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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, 2000 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 23, 2001 computed by reference to
the closing price of such common equity as of the close of business on March 23,
2001 was $178,746,094. As of March 23, 2001, 11,899,537 of the registrant's
common shares were issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of PXRE Group Ltd.'s definitive Proxy Statement
for the Annual General Meeting of Shareholders to be held
on June 12, 2001.
Part IV Portions of PXRE Corporation's Proxy Statement dated April 12, 1991.
3
PART I
Item 1. Business
Introduction
PXRE Group Ltd. (the "Company" or, collectively with its various
subsidiaries, "PXRE") -- with operations principally in Bermuda, Barbados, the
United States and Europe -- provides reinsurance products and services to a
worldwide marketplace. 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 was formed in 1999 as part of the reorganization of PXRE
Corporation ("PXRE Delaware"), a Delaware corporation. Prior to the
reorganization, PXRE Delaware was the ultimate parent holding company of the
various PXRE companies and its common shares were publicly traded on the New
York Stock Exchange. As a result of the reorganization, the Company became the
ultimate parent holding company of PXRE Delaware and the holders of PXRE
Delaware common stock automatically became holders of the same number of the
Company's common shares. The reorganization was consummated at the close of
business on October 5, 1999 and, on October 6, 1999, the Company's common shares
began to trade on the New York Stock Exchange under the symbol PXT. The
reorganization also involved the establishment of a Bermuda based reinsurance
company, PXRE Reinsurance Ltd. ("PXRE Bermuda"), operations in Barbados through
PXRE (Barbados) Ltd. ("PXRE Barbados"), and PXRE Solutions Inc. ("PXRE
Solutions"), a reinsurance intermediary.
Overview of the Reinsurance Industry
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.
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; accordingly,
that the premium ceded to the reinsurer in connection therewith may not
adequately compensate the reinsurer for the risk assumed. Treaty reinsurance
contributed more than 99% of PXRE's net premiums written in 2000.
4
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 bulk of PXRE's
net premiums written during the past three fiscal years, although they have
declined in percentage terms from 76% in 1998 to 46% in 2000. See "Operating
Segments."
Facultative reinsurance involves the reinsurance of specific 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 less than 1%
of PXRE's net premiums written in 2000.
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.
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 reinsurance
business both through professional reinsurance brokers and on a direct basis.
Overview of the Business
The Company conducts its business primarily through its principal
operating subsidiaries, PXRE Delaware, PXRE Reinsurance Company ("PXRE
Reinsurance"), PXRE Bermuda, PXRE Solutions and PXRE Barbados. PXRE has for many
years specialized in property reinsurance,
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including a strong focus on catastrophe-type products. In recent years PXRE has
diversified its business through:
o the addition of a reinsurance platform offering primarily casualty
products directly to insurance companies;
o the enhancement of its international broker market reinsurance
platform to include additional lines of business, including
casualty and credit risks;
o an acceleration of business offerings to one of its managed
business participants;
o the formation of a finite reinsurance unit; and
o the establishment of a direct presence in the Bermuda market.
PXRE Reinsurance is both a brokerage-market reinsurer and a
direct-writing reinsurer, with approximately $348.9 million of statutory capital
and surplus as of December 31, 2000, which principally underwrites treaty
reinsurance for property (including marine and aerospace) and casualty risks.
PXRE Reinsurance is licensed or authorized to transact business in all states
(except for Arkansas as of March 1, 2001) 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 and PXRE
Reinsurance provides aggregate excess of loss reinsurance protection for PXRE
Bermuda. Effective January 1, 2001, the quota share cession to PXRE Bermuda was
increased from 30% to 35%. PXRE Bermuda, with approximately $30.0 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 PXRE Bermuda.
At December 31, 2000, 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.
Along with its diversification strategy, the Company in recent years
has also restructured its investment portfolio to add a diversified portfolio of
hedge funds.
During 2000, PXRE decided to wind down its Lloyd's of London
("Lloyd's") operations and its excess and surplus lines operations. PXRE's
Lloyd's operations consist of PXRE Managing Agency Limited ("PXRE Managing
Agency") and PXRE Limited, the sole member of Syndicate 1224 ("PXRE Lloyd's
Syndicate"). PXRE Lloyd's Syndicate underwrote 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. During 2000, PXRE Managing Agency
managed, on a fee basis, PXRE Lloyd's Syndicate and other syndicates at Lloyd's.
During the third quarter of 2000, PXRE ceased accepting new or renewal risks at
PXRE Lloyd's Syndicate. As of January 1,
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2001, PXRE Managing Agency ceased managing third party syndicates at Lloyd's.
Final disposition of PXRE Lloyd's Syndicate and PXRE Managing Agency has not
been determined.
During the fourth quarter of 2000, Transnational Insurance Company
("Transnational Insurance"), an excess and surplus lines carrier which had
specialized in non-standard and excess property insurance risks distributed
substantially all of its assets and liabilities to PXRE Reinsurance and the
remaining corporate shell was sold on December 21, 2000. The sale followed
PXRE's withdrawal from the excess and surplus lines market in the first quarter
of 2000. Net premiums earned on this business were not material in 1999 and
2000.
Ratings
PXRE Reinsurance is rated "A" (Excellent) by A.M. Best Company ("A.M.
Best"), an independent insurance industry rating organization. PXRE Bermuda is
not rated by A.M. Best, although it and PXRE Reinsurance have been assigned an
"A" financial strength rating by Standard & Poor's Rating Services ("S&P"), a
division of the McGraw-Hill Companies, Inc. PXRE Reinsurance and PXRE Bermuda
were rated "A+" by S&P prior to a downgrade in 2000, caused primarily by adverse
underwriting results experienced by PXRE in 1999. 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.
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 12, 2001, Phoenix Home Life owned 1,131,700 of the
Company's common shares.
In November 1993, PXRE Delaware sponsored the initial public offering
of Transnational Re Corporation ("TREX") to raise capital and take advantage of
favorable conditions in the worldwide retrocessional reinsurance market. PXRE
Delaware, through PXRE Reinsurance, retained a 21% ownership position in TREX
and had responsibility for the day-to-day operations of TREX, including all the
reinsurance operations of TREX's subsidiary, Transnational Reinsurance Company
("Transnational Reinsurance").
On December 11, 1996, TREX merged into PXRE Delaware (the "Merger"),
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. Underwriting premium volume and loss experience
related to the business of PXRE
7
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.
In June 1998, PXRE Reinsurance added direct writing and international
teams. The direct writing team operates as the Direct Treaty operation of PXRE
Reinsurance and provides reinsurance on a direct basis (directly with the
primary insurance company) primarily on casualty and, to a lesser extent,
non-catastrophe type property business. The international team's focus is
property and casualty reinsurance in the brokerage market. Subsequently, in
1998, PXRE Reinsurance 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.
The Company, a Bermuda corporation, was formed in 1999. PXRE Delaware
became a wholly-owned indirect subsidiary of the Company at the close of
business on October 5, 1999, in connection with the reorganization and
redomestication of PXRE Delaware. This reorganization resulted in the Company
becoming the ultimate parent holding company of PXRE Delaware. Simultaneously,
holders of PXRE Delaware's common stock automatically became holders of the same
number of the Company's common shares. The reorganization also involved the
establishment of a Bermuda based reinsurance company, PXRE Bermuda, operations
in Barbados through PXRE Barbados, and PXRE Solutions, a reinsurance
intermediary.
In the fourth quarter of 2000, Transnational Insurance transferred
substantially all of its assets and liabilities to PXRE Reinsurance in a
transaction that was intended to qualify as a tax-free liquidation of
Transnational Insurance pursuant to Section 332 of the U.S. Internal Revenue
Code, leaving Transnational Insurance with only the minimum capital and surplus
necessary to maintain its insurance license and surplus lines authorizations.
PXRE Reinsurance then sold the remaining corporate shell of Transnational
Insurance to United States Fire Insurance Company pursuant to a Stock Purchase
Agreement, dated as of October 5, 2000, in consideration of a purchase price
equal to the remaining net assets of Transnational Insurance plus an additional
amount as a premium for the value of the insurance licenses and surplus lines
authorizations.
On March 16, 2001, PXRE Barbados was licensed as a qualifying insurance
company in Barbados and changed its name to PXRE Reinsurnace (Barbados) Ltd.
PXRE Barbados will commence reinsurance operations shortly and is expected to
focus primarily on finite reinsurance business.
Underwriting Operations
Through its subsidiaries, PXRE is principally engaged in providing
treaty 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 casualty products (including
general liability,
8
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 through the formation of PXRE Bermuda.
Operating Segments
PXRE operates in four reportable property and casualty segments --
catastrophe and risk excess, casualty, structured/finite business and other
lines -- based on PXRE's method of internal management reporting. In addition,
PXRE 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, 2000, 1999 and 1998:
9
Net Premiums Written (1)
Year Ended December 31,
2000 1999 1998
---------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ 20,354 $ 26,704 $ 12,795
International 74,256 63,957 58,595
Excess of loss cessions (15,489) (18,883) (3,938)
---------- ---------- ----------
79,121 46% 71,778 52% 67,452 76%
---------- ---------- ----------
Casualty
North American 26,766 13,148 650
International 14,876 12,851 4,433
---------- ---------- ----------
41,642 24 25,999 19 5,083 6
---------- ---------- ----------
Structured/Finite Business
North American 0 0 0
International 20,245 0 0
---------- ---------- ----------
20,245 12 0 0 0 0
---------- ---------- ----------
Other Lines
North American 1,209 12,073 2,054
International 30,484 28,995 14,105
---------- ---------- ----------
31,693 18 41,068 29 16,159 18
---------- --- ---------- --- ---------- ---
Total $ 172,701 100% $ 138,845 100% $ 88,694 100%
========== ========== ==========
10
Net Premiums Earned (1)
Year Ended December 31,
2000 1999 1998
-------------------------- ----------------------- ------------------------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ 20,517 $ 26,155 $ 13,561
International 73,378 61,241 63,830
Excess of loss cessions (19,115) (14,958) (2,869)
---------- ---------- ----------
74,780 47% 72,438 56% 74,522 81%
---------- ---------- ----------
Casualty
North American 19,062 11,593 (152)
International 13,865 9,794 2,207
---------- ---------- ----------
32,927 21 21,387 17 2,055 2
---------- ---------- ----------
Structured/Finite Business
North American 0 0 0
International 17,791 0 0
---------- ---------- ----------
17,791 11 0 0 0 0
---------- ---------- ----------
Other Lines
North American 1,308 11,296 3,234
International 33,400 23,383 12,575
---------- ---------- ----------
34,708 21 34,679 27 15,809 17
---------- --- ---------- --- ---------- ---
Total $ 160,206 100% $ 128,504 100% $ 92,386 100%
========== ========== ==========
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Underwriting Operations (2)
Year Ended December 31,
2000 1999 1998
--------------------------- ---------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ 12,701 $ (31,591) $ 6,970
International (2,553) (32,039) 7,081
Excess of loss cessions (11,265) 15,476 8,372
--------- ---------- ---------
(1,117) 15% (48,154) 87% 22,423 141%
--------- ---------- ---------
Casualty
North American (347) (279) (409)
International 100 (242) 87
--------- ---------- ---------
(247) 3 (521) 1 (322) (2)
--------- ---------- ---------
Structured/Finite Business
North American 0 0 0
International 1,661 411 0
--------- ---------- ---------
1,661 (22) 411 (1) 0 0
--------- ---------- ---------
Other Lines
North American (2,746) (715) (1,442)
International (4,980) (6,166) (4,794)
--------- ---------- ---------
(7,726) 104 (6,881) 13 (6,236) (39)
--------- --- ---------- --- --------- ---
Total $ (7,429) 100% $ (55,145) 100% $ 15,865 100%
========= ========== =========
- - ------------------
(1) Premiums written and earned are expressed on a net basis (after
deduction for ceded reinsurance premiums) to more accurately reflect
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, losses
incurred on weather contracts or management fees for syndicate agency
management.
Catastrophe and Risk Excess
PXRE's catastrophe and risk excess portfolio consists principally of
property catastrophe excess of loss, property retrocessional, property risk
excess, property London Market Excess ("LMX") and marine and aerospace excess
reinsurance coverages. This portfolio can be characterized on a longer term
basis as being comprised of coverages involving higher expected
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margins and greater volatility than other coverages written by PXRE. In 2000,
$94,610,000 of premiums written after reduction for quota share cessions were
attributable to the catastrophe and risk excess portfolio, or $79,121,000 net of
specific excess of loss retrocessional reinsurance ceded to other reinsurers. In
2000 and 1999, this segment produced underwriting losses of $1,117,000 and
$48,154,000, respectively, largely as a consequence of development on French
storms which occurred in the last week of 1999. In contrast, this segment
produced underwriting profits of $22,423,000 in 1998. The increase in premium
volume for catastrophe and risk excess coverages in 2000 was largely
attributable to increases in marine and aerospace coverages. 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 segment 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 segment emanate principally from European, Japanese and Carribbean
windstorm, flood and earthquake risks.
Casualty
PXRE's casualty segment consists principally of North American general
liability, commercial and personal auto liability, risk excess and other
liability coverages and International pro rata casualty coverages. This segment
can be characterized on a longer term basis as being comprised of coverages
involving lower margins and less volatility than PXRE's catastrophe and risk
excess segment. Additionally, the long-term nature of these liabilities will
generate investment income that is expected to contribute to PXRE's long-term
profitability. The casualty portfolio accounted for $41,642,000 of net premiums
written in 2000, with approximately two-thirds of the business written in the
North American geographic segment and one-third in the International
geographical segment. Premiums written in 2000 represented a substantial
increase over 1999, which was PXRE's first full year of operation in the
casualty market. In 2000, the casualty segment produced an underwriting loss of
$247,000.
Structured/Finite Business
PXRE entered the structured/finite business in mid-1999 with products
combining elements of risk transfer and management of 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. The risks reinsured are primarily
casualty risks and are subject to some of the same risks as PXRE's casualty
segment. Net premiums written of $20,245,000 were attributable to PXRE's
structured/finite business in 2000. In 2000, the structured/finite segment
produced an underwriting profit of $1,661,000.
Other Lines
PXRE's other lines segment consists of many different coverages, the
largest coverage being accident and health coverages amounting to $9,861,000 in
net premiums written in 2000. Other coverages include property pro rata
business, binding and lineslip authorities written through PXRE Lloyd's
Syndicate and credit coverages. PXRE's other lines segment produced
13
an underwriting loss of $7,726,000, up modestly from 1999. During the third
quarter of 2000, PXRE ceased accepting new and renewal risks at PXRE Lloyd's
Syndicate.
See Note 10 of Notes to Consolidated Financial Statements for
additional information regarding PXRE's reportable segments and geographic
areas.
Underwriting
PXRE's treaty underwriting process emphasizes a team approach among its
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 analysis conducted by PXRE. PXRE 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. PXRE has developed systems and software tools to monitor
and manage the accumulation of its exposure to such losses. Management has
established guidelines for maximum tolerable losses from a single or multiple
catastrophic event based on historical data. However, no assurance can be given
that these maximums will not be exceeded in some future catastrophe.
Marketing
PXRE provides reinsurance for international insurance and reinsurance
companies headquartered, principally, 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 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 commissions to these intermediaries or brokers which vary in size
based on the amount of premiums and type of business ceded. These commission
payments constitute part of PXRE's total acquisition costs and are included in
its underwriting expenses. PXRE generally pays reinsurance brokerage commissions
believed to be comparable to industry norms.
Approximately 14.2%, 13.2% and 12.5% of gross premiums written in
fiscal year 2000 were arranged through the worldwide branch offices of Aon Group
Ltd., Guy Carpenter & Company, Inc. (a subsidiary of Marsh & McLennan Companies,
Inc.) and Benfield Greig Ltd., respectively. Approximately 93.3% of PXRE's gross
premiums written in the structured/finite business segment in fiscal year 2000
were arranged by Pegasus Advisors - Towers Perrin Reinsurance, a division of
Towers Perrin, in conjunction with PXRE Solutions. The commissions paid by PXRE
to these intermediaries are generally at the same rates as those paid to other
intermediaries.
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In mid-1998, PXRE established a U.S. based direct writing reinsurance
unit to complement its existing brokerage-based reinsurance operations.
Approximately 82.3% and 17.7% of PXRE's 2000 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 industry are substantial. PXRE operates in an 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 decide to devote greater amounts of capital to
the types of business written by PXRE.
Although PXRE historically has obtained most of its 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 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
a reinsurer, premiums charged, other terms and conditions, 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 for Arkansas as of March 1, 2001) 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.
The property and casualty reinsurance industry has been experiencing an
extended period of soft market conditions characterized by inadequate pricing.
Recently, these conditions have begun to improve as a result of recent loss
activity in Europe and the Caribbean region.
15
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,
--------------------------------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Gross premiums written $268,990 $221,349 $136,215
Reinsurance premiums ceded:
Managed business participants 63,053 42,549 21,542
Catastrophe coverage, surplus
reinsurance and other 33,236 39,955 25,979
-------- -------- --------
Total reinsurance premiums
Ceded 96,289 82,504 47,521
-------- -------- --------
Net premiums written $172,701 $138,845 $ 88,694
======== ======== ========
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 2000, PXRE was a party to two such
arrangements. The first such arrangement, which is subject to renewal each
January 1 and which has been renewed effective January 1, 2001, is referred to
as the AMA. The AMA is a pool consisting of a number of insurance companies (the
"Pool"), for which PXRE Reinsurance acts as reinsurance manager. In 2000, 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 participating 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 Reinsurance 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 is with Select Reinsurance
Ltd. ("Select Re"). This quota share arrangement involves a multi-year fee based
undertaking by PXRE through the year ending December 31, 2003 to present
business to Select Re. The undertaking, which is subject to adjustment based on
Select Re's shareholders' equity, was approximately $22.1 million in aggregate
premium for 2000. PXRE receives an override commission on premiums ceded to
Select Re. Because Select Re is not licensed in any jurisdiction in the United
16
States, the retrocessional arrangement provides that a trust fund or letter of
credit be established for the benefit of PXRE or that funds be held by PXRE to
secure Select Re's obligations. Net assets due from Select Re under this
arrangement at December 31, 2000 of $16,959,000 are secured by a trust
agreement, letter of credit and funds held. Gerald L. Radke (Chairman, President
and Chief Executive Officer of the Company) and Jeffrey L. Radke (Executive Vice
President of the Company and President of PXRE Bermuda) are on the Board of
Directors 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. As of March
12, 2001, Select Re owned 1,112,000 of the Company's Common Shares.
A third such retrocessional arrangement with Trenwick America
Reinsurance Corporation ("Trenwick Group") was not renewed upon its expiration
on December 31, 1999. Under this arrangement PXRE received, 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.
The following table sets forth PXRE's earned commissions from
retrocessionaires pursuant to its managed business arrangements for the periods
indicated:
Year Ended December 31,
--------------------------------------------------------
2000 1999 1998
------ ------ ------
(in thousands)
Commission $4,159 $3,851 $2,247
Contingent profit commission (1) (271) (761) (75)
------ ------ ------
Total $3,888 $3,090 $2,172
====== ====== ======
- - -------------------
(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.
In addition to the quota share arrangement between Select Re and PXRE,
PXRE entered into several other reinsurance transactions with Select Re during
2000 whereby Select Re provided retrocessional support on a corresponding number
of finite and other lines reinsurance transactions underwritten by PXRE. These
reinsurance transactions involved reinsurance premiums ceded during 2000 of
$26,814,000 in the aggregate. As of December 31, 2000, net assets of $21,226,000
were due in the aggregate from Select Re in connection with such reinsurance
transactions, all of which were fully secured by way of a reinsurance trust,
letters of credit or funds held.
PXRE also purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. PXRE significantly increased its
purchases of such coverage during the past three years. In 2000, PXRE made
additional retrocessional coverage purchases to
17
protect against exposure to frequent loss occurrences. 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 in 1999.
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, 2000, estimated losses recoverable (including incurred
but not reported losses ("IBNR")) from retrocessionaires were $117,196,000,
including $21,080,000 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 PXRE 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 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, 2000 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
18
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, PXRE is required to make estimates of losses based on limited
information from ceding companies as well as its own underwriting data due to
the significant reporting delays which normally occur under PXRE's
retrocessional book of business and with respect to insured losses that occur
near the end of a reporting period.
Historically, PXRE has underwritten a small amount of casualty
reinsurance. In 1998, PXRE began underwriting new casualty lines of business
and, in 1999 and 2000, PXRE substantially expanded its casualty and finite
businesses. 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 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. In addition, most of the risks
reinsured in PXRE's structural/finite business are also casualty risks and are
subject to some of the same risks as PXRE's casualty business. While the
reserving process is difficult and subjective for ceding companies, the inherent
uncertainties of estimating such reserves are even greater for a reinsurer, due
primarily to the longer time between the date of the occurrence and the
reporting of any attendant claims to the reinsurer, the diversity of development
patterns among different types of reinsurance treaties or facultative contracts,
the necessary reliance on the ceding companies for information regarding
reported claims and differing reserving practices among ceding companies.
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.
19
The following table provides a reconciliation of beginning and ending
loss and loss expense liabilities under GAAP for the fiscal years ended December
31, 2000, 1999 and 1998. Except with respect to certain non-material worker's
compensation liabilities and the reserves maintained by PXRE Bermuda, PXRE does
not discount its loss and loss expense liabilities; that is, it does not
calculate them on a present value basis. PXRE Bermuda's reserves include a
discount of $849,000.
Year Ended December 31,
---------------------------------------------
2000 1999 1998
---------- ---------- ---------
(in thousands)
Gross GAAP liability for losses and loss expenses at
beginning of year...................................... $261,551 $102,592 $57,189
Add - Gross provision for losses and loss expenses:
Occurring in current year............................... 137,123 200,132 94,003
Occurring in prior years................................ 77,330 57,129 90
---------- ---------- ---------
Total gross provision(1).............................. 214,453 257,261 94,093
---------- ---------- ---------
Less - Gross payments for losses and loss expenses:
Occurring in current year............................... 20,920 17,508 19,582
Occurring in prior years................................ 210,520 80,794 29,108
---------- ---------- ---------
Total gross payments.................................. 231,440 98,302 48,690
---------- ---------- ---------
Add - Asset related to retroactive reinsurance assumed 7,056 0 0
Gross GAAP liability for losses and loss expenses at end
of year ................................................. $251,620 $261,551 $102,592
========== ========== ==========
Ceded GAAP liability for losses and loss expenses at end
of year ................................................. (96,117) (101,035) (33,350)
---------- ---------- ----------
Net GAAP liability for losses and loss expenses at end of
year .................................................... $155,503 $160,516 $69,242
========== ========== ==========
Foreign currency adjustment............................... (947) 249 (193)
========== ========== ==========
Gross SAP liability for losses and loss expenses at end of
year(2)............................................... $250,673 $261,800 $102,399
========== ========== ==========
- - ----------------
(1) The GAAP provision for losses and loss expenses includes net foreign
currency exchange (losses) gains of $(1,196,000), $442,000 and
$(675,000) for 2000, 1999 and 1998, respectively.
(2) SAP is U.S. and Bermuda statutory accounting principles.
The following table presents the development of PXRE's GAAP balance
sheet liability for losses and loss expenses for the period 1990 through 2000.
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 such liabilities. The
lower portion of the table shows the reestimated amount of previously recorded
liabilities based on experience as of the end of each succeeding year. These
estimates change as more information becomes known about the frequency and
severity of claims for individual years. A redundancy (deficiency) exists when
the reestimated liability at each December 31 is less (greater) than the prior
liability estimate. The "cumulative
20
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 1993 to be
$150,000 was first reserved in 1990 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 1990-1992 shown below. This table does not
present accident or policy year development data.
Loss and loss expense liabilities for fiscal years 1991 through 2000
are presented on a gross basis (excluding the effects of losses recoverable from
retrocessionaires). Loss and loss expense liabilities for December 31, 1990, 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.
21
Year Ended December 31,
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(in thousands, except percentages)
Liabilities for losses and
loss expenses......... $251,620 $261,551 $102,592 $57,189 $61,389 $72,719 $81,836
Cumulative amount of
liability paid through:
One year later........ 210,519 75,814 29,108 23,708 42,698 41,601
Two years later....... 102,526 39,853 40,673 55,620 58,968
Three years later..... 47,373 46,545 67,296 67,630
Four years later...... 52,220 70,676 76,762
Five years later...... 74,533 79,433
Six years later....... 82,930
Seven years later.....
Eight years later.....
Nine years later......
Ten years later.......
Liabilities reestimated as of:
One year later........ 338,881 135,227 57,280 66,257 83,228 87,818
Two years later....... 141,087 55,271 63,292 85,162 87,750
Three years later..... 63,151 61,178 83,178 90,409
Four years later...... 66,137 82,129 89,284
Five years later...... 85,820 88,326
Six years later....... 91,663
Seven years later.....
Eight years later.....
Nine years later......
Ten years later.......
Gross reserves of TREX at
date of merger........ 9,589 5,242 2,067
Gross reserves for elimination
of one quarter lag for U.K.
subsidiary............ (1,191)
Gross cumulative redundancy
(deficiency) through
December 31, 2000:....
Amount................ (77,330) (39,686) (5,962) 4,841 (7,859) (7,760)
Percentage............ (30%) (39%) (10%) 7% (10%) (9%)
Retrocessional recoveries 19,099 10,423 5,325 (650) 7,541 3,224
Net cumulative redundancy
(deficiency) through
December 31, 2000:....
-------- -------- -------- -------- -------- --------
Amount................ (58,231) (29,263) (637) 4,191 (318) (4,536)
Percentage............ (36%) (42%) (1%) 8% 1% (9%)
1993 1992 1991 1990
---- ---- ---- ----
Liabilities for losses and
loss expenses......... $71,442 $88,668 $62,664 $31,632
Cumulative amount of
liability paid through:
One year later........ 37,820 59,773 35,575 15,688
Two years later....... 54,400 79,926 48,393 25,466
Three years later..... 60,850 89,519 52,301 29,066
Four years later...... 64,566 94,261 55,022 30,117
Five years later...... 69,414 96,895 56,976 31,528
Six years later....... 70,392 99,864 58,822 32,137
Seven years later..... 71,091 100,724 61,235 33,202
Eight years later..... 101,357 62,130 33,624
Nine years later...... 62,557 33,956
Ten years later....... 34,198
Liabilities reestimated as of:
One year later........ 78,188 101,423 67,165 33,874
Two years later....... 76,902 103,632 62,262 33,726
Three years later..... 74,683 105,165 62,827 33,488
Four years later...... 75,392 103,801 63,032 33,682
Five years later...... 74,880 104,330 62,593 34,310
Six years later....... 74,173 104,222 63,632 33,777
Seven years later..... 73,934 103,854 63,792 34,714
Eight years later..... 103,663 63,633 34,815
Nine years later...... 63,781 34,777
Ten years later....... 35,249
Gross reserves of TREX at
date of merger........ 26
Gross reserves for elimination
of one quarter lag for U.K.
subsidiary............
Gross cumulative redundancy
(deficiency) through
December 31, 2000:....
Amount................ (2,466) (14,995) (1,117) NA
Percentage............ (3%) (17%) (2%) NA
Retrocessional recoveries 741 2,713 (1,858) NA
Net cumulative redundancy
(deficiency) through
December 31, 2000:....
-------- -------- -------- --------
Amount................ (1,725) (12,282) (2,975) (3,187)
Percentage............ (4%) (35%) (8%) (10%)
22
During 2000, PXRE incurred development from prior year losses amounting
to $58,231,000 net of reinsurance, primarily due to French storms Lothar and
Martin.
Conditions and trends that have affected reserve development in the
past may not necessarily occur in the future. Accordingly, it would not be
appropriate to extrapolate the future adequacy or inadequacy of PXRE's reserves
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, a 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. The investment
policies of PXRE stress conservation of principal, diversification of risk and
liquidity. PXRE's invested assets consist primarily of fixed maturities and
limited partnerships, but also include equity securities (primarily real estate
investment trusts ("REIT")) 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 of December 31, 2000, PXRE had a fair market value of $281,722,000
in fixed maturities, $71,468,000 in short term investments, $27,819,000 in a
hedge fund trading portfolio, $58,571,000 in hedge fund limited partnerships,
$30,252,000 in other limited partnerships and $16,260,000 in equity securities
(principally REITs). Short-term investments include one hedge fund limited
partnership amounting to $23,365,000, which invests primarily in marketable
fixed income securities and provides for fund withdrawals upon 30 days' notice.
Hedge funds included an investment in a "fund-of-funds" entity affiliated with
Mariner amounting to $26,861,000 representing sixteen funds. As at December 31,
2000, hedge funds included in limited partnership and trading portfolio
investments were allocated among twenty-two managers, with market values ranging
from $856,000 to $26,861,000. Hedge funds in the form of limited partnership
investments and other equity interests in hedge fund entities are accounted for
under the equity method or as part of a trading portfolio, 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 and the trading portfolio are investments aggregating
$86,391,000 affiliated with Mariner, including an investment of $26,861,000 in
Mariner Select, L.P., which provided approximately $2,389,000 of investment
income for PXRE in 2000. See Note 3 of Notes to Consolidated Financial
Statements. See also, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Risks and Uncertainties; and
Investments" for further information regarding PXRE's investment portfolio,
including its hedge fund portfolio.
23
The following table summarizes the investments of PXRE at December 31,
2000 and 1999 at fair market value:
Analysis of Investments
December 31, 2000 December 31, 1999
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(in thousands, except percentages)
Fixed maturities:
United States government securities $ 48,759 10.0% $101,520 19.9%
Foreign government securities 4,658 1.0 8,743 1.7
United States government agency mortgage-backed
securities 17,704 3.7 24,599 4.8
Other mortgage and asset-backed securities 70,855 14.6 67,213 13.2
Obligations of states and political subdivisions 89,635 18.4 93,951 18.4
Public utilities, industrial and miscellaneous
securities 50,111 10.3 25,222 5.0
-------- ----- -------- -----
Total fixed maturities 281,722 58.0 321,248 63.0
Short-term investments 71,468 14.7 50,004 9.8
-------- ----- -------- -----
Total fixed maturities & short-term 353,190 72.7 371,252 72.8
Equity securities 16,260 3.3 24,840 4.9
Limited partnerships 88,823 18.3 85,670 16.8
Trading portfolio 27,819 5.7 27,806 5.5
-------- ----- -------- -----
Total investments $486,092 100.0% $509,568 100.0%
======== ========
At December 31, 2000, the fair value of PXRE's investment portfolio
exceeded its amortized cost by $26,734,000, due to equity accounting on the
limited partnerships and trading portfolios amounting to $26,622,000 and
unrealized appreciation on fixed maturities and equity securities amounting to
$112,000. At December 31, 1999, the fair value of PXRE's investment portfolio
exceeded its amortized cost by $15,861,000.
24
The following table indicates the composition of PXRE's fixed maturity
investments (at fair market value), including short-term investments (at fair
market value), by time to maturity at December 31, 2000 and 1999:
Composition of Investments By Maturity
December 31, 2000 December 31, 1999
------------------------ ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(in thousands, except percentages)
Maturity(1)
- - -----------
One year or less $ 93,192 26.4% $ 56,663 15.3%
Over 1 year through 5 years 81,045 22.9 116,669 31.4
Over 5 years through 10 years 67,630 19.2 76,727 20.7
Over 10 years through 20 years 8,856 2.5 11,301 3.0
Over 20 years 13,908 3.9 17,205 4.6
-------- ----- -------- -----
264,631 74.9 278,565 75.0
United States government agency and other
mortgage and asset-backed securities 88,559 25.1 92,687 25.0
-------- ----- -------- -----
Total $353,190 100.0% $371,252 100.0%
======== ========
- - -----------
(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, 2000, and December 31, 1999, was 5.9% and 6.6%,
respectively. At December 31, 2000, the fair value of PXRE's fixed maturities
portfolio exceeded its amortized cost by $248,000. At December 31, 1999, the
fair value of PXRE's fixed maturities portfolio was less than its amortized cost
by $8,714,000.
25
The following table indicates the composition of PXRE's fixed
maturities portfolio (at fair market value), excluding short-term investments,
by rating at December 31, 2000 and 1999:
Composition of Fixed Maturities Portfolio By Rating
December 31, 2000 December 31, 1999
------------------------- -------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(in thousands, except percentages)
Ratings(1)
United States government securities $ 48,759 17.3% $101,520 31.6%
United States government agency
mortgage and asset-backed securities 17,704 6.3 24,599 7.7
Other mortgage and asset-backed securities
Aaa and/or AAA 66,689 23.7 56,219 17.5
Aa2 and/or AA 3,119 1.1 2,920 0.9
A2 and/or A 553 0.2 7,525 2.3
Baa2 and/or BBB 494 0.2 549 0.1
Obligations of states and political subdivisions
Aaa and/or AAA 64,861 23.0 69,572 21.7
Aa2 and/or AA 24,774 8.8 24,379 7.6
Public utilities and industrial and
miscellaneous securities
Aaa and/or AAA 5,908 2.1 2,491 0.8
Aa2 and/or AA 27,365 9.7 5,816 1.8
A2 and/or A 6,204 2.2 3,274 1.0
Baa2 and/or BBB 4,968 1.8 4,275 1.3
Ba2 and/or BB 5,345 1.9 6,916 2.2
B2 and/or B 321 0.1 2,450 0.8
Foreign government securities
Baa2 and/or BBB 0 0.0 2,521 0.8
Ba2 and/or BB 4,658 1.6 4,096 1.3
B2 and/or B 0 0.0 2,126 0.6
-------- ----- -------- -----
Total $281,722 100.0% $321,248 100.0%
======== ========
- - ------------------
(1) Ratings as assigned by Moody's and S&P, respectively. Such ratings are
generally assigned upon the issuance of the securities, subject to revision
on the basis of ongoing evaluations.
PXRE's management periodically 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
26
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Market Risk."
Regulation
United States
The Company and PXRE Reinsurance are subject to regulation under the
insurance statutes of various U.S. states, including Connecticut, the
domiciliary state of PXRE Reinsurance. The regulation and supervision to which
PXRE Reinsurance is subject relates primarily to the standards of solvency that
must be met and maintained, licensing requirements for reinsurers, the nature of
and limitations on investments, restrictions on the size of risks which may be
insured, deposits of securities for the benefit of a reinsured, methods of
accounting, periodic examinations of the financial condition and affairs of
reinsurers, the form and content of reports of financial condition required to
be filed, reserves for losses and other purposes. In general, such regulation is
for the protection of the reinsureds and policyholders, rather than investors.
In addition, the Company and PXRE Delaware 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
reinsurers that are subsidiaries of an insurance holding company to register
with the state regulatory authorities and to file with those authorities certain
reports including information concerning their capital structure, ownership,
financial condition, and general business operations. Moreover, PXRE Reinsurance
may not enter into certain transactions, including certain reinsurance
agreements, management agreements, and service contracts, with members of its
insurance holding company system, unless it has first notified the Connecticut
Insurance Commissioner of its intention to enter into any such transaction and
the Connecticut Insurance Commissioner has not disapproved of such transaction
within the period specified by the Connecticut insurance statute. Among other
things, such related company transactions are subject to the requirements that
their terms be fair and reasonable, charges or fees for services performed be
reasonable and the interests of policyholders not be adversely affected.
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 or attempts to
acquire shares representing or convertible into more than 10% of the voting
power of the securities of the Company would become subject to at least some of
such regulations, would require approval by the Connecticut Insurance
Commissioner prior to acquiring such shares and would be required to file
certain notices and reports with the Connecticut Insurance Commissioner prior to
such acquisition. See "Market for Registrant's Common Equity and Related
Stockholder Matters" for a discussion of other limitations on voting and
ownership of the Company's securities contained in the Company's Bye-Laws.
The principal sources of cash for the payment of operating expenses and
income taxes, debt service obligations, and dividends by the Company are the
receipt of dividends and net tax
27
allocation payments from PXRE Reinsurance and PXRE Bermuda. Under the
Connecticut insurance laws, the maximum amount of dividends or other
distributions that PXRE Reinsurance may declare or pay within any twelve-month
period, without regulatory approval, is limited to the lesser of (a) earned
surplus or (b) the greater of 10% of 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
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
2001, without regulatory approval, is limited to approximately $34,886,000.
During 2000, $16,252,000 in dividends were paid by PXRE Reinsurance. See below
for a discussion of Bermuda dividend restrictions applicable to PXRE Bermuda.
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 NAIC is an organization which assists state insurance supervisory
officials in achieving insurance regulatory objectives, including the
maintenance and improvement of state regulation. The risk-based capital
regulations adopted provide for the use of a formula to measure statutory
capital and surplus needs based on the risk characteristics of a company's
products and investment portfolio to identify weakly capitalized companies. As
at December 31, 2000, PXRE Reinsurance's surplus substantially exceeded its
calculated risk-based capital.
Effective January 1, 2001, the State of Connecticut requires that
insurance companies domiciled in Connecticut prepare their statutory basis
financial statements in accordance with the NAIC Accounting Practices and
Procedures Manual - Version Effective As of January 1, 2001 ("Codification")
subject to any deviations prescribed or permitted by the Insurance Commissioner
of the State of Connecticut. Accounting changes adopted to conform to the
provisions of the Codification are reported as an adjustment to unassigned
surplus in the period of the change in accounting principle. The cumulative
effect is the difference between the amount of capital and surplus at the
beginning of the year and the amount of capital and surplus that would have been
reported at that date if the new accounting had been applied retroactively for
all prior periods. PXRE Reinsurance is currently assessing the effect of the
adoption.
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, 2000,
1999 and 1998, PXRE Reinsurance's results were within the usual values for each
of the eleven ratios, except for three ratios in 2000 and one ratio in each of
1999 and 1998. PXRE's management believes that the
28
three ratios fell outside the usual range in 2000 due to (a) an increase in PXRE
Reinsurance's net written premium in 2000 as compared with 1999 due to the
nonrenewal in 2000 of the intercompany pooling agreement between Transnational
Insurance and PXRE Reinsurance caused by the sale of Transnational Insurance,
(b) the development of prior year losses primarily arising from the 1999 French
storms, (c) a decrease in investment income from certain alternative limited
partnership investments in 2000 compared to 1999, and (d) the statutory
accounting effect of one retroactive contract. PXRE Reinsurance fell outside a
usual ratio value 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.
From time to time, various regulatory and legislative changes have been
proposed in the U.S. insurance industry, some of which could have an effect on
reinsurers and insurers. Among the proposals that have in the past been or are
at present being considered are the possible introduction of federal regulation
in addition to, or in lieu of, the current system of state regulation of
insurers, an initiative to create a federally guaranteed disaster reinsurance
pool prefunded by insurers and proposals in various state legislatures (some of
which have been enacted) to conform portions of their insurance laws and
regulations to various model acts adopted by the NAIC. PXRE is unable to predict
what effect, if any, the foregoing developments may have on its operations and
financial condition in the future.
United Kingdom
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 bye-laws and directions.
The regulation and supervision to which PXRE Limited is subject relates
primarily to the maintenance of a risk based capital requirement (by way of a
deposit of securities and a letter of credit with Lloyd's to support its
underwriting) and prescribed methods of accounting. PXRE Managing Agency must
satisfy a solvency requirement, prescribed methods of accounting and is subject
to periodic examinations of compliance with Lloyd's bye-laws and other purposes.
PXRE Lloyd's Syndicate has to comply with accounting regulation, internal
reporting, and is subject to periodic examinations of compliance. The Lloyd's
market is regulated externally by the Financial Services Authority, although the
day to day regulation of the market remains the responsibility of the Council of
Lloyd's. All invested assets of PXRE Lloyd's Syndicate, amounting to
approximately $18,908,000 at December 31, 2000, are restricted from being paid
as a dividend for at least three years.
Bermuda
The Insurance Act 1978 of Bermuda and related regulations
(collectively, the "Act") imposes on Bermuda insurance companies, including PXRE
Bermuda, solvency and liquidity standards and auditing and reporting
requirements, and grants to the 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 a
prescribed minimum solvency margin.
29
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 or (C) 15% of
loss reserves. In addition, PXRE Bermuda is prohibited from declaring or paying
any dividends during any financial year it is in breach of its minimum solvency
margin or minimum liquidity ratio or if the declaration or payment of such
dividends would cause it to fail to meet such margin or ratio. If it fails to
meet its minimum solvency margin or minimum liquidity ratio on the last day of
any financial year, the insurer will be prohibited, without the approval of the
Minister of Finance, from declaring or paying any dividends during the next
financial year.
As a Class 3 insurer, PXRE Bermuda also is prohibited, without the
approval of the Minister of Finance, 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 of Finance that there is a risk of the insurer
becoming insolvent or that it is in breach of the Act or any conditions imposed
upon its registration, the 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 of Finance 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 of Finance, 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, 2000, PXRE Bermuda's solvency and liquidity margins and
statutory capital and surplus were in excess of the minimum levels required by
the Act.
30
Taxation of PXRE and its Subsidiaries
The following summary of the taxation of the Company, PXRE Bermuda,
PXRE Barbados and PXRE's U.S. subsidiaries, including PXRE Reinsurance
(collectively, the "PXRE U.S. Companies") is based upon current law.
Legislative, judicial or administrative changes may be forthcoming that could
affect this summary. See, for example, "Legislation" below. Certain subsidiaries
and branch offices of PXRE are subject to taxation related to operations in the
United Kingdom and Belgium.
Bermuda
The Company 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
the Company or PXRE Bermuda or to any of their operations or their shares,
debentures or other obligations until March 28, 2016. These assurances are
subject to the proviso that they are not construed so as to prevent the
application of any tax or duty to such persons as are ordinarily resident in
Bermuda (the Company and PXRE Bermuda are not currently so designated) or to
prevent the application of any tax payable in accordance with the provisions of
The Land Tax Act of 1967 of Bermuda or otherwise payable in relation to the land
leased to the Company or PXRE Bermuda.
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. The Company believes that it and its
subsidiaries, other than the PXRE U.S. Companies, have operated and will
continue to operate their business in a manner that will not cause them to be
treated as engaged in a trade or business within the United States. Tax
conventions between the United States and Bermuda or Barbados may provide relief
to PXRE Bermuda and PXRE Barbados, respectively, if either such company is
deemed to be engaged in the conduct of a U.S. trade or business. Under the tax
convention between Bermuda and the United States (the "Bermuda Treaty"), a
Bermuda company predominantly engaged in the insurance business, such as PXRE
Bermuda, is subject to U.S. income tax on its insurance income found to be
effectively connected with a U.S. trade or business only if that trade or
business is conducted through a permanent establishment in the United States. As
a holding company that is not predominantly engaged directly in an insurance
business, the Company is
31
not entitled to the benefits of the Bermuda Treaty. Similarly, under the tax
convention between Barbados and the United States (the "Barbados Treaty"), a
corporation that is a Barbados resident will not be subject to U.S. income tax
on income that is effectively connected with a U.S. business, unless such
business is conducted through a permanent establishment in the United States.
Each of the Company, PXRE Bermuda and PXRE Barbados operate under guidelines
that are intended to minimize the risk that they will be treated as engaged in a
U.S. trade or business; and each of PXRE Bermuda and PXRE Barbados operate under
guidelines that are intended to minimize the risk that they will be found to
have a U.S. permanent establishment.
On this basis, the Company 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 terminated or revised in a manner that could
adversely affect any protection from U.S. corporate tax that they currently
provide. In addition, because there is uncertainty as to the activities 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 the Company or a non-U.S. subsidiary is engaged in a trade or
business in the United States. The maximum federal tax rates currently are 35%
for a corporation's income 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 foreign (or non-US) 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"), which in certain cases
may be reduced or eliminated under applicable tax treaties.
The United States also imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. The rate of tax applicable to reinsurance
premiums paid to PXRE Bermuda and PXRE Barbados is 1% of gross premiums.
Legislation
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, PXRE 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 PXRE.
32
Employees
PXRE employed 88 full-time employees at December 31, 2000. None of
PXRE's employees is represented by a labor union, and management considers its
relationship with its employees to be excellent.
PXRE Bermuda employees, including senior management of the Company and
PXRE Bermuda, are employed pursuant to work permits granted by Bermuda
authorities. These permits expire at various times over the next few years. PXRE
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 81,000 square feet of office space
in Hamilton, Bermuda (the Company's corporate headquarters); Edison, New Jersey;
Norwalk, Connecticut; New York, New York; Larkspur, 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
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
and additional rents on account of PXRE Delaware'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 Delaware's proportionate share of taxes and operating expenses attributable
to the building. Additionally, in February 2000, PXRE Delaware subleased
approximately 11,000 square feet of the additional space covered by the November
1999 lease for a three year term ending on the 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 Delaware 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 PXRE Delaware a
proportionate share of taxes and operating expenses payable by PXRE Delaware
under the lease.
Item 3. Pending Legal Proceedings
PXRE is subject to litigation and arbitration in the ordinary course of
its business. Except as disclosed below, management does not believe that the
eventual outcome of any such pending litigation or arbitration is likely to have
a material adverse effect on PXRE's financial condition or business. Pursuant to
PXRE's insurance and reinsurance arrangements, disputes are generally required
to be finally settled by binding arbitration.
In May 1999, PXRE Delaware entered into weather option agreements with
two counterparties. In April 2000, these counterparties submitted invoices to
PXRE Delaware in the aggregate sum of $8,252,500 seeking payment under the
weather option agreements, which
33
invoices have been paid. PXRE Delaware insured its obligations under these
weather option agreements through two Commercial Inland Marine Weather Insurance
Policies issued by Terra Nova Insurance Company Limited ("Terra Nova"). PXRE
Delaware submitted claims under these policies to Terra Nova in April 2000.
Terra Nova has denied coverage, contending that its Managing General Agent had
no authority to issue these policies. PXRE Delaware disagrees with Terra Nova's
denial and has filed suit against Terra Nova in the United States District Court
for the District of New Jersey. Trial of this suit is presently scheduled to
commence on April 10, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
None.
34
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common shares are listed on the New York Stock Exchange
under the symbol "PXT". The following table sets forth, for the periods
indicated, the high and low bid quotations for the Company'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
---- --- ---------
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
2000:
First Quarter $17.00 $11.8125 $0.06
Second Quarter 17.00 13.50 0.06
Third Quarter 16.00 12.625 0.06
Fourth Quarter 17.125 12.625 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 23, 2001, there were 11,899,537 common shares issued
and outstanding, which shares were held by approximately 90 shareholders of
record and, based on the Company'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 Company's 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, the Company is largely dependent upon dividend
payments from its subsidiaries, including PXRE Reinsurance and PXRE Bermuda, to
pay dividends to the Company's shareholders. PXRE Reinsurance is subject to U.S.
state laws, and PXRE Bermuda is subject to Bermuda law, which may restrict their
ability to distribute dividends. In addition, certain covenants in 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.
35
Under the Company's Bye-Laws, subject to certain exceptions and to
waiver by the Company's Board of Directors on a case by case basis, no transfer
of the Company's shares is permitted if such transfer would result in a
shareholder owning, directly or indirectly, more than 9.9% of the voting power
of the outstanding shares, including common shares, of the Company or more than
9.9% of the outstanding shares of any class of the Company's stock. Ownership is
broadly defined in the Company's Bye-Laws.
The Company may refuse to register any such transfer on the Company's
share transfer records. A transferee will be permitted to promptly dispose of
any of the Company's shares purchased which violate the restriction and as to
the transfer of which registration is refused. The transferor of such shares of
the Company will be deemed to own such shares for dividend, voting and reporting
purposes until a transfer of such shares has been so registered.
In addition, in the event that the Company becomes aware of a
shareholder owning more than 9.9% of the voting power of the Company's
outstanding shares after a transfer of shares has been registered, the Company's
Bye-Laws provide that, subject to the same exceptions and waiver procedures, the
voting rights with respect to the shares of the Company owned by any such
shareholder will be limited to a voting power of 9.9%. The 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 the Company's common shares. Such
allocation will be pro rata based on the number of the Company's common shares
held by all such other holders of the Company's 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.
36
Item 6. Selected Financial Data.
Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
(1) (1)(2) (1)(2) (1)(2) (1)(3)
----- ------ ------ ------ ------
(in thousands, except per share data and ratios)
Income Statement Data:
Gross premiums written $268,990 $221,349 $136,215 $126,232 $114,348
Premiums ceded (96,289) (82,504) (47,521) (26,177) (46,630)
-------- -------- -------- -------- --------
Net premiums written 172,701 138,845 88,694 100,055 67,718
Change in unearned premiums (12,495) (10,342) 3,692 (8,640) 5,078
-------- -------- -------- -------- --------
Net premiums earned 160,206 128,503 92,386 91,415 72,796
Net investment income 30,037 47,173 19,612 31,191 16,782
Net realized investment gains (losses) 3,191 (3,766) (3,862) 2,467 94
Management fees(3) 5,483 3,590 2,172 3,006 6,032
-------- -------- -------- -------- --------
Total revenues 198,917 175,500 110,308 128,079 95,704
-------- -------- -------- -------- --------
Losses and loss expenses incurred 137,765 159,259 57,793 12,491 18,564
Commissions and brokerage 34,899 27,703 20,563 19,138 12,874
Other operating expenses 35,407 30,052 19,313 15,716 12,262
Interest expense 4,778 3,915 1,395 3,325 6,957
Minority interest in consolidated subsidiary 8,875 8,790 8,928 8,184 0
-------- -------- -------- -------- --------
Total losses and expenses 221,724 229,719 107,992 58,854 50,657
-------- -------- -------- -------- --------
(Loss) income before income taxes, cumulative effect
of accounting change, extraordinary
item and equity in net earnings of TREX (22,807) (54,219) 2,316