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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1999 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 (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
99 FRONT STREET SUITE 231
HAMILTON HM 12 12 CHURCH STREET
BERMUDA HAMILTON HM 11
(ADDRESS, INCLUDING ZIP CODE, BERMUDA
OF PRINCIPAL EXECUTIVE OFFICES) (MAILING ADDRESS)
(441) 296-5858
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: COMMON SHARES, PAR VALUE $1.00 PER SHARE
NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X * No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 24, 2000 computed by reference to
the closing price of such common equity as of the close of business on March 24,
2000 was $151,427,255. As of March 24, 2000, 11,758,174 of the registrant's
common shares were issued and outstanding.
*PXRE Group Ltd. ("PXRE") is the parent corporation of PXRE Corporation
("PXRE Delaware") (Commission File No. 001-12595; I.R.S. Employer
Identification No. 06-1183996) which became an indirect wholly owned subsidiary
of PXRE at the close of business on October 5, 1999 in connection with the
reorganization of PXRE Delaware. Simultaneously therewith, holders of PXRE
Delaware common stock, $.01 par value per share, automatically became holders of
the same number of PXRE common shares, $1.00 par value per share, which
shares continue to trade under the same New York Stock Exchange ticker symbol
PXT. In connection with the reorganization, PXRE has become subject to the
reporting requirements of the Securities Exchange Act of 1934 and has filed all
reports required to be filed thereafter.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of PXRE's definitive Proxy Statement for the Annual
General Meeting of Shareholders to be held on May 16, 2000.
Part IV Portions of PXRE Corporation's Proxy Statement dated April 12, 1991.
PART I
ITEM 1. BUSINESS
OVERVIEW
PXRE Group Ltd. ("PXRE" or the "Company") -- with operations
principally in Bermuda, Barbados, the United States, the United Kingdom and
Europe -- provides reinsurance products and services to a worldwide market
place. The Company primarily emphasizes commercial and personal property and
casualty reinsurance risks, and it offers both broker-based and direct-writing
distribution capabilities. PXRE also provides marine and aerospace reinsurance
products and services. The Company's shares trade on the New York Stock Exchange
under the symbol PXT. On October 5, 1999 PXRE Corporation, a Delaware holding
company ("PXRE Delaware") completed a reorganization that resulted in the
Company becoming the ultimate parent holding company of PXRE Delaware. Holders
of PXRE Delaware common stock automatically became holders of the same number
of PXRE common shares. The reorganization also involved the establishment of a
Bermuda based reinsurance company, PXRE Reinsurance Ltd. ("PXRE Bermuda"), and
operations in Barbados through PXRE (Barbados) Ltd. ("PXRE Barbados").
The Company conducts its business primarily through its principal
operating subsidiaries, PXRE Delaware, PXRE Reinsurance Company ("PXRE
Reinsurance"), PXRE Solutions Inc. ("PXRE Solutions"), PXRE Bermuda, PXRE
Barbados, PXRE Managing Agency Limited ("PXRE Managing Agency"), PXRE Limited,
the sole member of PG Butler Syndicate 1224 ("PXRE Lloyd's Syndicate") and
Transnational Insurance Company ("Transnational Insurance"). The term "PXRE," as
used herein, refers to one or more of PXRE Delaware, PXRE Reinsurance, PXRE
Solutions, PXRE Bermuda, PXRE Barbados, PXRE Managing Agency, PXRE Lloyd's
Syndicate and Transnational Insurance in discussions of these entities' business
and refers to PXRE Group Ltd. in all other circumstances.
PXRE Reinsurance is both a brokerage market reinsurer and a direct
writing reinsurer, with approximately $399 million of statutory capital and
surplus, which principally underwrites treaty and facultative reinsurance for
property (including marine and aerospace) and casualty risks. PXRE Reinsurance
is licensed or authorized to transact business in 46 states and the District of
Columbia, Puerto Rico, Columbia and Mexico and operates a branch in Belgium
("PXRE's Brussels Branch").
PXRE Bermuda is a quota share reinsurer of PXRE Reinsurance (30% in the
fourth quarter of 1999) and PXRE Reinsurance provides aggregate excess of loss
reinsurance protection for PXRE Bermuda. PXRE Bermuda, with approximately $25.2
million of statutory capital and surplus, also provides structured/finite
coverages. PXRE Bermuda is not licensed or admitted as an insurer in any
jurisdiction other than Bermuda. PXRE Solutions performs certain limited
reinsurance intermediary activities on behalf of a number of Bermuda reinsurers,
including PXRE Bermuda.
PXRE Managing Agency manages PXRE Lloyd's Syndicate, which has an
underwriting capacity of approximately 'L'35 million ($57 million at
December 31, 1999 exchange rates), and manages, on a fee basis, other syndicates
at Lloyd's of London ("Lloyds") with an aggregate underwriting capacity of
approximately 'L'250 million ($402 million at December 31, 1999 exchange
rates). PXRE Limited, which carries on business as a corporate member of
Lloyd's, is the sole member of PXRE Lloyd's Syndicate. PXRE Lloyd's Syndicate
underwrites specialty types of property and casualty insurance and reinsurance
(including certain accident and health coverages as well as catastrophe-type
coverages, aerospace reinsurance and facultative reinsurance) on a worldwide
basis. Underwriting premium volume and loss experience related to the business
of PXRE Lloyd's Syndicate is included in PXRE's consolidated results on a one
quarter lag basis, from 1997 through the third quarter of 1999. Beginning with
the fourth quarter of 1999, PXRE Lloyd's Syndicate reports its results
currently.
-4-
Transnational Insurance is an excess and surplus lines carrier which
has specialized in non-standard and excess property insurance risks.
Transnational Insurance, which is a wholly-owned subsidiary of PXRE Reinsurance,
has approximately $99 million of capital and is eligible to write business on a
surplus lines basis in 45 states and the District of Columbia, Guam and the U.S.
Virgin Islands.
The property and casualty reinsurance industry has been experiencing an
extended period of soft market conditions characterized by inadequate pricing.
The industry is also consolidating through mergers and other acquisitions. PXRE
competes with numerous companies, many of which have substantially greater
financial, marketing and management resources.
PXRE has specialized in property reinsurance, including a strong focus
on catastrophe-type products. Coverage terms for these products have
deteriorated in recent years, and PXRE has reduced commitments on marginally
priced business.
Meanwhile, PXRE has adopted an ambitious diversification strategy
involving:
the establishment of a direct presence in the Lloyd's market;
the addition of a reinsurance platform offering primarily casualty
products directly to customers;
the enhancement of its international broker market reinsurance
platform to include additional lines of business including casualty
risks;
the start-up of an excess and surplus lines insurance company;
an acceleration of business offerings to one of its managed business
participants;
the formation of a finite reinsurance unit; and
the establishment of a direct presence in the Bermuda market.
At December 31, 1999, PXRE was a party to retrocessional arrangements
with a number of insurers and reinsurers. Under these arrangements, PXRE cedes
some of its underwritten risks to the participants, subject to maximum aggregate
liabilities per reinsurance program. PXRE receives a management fee or
commission, initially based on premium volume, adjusted in some cases through
contingent profit commissions related to underwriting results measured over a
period of years. Future management fee income is dependent upon the amount of
business ceded to the participants and the profitability of that business.
Another arrangement with Select Reinsurance Ltd. ("Select Re"), a Bermuda
reinsurer, formerly Investors Reinsurance Ltd., involves a multi-year fee based
undertaking by PXRE through the year ending December 31, 2003 to produce and
underwrite business with Select Re. Gerald Radke (Chairman, President and Chief
Executive Officer of PXRE) and Jeffrey Radke (Executive Vice President of PXRE
and President of PXRE Bermuda) are on the Board of Directors of Select Re and
are shareholders of Select Re. Gerald Radke is Co-Vice Chairman of Select Re and
Jeffrey Radke was formerly the President of Select Re.
PXRE also purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. PXRE significantly increased its
purchases of such coverage in 1998 and 1999 in light of the continued general
deterioration in catastrophe reinsurance pricing and the opportunity to buy
protection at more favorable terms than in previous years.
HISTORY
PXRE Delaware was organized in July 1986 by Phoenix Home Life Mutual
Insurance Company ("Phoenix Home Life") to succeed, through PXRE Reinsurance, to
the property and casualty reinsurance business carried on since 1982 by Phoenix
General Insurance Company, formerly a wholly-owned subsidiary of Phoenix Home
Life. As of February 29, 2000, Phoenix Home Life owned 1,131,700 PXRE common
shares.
-5-
In November 1993, PXRE Delaware sponsored the initial public offering
of Transnational Re Corporation ("TREX") to raise capital and take advantage of
favorable conditions in the worldwide retrocessional reinsurance market. PXRE
Delaware, through PXRE Reinsurance, retained a 21% ownership position in TREX
and had responsibility for the day-to-day operations of TREX, including all the
reinsurance operations of its subsidiary, Transnational Reinsurance Company
("Transnational Reinsurance").
On December 11, 1996, TREX merged into PXRE Delaware (the "Merger"),
and each share of common stock of TREX was converted into the right to receive
1.0575 shares of PXRE Delaware common stock. Following the Merger, Transnational
Reinsurance became a wholly-owned subsidiary of PXRE Reinsurance and was
re-named Transnational Insurance Company. The Merger has been accounted for
using the purchase method of accounting; therefore net income of TREX (including
Transnational Reinsurance/Transnational Insurance) has been included in PXRE
Delaware's consolidated results of operations from the date of the Merger.
In December 1996, PXRE Delaware completed the organization of PXRE
Managing Agency and PXRE Lloyd's Syndicate, thereby establishing a direct
presence in the Lloyd's market. In 1999, PXRE Managing Agency expanded its
operations to managing for a fee other syndicates at Lloyd's.
In June 1998, PXRE Delaware added direct writing and international
teams, composed of eight direct writing reinsurance professionals and three
international reinsurance executives, respectively. The direct writing team
operates as the Direct Treaty Division of PXRE Reinsurance which provides
reinsurance on a direct basis (directly with the primary company) primarily on
casualty and, to a lesser extent, non-catastrophe type property business.
-6-
The international team's focus is property and casualty reinsurance in
the brokerage market. Subsequently in 1998, PXRE Delaware further strengthened
its Direct Treaty Division, and has also strengthened PXRE Managing Agency with
the recruitment of additional reinsurance professionals.
In mid 1999, PXRE Reinsurance formed a finite reinsurance unit to
provide structured/finite coverages combining elements of risk transfer and
managing the impact of such risks on a cedent's financial statements and cash
flow.
On October 5, 1999, PXRE Delaware completed a reorganization that
resulted in the Company becoming the ultimate parent holding company of PXRE
Delaware. The reorganization also involved the establishment of PXRE Bermuda,
a Bermuda based reinsurance company, operations in Barbados through PXRE
(Barbados) Ltd., and PXRE Solutions, a reinsurance intermediary.
RATINGS
PXRE Reinsurance is rated "A" (Excellent) by A.M. Best Company ("A.M.
Best"), an independent insurance industry rating organization. Transnational
Insurance also is rated "A" (Excellent) by A.M. Best. PXRE Bermuda is not
rated by A.M. Best, although it and PXRE Reinsurance and Transnational
Insurance have been assigned an A+ financial strength rating by Standard &
Poor's Corporation ("S&P"). PXRE Lloyd's Syndicate enjoys the benefit of ratings
of Lloyd's, which has been rated "A" (Excellent) by A.M. Best and has been
assigned an A+ financial strength rating by S&P. These ratings are based upon
factors that may be of concern to policyholders, agents and intermediaries, but
may not reflect the considerations applicable to an investment in a reinsurance
or insurance company. A change in any such rating is at the discretion of the
respective rating agencies.
-7-
GENERAL
Reinsurance is an arrangement in which a reinsurer agrees to indemnify
a primary insurer or another reinsurer (also known as a ceding company) against
all or a portion of the insurance risks underwritten by the ceding company under
one or more insurance contracts. Reinsurance can provide a ceding company with
several benefits, including a reduction in exposure on individual risks,
protection against catastrophic losses and assistance in maintaining acceptable
financial ratios. Reinsurance, however, does not legally discharge the ceding
company from its liability to policyholders.
There are two basic types of reinsurance arrangements: treaty and
facultative reinsurance. In treaty reinsurance, the reinsurer and the ceding
company negotiate a contractual arrangement which reinsures a specified portion
of a type or category of risk. Treaty reinsurers, including PXRE, do not
separately evaluate each individual risk assumed, and, consequently, after a
review of the ceding company's underwriting practices, are largely dependent on
the original underwriting decisions made by the ceding company. Such dependence
subjects reinsurers in general, including PXRE, to the risk that the primary
insurer has not adequately determined the risks to be reinsured and,
accordingly, that the premium ceded to the reinsurer in connection therewith may
not adequately compensate the reinsurer for the risk assumed. Treaty reinsurance
contributed approximately 97.4% of PXRE's gross premiums written in 1999.
Treaty reinsurance can be written on either a pro rata basis or an
excess of loss basis. In pro rata reinsurance, the reinsurer agrees, in return
for a percentage of the premiums, to share in a proportional amount of the
losses up to the limit, if any, of the reinsurance agreement. Premiums that the
ceding company pays to the reinsurer are proportional to the premiums that the
ceding company receives, and the reinsurer generally pays the ceding company a
ceding commission to reimburse the ceding company for the expenses incurred in
obtaining the business. In excess of loss treaty reinsurance, the reinsurer
indemnifies the ceding company for a portion of the losses and expenses on
underlying policies which exceed a specified dollar amount (known as the ceding
company's retention or the reinsurer's attachment point) generally subject to a
negotiated reinsurance contract limit. Premiums paid by the ceding company for
excess of loss coverage may not be directly proportional to the premiums on the
underlying policies because the reinsurer does not assume a proportional share
of the underlying risk.
Excess of loss treaty reinsurance can, in turn, be written on a per
risk or catastrophe basis. Per risk excess of loss reinsurance protects the
ceding company against a loss resulting from a single risk or location.
Catastrophe excess of loss reinsurance protects a ceding company from an
accumulation of a large number of related losses resulting from a variety of
risks which may occur in a given catastrophe, and hence is a highly volatile
business. Catastrophe-type coverages include catastrophe coverage provided to
ceding insurance companies and retrocessional catastrophe coverage provided to
other reinsurers. Catastrophe-type coverages have represented the majority of
PXRE's net premiums written during the past three fiscal years, although they
have declined in percentage terms from 84% in 1997 to 52% in 1999. See
"Underwriting Operations."
Facultative reinsurance is the reinsurance of individual risks; rather
than an agreement to reinsure a specified portion of a type or category of risk,
the reinsurer separately rates and underwrites each risk. In some cases, risks
covered by facultative reinsurance are those excluded from coverage by treaty
reinsurance. Facultative reinsurance contributed only approximately 2.6% of
PXRE's net premiums written in 1999.
Reinsurers typically purchase reinsurance to cover their own risk
exposure. Reinsurance of a reinsurer's business is called a retrocession.
Reinsurance companies cede risks under retrocessional agreements to other
reinsurers, known as retrocessionaires, for reasons similar to those that cause
ceding companies to purchase reinsurance.
-8-
Reinsurance can be written through professional reinsurance brokers or
directly for ceding companies. From a ceding company's perspective, both the
broker market and the direct market have advantages and disadvantages. A ceding
company's decision to select one market over the other will be influenced by its
perceptions of such advantages and disadvantages relative to the reinsurance
coverage being placed. PXRE writes property and casualty treaty and property
facultative business both through professional reinsurance brokers and on a
direct basis.
UNDERWRITING OPERATIONS
PXRE, through its subsidiaries, is principally engaged in providing
treaty and facultative reinsurance to primary insurers and other reinsurers of
commercial and personal property and casualty risks. PXRE also provides marine
and aerospace reinsurance products and services. PXRE has specialized in
property reinsurance, including a strong focus on catastrophe-type products. In
mid-1998, PXRE added new reinsurance lines and expanded its capabilities in
existing areas, including establishing a direct-writing reinsurance unit to
complement its existing brokerage-based reinsurance operations and offering
excess of loss casualty products (including general liability, commercial auto
and personal auto) for casualty markets in which PXRE had not previously had a
significant presence. In late 1999, PXRE established Bermuda underwriting
operations.
PXRE operates in four reportable property and casualty segments --
catastrophe and risk excess, casualty, structured/finite business and all
other lines -- based on the Company's method of internal management reporting.
In addition, the Company operates in two geographic segments -- North American
representing North American based risks written by North American based
reinsureds and International (principally the United Kingdom, Continental
Europe, Australia and Asia) representing all other premiums written. The
reportable segments were redefined during 1999 once the platform for the
diversification strategy was largely in place. The prior year segment
information has been restated to be consistent with the 1999 segments. The
following tables present the distribution of PXRE's net premiums written, net
premiums earned and underwriting operations for the years ended December 31,
1999, 1998 and 1997:
-9-
Net Premiums Written (1)
Year Ended December 31,
1999 1998 1997
------ ------ -----
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ 26,704 $ 12,795 $ 21,724
International 63,957 58,595 63,154
Excess of loss cessions (18,883) (3,938) (409)
--------- --------- ---------
Subtotal 71,778 52% 67,452 76% 84,469 84%
--------- --------- ---------
Casualty
North American 13,148 650 --
International 12,851 4,433 --
--------- --------- ---------
25,999 19% 5,083 6% --
--------- --------- ---------
Structured/Finite Business
North American -- -- --
International -- -- --
--------- --------- ---------
-- -- --
--------- --------- ---------
Other Lines
North American 12,073 2,054 4,848
International 28,995 14,105 10,738
--------- --------- ---------
41,068 29% 16,159 18% 15,586 16%
--------- --- --------- --- --------- ---
Total $ 138,845 100% $ 88,694 100% $ 100,055 100%
========= === ========= === ========= ===
-10-
Net Premiums Earned (1)
Year Ended December 31,
1999 1998 1997
------ ------ -------
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ 26,155 $ 13,561 $ 21,877
International 61,241 63,830 60,148
Excess of loss cessions (14,958) (2,869) (353)
--------- -------- --------
Subtotal 72,438 56% 74,522 81% 81,672 89%
--------- -------- --------
Casualty
North American 11,593 (152) --
International 9,794 2,207 --
--------- -------- --------
21,387 17% 2,055 2% --
--------- -------- --------
Structured/Finite Business
North American -- -- --
International -- -- --
--------- -------- --------
-- -- --
--------- -------- --------
Other Lines
North American 11,296 3,234 5,650
International 23,383 12,575 4,093
--------- -------- --------
34,679 27% 15,809 17% 9,743 11%
--------- --- -------- --- -------- ---
Total $ 128,504 100% $ 92,386 100% $ 91,415 100%
========= === ======== === ======== ===
-11-
Underwriting Operations (2)
Year Ended December 31,
1999 1998 1997
------ ------ -------
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ (31,591) $ 6,970 $ 13,655
International (32,039) 7,081 48,197
Excess of loss cessions 15,476 8,372 2,407
--------- -------- --------
Subtotal (48,154) 87% 22,423 141% 64,259 102%
--------- -------- --------
Casualty
North American (279) (409) --
International (242) 87 --
--------- -------- --------
(521) 1% (322) (2)% --
--------- -------- --------
Structured/Finite Business
North American -- -- --
International 411 -- --
--------- -------- --------
411 (1)% -- -- --
--------- -------- --------
Other Lines
North American (715) (1,442) (2,075)
International (6,166) (4,794) 573
--------- -------- --------
(6,881) 13% (6,236) (39)% (1,502) (2)%
--------- --- -------- --- -------- ---
Total $ (55,145) 100% $ 15,865 100% $ 62,757 100%
========= === ======== === ======== ===
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(1) Premiums written and earned are expressed on a net basis (after
deduction for ceded reinsurance premiums) to reflect more accurately
business written for PXRE's own account.
(2) Underwriting operations include premiums earned, losses incurred and
commission and brokerage net of management fees, but do not include
investment income, realized gains or losses, interest expense,
operating expenses, unrealized foreign exchange gains or losses on
losses incurred or management fees on weather contracts.
-12-
The catastrophe and risk excess portfolio consists principally of
property catastrophe excess of loss, property retrocessional, property risk
excess, property London Market Excess ("LMX") and marine and aerospace excess
reinsurance coverages. This portfolio can be characterized on a longer term
basis as being comprised of coverages involving higher margins and greater
volatility than other coverages written by the Company. In 1999, $90,661,000 of
net premiums written were attributable to the catastrophe and risk excess
portfolio, or $71,778,000 net of excess of loss retrocessional reinsurance ceded
to other reinsurers. Over the periods indicated pricing and other coverage terms
deteriorated and in response PXRE moved to layers of risk less affected by
competitive pressures, or reduced commitments. Notwithstanding these moves, in
1999 this portfolio produced an underwriting loss of $48,154,000 as a
consequence of major events. In contrast, this portfolio produced underwriting
profits of $22,423,000 and $64,259,000 in 1998 and 1997, respectively. The
increase in premium volume for catastrophe and risk excess coverages in 1999 was
attributable to reinstatement premiums on 1999 catastrophe activity, offset, in
part, by the purchase of increased amounts of retrocessional protection. The
exposures underlying the North American portion of this portfolio emanate from
East Coast and Gulf hurricanes, Midwest and West Coast earthquakes, major oil
rig explosions, cruise ship disasters, satellite failures, commercial airplane
crashes and similar risks. The exposures underlying the International portion of
this portfolio emanate from European, Japanese and Carribbean windstorm, flood
and earthquake.
The casualty portfolio consists principally of North American general
liability, commercial and personal auto liability risk excess and other
liability coverages and International pro rata casualty coverages. This
portfolio can be characterized on a longer term basis as being comprised of
coverages involving lower margins and less volatility than the Company's
catastrophe and risk excess portfolio. Casualty accounted for $25,999,000 of net
premiums written in 1999, split approximately equally between the Company's
North American and International geographical segments. Premiums written in 1999
represented a substantial increase over 1998, when PXRE entered the market in
the latter half of the year. In 1999, the casualty portfolio produced an
underwriting loss of $521,000 before investment income, realized gains and
losses and overhead expenses.
PXRE entered the structured/finite business in the latter part of 1999
with products combining elements of risk transfer and managing the impact of
such risk on a cedent's financial statements and cash flow. Premiums in this
segment are expected to vary widely from period to period.
PXRE's other lines portfolio consists of many different coverages,
principally accident and health coverages, of which North American and
International accounted for $6,980,000 and $13,324,000, respectively, of net
premiums written in 1999, property pro rata business and binding and lineslip
authorities written through PXRE Lloyd's Syndicate. The Company's other lines
portfolio produced a North American underwriting loss of $715,000 and
International underwriting loss of $6,166,000, up modestly in the aggregate from
1998.
See Note 10 of Notes to Consolidated Financial Statements for
additional information regarding PXRE's reportable segments and geographic
areas.
PXRE's treaty underwriting process emphasizes a team approach among the
Company's underwriters, actuaries and claims staff. Treaties are reviewed for
compliance with PXRE's general underwriting standards and certain treaties are
evaluated in part based upon actuarial analyses conducted by the Company. PXRE's
facultative underwriters operate within guidelines specifying acceptable types
of risks, limits and maximum risk exposure. The Company manages its risk of loss
through a combination of aggregate exposure limits, underwriting guidelines that
take into account risks, prices and coverage and retrocessional agreements. As
PXRE underwrites risks from a large number of insurers based on information
generally supplied by reinsurance brokers, there is a risk of developing a
concentration of exposure to loss in certain geographic areas prone to specific
types of catastrophes. The Company has developed systems and software tools to
monitor and manage the accumulation of its exposure to such losses. Management
has established guidelines for maximum tolerable losses from a single or
multiple catastrophic event based on historical data. However, no assurance can
be given that these maximums will not be exceeded in some future catastrophe.
-13-
MARKETING
PXRE provides reinsurance for international insurance and reinsurance
companies principally headquartered in the United Kingdom, Continental Europe,
Australia and Asia. In the United States, PXRE currently reinsures both national
and regional insurance and reinsurance companies and specialty insurance
companies.
Historically, PXRE has obtained most of its facultative and
substantially all of its treaty reinsurance business through reinsurance
intermediaries which represent reinsureds in negotiations for the purchase of
reinsurance. None of the reinsurance intermediaries through which PXRE obtains
this business are authorized to arrange any business in the name of PXRE without
PXRE's approval. PXRE pays such intermediaries or brokers commissions based on
the amount of premiums and type of business ceded. These payments constitute
part of PXRE's total acquisition costs and are included in its underwriting
expenses. PXRE generally pays reinsurance brokerage fees believed to be
comparable to industry norms.
Approximately 19.1%, 10.7% and 13.2% of gross premiums written in
fiscal year 1999 were arranged through the worldwide branch offices of Aon Group
Ltd., Guy Carpenter & Company, Inc. (subsidiary of Marsh & McLennan Companies,
Inc.) and Benfield Greig Ltd., respectively. The commissions paid by PXRE to
these intermediaries are generally at the same rates as those paid to other
intermediaries.
In mid-1998 PXRE established a U.S. based direct writing reinsurance
unit to complement its existing brokerage-based reinsurance operations.
Approximately 88.1% and 11.9% of PXRE's 1999 net premiums written were written
in the broker and direct markets, respectively. PXRE's U.S. based direct
writings are comprised principally of casualty business. PXRE's ability to write
reinsurance both through brokers and directly with ceding companies gives it the
flexibility to pursue business regardless of the ceding company's preferred
reinsurance purchasing method.
COMPETITION
Competitive forces in the property and casualty reinsurance and
insurance business are substantial. PXRE operates in a reinsurance industry
which is highly competitive and is undergoing a variety of challenging
developments. The industry has in recent years moved toward greater
consolidation as ceding companies have placed increased importance on size and
financial strength in the selection of reinsurers. Additionally, reinsurers are
tapping new markets and complementing their range of traditional reinsurance
products with innovative new products which bring together capital markets and
reinsurance experience. PXRE competes with numerous major reinsurance and
insurance companies. These competitors, many of which have substantially
greater financial, marketing and management resources than PXRE, include
independent reinsurance companies, subsidiaries or affiliates of established
worldwide insurance companies, reinsurance departments of certain commercial
insurance companies, and underwriting syndicates. PXRE also may face competition
from new market entrants or from market participants that determine to devote
greater amounts of capital to the types of business written by PXRE.
Although PXRE historically has obtained most of its facultative and
substantially all of its treaty reinsurance business through reinsurance
intermediaries or brokers, it competes indirectly with reinsurers who obtain
business directly from primary insurers because PXRE's brokers must compete with
direct reinsurers for business to be forwarded to PXRE. PXRE's recently
established direct writing reinsurance unit competes directly with other direct
reinsurers. PXRE therefore competes both with reinsurers that obtain business
directly from reinsureds and with reinsurers that obtain their business through
intermediaries and brokers.
Competition in the types of reinsurance business which PXRE underwrites
is based on many factors, including the perceived overall financial strength of
the reinsurers, premiums charged, other terms and conditions,
-14-
ratings of A.M. Best, S&P and Moody's Investors Service, Inc. ("Moody's"),
service offered, speed of service (including claims payment), and perceived
technical ability and experience of staff. The number of jurisdictions in which
a reinsurer is licensed or authorized to do business is also a factor. PXRE
Reinsurance is licensed, accredited, or otherwise authorized or permitted to
conduct reinsurance business in all states (except Arkansas, Minnesota, Oklahoma
and Washington) and the District of Columbia, Puerto Rico, Columbia and Mexico,
and PXRE's Brussels Branch operates from Belgium. PXRE Bermuda is licensed to
do business only in Bermuda.
RETROCESSIONAL AGREEMENTS
The following table sets forth certain information regarding the volume
of premiums PXRE has ceded to other reinsurers pursuant to retrocessional
agreements for the periods indicated:
Year Ended December 31,
-----------------------------------------
1999 1998 1997
(in thousands)
Gross premiums written $221,349 $136,215 $126,232
Reinsurance premiums ceded:
Managed business participants 42,549 21,542 16,534
Catastrophe coverage and other
reinsurance 39,955 25,979 9,643
Total reinsurance premiums
ceded 82,504 47,521 26,177
-------- -------- --------
Net premiums written $138,845 $ 88,694 $100,055
======== ======== ========
PXRE has been able to increase its underwriting commitments and to
generate management fee income by retroceding some of its underwritten risks to
other reinsurers through various retrocessional arrangements whereby it manages
business for such participants. In 1999, PXRE was a party to three such
arrangements. The first such arrangement, which is subject to renewal each
January 1 and which has been renewed effective January 1, 2000, is referred to
as the AMA. The AMA is a pool consisting of a number of insurance companies (the
"Pool"), for which PXRE acts as reinsurance manager. In 1999, the Pool was
comprised of Merrimack Mutual Fire Insurance Company, Pennsylvania Lumbermens
Mutual Insurance Company, NRMA Insurance Limited, Auto-Owners Insurance Company
and the Kyoei Mutual Fire & Marine Insurance Company. It is PXRE's policy that
in order to join the Pool, companies must have a rating by A.M. Best of "A-" or
better, other than foreign companies, most of which (including the foreign
participants in the AMA) are not rated by A.M. Best. Under the terms of the
agreements governing the Pool, if a participating company's rating falls below
"A-", it generally will be required to withdraw from the Pool in the following
year. PXRE receives, as reinsurance manager, a commission based on premiums
ceded, as well as a contingent profit commission equal to a percentage of any
ultimate underwriting profits in connection with the reinsurance ceded. The
contingent profit commission is paid after a three-year period and is subject to
adjustment based on cumulative experience.
The second such retrocessional arrangement, which was not renewed upon
its expiration December 31, 1999, was with Trenwick America Reinsurance
Corporation ("Trenwick Group"). Under this arrangement PXRE receives, as
reinsurance manager, a management fee based on premiums ceded, as well as a
contingent profit commission equal to a percentage of any ultimate underwriting
profits in connection with the reinsurance ceded. The contingent profit
commission is paid after a three-year period and is subject to adjustment based
on cumulative experience. Trenwick Group is currently rated "A" (Excellent) by
A.M. Best.
-15-
The third such retrocessional arrangement is with Select Re. This
arrangement involves a multi-year fee based undertaking by PXRE through the year
ending December 31, 2003 to produce and underwrite business with Select Re. The
undertaking, which is subject to adjustment based on Select Re's shareholders'
equity, was approximately $29.5 million in aggregate premium for 1999. PXRE
receives an override commission on premiums ceded to Select Re. Because Select
Re is not licensed in any jurisdiction in the United States, the retrocessional
arrangement provides that a trust fund and/or letter of credit be established by
Select Re for the benefit of PXRE to secure Select Re's obligations. Net assets
due from Select Re at December 31, 1999 of $14,932,000 is secured by a trust
agreement and letter of credit. As previously discussed, the Chief Executive
Officer and an Executive Officer of PXRE are on the Board of Directors and are
shareholders of Select Re. The Chief Executive Officer of PXRE is Co-Vice
Chairman of Select Re and the Executive Officer of PXRE was formerly the
President of Select Re.
The following table sets forth PXRE's earned commissions from
retrocessionaires pursuant to its three managed business arrangements for the
periods indicated:
Year Ended December 31,
------------------------------------------
1999 1998 1997
--------- ---------- ---------
(in thousands)
Commission $3,851 $2,247 $ 879
Contingent profit commission(1) (761) (75) 2,127
------ ------ ------
Total $3,090 $2,172 $3,006
====== ====== ======
- -------------------
(1) Contingent profit commission is paid after a three-year period and is
subject to adjustment based on cumulative experience under the AMA and
Trenwick Group arrangements and prior to 1998 under the arrangement with
Select Re.
PXRE also purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. PXRE significantly increased its
purchases of such coverage in 1998 and 1999. In 1999 and 1998, catastrophe and
other reinsurance ceded premiums written increased due to additional coverage
associated with new operations and to opportunistic purchases of catastrophe
retrocessional protection. Certain business fronted on behalf of other
reinsurers also contributed to the 1999 increase in catastrophe and other
reinsurance ceded premiums written. PXRE's property business is protected by a
series of retrocessional agreements which currently provide protection
principally against unusual severity of loss and are not designed to protect
PXRE's exposure to smaller, more frequent loss occurrences.
PXRE has a committee consisting of its chief executive officer and
senior underwriting executives responsible for the selection of reinsurers as
managed business participants or as participating reinsurers in the catastrophe
coverage protecting PXRE. Proposed reinsurers are evaluated at least annually
based on consideration of a number of factors including the management,
financial statements and the historical experience of the reinsurer. This
procedure is followed whether or not a rating has been assigned to a proposed
reinsurer by any rating organization. All reinsurers, whether obtained through
direct contact or the use of reinsurance intermediaries, are subject to approval
by PXRE.
At December 31, 1999, estimated losses recoverable (including incurred
but not reported losses ("IBNR")) from retrocessionaires were $106,702,000
including $5,667,000 of paid loss recoverables. Although management carefully
selects its retrocessionaires, PXRE is subject to credit risk with respect to
its retrocessions because the ceding of risk to retrocessionaires does not
relieve the Company of its liability to ceding companies.
LOSS LIABILITIES AND CLAIMS
PXRE establishes loss and loss expense liabilities (to cover expenses
related to settling claims, including legal and other fees) to provide for the
ultimate cost of settlement and administration of claims for losses, including
claims that have been reported to it by its reinsureds and claims for losses
that have occurred but have not yet been
-16-
reported to PXRE. Under United States generally accepted accounting principles
("GAAP"), PXRE is not permitted to establish loss reserves until an event which
may give rise to a claim occurs.
For reported losses, PXRE establishes liabilities when it receives
notice of the claim. It is PXRE's general policy to establish liabilities for
reported losses in an amount equal to the liability set by the reinsured. In
certain instances, PXRE will conduct an investigation to determine if the amount
established by the reinsured is appropriate or if it should be adjusted.
For incurred but not reported losses, a variety of methods have been
developed in the insurance industry for use in determining such liabilities. In
general, these methods involve the extrapolation of reported loss data to
estimate ultimate losses. PXRE's loss calculation methods generally rely upon a
projection of ultimate losses based upon the historical patterns of reported
loss development. Additionally, PXRE makes provision through its liabilities for
incurred but not reported losses for any identified deficiencies in the
liabilities for reported losses set by its reinsureds.
PXRE's management believes that its overall liability for losses and
loss expenses maintained as of December 31, 1999 is adequate. Because of the
inherent uncertainty in the reserving process, however, there is a risk that
PXRE's liability for losses and loss expenses could prove to be greater than
expected in any year, with a consequent adverse impact on future earnings and
shareholders' equity. Estimating the ultimate liability for losses and loss
expenses is an imprecise science subject to variables that are influenced by
both internal and external factors. Historically, PXRE has focused on property
related coverages. In contrast to casualty losses, which frequently are slow to
be reported and may be determined only through the lengthy, unpredictable
process of litigation, property losses tend to be reported more promptly and
usually are settled within a shorter time period. However, the estimation of
losses for catastrophe reinsurers is inherently less reliable than for
reinsurers of risks which have an established historical pattern of losses. In
addition, insured events which occur near the end of a reporting period, as well
as, with respect to PXRE's retrocessional book of business, the significant
delay in losses being reported to insurance carriers, reinsurers and finally
retrocessionaires, require PXRE to make estimates of losses based on limited
information from ceding companies and based on its own underwriting data.
Although historically PXRE has written a small amount of casualty
reinsurance, in 1998 PXRE began underwriting new casualty lines of business and
PXRE substantially expanded its casualty business in 1999. With respect to
casualty business, significant delay, ranging up to several years or more, can
be expected between the reporting of a loss to PXRE and the settlement of PXRE's
liability for that loss. As a result, such future claim settlements could be
influenced by changing rates of inflation and other economic conditions,
changing legislative, judicial and social environments and changes in PXRE's
claims handling procedures. While the reserving process is difficult and
subjective for ceding companies, the inherent uncertainties of estimating such
reserves are even greater for a reinsurer, due primarily to the longer time
between the date of the occurrence and the reporting of any attendant claims to
the reinsurer, the diversity of development patterns among different types of
reinsurance treaties or facultative contracts, the necessary reliance on the
ceding companies for information regarding reported claims and differing
reserving practices among ceding companies.
-17-
PXRE's difficulty in accurately predicting casualty losses may also be
exacerbated by the limited amount of statistically significant historical data
regarding losses on PXRE's new casualty lines of business. PXRE must therefore
rely on the inherently less reliable historical loss patterns reported by ceding
companies and industry loss standards in calculating its casualty reserves.
Thus, the actual casualty losses and loss expenses may deviate, perhaps
substantially, from estimates of liabilities reflected in PXRE's consolidated
financial statements.
The following table provides a reconciliation of beginning and ending
loss and loss expense liabilities under GAAP for the fiscal years ended December
31, 1999, 1998 and 1997. PXRE does not discount such liabilities; that is, it
does not calculate them on a present value basis.
Year Ended December 31,
1999 1998 1997
-------- -------- --------
(in thousands)
Gross GAAP liability for losses and
loss expenses at beginning of year................................. $ 102,592 $ 57,189 $ 70,978
Add: Gross provision for losses and loss expenses--
Occurring in current year.......................................... 200,132 94,003 19,344
Occurring in prior years........................................... 57,129 90 (4,721)
-------- -------- --------
Total gross provision(1)......................................... 257,261 94,093 14,623
-------- -------- --------
Less: Gross payments for losses and loss expenses--
Occurring in current year.......................................... 17,508 19,582 4,705
Occurring in prior years........................................... 80,794 29,108 23,707
-------- -------- --------
Total gross payments............................................. 98,302 48,690 28,412
-------- -------- --------
Gross GAAP liability for losses
and loss expenses at end of year................................... $ 261,551 $102,592 $ 57,189
========= ======== ========
Ceded GAAP liability for losses
and loss expenses at end of year................................... (101,035) (33,350) (12,734)
-------- -------- --------
Net GAAP liability for losses
and loss expenses at end of year................................... $ 160,516 $ 69,242 $ 44,455
========= ======== ========
Foreign currency adjustment.......................................... 249 (193) 482
========= ======== ========
Gross SAP liability for losses and
loss expenses at end of year(2).................................... $ 261,800 $102,399 $ 57,671
========= ======== ========
- ----------------
(1) The GAAP provision for losses and loss expenses includes net foreign
currency exchange (losses) gains of $442,000, ($675,000) and $627,000 for
1999, 1998 and 1997, respectively.
(2) SAP is U.S. statutory accounting principles.
The following table presents the development of PXRE's GAAP balance
sheet liability for losses and loss expenses for the period 1989 through 1999.
The top line of the table shows the liabilities at the balance sheet date for
each of the indicated years. This reflects the estimated amount of losses and
loss expenses for claims arising in that year and all prior years that are
unpaid at the balance sheet date, including losses incurred but not yet
reported to PXRE. The upper portion of the table shows the cumulative amounts
subsequently paid as of successive years with respect to the liability. The
lower portion of the table shows the reestimated amount of previously recorded
liability based on experience as of the end of each succeeding year. The
estimates change as more information becomes known about the frequency and
severity of claims for individual years. A redundancy (deficiency) exists when
the reestimated liability at each December 31 is less (greater) than the prior
liability estimate. The "cumulative redundancy (deficiency)" depicted in the
table, for any particular calendar year, represents the aggregate change in the
initial estimates over all subsequent calendar years.
Each amount in the table below includes the effects of all changes in
amounts for prior periods. For example, if a loss determined in 1992 to be
$150,000 was first reserved in 1989 at $100,000, the $50,000 deficiency (actual
loss minus original estimate) would be included in the cumulative redundancy
(deficiency) in each of the years 1989-1991 shown below. This table does not
present accident or policy year development data.
-18-
Loss and loss expense liabilities for fiscal years 1991 through 1999
are presented on a gross basis (excluding the effects of losses recoverable from
retrocessionaires). Loss and loss expense liabilities for December 31, 1990 and
prior periods are stated on a net basis (after deduction for losses recoverable
from retrocessionaires) because gross incurred but not reported liability data
were not developed by PXRE at any date prior to December 31, 1991 as it was not
required for reporting purposes. Furthermore, it is not practicable for PXRE
currently to reconstruct this information.
-19-
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------
(in thousands, except percentages)
Liabilities for losses and
loss expenses................. $261,551 $102,592 $57,189 $61,389 $72,719 $81,836 $71,442 $88,668 $62,664 $31,632 $37,963
Cumulative amount of
liability paid through:
One year later................ 75,814 29,108 23,708 42,698 41,601 37,820 59,773 35,575 15,688 18,421
Two years later............... 39,853 40,673 55,620 58,968 54,400 79,926 48,393 25,466 28,178
Three years later............. 46,545 67,296 67,630 60,850 89,519 52,301 29,066 31,852
Four years later.............. 70,676 76,762 64,566 94,261 55,022 30,117 33,980
Five years later.............. 79,433 69,414 96,895 56,976 31,528 34,434
Six years later............... 70,392 99,864 58,822 32,137 35,408
Seven years later............. 100,724 61,235 33,202 36,003
Eight years later............. 62,130 33,624 36,980
Nine years later.............. 33,956 37,301
Ten years later............... 37,485
Liabilities reestimated as of:
One year later................ 135,227 57,280 66,257 83,228 87,818 78,188 101,423 67,165 33,874 37,211
Two years later............... 55,271 63,292 85,162 87,750 76,902 103,632 62,262 33,726 37,800
Three years later............. 61,178 83,178 90,409 74,683 105,165 62,827 33,488 36,588
Four years later.............. 82,129 89,284 75,392 103,801 63,032 33,682 36,881
Five years later.............. 88,326 74,880 104,330 62,593 34,310 37,023
Six years later............... 74,173 104,222 63,632 33,777 37,667
Seven years later............. 103,854 63,792 34,714 37,166
Eight years later............. 63,633 34,815 37,998
Nine years later.............. 34,777 38,124
Ten years later............... 38,084
Gross reserves of TREX at date
of merger..................... 9,589 5,242 2,067 26
Gross reserves for elimination
of one quarter lag for
U.K. subsidiary............... (1,191)
Gross cumulative redundancy
(deficiency) through
December 31, 1999:
Amount........................ (33,826) 1,918 9,800 (4,168) (4,423) (2,705) (15,186) (969) NA NA
Percentage.................... (33%) 3% 14% (5%) (5%) (4%) (17%) (2%) NA NA
Retrocessional recoveries....... 14,045 (749) (1,517) 6,796 2,500 726 2,689 1,936 NA NA
Net cumulative redundancy
(deficiency) through
December 31, 1999:
------- ----- ------ ------ ------ ------ ------ ----- ------ -----
Amount....................... (19,781) 1,169 8,283 2,628 (1,923) (1,979) (12,497) (2,905) (3,145) (111)
Percentage................... (29%) 3% 15% 5% (4%) (5%) (35%) (8%) (10%) 0%
-20-
During 1999, PXRE incurred development from prior year losses amounting
to $19,781,000 net as a result of changes in estimates of insured events in
prior years, primarily Hurricanes Georges and Mitch and accident and health and
facultative reserve strengthening in PXRE Lloyd's Syndicate.
During 1998, PXRE experienced savings of $532,000 net, for prior year
losses and loss expenses primarily related to the triggering of a retrocessional
recovery on a 1994 aviation loss offset in part by adverse development due to
the 1997 German, Polish and Czech floods.
During 1997, PXRE experienced savings of $3,917,000 net, for prior-year
losses and loss expenses primarily related to the Eurotunnel fire and Hurricane
Fran where redundant reserves were recognized in 1997 of approximately
$1,644,000 and $1,440,000, respectively. In addition, included in the savings of
$3,917,000 were prior-year losses originally thought to have triggered market
loss coverage thresholds which proved to be redundant by approximately
$1,800,000 offset, in part, by development on prior-year facultative losses.
During 1996, PXRE incurred development from prior year losses amounting
to $3,249,000 primarily due to Hurricanes Marilyn and Luis. During 1995, PXRE
incurred development from prior year losses amounting to $4,311,000 primarily as
a result of losses from the Northridge earthquake. During 1994, PXRE incurred
development from prior year losses amounting to $3,261,000 primarily as a result
of marine pro rata losses and 1993 Midwest flood activity. During 1993, PXRE's
management strengthened the liability for incurred but not reported losses
occurring in prior years by $10,499,000, of which approximately $5,394,000 was
the result of additional information received with respect to Hurricanes Andrew
and Iniki and approximately $3,330,000 was the result of losses under a number
of pro rata reinsurance treaties. During 1992, PXRE's management strengthened
the liability for incurred but not reported losses occurring in prior years by
$2,355,000 of which $2,036,000 was the result of additional information received
with respect to losses under a number of pro rata reinsurance treaties. In 1991,
PXRE's management strengthened the liability for losses and loss expenses
occurring in prior years by $2,242,000, of which $1,196,000 was due to
unfavorable development experienced on PXRE's marine and aerospace reinsurance
business. PXRE commenced writing marine and aerospace reinsurance in 1988 and
estimated the amounts of losses and loss expenses for claims on such business
during 1988 and subsequent periods based on cumulative experience as of such
time. As more information became available, prior estimates were revised.
Approximately $740,000 of the balance of the liability strengthening in 1991 was
attributable to changes in 1991 in the loss amounts applicable to catastrophes
which occurred in 1989 and 1990, years impacted by high levels of catastrophe
loss activity.
Management of PXRE believes that the cumulative reserve redundancies in
1995, 1996 and 1997 demonstrated by the above table, and that the strengthening
of reserves in 1989-1994 and 1998, is attributable to the factors described
above and not to any material changes in reserving methods or assumptions.
-21-
Conditions and trends that have affected reserve development in the
past may not necessarily occur in the future. Accordingly, it would not be
appropriate to extrapolate future redundancies or deficiencies based on the
foregoing.
INVESTMENTS
PXRE's management has established general procedures and guidelines for
its investment portfolio and oversees investment management carried out by
Phoenix Investment Partners, Limited (formerly Phoenix Duff & Phelps
Corporation), a public majority-owned subsidiary of Phoenix Home Life, and by
Mariner Investment Group, Inc. ("Mariner") the sole shareholder of which is the
Chairman of the Board and a founding shareholder of Select Re. PXRE's invested
assets consist primarily of fixed maturities and limited partnerships, but also
include equities, real estate investment trusts ("REITS") and short-term
investments. PXRE's investments are subject to market-wide risks and
fluctuations, as well as to risk inherent in particular securities. As at
December 31, 1999, PXRE had $26,214,000 in equity securities (at cost) and
$93,147,000 in various limited partnerships (at cost). The limited partnerships
primarily include a fund of funds investing in a multiple number of hedge
strategies. Short-term investments includes one limited partnership which
invests primarily in marketable fixed income securities and provides for fund
withdrawals upon 30 days' notice. Limited partnership investments are accounted
for under the equity method, whereby both the investment income and any change
in the market value are recorded through the investment income line of the
income statement. Included in investments in limited partnerships are
investments (at cost) aggregating $55,517,000 in various limited partnerships
affiliated with Mariner, including an investment of $17,517,000 in Mariner
Select, L.P., which provided approximately $10,618,000 of investment income for
PXRE in 1999. See Note 3 of Notes to Consolidated Financial Statements. The
investment policies of PXRE stress conservation of principal, diversification of
risk and liquidity.
-22-
The following table summarizes the investments of PXRE at December 31,
1999 and 1998:
ANALYSIS OF INVESTMENTS
December 31, 1999 December 31, 1998
----------------------------- ---------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(in thousands, except percentages)
Fixed maturities (at amortized cost):
United States government securities $104,034 21.1 $113,030 23.9
Foreign government securities 10,116 2.0 43,815 9.3
United States government agency
mortgage and asset-backed securities 25,417 5.1 1,087 0.2
Other mortgage and asset-backed
securities 69,105 14.0 43,175 9.1
Obligations of states and political
subdivisions 94,692 19.2 97,470 20.6
Public utilities, industrial and
miscellaneous securities 26,598 5.4 10,081 2.1
-------- ----- -------- ----
Total fixed maturities 329,962 66.8 308,658 65.2
Equity securities (at cost) 26,214 5.3 41,146 8.7
Short-term investments (at cost) 44,384 9.0 57,244 12.1
Limited Partnership assets (at cost) 93,147 18.9 66,588 14.0
-------- ---- -------- ----
Total investments $493,707 100 $473,636 100
======== ==== ======== ====
At December 31, 1999, the fair value of PXRE's investment portfolio
exceeded its amortized cost by $15,861,000 due to equity accounting on the
limited partnerships amounting to $25,949,000, offset in part by unrealized
depreciation on fixed maturities and equity securities amounting to $10,088,000.
At December 31, 1998, the fair value of PXRE's investment portfolio exceeded its
amortized cost by $841,000.
-23-
The following table indicates the composition of PXRE's fixed maturity
investments (at amortized cost), including short-term investments (at cost), by
time to maturity at December 31, 1999 and 1998:
COMPOSITION OF INVESTMENTS BY MATURITY
December 31, 1999 December 31, 1998
------------------ --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(in thousands, except percentages)
Maturity(1)
One year or less $ 50,963 13.6 $73,955 20.2
Over 1 year through 5 years 118,566 31.7 121,627 33.2
Over 5 years through 10 years 79,630 21.3 65,077 17.8
Over 10 years through 20 years 10,659 2.8 27,777 7.6
Over 20 years 18,929 5.1 33,204 9.1
-------- ---- -------- -----
278,747 74.5 321,640 87.9
United States government agency
and other mortgage and asset-backed
securities 95,599 25.5 44,262 12.1
-------- ---- -------- ----
Total $374,346 100 $365,902 100
======== ==== ======== ====
- ------------------------
(1) Based on stated maturity dates with no prepayment assumptions.
The average market yield to maturity of PXRE's fixed maturities
portfolio at December 31, 1999 and December 31, 1998 was 6.6% and 5.9%,
respectively. At December 31, 1999, the fair value of PXRE's fixed maturities
portfolio was less than its amortized cost by $8,714,000. At December 31, 1998,
the fair value of PXRE's fixed maturities portfolio exceeded its amortized cost
by $819,000.
-24-
The following table indicates the composition of PXRE's fixed maturities
portfolio (at amortized cost), excluding short-term investments, by rating at
December 31, 1999 and 1998:
COMPOSITION OF FIXED MATURITIES PORTFOLIO BY RATING
December 31, 1999 December 31, 1998
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(in thousands, except percentages)
Ratings(1)
- -----------
United States government securities $104,034 31.5 $113,030 36.6
United States government agency
mortgage and asset-backed securities 25,416 7.7 1,087 0.4
Other mortgage and asset-backed securities
Aaa and/or AAA 57,321 17.4 34,558 11.2
Aa2 and/or AA 3,168 1.0 -- --
A2 and/or A 8,000 2.4 8,000 2.6
Baa2 and/or BBB 615 0.1 616 0.2
Obligations of states and political
subdivisions
Aaa and/or AAA 70,053 21.2 64,883 21.0
Aa2 and/or AA 24,639 7.5 32,587 10.6
Public utilities and industrial and
miscellaneous securities
Aaa and/or AAA 2,499 0.8 -- --
Aa2 and/or AA 5,871 1.8 -- --
A2 and/or A 3,379 1.0 749 0.2
Baa2 and/or BBB 4,549 1.4 4,226 1.4
Ba2 and/or BB 7,444 2.3 3,117 1.0
B2 and/or B 2,856 0.9 1,989 0.6
Foreign government securities
Baa2 and/or BBB 2,908 0.9 3,820 1.2
Ba2 and/or BB 4,873 1.5 30,196 9.8
B2 and/or B 2,337 0.6 8,618 2.8
Ca and/or CC -- -- 1,182 0.4
-------- --- -------- ---
Total $329,962 100 $308,658 100
======== === ======== ===
- ----------------------------
(1) Ratings as assigned by Moody's and S&P, respectively. Such ratings are
generally assigned upon the issuance of the securities, subject to
revision on the basis of ongoing evaluations.
PXRE's management continually evaluates the composition of the
investment portfolio and repositions the portfolio in response to market
conditions in order to improve total returns while maintaining liquidity and
superior credit quality. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources -- Market
Risk."
-25-
REGULATION
PXRE, PXRE Reinsurance and Transnational Insurance are subject to
regulation under the insurance statutes of various U.S. states, including
Connecticut, the domiciliary state of PXRE Reinsurance and Transnational
Insurance. The regulation and supervision to which PXRE Reinsurance and
Transnational Insurance are subject relate primarily to the standards of
solvency that must be met and maintained, licensing requirements for reinsurers
and insurers, the nature of and limitations on investments, restrictions on the
size of risks which may be insured, deposits of securities for the benefit of a
reinsured or insured, methods of accounting, periodic examinations of the
financial condition and affairs of reinsurers and insurers, the form and content
of reports of financial condition required to be filed, reserves for losses, and
other purposes. In general, such regulation is for the protection of the
reinsureds and policyholders, rather than investors.
In addition, PXRE, PXRE Reinsurance and Transnational Insurance are
subject to regulation by U.S. state insurance authorities under the insurance
holding company statutes of various states, including Connecticut. These laws
and regulations vary from state to state, but generally require an insurance
holding company and insurers and reinsurers that are subsidiaries of an
insurance holding company to register with the state regulatory authorities and
to file with those authorities certain reports including information concerning
their capital structure, ownership, financial condition, and general business
operations. Moreover, PXRE Reinsurance and Transnational Insurance may not enter
into certain transactions, including certain reinsurance agreements, management
agreements, and service contracts, with members of their insurance holding
company system, unless they have first notified the Connecticut Insurance
Commissioner of their intention to enter into any such transaction and the
Connecticut Insurance Commissioner has not disapproved of such transaction
within the period specified by the Connecticut insurance statute. Among other
things, such transactions are subject to the requirements that their terms be
fair and reasonable, charges or fees for services performed be reasonable and
the interests of policyholders not be adversely affected.
U.S. state laws also require prior notice or regulatory agency approval
of direct or indirect changes in control of an insurer, reinsurer, or its
holding company, and of certain significant intercorporate transfers of assets
within the holding company structure. An investor who acquires shares
representing or convertible into more than 10% of the voting power of the
securities of PXRE would become subject to at least some of such regulations,
would be subject to approval by the Connecticut Insurance Commissioner prior to
acquiring such shares, and would be required to file certain notices and reports
with the Commissioner prior to such acquisition. See "Market for Registrant's
Common Equity and Related Stockholder Matters" for a discussion of other
limitations on voting and ownership of PXRE securities contained in PXRE's
Bye-Laws.
The principal sources of cash for the payment of operating expenses and
income taxes, debt service obligations, and dividends by PXRE are the receipt of
dividends and net tax allocation payments from PXRE Reinsurance, Transnational
Insurance and PXRE Bermuda. Under the Connecticut insurance laws, the maximum
amount of dividends or other distributions that PXRE Reinsurance may declare or
pay, and that Transnational Insurance may declare or pay to PXRE Reinsurance,
within any twelve-month period, without regulatory approval, is limited to the
lesser of (a) earned surplus or (b) the greater of 10% of policyholder surplus
at December 31 of the preceding year, or 100% of net income for the twelve-month
period ended December 31 of the preceding year, all determined in accordance
with U.S. statutory accounting principles ("SAP"). Accordingly, the Connecticut
insurance laws could limit the amount of dividends available for distribution by
PXRE Reinsurance or Transnational Insurance without prior regulatory approval,
depending upon a variety of factors outside the control of PXRE, including the
frequency and severity of catastrophe and other loss events and changes in the
reinsurance market, in the insurance regulatory environment and in general
economic conditions. The maximum amount of dividends or distributions that PXRE
Reinsurance may declare and pay during 2000, without regulatory approval, is
limited to approximately $39,901,000. Transnational Insurance may not declare or
pay any dividend to PXRE Reinsurance in 2000, without regulatory approval.
During 1999, $35,525,695 in dividends were paid by PXRE Reinsurance, including
extraordinary dividends and $10,000,000 was paid by Transnational Insurance to
PXRE Reinsurance, including extraordinary dividends. In both cases authorization
was obtained from the Insurance Department of the State of Connecticut. See
below for a discussion of Bermuda dividend restrictions applicable to PXRE
Bermuda.
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See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Additionally, Connecticut has adopted regulations respecting certain
minimum capital requirements for property and casualty companies, based upon a
model adopted by the National Association of Insurance Commissioners (the
"NAIC"). The risk-based capital regulations provide for the use of a formula to
measure statutory capital and surplus needs based on the risk characteristics of
a company's products and investment portfolio to identify weakly capitalized
companies. As at December 31, 1999, PXRE Reinsurance's surplus and Transnational
Insurance's surplus substantially exceeded their respective calculated
risk-based capital.
In addition, from time to time various regulatory and legislative
changes have been proposed in the U.S. insurance industry, some of which could
have an effect on reinsurers and insurers. Among the proposals that have in the
past been or are at present being considered are the possible introduction of
federal regulation in addition to, or in lieu of, the current system of state
regulation of insurers, the initiative to create a federally guaranteed disaster
reinsurance pool prefunded by insurers, and proposals in various state
legislatures (some of which proposals have been enacted) to conform portions of
their insurance laws and regulations to various model acts adopted by the NAIC.
Furthermore, the NAIC has commenced a project to codify statutory accounting
practices, the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which is
expected to take affect in 2001, will likely change the definitions of what
constitutes prescribed versus permitted statutory accounting practices and will
likely result in changes to the accounting policies that insurance enterprises
use to prepare their statutory financial statements. The NAIC is an organization
which assists state insurance supervisory officials in achieving insurance
regulatory objectives, including the maintenance and improvement of state
regulation. See also, "Taxation of PXRE and its Subsidiaries -- Legislation"
PXRE is unable to predict what effect, if any, the foregoing developments may
have on its operations and financial condition in the future.
The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and is primarily intended
to assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies eleven industry ratios and specifies "usual
values" for each ratio. Departure from the usual values on four or more of the
ratios can lead to inquiries from individual state insurance commissioners as to
certain aspects of an insurer's business. For the years ended December 31, 1999,
1998 and 1997, PXRE Reinsurance's results were within the usual values for each
of the eleven ratios, except for one ratio in each of 1999 and 1998. PXRE's
management believes that the ratio fell outside the usual range in 1999 due to
the unusual level of catastrophe losses in 1999 and in 1998 due to the
substantial turmoil in global securities markets and the resulting decline in
the value of certain limited partnership investments. In 1999, Transnational
Insurance's results were within the usual values for each of the eleven ratios
except for one due to the increase in net writings arising from an intercompany
pooling agreement in 1999 with its parent PXRE Reinsurance. In 1998 one ratio
was outside the usual range due primarily to the change in net writings
associated with business written in 1994 to 1996. In 1997, two ratios were
outside the usual range, when Transnational Insurance did not write any business
and paid a dividend, including an extraordinary dividend, of $58,877,000 to PXRE
Reinsurance, affecting the change in net writings ratio and change in surplus
ratio.
PXRE Limited, PXRE Managing Agency and PXRE Lloyd's Syndicate are
subject to regulation by Lloyd's. The form of that regulation is prescribed by
the Lloyd's Act of 1982 and Lloyd's internal regulatory by-laws and directions.
The regulation and supervision to which PXRE Limited is subject relates
primarily to the maintenance of a risk based capital requirement (by way of a
deposit of securities and a letter of credit with Lloyd's to support its
underwriting) and methods of accounting. PXRE Managing Agency must satisfy a
solvency requirement, methods of accounting and periodic examinations of
compliance with Lloyd's by-laws and other purposes. PXRE Lloyd's Syndicate has
to comply with accounting regulation, internal reporting and periodic
examinations of compliance. The Lloyd's market is regulated externally by the
Financial Services Authority, although the day to day regulation of the market
remains the responsibility of the Council of Lloyd's. All invested
-27-
assets of PXRE Lloyd's Syndicate amounting to approximately $11,253,000 at
December 31, 1999, are restricted from being paid as a dividend for at least
three years.
The Insurance Act 1978 of Bermuda and related regulations
(collectively, the "Act") imposes on Bermuda insurance companies, including PXRE
Bermuda, solvency and liquidity standards and auditing and reporting
requirements and grants to the Minister of Finance powers to supervise,
investigate and intervene in the affairs of insurance companies.
The Act provides that the value of the general business assets of a
Class 3 insurer must exceed the amount of its general business liabilities by at
least the prescribed minimum solvency margin. PXRE Bermuda, as a Class 3
insurer, is required to maintain a minimum solvency margin equal to the greatest
of: (A) $1,000,000, (B) 20% of net premiums written up to $6,000,000 plus 15% of
net premiums written over $6,000,000, and (C) 15% of loss reserves. In addition,
PXRE Bermuda is prohibited from declaring or paying any dividends during any
financial year it is in breach of its minimum solvency margin or minimum
liquidity ratio or if the declaration or payment of such dividends would cause
it to fail to meet such margin or ratio (if it fails to meet its minimum
solvency margin or minimum liquidity ratio on the last day of any financial
year, the insurer will be prohibited, without the approval of the Minister, from
declaring or paying any dividends during the next financial year).
As a Class 3 insurer, PXRE Reinsurance also is prohibited, without the
approval of the Minister, from reducing by 15% or more its total statutory
capital, as set out in its previous year's financial statements, and if it
appears to the Minister that there is a risk of the insurer becoming insolvent
or that it is in breach of the Insurance Act or any conditions imposed upon its
registration, the Minister may, in addition to the restrictions specified above,
direct the insurer not to declare or pay any dividends or any other
distributions or may restrict it from making such payments to such extent as the
Minister may think fit.
The Act provides a minimum liquidity ratio for general business. An
insurer engaged in general business is required to maintain the value of its
relevant assets at not less than 75% of the amount of its relevant liabilities.
Relevant assets include cash and time deposits, quoted investments, unquoted
bonds and debentures, first liens on real estate, investment income due and
accrued, accounts and premiums receivable and reinsurance balances receivable.
There are certain categories of assets which, unless specifically permitted by
the Minister, do not automatically qualify as relevant assets such as unquoted
equity securities, investments in and advances to affiliates, real estate and
collateral loans. The relevant liabilities are total general business insurance
reserves and total other liabilities less deferred income tax and sundry
liabilities (by interpretation, those not specifically defined).
Under Bermuda law, PXRE Bermuda may not lawfully declare or pay a
dividend unless there are reasonable grounds for believing that it is, or will
after payment of the dividend be, able to pay its liabilities as they become
due, and that the realizable value of its assets will, after payment of the
dividend, be greater than the aggregate value of its liabilities, issued share
capital and share premium accounts. PXRE Bermuda is also required to maintain
statutory assets in an amount that permits it to meet the prescribed minimum
solvency margin for the net premium income level of its business from time to
time. In addition, the directors of PXRE Bermuda are, as a matter of prudence,
required to ensure that any dividend declared or paid is not of an amount that
will reduce the reserves of PXRE Bermuda to a level that is not sufficient to
meet the reserve requirements of its business.
At December 31, 1999 PXRE Bermuda's solvency and liquidity margins and
statutory capital and surplus were in excess of the minimum levels required by
Bermuda regulations.
TAXATION OF PXRE AND ITS SUBSIDIARIES
The following summary of the taxation of PXRE, PXRE Bermuda, PXRE
Barbados and PXRE's U.S. subsidiaries, including PXRE Reinsurance, Transnational
Insurance, PXRE Trading Corporation, TREX Trading Corporation, PXRE Solutions
Inc., PXRE Direct Underwriting Managers, Inc. and PXRE Underwriting Managers,
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Inc. (collectively, the "PXRE U.S. Companies") is based upon current law.
Legislative, judicial or administrative changes may be forthcoming that could
affect this summary. See, for example, "Legislation" below. Certain subsidiaries
and branch offices of PXRE are subject to taxation related to operations in the
United Kingdom and Belgium.
Bermuda
PXRE and PXRE Bermuda have each received from the Minister of Finance
an assurance under The Exempted Undertakings Tax Protection Act, 1966 of
Bermuda, to the effect that in the event of there being enacted in Bermuda any
legislation imposing tax computed on profits or income, or computed on any
capital asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, then the imposition of any such tax shall not be applicable to
PXRE or PXRE Bermuda or to any of their operations or the shares, debentures or
other obligations of PXRE or PXRE Bermuda until March 28, 2016. These assurances
are subject to the proviso that they are not construed so as to prevent the
application of any tax or duty to such persons as are ordinarily resident in
Bermuda (PXRE and PXRE Bermuda are not currently so designated) or to prevent
the application of any tax payable in accordance with the provisions of The Land
Tax Act of 1967 of Bermuda or otherwise payable in relation to the land leased
to PXRE or PXRE Bermuda.
Barbados
PXRE Barbados is subject to a Barbados corporation tax, assessed at a
rate of 2.5% on profits and gains of up to 10 million Barbados Dollars
(approximately U.S. $5 million), and at declining rates on profits and gains
exceeding 10 million Barbados Dollars. PXRE Barbados may elect to take a credit
in respect of taxes paid to a country other than Barbados provided that such an
election does not reduce the tax payable in Barbados to a rate less than 1% of
the profits and gains of PXRE Barbados in any income year.
United States
The PXRE U.S. Companies carry on business in, and are subject to
taxation in, the United States. PXRE believes that it and its subsidiaries,
other than the PXRE U.S. Companies, have operated and will continue to operate
their business in a manner that will not cause them to be treated as engaged in
a trade or business within the United States. Tax conventions between the United
States and Bermuda or Barbados may provide relief to PXRE Bermuda and PXRE
Barbados, respectively, if either such company is deemed to be engaged in the
conduct of a U.S. trade or business. Under the tax convention between Bermuda
and the United States (the "Bermuda Treaty"), a Bermuda company predominantly
engaged in the insurance business, such as PXRE Bermuda, is subject to U.S.
income tax on its insurance income found to be effectively connected with a U.S.
trade or business only if that trade or business is conducted through a
permanent establishment in the United States. (As a holding company that is not
predominantly engaged directly in an insurance business, PXRE Group Ltd. is not
entitled to the benefits of the Bermuda Treaty.) Similarly, under the tax
convention between Barbados and the United States (the "Barbados Treaty"), a
corporation that is a Barbados resident will not be subject to U.S. income tax
on income that is effectively connected with a U.S. business, unless such
business is conducted through a permanent establishment in the United States.
Each of PXRE Group Ltd., PXRE Bermuda and PXRE Barbados will operate under
guidelines that are intended to minimize the risk that it will be treated as
engaged in a U.S. trade or business, and each of PXRE Bermuda and PXRE Barbados
will operate under guidelines that are intended to minimize the risk that it
will be found to have a U.S. permanent establishment.
On this basis, PXRE does not expect that it and its subsidiaries,
other than the PXRE U.S. Companies, will be required to pay U.S. federal
corporate income taxes (other than withholding taxes on certain U.S. source
investment income and excise taxes on reinsurance premiums as described below).
However, irrespective of such guidelines, there can be no assurance that PXRE
Bermuda and PXRE Barbados will qualify for the Bermuda Treaty and the Barbados
Treaty, respectively, now or in the future, or that the Bermuda Treaty or the
Barbados Treaty will not be
-29-
terminated or revised in a manner that could adversely affect any protection
from U.S. corporate tax that it currently provides. In addition, because there
is uncertainty as to the activities which constitute being engaged in a trade or
business in the United States, there can be no assurances that the U.S. Internal
Revenue Service will not contend successfully that PXRE or a non-U.S. subsidiary
is engaged in a trade or business in the United States. The maximum federal tax
rates currently are 35% for a corporation's income which is effectively
connected with being engaged in a trade or business in the United States. In
addition, the U.S. branch profits tax of 30% is imposed each year on a
corporation's earnings and profits (with certain adjustments) effectively
connected with its U.S. trade or business deemed repatriated out of the United
States, for a potential maximum effective tax rate of approximately 54% on the
net business connected with a U.S. trade or business.
Foreign corporations not engaged in a trade or business in the United
States are subject to U.S. income tax, effected through withholding by the
payor, on certain "fixed or determinable annual or periodic gains, profits and
income" derived from sources within the United States as enumerated in Section
881(a) of the U.S. Internal Revenue Code (the "Code").
The United States also imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. The rate of tax applicable to reinsurance
premiums paid to PXRE Bermuda is 1% of gross premiums.
Legislation
PXRE understands that certain U.S.-based insurance companies are
advocating an amendment to the Code which would impose federal income tax on a
domestic insurer which is controlled by a foreign reinsurer on the deemed
investment income on its reserves on U.S. risks ceded to one or more foreign
reinsurers. At this point, the Company is unable to predict whether this
legislative effort will be successful, what form any such legislation may
ultimately take and what impact any such legislation would have on the Company.
EMPLOYEES
PXRE employed 103 full-time employees as at December 31, 1999. None of
PXRE's employees is represented by a labor union, and management considers its
relationship with its employees to be excellent.
Bermuda based employees of PXRE, including senior management of PXRE
Group Ltd. and PXRE Bermuda, are employed pursuant to work permits granted by
Bermuda authorities. These permits expire at various times over the next few
years. The Company has no reason to believe that these permits would not be
extended at expiration upon request, although no assurance can be given in this
regard.
ITEM 2. PROPERTIES
PXRE leases a total of approximately 69,500 square feet of office space
in Hamilton, Bermuda (PXRE's corporate headquarters), Edison, New Jersey,
Norwalk, Connecticut, New York, New York, Richmond, Virginia, San Francisco,
California, London, England and Brussels, Belgium. The Hamilton, Bermuda lease,
which covers approximately 2,618 square feet of office space, was signed in 1999
and is for a term of two (2) years at a fixed annual rent of approximately
$102,000 and additional rents on account of PXRE's proportionate share of
services. The Edison, New Jersey space is comprised of (i) a 1994 lease of
approximately 24,000 square feet of office space, for a term of 15 years at a
fixed annual rent of approximately $370,000 (inclusive of basic electricity) and
additional rents on account of PXRE Corporation's proportionate share of
increases in building operating expenses and property taxes over calendar year
1994, and (ii) a November 1999 lease of approximately 24,000 square feet of
additional office space for a term of 10 years expiring on October 31, 2009 at
fixed rentals of approximately $582,000 for years 1-5 of the term and $676,000
for years 6-10 of the term, in each case plus additional rents on account of
PXRE Corporation's proportionate share of taxes and operating expenses
attributable to the building. Relatedly, in February 2000 PXRE Corporation
subleased approximately 11,000 square feet of the additional space for a three
year term ending on the
-30-
36th month next following the date that the premises are delivered to the
subtenant. The sublease provides for the subtenant to pay fixed rent to PXRE
Corporation at the rate of approximately $274,000 per annum, together with
electricity at the rate of approximately $16,500 per annum. The subtenant is
additionally required to pay its proportionate share of taxes and operating
expenses payable by PXRE Corporation under the lease.
ITEM 3. PENDING LEGAL PROCEEDINGS
PXRE is subject to litigation and arbitration in the ordinary course of
its business. Management does not believe that the eventual outcome of any such
pending litigation or arbitration is likely to have a material adverse effect on
the Company's financial condition or business. Pursuant to PXRE's insurance and
reinsurance arrangements, disputes are generally required to be finally settled
by arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of the stockholders of PXRE Corporation on October
5, 1999, the holders of PXRE Corporation common stock approved the following:
(1) The approval and adoption of the Agreement and Plan of Merger,
dated July 7, 1999 (the "Merger Agreement") among PXRE
Corporation, PXRE Group Ltd. and PXRE Merger Corp.
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ------------ ----------
Approval of the
Merger Agreement 6,989,981 2,065,714 18,941 2,549,966
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PXRE's common shares are listed on the New York Stock Exchange under
the symbol "PXT". The following table sets forth for the periods indicated the
high and low bid quotations for PXRE's common shares as reported by the New York
Stock Exchange and cash dividends per common share declared and subsequently
paid:
Bid Price
---------------
High Low Dividends
---- --- ---------
1998:
First Quarter $ 35.25 $ 29.375 $ 0.25
Second Quarter 32.875 29.00 0.25
Third Quarter 30.50 25.625 0.25
Fourth Quarter 26.688 20.625 0.26
1999:
First Quarter $ 26.25 $ 18.00 $ 0.26
Second Quarter 21.25 16.00 0.26
Third Quarter 19.0625 14.3125 0.06
Fourth Quarter 14.50 10.00 0.06
These prices represent quotations by dealers and do not include
markups, markdowns, or commissions, and do not necessarily represent actual
transactions. As of March 24, 2000, there were 11,758,174 common shares issued
and outstanding, which shares were held by approximately 90 shareholders of
record and, based on PXRE's best information, by approximately 2200 beneficial
owners of the common shares. See Notes 8 and 9 of Notes to Consolidated
Financial Statements for information with respect to shares reserved for
issuance under employee benefit and stock option plans.
The payment of dividends on the common shares is subject to the
discretion of the Board of Directors which will consider, among other factors,
PXRE's operating results, overall financial condition, capital requirements and
general business conditions. There can be no assurance that dividends will be
paid in the future.
As a holding company, PXRE is largely dependent upon dividends and net
tax allocation payments from its subsidiaries including PXRE Reinsurance,
Transnational Insurance and PXRE Bermuda, to pay dividends to PXRE's
shareholders. PXRE Reinsurance and Transnational Insurance are subject to U.S.
state laws, and PXRE Bermuda is subject to Bermuda law, that may restrict their
ability to distribute dividends. In addition, certain covenants in PXRE's bank
credit agreement may restrict PXRE's ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Regulation" for
further information concerning restrictions contained in PXRE's bank credit
agreement and under U.S. and Bermuda law.
Under PXRE's Bye-Laws, subject to certain exceptions and to waiver by
PXRE's board of directors on a case by case basis, no transfer of PXRE shares is
permitted if such transfer would result in a shareholder owning, directly or
indirectly, more than 9.9% of the voting power of the outstanding shares,
including common shares, of
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PXRE or more than 9.9% of the outstanding shares of any class of PXRE's stock.
Ownership is broadly defined in PXRE's Bye-Laws.
PXRE may refuse to register any such transfer on PXRE's share transfer
records. A transferee will be permitted to promptly dispose of any PXRE shares
purchased which violate the restriction and as to the transfer of which
registration is refused. The transferor of such PXRE shares will be deemed to
own such shares for dividend, voting and reporting purposes until a transfer of
such shares has been so registered.
In addition, in the event that PXRE becomes aware of a shareholder
owning more than 9.9% of the voting power of PXRE's outstanding shares after a
transfer of shares has been registered, PXRE's Bye-Laws provide that, subject to
the same exceptions and waiver procedures, the voting rights with respect to
PXRE shares owned by any such shareholder will be limited to a voting power of
9.9%. The voting rights with respect to all shares held by such person in excess
of the 9.9% limitation will be allocated to the other holders of PXRE common
shares. Such allocation will be pro rata based on the number of PXRE common
shares held by all such other holders of PXRE common shares, subject only to the
further limitation that no shareholder allocated any such voting rights may
exceed the 9.9% limitation as a result of such allocation.
Recent Sales of Unregistered Securities (Information required by Item 701 of
Regulation S-K):
(a) On June 4, 1999, 12,000 PXRE common shares were issued.
(b) The securities were issued to the PXRE Purpose Trust in connection
with the Bermuda redomestication.
(c) The securities were issued for $12,000 and the PXRE Purpose Trust made
subsequent capital contributions, of $865,000 in respect of such
shares.
(d) Exemption from registration was claimed pursuant to Section 4(2) of the
Securities Act of 1933. There was no public offering and the
participants in the transaction were the Company and the PXRE Purpose
Trust, a trust established and funded by PXRE Corporation in connection
with that corporation's Bermuda redomestication.
(e) Not applicable.
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ITEM 6. SELECTED FINANCIAL DATA.
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
(1)(2) (1)(2) (1)(2) (3)
------ ------- ------ ------- ------
(in thousands, except per share data and ratios)
INCOME STATEMENT DATA:
Gross premiums written $221,349 $136,215 $126,232 $114,348 $155,380
Premiums ceded (82,504) (47,521) (26,177) (46,630) (57,744)
--------- --------- --------- --------- ---------
Net premiums written 138,845 88,694 100,055 67,718 97,636
Change in unearned premiums (10,341) 3,692 (8,640) 5,078 (494)
--------- --------- ---------- ---------- ----------
Net premiums earned 128,503 92,386 91,415 72,796 97,142
Net investment income 47,173 19,612 31,191 16,782 14,730
Net realized investment (losses) gains (3,766) (3,862) 2,467 94 85
Management fees(3) 3,590 2,172 3,006 6,032 6,417
--------- --------- ---------- ---------- ----------
Total revenues 175,500 110,308 128,079 95,704 118,374
------- ------- -------- --------- --------
Losses and loss expenses incurred 159,259 57,793 12,491 18,564 34,716
Commissions and brokerage 27,703 20,563 19,138 12,874 13,251
Other operating expenses 30,052 19,313 15,716 12,262 11,237
Interest expense 3,915 1,395 3,325 6,957 7,143
Minority interest in consolidated subsidiary 8,790 8,928 8,184 -- --
-------- --------- --------- ----------- -------------
Total losses and expenses 229,719 107,992 58,854 50,657 66,347
------- ------- -------- -------- ---------
(Loss) income before income taxes, cumulative effect
of accounting change, extraordinary (54,219) 2,316 69,225 45,047 52,027
item and equity in net earnings of TREX
Equity in net earnings of TREX(3) 0 0 0 3,898 5,948
Income tax (benefit) provision (12,775) (1,206) 22,198 15,644 18,189
-------- ------- ---------- -------- --------
(Loss) income before cumulative effect of (41,444) 3,522 47,027 33,301 39,786
accounting change and extraordinary loss
Cumulative effect of accounting change, net of tax 695 -- -- -- --
Extraordinary loss on debt redemption, net of tax 0 843 2,774 -- --
--------- ------ -------- -------- --------
Net (loss) income $(42,139) $2,679 $ 44,253 $ 33,301 $ 39,786
========= ====== ======== ======== ========
Preferred stock dividend(4) 0 0 0 0 599
========= ====== ======== ======== ========
Net (loss) income available to common
stockholders $(42,139) $2,679 $ 44,253 $ 33,301 $ 39,187
========= ====== ======== ======== ========
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1999 1998 1997 1996 1995
(1)(2) (1)(2) (1)(2) (3)
------ ------- ------- ------ ------
(in thousands, except per share data and ratios)