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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
---------------------------
For the fiscal year ended Commission File Number 1-15259
December 31, 2001
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 22, 2002 computed by reference to
the closing price of such common equity as of the close of business on March 22,
2002 was $268,148,884. As of March 22, 2002, 11,944,271 of the registrant's
common shares were issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of PXRE Group Ltd.'s definitive Proxy Statement for the
Annual General Meeting of Shareholders to be held on May 30, 2002.
Part IV Portions of PXRE Corporation's Proxy Statement dated April 12, 1991.
2
PART I
Unless the context otherwise requires, references in this Form 10-K to
"PXRE" or "we" include PXRE Group Ltd. (the "Company") and its subsidiaries,
which principally include PXRE Reinsurance Company ("PXRE Reinsurance"), PXRE
Corporation ("PXRE Delaware"), PXRE Reinsurance Ltd. ("PXRE Bermuda"), PXRE
Reinsurance (Barbados) Ltd. ("PXRE Barbados") and PXRE Solutions Inc. ("PXRE
Solutions"). References to U.S. GAAP refer to accounting principles generally
accepted in the United States ("U.S. GAAP"). References to SAP refer to
statutory accounting principles ("SAP") in either the State of Connecticut where
PXRE Reinsurance is domiciled or Bermuda where PXRE Bermuda is domiciled.
Cautionary Statement Regarding Forward-Looking Statements
This report contains various forward-looking statements and includes
assumptions concerning our operations, future results and prospects. Statements
included herein, as well as statements made by or on our behalf in press
releases, written statements or other documents filed with the Securities and
Exchange Commission, or in our communications and discussions with investors and
analysts in the normal course of business through meetings, phone calls and
conference calls, which are not historical in nature are intended to be, and are
hereby identified as, "forward-looking statements" for purposes of the safe
harbor provided by Section 21E of the Securities Exchange Act of 1934 as
amended. These forward-looking statements, identified by words such as "intend,"
"believe," "anticipate," or "expects" or variations of such words or similar
expressions are based on current expectations and are subject to risk and
uncertainties. In light of the risks and uncertainties inherent in all future
projections, the inclusion of forward-looking statements in this report should
not be considered as a representation by us or any other person that our
objectives or plans will be achieved. We caution investors and analysts that
actual results or events could differ materially from those set forth or implied
by the forward-looking statements and related assumptions, depending on the
outcome of certain important factors including, but not limited to, the
following:
(i) significant catastrophe losses or losses under other
coverages, the timing and extent of which are difficult to
predict;
(ii) changes in the level of competition in the reinsurance or
primary insurance markets that impact the volume or
profitability of business (these changes include, but are not
limited to, the intensification of price competition, the
entry of new competitors, existing competitors exiting the
market and competitors' development of new products);
(iii) the lowering or loss of one of the financial or claims paying
ratings of ours or one or more of our subsidiaries;
(iv) changes in the demand for reinsurance, including changes in
the amount of risk that our clients elect to maintain for
their own account;
(v) risks associated with the termination and run-off of our
diversification initiatives;
(vi) adverse development on loss reserves related to business
written in current and prior years;
3
(vii) lower than estimated retrocessional recoveries on unpaid
losses, including the effects of losses due to a decline in
the creditworthiness of our retrocessionaires;
(viii) increases in interest rates, which cause a reduction in the
market value of our interest rate sensitive investments,
including our fixed income investment portfolio and potential
underperformance in our finite coverages;
(ix) decreases in interest rates causing a reduction of income
earned on net cash flow from operations and the reinvestment
of the proceeds from sales, calls or maturities of existing
investments and shortfalls in cash flows necessary to pay
fixed rate amounts due to finite contract counterparties;
(x) market fluctuations in equity securities and with respect to
our portfolio of hedge funds and other privately held
securities: leverage, concentration of investments, lack of
liquidity, market fluctuations and direction (including as a
result of interest rate fluctuations and direction, with
respect to price levels and volatility thereof), currency
fluctuations, credit risk, yield curve risk, spread risk
between two or more similar securities, political risk,
counterparty risk and risks relating to settlements on foreign
exchanges;
(xi) foreign currency fluctuations resulting in exchange gains or
losses;
(xii) changes in the composition of our investment portfolio;
(xiii) a contention by the United States Internal Revenue Service
that the Company or our offshore subsidiaries are subject to
U.S. taxation;
(xiv) changes in tax laws, tax treaties, tax rules and
interpretations; and
(xv) changes in management's evaluation of potential Year 2000
exposures emanating from our reinsurance business.
In addition to the factors outlined above that are directly related to
our business, we are also subject to general business risks, including, but not
limited to, adverse state, federal or foreign legislation and regulation,
adverse publicity or news coverage, changes in general economic factors and the
loss of key employees. The factors listed above should not be construed as
exhaustive.
We undertake no obligation to release publicly the results of any
future revisions we may make to forward looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Item 1. Business
Introduction
The Company was formed in 1999 as part of the reorganization of PXRE
Delaware, a Delaware corporation. Prior to the reorganization, PXRE Delaware was
the ultimate parent holding company of the various PXRE companies and its common
shares were publicly traded on the New York Stock Exchange. As a result of the
reorganization, the Company became the ultimate parent holding company of PXRE
Delaware and the holders of PXRE Delaware common stock automatically became
holders of the same number of the Company's common shares. The reorganization
was consummated at the close of business on October 5, 1999 and, on October 6,
1999, the Company's common shares began to trade on the New York Stock Exchange
under the symbol PXT. The reorganization also involved the establishment of a
Bermuda based reinsurance company, PXRE Bermuda, operations in Barbados through
PXRE Barbados, and PXRE Solutions, a reinsurance intermediary.
4
Overview of the Business
We provide reinsurance products and services to a worldwide market
place through subsidiary operations in the United States, Europe, Bermuda and
Barbados. Our primary focus is providing property catastrophe reinsurance and
retrocessional coverage to a worldwide group of clients, where we have been
among the leading franchises for two decades. Property catastrophe reinsurance
generally covers claims arising from large catastrophes such as hurricanes,
windstorms, hailstorms, earthquakes, volcanic eruptions, fires, industrial
explosions, freezes, riots, floods and other man-made or natural disasters.
Substantially all of our non-finite reinsurance products have been, and will
continue to be, offered on an excess-of-loss basis with aggregate limits on our
exposure to losses. This means that we do not begin to pay our client's claims
until their claims exceed a certain specified amount and our obligation to pay
those claims is limited to a specified aggregate amount.
We also offer our clients property-per-risk, marine and aviation
reinsurance and retrocessional products. Unlike property catastrophe
reinsurance, which protects against the accumulation of a large number of
related losses arising out of one catastrophe, per-risk excess of loss
reinsurance protects our clients against a large loss arising from a single risk
or location. Substantially all of our property-per-risk, marine and aviation
business is also written on an excess-of-loss basis with aggregate limits on our
exposure to losses.
We also provide our clients with finite reinsurance products. Unlike
traditional reinsurance products that are primarily focused on transferring risk
from the client to the reinsurer, finite products combine elements of risk
transfer and the management of the impact of such risk on a client's financial
statements and cash flow. Finite reinsurance contracts are highly customized for
each transaction. Under a typical finite contract, a portion of the expected
losses are ultimately borne by our client and are funded through the payment of
premium and the income we earn on that premium. If the loss experience with
respect to the risks assumed by us is as expected or better than expected, our
finite clients will share in the profitability of the underlying business
through premium adjustments or profit commissions. If the loss experience is
worse than expected, our finite clients participate in this negative outcome. In
addition, we offer finite reinsurance products where investment returns on the
funds transferred to us over a period of years affect the profitability of the
contract and the magnitude of any premium or commission adjustments.
5
As of December 31, 2001, we had over 350 clients, including many of the
leading insurance and reinsurance companies in the world. Our clients include
both primary insurance companies and other reinsurance companies. Approximately
75% of our clients in 2001 were based outside of the United States.
In the wake of the events of September 11, 2001, which have resulted in
industry losses estimated as high as $45-75 billion, reinsurance markets across
the world are expected to harden significantly. These developments follow on
significant pricing increases in 2000-01 across sectors and geographic regions,
raising the prospect of sector profitability comparable to the environment
following Hurricane Andrew in 1992. We expect these market changes to most
dramatically impact the specialized short tail, high-severity sectors of the
market, which represent our focus areas and in which we are a significant and
established provider.
Following a diversification effort into Lloyd's and the casualty
sectors during the soft reinsurance market of the late 1990s, we decided during
2000 and 2001 to exit these businesses, and are today focused on our traditional
core property reinsurance operations. While our core businesses are volatile due
to significant potential loss severity, we have been a successful underwriting
organization over the long term. This proven expertise in some of the most
dynamic areas of the reinsurance sector represents an opportunity to achieve
particularly strong financial results in the current hardening phase of the
underwriting cycle.
We conduct our business primarily through our principal operating
subsidiaries, PXRE Reinsurance, PXRE Bermuda, PXRE Solutions and PXRE Barbados.
PXRE Reinsurance is a brokerage-market reinsurer with approximately $331.9
million of statutory capital and surplus as of December 31, 2001, which
principally underwrites treaty reinsurance for property (including marine and
aerospace) risks. PXRE Reinsurance is licensed, accredited or permitted to do
business in all states and the District of Columbia, Puerto Rico, Colombia 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. PXRE Bermuda, with approximately $34.3 million of statutory capital and
surplus as of December 31, 2001, also provides finite reinsurance coverages.
PXRE Bermuda is not licensed nor admitted as an insurer in any jurisdiction
other than Bermuda.
PXRE Barbados was licensed as an insurance company in March 2001 under
Barbados' Insurance Act, 1996 and its name was changed from PXRE (Barbados) Ltd.
to PXRE Reinsurance (Barbados) Ltd. It is not licensed nor admitted in any
jurisdiction other than Barbados. PXRE Barbados commenced underwriting business
in 2001. PXRE Barbados is expected to provide finite reinsurance coverages to
clients and to provide reinsurance coverage to other PXRE entities.
6
PXRE Solutions performs reinsurance intermediary activities on behalf
of PXRE Bermuda, PXRE Reinsurance and PXRE Barbados.
Recent Developments
On December 10, 2001, we signed a definitive agreement with Capital Z
Financial Services Fund II, investment funds managed by Reservoir Capital Group,
and Richard Rainwater, to invest $150 million in new equity capital in the form
of convertible preferred stock (the "Preferred Stock Investment"). The capital
infusion from the Preferred Stock Investment will enable us to increase
underwriting capacity and therefore maximize participation in the new market
environment. The closing of the Preferred Stock Investment is subject to
customary closing conditions, including regulatory approval. The Company's
shareholders approved the transaction on February 12, 2002. The State of
Connecticut Insurance Department held a hearing to consider the investment on
March 13, 2002 and, under Connecticut law, the Connecticut Insurance
Commissioner is required to render her decision on the matter within thirty days
of the conclusion of the hearing.
Ratings
PXRE Reinsurance and PXRE Bermuda are rated "A" (Excellent) by A.M.
Best Company ("A.M. Best"), an independent insurance industry rating
organization. PXRE Reinsurance and PXRE Bermuda have been assigned an "A"
financial strength rating by Standard & Poor's Rating Services ("S&P"), a
division of the McGraw-Hill Companies, Inc. Following the terrorist attacks on
September 11, 2001, these ratings were placed under review by both rating
agencies. Following the announcement of the Preferred Stock Investment, A.M.
Best removed the rating from under review and assigned a negative outlook. Our
S&P rating remains on credit watch with negative implications, but S&P commented
that it would likely affirm the "A" rating if the Preferred Stock Investment was
successfully consummated. Both rating agencies noted that the sustainability of
our "A" ratings was contingent upon our ability to take advantage of the
improved property casualty reinsurance market and to demonstrate improved
operating results in 2002.
The property catastrophe reinsurance market is highly sensitive to the
ratings assigned by the rating agencies. If either of S&P or A.M. Best were to
downgrade us, such downgrade would likely have a material negative impact on our
ability to expand our reinsurance portfolio and renew our existing reinsurance
portfolio, especially if we were to be downgraded more than one level from the
"A" rating category to the "B" rating category.
These ratings are based upon factors that may be of concern to
policyholders, agents and intermediaries, but may not reflect the considerations
applicable to an investment in a reinsurance or insurance company. A change in
any such rating is at the discretion of the respective rating agencies.
In addition, if we were downgraded below "A-" by either rating agency,
an event of default would occur under PXRE Delaware's credit agreement with
First Union National Bank, as agent, and the lenders thereunder (the "First
Union Loan"). As of December 31, 2001, the principal amount of $55 million was
outstanding under the First Union Loan. See "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Financial
Condition -- Liquidity and Capital Resources" for a full description of the
terms and provisions of the First Union Loan.
It is increasingly common for our assumed reinsurance contracts to
contain terms that would allow our clients to cancel the contract if we are
downgraded below various rating levels by one or more rating agencies. Whether a
client would exercise such rights would depend, among other things, on the
reasons for such a downgrade, the extent of the downgrade, the prevailing market
conditions, and the pricing and availability of replacement reinsurance
coverage. It is impossible to predict in advance whether and how many of our
clients would actually exercise such rights or what effect such cancellations
would have on our financial condition or future prospects, but such an effect
could potentially be materially adverse. In addition, certain of our excess of
loss reinsurance contracts require us to transfer premiums currently retained by
us on a funds withheld basis into a trust for the benefit of the reinsurers if
A.M. Best were to downgrade us below "A-." If A.M. Best were to downgrade us to
"B++" or below, certain other ceded excess of loss reinsurance contracts contain
provisions that give the reinsurer the right to cancel the contract and require
us to pay a termination fee. The amount of the termination fee would be
dependent upon various factors, including level of loss activity.
7
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 28, 2002, 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 was accounted for using the
purchase method of accounting; therefore, net income of TREX (including
Transnational Reinsurance/Transnational Insurance) was included in PXRE
Delaware's consolidated results of operations from the date of the Merger.
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 client'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 third quarter of 2001, we announced that we were returning to
our core focus on property catastrophe, property per-risk, marine and aerospace
reinsurance and retrocessional products. Prior to 1998, these had been our only
significant lines of coverage. Beginning in 1997, the pricing and terms in our
core property reinsurance markets began to deteriorate, resulting in a soft
reinsurance market that only began to recover in late 2000. We decided to pursue
a variety of diversification efforts to enhance our competitiveness and growth
opportunities in that soft reinsurance market environment. Our diversification
initiatives included:
8
o the establishment of a Lloyd's of London ("Lloyd's") underwriting
syndicate and managing agent;
o the establishment of an excess and surplus lines operation;
o the addition of a reinsurance platform offering primarily casualty
products directly to insurance companies (rather than through
reinsurance brokers);
o the enhancement of our international broker market reinsurance
platform to include additional lines of business, including casualty
and credit risks;
o an acceleration of business offerings to one of our managed business
participants;
o the formation of a finite reinsurance unit; and
o the establishment of a direct presence in the Bermuda market.
As the reinsurance market conditions began to improve, we undertook a
significant strategic realignment in 2000 through 2001, exiting our excess and
surplus lines, Lloyd's and direct operations. This follows our gradual
withdrawal from the facultative reinsurance business over the last several
years.
During the third quarter of 2000, we stopped underwriting new or
renewal business through our Lloyd's vehicle, PXRE Limited, the sole member of
Lloyd's Syndicate 1224 ("PXRE Lloyd's Syndicate"), which had been active in the
accident and health, property catastrophe, aerospace, facultative and casualty
reinsurance areas. This decision followed our redomestication to Bermuda and the
resulting direct access to the risks written in this market, which reduced the
benefit of a Lloyd's presence. Our Lloyd's Managing Agency, PXRE Managing Agency
Limited, ceased managing third party syndicates at Lloyd's as of January 1, 2001
and was sold in April 2001 at approximately book value; the syndicate run-off is
ongoing. We are continuing to run-off the business underwritten through PXRE's
Lloyd's Syndicate.
During the fourth quarter of 2000, Transnational Insurance Company
("Transnational Insurance"), an excess and surplus lines carrier which, prior to
our withdrawal, had specialized in non-standard and excess property insurance
risks distributed substantially all of its assets and liabilities to PXRE
Reinsurance and the remaining corporate shell was sold on December 21, 2000. Net
premiums earned on this business were not material in 1999 and 2000.
In September 2001, completing the return to our core business, we
decided to exit the casualty reinsurance business that was principally
underwritten by our direct reinsurance unit. Our direct reinsurance portfolio
consists primarily of North American general liability, automobile, workers'
compensation and per-risk excess business. We had expanded into this area in an
effort to diversify during the most difficult period in the property catastrophe
pricing cycle, and hired a direct underwriting team from National Reinsurance
Company/General Reinsurance Company to establish the operation de novo, with a
focus on small to medium-sized insurance company clients. This unit ceased
writing both new and renewal treaties in September 2001 and the unit was closed
at the end of February, 2002. We also ceased underwriting our more limited
portfolio of international pro-rata casualty reinsurance as part of the return
to our core property reinsurance focus. We remain liable for losses incurred in
these lines of business and expect that the majority of this business will be
run-off during the next 5 to 7 years.
9
As a result of this strategic realignment, we reduced the number of our
employees from a high of 103 in December, 1999 to 59 at the end of February,
2002.
Underwriting Operations
Through our subsidiaries, we are principally engaged in providing
treaty reinsurance to primary insurers and retrocessional coverage to other
reinsurers of commercial and personal property risks. We also provide marine and
aerospace reinsurance and retrocessional products and services. We have
specialized in property reinsurance, including a strong focus on
catastrophe-type products.
Operating Segments
We operate in four reportable property and casualty segments -
catastrophe and risk excess, casualty, structured/finite business and all other
lines - based on our method of internal management reporting. In addition, we
operate in two geographic segments - North American representing North American
based risks written by North American based clients and International
(principally the United Kingdom, Continental Europe, Australia, Latin America,
the Caribbean and Asia) representing all other premiums written. These
reportable segments were redefined during 1999 once the platform for the
diversification strategy was largely in place. With the return to our core lines
of business, we expect to re-define these segments in 2002.
10
The following tables present the distribution of our net premiums
written, net premiums earned and underwriting operations for the years ended
December 31, 2001, 2000 and 1999:
Net Premiums Written (1)
Year Ended December 31,
2001 2000 1999
---- ---- ----
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ 34,127 $ 20,354 $ 26,704
International 90,107 74,197 63,957
Excess of loss cessions (60,485) (15,489) (18,883)
--------------- --------------- ---------------
63,749 41% 79,062 46% 71,778 52%
--------------- --------------- ---------------
Casualty
North American 27,325 26,766 13,148
International 13,389 14,876 12,851
--------------- --------------- ---------------
40,714 26 41,642 24 25,999 19
--------------- --------------- ---------------
Structured/Finite Business
North American 33,651 20,245 0
International 0 0 0
--------------- --------------- ---------------
33,651 22 20,245 12 0 0
--------------- --------------- ---------------
Other Lines
North American 4,294 2,030 12,073
International 12,070 29,722 28,995
--------------- --------------- ---------------
16,364 11 31,752 18 41,068 29
--------------- --- --------------- --- --------------- ---
Total $ 154,478 100% $ 172,701 100% $ 138,845 100%
=============== === =============== === =============== ===
11
Net Premiums Earned (1)
Year Ended December 31,
2001 2000 1999
---- ---- ----
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ 32,978 $ 20,517 $ 26,155
International 92,224 73,318 61,241
Excess of loss cessions (58,839) (19,115) (14,958)
--------------- --------------- ---------------
66,363 41% 74,720 47% 72,438 56%
--------------- --------------- ---------------
Casualty
North American 27,145 19,062 11,593
International 13,310 13,865 9,794
--------------- --------------- ---------------
40,455 25 32,927 21 21,387 17
--------------- --------------- ---------------
Structured/Finite Business
North American 32,365 17,791 0
International 0 0 0
--------------- --------------- ---------------
32,365 20 17,791 11 0 0
--------------- --------------- ---------------
Other Lines
North American 3,336 1,978 11,296
International 19,606 32,790 23,383
--------------- --------------- ---------------
22,942 14 34,768 21 34,679 27
--------------- --- --------------- --- --------------- ---
Total $ 162,125 100% $ 160,206 100% $ 128,504 100%
=============== === =============== === =============== ===
12
Underwriting Operations (2)
Year Ended December 31,
2001 2000 1999
---- ---- ----
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------
(in thousands, except percentages)
Catastrophe and Risk Excess
North American $ (29,607) $ 12,701 $ (31,591)
International (17,975) (2,609) (32,039)
Excess of loss cessions 38,117 (11,265) 15,476
--------------- --------------- ---------------
(9,465) 65% (1,173) 16% (48,154) 87%
--------------- --------------- ---------------
Casualty
North American (214) (347) (279)
International (3,118) 100 (242)
--------------- --------------- ---------------
(3,332) 23 (247) 3 (521) 1
--------------- --------------- ---------------
Structured/Finite Business
North American 2,944 1,661 411
International 0 0 0
--------------- --------------- ---------------
2,944 (20) 1,661 (22) 411 (1)
--------------- --------------- ---------------
Other Lines
North American (276) (2,456) (715)
International (4,481) (5,214) (6,166)
--------------- --------------- ---------------
(4,757) 32 (7,670) 103 (6,881) 13
--------------- --- --------------- --- --------------- ---
Total $ (14,610) 100% $ (7,429) 100% $ (55,145) 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 our 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
Our catastrophe and risk excess portfolio consists principally of
property catastrophe excess of loss, property retrocessional, property risk
excess, property London Market Excess ("LMX") and marine and aerospace excess
reinsurance coverages. This portfolio can be characterized on a longer term
basis as being comprised of coverages involving higher expected margins and
greater volatility than the other coverages that we underwrite. In 2001, $124.2
million of premiums written after reduction for quota share cessions were
attributable to the catastrophe and risk excess portfolio, or $63.7 million net
of specific excess of loss retrocessional reinsurance ceded to other reinsurers.
In 2001 and 2000, this segment produced underwriting losses of $9.5 million and
$1.2 million, respectively, largely as a result of the September 11th terrorist
attacks in 2001 and, in 2000, as a consequence of development on French storms
that occurred in the last week of 1999. The increase in premium volume for
catastrophe and risk excess coverages in 2001 was largely attributable to price
increases and increases in the volume of business written in the aftermath of
the 1999 International losses. The increase in premium volume for catastrophe
and risk excess coverages in 2000 was largely attributable to increases in
marine and aerospace coverages.
13
The exposures underlying the North American portion of this segment
emanate principally from East Coast and Gulf hurricanes and Midwest and West
Coast earthquakes. The exposures underlying the International portion of this
segment emanate principally from European, Japanese and Caribbean windstorm,
flood and earthquake risks, major oil rig explosions, cruise ship disasters,
satellite failures, commercial airplane crashes and similar risks.
Casualty
Our 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. We decided to
stop underwriting new or renewal casualty business in September 2001 as part of
our strategic realignment. This segment could be characterized on a longer term
basis as being comprised of coverages involving lower margins and less
volatility than our catastrophe and risk excess segment. Additionally, the
long-term nature of these liabilities will generate investment income. The
casualty portfolio accounted for $40.7 million of net premiums written in 2001,
with approximately two-thirds of the business written in the North American
geographic segment and one-third in the International geographic segment.
Premiums written in 2001 represented a 2% decrease from 2000. In 2001, the
casualty segment produced an underwriting loss of $3.3 million.
Structured/Finite Business
We entered the structured/finite business in mid-1999 with products
combining elements of risk transfer and management of the impact of such risk by
our clients. Due to our small size, we have pursued a niche focus on
smaller/medium sized clients. At the same time, we believe we have maintained a
more conservative underwriting approach than many competitors, eschewing riskier
transactions and opportunistically ceding business to other reinsurers to reduce
payout and investment risks where appropriate. In returning to our core property
reinsurance focus, we elected to continue our finite business, which we believe
provides significant diversification and reduces the volatility to our overall
portfolio. We also believe that market conditions in the wake of September 11th
losses will present increased opportunities in this area.
Premiums in this segment are expected to vary widely from period to
period due to the large-transactional nature of this business. The risks
reinsured are primarily casualty risks and are subject to some of the similar
risks as our casualty segment. Net premiums written of $33.7 million were
attributable to our structured/finite business in 2001. In 2001, the
structured/finite segment produced an underwriting profit of $2.9 million.
Compared to our other lines of business, our finite business involves a
relatively small number of large reinsurance contracts.
14
Finite contracts that do not meet certain accounting requirements of
the Financial Accounting Standard Board's Statement of Financial Accounting
Standard ("SFAS") No. 113 and other accounting literature, that generally define
a reinsurance transaction, are not booked as premiums, but rather are treated as
deposits. During the second quarter of 2001, we entered into contracts that have
expected deposits of $35.9 million from ceding companies on this deposit
accounting basis. We also have two finite retrocessional agreements in place
with Select Reinsurance, Ltd. ("Select Re") that are accounted for as deposits
pursuant to SFAS No. 113, totaling $19.9 million. We believe these
retrocessional agreements will enhance the long-term profitability of the finite
contracts to which they relate.
Other Lines
Our Other Lines segment consists of many different coverages, the
largest coverage being property pro rata amounting to $7.5 million in net
premiums written in 2001. Other coverages include accident and health coverages,
binding and line slip authorities written through PXRE Lloyd's Syndicate and
credit coverages. Our Other Lines segment produced an underwriting loss of $4.8
million in 2001, down significantly from 2000. During the third quarter of 2000,
we ceased accepting new and renewal risks at PXRE Lloyd's Syndicate. With the
return to our core lines of business, we do not expect to write a significant
volume of premium in our Other Lines segment in the near future.
See Note 10 of Notes to Consolidated Financial Statements for
additional information regarding our reportable segments and geographic areas.
Underwriting
Since inception, we have pursued a core strategy of leveraging the
specialized analytical and underwriting expertise of our reinsurance
professionals in high-severity, low-frequency lines of business.
Our underwriting process emphasizes a team approach among our
underwriters, actuaries and claims staff and is strictly geared toward
profitability rather than market share, with a resulting willingness to reduce
underwriting commitments in a soft market.
Reinsurance treaties are reviewed for compliance with our general
underwriting standards and certain treaties are evaluated in part based upon our
internal actuarial analysis. We manage our risk of loss through a combination of
aggregate exposure limits, underwriting guidelines that take into account risks,
prices and coverage and retrocessional agreements. As we underwrite risks from a
large number of clients based on information generally supplied by reinsurance
brokers, there is a risk of developing a concentration of exposure to loss in
certain geographic areas prone to specific types of catastrophes. We have
developed systems and software tools to monitor and manage the accumulation of
our exposure to such losses. We have established guidelines for maximum
tolerable losses from a single or multiple catastrophic events based on
historical data. However, no assurance can be given that these maximums will not
be exceeded in some future catastrophe.
15
We utilize a two-tier approach to risk management, including both a
portfolio optimization system and overall risk limits. Our portfolio
optimization system incorporates third-party catastrophe modeling software and
internally developed models. This system is used to price each reinsurance
contract based on marginal capital requirements, and enables our underwriters to
dynamically evaluate potential new business and exposures against the background
of our existing business to optimize the overall portfolio. Any new business
bound is incorporated in this analytical approach to enable a dynamic assessment
of the portfolio. Our portfolio is also subject to management-specified
probabilistic risk limits for the business as a whole, by territory and by type
of event. Our management believes that the portfolio model is a valuable tool to
supplement the experience and judgment of our underwriters.
In addition, to avoid the perils associated with exclusively
model-driven underwriting, we maintain overall risk limits based on absolute,
rather than probabilistic risk. These limits are evaluated in the context of
rate levels, terms and conditions and buying practices of clients, and adapted
depending on expected risk-adjusted returns.
We have traditionally maintained strict limits to departmental
underwriting authority, with approval by two, three or more members of a
seven-member underwriting committee required for all business deemed outside the
predominant risk distribution of the overall portfolio.
Marketing
We provide reinsurance for international insurance and reinsurance
companies headquartered, principally, in the United Kingdom, Continental Europe,
Australia, Latin America, the Caribbean and Asia. In the United States, we
currently reinsure both national and regional insurance and reinsurance
companies and specialty insurance companies.
Historically, we have obtained substantially all of our reinsurance
business through reinsurance intermediaries, which represent our clients in
negotiations for the purchase of reinsurance. None of the reinsurance
intermediaries through whom we obtain this business are authorized to arrange
any business in our name without our approval. We pay commissions to these
intermediaries or brokers that vary in size based on the amount of premiums and
type of business ceded. These commission payments constitute part of our total
acquisition costs and are included in our underwriting expenses. We generally
pay reinsurance brokerage commissions believed to be comparable to industry
norms.
16
Approximately 17.0%, 14.8%, 14.7% and 13.3% of gross premiums written
in fiscal year 2001 were arranged through Pegasus Advisors-Towers Perrin
Reinsurance, the worldwide branch offices of Aon Group Ltd., Benfield Greig Ltd.
and Guy Carpenter & Company, Inc. (a subsidiary of Marsh & McLennan Companies,
Inc.), respectively. The commissions we paid to these intermediaries are
generally at the same rates as those paid to other intermediaries.
In mid-1998, we established a U.S. based direct writing reinsurance
unit to complement our existing brokerage-based reinsurance operations. As part
of our strategic realignment, we decided in September, 2001 to abandon this
initiative and to focus exclusively on the broker reinsurance market.
Approximately 87.9% and 12.1% of PXRE's 2001 net premiums written were written
in the broker and direct markets, respectively.
Competition
Competitive forces in the property and casualty reinsurance and
insurance industry are substantial. We operate in an industry that is highly
competitive and is undergoing a variety of challenging developments. The
industry has in recent years moved toward greater consolidation as ceding
companies have placed increased importance on size and financial strength in the
selection of reinsurers. This trend became more pronounced in the wake of
September 11th, with the formation of a number of large well capitalized
reinsurance companies in Bermuda and the significant level of additional capital
raised by existing competitors. Additionally, reinsurers are tapping new markets
and complementing their range of traditional reinsurance products with
innovative new products which bring together capital markets and reinsurance
experience. We compete with numerous major reinsurance and insurance companies.
These competitors, many of which have substantially greater financial, marketing
and management resources than us, include independent reinsurance companies,
subsidiaries or affiliates of established worldwide insurance companies,
reinsurance departments of certain commercial insurance companies, and
underwriting syndicates. We also may face competition from new market entrants
or from market participants that decide to devote greater amounts of capital to
the types of business written by us.
Competition in the types of reinsurance business which we underwrite is
based on many factors, including the perceived overall financial strength of a
reinsurer, premiums charged, other terms and conditions, ratings of A.M. Best,
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 and the District of Columbia, Puerto Rico,
Colombia and Mexico, and PXRE's Brussels Branch operates from Belgium. PXRE
Bermuda is licensed to do business only in Bermuda. PXRE Barbados is licensed
only in Barbados.
17
The property and casualty reinsurance industry experienced an extended
period of soft market conditions characterized by inadequate pricing. These
conditions began to improve as a result of loss activity in Europe and the
Caribbean region in late 1999. In the wake of the September 11th attacks on the
World Trade Center and the Pentagon, which have resulted in industry losses
estimated as high as $45-75 billion, representing the largest insured event in
history, reinsurance markets across the world have hardened significantly. Even
before the September 11th attacks, property catastrophe rates were improving at
a significant pace. In the wake of this loss, we have experienced significant
rate increases of 20% to 100% in our core property catastrophe, risk excess and
marine and aerospace lines.
Retrocessional Agreements
The following table sets forth certain information regarding the volume
of premiums we ceded to other reinsurers pursuant to retrocessional agreements
for the periods indicated:
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
(in thousands)
Gross premiums written $ 290,213 $ 268,990 $ 221,349
Reinsurance premiums ceded:
Managed business participants 50,271 36,239 42,549
Finite 13,573 26,814 0
Catastrophe coverage, surplus
reinsurance and other 71,891 33,236 39,955
--------------- --------------- ---------------
Total reinsurance premiums
ceded 135,735 96,289 82,504
--------------- --------------- ---------------
Net premiums written $ 154,478 $ 172,701 $ 138,845
=============== =============== ===============
In the past, we have been able to increase our underwriting commitments
and to generate management fee income by retroceding some of our underwritten
risks to other reinsurers through various retrocessional arrangements whereby we
managed business for such participants. In 2001, we were a party to two such
arrangements. The first such arrangement is referred to as the AMA. The AMA was
a pool consisting of a number of insurance companies (the "Pool"), for which
PXRE Reinsurance acted as reinsurance manager. In 2001, the Pool was comprised
of Merrimack Mutual Fire Insurance Company, Pennsylvania Lumbermens Mutual
Insurance Company and Auto-Owners Insurance Company. PXRE Reinsurance, as
reinsurance manager, receives 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 AMA facility terminated as of December 31, 2001
and was not renewed. Given the current favorable reinsurance market conditions,
we have elected to retain more business for our own account and not seek
additional managed business participants.
18
The second managed business arrangement is with Select Re. PXRE
Reinsurance is a party to a retrocessional agreement with Select Re (as amended
from time to time, the "Select Re Quota Share Agreement"), pursuant to which we
offer to cede a proportional share of our non-casualty reinsurance business. In
2001, the proportional share of our non-casualty business ceded to Select Re
under that agreement was 16.5%. This proportional share has been reduced to 8.0%
for 2002. As a complement to the Select Re Quota Share Agreement, we cede an
additional proportional share to Select Re on certain agreed risks under a
variable quota share agreement. In connection with the Select Re Quota Share
Agreement, we have entered into an undertaking to present Select Re with
aggregate annual premiums equal to a minimum of 20% of Select Re's shareholders'
equity. In return, Select Re is obligated to pay us a management fee based on
the gross premiums ceded to them under these quota share agreements.
In addition to the Select Re Quota Share Agreement, we have entered
into several other reinsurance transactions with Select Re during 2001 whereby:
(i) Select Re provided retrocessional support on several finite and other lines
reinsurance transactions underwritten by PXRE; (ii) Select Re provided us with
aggregate excess of loss retrocessional coverage that protects us against large
losses arising from a single catastrophe event and against the accumulation of
aggregate losses arising from a number of events; and (iii) we provided Select
Re with catastrophe excess of loss retrocessional coverage that protects them in
the event they incur significant losses arising from a single catastrophe event
which involved premiums of $0.7 million. In 2001, we ceded reinsurance premiums
of $58 million to Select Re and earned management fees and ceding commissions of
$16.6 million.
As of December 31, 2001, net assets of $102 million were due in the
aggregate from Select Re, $82.1 million of which are secured by way of a
reinsurance trust, or funds withheld by us. In addition to the collateralization
requirements, we have various additional protections to ensure Select Re's
performance of its obligations to us. In this regard, pursuant to the Select Re
Quota Share Agreement, among other rights, we have the right to designate one
member of Select Re's board of directors and we have the right to limit the
amount of non-PXRE reinsurance business assumed by Select Re.
Select Re is a Class 3 Bermuda reinsurance company that was formed in
1997. As of December 31, 2001, it had shareholders' equity of approximately $169
million and is privately owned by approximately 120 shareholders. In accordance
with our contractual rights under the Select Re Quota Share Agreement, we had
designated Gerald L. Radke, our Chairman, President and Chief Executive Officer,
to serve on Select Re's board of directors. In addition, Jeffrey L. Radke, one
of our Executive Vice Presidents, also sits on Select Re's board. Prior to
joining us in 1999, Jeffrey Radke had served as the President of Select Re and
had been appointed to Select Re's board while he served in that capacity. Mr.
Gerald Radke resigned from Select Re's board in March, 2002 and Mr. Jeffrey
Radke is now acting as our designee on their board of directors. Neither
individual received any remuneration for serving on Select Re's board.
19
As of December 31, 2001, Select Re held 1,112,200 of the Company's
Common Shares, but subsequently liquidated its position in the open market
during February 2002. Gerald Radke, Jeffrey Radke and Halbert Lindquist, one of
our directors, each individually holds Select Re shares, but each such person
holds less than 1% of Select Re's outstanding shares. Mr. William Michaelcheck
is the Chairman of the Board of Select Re and also one of its founding
shareholders. Mr. Michaelcheck is also the President and sole shareholder of
Mariner Investment Group, Inc. ("Mariner"). Mariner acts as the investment
manager for our hedge fund portfolio. In 2001 and 2000, we incurred investment
management fees of $0.8 million and $0.9 million, respectively to Mariner.
The Company's Board of Directors reviews the various transactions with
Select Re at each of its meetings. In addition, the Board has required that the
Company cannot enter into any transaction with Select Re without the prior
approval of the Company's Chief Financial Officer.
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 we 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-" by A.M. Best.
The following table sets forth our earned commissions from
retrocessionaires pursuant to our managed business arrangements for the periods
indicated:
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
(in thousands)
Commission $ 5,130 $ 4,159 $ 3,851
Contingent profit commission (1) 624 (271) (761)
--------------- --------------- ---------------
Total $ 5,754 $ 3,888 $ 3,090
=============== =============== ===============
- ---------------
(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, also under the
arrangement with Select Re.
We also purchase catastrophe retrocessional coverage for our own
protection, depending on market conditions. We significantly increased our
purchases of such coverage during the past three years. In 2001, we made
additional retrocessional coverage purchases to protect against frequency
exposure, which is the risk that we will suffer a significant accumulation of
multiple smaller losses. In 2000 and 1999, catastrophe and other reinsurance
ceded premiums written increased due to opportunistic purchases of catastrophe
retrocessional protection. Certain business fronted on behalf of other
reinsurers also contributed to the increase in catastrophe and other reinsurance
ceded premiums written in 1999.
20
At December 31, 2001, estimated losses recoverable (including incurred
but not reported losses ("IBNR")), from retrocessionaires were $262.1 million,
including $16.2 million of paid loss recoverables. $155.6 million, or 59%, of
our reinsurance recoverables are attributable to the terrorist attacks of
September 11th. Approximately 93% of our September 11th related reinsurance
recoverables as of March 1, 2002 are either fully collateralized or reside with
entities rated "A" or higher.
We have a committee consisting of our 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 us. Proposed reinsurers are evaluated at least annually
based on consideration of a number of factors including the management,
financial statements and the historical experience of the reinsurer. This
procedure is followed whether or not a rating has been assigned to a proposed
reinsurer by any rating organization. All reinsurers, whether obtained through
direct contact or the use of reinsurance intermediaries, are subject to our
approval.
Although management carefully selects our retrocessionaires, we are
subject to credit risk with respect to our retrocessionaires because the ceding
of risk to retrocessionaires does not relieve us of our liability to clients.
Loss Liabilities and Claims
We establish loss and loss expense liabilities (to cover expenses
related to settling claims, including legal and other fees) to provide for the
ultimate cost of settlement and administration of claims for losses, including
claims that have been reported to us by our reinsureds and claims for losses
that have occurred but have not yet been reported to us. Under accounting
principles generally accepted in the United States of America ("GAAP"), we are
not permitted to establish loss reserves until an event that may give rise to a
claim occurs.
For reported losses, we establish liabilities when we receive notice of
the claim. It is our general policy to establish liabilities for reported losses
in an amount equal to the liability set by the reinsured. In certain instances,
we will conduct an investigation to determine if the amount established by the
reinsured is appropriate or if it should be adjusted.
For incurred but not reported losses, a variety of methods have been
developed in the insurance industry for use in determining our provision for
such liabilities. In general, these methods involve the extrapolation of
reported loss data to estimate ultimate losses. Our loss calculation methods
generally rely upon a projection of ultimate losses based upon the historical
patterns of reported loss development. Additionally, we make provision through
our liabilities for incurred but not reported losses for any identified
deficiencies in the liabilities for reported losses set by our reinsureds.
21
Our management believes that our overall liability for losses and loss
expenses maintained as of December 31, 2001 is adequate. There is a risk that
our liability for losses and loss expenses could prove to be greater than
expected in any year, because of the inherent uncertainty in the reserving
process with a consequent adverse impact on future earnings and 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, we have focused on property related coverages.
In contrast to casualty losses, which frequently are slow to be reported and may
be determined only through the lengthy, unpredictable process of litigation,
property losses tend to be reported more promptly and usually are settled within
a shorter time period. However, the estimation of losses for catastrophe
reinsurers is inherently less reliable than for reinsurers of risks that have an
established historical pattern of losses. In addition, we are required to make
estimates of losses based on limited information from ceding companies as well
as our own underwriting data due to the significant reporting delays which
normally occur under our retrocessional book of business and with respect to
insured losses that occur near the end of a reporting period.
Historically, we have underwritten a small amount of casualty
reinsurance. In 1998, we began underwriting new casualty lines of business and,
in 1999 and 2000, we substantially expanded our casualty and finite businesses.
With respect to casualty business, significant delay, ranging up to several
years or more, can be expected between the reporting of a loss to us and
settlement of our liability for that loss. As a result, such future claim
settlements could be influenced by changing rates of inflation and other
economic conditions, changing legislative, judicial and social environments and
changes in our claims handling procedures. In addition, most of the risks
reinsured in our structured/finite business are also casualty risks and are
subject to some of the same risks as our casualty business. While the reserving
process is difficult and subjective for ceding companies, the inherent
uncertainties of estimating such reserves are even greater for a reinsurer, due
primarily to the longer time between the date of the occurrence and the
reporting of any attendant claims to the reinsurer, the diversity of development
patterns among different types of reinsurance treaties, the necessary reliance
on the ceding companies for information regarding reported claims and differing
reserving practices among ceding companies.
Our difficulty in accurately predicting casualty losses may also be
exacerbated by the limited amount of statistically significant historical data
regarding losses on our casualty lines of business. We must therefore rely on
the inherently less reliable historical loss patterns reported by ceding
companies and industry loss standards in calculating our casualty reserves.
Thus, the actual casualty losses and loss expenses may deviate, perhaps
substantially, from estimates of liabilities reflected in our consolidated
financial statements.
22
The following table provides a reconciliation of beginning and ending
loss and loss expense liabilities under GAAP for the fiscal years ended December
31, 2001, 2000 and 1999. Except with respect to certain workers' compensation
liabilities, discounted by $0.4 million, and the reserves maintained by PXRE
Bermuda, we do not discount our loss and loss expense liabilities; that is, we
do not calculate them on a present value basis. PXRE Bermuda's reserves include
a discount of $0.3 million.
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
(in thousands)
Gross GAAP liability for losses and loss expenses at
beginning of year ..................................... $ 251,620 $ 261,551 $ 102,592
Add - Gross provision for losses and loss expenses:
Occurring in current year ............................. 318,373 137,123 200,132
Occurring in prior years .............................. 34,339 77,330 57,129
--------------- --------------- ---------------
Total gross provision (1) ............................. 352,712 214,453 257,261
--------------- --------------- ---------------
Less - Gross payments for losses and loss expenses:
Occurring in current year ............................. 63,960 20,920 17,508
Occurring in prior years .............................. 85,904 210,520 80,794
--------------- --------------- ---------------
Total gross payments .................................. 149,864 231,440 98,302
--------------- --------------- ---------------
Add - Asset related to retroactive reinsurance assumed .... (763) 7,056 0
Gross GAAP liability for losses and loss expenses at end
of year ................................................ $ 453,705 $ 251,620 $ 261,551
=============== =============== ===============
Ceded GAAP liability for losses and loss expenses at end
of year ................................................ (245,906) (96,117) (101,035)
--------------- --------------- ---------------
Net GAAP liability for losses and loss expenses at end of
year ................................................... $ 207,799 $ 155,503 $ 160,516
=============== =============== ===============
Foreign currency adjustment ............................... 34 (947) 249
=============== =============== ===============
Gross SAP liability for losses and loss expenses at end
of year (2) ............................................ $ 453,739 $ 250,673 $ 261,800
=============== =============== ===============
- ---------------
(1) The GAAP provision for losses and loss expenses includes net foreign
currency exchange gains (losses) of $981,000, $(1,196,00) and $442,000
for 2001, 2000, and 1999, respectively.
(2) SAP is the State of Connecticut and Bermuda statutory accounting
principles.
The following table presents the development of our GAAP balance sheet
liability for losses and loss expenses for the period 1991 through 2001. The top
line of the table shows the liabilities at the balance sheet date for each of
the indicated years. This reflects the estimated amount of losses and loss
expenses for claims arising in that year and all prior years that are unpaid at
the balance sheet date, including losses incurred but not yet reported to us.
The upper portion of the table shows the cumulative amounts subsequently paid as
of successive years with respect to such liabilities. The lower portion of the
table shows the 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 redundancy (deficiency)" depicted in the table, for
any particular calendar year, represents the aggregate change in the initial
estimates over all subsequent calendar years.
23
Each amount in the table below includes the effects of all changes in
amounts for prior periods. For example, if a loss determined in 1994 to be
$150,000 was first reserved in 1991 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 1992-1993 shown below. This table does not
present accident or policy year development data.
24
Year Ended December 31,
-------------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996 1995 1994
-------------------------------------------------------------------------------------
(in thousands, except percentages)
Liabilities for losses and loss expenses $453,705 $251,620 $261,551 $102,592 $ 57,189 $ 61,389 $ 72,719 $ 81,836
Cumulative amount of liability paid through:
One year later........................ 85,904 210,519 75,814 29,108 23,708 42,698 41,601
Two years later....................... 265,904 102,526 39,853 40,673 55,620 58,968
Three years later..................... 112,966 47,373 46,545 67,296 67,630
Four years later...................... 50,085 52,220 70,676 76,762
Five years later...................... 54,144 74,533 79,433
Six years later........................ 75,741 82,930
Seven years later..................... 84,049
Eight years later.....................
Nine years later......................
Ten years later.......................
Liabilities reestimated as of:.............
One year later........................ 285,959 338,881 135,227 57,280 66,257 83,228 87,818
Two years later....................... 344,773 141,087 55,271 63,292 85,162 87,750
Three years later..................... 139,220 63,151 61,178 83,178 90,409
Four years later...................... 62,664 66,137 82,129 89,284
Five years later...................... 65,819 85,820 88,326
Six years later....................... 85,842 91,663
Seven years later..................... 93,116
Eight years later.....................
Nine years later......................
Ten years later.......................
Gross reserves of TREX at date of merger... 9,589 5,242 2,067
Gross reserve for elimination of one
quarter lag for U.K. subsidiary......... (1,191)
Gross cumulative redundancy (deficiency)
through December 31, 2001:...............
Amount................................ (34,339) (83,222) (37,819) (5,475) 5,159 (7,881) (9,213)
Percentage............................ (14%) (32%) (37%) (10%) 7% (10%) (11%)
Retrocessional recoveries................ 16,487 22,707 10,747 5,919 (14) 8,227 4,072
Net cumulative redundancy (deficiency)
through December 31, 2001:...............
Amount................................ (17,852) (60,514) (27,072) 444 5,145 346 (5,141)
Percentage............................ (11%) (38%) (39%) 1% 9% 1% (10%)
Year Ended December 31,
------------------------------
1993 1992 1991
------------------------------
Liabilities for losses and loss expenses $ 71,442 $ 88,668 $ 62,664
Cumulative amount of liability paid through:
One year later........................ 37,820 59,773 35,575
Two years later....................... 54,400 79,926 48,393
Three years later..................... 60,850 89,519 52,301
Four years later...................... 64,566 94,261 55,022
Five years later...................... 69,414 96,895 56,976
Six years later........................ 70,392 99,864 58,822
Seven years later..................... 71,091 100,724 61,235
Eight years later..................... 71,773 101,357 62,130
Nine years later...................... 101,935 62,557
Ten years later....................... 62,675
Liabilities reestimated as of:.............
One year later........................ 78,188 101,423 67,165
Two years later....................... 76,902 103,632 62,262
Three years later..................... 74,683 105,165 62,827
Four years later...................... 75,392 103,801 63,032
Five years later...................... 74,880 104,330 62,593
Six years later....................... 74,173 104,222 63,632
Seven years later..................... 73,934 103,854 63,792
Eight years later..................... 75,126 103,663 63,633
Nine years later...................... 105,082 63,781
Ten years later....................... 65,451
Gross reserves of TREX at date of merger... 26
Gross reserve for elimination of one
quarter lag for U.K. subsidiary.........
Gross cumulative redundancy (deficiency)
through December 31, 2001:...............
Amount................................ (3,658) (16,414) (2,787)
Percentage............................ (5%) (19%) (4%)
Retrocessional recoveries................ 1,593 3,571 (938)
Net cumulative redundancy (deficiency)
through December 31, 2001:...............
Amount................................ (2,064) (12,844) (3,726)
Percentage............................ (5%) (36%) (10%)
25
During 2001, we incurred development from prior year losses amounting
to $17.9 million net of reinsurance, primarily due to adverse development in our
casualty, marine and aerospace lines of business, and further development on
several historical catastrophe losses.
Conditions and trends that have affected reserve development in the
past may not necessarily occur in the future. Accordingly, it would not be
appropriate to extrapolate the future adequacy or inadequacy of our reserves
based on the foregoing.
Investments
We have established general procedures and guidelines for our
investment portfolio and oversee investment management carried out by our
investment managers. Phoenix Investment Partners, Limited, a subsidiary of
Phoenix Home Life, and Mariner, a specialist in alternative investments, are our
principal investment managers. Our investment policies stress conservation of
principal, diversification of risk and liquidity. Our invested assets consist
primarily of long-term bonds with fixed maturities, hedge funds, and short-term
investments, but also include limited amounts of equity securities and other
non-hedge fund limited partnership investments. Our investments are subject to
market-wide risks and fluctuations, as well as to risk inherent in particular
securities.
As of December 31, 2001, we had, at fair market value, $219.5 million
in fixed maturities, $153.5 million in non-hedge short-term investments, $115.6
million in hedge fund limited partnerships, $19.1 million in other limited
partnerships and $0.6 million in equity securities. As at December 31, 2001,
hedge fund investments were allocated among nineteen managers, with market
values ranging from $0.8 million to $16.7 million. Hedge funds and other limited
partnership investments are accounted for under the equity method, or as part of
a trading portfolio, whereby both the investment income and any change in the
fair 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 actively managed by Mariner. 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 our investment
portfolio, including our hedge fund portfolio.
26
The following table summarizes our investments at December 31, 2001 and
2000 at fair value:
Analysis of Investments
December 31, 2001 December 31, 2000
----------------------------------- -----------------------------------
Amount Percent Amount Percent
--------------- --------------- --------------- ---------------
(in thousands, except percentages)
Fixed maturities:
United States government securities $ 48,413 9.5% $ 48,759 10.0%
Foreign government securities 5,355 1.1 4,658 1.0
United States government sponsored agency
and mortgage-backed securities 54,535 10.7 32,659 6.7
Other mortgage and asset-backed securities 20,620 4.1 67,169 13.8
Obligations of states and political
subdivisions 35,070 6.9 80,883 16.6
Public utilities, industrial and
miscellaneous securities 55,489 10.9 47,594 9.9
--------------- --------------- --------------- ---------------
Total long-term fixed maturities 219,482 43.2 281,722 58.0
Short-term investments with fixed maturities 153,503 30.2 48,103 9.9
--------------- --------------- --------------- ---------------
Total fixed maturities 372,985 73.4 329,825 67.9
Equity securities 650 0.1 16,260 3.3
Hedge funds and other limited partnerships 134,711 26.5 140,007 28.8
--------------- --------------- --------------- ---------------
Total investment portfolio $ 508,346 100.0% $ 486,092 100.0%
=============== =============== =============== ===============
At December 31, 2001, the fair value of our investment portfolio
exceeded its amortized cost by $33.4 million, of which $32.6 million related to
limited partnerships and trading portfolios and $0.8 million related to
unrealized appreciation on fixed maturities and equity securities. At December
31, 2000, the fair value of our investment portfolio exceeded its amortized cost
by $26.7 million.
The following table indicates the composition of our fixed maturity
investments, including short-term investments, at fair value, by time to
maturity at December 31, 2001 and 2000:
Composition of Investments By Maturity
December 31, 2001 December 31, 2000
----------------------------------- -----------------------------------
Amount Percent Amount Percent
--------------- --------------- --------------- ---------------
(in thousands, except percentages)
Maturity (1)
One year or less $ 157,467 42.2% $ 69,827 21.2%
Over 1 year through 5 years 77,335 20.7 81,045 24.6
Over 5 years through 10 years 93,969 25.2 67,630 20.5
Over 10 years through 20 years 0 0 8,856 2.7
Over 20 years 14,982 4.0 13,908 4.2
--------------- --------------- --------------- ---------------
343,753 92.1 241,266 73.2
United States government sponsored
agency and other mortgage and asset-
backed securities 29,232 7.9 88,559 26.8
--------------- --------------- --------------- ---------------
Total $ 372,985 100.0% $ 329,825 100.0%
=============== =============== =============== ===============
- ---------------
(1) Based on stated maturity dates with no prepayment assumptions.
27
The average market yield to maturity of our long-term fixed maturities
portfolio at December 31, 2001 and 2000, was 4.5% and 5.9%, respectively. At
December 31, 2001, the fair value of our fixed maturities portfolio exceeded its
amortized cost by $0.8 million. At December 31, 2000, the fair value of our
fixed maturities portfolio exceeded its amortized cost by $0.2 million.
The following table indicates the composition of our long term fixed
maturities portfolio (at fair value), excluding short-term investments, by
rating at December 31, 2001 and 2000:
Composition of Fixed Maturities Portfolio By Rating
December 31, 2001 December 31, 2000
----------------------------------- -----------------------------------
Amount Percent Amount Percent
--------------- --------------- --------------- ---------------
(in thousands, except percentages)
Ratings (1)
United States government securities $ 48,413 22.1% $ 48,759 17.3%
United States government sponsored agency and
mortgage-backed securities 54,535 24.9 17,704 6.3
Other mortgage and asset-backed securities
Aaa and/or AAA 20,229 9.2 66,689 23.7
Aa2 and/or AA 0 0.0 3,119 1.1
A2 and/or A 0 0.0 553 0.2
Baa2 and/or BBB 391 0.2 494 0.2
Obligations of states and political
subdivisions
Aaa and/or AAA 24,658 11.2 64,861 23.0
Aa2 and/or AA 10,412 4.7 24,774 8.8
Public utilities and industrial and
miscellaneous securities
Aaa and/or AAA 687 0.3 5,908 2.1
Aa2 and/or AA 1,023 0.5 27,365 9.7
A2 and/or A 37,482 17.1 6,204 2.2
Baa2 and/or BBB 11,395 5.2 4,968 1.8
Ba2 and/or BB 1,192 0.5 5,345 1.9
Not rated or below BB 3,710 1.7 321 0.1
Foreign government securities
Ba2 and/or BB 5,355 2.4 4,658 1.6
--------------- --------------- --------------- ---------------
Total $ 219,482 100.0% $ 281,722 100.0%
=============== =============== =============== ===============
- ------------------
(1) Ratings as assigned by Moody's and S&P, respectively. Such ratings are
generally assigned upon the issuance of the securities, subject to
revision on the basis of ongoing evaluations.
The investment committee of our Board and management periodically
evaluate the composition of the investment portfolio and reposition the
portfolio in response to market conditions in order to improve total returns
while maintaining liquidity and superior credit quality. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Market Risk."
28
Regulation
United States
The Company and PXRE Reinsurance are subject to regulation under the
insurance statutes of various U.S. states, including Connecticut, the
domiciliary state of PXRE Reinsurance. The regulation and supervision to which
PXRE Reinsurance is subject relates primarily to the standards of solvency that
must be met and maintained, licensing requirements for reinsurers, the nature of
and limitations on investments, deposits of securities for the benefit of a
reinsured, methods of accounting, periodic examinations of the financial
condition and affairs of reinsurers, the form and content of reports of
financial condition required to be filed, reserves for losses and other matters.
In general, such regulation is for the protection of the reinsureds and
policyholders, rather than investors.
In addition, the Company and PXRE Delaware are subject to regulation
under the insurance holding company statutes of various U.S. states, including
Connecticut. These laws and regulations vary from state to state, but generally
require an insurance holding company and reinsurers that are subsidiaries of an
insurance holding company to register with the state regulatory authorities and
to file with those authorities certain reports including information concerning
their capital structure, ownership, financial condition, and general business
operations. Moreover, PXRE Reinsurance may not enter into certain transactions,
including certain reinsurance agreements, management agreements, and service
contracts, with members of its insurance holding company system, unless it has
first notified the Connecticut Insurance Commissioner of its intention to enter
into any such transaction and the Connecticut Insurance Commissioner had not
disapproved of such transaction within the period specified by the Connecticut
insurance statute. Among other things, such related company transactions are
subject to the requirements that their terms be fair and reasonable, charges or
fees for services performed be reasonable and the interests of policyholders not
be adversely affected.
State laws also require prior notice or regulatory agency approval of
direct or indirect changes in control of an insurer, reinsurer, or its holding
company, and of certain significant 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.
29
The principal sources of cash for the payment of operating expenses and
income taxes, debt service obligations, and dividends by the Company are the
receipt of dividends and net tax allocation payments from PXRE Reinsurance, PXRE
Bermuda and PXRE Barbados. Under the Connecticut insurance laws, the maximum
amount of dividends or other distributions that PXRE Reinsurance may declare or
pay within any twelve-month period, without regulatory approval, is limited to
the lesser of (a) earned surplus or (b) the greater of 10% of policyholders
surplus at December 31 of the preceding year or 100% of net income for the
twelve-month period ended December 31 of the preceding year, all determined in
accordance with SAP. Accordingly, the Connecticut insurance laws could limit the
amount of dividends available for distribution by PXRE Reinsurance without prior
regulatory approval, depending upon a variety of factors outside our control,
including the frequency and severity of catastrophe and other loss events and
changes in the reinsurance market, in the insurance regulatory environment and
in general economic conditions. The maximum amount of dividends or distributions
that PXRE Reinsurance may declare and pay during 2002, without regulatory
approval, is limited to approximately $33.2 million. During 2001, $30.1 million
in dividends were paid by PXRE Reinsurance. See below for a discussion of
dividend restrictions applicable to PXRE Bermuda and PXRE Barbados. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
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 that 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, 2001, 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. The effect of the adoption is a decrease in statutory surplus
of $2.5 million.
30
The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and is primarily intended
to assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies twelve industry ratios and specifies "usual
values" for each ratio. Departure from the usual values on four or more of the
ratios can lead to inquiries from individual state insurance commissioners as to
certain aspects of an insurer's business. For the years ended December 31, 2001,
2000 and 1999, PXRE Reinsurance's results were within the usual values for each
of the twelve ratios, except for one ratio in 2001, three for 2000 and one ratio
for 1999. PXRE's management believes that the one ratio that fell outside the
usual range in 2001 was due to (a) an increase in excess of loss ceded premiums
written, and (b) the statutory accounting effect of one retroactive contract.
PXRE Reinsurance's three ratios outside the usual range in 2000 were due to (a)
an increase in PXRE Reinsurance's net written premium 2000 as compared in 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) a decrease in investment income from certain alternative limited
partnership investments in 2000 compared to 1999, and (c) the statutory
accounting effect of one retroactive reinsurance contract. PXRE Reinsurance fell
outside the usual ratio value in 1999 due to the unusual level of catastrophe
losses in 1999.
From time to time, various regulatory and legislative changes have been
proposed in the U.S. insurance industry, some of which could have an effect on
reinsurers and insurers. Among the proposals that have in the past been or are
at present being considered are the possible introduction of federal regulation
in addition to, or in lieu of, the current system of state regulation of
insurers, an initiative to create a federally guaranteed disaster reinsurance
pool pre-funded by insurers and proposals in various state legislatures (some of
which have been enacted) to conform portions of their insurance laws and
regulations to various model acts adopted by the NAIC. We are unable to predict
what effect, if any, the foregoing developments may have on its operations and
financial condition in the future.
Bermuda
The Insurance Act 1978 of Bermuda and related regulations
(collectively, the "Act") imposes on Bermuda insurance companies, including PXRE
Bermuda, solvency and liquidity standards and auditing and reporting
requirements, and grants to the Supervisor of Insurance powers to supervise,
investigate and intervene in the affairs of insurance companies.
The Act provides that the value of the general business assets of a
Class 3 insurer must exceed the amount of its general business liabilities by a
prescribed minimum solvency margin. PXRE Bermuda, as a Class 3 insurer, is
required to maintain a minimum solvency margin equal to the greatest of: (A) $1
million, (B) 20% of net premiums written up to $6 million, or where net premiums
are projected to exceed $6 million, $1.2 million plus 15% of net premiums
written over $6 million or (C) 15% of loss reserves. In addition, PXRE Bermuda
is prohibited from declaring or paying any dividends during any financial year
it is in breach of its minimum solvency margin or minimum liquidity ratio or if
the declaration or payment of such dividends would cause it to fail to meet such
margin or ratio. If it fails to meet its minimum solvency margin or minimum
liquidity ratio on the last day of any financial year, the insurer will be
prohibited, without the approval of the Supervisor of Insurance, from declaring
or paying any dividends during the next financial year.
31
As a Class 3 insurer, PXRE Bermuda also is prohibited, without the
approval of the Supervisor of Insurance, from reducing by 15% or more its total
statutory capital, as set out in its previous year's financial statements, and
if it appears to the Supervisor of Insurance that there is a risk of the insurer
becoming insolvent or that it is in breach of the Act or any conditions imposed
upon its registration, the Supervisor may, in addition to the restrictions
specified above, direct the insurer not to declare or pay any dividends or any
other distributions or may restrict it from making such payments to such extent
as the Supervisor of Insurance may think fit.
The Act provides a minimum liquidity ratio for general business. An
insurer engaged in general business is required to maintain the value of its
relevant assets at not less than 75% of the amount of its relevant liabilities.
Relevant assets include cash and time deposits, quoted investments, unquoted
bonds and debentures, first liens on real estate, investment income due and
accrued, accounts and premiums receivable and reinsurance balances receivable.
There are certain categories of assets which, unless specifically permitted by
the Supervisor of Insurance, do not automatically qualify as relevant assets
such as unquoted equity securities, investments in and advances to affiliates,
real estate and collateral loans. The relevant liabilities are total general
business insurance reserves and total other liabilities less deferred income tax
and sundry liabilities (by interpretation, those not specifically defined).
Under Bermuda law, PXRE Bermuda may not lawfully declare or pay a
dividend unless there are reasonable grounds for believing that it is, or will
after payment of the dividend be, able to pay its liabilities as they become
due, and that the realizable value of its assets will, after payment of the
dividend, be greater than the aggregate value of its liabilities, issued share
capital and share premium accounts.
At December 31, 2001, PXRE Bermuda's solvency and liquidity margins and
statutory capital and surplus were in excess of the minimum levels required by
the Act.
Barbados
PXRE Barbados is subject to regulation under Barbados' Insurance Act,
1996 (the "Barbados Act"). Under the Barbados Act, PXRE Barbados may only pay a
dividend out of the realized profits of the company. PXRE Barbados may not pay a
dividend unless (a) after payment of the dividend it is able to pay its
liabilities as they become due, and (b) the realizable value of its assets is
greater than the aggregate value of its liabilities, and the stated capital
accounts maintained in respect of all classes of shares.
PXRE Barbados is also required to maintain assets in an amount that
permits it to meet the prescribed minimum solvency margin for the net premium
income level of its business from time to time. In respect of its general
insurance business, PXRE Barbados is required to maintain the following margin
of solvency:
32
(i) to the extent that premium income of the preceding financial
year did not exceed US$750,000 - the assets must exceed
liabilities by US$125,000;
(ii) to the extent that premium income of the preceding financial
year exceeds US$750,000 but is equal to or greater than US$5
million - the assets must exceed liabilities by 20% of the
premium income of the preceding financial year; and
(iii) to the extent that premium income of the preceding financial
year exceeds US$5 million - the assets must exceed liabilities
by the aggregate of US$1 million and 10% of the premium income
of the preceding financial year.
PXRE Barbados is not required at the present time to maintain any
additional statutory deposits or reserves relative to its business.
United Kingdom
PXRE Limited and PXRE Lloyd's Syndicate are subject to regulation by
Lloyd's. The form of that regulation is prescribed by the Lloyd's Act of 1982
and Lloyd's internal regulatory bye-laws and directions. The regulation and
supervision to which PXRE Limited is subject relates primarily to the
maintenance of a risk based capital requirement (by way of a deposit of
securities and a letter of credit with Lloyd's to support its underwriting) and
prescribed methods of accounting. PXRE Lloyd's Syndicate has to comply with
accounting regulation, internal reporting, and is subject to periodic
examinations of compliance. The Lloyd's market is regulated externally by the
Financial Services Authority, although the day-to-day regulation of the market
remains the responsibility of the Council of Lloyd's. All cash and invested
assets of PXRE Lloyd's Syndicate, amounting to approximately $15.4 million at
December 31, 2001, are restricted from being paid as a dividend through June,
2003.
Taxation of PXRE and its Subsidiaries
The following summary of the taxation of the Company, PXRE Bermuda,
PXRE Barbados and our U.S. subsidiaries, including PXRE Reinsurance
(collectively, the "PXRE U.S. Companies") is based upon current law.
Legislative, judicial or administrative changes may be forthcoming that could
affect this summary. See, for example, "Legislation" below. Certain subsidiaries
and branch offices of PXRE are subject to taxation related to our operations in
the United Kingdom and Belgium.
Bermuda
Under current Bermuda law, no income, withholding or capital gains are
imposed on the Company or PXRE Bermuda. The Company and PXRE Bermuda have each
received from the Supervisor of Insurance 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.
33
Barbados
Under Barbados law, PXRE Barbados is subject to tax on its worldwide
income at the normal corporation tax rate of 40%. PXRE Barbados is allowed a tax
credit in respect of premiums from insurance business and investment income that
does not originate in Barbados ("foreign business"). To the extent that the
foreign business constitutes more than 81% of the aggregate total insurance
business and investment returns of PXRE Barbados, PXRE Barbados will be allowed
a tax credit of 93%, thereby reducing the effective tax rate in Barbados to
2.8%.
United States
The PXRE U.S. Companies carry on business in, and are subject to
taxation in, the United States. The Company believes that it and its
subsidiaries, other than the PXRE U.S. Companies, have operated and will
continue to operate their business in a manner that will not cause them to be
treated as engaged in a trade or business within the United States. Tax
conventions between the United States and Bermuda or Barbados may provide relief
to PXRE Bermuda and PXRE Barbados, respectively, if either such company is
deemed to be engaged in the conduct of a U.S. trade or business. Under the tax
convention between Bermuda and the United States (the "Bermuda Treaty"), a
Bermuda company predominantly engaged in the insurance business, such as PXRE
Bermuda, is subject to U.S. income tax on its insurance income found to be
effectively connected with a U.S. trade or business only if that trade or
business is conducted through a permanent establishment in the United States. As
a holding company that is not predominantly engaged directly in an insurance
business, the Company is not entitled to the benefits of the Bermuda Treaty.
Similarly, under the tax convention between Barbados and the United States (the
"Barbados Treaty"), a corporation that is a Barbados resident will not be
subject to U.S. income tax on income that is effectively connected with a U.S.
business, unless such business is conducted through a permanent establishment in
the United States. Each of the Company, PXRE Bermuda and PXRE Barbados operate
under guidelines that are intended to minimize the risk that they will be
treated as engaged in a U.S. trade or business; and each of PXRE Bermuda and
PXRE Barbados operate under guidelines that are intended to minimize the risk
that they will be found to have a U.S. permanent establishment.
34
On this basis, we do not expect that the Company and our subsidiaries,
other than the PXRE U.S. Companies, will be required to pay U.S. Federal
corporate income taxes (other than withholding taxes on certain U.S. source
investment income and excise taxes on reinsurance premiums as described below).
Howev