- -----------
Total shareholders' equity 520,132 453,464
----------- -----------
Total liabilities and shareholders' equity $ 1,388,091 $ 1,237,142
=========== ===========
The accompanying notes are an integral part of these statements.
3
PXRE Consolidated Statements of Income and Comprehensive Income
Group Ltd. (Dollars in thousands, except per share amounts)
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Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
Revenues Net premiums earned $ 69,082 $ 75,741 $ 237,870 $ 180,661
Net investment income 5,994 5,011 20,026 17,543
Net realized investment gains 502 4,782 611 5,785
Fee income 1,148 928 3,533 2,766
-------- -------- --------- ---------
76,726 86,462 262,040 206,755
-------- -------- --------- ---------
Losses and Losses and loss expenses incurred 35,387 48,264 113,041 84,350
Expenses Commissions and brokerage 3,218 13,489 37,863 31,208
Other operating expenses 10,573 6,696 29,586 21,790
Interest expense - 698 2,504 2,197
Minority interest in consolidated subsidiaries 2,817 2,127 7,350 6,550
-------- -------- --------- ---------
51,995 71,274 190,344 146,095
-------- -------- --------- ---------
Income before income taxes 24,731 15,188 71,696 60,660
Income tax provision 1,007 4,179 2,887 12,375
-------- -------- --------- ---------
Net income before convertible preferred share dividends $ 23,724 $ 11,009 $ 68,809 $ 48,285
-------- -------- --------- ---------
Convertible preferred share dividends 3,310 3,058 9,737 5,958
-------- -------- --------- ---------
Net income available to common shareholders $ 20,414 $ 7,951 $ 59,072 $ 42,327
======== ======== ========= =========
Comprehensive Net income before convertible preferred share dividends $ 23,724 $ 11,009 $ 68,809 $ 48,285
Income, Net Net unrealized (depreciation) appreciation on investments (4,008) 6,262 (2,262) 10,771
of Tax Net unrealized (depreciation) appreciation on cash flow hedge - (346) 946 (284)
-------- -------- --------- ---------
Comprehensive income $ 19,716 $ 16,925 $ 67,493 $ 58,772
======== ======== ========= =========
Per Share Basic:
Net income before convertible preferred share dividends $ 1.99 $ 0.93 $ 5.77 $ 4.10
Convertible preferred share dividends (0.28) (0.26) (0.82) (0.51)
-------- -------- --------- ---------
Net income available to common shareholders $ 1.71 $ 0.67 $ 4.95 $ 3.59
======== ======== ========= =========
Average shares outstanding (000's) 11,925 11,817 11,931 11,778
======== ======== ========= =========
Diluted:
Net income $ 1.01 $ 0.50 $ 2.97 $ 2.59
======== ======== ========= =========
Average shares outstanding (000's) 23,583 22,137 23,201 $ 18,630
======== ======== ========= =========
The accompanying notes are an integral part of these statements.
4
PXRE Consolidated Statements of Shareholders' Equity
Group Ltd. (Dollars in thousands)
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
Convertible Balance at beginning of period $ 165,504 $ 152,900 $ 159,077 $ -
Preferred Shares Issuance of shares, net - - - 150,000
Dividends to convertible preferred shareholders 3,310 3,058 9,737 5,958
--------- --------- --------- ---------
Balance at end of period $ 168,814 $ 155,958 $ 168,814 $ 155,958
========= ========= ========= =========
Common Shares Balance at beginning of period $ 12,169 $ 11,966 $ 12,030 $ 11,873
Issuance of shares, net 8 65 147 158
--------- --------- --------- ---------
Balance at end of period $ 12,177 $ 12,031 $ 12,177 $ 12,031
========= ========= ========= =========
Additional Balance at beginning of period $ 172,096 $ 168,034 $ 168,866 $ 175,405
Paid-in Capital Issuance of shares 118 916 3,259 (6,420)
Other - (18) 89 (53)
--------- --------- --------- ---------
Balance at end of period $ 172,214 $ 168,932 $ 172,214 $ 168,932
========= ========= ========= =========
Accumulated Balance at beginning of period $ 9,834 $ 4,272 $ 7,142 $ (299)
Other Change in unrealized gains (4,008) 6,262 (2,262) 10,771
Comprehensive Change in cash flow hedge - (346) 946 (284)
Income --------- --------- --------- ---------
Balance at end of period $ 5,826 $ 10,188 $ 5,826 $ 10,188
========= ========= ========= =========
Retained Balance at beginning of period $ 145,256 $ 88,414 $ 108,062 $ 55,473
Earnings Net income before convertible preferred share dividends 23,724 11,009 68,809 48,285
Dividends to convertible preferred shareholders (3,310) (3,058) (9,737) (5,958)
Dividends to common shareholders (731) (721) (2,195) (2,156)
--------- --------- --------- ---------
Balance at end of period $ 164,939 $ 95,644 $ 164,939 $ 95,644
========= ========= ========= =========
Restricted Shares Balance at beginning of period $ (4,328) $ (2,644) $ (1,713) $ (2,672)
Issuance of restricted shares 26 (9) (4,582) (1,049)
Amortization of restricted shares 464 401 2,457 1,469
--------- --------- --------- ---------
Balance at end of period $ (3,838) $ (2,252) $ (3,838) $ (2,252)
========= ========= ========= =========
Total Balance at beginning of period $ 500,531 $ 422,942 $ 453,464 $ 239,780
Shareholders' Issuance of convertible preferred shares - - - 150,000
Equity Issuance of shares 126 981 3,406 (6,262)
Restricted shares, net 490 392 (2,125) 420
Unrealized (depreciation) appreciation on investments,
net of deferred income tax (4,008) 6,262 (2,262) 10,771
Unrealized (depreciation) appreciation on cash flow
hedge, net of deferred income tax - (346) 946 (284)
Net income before convertible preferred share dividends 23,724 11,009 68,809 48,285
Dividends to common shareholders (731) (721) (2,195) (2,156)
Other - (18) 89 (53)
--------- --------- --------- ---------
Balance at end of period $ 520,132 $ 440,501 $ 520,132 $ 440,501
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
5
PXRE Consolidated Statements of Cash Flows
Group Ltd. (Dollars in thousands)
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Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
Cash Flow Net income before convertible preferred share dividends $ 23,724 $ 11,009 $ 68,809 $ 48,285
from Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities:
Losses and loss expenses (5,687) 11,729 (10,518) (16,809)
Unearned premiums 960 (8,932) (16,439) 10,498
Deferred acquisition costs 1,646 904 14,940 (5,508)
Receivables (19,197) (7,008) (9,636) (14,096)
Reinsurance balances payable (6,500) 1,835 (21,088) 21,917
Reinsurance recoverable 15,480 16,128 63,847 15,717
Income taxes (259) 3,242 (10,001) 10,930
Equity in earnings of limited partnerships (1,892) (691) (9,741) (6,097)
Trading portfolio purchased - (10,913) (5,688) (30,886)
Trading portfolio disposed - 12,371 8,496 12,371
Deposit liability 6,450 3,196 40,668 19,891
Other (3,059) (6,682) 5,427 (6,738)
-------- -------- -------- --------
Net cash provided by operating activities 11,666 26,188 119,076 59,475
-------- -------- -------- --------
Cash Flow Fixed maturities available for sale purchased (204,877) (104,852) (356,670) (348,500)
from Investing Fixed maturities available for sale disposed or matured 177,479 100,245 239,389 111,958
Activities Payable for securities 45,548 (10,590) 82,919 3,702
Net change in short-term investments (88,880) (17,666) (99,328) 34,716
Hedge funds purchased (5,000) - (12,000) (26,366)
Hedge funds disposed 3,095 3,639 19,936 36,793
Other invested assets purchased (12) (283) (133) (283)
Other invested assets disposed 530 665 1,568 8,380
-------- -------- -------- --------
Net cash used by investing activities (72,117) (28,842) (124,319) (179,600)
-------- -------- -------- --------
Cash Flow Proceeds from issuance of convertible preferred shares - (46) - 140,892
from Financing Proceeds from issuance of common shares 129 880 671 2,073
Activities Proceeds from issuance of minority interest in consolidated
subsidiaries - - 32,500 -
Cash dividends paid to common shareholders (731) (722) (2,195) (2,156)
Repayment of debt - (5,000) (30,000) (25,000)
Repurchase of minority interest in consolidated subsidiary - - - (2,967)
Cost of shares repurchased 24 (31) (1,848) (589)
-------- -------- -------- --------
Net cash (used) provided by financing activities (578) (4,919) (872) 112,253
-------- -------- -------- --------
Net change in cash (61,029) (7,573) (6,115) (7,872)
Cash, beginning of period 101,544 22,589 46,630 22,888
-------- -------- -------- --------
Cash, end of period $ 40,515 $ 15,016 $ 40,515 $ 15,016
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 5,381 $ 4,816 $ 10,175 $ 10,591
Income taxes paid 1,174 666 12,793 3,668
The accompanying notes are an integral part of these statements.
6
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
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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 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"), PXRE
Capital Trust I, PXRE Capital Statutory Trust II, PXRE Capital Trust III and
PXRE Limited. All material inter-company transactions have been eliminated in
preparing these consolidated financial statements.
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.
The interim consolidated financial statements are unaudited; however,
in the opinion of management, such consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods. These interim statements
should be read in conjunction with the 2002 audited consolidated financial
statements and related notes. The preparation of interim consolidated financial
statements relies significantly upon estimates. Use of such estimates, and the
seasonal nature of the reinsurance business, necessitate caution in drawing
specific conclusions from interim results.
Certain reclassifications have been made for 2002 to conform to the
2003 presentation.
Share-Based Compensation
------------------------
At September 30, 2003, PXRE has share option plans, which are accounted
for under the recognition and measurement principles of the Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No share-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 shares 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") Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation to share-based
employee compensation.
7
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
($000's, except per share data) September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income before convertible preferred share dividends:
As reported $ 23,724 $ 11,009 $ 68,809 $ 48,285
Deduct:
Total share-based compensation expense
determined under fair value based method for
all awards, net of related tax effects (406) (489) (2,251) (1,705)
-------- -------- -------- --------
Pro-forma $ 23,318 $ 10,520 $ 66,558 $ 46,580
======== ======== ======== ========
Basic income per share:
As reported $ 1.71 $ 0.67 $ 4.95 $ 3.59
Pro-forma $ 1.68 $ 0.63 $ 4.76 $ 3.45
Diluted income per share:
As reported $ 1.01 $ 0.50 $ 2.97 $ 2.59
Pro-forma $ 0.99 $ 0.48 $ 2.87 $ 2.50
Debt and Equity Classification
------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within the scope of the statement as a liability (or an asset in some
circumstances). PXRE adopted this statement during the quarter ended September
30, 2003, however due to certain parts of this statement being deferred
indefinitely by the FASB, the adoption of this statement did not have any impact
on PXRE's Consolidated Financial Statements, financial position or results of
operations.
Consolidation of Variable Interest Entities
-------------------------------------------
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which requires
consolidation of all "variable interest entities" ("VIE") by the "primary
beneficiary," as these terms are defined in FIN 46, effective immediately for
VIEs created after January 31, 2003. However, on October 9, 2003 the FASB issued
FASB Staff Position FIN 46-6, "Effective Date of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities", which deferred the effective date
until the first interim or annual period ending after December 15, 2003, which
for the Company would be the quarter ended December 31, 2003. The adoption of
this statement is not expected to have any effect on PXRE's financial position
or results of operations.
8
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
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2. Reinsurance
PXRE from time to time purchases catastrophe retrocessional coverage
for its own protection, depending on market conditions. PXRE purchases
reinsurance primarily to reduce its exposure to severe losses related to any one
event or catastrophe. PXRE currently has many reinsurance treaties in place with
several different coverages, territories, limits and retentions that serve to
reduce a large gross loss emanating from any one event. In addition, primarily
related to our exposure assumed on per-risk treaties, we purchase clash
reinsurance protection which allows us to recover losses ceded by more than one
reinsured related to any one particular property. In the event that
retrocessionaires are unable to meet their contractual obligations, PXRE would
remain liable for the underlying covered claims. The effects of such
retrocessional coverage on premiums written and earned are as follows:
Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
-------------------------- (Decrease) -------------------------- (Decrease)
($000's) 2003 2002 % 2003 2002 %
---------- --------- -------- --------- -------- --------
Premiums written
Gross premiums written $ 95,275 $ 120,734 $ 274,123 $ 287,881
Ceded premiums written (25,233) (53,925) (52,692) (96,688)
--------- --------- --------- ---------
Net premiums written $ 70,042 $ 66,809 5 $ 221,431 $ 191,193 16
========= ========= ========= =========
Premiums earned
Gross premiums earned $ 83,053 $ 99,667 $ 282,210 $ 243,367
Ceded premiums earned (13,971) (23,926) (44,340) (62,706)
--------- --------- --------- ---------
Net premiums earned $ 69,082 $ 75,741 (9) $ 237,870 $ 180,661 32
========= ========= ========= =========
3. Earnings Per Share
The table below presents the computation of basic and diluted earnings
per share:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(000's, except per share data) 2003 2002 2003 2002
-------- -------- -------- --------
Net income available to common shareholders:
Income before convertible preferred share dividends $ 23,724 $ 11,009 $ 68,809 $ 48,285
Convertible preferred share dividends (3,310) (3,058) (9,737) (5,958)
-------- -------- -------- --------
Net income available to common shareholders $ 20,414 $ 7,951 $ 59,072 $ 42,327
======== ======== ======== ========
Weighted average common shares outstanding:
Weighted average common share outstanding 11,925 11,817 11,931 11,778
Equivalent shares underlying options 162 337 239 325
Equivalent number of restricted shares 76 141 113 132
Equivalent number of convertible preferred shares 11,420 9,842 10,918 6,395
-------- -------- -------- --------
Weighted average common equivalent shares (diluted) 23,583 22,137 23,201 18,630
======== ======== ======== ========
Per share amounts:
Basic:
Net income before convertible preferred share dividends $ 1.99 $ 0.93 $ 5.77 $ 4.10
Convertible preferred share dividends (0.28) (0.26) (0.82) (0.51)
-------- -------- -------- --------
Net income available to common shareholders $ 1.71 $ 0.67 $ 4.95 $ 3.59
======== ======== ======== ========
Diluted:
Net income $ 1.01 $ 0.50 $ 2.97 $ 2.59
======== ======== ======== ========
9
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
4. Income Taxes
The Company 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. The Company 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 the Company 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.
The Company 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.
5. Shareholders' Equity
On April 4, 2002, the Company issued $150.0 million of additional
capital comprised of 15,000 convertible voting preferred shares in a private
placement not involving a public offering under Section 4(2) of the Securities
Act of 1933, as amended. The convertible preferred share investment occurred
pursuant to a share purchase agreement, dated as of December 10, 2001, between
the Company and certain investors. On February 12, 2002, the shareholders
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. Proceeds before the offering of the convertible
preferred shares, net of offering expenses of $9.1 million, amounted to $140.9
million.
The convertible preferred 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
shareholders 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, 6,666.667
Class B convertible voting common shares, and 3,333.333 Class C convertible
voting common shares. No convertible voting common shares of any class are
currently outstanding.
Convertible preferred shares are convertible into convertible common
shares at the option of the holder at any time at a conversion price equal to
the original conversion price, subject to adjustment if PXRE experiences adverse
development in excess of a $7.0 million after-tax threshold. The number of
convertible common shares issued upon the conversion of each convertible
preferred share would be equal to the sum of the original purchase price
($10,000) of such convertible preferred share plus accrued but unpaid dividends
divided by the adjusted conversion price. Certain adverse development, excluding
that related to most of the adverse development on loss reserves within the
exited lines segment and all of the losses arising from the events of September
11, 2001, is subject to a cap of $12.0 million after-tax. Adverse development on
the reserves excluded is not subject to any cap or limit. As of September 30,
2003, after giving effect to the $12.0 million cap referred to above, PXRE has
incurred $20.1 million of net after-tax adverse development above this $7.0
million threshold, resulting in an adjusted conversion price of $14.34.
Two-thirds of the convertible preferred shares mandatorily convert by April 4,
2005, and the balance by April 4, 2008. Convertible preferred shares vote on a
fully converted basis on all matters brought before the shareholders other than
the election of directors. As of September 30, 2003, 16,881 convertible
preferred shares were issued and outstanding.
10
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
6. Segment Information
PXRE operates in four reportable property and casualty reinsurance
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 property
catastrophe and risk excess business. Businesses that were not renewed in 2002
are reported as exited lines. In addition, PXRE operates 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, unrealized foreign exchange gains or
losses 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.
The following tables summarize the net premiums written and earned by
PXRE's business segments. The amounts shown for the North American and
International geographic segments are presented net of proportional reinsurance
and allocated excess of loss reinsurance cessions, but gross of corporate
catastrophe excess of loss reinsurance cessions, which are separately itemized
where applicable:
11
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
Net Premiums Written
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------- ------------------------------------------------
($000's) 2003 2002 2003 2002
--------------------- ---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- -------
Catastrophe and Risk Excess
North American $ 18,116 $ 17,050 $ 48,762 $ 39,080
International 69,834 51,110 185,799 126,714
Excess of Loss
Cessions (17,443) (18,730) (26,011) (29,634)
---------- ---------- ---------- ----------
70,507 101% 49,430 74% 208,550 94% 136,160 71%
---------- ---------- ---------- ----------
Finite Business
North American (2,091) 12,754 3,315 42,446
International - - - -
---------- ---------- ---------- ----------
(2,091) (3) 12,754 19 3,315 2 42,446 22
---------- ---------- ---------- ----------
Other Lines
North American 2,321 3,214 6,407 6,014
International 36 4 35 45
---------- ---------- ---------- ----------
2,357 3 3,218 5 6,442 3 6,059 3
---------- ---------- ---------- ----------
Exited Lines
North American 68 (224) 973 8,090
International (799) 1,631 2,151 (1,562)
---------- ---------- ---------- ----------
(731) (1) 1,407 2 3,124 1 6,528 4
---------- --- ---------- --- ---------- --- ---------- ---
Total $ 70,042 100% $ 66,809 100% $ 221,431 100% $ 191,193 100%
========== === ========== === ========== === ========== ===
12
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
Net Premiums Earned
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------- ------------------------------------------------
($000's) 2003 2002 2003 2002
--------------------- ---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- -------
Catastrophe and Risk Excess
North American $ 15,037 $ 14,639 $ 46,766 $ 35,951
International 54,322 39,999 161,579 104,896
Excess of Loss
Cessions (7,365) (6,774) (20,010) (17,677)
---------- ---------- ---------- ----------
61,994 90% 47,864 63% 188,335 79% 123,170 68%
---------- ---------- ---------- ----------
Finite Business
North American 5,192 18,024 39,406 26,338
International - - - -
---------- ---------- ---------- ----------
5,192 8 18,024 24 39,406 16 26,338 15
---------- ---------- ---------- ----------
Other Lines
North American 2,372 2,031 6,319 5,756
International 36 4 35 106
---------- ---------- ---------- ----------
2,408 3 2,035 3 6,354 3 5,862 3
---------- ---------- ---------- ----------
Exited Lines
North American 416 5,419 1,947 17,471
International (928) 2,399 1,828 7,820
---------- ---------- ---------- ----------
(512) (1) 7,818 10 3,775 2 25,291 14
---------- --- ---------- --- ---------- --- ---------- ---
Total $ 69,082 100% $ 75,741 100% $ 237,870 100% $ 180,661 100%
========== === ========== === ========== === ========== ===
13
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
The following table summarizes the underwriting income (loss) by
segment. The amounts shown in the North American and International geographic
segments are presented net of proportional reinsurance and allocated excess of
loss reinsurance cessions, but gross of corporate catastrophe excess of loss
reinsurance cessions, which are separately itemized where applicable:
Underwriting Income (Loss)
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------- ------------------------------------------------
($000's) 2003 2002 2003 2002
--------------------- ---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- -------
Catastrophe and Risk Excess
North American $ 13,292 $ 9,810 $ 29,960 $ 31,944
International 37,484 14,790 108,748 56,358
Excess of Loss
Cessions (6,562) (4,652) (22,604) (9,055)
---------- ---------- ---------- ----------
44,214 144% 19,948 139% 116,104 133% 79,247 117%
---------- ---------- ---------- ----------
Finite Business
North American (1,258) 469 (5,987) 2,635
International - - - -
---------- ---------- ---------- ----------
(1,258) (4) 469 3 (5,987) (7) 2,635 4
---------- ---------- ---------- ----------
Other Lines
North American 1,647 70 2,121 2,329
International (34) (123) 95 119
---------- ---------- ---------- ----------
1,613 5 (53) - 2,216 2 2,448 4
---------- ---------- ---------- ----------
Exited Lines
North American (11,257) (5,247) (19,870) (14,043)
International (2,563) (803) (4,994) (2,538)
---------- ---------- ---------- ----------
(13,820) (45) (6,050) (42) (24,864) (28) (16,581) (25)
---------- --- ---------- --- ---------- --- ---------- ---
Total $ 30,749 100% $ 14,314 100% $ 87,469 100% $ 67,749 100%
========== === ========== === ========== === ========== ===
14
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
The following table reconciles the net underwriting income for the
operating segments to income before income taxes as reported in the Consolidated
Statements of Income and Comprehensive Income:
($000's) Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net underwriting income $ 30,749 $ 14,314 $ 87,469 $ 67,749
Net investment income 5,994 5,011 20,026 17,543
Net realized investment gains 502 4,782 611 5,785
Interest expense - (698) (2,504) (2,197)
Minority interest in consolidated subsidiaries (2,817) (2,127) (7,350) (6,550)
Other operating expenses (10,573) (6,696) (29,586) (21,790)
Unrealized foreign exchange gains on
losses incurred 876 616 3,052 194
Other - (14) (22) (74)
-------- -------- -------- --------
Income before income taxes $ 24,731 $ 15,188 $ 71,696 $ 60,660
======== ======== ======== ========
7. Minority Interest in Consolidated Subsidiaries
The minority interest in consolidated subsidiaries comprises Company
obligated mandatorily redeemable capital trust pass-through securities of
subsidiary trusts holding solely a Company-guaranteed related subordinated debt
as follows:
($000's) September 30, December 31,
2003 2002
------------- -------------
$94.8 million 8.85% fixed rate TRUPS(sm) due February 1, 2027 $ 94,339 $ 94,335
$17.5 million 7.35% fixed/floating rate I-PreTS(sm) due May 15, 2033 17,500 -
$15.0 million 9.75% fixed rate InCapS(sm) due May 23, 2033 15,000 -
--------- --------
$ 126,839 $ 94,335
========= ========
The 8.85% fixed rate capital trust pass-through securities pay interest
semi-annually and are redeemable by PXRE from February 1, 2007 at 104.180%
declining to 100.418% at February 1, 2016, and at par thereafter. The 7.35%
fixed/floating rate capital trust pass-through securities initially pay interest
quarterly at a fixed rate of 7.35% for 5 years and then at a floating rate of
LIBOR + 4.1% reset quarterly thereafter, and are redeemable by PXRE at par on or
after May 15, 2008. The 9.75% fixed rate capital trust pass-through securities
pay interest quarterly and are redeemable by PXRE from May 23, 2008 at 104.875%
declining to 100.975% at May 23, 2013, and at par thereafter. PXRE has the
option to defer interest payments on the capital trust pass-through securities
and redeem them earlier than the due dates, subject to limits and penalties as
set out in the relevant indentures.
8. Contingencies
In April 2000, PXRE Reinsurance entered into an aggregate excess of
loss retrocessional reinsurance agreement with a U.S. based cedent. In the
agreement, PXRE Reinsurance reinsured a portfolio of treaties underwritten by a
former business unit of the cedent, which had been divested. Pursuant to this
excess of loss retrocessional agreement, PXRE Reinsurance agreed to indemnify
the cedent for losses in excess of a 75% paid loss ratio on this underlying
portfolio of treaties up to a 100% paid loss ratio, subject to an aggregate
limit of liability of $50.0 million. The latest loss reports related to the
agreement provided by the cedent forecast an ultimate net loss ratio in excess
of 100%, which could result in a full limit loss to PXRE.
15
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
- -------------------------------------------------------------------------------
In June 2003, PXRE Reinsurance performed an audit of this portfolio of
treaties reinsured under the agreement. As a result of this audit, management
identified problems and believes that the cedent breached its contractual
obligations and fiduciary duties under the agreement. PXRE Reinsurance therefore
filed suit against the cedent on July 24, 2003 in a United Stated District Court
seeking rescission of the agreement and/or compensatory and punitive damages.
Although the ultimate outcome of the litigation cannot presently be
determined, management believes that PXRE Reinsurance's claims are meritorious
and intends to vigorously prosecute its suit. As of September 30, 2003, we have
recorded $34.0 million of loss reserves related to the agreement. If our lawsuit
is unsuccessful, we could potentially incur additional losses under the
agreement of up to $10.4 million on an after-tax basis.
On October 6, 2003, the United States Court of Appeals for the Third
Circuit affirmed a $9.8 million judgment awarded in June 2002 after a jury trial
of its dispute against Terra Nova Insurance Company Limited ("Terra Nova"). The
dispute concerned PXRE's claims under two insurance policies that had been
issued by an agent of Terra Nova. Terra Nova paid the full amount of the
judgment on October 16, 2003. PXRE had previously recorded this amount as a
receivable and as a result there was no income statement impact.
9. Subsequent Events
Subsequent to September 30, 2003, two Delaware statutory trusts
controlled by PXRE, PXRE Capital Statutory Trust V and PXRE Capital Statutory
Trust VI, separately entered into agreements to sell, in private transactions,
$20.0 million and $10.0 million principal amounts, respectively, of 30-year
fixed/floating rate deferrable interest capital securities based on an equal
principal amount of the Company's fixed/floating rate capital trust pass-through
securities. These issues closed on October 29, 2003 and November 6, 2003,
respectively, and have maturity dates of October 29, 2033 and November 6, 2033,
respectively. The capital trust pass-through securities pay interest at an
initial rate of 7.7% and 7.58%, respectively. The Company intends to use the net
proceeds of the sales to provide additional capital to PXRE Bermuda.
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Unless the context otherwise requires, references in this Form 10-Q to
the "Company" refer to PXRE Group Ltd. a Bermuda holding company, while "PXRE",
"we", "us" and "our" include PXRE Group Ltd. and its subsidiaries, which
principally include 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"), PXRE Capital Trust I, PXRE Capital Statutory
Trust II, PXRE Capital Trust III and PXRE Limited. 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, as applicable.
The following is a discussion and analysis of PXRE's results of
operations for the three and nine months ended September 30, 2003 compared with
the three and nine months ended September 30, 2002, and also a discussion of our
financial condition as of September 30, 2003. This discussion and analysis
should be read in conjunction with the attached unaudited consolidated financial
statements and notes thereto and PXRE's Annual Report on Form 10-K for the year
ended December 31, 2002 (the "10-K"), including the audited consolidated
financial statements and notes thereto and the discussion of Certain Risks and
Uncertainties (including the discussion of Critical Accounting Policies)
contained in the 10-K.
Overview
PXRE Group Ltd. is an insurance holding company domiciled in Bermuda.
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. Of the client groups that we service
as of September 30, 2003, primary insurers comprise approximately 78% and
reinsurance companies comprise approximately 22%, based solely on the number of
client groups in each category.
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 property
catastrophe 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.
We also offer our clients property per-risk, marine and aerospace
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 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.
17
For the nine months ended September 30, 2003 and the year ended
December 31, 2002 our catastrophe and risk excess segment produced net premiums
written of $208.6 million and $176.0 million, respectively. For the same time
periods the loss ratios in this segment were 26.7% and 30.0%, respectively.
To a lesser extent and on an opportunistic basis, 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
through, for example, increased premiums or reductions in profit commissions. 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.
Recent events, including losses associated with the events of September
11, 2001, recognized reserve deficiencies, poor investment performance and the
exit of key insurance industry players, have decreased the capital available to
the insurance industry. This has resulted in considerable increases in pricing
in conjunction with improved terms and conditions for the industry. Importantly,
this has impacted our markets and has created attractive opportunities for us to
deploy our capital. As a direct result, we experienced significant rate
increases of 20% to 100% in our core property catastrophe, risk excess and
marine and aerospace lines for the year ended December 31, 2002. Net earned
premiums for the nine months ended September 30, 2003 increased 32% to $237.9
million from $180.7 million for the corresponding period of 2002. Net earned
premiums for the year ended December 31, 2002 increased 66% to $269.4 million
from $162.1 million for 2001. The GAAP combined ratio for the nine months ended
September 30, 2003 was 74.4% and 74.5% for the corresponding period of 2002
reflecting the above mentioned price increases and improved loss experience
since September 11, 2001. The GAAP combined ratio was 77.7% for the year ended
December 31, 2002 compared with 127.0% for 2001.
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 risks
and
18
uncertainties. In light of the risks and uncertainties inherent in all future
projections, these 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 amount 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 or more of our subsidiaries' financial
strength or claims paying ratings;
(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) adverse development on loss reserves related to business written in
current and prior years;
(vi) lower than estimated retrocessional recoveries on paid and unpaid
losses, including the effects of losses due to a decline in the
creditworthiness of our retrocessionaires;
(vii) 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;
(viii) 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;
(ix) market fluctuations with respect to our portfolio of hedge funds
and other privately held securities: liquidity risk, credit risk
and market risk;
(x) foreign currency fluctuations resulting in exchange gains or
losses;
(xi) contention by the United States Internal Revenue Service that we or
our offshore subsidiaries are subject to U.S. taxation; and
(xii) changes in tax laws, tax treaties, tax rules and interpretations.
19
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.
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.
Comparison of Third Quarter Results for 2003 with 2002
For the quarter ended September 30, 2003, net income before convertible
preferred share dividends was $23.7 million compared to net income of $11.0
million for the comparable period of 2002. The net income per diluted common
share was $1.01 for the third quarter of 2003 compared to a net income per
diluted share of $0.50 for the third quarter of 2002, based on diluted average
shares outstanding of approximately 23.6 million in the third quarter of 2003
and 22.1 million in the third quarter of 2002.
Premiums
Gross and net premiums written for the third quarter of 2003 and 2002
were as follows:
($000's) Three Months Ended
September 30,
-------------------------- % Increase
2003 2002 (Decrease)
---------- ---------- ----------
Gross premiums written $ 95,275 $ 120,734 (21)
Ceded premiums written (25,233) (53,925) (53)
---------- ----------
Net premiums written $ 70,042 $ 66,809 5
========== ==========
Gross premiums written for the third quarter of 2003 decreased 21% to
$95.3 million from $120.7 million in the third quarter of 2002. This decrease is
primarily due to a decrease in our finite segment of $39.5 million, or 106%,
compared to the corresponding period of 2002. This business is currently focused
on a limited group of cedents and on policies that do not contain significant
risk transfer. Finite contracts that do not contain sufficient risk transfer are
not recorded as reinsurance arrangements but are treated as deposits for
accounting purposes. As such, the income related to these transactions is
recorded as fee income, and liabilities, if any, are recorded as deposit
liabilities. As a result, finite premiums are expected to be less than in prior
periods. Offsetting the decrease in finite gross premiums written was an
increase in the catastrophe and risk excess segment of $18.7 million, or 24%,
compared to the corresponding period of 2002. This increase is attributable to
improved pricing, increased participation with long-standing clients and
increased amounts of new business for this segment.
Ceded premiums written decreased by 53% to $25.2 million for the third
quarter of 2003 compared to $53.9 million for the third quarter of 2002,
primarily as a result of a $24.6 million decrease in finite business ceded and
the timing of ceded excess deposits.
20
Net premiums written for the third quarter of 2003 increased 5% to
$70.0 million from $66.8 million in the third quarter of 2002. Net premiums
written increased in our core catastrophe and risk excess segment by $21.1
million, or 43%, as compared to the corresponding prior-year period due to the
same factors that caused the increase in gross written premiums for this segment
as explained above. Net premiums written in the exited lines segment decreased
$2.1 million, or 152%, compared to the corresponding period of 2002. Since we
have decided to re-focus on our core catastrophe and risk excess segment and
have ceased writing 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 and 2004. On a net premiums written basis, the finite
segment decreased $14.8 million, or 116%, during the third quarter of 2003
versus the prior-year comparable quarter due to the same factors that caused the
decrease in gross premiums written as explained above.
Gross and net premiums earned for the third quarter of 2003 and 2002
were as follows:
($000's) Three Months Ended
September 30,
-------------------------- % Increase
2003 2002 (Decrease)
---------- ---------- ----------
Gross premiums earned $ 83,053 $ 99,667 (17)
Ceded premiums earned (13,971) (23,926) (42)
--------- ---------
Net premiums earned $ 69,082 $ 75,741 (9)
========= =========
Gross premiums earned for the third quarter of 2003 decreased 17% to
$83.1 million from $99.7 million in the third quarter of 2002. This decrease is
primarily due to decreases in our finite segment of $20.5 million, or 80%, and
our exited lines segment of $9.5 million, or 111%, both compared to the
corresponding period of 2002. Offsetting the decrease in finite and exited lines
was an increase in the gross premiums earned in the catastrophe and risk excess
segment of $13.3 million, or 21%, compared to the corresponding period of 2002.
The changes in all of these segments are due to the same factors as those
discussed above in gross and net premium written.
Ceded premiums earned decreased by 42% to $14.0 million for the third
quarter of 2003 compared to $23.9 million for the third quarter of 2002,
primarily as a result of a $7.6 million decrease in finite business ceded.
Net premiums earned for the third quarter of 2003 decreased 9% to $69.1
million from $75.7 million for the corresponding period of 2002. Net premiums
earned in the catastrophe and risk excess segment increased $14.1 million, or
30%, and net premiums earned in the finite segment decreased $12.8 million, or
71%, for the third quarter of 2003 as compared to the corresponding prior-year
period. Net premiums earned in the exited lines segment decreased $8.3 million,
or 107%, for the third quarter of 2003 as compared to the third quarter of 2002.
The changes in all of these segments are due to the same factors as those
discussed above in gross and net premiums written.
21
A summary of our net premiums written and earned by business segment
for the three months ended September 30, 2003 and 2002 is included in Note 6 to
the Consolidated Financial Statements.
Fee Income
Fee income was $1.1 million for the three months ended September 30,
2003 compared to $0.9 million for the three months ended September 30, 2002.
This income is comprised primarily of override commissions on quota share
reinsurance cessions as well as fees earned from certain finite contracts
accounted for as deposits.
Ratios
The underwriting results of a property and casualty insurer are
discussed frequently by reference to its loss ratio, expense ratio (including
the commission and brokerage ratio, net of fee income, if any, and the operating
expense ratio) and combined ratio. The loss ratio is the result of dividing
losses and loss expenses incurred by net premiums earned. The expense ratio is
the result of dividing underwriting expenses (including commission and
brokerage, net of fee income, if any, and the operating expenses) by net
premiums earned. The combined ratio is the sum of the loss ratio and the expense
ratio. A combined ratio less than 100% indicates underwriting profits and a
combined ratio greater than 100% indicates underwriting losses. The combined
ratio does not reflect the effect of investment income on underwriting 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 quarters ended September 30, 2003 and 2002, respectively:
Three Months Ended
(%) September 30,
-----------------------
2003 2002
---- ----
Loss ratio 51.2 63.7
Expense ratio 18.3 25.4
---- ----
Combined ratio 69.5 89.1
==== ====
Catastrophe and Risk Excess loss ratio 19.3 52.0
==== ====
Losses and Loss Expenses
Losses incurred amounted to $35.4 million in the third quarter of 2003
compared to $48.3 million in the third quarter of 2002. Our loss ratio was 51.2%
for the third quarter of 2003 compared to 63.7% for the comparable prior-year
period. While the number of catastrophes that occurred during the third quarter
was greater than normal, the relatively low severity of the events resulted in a
lower level of losses during the third quarter of 2003 compared to the prior
period. As a result, the loss ratio in the core catastrophe and risk excess
segment decreased to 19.3% for the quarter from 52% for the comparable prior
year period.
During the third quarter of 2003, we experienced net adverse
development of $10.0 million for prior-year losses and loss expenses, due
primarily to $10.1 million of adverse development on our exited direct casualty
reinsurance operations. The loss ratio for the comparable period of 2002 was
affected by the 2002 European flood losses of $15.7 million and by net adverse
development of $5.6 million for prior-year loss and loss expenses primarily
arising from adverse development on our exited direct casualty reinsurance
operations and the Toulouse fertilizer plant loss.
22
Underwriting Expenses
The expense ratio was 18.3% for the third quarter of 2003 compared to
25.4% during the comparable year-earlier period. The decrease was primarily due
to a finite contract in which an increase in assumed losses was offset by a
reduction in ceding commissions. The commission and brokerage ratio, net of fee
income, was 3.0% for the third quarter of 2003 compared with 16.6% for the third
quarter of 2002. Excluding the finite segment, the commission and brokerage
ratio, net of fee income, was 9.7% for the third quarter of 2003 compared to
9.1% in the comparable year-earlier period. The operating expense ratio was
15.3% for the three months ended September 30, 2003 compared with 8.8% for the
comparable period of 2002. Other operating expenses increased 58% to $10.6
million for the three months ended September 30, 2003 from $6.7 million in the
comparable period of 2002. This increase is largely due to $0.7 million of
expenses associated with hiring new underwriters and relocating other
underwriters to our Bermuda office, $0.5 million of additional variable
compensation expenses and a $1.6 million change in net realized foreign
exchange.
Interest Expense
Interest expense, other than minority interest expense in consolidated
subsidiaries, decreased from $0.7 million to zero due to the repayment of the
remaining balance of $10.0 million under a bank credit facility on May 16, 2003.
PXRE incurred minority interest expense of $2.8 million during the three-month
period ended September 30, 2003 on its capital trust pass-through securities
(see "Liquidity and Capital Resources" below for a full description of the
capital trust pass-through securities). In the corresponding prior period, PXRE
only incurred $2.1 million of minority interest expense on its capital trust
pass-through securities. Minority interest expense on the capital trust
pass-through securities increased because $32.5 million of additional capital
trust pass-through securities were issued during the quarter ended June 30,
2003.
Net Investment Income
Net investment income for the third quarter of 2003 increased 20% to
$6.0 million from $5.0 million in the third quarter of 2002 primarily as a
result of a $1.9 million increase in income from hedge funds as well as an
increase in the average invested balance due to cash flows from operations.
Investment income related to our hedge fund portfolio increased to $2.4 million
in the third quarter of 2003 from $0.5 million in the third quarter of 2002.
Investment in hedge funds produced a return of 2.1% for the third quarter of
2003 compared with 0.5% in the comparable prior-year period. Offsetting these
increases was a decrease in the book yield of fixed maturity and short-term
investment portfolios to 3.5% during the third quarter of 2003 from 5.0% during
the comparable prior-year period.
23
Investment income for the quarter 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 $26.0 million and $25.6 million as of September 30, 2003 and
2002, respectively, for which we have recognized $0.4 million of investment
income for each of the three-month periods ended September 30, 2003 and 2002. On
ceded reinsurance contracts, we held premiums and accrued investment income of
$123.0 million and $135.1 million due to reinsurers as of September 30, 2003 and
2002, respectively, for which we recognized a charge to investment income of
$2.2 million and $2.9 million for the third quarter of 2003 and 2002,
respectively. On a net basis, this reduction to investment income was $0.8
million and $1.1 million for the quarters ended September 30, 2003 and 2002,
respectively, representing the difference between the stated investment return
under such contracts and the overall yield achieved on our total investment
portfolio for the quarter. The weighted average contractual investment return on
the funds held by PXRE is 6.8% and 7.8% for the quarters ended September 30,
2003 and 2002, respectively, and we expect to be obligated for this contractual
investment return for the life of the underlying liabilities, which is expected
to be six years as of September 30, 2003 on a weighted average basis.
Net Realized Investment Gains
Net realized investment gains for the third quarter of 2003 were $0.5
million compared to $4.8 million in the third quarter of 2002. Included in net
realized investment gains for the third quarter of 2003 is a $0.2 million other
than temporary write-down of a non-agency mortgage-backed security. Included in
the net realized investment gains for the third quarter of 2002 were gains
realized on the shortening of the average maturity of securities in our
investment portfolio.
Income Taxes
PXRE recognized a tax expense of $1.0 million in the third quarter of
2003 compared to a tax expense of $4.2 million in the comparable prior-year
period. The tax expense in the third quarter of 2003 differed from the U.S.
statutory rate primarily due to the increase in reinsurance business written in
Bermuda as a percentage of our total amount written and a decrease in the
reinsurance business written in the United States.
Comparison of Year-to-Date Results for 2003 and 2002
For the nine months ended September 30, 2003, net income before
convertible preferred share dividends was $68.8 million compared to net income
of $48.3 million for the comparable period of 2002. The net income per diluted
common share was $2.97 for the nine-month period ended September 30, 2003
compared to a net income per diluted common share of $2.59 for the corresponding
prior-year period, based on diluted average shares outstanding of approximately
23.2 million in the nine-month period ended September 30, 2003 and 18.6 million
in the corresponding prior-year period.
24
Premiums
Gross and net premiums written for the nine-month period ended
September 30, 2003 and 2002 were as follows:
($000's) Nine Months Ended
September 30,
-------------------------- % Increase
2003 2002 (Decrease)
---------- ---------- ----------
Gross premiums written $ 274,123 $ 287,881 (5)
Ceded premiums written (52,692) (96,688) (46)
--------- ---------
Net premiums written $ 221,431 $ 191,193 16
========= =========
Gross premiums written for the nine-month period ended September 30,
2003 decreased 5% to $274.1 million from $287.9 million in the corresponding
prior-year period. The decrease in gross premiums written is primarily due to a
decrease in our finite segment of $78.6 million, or 97%, compared to the
corresponding period of 2002. This business is currently focused on a limited
group of cedents and on policies that do not contain significant risk transfer.
Finite contracts that do not contain sufficient risk transfer are not recorded
as reinsurance arrangements but are treated as deposits for accounting purposes.
As such, the income related to these transactions is recorded as fee income, and
liabilities, if any, are recorded as deposit liabilities. As a result, finite
premiums are expected to be less than in prior periods. Offsetting the decrease
in finite gross premiums written was an increase in the catastrophe and risk
excess segment of $66.9 million, or 35%, compared to the corresponding period of
2002. This increase is attributable to improved pricing, increased participation
with long-standing clients and increased amounts of new business.
Ceded premiums written decreased by 46% to $52.7 million for the
nine-month period ended September 30, 2003 compared to $96.7 million for the
corresponding prior-year period, primarily as a result of a $39.5 million
decrease in finite business ceded and cessions on the per-risk portion of the
catastrophe and risk excess segment.
Net premiums written for the nine-month period ended September 30, 2003
increased 16% to $221.4 million from $191.2 million in the corresponding
prior-year period. Net premiums written increased in our core catastrophe and
risk excess segment by $72.4 million, or 53%, for the nine-month period ended
September 30, 2003 as compared to the corresponding prior-year period. Net
premiums written in the finite segment decreased $39.1 million, or 92%, during
the nine-month period ended September 30, 2003 versus the prior-year comparable
period. The changes in these segments are due to the same factors as those
discussed above in gross premiums written. Net premiums written in the exited
lines segment decreased $3.4 million during the nine-month period ended
September 30, 2003 compared to the corresponding prior-year period. Since we
have decided to re-focus on our core catastrophe and risk excess segment and
have ceased writing 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 and 2004.
25
Gross and net premiums earned for the nine-month period ended September
30, 2003 and 2002 were as follows:
Nine Months Ended
($000's) September 30,
-------------------------- % Increase
2003 2002 (Decrease)
---------- ---------- ----------
Gross premiums earned $ 282,210 $ 243,367 16
Ceded premiums earned (44,340) (62,706) (29)
--------- --------- ---------
Net premiums earned $ 237,870 $ 180,661 32
========= ========= =========
Gross premiums earned for the nine-month period ended September 30,
2003 increased 16% to $282.2 million from $243.4 million in the corresponding
prior-year period. This increase is due to an increase in the catastrophe and
risk segment of $65.2 million, or 39%, compared to the corresponding period of
2002. Offsetting this increase was a decrease in our exited lines of $22.8
million, or 83%, compared to the corresponding period of 2002. The changes in
these segments are due to the same factors as discussed above in gross and net
premiums written.
Ceded premiums earned decreased by 29% to $44.3 million for the
nine-month period ended September 30, 2003 compared to $62.7 million for the
corresponding prior-year period, primarily as a result of a $14.5 million
decrease in finite business ceded.
Net premiums earned in the nine-month period ended September 30, 2003
increased 32% to $237.9 million from $180.7 million for the corresponding
prior-year period. Net premiums earned in the catastrophe and risk excess
segment increased $65.2 million, or 53%, while the net premiums earned in the
finite segment increased $13.1 million, or 50%, for the nine-month period ended
September 30, 2003 compared to the corresponding prior-year period. The increase
in the finite segment's net premiums earned relates to the run-off of a
transaction entered into in 2002. Net premiums earned in the exited lines
segment experienced a decline of $21.5 million, or 85%, for the nine-month
period ended September 30, 2003 as compared to the corresponding prior-year
period. The changes in net premiums earned for the catastrophe and risk excess
segment and the exited lines segment are due to the same factors as discussed
above in gross premiums written.
A summary of our net premiums written and earned by business segment
for the first nine months of 2003 and 2002 is included in Note 6 to the
Consolidated Financial Statements.
Fee Income
Fee income was $3.5 million for the nine months ended September 30,
2003 compared to $2.8 million for the nine months ended September 30, 2002. This
income is comprised primarily of override commissions on quota share reinsurance
cessions as well as fees earned from certain finite contracts accounted for as
deposits.
26
Ratios
The following table summarizes the loss ratio, expense ratio and
combined ratio for the nine months ended September 30, 2003 and 2002,
respectively:
(%) Nine Months Ended September 30,
- --- -------------------------------
2003 2002
---------- -----------
Loss ratio 47.5 46.7
Expense ratio 26.9 27.8
---- ----
Combined ratio 74.4 74.5
==== ====
Catastrophe and Risk Excess loss ratio 26.7 29.0
==== ====
Losses and Loss Expenses
Losses incurred for the nine months ended September 30, 2003 amounted
to $113.0 million compared to $84.4 million in the comparable prior-year period.
Our loss ratio was 47.5% for the nine-month period ended September 30, 2003
compared to 46.7% for the corresponding prior-year period.
During the nine-month period ended September 30, 2003, we experienced
net adverse development of $41.2 million for prior-year losses and loss
expenses, primarily due to $19.7 million on our exited direct casualty
reinsurance operations, $9.1 million adverse development from aerospace claims
primarily arising from our first receipt of notice that the increase in industry
losses related to a 1998 air crash had resulted in the exhaustion of deductibles
under three aerospace contracts between PXRE and Reliance Insurance Company and
$6.0 million of development from finite contracts. The loss ratio for the
comparable period of 2002 was affected by the 2002 European flood losses of
$15.7 and by net adverse development of $20.4 million for prior-year loss and
loss expenses mainly due to $12.0 million of adverse development on our exited
direct casualty reinsurance operations.
Underwriting Expenses
The expense ratio was 26.9% for the nine-month period ended September
30, 2003 compared to 27.8% during the corresponding prior-year period. The
decrease was primarily due to reduced commissions associated with assumed finite
contracts and exited lines business, offset, in part, by a fee on the
commutation of the P-1 Re Ltd. reinsurance agreement. The commission and
brokerage ratio, net of fee income, was 14.4% for the nine-month period ended
September 30, 2003 compared with 15.7% for the corresponding prior-year period.
During the nine-month period ended September 30, 2003, we incurred $4.0 million
of structuring fees related to the P-1 Re Ltd. reinsurance agreement and the
subsequent commutation thereof. The operating expense ratio was 12.4% for the
nine months ended September 30, 2003 compared with 12.1% for the comparable
period of 2002. Other operating expenses increased 36% to $29.6 million for the
nine months ended September 30, 2003 from $21.8 million in the comparable period
of 2002. This increase is largely due to $2.4 million of expenses associated
with hiring new underwriters and relocating other underwriters to our Bermuda
office, various compensation costs of $1.2 million relating to the retirement of
the Company's former Chief Executive Officer, Gerald L. Radke, on June 30, 2003
and his transition into a consulting role, $1.2 million of additional variable
compensation expenses, a $1.2 million change in net realized foreign exchange
and a $0.4 million increase in our director and officer liability insurance.
27
Interest Expense
Interest expense, other than minority interest expense in consolidated
subsidiaries, increased to $2.5 million for the nine months ended September 30,
2003 from $2.2 million for the nine months ended September 30, 2002. Following
the repayments of $20.0 million on March 31, 2003 and the remaining $10.0
million on May 16, 2003 under a bank credit facility, an interest rate swap
previously accounted for as a cash flow hedge was no longer effective.
Consequently $1.1 million has been charged as interest expense in the nine-month
period ended September 30, 2003. This charge did not impact shareholders' equity
because it was previously recorded as a component of other comprehensive income.
In addition, there was an acceleration of the amortization of expenses related
to this bank facility of $0.3 million during the nine-month period ended
September 30, 2003. PXRE incurred minority interest expense of $7.3 million
related to PXRE's capital trust pass-through securities during the nine-month
period ended September 30, 2003 (see "Liquidity and Capital Resources" below for
a full description of the capital trust pass-through securities). In the prior
period, PXRE only incurred $6.6 million of minority interest expense on the
capital trust pass-through securities. Minority interest expense on the capital
trust pass-through securities increased because $32.5 million of additional
capital trust pass-through securities were issued during the quarter ended June
30, 2003.
Net Investment Income
Net investment income for the nine-month period ended September 30,
2003 increased 14% to $20.0 million from $17.5 million in the corresponding
prior-year period primarily as a result of a $6.4 million increase in income
from hedge funds as well as an increase in the average invested balance due to
cash flows from operations. Investment income related to our hedge fund
portfolio increased to $9.9 million in the nine-month period ended September 30,
2003 from $3.5 million in the corresponding prior-year period. Investment in
hedge funds produced a return of 8.8% for the nine-month period ended September
30, 2003 compared with 3.5% in the corresponding prior-year period. Offsetting
these increases was a decrease in the book yield of fixed maturity and
short-term investment portfolios to 3.7% during the nine months ended September
30, 2003 from 4.6% during the nine months ended September 30, 2002. In addition,
there were two non-recurring items during the nine-month period ended September
30, 2002; investment income of $1.5 million of judgment interest from the Terra
Nova Insurance Company Limited ("Terra Nova") lawsuit (see "Liquidity") and a
$3.0 million special distribution from a private limited partnership.
Investment income for the nine-month period ended September 30, 2003
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 $26.0 million
and $25.6 million as of September 30, 2003 and 2002, respectively, for which we
have recognized $1.3 million of investment income for each of the nine-month
periods ended September 30, 2003 and 2002. On ceded reinsurance contracts, we
held premiums and accrued investment income of $123.0 million and $135.1 million
due to reinsurers as of September 30, 2003 and 2002, respectively, for which we
recognized a charge to investment income of $6.9 million and $8.3 million for
the nine-month period ended September 30, 2003 and 2002, respectively. On a net
basis, this reduction to investment income was $1.8 million and $2.5 million for
the nine months ended September 30, 2003 and 2002, respectively, representing
the difference between the stated investment return under such contracts and the
overall yield achieved on our total investment portfolio for the period. The
weighted average contractual investment return on the funds held by PXRE is 7.0%
and 7.8% for the nine months ended September 30, 2003 and 2002, respectively,
and we expect to be obligated for this contractual investment return for the
life of the underlying liabilities, which is expected to be six years as of
September 30, 2003 on a weighted average basis.
28
Net Realized Investment Gains
Net realized investment gains for the nine-month period ended September
30, 2003 were $0.6 million compared to $5.8 million in the corresponding
prior-year period. Included in the net realized investment gains for the
nine-month period ended September 30, 2002 were gains of $1.2 million realized
on the repurchase of $4.2 million of our capital trust pass-through securities
and gains realized on shortening of the average maturity of securities in our
investment portfolio.
Income Taxes
PXRE recognized a tax expense of $2.9 million in the nine-month period
ended September 30, 2003 compared to a tax expense of $12.4 million in the
corresponding prior-year period. The tax expense in the nine-month period ended
September 30, 2003 differed from the U.S. statutory rate primarily due to the
increase in reinsurance business written in Bermuda as a percentage of our total
amount written and a decrease in the reinsurance business written in the United
States.
Update on Critical Accounting Policies
The Company's Annual Report on Form 10-K for the year ended December
31, 2002 discloses certain risks and uncertainties relating to critical
accounting policies (See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Risks and Uncertainties
Relating to Critical Accounting Policies contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002). This included
disclosure concerning our estimation of losses and loss expenses, the
assumptions used in making such estimation and the various factors that
contribute to uncertainty in those estimates.
Estimation of 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. 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 requires 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 shareholders' equity.
29
In reserving for catastrophe losses, our estimates are influenced by
underwriting information provided by our clients, industry catastrophe models
and our internal analyses of this information. This reserving approach 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 own
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 industry
estimates, which were approximately $1 billion. In 2001, the cost was estimated
to be $2.5 billion by SIGMA, a widely used industry publication. Our gross 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%.
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 on an individual contract basis. We
consider historical loss ratios for each line of business and utilize
information provided by our clients and estimates provided by underwriters and
actuaries concerning the impact of pricing and coverage changes. As experience
emerges, we 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.
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 shareholders' 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
businesses. 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 businesses, we do not have established historical
adverse development patterns that can be used to establish these loss
liabilities. We must therefore rely on the inherently less reliable historical
adverse development patterns reported by our clients and industry adverse
development data in calculating our liabilities.
During the third quarter of 2003, we experienced net adverse
development of $10.0 million for prior-year loss and loss expenses, due to $10.1
million of adverse development on our exited direct casualty reinsurance
operations. Offsetting this adverse development was $1.9 million of related
premium offsets resulting in adverse development, net of offsets, of $8.1
million. The loss ratio for the comparable period of 2002 was affected by net
adverse development of $5.6 million for prior-year loss and loss expenses mainly
due to our exited direct casualty reinsurance operations and the Toulouse
fertilizer plant loss.
30
The $10.1 million of adverse development attributable to our exited
direct casualty reinsurance operations was primarily caused by $8.2 million of
general liability development, with $8.0 million of this development
attributable to the 2001 and 2002 accident years. In addition to the explicit
recognition of more than expected reported losses during the quarter, there was
a shift to more conservative actuarial methods and higher loss ratio
assumptions.
In addition to our internal reserve review, a nationally recognized
actuarial firm performed an independent third-party analysis of the general
liability line of business during the quarter ended September 30, 2003. As of
September 30, 2003, the loss reserves recorded by management on this business
exceeded the independent actuarial firm's best estimate of liabilities for this
line of business.
Loss and loss expense liabilities as estimated by PXRE's actuaries and
recorded by management in the statement of financial position as of September
30, 2003 were as follows:
($000's) Gross Net
--------- ---------
Catastrophe and Risk Excess $ 190,263 $ 89,744
Finite Business 120,077 87,258
Other Lines 6,827 5,441
Exited Lines 120,143 108,334
--------- ---------
Total $ 437,310 $ 290,777
========= =========
The low and high ends of a range of reasonable net loss reserves for
our exited lines segment is $12.0 million below, and $12.9 million above, the
$108.3 million best estimate displayed in the table above. The low and high ends
of a range of reasonable net loss reserves for our catastrophe and risk excess
segment are $14.0 million below and $15.5 million above the $89.7 million best
estimate displayed above. The low and high ends of a range of reasonable net
loss reserves for our finite segment are $16.4 million below and $19.1 million
above the $87.3 million best estimate displayed above. The low and high ends of
a range of reasonable net loss reserves for our other lines segment are $0.7
million below and $0.7 million above the $5.4 million best estimate displayed
above. On an overall basis, the low and high ends of a range of reasonable net
loss reserves are $31.3 million below and $35.0 million above the $290.8 million
best estimate displayed above. Note that the range around the overall estimate
is not the sum of the ranges about the component segments due to the benefits of
diversification when the reserve levels are considered in total.
31
FINANCIAL CONDITION
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. Under the Connecticut insurance law, the maximum amount of
dividends that PXRE Reinsurance may declare and 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. In
2003, based on surplus of $457.2 million at December 31, 2002, the maximum
amount of dividends that PXRE Reinsurance could pay is $45.7 million. PXRE
Reinsurance paid dividends of $65.7 million in the nine months ended September
30, 2003, with regulatory approval. No additional dividends may be paid in 2003
without the prior approval of the Insurance Department of the State of
Connecticut.
The payment of dividends by PXRE Bermuda is limited under Bermuda
insurance law, which requires PXRE Bermuda to maintain sufficient funds to meet
certain measures of solvency and liquidity. At September 30, 2003, the statutory
capital and surplus of PXRE Bermuda was estimated to be $328.9 million and the
amount required to be maintained was estimated to be $23.9 million. In addition,
under Bermuda law, PXRE Bermuda may not reduce its total statutory capital of
$70.6 million, as set forth in its statutory financial statement dated December
31, 2002, by 15% or more without the prior approval of Bermuda's Minister of
Finance.
Under Barbados law, PXRE Barbados may only pay a dividend out of its
realized profits. PXRE Barbados may not pay a dividend unless after payment of
the dividend (a) it would be able to pay its liabilities as they become due, and
(b) the realizable value of its assets would be greater than the aggregate value
of its liabilities, and (c) the stated capital accounts are maintained in
respect of all classes of shares.
In connection with the capitalization of PXRE Lloyd's Syndicate 1224,
PXRE Reinsurance had placed on deposit a $30.6 million par value U.S. Treasury
security as collateral for Lloyd's. Cash and invested assets held by PXRE
Lloyd's Syndicate 1224, amounting to $9.9 million at September 30, 2003, are
restricted from being paid as a dividend until the run-off of our exited Lloyd's
business has been completed.
Liquidity
The primary sources of liquidity for PXRE Reinsurance and PXRE Bermuda,
our principal operating subsidiaries, are net cash flow 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.
32
Financings
In 2002, the Company issued $150.0 million in principal amount of
additional capital through the issuance of 15,000 convertible voting preferred
shares. Two-thirds of the preferred shares mandatorily convert by April 4, 2005,
and the balance by April 4, 2008. The preferred shares, on a converted basis,
constitute 49.2% of the Company's fully diluted outstanding common shares at
September 30, 2003.
On May 15, 2003, PXRE Capital Statutory Trust II, a Connecticut
statutory trust and subsidiary of the Company, sold $17.5 million principal
amount of capital trust pass-through securities due May 15, 2033. The securities
bear interest at an initial rate of 7.35%. The Company used the net proceeds of
the sale to repay the balance of $10.0 million outstanding under its credit
agreement, and to provide additional capital to PXRE Bermuda.
On May 23, 2003, PXRE Capital Trust III, a Delaware statutory trust and
a subsidiary of the Company, sold $15.0 million principal amount of capital
trust pass-through securities due May 23, 2033. The securities bear interest at
a rate of 9.75%. The Company used the net proceeds to provide additional capital
to PXRE Bermuda.
Cash Flows
Net cash flows provided by operations were $11.7 million in the third
quarter of 2003 compared to $26.2 million in the third quarter of 2002 and were
$119.1 million in the nine months ended September 30, 2003 compared to $59.5
million in the nine months ended September 30, 2002 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
individual quarters and years.
Net cash flows used by investing activities were $72.1 million in the
third quarter of 2003 compared to $28.8 million in the third quarter of 2002 and
were $124.3 million in the nine months ended September 30, 2003 compared to
$179.6 million in the nine months ended September 30, 2002 due primarily to
purchases of securities for investment partially offset by proceeds received on
sale or maturity of investments.
Currency Fluctuations
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 2.2% of our investment portfolio and,
in our opinion, are sufficiently liquid for our needs.
33
Share Dividends and Book Value
Dividends to common shareholders declared in the third quarter of 2003
and 2002 were $0.7 million. The expected annual dividend based on common shares
outstanding at September 30, 2003 is approximately $2.9 million. Book value per
common share was $21.72 at September 30, 2003 after considering convertible
preferred shares.
Commitments and Contingencies
As of September 30, 2003, other commitments and pledged assets include
(a) letters of credit amounting to $14.0 million which are secured by cash and
securities amounting to $14.3 million, (b) securities with a par value of $9.2
million on deposit with various state insurance departments in order to comply
with insurance laws, (c) securities with a fair value of $58.7 million deposited
in a trust for the benefit of a cedent in connection with certain finite
reinsurance transactions, (d) funding commitments to certain limited
partnerships of $1.1 million, (e) a commitment to lend up to $1.6 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 $1.1 million
under the 1992 Restated Employee Annual Incentive Bonus Plan plus interest, and
(g) commitments under the capital trust pass-through securities discussed above.
We entered into a joint venture agreement in June 2001 with BF&M
Properties Limited to form a Bermuda company, 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 joint venture agreement, we agreed to lend up to
$7.0 million to Barr's Bay to finance the construction of the office building of
which $5.4 million has been advanced as of September 30, 2003. Such loans are
secured by a first mortgage on the property.
In April 2000, PXRE Reinsurance entered into an aggregate excess of
loss retrocessional reinsurance agreement with a U.S. based cedent. In the
agreement, PXRE Reinsurance reinsured a portfolio of treaties underwritten by a
former business unit of the cedent, which had been divested. Pursuant to this
excess of loss retrocessional agreement, PXRE Reinsurance agreed to indemnify
the cedent for losses in excess of a 75% paid loss ratio on this underlying
portfolio of treaties up to a 100% paid loss ratio, subject to an aggregate
limit of liability of $50.0 million. The latest loss reports related to the
agreement provided by the cedent forecast an ultimate net loss ratio in excess
of 100%, which could result in a full limit loss to PXRE.
In June 2003, PXRE Reinsurance performed an audit of this portfolio of
treaties reinsured under the agreement. As a result of this audit, management
identified problems and believes that the cedent breached its contractual
obligations and fiduciary duties under the agreement. PXRE Reinsurance therefore
filed suit against the cedent on July 24, 2003 in a United Stated District Court
seeking rescission of the agreement and/or compensatory and punitive damages.
Although the ultimate outcome of the litigation cannot presently be
determined, management believes that PXRE Reinsurance's claims are meritorious
and intends to vigorously prosecute its suit. As of September 30, 2003, we have
recorded $34.0 million of loss reserves related to the agreement. If our lawsuit
is unsuccessful, we could potentially incur additional losses under the
agreement of up to $10.4 million on an after-tax basis.
34
On October 6, 2003, the United States Court of Appeals for the Third
Circuit affirmed a $9.8 million judgment awarded in June 2002 after a jury trial
of its dispute against Terra Nova. The dispute concerned PXRE's claims under two
insurance policies that had been issued by an agent of Terra Nova. Terra Nova
paid the full amount of the judgment on October 16, 2003. PXRE had previously
recorded this amount as a receivable and as a result there was no income
statement impact.
Investments
As of September 30, 2003, our investment portfolio, at fair value, was
allocated 63.1% in fixed maturity debt instruments, 24.0% in short-term
investments, 11.9% in hedge funds and 1.0% in other investments.
The following table summarizes our investments at September 30, 2003
and December 31, 2002 at fair value:
Analysis of Investments
---------------------------------------------
September 30, 2003 December 31, 2002
---------------------- --------------------
($000's, except percentages) Amount Percent Amount Percent
--------- ------- -------- -------
Fixed maturities:
United States treasury securities $ 35,105 3.6% $ 46,165 6.1%
Foreign denominated securities 21,006 2.2 21,871 2.9
Foreign government securities - - 315 -
United States government sponsored agency debentures 73,151 7.5 38,062 5.0
United States government sponsored agency
mortgage-backed securities 122,547 12.6 42,467 5.6
Other mortgage and asset-backed securities 143,920 14.8 143,736 19.0
Municipal securities 61,062 6.3 76,522 10.1
Corporate securities 156,343 16.1 131,611 17.3
-------- ----- -------- -----
Total fixed maturities 613,134 63.1 500,749 66.0
Short-term investments 232,646 24.0 133,318 17.6
-------- ----- -------- -----
Total fixed maturities and short-term investments 845,780 87.1 634,067 83.6
Hedge funds 115,065 11.9 113,105 14.9
Other investments 9,939 1.0 11,529 1.5
-------- ----- -------- -----
Total investment portfolio $970,784 100.0% $758,701 100.0%
======== ===== ======== =====
At September 30, 2003, 97.1% of the fair value of our fixed maturities
and short-term investments portfolio was in obligations rated "A" (strong) or
better by Moody's or S&P. Mortgage and asset-backed securities accounted for
31.5% of fixed maturities and short-term investments or 27.4% of our total
investment portfolio based on fair value at September 30, 2003. The average
yield on our fixed maturities and short-term investments at September 30, 2003
and 2002 was 3.0% and 3.7%, respectively.
35
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 shareholders' 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 September 30, 2003, an
after-tax unrealized gain of $5.8 million (gain of 24 cents per share, after
considering convertible preferred shares) was included in shareholders' equity.
Short-term investments are carried at amortized cost, which
approximates fair value. Our short-term investments, principally short-term
agencies and United States treasuries, amounted to $232.6 million at September
30, 2003, compared to $133.3 million at December 31, 2002.
A significant component of our investment strategy is investing a
portion of our invested assets in a diversified portfolio of hedge funds. At
September 30, 2003, total hedge fund investments amounted to $115.1 million,
representing 11.9% of the total investment portfolio. At December 31, 2002,
total hedge fund investments amounted to $113.1 million, representing 14.9% of
the total investment portfolio. For the nine months ended September 30, 2003,
our hedge funds yielded a return of 8.8% as compared to 3.5% in the nine months
ended September 30, 2002. At September 30, 2003, hedge fund investments with
fair values ranging from $1.9 million to $16.2 million were administered by
fifteen managers.
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.
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 is likely to change over time.
36
Mariner Investment Group, Inc. ("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 September 30, 2003, our investment portfolio also included $9.9
million of other invested assets of which 98% 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. Total investment income for the nine months ended
September 30, 2003, included $9.7 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.
Taxes
PXRE Delaware files U.S. income tax returns for itself and all of its
direct or indirect U.S. subsidiaries that satisfy the stock ownership
requirements for consolidation. PXRE Delaware is party to a tax allocation
agreement concerning filing of consolidated Federal income tax returns pursuant
to which each of these U.S. subsidiaries makes tax payments to PXRE Delaware in
an amount equal to the federal income tax payment that would have been payable
by the relevant U.S. subsidiary for the year if it had filed a separate income
tax return for that year. PXRE Delaware is required to provide 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 one of these U.S. subsidiaries is
less than (or greater than) the annual tax liability for that U.S. subsidiary on
a stand-alone basis for that year, the U.S. subsidiary will be required to make
up the deficiency to PXRE Delaware (or will be entitled to receive a credit if
payments exceed the separate return tax liability of that U.S. subsidiary).
Certain Related Party Transactions
PXRE Reinsurance is a party to a retrocessional agreement with Select
Reinsurance Ltd. ("Select Re"), pursuant to which we offer to cede a
proportional share of our non-casualty reinsurance business. In 2003 and 2002,
the proportional share of our non-casualty business ceded to Select Re under
that agreement was 8.0%. 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 of 15% based
on the gross premiums ceded to them under these quota share agreements, which
resulted in fee income of $2.8 million for the nine months ended September 30,
2003.
37
In addition to the Select Re quota share agreement, we have entered
into several other reinsurance transactions with Select Re whereby: (i) Select
Re provided retrocessional support on several reinsurance transactions; (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 $1.2
million and $1.1 million in the nine-month periods ended September 30, 2003 and
September 30, 2002, respectively.
During the nine-month period ended September 30, 2003, we ceded
reinsurance premiums of $21.3 million to Select Re and net assets of $65.5
million were due in the aggregate to us from Select Re, all of which is fully
secured by way of reinsurance trusts. 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.
Gerald Radke, Chairman of our Board of Directors, and Jeffrey Radke,
our Chief Executive Officer, each held Select Re shares, but each such person
beneficially held less than 1% of Select Re's outstanding shares. Pursuant to an
agreement with shareholders of Select Re, Gerald Radke and Jeffrey Radke
redeemed their Select Re shares effective December 31, 2002.
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, which acts as the investment manager for our
hedge fund and alternative investment portfolio. During both the nine months
ended September 30, 2003 and 2002, we incurred investment management fees of
$0.6 million 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 of Directors requires
the prior approval of the Company's Chief Financial Officer for any transaction
entered into with Select Re.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have reviewed our exposure to market risks at September 30, 2003 and
the changes in exposure since December 31, 2002. The principal market risks we
are exposed to continue to be interest rate and credit risk. The additional
risks associated with our hedge fund investments are described earlier.
38
The composition of our fixed maturity portfolio did not change
materially during the third quarter of 2003. There were no material changes in
our exposure to market risks or our risk management strategy during the third
quarter of 2003.
Item 4. Controls and Procedures
An evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended) was carried out under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective as of the end of the period
covered by this report.
No change in our internal control over financial reporting (as defined
in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended) occurred
during the period covered by this report that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In April 2000, PXRE Reinsurance entered into an aggregate excess of
loss retrocessional reinsurance agreement with a U.S. based cedent. In the
agreement, PXRE Reinsurance reinsured a portfolio of treaties underwritten by a
former business unit of the cedent, which had been divested. Pursuant to this
excess of loss retrocessional agreement, PXRE Reinsurance agreed to indemnify
the cedent for losses in excess of a 75% paid loss ratio on this underlying
portfolio of treaties up to a 100% paid loss ratio, subject to an aggregate
limit of liability of $50.0 million. The latest loss reports related to the
agreement provided by the cedent forecast an ultimate net loss ratio in excess
of 100%, which could result in a full limit loss to PXRE.
In June 2003, PXRE Reinsurance performed an audit of this portfolio of
treaties reinsured under the agreement. As a result of this audit, management
identified problems and believes that the cedent breached its contractual
obligations and fiduciary duties under the agreement. PXRE Reinsurance therefore
filed suit against the cedent on July 24, 2003 in a United Stated District Court
seeking rescission of the agreement and/or compensatory and punitive damages.
Although the ultimate outcome of the litigation cannot presently be
determined, management believes that PXRE Reinsurance's claims are meritorious
and intends to vigorously prosecute its suit. As of September 30, 2003, we have
recorded $34.0 million of loss reserves related to the agreement. If our lawsuit
is unsuccessful, we could potentially incur additional losses under the
agreement of up to $10.4 million on an after-tax basis.
39
On October 6, 2003, the United States Court of Appeals for the Third
Circuit affirmed a $9.8 million judgment awarded in June 2002 after a jury trial
of its dispute against Terra Nova. The dispute concerned PXRE's claims under two
insurance policies that had been issued by an agent of Terra Nova. Terra Nova
paid the full amount of the judgment on October 16, 2003. PXRE had previously
recorded this amount as a receivable and as a result there was no income
statement impact.
Item 2. Changes in Securities and Use of Proceeds.
During the quarter ended September 30, 2003, the Company issued the
following equity securities in transactions that were not registered under the
Securities Act of 1933, as amended (the "Act"):
(a) Securities sold. On September 30, 2003, the Company issued 331.01
Convertible Voting Preferred Shares to the existing holders of the
Company's Convertible Preferred Shares in payment of its dividend
obligation thereon. The 331.01 Convertible Voting Preferred Shares
issued were allocated among Series as follows:
i. 165.50 shares of Series A convertible voting preferred shares,
allocated to two sub-series of shares, 110.34 shares allocated to
sub-series Al and 55.16 shares allocated to sub-series A2;
ii. 110.34 shares of Series B convertible voting preferred shares,
allocated to two sub-series of shares, 73.54 shares allocated to
Series B1 and 36.80 shares allocated to Series B2; and
iii. 55.17 shares of Series C convertible voting preferred shares,
allocated to two sub-series of shares, 36.78 shares allocated to
Series Cl and 18.39 shares allocated to Series C2.
(b) Underwriters and other purchasers. No underwriter participated. The
additional Convertible Voting Preferred Shares were issued to the
holders of record on September 15, 2003 of the outstanding convertible
voting preferred shares.
(c) Consideration. The convertible voting preferred shares were issued in
satisfaction of the Company's obligation to pay a quarterly dividend
of $3.31 million to the holders of the outstanding convertible voting
preferred shares.
(d) Exemption from registration claimed. Exemption from registration under
the Act was claimed based upon Section 4(2) of the Act as a sale by an
issuer not involving a public offering.
(e) Terms of conversion and exercise. The description of the terms of the
Preferred Shares contained in Part II, Item 5 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 is
incorporated herein by reference.
(f) Use of proceeds. Not applicable.
40
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
10.1 Endorsement to the Amended and Restated Facultative Obligatory
Retrocessional Agreement, effective January 1, 2003, between
PXRE Reinsurance Company, PXRE Reinsurance Ltd., and Select
Reinsurance Ltd.
10.2 Amendment to the Amended and Restated Facultative Obligatory
Retrocessional Agreement, effective January 1, 2003, between
Select Reinsurance Ltd., PXRE Reinsurance Company, and PXRE
Reinsurance Ltd.
10.3 Retrocession Contract, between PXRE Reinsurance Ltd. and Select
Reinsurance Ltd.
10.4 Amendment to the Retrocession Contract, effective October 1,
2003, between PXRE Reinsurance Ltd., PXRE Reinsurance Company
and Select Reinsurance Ltd.
31.1 Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Periodic Report Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b. Current Reports on Form 8-K
Form 8-K dated August 7, 2003 reporting Item 7 and Item 12, including
financial statements of the Company as of and for the three and six
months ended June 30, 2003.
Form 8-K dated September 3, 2003 reporting Item 7 and Item 9.
41
EXHIBIT INDEX
-------------
Exhibit Number Description
-------------- -----------
10.1 Endorsement to the Amended and Restated Facultative
Obligatory Retrocessional Agreement, effective January 1,
2003, between PXRE Reinsurance Company, PXRE Reinsurance
Ltd., and Select Reinsurance Ltd.
10.2 Amendment to the Amended and Restated Facultative
Obligatory Retrocessional Agreement, effective January 1,
2003, between Select Reinsurance Ltd., PXRE Reinsurance
Company, and PXRE Reinsurance Ltd.
10.3 Retrocession Contract, between PXRE Reinsurance Ltd. and
Select Reinsurance Ltd.
10.4 Amendment to the Retrocession Contract, effective October
1, 2003, between PXRE Reinsurance Ltd., PXRE Reinsurance
Company and Select Reinsurance Ltd.
31.1 Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Periodic Report Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report or amendment thereto to be signed on
its behalf by the undersigned thereunto duly authorized.
PXRE GROUP LTD.
November 14, 2003 By: /s/ John M. Modin
--------------------------------------
John M. Modin
Senior Vice President
and Chief Financial Officer
43