Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
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
-------- -------
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.
================================================================================
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).
However, irrespective of such guidelines, there can be no assurance that PXRE
Bermuda and PXRE Barbados will qualify for the Bermuda Treaty and the Barbados
Treaty, respectively, now or in the future, or that the Bermuda Treaty or the
Barbados Treaty will not be terminated or revised in a manner that could
adversely affect any protection from U.S. corporate tax that they currently
provide. In addition, because there is uncertainty as to the activities which
constitute being engaged in a trade or business in the United States, there can
be no assurances that the U.S. Internal Revenue Service will not contend
successfully that the Company or a non-U.S. subsidiary is engaged in a trade or
business in the United States. The maximum federal tax rates currently are 35%
for a corporation's income that is effectively connected with a trade or
business in the United States. In addition, the U.S. branch profits tax of 30%
is imposed each year on a foreign (or non-US) corporation's earnings and profits
(with certain adjustments) effectively connected with its U.S. trade or business
which are deemed repatriated out of the United States, for a potential maximum
effective tax rate of approximately 54% on the net business connected with a
U.S. trade or business.
The Company and its non-U.S. subsidiaries are subject to U.S.
withholding tax at the 30 percent rate on certain "U.S. source investment
income," which is not considered effectively connected with the conduct of a
U.S. trade or business. This rate is reduced under the Barbados Treaty, to 5%
for dividends paid to PXRE Barbados by our U.S. subsidiaries.
The United States also imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. The rate of tax applicable to reinsurance
premiums paid to PXRE Bermuda and PXRE Barbados is 1% of gross premiums.
Legislation
In early March, 2002, two bills were proposed in the U.S. House of
Representatives that seek to prevent so-called "corporate inversion"
transactions. Under these bills, a foreign corporation would be taxed as a U.S.
domestic corporation under the Internal Revenue Code if it became a foreign
corporation as a result of an "inversion transaction" under the bill proposed by
Representative McInnis or "corporate expatriation transaction" under the bill
proposed by Representative Neal. As currently drafted, the McInnis bill would
only apply to transactions completed after December 31, 2001. Commencing with
the 2004 tax year, the Neal bill would apply to "corporate expatriation
transactions" that occurred prior to September 11, 2001. It is unclear whether
our 1999 reorganization would be treated as a "corporate expatriation
transaction" under the Neal bill as currently drafted.
35
We are unable to predict whether the effort to enact either of the
current legislative proposals to amend the Internal Revenue Code will be
successful, what form any legislation may ultimately take and what impact any
such legislation would have on us.
Employees
We employed 63 full-time employees at December 31, 2001. No employees
are represented by a labor union, and management considers its relationship with
our employees to be excellent.
PXRE Bermuda employees, including senior management of the Company and
PXRE Bermuda, are employed pursuant to work permits granted by Bermuda
authorities. These permits expire at various times over the next few years. We
have no reason to believe that these permits would not be extended at expiration
upon request, although no assurance can be given in this regard.
Item 2. Properties
The Company leases office space in Bermuda where the Company's
principal executive offices are located, and in Edison, New Jersey, where PXRE
Reinsurance's principal offices are located. We also lease office space in
Brussels, Belgium, Norwalk, Connecticut and Richmond, Virginia.
Item 3. Pending Legal Proceedings
We are subject to litigation and arbitration in the ordinary course of
business. Except as disclosed below, management does not believe that the
eventual outcome of any such pending litigation or arbitration is likely to have
a material effect on our financial condition or business. Pursuant to our
insurance and reinsurance arrangements, disputes are generally required to be
finally settled by binding arbitration.
In May 1999, PXRE Delaware entered into weather option agreements with
two counterparties. In April 2000, these counterparties submitted invoices to
PXRE Delaware in the aggregate sum of $8.3 million seeking payment under the
weather option agreements, which invoices have been paid. PXRE Delaware insured
its obligations under these weather option agreements through two Commercial
Inland Marine Weather Insurance Policies issued by Terra Nova Insurance Company
Limited ("Terra Nova"). PXRE Delaware submitted claims under these policies to
Terra Nova in April 2000. Terra Nova has denied coverage, contending that its
Managing General Agent had no authority to issue these policies. PXRE Delaware
disagrees with Terra Nova's denial and has filed suit against Terra Nova in the
United States District Court for the District of New Jersey. Both parties
submitted motions of summary judgment, and the court denied both motions in an
order dated as of January 18, 2002. The trial of this matter is expected to
occur during the third quarter of 2002. The aggregate sum of $8.3 million is
included in Other Assets; management has concluded that it is realizable and
that no valuation allowance is necessary.
36
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Common Shares
The Company's Common Shares are listed on the New York Stock Exchange
under the symbol "PXT." The following table sets forth, for the periods
indicated, the high and low closing sale prices for the Company's Common Shares
as reported by the New York Stock Exchange and cash dividends per Common Share
declared and subsequently paid:
Closing Price
-------------
High Low Dividends
---- --- ---------
2000:
First Quarter $ 17.00 $ 11.8125 $ 0.06
Second Quarter 17.00 13.50 0.06
Third Quarter 16.00 12.625 0.06
Fourth Quarter 17.125 12.625 0.06
2001:
First Quarter $ 19.75 $ 14.875 $ 0.06
Second Quarter 19.50 16.36 0.06
Third Quarter 19.25 10.40 0.06
Fourth Quarter 17.64 12.25 0.06
These prices represent quotations by dealers and do not include
markups, markdowns or commissions, and do not necessarily represent actual
transactions. As of March 22, 2002, there were 11,944,271 Common Shares issued
and outstanding, which shares were held by approximately 168 shareholders of
record and, based on the Company's best information, by approximately 1,150
beneficial owners of the Common Shares. See Notes 8 and 9 of Notes to
Consolidated Financial Statements for information with respect to shares
reserved for issuance under employee benefit and stock option plans. The
Preferred Shares, following the closing of the Preferred Stock Investment, will
be ultimately convertible into 9,560,229 common shares, representing
approximately 44.5% of the Company's outstanding common shares on a fully
diluted basis as of March 22, 2002. See "Market for Registrants Common Equity
and Related Shareholder Matters--Preferred Shares" below.
37
The payment of dividends on the Common Shares is subject to the
discretion of the Company's Board of Directors which will consider, among other
factors, our operating results, overall financial conditions, capital
requirements and general business conditions. There can be no assurance that
dividends will be paid in the future. Following the consummation of the
Preferred Stock Investment, the payment of dividends on the Company's Common
Shares will be subject to the following limitations: (i) no dividend may be paid
upon the Common Shares if the dividends payable upon the Preferred Stock are
overdue, (ii) the amount of dividends paid with respect to the Common Shares may
not be increased at a cumulative annualized rate of more than 10% at any time
prior to the third anniversary of the closing (the "Closing") of the Preferred
Stock Investment (the "Permitted Dividend Amount") without the consent of the
majority of the Preferred Shareholders; and (iii) at any time on or after the
third anniversary of the Closing, no dividend may be paid that would result in
payment of any dividend or other distribution with respect to Common Shares or
result in a redemption, offer to purchase, tender offer or other acquisition of
capital stock of the Company involving consideration having an aggregate fair
value in excess of the greater of the Permitted Tender Offer Amount and the
Permitted Dividend Amount. For this purpose, the term "Permitted Tender Offer
Amount" means an amount equal to 20% of the cumulative amount by which our
consolidated net income in any calendar year commencing with the year ending
December 31, 2002 exceeds $50 million minus the sum of all cash and the fair
value of all non-cash consideration paid in respect of redemptions, offers to
purchase, tender offers or other acquisitions of our capital stock on or after
December 10, 2001.
As a holding company, the Company is largely dependent upon dividend
payments from its subsidiaries, including PXRE Reinsurance and PXRE Bermuda, to
pay dividends to the Company's shareholders. PXRE Reinsurance is subject to U.S.
state laws, and PXRE Bermuda is subject to Bermuda law, which may restrict their
ability to distribute dividends. In addition, certain covenants in our bank
credit agreement may restrict our ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Business - Regulation" for further
information concerning restrictions contained in our bank credit agreement and
under U.S. and Bermuda law.
Under the Company's Bye-Laws, subject to certain exceptions and to
waiver by the Company's Board of Directors on a case by case basis, no transfer
of the Company's shares is permitted if such transfer would result in a
shareholder owning, directly or indirectly, more than 9.9% of the voting power
of the outstanding shares, including common shares, of the Company or more than
9.9% of the outstanding shares of any class of the Company's stock. Ownership is
broadly defined in the Company's Bye-Laws.
38
The Company may refuse to register any such transfer on the Company's
share transfer records. A transferee will be permitted to promptly dispose of
any of the Company's shares purchased which violate the restriction and as to
the transfer of which registration is refused. The transferor of such shares of
the Company will be deemed to own such shares for dividend, voting and reporting
purposes until a transfer of such shares has been so registered.
In addition, in the event that the Company becomes aware of a
shareholder owning more than 9.9% of the voting power of the Company's
outstanding shares after a transfer of shares has been registered, the Company's
Bye-Laws provide that, subject to the same exceptions and waiver procedures, the
voting rights with respect to the shares of the Company owned by any such
shareholder will be limited to a voting power of 9.9%.
Preferred Shares
On December 10, 2001, the Company entered into a Share Purchase
Agreement with Capital Z Financial Services Fund II, L.P., Capital Z Financial
Services Private Fund II, L.P. (together with Capital Z Financial Services Fund
II, L.P., Capital Z), Reservoir Capital Master Fund, L.P., Reservoir Capital
Partners, L.P. (together with Reservoir Capital Master Fund, L.P., Reservoir)
and Richard E. Rainwater (Rainwater) (each of Capital Z, Reservoir and
Rainwater, a Purchaser, and together, the Purchasers). The Share Purchase
Agreement provides for the sale by the Company to the Purchasers of 7,500 shares
of Series A Preferred Shares, allocated to two sub-series of shares, 5,000
shares allocated to sub-series Al (Al Preferred Shares) and 2,500 shares
allocated to sub-series A2 (A2 Preferred Shares); the purchase of 5,000 shares
of Series B Preferred Shares, allocated to two sub-series of shares, 3,333.333
shares allocated to Series B1 (B1 Preferred Shares) and 1,666.667 shares
allocated to Series B2 (B2 Preferred Shares); and 2,500 shares of Series C
Preferred Shares, allocated to two sub-series of shares. 1,666.667 shares
allocated to Series Cl (Cl Preferred Shares) and 833.333 shares allocated to
Series C2 (C2 Preferred Shares). The material terms and provisions of the
rights, preferences and privileges of the Preferred Shares and Convertible
Common Shares are contained in the Description of Stock for Series A Convertible
Voting Preferred Shares, Series B Convertible Voting Preferred Shares, Series C
Convertible Voting Preferred Shares, Class A Convertible Voting Common Shares,
Class B Convertible Voting Common Shares and Class C Convertible Voting Common
Shares (Description of Stock), the form of which is contained as Exhibit A to
the Share Purchase Agreement (a copy of which is incorporated herein by
reference as Exhibit 4.16 hereto).
For each series, each Preferred Share, in whole or in part, is
convertible at any time at the option of the holder into Convertible Common
Shares for such series. The number of Convertible Common Shares per Preferred
Share issuable upon any conversion will be determined by dividing a liquidation
preference for the series equal to the aggregate original purchase price of the
Preferred Shares plus accrued but unpaid dividends thereon, by the conversion
price then in effect. The initial conversion price is $15.69. The conversion
price is subject to adjustment to avoid dilution in the event of
recapitalization, reclassification, stock split, consolidation, merger,
amalgamation or other similar event or an issuance of additional Common Shares
in a private transaction below the fair market value or in a registered public
offering below 95% of fair market value (in each case, fair market value being
the value immediately prior to the date of announcement of such issuance) or
without consideration. In addition, the conversion price is subject to
adjustment, for certain loss and loss expense development on reserves for losses
incurred on or before September 30, 2001 (and loss adjustment expenses related
thereto) and for any liability or loss arising out of pending material
litigation (other than legal fees and expenses), on an after-tax basis, equal to
an amount computed in accordance with a formula as set forth in the Description
of Stock. No adjustment will occur unless the development exceeds a deductible
of $7 million and, with respect to all reserves other than reserves for certain
discontinued operations and the events of September 11, 2001 and liability
arising out of pending litigation, the adjustment is limited to $12 million of
further development.
39
Al Preferred Shares, Bl Preferred Shares and Cl Preferred Shares will
be mandatorily convertible into Class A Common Shares, Class B Common Shares and
Class C Common Shares, respectively, on the third anniversary of the date of
issuance, and all remaining Preferred Shares will be mandatorily convertible
into Convertible Common Shares on the sixth anniversary of the date of issuance.
The conversion price used in connection with the mandatory conversion of Al, B1
and Cl Preferred Shares includes price protection. Notwithstanding the
foregoing, on any conversion date, to the extent necessary to prevent the
initial Purchasers of Preferred Shares and their affiliates from owning more
than 49.9% of the capital shares of the Company following conversion, we shall
have the right (but not the obligation) to make a cash payment in lieu of
Convertible Common Shares equal to the fair market value of the Convertible
Common Shares that would have been received in excess of the 49.9% limitation in
connection with any conversion, plus an additional tax gross-up amount to take
into account in appropriate circumstances the difference between the federal
income tax rate on long-term capital gains and the federal ordinary income tax
rate that might apply to the recipient on the receipt of a cash payment in lieu
of Convertible Common Shares.
Convertible Common Shares
Except as otherwise provided, each class of Convertible Common Shares
shall have the same rights, preferences and restrictions as Common Shares. The
Convertible Common Shares shall automatically convert into Common Shares on a
one-for-one ratio upon a transfer of record ownership thereof to any person
other than Capital Z, Reservoir, Rainwater, or any of their respective
affiliates or limited partners (including without limitation in connection with
a public offering of such shares), or a person approved by the Board of
Directors in its sole discretion. Convertible Common Shares may be converted at
the option of the holder thereof into Common Shares on a one-for-one ratio at
any time that such holder would be entitled to vote Preferred Shares generally
in the election of directors in accordance with the Description of Stock.
The aggregate purchase price to be paid by the Purchasers for the
shares of Preferred Stock to be issued in accordance with the Share Purchase
Agreement totals $150 million. 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
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.
40
Item 6. Selected Financial Data.
Year Ended December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
(1) (1) (1)(2) (1)(2) (1)(2)
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data and ratios)
Income Statement Data:
Gross premiums written $ 290,213 $ 268,990 $ 221,349 $ 136,215 $ 126,232
Premiums ceded (135,735) (96,289) (82,504) (47,521) (26,177)
------------ ------------ ------------ ------------ ------------
Net premiums written 154,478 172,701 138,845 88,694 100,055
Change in unearned premiums 7,647 (12,495) (10,342) 3,692 (8,640)
------------ ------------ ------------ ------------ ------------
Net premiums earned 162,125 160,206 128,503 92,386 91,415
Net investment income 30,036 30,037 47,173 19,612 31,191
Net realized investment gains (losses) 4,023 3,191 (3,766) (3,862) 2,467
Management fees 5,786 5,483 3,590 2,172 3,006
------------ ------------ ------------ ------------ ------------
Total revenues 201,970 198,917 175,500 110,308 128,079
------------ ------------ ------------ ------------ ------------
Losses and loss expenses incurred 151,703 137,765 159,259 57,793 12,491
Commissions and brokerage 30,350 34,899 27,702 20,563 19,138
Other operating expenses 29,606 35,407 30,053 19,313 15,716
Interest expense 4,424 4,778 3,915 1,395 3,325
Minority interest in consolidated subsidiary 8,877 8,875 8,790 8,928 8,184
------------ ------------ ------------ ------------ ------------
Total losses and expenses 224,960 221,724 229,719 107,992 58,854
------------ ------------ ------------ ------------ ------------
(Loss) income before income taxes, cumulative
effect of accounting change, and
extraordinary item (22,990) (22,807) (54,219) 2,316 69,225
Income tax benefit (provision) 4,704 12,007 12,775 1,206 (22,198)
------------ ------------ ------------ ------------ ------------
(Loss) income before cumulative effect of
accounting change and extraordinary loss
(18,286) (10,800) (41,444) 3,522 47,027
Cumulative effect of accounting change, net
of tax 319 0 (695) 0 0
Extraordinary loss on debt redemption, net of
tax 0 0 0 (843) (2,774)
------------ ------------ ------------ ------------ ------------
Net (loss) income available to common
shareholders $ (17,967) $ (10,800) $ (42,139) $ 2,679 $ 44,253
============ ============ ============ ============ ============
41
Year Ended December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
(1) (1) (1)(2) (1)(2) (1)(2)
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data and ratios)
Ratio of earnings to fixed charges (3) 0 0 0 1.09 6.59
Ratio of earnings to combined fixed charges
and preferred dividends (3) 0 0 0 1.09 6.59
Basic earnings per common share:
(Loss) income before cumulative effect of
accounting change and extraordinary item $ (1.58) $ (0.95) $ (3.58) $ 0.26 $ 3.41
Cumulative effect of accounting change 0.03 0 (0.06) 0 0
Extraordinary loss 0 0 0 0.06 0.20
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (1.55) $ (0.95) $ (3.64) $ 0.20 $ 3.21
------------ ------------ ------------ ------------ ------------
Average common shares outstanding 11,578 11,394 11,568 13,339 13,776
============ ============ ============ ============ ============
Diluted earnings per common share:
(Loss) income before cumulative effect of
accounting change and extraordinary item $ (1.58) $ (0.95) $ (3.58) $ 0.26 $ 3.39
Cumulative effect of accounting change 0.03 0 (0.06) 0 0
Extraordinary loss 0 0 0 0.06 0.20
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (1.55) $ (0.95) $ (3.64) $ 0.20 $ 3.19
============ ============ ============ ============ ============
Average common shares outstanding 11,578 11,394 11,568 13,452 13,893
============ ============ ============ ============ ============
Cash dividends per common share $ 0.24 $ 0.24 $ 0.64 $ 1.01 $ 0.88
Other Operating Data:
GAAP loss ratio (4) 93.6% 86.0% 123.9% 62.6% 13.7%
GAAP underwriting expense ratio (4) 33.4 40.5 43.0 40.9 34.8
------------ ------------ ------------ ------------ ------------
GAAP combined ratio (4) 127.0% 126.5% 166.9% 103.5% 48.5%
============ ============ ============ ============ ============
As of December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data and ratios)
Balance Sheet Data:
Cash and investments $ 531,233 $ 505,101 $ 524,303 $ 490,594 $ 527,738
Total assets 1,005,938 784,747 780,180 632,691 608,172
Losses and loss expenses 453,705 251,619 261,551 102,592 57,189
Minority interest in consolidated subsidiary 99,530 99,525 99,521 99,517 99,513
Debt payable 55,000 65,000 75,000 50,000 21,414
Total stockholders' equity 239,780 259,386 263,279 334,376 386,688
Book value per common share $ 20.20 $ 21.94 $ 22.54 $ 27.13 $ 28.10
Statutory capital and surplus
PXRE Reinsurance Company $ 331,959 $ 348,858 $ 399,007 $ 447,229 $ 451,321
PXRE Reinsurance Ltd. 34,332 29,982 24,598 N/A N/A
42
- -------------------
(1) The Company was incorporated on June 1, 1999 as a Bermuda holding
company and a wholly owned subsidiary of PXRE Purpose Trust, a purpose
trust established under the laws of Bermuda. On October 5, 1999, PXRE
Delaware completed a reorganization pursuant to which the Company
became the ultimate parent holding company of PXRE Delaware. PXRE
Delaware and its subsidiaries provide property and casualty reinsurance
and insurance products to a national and international marketplace. In
connection with the reorganization, the Company repurchased for $1.00
per share 100% of the common shares owned by PXRE Purpose Trust and
each outstanding share of PXRE Delaware common stock (other than shares
held by PXRE Delaware and its subsidiaries) was converted into one
common share of the Company. After the consummation of the
reorganization the Company commenced carrying on the holding company
functions previously conducted by PXRE Delaware.
(2) In the fourth quarter of 1999, the Company changed the reporting period
for its U.K. operations from a fiscal year ending September 30 to a
calendar year ending December 31. The results of operations for the
period from October 1, 1998 to December 31, 1998, amounted to a loss of
approximately $140,000. This loss was charged to retained earnings
during 1999 in order to report only twelve months operating results.
The U.K. operations of PXRE Limited and PXRE Managing Agency are
included in the consolidated results on a one-quarter lag basis from
1997 through the third quarter of 1999.
(3) The ratios of earnings to fixed charges were determined by dividing
consolidated earnings by total fixed charges. For purposes of these
computations, (i) earnings consist of consolidated income before
considering income taxes, fixed charges and minority interest, and (ii)
fixed charges consist of interest on indebtedness and that portion of
rentals which is deemed by the Company's management to be an
appropriate interest factor. Earnings were inadequate to cover fixed
charges by $22.5 million, $22.8 million and $55.3 million for the years
ended December 31, 2001, 2000, and 1999 respectively. The ratios of
earnings to combined fixed charges and preferred dividends were
determined by dividing consolidated earnings by total fixed charges and
preferred dividends. Earnings were inadequate to cover fixed charges
and preferred dividends by $22.5 million, $22.8 million and $55.3
million for the years ended December 31, 2001, 2000, and 1999
respectively.
(4) The loss, underwriting expense and combined ratios included under
"Other Operating Data" have been derived from the audited consolidated
statements of income of the Company prepared in accordance with U.S.
GAAP.
43
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is a discussion and analysis of our results of operations
for the year ended December 31, 2001 compared with the years ended December 31,
2000 and 1999, and also a discussion of our financial condition at December 31,
2001. This discussion and analysis should be read in conjunction with the
audited consolidated financial statements and related notes included in this
filing. This filing contains forward-looking statements that involve risks and
uncertainties. Actual results may vary materially from the results described or
implied by these forward-looking statements.
Overview
PXRE Group Ltd. (the "Company" and collectively with its
subsidiaries, "PXRE" or "we") provides 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 reinsurance products
have been, and will continued 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 provide our clients with property per-risk, marine and
aerospace reinsurance products. Unlike property catastrophe reinsurance, which
protects against the accumulation of a large number of related losses arising
out of one catastrophe, per-risk excess of loss reinsurance protects our clients
against a large loss arising from a single risk or location. Substantially all
of our property per-risk, marine and aerospace business is also written on an
excess-of-loss basis with aggregate limits on our exposure to losses.
We also provide our clients with finite reinsurance products. 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 by our clients. 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 is 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 and commission adjustments.
44
The Company was formed in 1999 as part of the reorganization of PXRE
Corporation ("PXRE Delaware"). Prior to the reorganization, PXRE Delaware was
the ultimate parent holding company of the various PXRE companies and its common
shares were publicly traded on the New York Stock Exchange. As a result of the
reorganization, the Company became the ultimate parent holding company of PXRE
Delaware and the holders of PXRE Delaware common stock automatically became
holders of the same number of the Company's common shares. The reorganization
was consummated at the close of business on October 5, 1999 and, on October 6,
1999, the Company's common shares began to trade on the New York Stock Exchange
under the symbol PXT. The reorganization also involved the establishment of a
Bermuda based reinsurance company, PXRE Reinsurance Ltd. ("PXRE Bermuda"),
operations in Barbados through PXRE Reinsurance (Barbados) Ltd. ("PXRE
Barbados"), and the formation of a reinsurance intermediary, PXRE Solutions Inc.
("PXRE Solutions").
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 hardening
reinsurance market following the September 11th terrorist attacks. 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.
Background
Following a diversification effort into Lloyd's and the casualty
sectors during the soft reinsurance market of the late 1990s, we decided to exit
these businesses during 2000 and 2001, and are today fully focused on our
traditional core property reinsurance operations. While our core businesses are
volatile due to significant potential loss severity, we have been a highly
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 Barbados and PXRE Solutions.
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) and casualty risks. PXRE Reinsurance is licensed, accredited or
permitted to transact business in all states and the District of Columbia,
Puerto Rico, Colombia and Mexico and operates a branch in Belgium ("PXRE's
Brussels Branch").
45
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, 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 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 is expected to provide finite reinsurance
coverages to clients and to provide reinsurance coverage to other PXRE entities.
PXRE Solutions performs certain limited reinsurance intermediary
activities on behalf of PXRE Reinsurance, PXRE Bermuda and PXRE Barbados.
Certain Risks and Uncertainties
General Risks and Uncertainties
As a reinsurer of property catastrophe-type coverages in the worldwide
market place, our operating results in any given period depend to a large extent
on the number and magnitude of natural and man-made catastrophes such as
hurricanes, windstorms, hailstorms, earthquakes, volcanic eruptions, fires,
industrial explosions, freezes, riots and floods. While we may, depending on
market conditions, purchase catastrophe retrocessional coverage for our own
protection, the occurrence of one or more major catastrophes in any given period
could nevertheless have a material adverse impact on our results of operations
and financial condition and result in substantial liquidation of investments and
outflows of cash as losses are paid.
As we underwrite risks from a large number of insurers based on
information generally supplied by reinsurance brokers, there is a risk of
developing a concentration of exposure to loss in certain geographic areas prone
to specific types of catastrophes. 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.
Premium receivables and loss reserves include business denominated in
currencies other than U.S. dollars. We are exposed to the possibility of
significant claims in currencies other than U.S. dollars. While we hold
positions denominated in foreign currencies to mitigate, in part, the effects of
currency fluctuations on our results of operations, we currently do not hedge
our currency exposures before a catastrophic event which may produce a claim.
The reinsurance industry has been consolidating in recent years through
mergers and other acquisitions. We compete with numerous companies, many of
which have substantially greater financial, marketing and management resources.
The level of competition has increased in the wake of the September 11th
terrorist attacks with the formation of a number of large and well-capitalized
Bermuda reinsurance companies. In addition, a number of our pre-existing
competitors were successful in raising substantial levels of additional capital.
Although we expect to increase our capital as well through the Preferred Stock
Investment, we will remain smaller than most of our competitors.
46
The Company and its non-U.S. subsidiaries intend to operate their
business in a manner that will not cause them to be treated as engaged in a
trade or business in the United States and, thus, will not require them to pay
U.S. federal corporate income taxes (other than withholding taxes on certain
U.S. source investment income, dividends from PXRE Delaware to PXRE Barbados and
excise taxes on reinsurance premiums). However, because there is uncertainty as
to the activities which constitute being engaged in a trade or business within
the United States, there can be no assurances that the U.S. Internal Revenue
Service will not contend successfully that the Company or a non-U.S. subsidiary
is engaged in a trade or business in the United States. In early March, 2002,
two bills were proposed in the U.S. House of Representatives that seek to
prevent so-called "corporate inversion" transactions. Under these bills, a
foreign corporation would be taxed as a U.S. domestic corporation under the
Internal Revenue Code if it became a foreign corporation as a result of an
"inversion transaction" under the bill proposed by Representative McInnis or
"corporate expatriation transaction" under the bill proposed by Representative
Neal. As currently drafted, the McInnis bill would only apply to transactions
completed after December 31, 2001. Commencing with the 2004 tax year, the Neal
bill would apply to "corporate expatriation transactions" that occurred prior to
September 11, 2001. It is unclear whether our 1999 reorganization would be
treated as a "corporate expatriation transaction" under the Neal bill as
currently drafted. At this point, we are unable to predict whether such a
legislative effort would be successful, what form any such legislation could
ultimately take and what impact any such legislation would have on us. If the
Company or any of its non-U.S. subsidiaries were subject to U.S. income tax, the
Company's shareholders' equity and earnings could be materially adversely
effected.
Our invested assets consist primarily of fixed maturities and a
diversified portfolio of hedge funds, but also include mezzanine bond and equity
limited partnerships, and short-term investments. Our investments are subject to
market-wide risks and fluctuations, as well as to risk inherent in particular
securities. Although we seek to preserve our capital by investing in a portfolio
of hedge funds and other privately held securities designed to provide
diversification of risk, such investments entail substantial risks. Portfolio
performance may be adversely impacted by equity and credit market conditions.
There can be no assurance that our investment objectives will be achieved, and
results may vary substantially over time. In addition, although we seek to
employ investment strategies that are not correlated with our reinsurance
exposures, losses in our investment portfolio may occur at the same time as
underwriting losses and, therefore, exacerbate such losses' adverse effect on
us. To our knowledge, very few other publicly traded reinsurers follow our
strategy of investing a significant portion of our invested assets in hedge
funds and other privately held securities. See "Investments."
Our portfolio of hedge funds and other privately held securities is
subject to some or all of the following categories of risk: leverage;
concentration of investments; lack of liquidity; market fluctuations and
direction (including as a result of interest rate fluctuations and direction,
with respect to price levels and volatility); currency fluctuations; credit risk
of the securities issuer; yield curve risk; political risk for emerging market
investments; and spread risk between two or more similar securities. In
addition, we are subject to: (a) counter-party risk, (b) the risk when
transactions settle on foreign exchanges, the protections afforded on U.S.
exchanges will be absent, (c) the risk of exchange controls and (d) the risk
that one or more of our hedge fund managers mishandles trading, hedging or
deviates from the agreed upon strategy, resulting in loss.
47
The property catastrophe reinsurance market is highly sensitive to the
ratings assigned by the rating agencies. If either of S&P or A.M. Best were to
downgrade us, such downgrade would likely have a material negative impact on our
ability to expand our reinsurance portfolio and renew all of our existing
reinsurance agreements, especially if we were to be downgraded more than one
level from the "A" category to the "B" category.
Certain Risks and Uncertainties Relating to Critical Accounting Policies
The Company's financial statements disclose in footnotes its
significant accounting policies. Certain of these policies are critical to the
portrayal of the Company's financial condition and results since they require
management to establish estimates based on complex and subjective judgments. The
Company's critical accounting policies include liabilities for loss and loss
expenses, premiums assumed and ceded and investments.
Loss and Loss Expenses
As a catastrophe reinsurer, our estimations of losses are inherently
less reliable than for reinsurers of risks that have an established historical
pattern of losses. In addition, insured events which occur near the end of a
reporting period, as well as with respect to our retrocessional book of
business, the significant delay in losses being reported to insurance carriers,
reinsurers and finally retrocessionaires require us to make estimates of losses
based on limited information from our clients, industry loss estimates and our
own underwriting data. Because of the uncertainty in the process of estimating
our losses from insured events, there is a risk that our liabilities for losses
and loss expenses could prove to be inadequate, with a consequent adverse impact
on our future earnings and stockholders' equity. Additionally, as a consequence
of our emphasis on property reinsurance, we may forgo potential investment
income because property losses are typically settled within a shorter period of
time than casualty losses.
In reserving for non-catastrophe losses from recent years, we are
required to make assumptions concerning the expected loss ratio usually for
broad lines of business but sometimes by contract. We consider historical loss
ratios for each line of business and estimates provided by underwriters and
actuaries concerning the impact of pricing and coverage changes. We also utilize
information provided by our clients when we reserve heterogeneous lines by
selecting expected loss ratios based upon loss ratio projections from pricing
analyses. As experience emerges, we will revise our prior estimates concerning
pricing adequacy and non-catastrophe loss potential for our coverages and we
will eventually rely solely on our estimated development pattern in projecting
ultimate losses.
48
Concerning catastrophe losses, our estimates are initially influenced
to a significant degree by industry catastrophe models and underwriting
information provided by our clients. This can cause significant development for
an accident year when events occur late in the year, as happened in 1999. As an
event matures, we rely more and more on our company development patterns by type
of event as well as contract information to project ultimate losses for the
event. This process can cause our ultimate estimates to differ significantly
from initial projections. As an extreme example of these potential
uncertainties, the European Wind Storm Martin occurred on December 27, 1999. We
based our reserves to a significant degree on the average estimate of the cost
of this storm by two major catastrophe modelers, which was approximately $1.0
billion. In 2001, the cost was estimated to be $2.5 billion by SIGMA. Our gross
reserve at December 31, 1999 for this event was $31.3 million. Our gross
estimate at December 31, 2001 for this event was $68.8 million. Thus, the
original industry loss estimate increased by 150%, and our loss estimate has
increased by 120%.
Excluding the extraordinary development of European Wind Storms Martin
and Lothar in 2000, during the last 10 years, reserve development in any single
year from prior year losses, expressed as a percentage of shareholders' equity,
ranged from 15% adverse development in 1993 (primarily arising from Hurricane
Andrew) to 4% favorable development in 1996.
In addition, the potential for uncertainty for recent underwriting
years is greater than in past years because of the increased casualty exposures
assumed by us through our casualty and finite business. Unlike property losses
that tend to be reported more promptly and usually are settled within a shorter
time period, casualty losses are frequently slower to be reported and may be
determined only through the lengthy, unpredictable process of litigation.
Moreover, given our recent expansion of casualty and finite business, we do not
have established historical loss development patterns that can be used to
establish casualty loss liabilities. We must therefore rely on the inherently
less reliable historical loss development patterns reported by our clients and
industry loss development data in calculating our liabilities.
Premiums Assumed and Ceded
Our premiums on reinsurance business assumed are recorded as earned on
a pro rata basis over the contract period based upon estimated subject premiums.
Management must estimate the subject premiums associated with the treaties in
order to determine the level of earned premiums for a reporting period. Such
estimates are based on information from brokers, which can be subject to change
as new information becomes available. Because of the inherent uncertainty in
this process, there is the risk that premiums and related receivable balances
may turn out to be higher or lower than reported.
The premiums on reinsurance business ceded are recorded as incurred on
a pro rata basis over the contract period. Certain ceded reinsurance contracts
contain provisions requiring us to pay additional premiums or reinstatement
premiums in the event that losses of a significant magnitude are ceded under
such contracts. Under U.S. GAAP, we are not permitted to establish reserves for
potential additional premiums or record such amounts until a loss occurs that
would trigger the obligation to pay such additional or reinstatement premiums.
As a result, the net amount recoverable from our reinsurers in the event of a
loss may be reduced by the payment of additional premiums and reinstatement
premiums. In many cases, the impact of such premiums will be offset by
additional premiums and reinstatement premiums payable to us by our clients on
our assumed reinsurance business. No assurance can be given, however, that
assumed reinstatement and additional premiums will offset ceded reinstatement
and additional premiums. For example, in the case of the September 11th
terrorist attacks, our net premiums earned during 2001 were reduced by $26.3
million as a result of additional premiums and reinstatement premiums payable
due to that loss.
49
Investments
Fair values for our investments in hedge funds and other privately held
securities generally are established on the basis of the valuations provided
monthly or quarterly by the managers of such investments. These valuations are
determined based upon the valuation criteria established by the governing
documents of such investments. Such valuations may differ significantly from the
values that would have been used had ready markets existed and the differences
could be material.
We utilize the valuations provided to us by managers of our hedge funds
and other privately held securities in preparing our financial statements. The
carrying values used in such financial statements may not reflect the value we
receive when liquidating our investment in a hedge fund or other privately held
security. If liquidity is by redemption, the valuations supplied quarterly by
the manager of the hedge fund or other privately held security will generally be
the value used by the manager to set the redemption price. However, to the
extent a manager has discretion in pricing holdings, should substantial
redemptions occur in a limited period of time that discretion may be used to
price at lower values than would otherwise be used, thus reducing the redemption
price. If liquidation of our investment occurs by virtue of a liquidation of a
hedge fund or other privately held securities, we may receive substantially less
than the valuation method used by the manager since the valuation method used by
the manager is unlikely to use liquidation values. Accordingly, the estimated
fair value of our hedge fund and other privately held investments does not
necessarily represent the amount which could be realized upon future sale,
including in the event we need liquidity to fund catastrophic losses.
Since our investment strategy is to invest a significant portion of our
investment portfolio in hedge funds and other privately held securities, which
are accounted for under the equity method, or in some cases as a trading
portfolio, net realized and unrealized gains (losses) on such investments may
have a greater effect on our results of operations at the end of any reporting
period than would be the case for other insurance and/or reinsurance companies.
Comparison of 2001 with 2000
For the year ended December 31, 2001, the net loss was $17.9 million
compared to a net loss of $10.8 million for 2000. The diluted net loss per
common share was $1.55 for 2001 compared to a diluted net loss per share of
$0.95 for 2000, based on diluted average shares outstanding of approximately
11,578,000 in 2001 and 11,394,000 in 2000.
50
The most significant factor affecting our results in 2001 was the
losses arising from the terrorist attacks on September 11, 2001. Our estimated
net loss after tax arising from the September 11th terrorist attacks was $32.6
million or $2.82 per diluted share for the 2001 year. This loss estimate was
developed through a contract-by-contract review of our entire book of business
and assumed full-limit losses on all reinsurance contracts deemed affected
except where credibly advised to the contrary by our clients. The following
table more fully details the impact of the September 11th terrorist attacks on
the year ended December 31, 2001:
Results
Results Excluding
as September 11th September 11th
($000's) Reported Events Events
-------------- ------------- -------------
Gross premiums written $ 290,213 $ 30,290 $ 259,923
Net premiums written 154,478 (26,295) 180,773
Net premiums earned 162,125 (26,295) 188,420
Management fees 5,786 856 4,930
Net losses incurred 151,703 (26,070) 125,633
Commission and brokerage 30,350 10,557 40,907
-------------- ------------- -------------
Underwriting results before taxes $ (14,142) $ (40,952) $ 26,810
============== ============= =============
Gross losses and loss expenses arising from the September 11th
terrorist attacks totaled $181.7 million. This gross loss was reduced by
specific and corporate retrocessional recoverables of $155.6 million.
Approximately 93% of our September 11th related reinsurance recoverables are
either fully collateralized or reside with entities rated "A" or higher. In this
regard, proportional and specific excess coverages provided recoveries of $65.3
million and our general corporate excess of loss coverages provided a further
benefit of $90.3 million. The net result of these covers reduced our gross loss
from $181.7 million to $26.1 million. Many of these retrocessional covers on
both an assumed and ceded basis have either reinstatement or additional
premiums, resulting in a net premium reduction of $26.3 million. These
additional costs are partially reduced by approximately $11.4 million of lower
commission and brokerage expense and increased management fees, bringing the net
impact to $41 million before tax.
Written premiums for 2001 and 2000 were as follows:
Year Ended December 31,
----------------------------------
% Increase
2001 2000 (Decrease)
--------------- --------------- ---------------
($000's)
Gross premiums written $ 290,213 $ 268,990 7.9%
Ceded premiums:
Managed business participants 50,271 36,239 38.7
Finite 13,573 26,814 (49.4)
Catastrophe coverage, surplus reinsurance
and other 71,891 33,236 116.3
--------------- ---------------
Total reinsurance premiums ceded 135,735 96,289 41.0
--------------- ---------------
Net premiums written $ 154,478 $ 172,701 (10.6)
=============== ===============
51
Gross written premiums for 2001 increased 7.9% to $290.2 million from
$269.0 million for 2000, while net premiums written declined 10.6% to $154.5
million versus $172.7 million for 2000. Excluding the impact of the September
11th terrorist attacks and the Company's London operations, the Company had
gross premium written growth in the catastrophe and risk excess segment and net
premium written growth in the catastrophe and risk excess and finite segments.
Net premiums earned for 2001 increased 1.2% to $162.1 million from $160.2
million for 2000, reflecting the September 11th terrorist attacks and cessation
of London operations. Excluding the September 11th terrorist attacks and the
London operations, the Company had net premiums earned growth in all segments
except our Other Lines segment. Gross premiums written decreased by $31 million,
net premiums written decreased by $21.6 million and net premiums earned
decreased by $15.7 million in 2001 compared to 2000 as a result of the cessation
of our underwriting activities in London.
Premiums ceded to our managed business participants increased 38.7% to
$50.3 million for 2001 compared with $36.2 million for 2000. The percentage
increase in premiums ceded to these programs was higher than for gross premiums
written due primarily to increases in reinstatement premiums ceded in connection
with the September 11th terrorist attacks.
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 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.
Catastrophe coverage, surplus and other ceded premiums written
increased in 2001 from 2000 primarily due to additional premiums on
retrocessional protection following the September 11th terrorist attacks.
A summary of our 2001 and 2000 net premiums written and earned by
business segment is included in Note 10 to the Consolidated Financial
Statements.
Management fee income from all sources for the year ended December 31,
2001 increased 5.5% to $5.8 million from $5.5 million for 2000, reflecting the
increase in business ceded to our managed business participants, including the
effects of the September 11th terrorist attacks.
The underwriting results of a property and casualty insurer are
discussed frequently by reference to its loss ratio, underwriting expense ratio
and combined ratio. The loss ratio is the result of dividing losses and loss
expenses incurred by net premiums earned. The underwriting expense ratio is the
result of dividing underwriting expenses (reduced by management fees, if any) by
net premiums written for purposes of SAP and net premiums earned for purposes of
U.S. GAAP. The combined ratio is the sum of the loss ratio and the underwriting
expense ratio. A combined ratio under 100% indicates underwriting profits and a
combined ratio exceeding 100% indicates underwriting losses. The combined ratio
does not reflect the effect of investment income on operating results. The
ratios discussed below have been calculated on a U.S. GAAP basis.
52
Our loss ratio was 93.6% for the year ended December 31, 2001 compared
with 86% for 2000. Excluding the effects of the September 11th terrorist
attacks, our loss ratio was 66.7%. Our loss ratio for the year ended December
31, 2001 reflected incurred catastrophe and risk excess losses of $225.8 million
gross and $56 million net for the 2001 and prior accident years. Our loss ratio
for 2000 reflected incurred catastrophe and risk excess losses of $78.1 million
gross and $51.9 million net.
Significant catastrophe and risk losses affecting the year ended
December 31, 2001 loss incurred are as follows:
Amount of Losses
-----------------------------------
Loss Event Gross Net
- ---------- --------------- ---------------
($000's)
September 11th Terrorist Attacks $ 181,671 $ 26,070
Petrobras Oil Rig Disaster 16,779 11,596
Significant catastrophe and risk losses affecting the year ended
December 31, 2000 loss incurred are as follows:
Amount of Losses
-----------------------------------
Loss Event Gross Net
- ---------- --------------- ---------------
($000's)
French Storm Martin $ 33,940 $ 25,446
French Storm Lothar 27,197 17,961
The provision for losses and loss expenses and the loss ratio includes
the effect of foreign exchange movements on our liability for losses and loss
expenses, resulting in foreign currency exchange gains of $1 million for 2001
compared to losses of $1.2 million for 2000.
During 2001, we experienced adverse development of $17.9 million net
for prior-year loss and loss expenses primarily due to strengthening of reserves
in casualty, marine and aerospace lines of business, and development on a number
of historical catastrophe events. The loss ratio for 2000 was adversely affected
by development of $58.2 million net for prior-year loss and loss expenses
largely due to the French storms Lothar and Martin.
The underwriting expense ratio was 33.4% for 2001 compared with 40.5%
for 2000. Excluding the September 11th terrorist attacks, the expense ratio was
34.8%. The commission and brokerage ratio, net of management fee income, was
15.2% for 2001, compared with 18.4% in 2000. Excluding the September 11th
terrorist attacks, the commission and brokerage ratio, net of management fee
income, was 19.1% for 2001, compared with 18.4% for 2000. The operating expense
ratio was 18.3% for 2001 (15.7% excluding the September 11th terrorist attacks)
compared with 22.1% for 2000. The decrease largely reflected the expense savings
associated with the termination of our Lloyd's operations. As a result of the
above, our combined ratio was 127.0% for 2001 (101.5% excluding the September
11th terrorist attacks) compared with a combined ratio of 126.5% for 2000.
53
Underwriting operations as described in Note 10 to the Consolidated
Financial Statements include premiums earned, losses incurred and commission and
brokerage net of management fees, but do not include investment income, realized
gains or losses, interest expense, operating expenses, unrealized foreign
exchange gains or losses on losses incurred on weather contracts or management
fees for Lloyd's syndicate agency management.
The catastrophe and risk excess underwriting portfolio can be
characterized on a longer term basis as being comprised of coverages involving
higher margins and greater volatility than other coverages written by PXRE.
Other operating expenses decreased 16.4% to $29.6 million for 2001 from
$35.4 million in 2000. The decrease was primarily related to the expense savings
associated with the termination of our Lloyd's operations. Included in other
operating expenses were foreign currency exchange losses of $0.7 million for
2001 compared to losses of $0.6 million for 2000.
During 2001, interest expense decreased to $4.4 million compared to
$4.8 million in 2000. The decrease in interest expense reflects the repayments
of $10 million on our primary credit facility at each of March 31, 2001 and 2000
(as described under "Liquidity and Capital Resources"). As of December 31, 2001,
$55 million remains outstanding under this credit facility. The interest rate on
$36.7 million of the $55 million outstanding is fixed at 6.34% as a result of a
cash flow hedge interest rate swap. The interest rate on the remaining $18.3
million outstanding is variable and was 3.59% at December 31, 2001. This is part
of PXRE Delaware's Credit Agreement with a syndicate of lenders. In addition,
the Company recorded income of $0.3 million, after tax in the first quarter of
2001, for the cumulative effect of adoption of a change of accounting principle
under SFAS No. 133. Included in other comprehensive income is a decrease in the
fair value of the cash flow hedge for the period from July 1, 2001 to December
31, 2001 of $0.7 million, net of tax. We incurred minority interest expense
amounting to $8.9 million related to our $100 million of 8.85% Capital Trust
Pass-through Securities `sm' (TRUPS `sm') during 2001 and in 2000 (See
"Liquidity and Capital Resources" below for a full description of the TRUPS).
Net investment income of $30 million for 2001 was virtually unchanged
from 2000. Our pre-tax gross annualized investment yield based on quarterly
investment balances was 6.3% for 2001 compared with 6.1% for 2000, both
calculated using amortized cost and investment income before interest expense on
funds held and investment expenses. Interest expense on funds held amounted to
$2.2 million in the fourth quarter representing an allocation of investment
income principally in relation to reinsurance recoveries arising from the
September 11th terrorist attacks. Net realized investment gains for 2001 were $4
million, compared to gains of $3.2 million for 2000, resulting from the
liquidation of bonds in 2001 to raise cash in preparation for paying claims from
the September 11th terrorist attacks. In 2000, realized gains included a $1.5
million gain from the sale of Transnational Insurance Company.
54
The net effect of foreign currency exchange fluctuations were gains of
$0.3 million in 2001 compared to losses of $1.8 million for 2000.
Our London operations, which are winding down, resulted in a loss
before taxes of $6.5 million for 2001 compared to a loss before taxes of $11.1
million in 2000.
We recognized a tax benefit of $4.5 million in 2001 compared to a
benefit of $12 million in 2000.
Comparison of 2000 with 1999
For the year ended December 31, 2000, our net loss was $10.8 million
compared to a net loss of $42.1 million for 1999. The diluted net loss per
common share was $0.95 for 2000 compared to a net loss per share of $3.64 for
1999, based on diluted average shares outstanding of approximately 11,394,000 in
2000 and 11,568,000 in 1999.
Year Ended December 31,
----------------------------------
% Increase
2000 1999 (Decrease)
--------------- --------------- ---------------
($000's)
Gross premiums written $ 268,990 $ 221,349 21.5%
Ceded premiums:
Managed business participants 63,053 42,549 48.2
Catastrophe coverage, surplus reinsurance and other 33,236 39,955 (16.8)
--------------- ---------------
Total reinsurance premiums ceded 96,289 82,504 16.7
--------------- ---------------
Net premiums written $ 172,701 $ 138,845 24.4
=============== ===============
Gross premiums written for 2000 increased 21.5% to $269.0 million from
$221.3 million for 1999. Net premiums written for the year ended December 31,
2000 increased 24.4% to $172.7 million from $138.8 million for 1999. Net
premiums earned for the year ended December 31, 2000, increased 24.7% to $160.2
million from $128.5 million in 1999. Gross written, net written and net earned
premium for 2000 increased from prior-year levels reflecting growth in our
Structured/Finite Business segment, Casualty segment and the Catastrophe and
Risk Excess segment, including one retroactive finite reinsurance contract
written amounting to $20 million gross premiums written, ceded premiums written
of $10 million and net premiums written and earned of $10 million. Gross and net
premiums written increased in 2000 as compared to 1999 in all segments except
"Other Lines," as we curtailed the underwriting activities of PXRE Lloyd's
Syndicate during 2000. Our decision to buy additional retrocessional coverage
reduced growth in net written and net earned premium from 1999 to 2000.
Reinstatement premiums were lower in 2000 on retrocessional coverage since the
level of loss activity was lower than in 1999.
Catastrophe coverage, surplus and other ceded premiums written
decreased in 2000 from 1999 due to our fronting less business on behalf of other
reinsurers and lower reinstatement premiums which in 1999 were driven by the
December 1999 French Storms, offset in part, by additional retrocessional
coverage.
55
In 2000, we made additional retrocessional coverage purchases. Our
property business is protected by a series of retrocessional agreements that
provide protection against unusual severity of loss. Through 1999 these
protections did not protect us against exposure to smaller, more frequent loss
occurrences; however, additional purchases in 2000 provided more protection
against such loss occurrences.
The premiums ceded to our managed business participants decreased 14.8%
to $36.2 million for 2000 compared with $42.5 million for 1999. The decrease in
premiums ceded to these programs was due primarily to decreases in gross
premiums written primarily on fronted business. In addition, we ceded premiums
of $26.8 million from the Structured/Finite Business segment to a managed
business participant, Select Re, commencing in 2000.
A summary of our 2000 and 1999 net premiums written and earned by
business segment is included in Note 10 to the Consolidated Financial
Statements.
Management fee income from all sources for the year ended December 31,
2000 increased 52.8% to $5.5 million from $3.6 million for 1999, reflecting
higher premiums ceded to managed business participants and fees from PXRE
Lloyd's Syndicate and PXRE Managing Agency.
The loss ratio was 86.0% for 2000 compared with 123.9% for 1999 largely
due to French storms Lothar and Martin in both years as well as fifteen
catastrophe events in 1999. Excluding the effect of prior year loss development,
the loss ratio for 2000 would have been 49.7%. The loss ratio for 2000 reflected
incurred catastrophe and risk excess losses of $78.1 million gross and $51.9
million net for the 2000 and prior accident years. The loss ratio for 1999
reflected incurred catastrophe losses of $170.5 million gross and $92.7 million
net for 1999 and prior accident years.
Significant catastrophe and risk losses affecting the year ended
December 31, 2000 loss incurred are as follows:
Amount of Losses
-----------------------------------
Loss Event Gross Net
- ---------- --------------- ---------------
($000's)
French Storm Martin $ 33,940 $ 25,446
French Storm Lothar 27,197 17,961
Significant catastrophe and risk losses affecting the year ended
December 31, 1999 loss incurred are as follows:
Amount of Losses
-----------------------------------
Loss Event Gross Net
- ---------- --------------- ---------------
($000's)
French Storm Martin $ 31,300 $ 24,000
French Storm Lothar 51,900 20,600
Hurricane Floyd 20,900 13,700
Danish Storms 14,800 11,400
56
The provision for losses and loss expenses and the loss ratio includes
the effect of foreign exchange movements on our liability for losses and loss
expenses, resulting in a foreign currency exchange loss of $1.2 million for 2000
compared to an exchange gain of $0.4 million for 1999.
During 2000, we experienced adverse development of $58.2 million net
for prior-year loss and loss expenses primarily related to the French Storms
Lothar and Martin. The loss ratio for 1999 was adversely affected by the
development of $19.8 million net for prior-year loss and loss expenses.
Our underwriting expense ratio was 40.5% for 2000 compared with 43% for
1999. The decrease in underwriting expense ratio was substantially due to the
increase in premiums earned and management fee income. Our commission and
brokerage ratio net of management fee income was 18.4% for 2000 compared with
18.8% for 1999. Our operating expense ratio was 22.1% for 2000 compared with
24.2% for 1999 reflecting the benefit of growth in the Company's new lines of
business. As a result of the above, our combined ratio was 126.5% for 2000
compared with 166.9% for 1999. The decrease in our U.S. GAAP combined ratio was
due to reduced catastrophe activity.
Underwriting operations as described in Note 10 to the Consolidated
Financial Statements include premiums earned, losses incurred and commission and
brokerage net of management fees, but do not include investment income, realized
gains or losses, interest expense, operating expenses, unrealized foreign
exchange gains or losses on losses incurred on weather contracts or management
fees for Lloyd's syndicate agency management.
The catastrophe and risk excess underwriting portfolio can be
characterized on a longer term basis as being comprised of coverages involving
higher margins and greater volatility than other coverages written by PXRE.
Other operating expenses increased to $35.4 million for the year ended
December 31, 2000 from $30.1 million in 1999. The increase was primarily related
to a full year of our London agency operations as well as amortization of
negative goodwill in 1999 that did not continue in 2000. Included in other
operating expenses were foreign currency exchange losses of $0.6 million for
2000 compared to losses of $0.8 million for 1999.
Also in 1999, we incurred $0.7 million in after-tax expenses associated
with a change in accounting in accordance with the American Institute of
Certified Public Accountants Statement of Position 98-5, for organizational and
start-up costs capitalized in prior years.
During 2000, interest expense increased to $4.8 million compared to
$3.9 million in 1999. The increase in interest expense relates to a draw down of
$25 million under a credit facility in the fourth quarter of 1999, partially
offset by a repayment of $10 million of the credit facility at March 31, 2000.
The variable interest rate on this portion was 7.66% at December 31, 2000. This
is part of PXRE Delaware's Credit Agreement with a syndicate of lenders (as
described under "Liquidity and Capital Resources"). In addition, during 2000, we
incurred minority interest expense amounting to $8.9 million related to our $100
million of TRUPS (as described below under "Liquidity and Capital Resources")
compared to $8.8 million in 1999.
57
Net investment income for the year ended December 31, 2000 decreased
36.3% to $30 million from $47.2 million for 1999. The decrease in net investment
income was caused primarily by certain alternative investments (which are
carried on the equity method, for which the unrealized gains and losses in each
case are recorded through the income statement) and trading portfolio, which
produced a loss of $3.5 million for 2000 reflecting a loss in two partnerships,
compared to income of $11.1 million for 1999. Our pre-tax annualized investment
yield was 6.1% for 2000 compared with 10.4% for 1999, both calculated using
amortized cost and investment income before investment expenses. Net realized
investment gains for 2000 were $3.2 million, compared to losses of $3.8 million
for 1999, reflecting the restructuring of the investment portfolio and sale of
Transnational Insurance in 2000 and losses from trading of weather contracts in
1999.
The net effect of foreign currency exchange fluctuations was a loss of
$1.8 million in 2000 compared to a loss of $0.4 million in 1999.
The tax benefit in 1999 includes a one-time income tax charge in
connection with the Bermuda redomestication of approximately $1.8 million
related to the cancellation of shares of PXRE Delaware held by its subsidiary.
In addition, in 1999 we incurred a tax charge of $2.3 million upon payment of a
dividend by PXRE Delaware in connection with the redomestication.
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company relies primarily on dividend payments and net tax
allocation payments from its subsidiaries, including PXRE Reinsurance and PXRE
Bermuda, to pay its operating expenses and income taxes, to meet its debt
service obligations and to pay dividends. The payment of dividends by PXRE
Reinsurance to PXRE Delaware is subject to limits imposed under the insurance
laws and regulations of Connecticut, the state of incorporation and domicile of
PXRE Reinsurance, as well as certain restrictions arising in connection with our
indebtedness discussed below. Under the Connecticut insurance law, the maximum
amount of dividends or other distributions that PXRE Reinsurance may declare or
pay, within any twelve-month period, without regulatory approval, is limited to
the lesser of (a) earned surplus or (b) the greater of 10% of policyholders'
surplus at December 31 of the preceding year or 100% of net income for the
twelve-month period ending December 31 of the preceding year, all determined in
accordance with SAP. Accordingly, the Connecticut insurance laws could limit the
amount of dividends available for distribution by PXRE Reinsurance without prior
regulatory approval, depending upon a variety of factors outside the control of
PXRE, including the frequency and severity of catastrophe and other loss events
and changes in the reinsurance market, in the insurance regulatory environment
and in general economic conditions. The maximum amount of dividends or
distributions that PXRE Reinsurance may declare and pay during 2002, without
regulatory approval, is $33.2 million. During 2001, $30.1 million in dividends
were paid by PXRE Reinsurance.
58
Under Bermuda law, PXRE Bermuda is prohibited from declaring or paying
any dividends during any financial year it is in breach of its minimum solvency
margin or minimum liquidity ratio or if the declaration or payment of such
dividends would cause it to fail to meet such margin or ratio. If it fails to
meet its minimum solvency margin or minimum liquidity ratio on the last day of
any financial year, the insurer will be prohibited, without the approval of the
Supervisor of Insurance, from declaring or paying any dividends during the next
financial year.
As a Class 3 insurer, PXRE Bermuda also is prohibited, without the
approval of the Supervisor of Insurance, from reducing by 15% or more its total
statutory capital, as set out in its previous year's financial statements, 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. As at December 31, 2001, the
statutory capital and surplus of PXRE Bermuda was estimated to be $34.3 million
and the amount required to be maintained was estimated to be $9.4 million.
Under Barbados law, PXRE Barbados may only pay a dividend out of the
realized profits of the company. PXRE Barbados may not pay a dividend unless (a)
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.
Dividends and other permitted payments from PXRE Delaware to PXRE
Barbados are expected to be subject to U.S. withholding taxes at the rate of 5%
(reduced from 30% under the tax convention between the United States and
Barbados) and (based on source of insurance business) an effective corporate
income tax rate of 2.8% after giving effect to a 93% tax credit.
In the event the amount of dividends available, together with other
sources of funds, are not sufficient to permit us to meet our debt service and
other obligations and to pay cash dividends, it would be necessary to obtain the
approval of the Connecticut Insurance Commissioner prior to the payment of
additional dividends by PXRE Reinsurance or the approval of the Bermuda
Supervisor of Insurance prior to the payment of additional dividends by PXRE
Bermuda. If such approval were not obtained, we would have to adopt one or more
alternatives, such as refinancing or restructuring our indebtedness or seeking
additional equity. There can be no assurance that any of these strategies could
be effected on satisfactory terms, if at all. In the event that we were unable
to generate sufficient cash flow and were otherwise unable to obtain funds
necessary to meet required payments of principal and interest on our
indebtedness, we could be in default under the terms of the agreements governing
such indebtedness. In the event of such default, the holders of such
indebtedness could elect to declare all of the funds borrowed thereunder to be
due and payable together with accrued and unpaid interest.
On December 10, 2001, the Company entered into a Share Purchase
Agreement with certain investors, Capital Z Financial Services Fund II, L.P.,
Capital Z Financial Services Private Fund II, L.P. (together with Capital Z
Financial Services Fund II, L.P., "Capital Z"), Reservoir Capital Master Fund,
L.P., Reservoir Capital Partners, L.P. (together with Reservoir Capital Master
Fund, L.P., "Reservoir") and Richard E. Rainwater ("Rainwater") (each of Capital
Z, Reservoir and Rainwater, a "Purchaser", and together, the "Purchasers"). The
Share Purchase Agreement provides for the purchase of 7,500 shares of Series A
Preferred Shares, allocated to two sub-series of shares, 5,000 shares allocated
to sub-series A1 (A1 Preferred Shares) and 2,500 shares allocated to sub-series
A2 (A2 Preferred Shares); the purchase of 5,000 shares of Series B Preferred
Shares, allocated to two sub-series of shares, 3,333.333 shares allocated to
Series B1 (B1 Preferred Shares) and 1,666.667 shares allocated to Series B2 (B2
Preferred Shares); and 2,500 shares of Series C Preferred Shares, allocated to
two sub-series of shares, 1,666.667 shares allocated to Series C1 (C1 Preferred
Shares) and 833.333 shares allocated to Series C2 (C2 Preferred Shares).
59
The capital infusion from the issuance of the Preferred Shares 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.
The issuance of the Preferred Shares is not expected to have a material
effect on our liquidity during the three-year period following their issuance.
In this regard, the Preferred Shares will be entitled to receive, when, as and
if declared by our Board of Directors and to the extent of funds legally
available for the payment of dividends, cumulative dividends per share at the
rate per annum of 8% of the sum of the stated value on each share plus any
accrued and unpaid dividends thereon, payable on a quarterly basis. To the
extent such dividends are not paid when due, dividends shall be payable and
accrue at the rate of 10% per annum compounded quarterly until paid. Such
dividends, if declared by our Board of Directors, shall be payable in additional
Preferred Shares prior to the third anniversary of the closing and cash
thereafter. We, at our sole election, may decide, in substitution in whole or in
part for dividends payable in shares, to pay dividends in cash to the extent of
any dividends that, if paid in additional shares of Preferred Shares, would
otherwise cause the Purchasers and their affiliates to own more than 49.9% of
the capital stock of the Company on a fully-diluted and fully-converted basis.
The A1 Preferred Shares, B1 Preferred Shares and C1 Preferred Shares
will be mandatorily convertible into Class A Common Shares, Class B Common
Shares and Class C Common Shares, respectively, on the third anniversary of the
date of issuance, and all remaining Preferred Shares will be mandatorily
convertible into Convertible Common Shares on the sixth anniversary of the date
of issuance. Notwithstanding the foregoing, on any conversion date, to the
extent necessary to prevent the initial Purchasers of Preferred Shares and their
affiliates from owning more than 49.9% of the capital shares of the Company
following conversion, we shall have the right (but not the obligation) to make a
cash payment in lieu of Convertible Common Shares equal to the fair market value
of the Convertible Common Shares that would have been received in excess of the
49.9% limitation in connection with any conversion, plus an additional tax gross
up amount to take into account in appropriate circumstances the difference
between the federal income tax rate on long-term capital gains and the federal
ordinary income tax rate that might apply to the recipient on the receipt of a
cash payment in lieu of Convertible Common Shares. If the A2 Preferred Shares,
B2 Preferred Shares and C2 Preferred Shares are not voluntarily converted on or
prior to the third anniversary of their issuance, an annual 8% dividend, payable
in cash, will accrue until these Preferred Shares are converted.
60
PXRE Delaware entered into a Credit Agreement dated as of December 30,
1998 (as amended and restated in connection with the reorganization of PXRE
Delaware, the "Credit Agreement") with First Union National Bank ("First Union")
as Agent and as a Lender, pursuant to which First Union agreed to make available
to PXRE Delaware a $75 million revolving credit facility. On May 18, 1999,
pursuant to various Joinder Agreements and Assignment and Acceptance Agreements,
First Union syndicated the revolving credit facility, joining Fleet National
Bank, Credit Lyonnais New York Branch and Bank One (formerly, The First National
Bank of Chicago) as additional lenders (collectively with First Union, the
"Lenders"). As at December 31, 1998, PXRE Delaware had outstanding borrowings
under the Credit Agreement of $50 million, and in October 1999, the remaining
$25 million was borrowed. On March 1, 2000 and March 31, 2001, PXRE Delaware
fulfilled its commitment and made principal payments of $10 million each,
reducing the outstanding loan to $55 million, at December 31, 2001.
The Preferred Stock Investment would trigger an event of default under
the Credit Agreement if the transaction were consummated without the consent of
the Lenders. As a condition to the Lenders' consent to the Preferred Stock
Investment, the Credit Agreement was amended pursuant to the Second Amendment to
the First Amended and Restated Credit Agreement, dated March 12, 2002, between
PXRE Delaware and the Lenders (the "Second Amendment" and together with the
Credit Agreement, as amended by the Second Amendment, the "Amended Credit
Agreement"). The Second Amendment will not be effective until the closing of the
Preferred Stock Investment.
In connection with the Credit Agreement, PXRE Delaware and First Union
entered into a cash flow hedge interest rate swap which, effective December 31,
1998, has the intended effect of converting the initial $36.7 million borrowings
by PXRE Delaware into a fixed rate borrowing at an annual interest rate of
6.34%. The remaining $18.3 million outstanding on December 31, 2001, after
paying down $10 million on March 31, 2001 and March 31, 2000, incurred an
interest rate of 3.59% at December 31, 2001. Commitments under the Credit
Agreement terminate on March 31, 2005 and are subject to annual reductions of
$10 million commencing March 31, 2000 and $25 million on March 31, 2005, and,
unless due or paid sooner, the aggregate principal of the loans are due and
payable in full on March 31, 2005. Under the Amended Credit Agreement, the
reduction of the outstanding commitments under the Credit Agreement has been
accelerated. As amended, the outstanding commitment is reduced by $20 million on
March 31, 2002, $5 million on July 1, 2002, $20 million on March 31, 2003 and by
the remaining $10 million on March 31, 2004. In addition, commencing on June 30,
2003, 50% of Excess Cash Flow (as defined in the Second Amendment) shall be used
to reduce the outstanding commitment. The variable interest rate under the
Amended Credit Agreement has been increased by 100 basis points.
61
The Credit Agreement contains covenants which, among other things,
limit the ability of the Company and its subsidiaries and affiliates: (a) to
incur additional Indebtedness (other than certain permitted Indebtedness); (b)
to create Liens upon their properties or assets (other than Permitted Liens);
(c) to sell, transfer or otherwise dispose of their assets, business or
properties (other than certain permitted dispositions); (d) to make additional
Investments (other than certain permitted Investments, including Permitted
Acquisitions and other Investments in compliance with, among other things,
applicable law and the limitations set forth in the companies' investment
policies and not exceeding specified limits); (e) to pay dividends or repurchase
stock if after giving effect thereto a Default or Event of Default exists or the
Fixed Charge Coverage Ratio would be less than 1.5 to 1.0 as defined in the
Credit Agreement; (f) to enter into certain transactions with Affiliates; (g) to
engage in any unrelated business; (h) to enter into or remain a party to certain
ceded reinsurance agreements; or (i) to consolidate, merge or otherwise combine
(or agree to do any of the foregoing) unless, among other things, (1) the
Company is the surviving entity in such merger or consolidation, (2) such merger
or consolidation constitutes a Permitted Acquisition and the conditions and
requirements of the Credit Agreement are complied with and (3) immediately
thereafter no Default or Event of Default exists. The Credit Agreement also
requires compliance with Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based
Capital Ratio and Combined Statutory Surplus requirements.
As of December 31, 2001, PXRE Reinsurance held an investment whose
value exceeded the applicable limit under the Credit Agreement, which absent a
waiver, would have resulted in an Event of Default under the Credit Agreement.
In the Second Amendment, the Lenders agreed to waive this violation until May 1,
2002 in order to allow PXRE Reinsurance an opportunity to cure this violation.
In this regard, PXRE Reinsurance owns certain fixed rate secured notes, due
September 10, 2010, issued by FSL Funding Ltd. As of December 31, 2001, the
value of these notes was $22 million. Under 7.5(viii)(c) of the Credit
Agreement, the aggregate investment in any single non-U.S. Government guaranteed
investment that may be held by PXRE Reinsurance is limited to 5% of its Average
Combined Invested Assets (as defined in the Credit Agreement), which was $21.1
million at December 31, 2001.
Under the Amended Credit Agreement, the definition of Fixed Charge
Coverage Ratio has been amended to provide credit for the capital infusion
resulting from the Preferred Stock Investment and the Fixed Charge Coverage
Ratio is reduced from 1.5 to 1, to 1.25 to 1 at March 31, 2002 and June 30, 2002
and 1.3 to 1 at September 30, 2002 and December 31, 2002.
The Credit Agreement enumerates various Events of Default, including
but not limited to, if: (1) any Person or group becomes the "beneficial owner"
of securities of the Company representing 20% or more of the combined voting
power of the then outstanding securities of the Company ordinarily having the
right to vote in the election of directors; or (2) the Board of Directors of the
Company ceases to consist of a majority of the individuals who constituted the
Board as of the date of the Credit Agreement or who subsequently become members
after having been nominated, or otherwise approved in writing, by at least a
majority of individuals who constituted the Board as of the date of the Credit
Agreement (or their approved replacements).
62
On January 29, 1997, PXRE Capital Trust I ("PXRE Capital Trust"), a
Delaware statutory business trust and a wholly-owned subsidiary of PXRE
Delaware, issued $100 million principal amount of its 8.85% TRUPS 'sm' due
February 1, 2027 in an institutional private placement. Proceeds from the sale
of these securities were used to purchase PXRE Delaware's 8.85% Junior
Subordinated Deferrable Interest Debentures due February 1, 2027 (the
"Subordinated Debt Securities"). On April 23, 1997, PXRE Delaware and PXRE
Capital Trust completed the registration with the Securities and Exchange
Commission of an exchange offer for these securities and the securities were
exchanged for substantially similar securities (the "Capital Securities").
Distributions on the Capital Securities (and interest on the related
Subordinated Debt Securities) are payable semi-annually, in arrears, on February
1 and August 1 of each year, commencing August 1, 1997. Minority interest
expense, including amortization of debt offering costs, for 2001 in respect of
the Capital Securities (and related Subordinated Debt Securities) amounted to
$8.9 million. On or after February 1, 2007, PXRE Delaware has the right to
redeem the Subordinated Debt Securities, in whole at any time or in part from
time to time, subject to certain conditions, at call prices of 104.180% at
February 1, 2007, declining to 100.418% at February 1, 2016, and 100%
thereafter. PXRE Delaware has the right, at any time, subject to certain
conditions, to defer payments of interest on the Subordinated Debt Securities
for Extension Periods (as defined in the applicable indenture), each not
exceeding 10 consecutive semi-annual periods; provided that no Extension Period
may extend beyond the maturity date of the Subordinated Debt Securities. As a
consequence of PXRE Delaware's extension of any interest payment period on the
Subordinated Debt Securities, distributions on the Capital Securities would be
deferred (though such distributions would continue to accrue interest at a rate
of 8.85% per annum compounded semi-annually). In the event that PXRE Delaware
exercises its right to extend an interest payment period, then during any
Extension Period, subject to certain exceptions, (i) PXRE Delaware may not
declare or pay any dividend on, make any distributions with respect to, or
redeem, purchase, acquire or make a liquidation payment with respect to, any of
its capital stock or rights to acquire such capital stock or make any guarantee
payments (subject to specified exceptions) with respect to the foregoing, and
(ii) PXRE Delaware may not make any payment of interest on, or principal of (or
premium, if any, on), or repay, repurchase or redeem, any debt securities issued
by PXRE Delaware which rank pari passu with or junior to the Subordinated Debt
Securities. Upon the termination of any Extension Period and the payment of all
amounts then due, PXRE Delaware may commence a new Extension Period, subject to
certain requirements.
We believe that the TRUPS are currently trading at an attractive price.
In order to take advantage of this opportunity, we may cause one or more of our
subsidiaries to purchase some of the outstanding TRUPS and to hold them for
investment purposes. If consummated, such a purchase is not expected to be
treated as a redemption.
PXRE Delaware files U.S. income tax returns for itself and all of its
direct or indirect subsidiaries that satisfy the stock ownership requirements
for consolidation (collectively, the "Subsidiaries"). PXRE Delaware is party to
an Agreement Concerning Filing of Consolidated Federal Income Tax Returns (the
"Tax Allocation Agreement") pursuant to which each U.S. Subsidiary makes tax
payments to PXRE Delaware in an amount equal to the federal income tax payment
that would have been payable by such Subsidiary for such year if it had filed a
separate income tax return for such year. PXRE Delaware is required to provide
for payment of the consolidated federal income tax liability for the entire
group. If the aggregate amount of tax payments made in any tax year by a U.S.
Subsidiary is less than (or greater than) the annual tax liability for such
Subsidiary on a stand-alone basis for such year, such Subsidiary will be
required to make up such deficiency to PXRE Delaware (or will be entitled to
receive a credit if payments exceed the separate return tax liability of the
Subsidiary).
63
Investments
As of December 31, 2001, 73.4% of our investment portfolio, at fair
value, consisted of bonds and short-term investments with fixed maturities.
At December 31, 2001, 90.0% of the fair value of our bond portfolio was
in obligations rated "A1" or "A" or better by Moody's or S&P, respectively.
Mortgage and asset-backed securities accounted for 13.3% of fixed maturities
based on fair value at December 31, 2001. The average market yield to maturity
of our bond portfolio at December 31, 2001 and 2000, was 4.5% and 5.9%,
respectively.
We had no direct investments in real estate or commercial mortgage
loans as of December 31, 2001.
Fixed maturity and equity investments are reported at fair value, with
the net unrealized gain or loss, net of tax, reported as a separate component of
shareholders' equity. At December 31, 2001, an after-tax unrealized gain of $0.5
million ($0.04 book value per share) was included in shareholders' equity.
Non-hedge fund short-term investments are carried at amortized cost,
which approximates fair value. Our short-term investments, principally
high-grade commercial paper, marketable fixed income securities and hedge fund
investments which invest primarily in marketable fixed income securities, were
$170.2 million at December 31, 2001, compared to $71.5 million at December 31,
2000. The amount of short-term investments was increased to raise cash in
preparation for paying claims related to the September 11th terrorist attacks.
A principal component of our investment strategy is investing a
significant portion of our invested assets in a diversified portfolio of hedge
funds. At December 31, 2001, total hedge fund investments amounted to $115.6
million (including $16.7 million in short-term investments mentioned above),
representing 11.5% of December 31, 2001 total assets. As at December 31, 2001,
hedge fund investments with fair values ranging from $0.8 to $16.7 million were
administered by nineteen managers. Four of the managers are affiliated with
Mariner Investment Group ("Mariner").
Our hedge fund managers invest in a variety of markets utilizing a
variety of strategies, generally through the medium of private investment
companies or other entities. Criteria for the selection of hedge fund managers
include, among other factors, the historical performance and/or recognizable
prospects of the particular manager and a substantial personal investment by the
manager in the investment program. However, managers without past trading
histories or substantial personal investment may also be considered. Generally,
our hedge fund managers may be compensated or receive profit participations on
terms that may include fixed and/or performance-based fees or profit
participations.
64
Through our hedge fund managers, we may invest or trade in any
securities or instruments including, but not limited to, U.S. and non-U.S.
equities and equity-related instruments, currencies, commodities and
fixed-income and other debt-related instruments and derivative instruments.
Hedge fund managers may use both over-the-counter and exchange traded
instruments (including derivative instruments such as swaps, futures and forward
agreements), trade on margin and engage in short sales. Substantially all
strategies hedge fund managers are expected to adopt employ leverage, to varying
degrees, which magnifies both the potential for gain and the exposure to loss,
which may be substantial. Leverage may be obtained through margin arrangements,
as well as repurchase, reverse repurchase, securities lending and other
techniques. Trades may be on or off exchanges and may be in thinly traded
securities or instruments, which creates the risk that attempted purchases or
sales may adversely affect the price of a particular investment or its
liquidation and may increase the difficulty of valuing particular positions.
While we seek capital appreciation with respect to our hedge fund
investments, we are also concerned with preservation of capital. For that
reason, our hedge fund portfolio is designed to take advantage of broad market
opportunities and diversify risk. Nevertheless, our investment policies with
respect to our hedge fund investments generally do not restrict us from
participating in particular markets, strategies or investments. In fact, our
hedge fund investments may generally be deployed and redeployed in whatever
investment strategies are deemed appropriate under prevailing economic and
market conditions in an attempt to achieve capital appreciation, including, if
appropriate, a concentration of investments in a relatively small group of
strategies or hedge fund managers. Accordingly, the identity and number of hedge
fund managers is likely to change over time.
Mariner, as investment advisor, allocates assets to the hedge fund
managers. Mariner monitors hedge fund performance and periodically reallocates
assets in its discretion. Mariner is familiar with a number of hedge fund
investment strategies utilized by our hedge fund managers. Mariner has invested
in some of these strategies and has a varying level of knowledge of others. New
strategies, or strategies not currently known to Mariner, may come to Mariner's
attention and may be adopted from time to time.
As at December 31, 2001, our investment portfolio also included $19.1
million of mezzanine bond and equity limited partnership investments at fair
values, with values ranging from $1.7 million to $8.5 million and remaining
aggregate cash call commitments in respect of such investments of $1.7 million.
Hedge funds and other limited partnership investments are accounted for
under the equity method or as part of a trading portfolio. Total investment
income for the twelve months ended December 31, 2001, included $10.6 million
attributable to hedge funds and other limited partnership investments.
Our hedge fund and other privately held securities program should be
viewed as exposing us to the risk of substantial losses, which we seek to reduce
through our multi-asset and multi-management strategy. There can be no
assurance, however, that this strategy will prove to be successful.
65
Liquidity
The primary sources of liquidity for our principal operating
subsidiaries are net cash flow from operating activities (including interest
income from investments), the maturity or sale of investments, borrowings,
capital contributions and advances. Funds are applied primarily to the payment
of claims, operating expenses, income taxes and to the purchase of investments.
Premiums are typically received in advance of related claim payments.
Net cash flow provided by operations was $25.1 million in 2001 compared
to $24.3 million used by operations in 2000 due to the effects of timing of
collection of receivables and reinsurance recoverables and payments of losses.
Dividends declared in 2001 to shareholders were $2.9 million compared
to $2.8 million in 2000. The expected annual dividend based on shares
outstanding at December 31, 2001 is approximately $2.8 million.
Book value per common share was $20.20 at December 31, 2001.
In December 1999, we announced a stock repurchase program of up to
1,000,000 shares. We had approximately 11,873,000 common shares outstanding as
of December 31, 2001. No share repurchases were made in 2001 except in
connection with tax withholding on the vesting of employee stock option or
restricted stock plans.
We may be subject to gains and losses resulting from currency
fluctuations because substantially all of our investments are denominated in
U.S. dollars, while some of our net liability exposure is in currencies other
than U.S. dollars. We hold, and expect to continue to hold, currency positions
and have made, and expect to continue to make, investments denominated in
foreign currencies to mitigate, in part, the effects of currency fluctuations on
our results of operations. Currency holdings and investments denominated in
foreign currencies do not constitute a material portion of our investment
portfolio and, in the opinion of our management, are sufficiently liquid for our
needs.
In connection with the capitalization of PXRE Lloyd's Syndicate 1224,
PXRE Reinsurance has placed on deposit $36.4 million par value of agency
debenture municipal securities and $11.5 million in money market funds as
collateral for Lloyd's. Cash and invested assets amounting to $15.4 million at
December 31, 2001, are restricted from being paid as a dividend through June,
2003.
Other commitments include a) letters of credit amounting to $20.6
million, with securities pledged as collateral amounting to $20.8 million, b)
securities with a par value of $9.1 million on deposit with various state
insurance departments in order to comply with insurance laws and c) securities
with a fair value of $12.9 million deposited into a trust for the benefit of a
cedent in connection with a finite reinsurance transaction.
In September 1997, we and Phoenix Home Life formed a joint venture, Cat
Bond Investors L.L.C. ("Cat Bond"), with initial committed capital of $20
million. The joint venture specializes in investing in instruments, the returns
on which are determined, in whole or in part, by the nature, magnitude and/or
effects of certain catastrophe events or meteorological conditions. Cat Bond
ceased investing in new transactions in 1999. It has one remaining transaction
open, which is expected to settle in November 2002.
66
In 2001, we entered into a joint venture agreement, dated June 2001
(the "JV Agreement"), with BF&M Properties Limited to form a Bermuda
corporation, Barr's Bay Properties Limited ("Barr's Bay"). Barr's Bay was formed
to construct an office building in Hamilton, Bermuda, in which we will have the
option to lease office space for 3 consecutive five-year terms. We own 40% of
the outstanding shares of Barr's Bay. Pursuant to the JV Agreement, we have
agreed to lend up to $7 million to Barr's Bay to finance the construction of the
subject office building. Such loans will be secured by a first mortgage on the
property.
For other future commitments that affect liquidity, see the Credit
Agreement and cash call commitments discussed above.
All amounts classified as reinsurance recoverable at December 31, 2001
are considered by our management to be collectible in all material respects.
In January of 2000, we entered into an insurance contract outside of
our normal businesses under which we guaranteed performance of a minority
portion of the debt of an unrelated company, Mariner Structured Products Sub-2,
Ltd. ("MSP") for the benefit of a syndicate of lenders led by Bank of America,
N.A. The maximum exposure under this policy is $4.0 million. MSP's debt is
expected to be outstanding for at least six more years. No payments have been
made or are contemplated under this policy. The owner of MSP is a hedge fund
managed by Mariner. The portion of MSP's debt not guaranteed by us is guaranteed
by Select Re.
Market Risk
We are exposed to market risks that are principally interest rate and
credit risks. The potential for losses from changes in interest rates with
respect to our investments, borrowings, and a related interest rate swap exists.
We are exposed to potential losses from changes in probability of default with
respect to our investments. However, we believe our exposure to foreign exchange
risk is not material with respect to our fixed income portfolio.
Our risk management strategy is to accept certain levels of market
risks, principally through our investment activities, in order to offset our
insurance exposures that may be considered actuarial rather than financial. The
objectives of our investment activities are to generate the required return from
selected market sectors, that do not correlate with underwriting risk, and limit
our exposures to market risks that may prevent us from servicing our insurance
obligations. Our Board of Directors approves investment guidelines and the
selection of external investment advisers who manage our portfolios. The
investment managers make tactical investment decisions within the established
guidelines. Management monitors the external advisers through written reports
that are reviewed and approved by the Board of Directors or committee thereof.
Management also manages diversification strategies across the portfolios in
order to limit our potential loss from any single market risk. The performance
and risk profiles of the portfolio are reported in various forms throughout the
fiscal year to management, the Board of Directors, rating agencies, regulators,
and to stockholders.
67
Our investment portfolio is summarized in Item 14, Notes to the
Financial Statements, Item 7, Management's Discussion and Analysis and Item 1,
Business.
Interest Rate Risk
Our principal fixed maturity market risk exposure is to changes in U.S.
interest rates. Changes in interest rates may affect the fair value of our
fixed-maturity portfolio, borrowings (bank debt and trust preferred) and a
related interest rate swap. Our holdings subject us to exposures in the
treasury, municipal, and various asset-backed sectors. These sectors consist
primarily of investment grade securities whose fair value is subject to interest
rate, credit and prepayment risk. All fixed maturity investment positions are
long with no "short" or derivative positions.
Our investments in emerging market debt securities are subject to
interest rate risk which is included in the analysis below. During 1999 and
2000, we substantially reduced our investment in emerging market debt
securities, and at December 31, 2001 such securities represent less than 1.7% of
the fixed maturity portfolio. Therefore, the level of credit exposure associated
with these securities has been substantially reduced.
We believe that reinsurance receivables and payables do not expose us
to significant interest rate risk and are excluded from the analysis below.
In order to measure our exposure to changes in interest rates a
sensitivity analysis was performed. Potential loss is measured as a change in
fair value. The fair value of the fixed maturity portfolio, borrowings and
related interest rate swap at year-end was remeasured from the fair values
reported in the financial statements assuming a 10% increase in interest rates
using a Salomon Analytics "Yield Book." The potential loss in fair value due to
interest rate exposure was estimated at $3.1 million at December 31, 2001 and
$1.7 million at December 31, 2000. This net exposure has increased due to the
reduction in value of borrowings and the offsetting effect that interest rates
have on them compared to investments.
The estimated potential loss is net of prepayment risk associated with
the mortgage-related securities. The mortgage sector represents 6% of the
portfolio at year-end. The estimate assumes a similar change in fair value
across security sectors with no adjustment for change in value due to credit
risk. The interest rate risk related to the short-term investments is not
material. The average maturity of these investments is under one year.
Credit Risk
As of December 31, 2001, 73.4% of our investment portfolio, at fair
value, consisted of fixed maturities and short-term investments with fixed
maturities. At December 31, 2001, 90.0% of the fair value of our long-term fixed
maturities portfolio was in obligations rated "A1" or "A" or better by Moody's
or S&P, respectively. The average value of our fixed maturity investments
decreased 17.6% from $3.1 million at year end 2000 to $2.6 million at year end
2001. Non-agency mortgage and asset-backed securities accounted for 4.1% of
fixed maturities based on fair value at December 31, 2001. We significantly
reduced our investments in emerging market securities in 1999 and 2000, and have
limited fixed income investment holdings not traded on a recognized exchange.
68
Foreign Exchange Risk
Our exposure to foreign exchange risk from our foreign denominated
securities is not material. Only a small portion of our investment portfolio is
denominated in currencies other than U.S. dollars. Additionally, the carrying
value of certain receivables and payables denominated in foreign currencies are
carried at fair value. For these reasons, these items have been excluded from
the market risk disclosure. We may, however, be exposed to material foreign
exchange risk in the event that a significant non-U.S. catastrophe event occurs.
Equity Price Risk
We are exposed to minimal equity price risk in the form of a limited
number of equity investments. At December 31, 2001, equity investments amounted
to $0.7 million. Based on a 10% decrease in equity prices the potential loss in
fair value is estimated to be $0.1 million and $1.6 million at December 31, 2001
and 2000, respectively. The decrease reflects the reduction in the size of the
equity portfolio at December 31, 2001. In addition, in 2001, we maintained an
equity-trading portfolio with a fair value of approximately $25.8 million
as of December 31, 2001, which, based on a 10% decrease in fair value,
represented a potential loss in fair value of $2.6 million. Our equity-trading
portfolio, however, was liquidated during the first quarter of 2002.
Diversification Benefit
Our risk management strategy includes investments that are expected to
reflect offsetting changes in fair value in response to various changes in
market risks.
We also hold other investments that are excluded from this disclosure
that are expected to provide positive returns under most market conditions
representing adverse changes in interest rates and other market factors (See
Note 3 of Notes to Consolidated Financial Statements).
Income Taxes
We recognized a tax benefit of $4.5 million in 2001 compared to a
benefit of $12 million in 2000. The tax benefit in 2001 differed from the
statutory rate primarily due to the mix of business in the U.S. and Bermuda,
underwriting losses, tax exempt income and the dividends received deduction. The
tax benefit reported in 2000 differed from the statutory rate for similar
reasons as in 2001.
69
Contingencies
In May 1999, PXRE Delaware entered into weather option agreements with
two counterparties. In April 2000, these counterparties submitted invoices to
PXRE Delaware in the aggregate sum of $8.3 million seeking payment under the
weather option agreements, which invoices have been paid. PXRE Delaware insured
its obligations under these weather option agreements through two Commercial
Inland Marine Weather Insurance Policies issued by Terra Nova Insurance Company
Limited ("Terra Nova"). PXRE Delaware submitted claims under these policies to
Terra Nova in April 2000. Terra Nova has denied coverage, contending that its
Managing General Agent had no authority to issue these policies. PXRE Delaware
disagrees with Terra Nova's denial and has filed suite against Terra Nova in the
United States District Court for the District of New Jersey. Both parties
submitted motions of summary judgment, and the court denied both motions in an
order dated as of January 18, 2002. The trial of this matter is expected to
occur during the third quarter of 2002. The aggregate sum of $8.3 million is
included in Other Assets; management has concluded that it is realizable and
that no valuation allowance is necessary.
70
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as part of this Form 10-K:
Page
PXRE Group Ltd.:
Report of Independent Accountants for the year ended
December 31, 2001 F-1
Report of Independent Accountants for the years ended
December 31, 2000 and 1999 F-2
Consolidated Balance Sheets
at December 31, 2001 and 2000 F-3
Consolidated Statements of Operations and
Comprehensive Income for the years
ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of
Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flow
for the years ended December 31, 2001,
2000 and 1999 F-6
Notes to Consolidated Financial
Statements F-7
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On April 3, 2001, we retained KPMG to serve as the Company's
independent auditors subject to the approval of the Company's shareholders at
the Company's Annual General Meeting on June 12, 2001. The retention of KPMG was
recommended by the Audit Committee of the Board of Directors, approved by the
Board of Directors on April 3, 2001 and approved by our shareholders on June 12,
2001.
KPMG replaced our prior auditor, PricewaterhouseCoopers ("PWC"), who
notified us on March 12, 2001, that it would not stand for re-appointment as our
auditor for fiscal year 2001. PWC's decision followed the recommendation of the
Audit Committee of the Company's Board of Directors, and the Board of Directors'
determination on February 13, 2001, to conduct a review of auditing services and
to invite PWC, KPMG and another "Big Five" firm of independent auditors to make
proposals to the Audit Committee for the provision of auditing services at the
Audit Committee's April 2, 2001 meeting. PWC's election not to stand for
re-appointment was reported by the Company on Form 8-K filed on March 16, 2001.
71
During the two fiscal years prior to their appointment, the Company had
no consultations with KPMG concerning: (a) the application of accounting
principles to a specific transaction or the type of opinion that might be
rendered on our financial statements as to which a written report was provided
to us or as to which we received oral advice that was an important factor in
reaching a decision on any accounting, auditing or financial reporting issue; or
(b) any matter that was either the subject of disagreements or a reportable
event within the meaning of Item 304(a)(1) of Regulation S-K.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is contained in the Company's
Proxy Statement, which information is incorporated herein by reference and which
Proxy Statement will be filed within 120 days of the end of the Company's 2001
fiscal year.
Item 11. Executive Compensation
The information required by this Item 11 is contained in the Company's
Proxy Statement, which information is incorporated herein by reference and which
Proxy Statement will be filed within 120 days of the end of the Company's 2001
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is contained in the Company's
Proxy Statement, which information is incorporated herein by reference and which
Proxy Statement will be filed within 120 days of the end of the Company's 2001
fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is contained in the Company's
Proxy Statement, which information is incorporated herein by reference and which
Proxy Statement will be filed within 120 days of the end of the Company's 2001
fiscal year.
72
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements.
---------------------
Page
PXRE Group Ltd.:
Report of Independent Accountants for the year ended
December 31, 2001 F-1
Report of Independent Accountants for the years ended
December 31, 2000 and 1999 F-2
Consolidated Balance Sheets at
December 31, 2001 and 2000 F-3
Consolidated Statements of Operations and
Comprehensive Income for the years
ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flow for the years
ended December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
(2) Financial Statements Schedules.
-------------------------------
Schedule I - Summary of Investments
(The information required by this Schedule is presented in the
financial statements and the notes thereto
included in this Form 10-K). --
Schedule II - Condensed Financial Information of Registrant F-34
Schedule III - Supplementary Insurance Information F-35
Schedule IV - Reinsurance
(The information required by this Schedule is presented in the
financial statements and the notes thereto included in
this Form 10-K.) --
Schedule V - Valuation and Qualifying Accounts and Reserves F-36
Schedule VI - Supplemental Information Concerning
Property/Casualty Insurance Operations F-37
Report of Independent Accountants on the Financial Statement
Schedules and Consent of Independent Accountants F-38
Report of Independent Accountants on the Financial Statement
Schedules and Consent of Independent Accountants F-39
All other financial statement schedules have been omitted as
inapplicable.
73
(3) Exhibits.
---------
3.1 Memorandum of Association and Bye-laws of PXRE Group Ltd. (Exhibits
3.1 and 3.2, respectively, to PXRE Group Ltd.'s Form S-4 Registration Statement
dated August 18, 1999 (File No. 333-85451), and incorporated herein by
reference).
3.2 Description of Stock of PXRE Group Ltd. (Appendix II to PXRE Group
Ltd.'s Proxy Statement for the February 12, 2002 Special Meeting of Shareholders
(File No. 001-15259), and incorporated herein by reference).
(4) Instruments Defining the Rights of Security Holders.
----------------------------------------------------
4.1 Form of Specimen Common Share certificate, par value $1.00 per
share, of PXRE Group Ltd. (Exhibit 4.1 to PXRE Group Ltd.'s Form S-4
Registration Statement dated August 18, 1999 (File No. 333-85451), and
incorporated herein by reference).
4.2 Credit Agreement dated as of December 30, 1998, among PXRE
Corporation, the banks and financial institutions listed on the signature pages
thereto or that subsequently become parties thereto (collectively, the
"Lenders") and First Union National Bank as agent for the Lenders (Exhibit 4.8
to PXRE Corporation's Form 8-K dated January 8, 1999 (File No. 1-12595), and
incorporated herein by reference).
4.3 First Amendment and Waiver to Credit Agreement, dated as of May 18,
1999, among PXRE Corporation, the Lenders and First Union National Bank, Joinder
Agreements dated May 18, 1999 by Fleet National Bank and Credit Lyonnais New
York Branch, Assignments and Acceptances dated May 18, 1999 between First Union
National Bank and Fleet National Bank and between First Union National Bank and
The First National Bank of Chicago, respectively (Exhibit 4.9 to PXRE
Corporation's Form 10-Q for the quarterly period ended June 30, 1999 (File No.
1-12595), and incorporated herein by reference).
4.4 Second Amendment and Waiver to Credit Agreement, dated as of June
25, 1999, among PXRE Corporation, the Lenders and First Union National Bank,
(Exhibit 4.9 to PXRE Corporation's Form lO-Q for the quarterly period ended June
30, 1999 (File No. 1-12595), and incorporated herein by reference).
4.5 First Amended and Restated Credit Agreement, dated as of August 31,
1999, among PXRE Corporation, as Borrower, PXRE Group Ltd. and PXRE (Barbados)
Ltd., as Guarantors, the Lenders named therein and First Union as agent (Exhibit
4.5 to PXRE Group Ltd.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (File No. 1-15259) and incorporated herein by reference).
4.6 First Amendment to First Amended and Restated Credit Agreement,
dated as of March 29, 2000, among PXRE Corporation, as borrower, PXRE Group Ltd.
and PXRE (Barbados) Ltd., as Guarantors, the Lenders named therein and First
Union National Bank as agent (Exhibit 4.6 to the Annual Report on Form 10-K of
PXRE Group Ltd. for the fiscal year ended December 31, 2000 (File No. 1-15259),
and incorporated herein by reference).
74
4.7 Second Amendment To First Amended and Restated Credit Agreement and
Consent, dated as of the 12 day of March, 2002, among PXRE Corporation, PXRE
Group Ltd., and PXRE Reinsurance (Barbados) Ltd., and the Lenders named therein
and First Union National Bank, as agent.
4.8 Indenture, dated as of January 29, 1997, between PXRE Corporation
and First Union National Bank, as Trustee (Exhibit 4.3 to PXRE Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No.
0-15428), and incorporated herein by reference).
4.9 First Supplemental Indenture, dated as of January 29, 1997, between
PXRE Corporation and First Union National Bank, as Trustee, in respect of PXRE
Corporation's 8.85% Junior Subordinated Deferrable Interest Debentures due 2027
(Exhibit 4.4 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1996 (File No. 0- 15428), and incorporated herein
by reference).
4.10 Amended and Restated Declaration of Trust of PXRE Capital Trust I,
dated as of January 29, 1997, among PXRE Corporation, as sponsor, the
Administrators thereof, First Union Bank of Delaware, as Delaware Trustee, First
Union National Bank, as Institutional Trustee, and the holders from time to time
of undivided interests in the assets of PXRE Capital Trust I (Exhibit 4.5 to the
Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1996 (File No. 0-15428), and incorporated herein by reference).
4.11 Capital Securities Guarantee Agreement, dated as of January 29,
1997, between PXRE Corporation and First Union National Bank, as Guarantee
Trustee (Exhibit 4.6 to the Annual Report on Form 10-K of PXRE Corporation for
the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated
herein by reference).
4.12 Common Securities Guarantee Agreement, dated as of January 29,
1997, executed by PXRE Corporation (Exhibit 4.7 to the Annual Report on Form
10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No.
0-15428), and incorporated herein by reference).
4.14 Registration Rights Agreement, dated January 29, 1997, among PXRE
Corporation, PXRE Capital Trust I and Salomon Brothers Inc., as Representative
of the Initial Purchasers (Exhibit 10.1 to the Annual Report on Form 10-K of
PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428),
and incorporated herein by reference).
4.15 Purchase Agreement among PXRE Corporation, PXRE Capital Trust I
and Salomon Brothers Inc., as Representative of the Initial Purchasers, dated
January 24, 1997 (Exhibit 10.2 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and
incorporated herein by reference).
4.16 Share Purchase Agreement, dated as of December 10, 2001, between
PXRE Group Ltd. and certain Purchasers named therein (Appendix I to PXRE Group
Ltd.'s Proxy Statement for the February 12, 2002 Special Meeting of
Shareholders (File No. 001-15259), and incorporated herein by reference).
75
(10) Material Contracts.
-------------------
The material contracts of PXRE are as follows:
10.1 PXRE Reinsurance Company Management Agreement, dated as of January
1, 1990, among PXRE Reinsurance Company and, among others, Merrimack Mutual Fire
Insurance Company ("Merrimack"), Pennsylvania Lumbermens Mutual Insurance
Company ("Pennsylvania Lumbermens"), and NRMA Insurance Limited ("NRMA")
(Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein
by reference); letter dated November 28, 1990 from Pennsylvania Lumbermens
confirming reduced participation (Exhibit 10.7 to PXRE Corporation's Form S-2
Registration Statement dated February 21, 1992, as amended by Amendment No. 1
thereto dated April 1, 1992 and by Amendment No. 2 thereto dated April 13, 1992
and by Amendment No. 3 thereto dated April 23, 1992 (File No. 33-45893), and
incorporated herein by reference); cover notes respecting January 1997 renewals
by Merrimack, Pennsylvania Lumbermens and NRMA and cover note respecting
participation commencing January 1, 1997 by Auto-Owners Insurance Company
("Auto-Owners") (Exhibit 10.3 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and
incorporated herein by reference); cover notes respecting January 1999 renewals
by NRMA, Pennsylvania Lumbermens, Auto-Owners and The Andover Companies (a
Merrimack company) (Exhibit 10.3 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428), and
incorporated herein by reference); cover note respecting participation
commencing January 1, 1999 by the Kyoei Mutual Fire & Marine Insurance Company
(Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Group Ltd. for the
fiscal year ended December 31, 1999 (File No. 1-15259) and incorporated herein
by reference); cover note from Pennsylvania Lumbermans reflecting the amendment
effective January 1, 1996 to put a maximum limit on cessions and the amendment
to the Profit Commission Calculation effective January 1, 1997 (Exhibit 10.1 to
the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 2000 (File No. 1-15259), and incorporated herein by reference);
cover note from Auto-Owners reflecting a change in participation effective
January 1, 1999 (Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Group
Ltd. for the fiscal year ended December 31, 2000 (File No. 1-15259), and
incorporated herein by reference); cover note from The Andover Companies
reflecting a change in participation effective January 1, 1999 (Exhibit 10.1 to
the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 2000 (File No. 1-15259), and incorporated herein by reference); and
cover note from NRMA reflecting a change in participation effective January 1,
2001 (Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Group Ltd. for the
fiscal year ended December 31, 2000 (File No. 1-15259), and incorporated herein
by reference).
10.2 Quota Share Retrocessional Agreement, dated as of January 1, 1994,
between PXRE Reinsurance Company and Trenwick America Reinsurance Corporation
("Trenwick Group") (Exhibit 10.21 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1993 (File No. 0-15428), and
incorporated herein by reference); cover note respecting January 1999 renewal by
Trenwick Group (Exhibit 10.17 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428), and
incorporated herein by reference).
76
10.3 Undertaking, dated September 1, 1998, between PXRE Reinsurance
Company and Select Reinsurance Ltd., Amended and Restated Facultative Obligatory
Quota Share Retrocessional Agreement between PXRE Reinsurance Company and Select
Reinsurance Ltd. and Variable Quota Share Retrocessional Agreement between PXRE
Reinsurance Company and Select Reinsurance Ltd. (Exhibit 10.36 to the Annual
Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31,
1998 (File No. 0-15428), and incorporated herein by reference); letter dated
November 1, 1999 regarding Undertaking extension; and endorsement regarding
Select Reinsurance Ltd. participation for 2000 (Exhibit 10.3 to the Annual
Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31,
1999 (File No. 1-15259), and incorporated herein by reference); and endorsement,
dated January 1, 2001, regarding Select Reinsurance Ltd. participation for 2001
(Exhibit 10.3 to the Annual Report on Form 10-K of PXRE Group Ltd. for the
fiscal year ended December 31, 2000 (File No. 1-15259), and incorporated herein
by reference); and endorsement dated March 21, 2002, regarding Select
Reinsurance Ltd.'s participation for 2002.
10.4 Tax Settlement Agreement, dated June 21, 1991, between PXRE
Corporation, PXRE Reinsurance Company and PM Holdings, Inc. (Exhibit 10.2 to the
Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1991 (File No. 0-15428), and incorporated herein by reference).
10.5 Investment Advisory Agreement between PXRE Reinsurance Company and
Phoenix Investment Counsel, Inc., dated February 25, 1987 and effective as of
January 1, 1987 (Exhibit 10.10 to Amendment No. 1, dated February 19, 1987 to
PXRE Corporation's Form S-1 Registration Statement dated August 29, 1986, as
subsequently amended by Amendment No. 2 thereto dated March 25, 1987 (File No.
33-8406), and incorporated herein by reference); Amendment to Investment
Advisory Agreement between PXRE Reinsurance Company and Phoenix Investment
Counsel, Inc., effective retroactively as of January 1, 1987 (Exhibit 10.3 to
the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1991 (File No. 0-15428), and incorporated herein by reference);
Amendment No. 2 to Investment Advisory Agreement between PXRE Reinsurance
Company and Phoenix Investment Counsel, Inc., effective as of November 1, 1989
(Exhibit 10.4 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein
by reference); Amendment No. 3 to Investment Advisory Agreement between PXRE
Reinsurance Company and Phoenix Investment Counsel, Inc., effective June 1, 1995
(Exhibit 10.26 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1995 (File No. 0-15428), and incorporated herein
by reference); Amendment No. 4 to Investment Advisory Agreement between PXRE
Reinsurance Company and Phoenix Investment Counsel, Inc., dated July 7, 2000.
10.6 Investment Management Agreement, effective January 29, 1997,
between PXRE Corporation and Phoenix Investment Counsel, Inc. (Exhibit 10.29 to
the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1996 (File No. 0-15428), and incorporated herein by reference).
10.7 Investment Management Agreement, effective October 15, 1999,
between PXRE Reinsurance Ltd. and Phoenix Investment Counsel, Inc. (Exhibit 10.9
to the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 1999 (File No. 1-15259), and incorporated herein by reference).
77
10.8 SVO Filings Agreement, dated July 7, 2000, between PXRE
Corporation and Phoenix Investment Partners, Ltd.
10.9 Investment Management Agreement, effective October 15, 1999,
between PXRE Group Ltd. and Phoenix Investment Counsel, Inc.
10.10 Investment Advisory Services Agreement between PXRE Reinsurance
Ltd. and Mariner Investment Group, Inc., dated October 1, 1999 (Exhibit 10.10 to
the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 1999 (File No. 1-15259), and incorporated herein by reference).
10.11 Amended and Restated Agreement Concerning Filing of Consolidated
Federal Income Tax Returns, dated as of August 23, 1993, between PXRE
Corporation and PXRE Reinsurance Company (Exhibit 10.8 to the Annual Report on
Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1993 (File
No. 0-15428), and incorporated herein by reference); Addendum No. 2, dated
November 10, 1994 to the PXRE Corporation Amended and Restated Agreement
Concerning Filing of Consolidated Federal Income Tax Returns (Exhibit 10.22 to
the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1994 (File No. 0-15428), and incorporated herein by reference);
Addendum No. 3, dated as of December 11, 1996 to the PXRE Corporation Amended
and Restated Agreement Concerning Filing of Consolidated Federal Income Tax
Returns (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE Corporation for
the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated
herein by reference); and Addendum No. 4 to the PXRE Group Amended and Restated
Agreement Concerning Filing of Consolidated Federal Income Tax Return between
PXRE Corporation and Transnational Insurance Company (Exhibit 10.9 to the Annual
Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31,
2000 (File No. 1-15259), and incorporated herein by reference).
10.12 Employee Stock Purchase Plan as amended (Appendix C to the
Company's Proxy Statement for the 2000 Annual General Meeting of Shareholders
(File No. 33-08405), and incorporated herein by reference).(M)
10.13 Executive Severance Plan (Exhibit 10.10 to PXRE Group Ltd.'s Form
S-4 Registration Statement dated August 18, 1999 (File No. 333-85451) and
incorporated herein by reference).(M)
10.14 1988 Stock Option Plan as amended (Exhibit A to the first
Prospectus forming part of PXRE's Form S-8 and S-3 Registration Statement dated
June 21, 1990 (File No. 33-35521), and incorporated herein by reference).(M)
10.15 Restated Employee Annual Incentive Bonus Plan, as amended
(Appendix A to PXRE Group Ltd.'s Proxy Statement for the 2000 Annual General
Meeting of Shareholders (File No. 33-08406), and incorporated herein by
reference).(M)
- ----------
(M) indicates a management contract or compensatory plan or arrangement in which
the directors and/or executive officers of PXRE participate.
78
10.16 1992 Officer Incentive Plan as amended (Appendix B to PXRE Group
Ltd.'s Proxy Statement for the 2000 Annual General Meeting of Shareholders (File
No. 33-08406), and incorporated herein by reference).(M)
10.17 Director Stock Plan (Appendix D to PXRE Group Ltd.'s Proxy
Statement for the 2000 Annual General Meeting of Shareholders (File
No. 33-08406), and incorporated herein by reference).(M)
10.18 Director Equity and Deferred Compensation Plan (Appendix E to
PXRE Group Ltd.'s Proxy Statement for the 2000 Annual General Meeting of
Shareholders (File No. 33-08406), and incorporated herein by reference).(M)
10.19 Non-Employee Director Deferred Stock Plan (Exhibit 10.17 to the
Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December
31, 2000 (File No. 1-15259), and incorporated herein by reference).
10.20 Agreement and Plan of Merger, dated as of August 22, 1996,
between PXRE Corporation and Transnational Re Corporation, as amended by
Amendment No. 1 dated as of September 27, 1996 and Amendment No. 2 dated as of
October 24, 1996 (Annex A to PXRE Corporation's Form S-4 Registration Statement
dated October 30, 1996 (File No. 333-15087), and incorporated herein by
reference).
10.21 Quota Share Reinsurance Agreement, dated as of November 30, 2000,
between Transnational Insurance Company and PXRE Reinsurance Company and
Assumption Agreement, dated as of November 30, 2000, between Transnational
Insurance Company and PXRE Reinsurance Company (Exhibit 10.19 to the Annual
Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31,
2000 (File No. 1-15259), and incorporated herein by reference).
10.22 Agreement and Plan of Merger, dated as of July 7, 1999, among
PXRE Corporation, PXRE Group Ltd. and PXRE Merger Corp. (Annex A to PXRE Group
Ltd.'s Form S-4 Registration Statement dated August 18, 1999 (File
No. 333-85451), and incorporated herein by reference).
10.23 Facultative Obligatory Quota Share Retrocessional Agreement,
effective October 1, 1999 between PXRE Reinsurance Company and PXRE Reinsurance
Ltd. and Aggregate Excess of Loss Agreement effective October 1, 1999 between
PXRE Reinsurance Ltd. and PXRE Reinsurance Company (Exhibit 10.25 to the Annual
Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31,
1999 (File No. 1-15259), and incorporated herein by reference).
10.24 First Amendment to Facultative Obligatory Quota Share
Retrocessional Agreement, dated as of December 1, 2000, between PXRE Reinsurance
Ltd. and PXRE Reinsurance Company (Exhibit 10.22 to the Annual Report on Form
10-K of PXRE Group Ltd. for the fiscal year ended December 31, 2000 (File No.
1-15259), and incorporated herein by reference).
79
10.25 Lease, dated May 9, 1994, between Thornall Associates, L.P. and
PXRE Corporation (Exhibit 10.24 to the Annual Report on Form 10-K of PXRE
Corporation for the fiscal year ended December 31, 1994 (File No. 0-15428), and
incorporated herein by reference); Lease, dated November 1, 1999, between
Thornall Associates, L.P. and PXRE Corporation (Exhibit 10.26 to the Annual
Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended December 31,
1999 (File No. 1-15259), and incorporated herein by reference); and Sublease,
dated July 1, 2000, between I-many, Inc. and PXRE Corporation.
10.26 Lloyd's Deposit Trust Deed (Third Party Deposit) dated November
29, 1996 between PXRE Limited and PXRE Reinsurance Company (Exhibit 10.32 to the
Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended
December 31, 1997 (File No. 0-15428), and incorporated herein by reference).
10.27 Lloyd's Security Trust Deed (Letter of Credit and Bank
Guarantee), dated November 29, 1997, between PXRE Limited and Lloyd's of London
(Exhibit 10.34 to the Annual Report on Form 10-K of PXRE Corporation for the
fiscal year ended December 31, 1997 (File No. 0-15428), and incorporated herein
by reference).
10.28 Operating Agreement of Cat Bond Investors L.L.C., effective as of
June 9, 1997, among Cat Bond Investors, Phoenix Home Life Mutual Insurance
Company and PXRE Corporation (Exhibit 10.35 to the Annual Report on Form 10-K of
PXRE Corporation for the fiscal year ended December 31, 1997 (File No. 0-15428),
and incorporated herein by reference).
10.29 Investment Advisory Services Agreement, dated March 14, 2000,
between PXRE Corporation and Mariner Investment Group, Inc., (Exhibit 10.34 to
the Annual Report on Form 10-K of PXRE Group Ltd. for the fiscal year ended
December 31, 1999 (File No. 1-15259), and incorporated herein by reference).
10.30 Investment Accounting Service Agreement, dated January 1, 1999,
by and between Phoenix Home Life Mutual Insurance Company and PXRE Corporation.
10.31 Joint Venture Agreement, dated June 20, 2001, between BF&M
Properties Limited and PXRE Group Ltd.
10.32 Accident Year Aggregate Excess of Loss Reinsurance Agreement,
effective as of July 1, 2001, between PXRE Reinsurance Company and Select
Reinsurance Ltd.
10.33 Reinsurance Agreement, effective January 1, 2001, between PXRE
Reinsurance Ltd. and Select Reinsurance Ltd.
10.34 Swap Confirmation, effective as of June 29, 2001, between PXRE
Reinsurance Ltd. and Select Reinsurance Ltd.
10.35 Retention Bonus Letter Agreements, dated December 12, 2001,
between PXRE Reinsurance Company and each of Michael Bleisnick, James Dore,
Gordon Forsyth III, Gerald L. Radke and Jeffrey L. Radke. (M)
80
(11) Statement setting forth computation of earnings per share. The
information required by this Exhibit is presented in the financial statements
and the notes thereto included in this Form 10-K.
(12) Statement setting forth computation of ratios. Attached hereto as
Exhibit 12.
(21) List of Subsidiaries. At December 31, 2001, PXRE Group Ltd. had
the following subsidiaries: PXRE Reinsurance Ltd., a Bermuda insurance company;
PXRE Reinsurance (Barbados) Ltd., a Barbados company; PXRE Corporation, a
Delaware corporation; PXRE Reinsurance Company, a Connecticut insurance company;
PXRE Capital Trust I, a Delaware statutory business trust; PXRE Limited, an
English company (the sole member of Syndicate 1224 at Lloyd's of London); PXRE
Trading Corporation, a Delaware corporation; TREX Trading Corporation, a
Delaware corporation; PX/TX Associates, a Delaware general partnership (of which
PXRE Trading and TREX Trading are the only partners); CAT Fund, L.P., a Delaware
limited partnership (of which PX/TX Associates is the sole general partner and
PXRE Trading Corporation and TREX Trading Corporation are the only limited
partners); Cat Bond Investors L.L.C. (of which PXRE Corporation and Phoenix Home
Life Mutual Insurance Company are the only members); PXRE Solutions Inc., a
Connecticut corporation; PXRE Direct Underwriting Managers, Inc., a Connecticut
corporation; PXRE Underwriting Managers, Inc., a Virginia corporation and Nexus
Management Advisors LLC, a Delaware limited liability company of which PXRE
Corporation holds 70% of the Membership interests. (See the discussion in this
Form 10-K under the captions "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations.")
(23) Consents of Experts and Counsel. The consents of
PricewaterhouseCoopers LLP and KPMG, independent accountants to the Company, are
included as part of Item 14(a)(2) of this Form 10-K.
(24) Power of Attorney. Copies of the powers of attorney executed by
each of F. Sedgwick Browne, Robert W. Fiondella, Franklin D. Haftl, Bernard
Kelly, Halbert D. Lindquist, Wendy Luscombe, Philip R. McLoughlin and David W.
Searfoss are attached hereto as Exhibit 24.
(b) Current Reports. None.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, PXRE Group Ltd. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PXRE GROUP LTD.
By: /s/ Gerald L. Radke
Gerald L. Radke
Its Chairman of the
Board, President and
Chief Executive Officer
Date: March 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of PXRE
Group Ltd. and in the capacity and on the dates indicated:
By: /s/ Gerald L. Radke By: /s/ James F. Dore
Gerald L. Radke James F. Dore
Its Chairman of the Board, Its Executive Vice
President and Chief President and Chief
Executive Officer Financial Officer
(Principal Executive (Principal Financial
Officer) and Director Officer and Principal
Accounting Officer)
Date: March 27, 2002 Date: March 27, 2002
By* /s/ F. Sedgwick Browne By* /s/ Franklin D. Haftl
-------------------------- ------------------------
F. Sedgwick Browne Franklin D. Haftl
Director Director
Date: March 27, 2002 Date: March 27, 2002
By* /s/ Robert W. Fiondella By* /s/ Wendy Luscombe
-------------------------- ------------------------
Robert W. Fiondella Wendy Luscombe
Director Director
Date: March 27, 2002 Date: March 27, 2002
82
By* /s/ Bernard Kelly By* /s/ Philip R. McLoughlin
-------------------------- ------------------------
Bernard Kelly Philip R. McLoughlin
Director Director
Date: March 27, 2002 Date: March 27, 2002
By* /s/ David W. Searfoss By* /s/ Halbert D. Linquist
-------------------------- ------------------------
David W. Searfoss Halbert D. Lindquist
Director Director
Date: March 27, 2002 Date: March 27, 2002
By* /s/ Gerald L. Radke
Gerald L. Radke
Attorney-in-Fact
83
Independent Auditors' Report
The Board of Directors and Stockholders
PXRE Group Ltd.
We have audited the accompanying consolidated balance sheet of PXRE Group Ltd.
and subsidiaries as of December 31, 2001, and the related consolidated statement
of operations and comprehensive income, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PXRE Group Ltd. and
subsidiaries as of December 31, 2001, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements PXRE Group Ltd.
adopted the provisions of FAS 133 "Accounting For Derivative Instruments and
Hedging Activities," during 2001.
KPMG
Hamilton, Bermuda
February 12, 2002
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of PXRE Group Ltd.
(Successor Registrant of PXRE Corporation)
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income, of
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of PXRE Group Ltd. (Successor Registrant of PXRE
Corporation) and its subsidiaries at December 31, 2000, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers
Hamilton, Bermuda
February 12, 2001
F-2
PXRE
Group Ltd. Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31,
2001 2000
--------------- ---------------
Assets Investments:
Available for sale:
Fixed maturities, available-for-sale, at fair value (amortized
cost $218,635,000 and $281,474,000, respectively) $ 219,482,012 $ 281,721,678
Equity securities, at fair value (cost $650,000 and $16,396,000,
respectively) 649,947 16,260,089
Short-term investments
Hedge funds 16,736,629 23,364,843
Non-hedge funds 153,503,260 48,103,034
Trading securities
Hedge funds (cost $20,250,000 and $23,250,000, respectively) 25,764,453 27,819,800
Limited partnerships, at equity
Hedge funds (cost $48,760,000 and $39,264,000, respectively) 73,068,447 58,570,720
Non-hedge funds (cost $16,430,000 and $27,506,000, respectively) 19,140,869 30,251,802
--------------- ---------------
Total investments 508,345,617 486,091,966
Cash 22,887,816 19,008,897
Accrued investment income 4,149,115 5,010,538
Receivables:
Unreported premiums 82,455,075 54,607,126
Balances due from intermediaries and brokers, net 11,147,662 20,074,909
Other receivables 20,175,542 23,498,041
Reinsurance recoverable 262,114,615 117,196,459
Ceded unearned premiums 18,163,476 13,764,781
Deferred acquisition costs 7,312,164 9,697,003
Current income tax recoverable 4,081,010 2,978,556
Deferred tax asset 21,037,532 15,002,429
Other assets 44,068,546 17,816,090
--------------- ---------------
Total assets $ 1,005,938,170 $ 784,746,795
=============== ===============
Liabilities Losses and loss expenses $ 453,705,152 $ 251,619,635
Unearned premiums 46,334,848 49,548,368
Debt payable 55,000,000 65,000,000
Reinsurance balances payable 78,177,819 34,311,963
Other liabilities 33,410,162 25,355,172
--------------- ---------------
Total liabilities 666,627,981 425,835,138
--------------- ---------------
Minority interest in consolidated subsidiary:
Company-obligated mandatorily redeemable capital trust
pass-through securities of subsidiary trust holding solely a
company-guaranteed related subordinated debt 99,530,064 99,525,376
--------------- ---------------
Stockholders' Serial preferred stock, $1.00 par value -- 10,000,000 shares
Equity authorized respectively; 0 shares issued and outstanding 0 0
Common stock, $1.00 par value -- 50,000,000 shares
authorized, 11,872,842 and 11,820,079 shares
issued and outstanding, respectively 11,872,842 11,820,079
Additional paid-in capital 175,405,548 175,014,314
Accumulated other comprehensive income, net of deferred income
tax benefit (expense) of $37,000 and $(39,000), respectively (298,764) (69,147)
Retained earnings 55,472,622 76,301,524
Restricted stock at cost (236,417 and 386,047 shares) (2,672,123) (3,680,489)
--------------- ---------------
Total stockholders' equity 239,780,125 259,386,281
--------------- ---------------
Total liabilities and stockholders' equity $ 1,005,938,170 $ 784,746,795
=============== ===============
The accompanying notes are an integral part of these statements.
F-3
PXRE
Group Ltd. Consolidated Statements of Operations and Comprehensive Income
- --------------------------------------------------------------------------------
Years Ended December 31,
2001 2000 1999
------------- ------------- -------------
Revenues Net premiums earned $ 162,125,059 $ 160,205,927 $ 128,503,110
Net investment income 30,036,040 30,036,808 47,172,616
Net realized investment gains (losses) 4,023,458 3,190,857 (3,765,816)
Management fees 5,785,658 5,483,689 3,590,337
------------- ------------- -------------
201,970,215 198,917,281 175,500,247
------------- ------------- -------------
Losses and Losses and loss expenses incurred 151,703,025 137,764,938 159,259,413
Expenses Commissions and brokerage 30,350,016 34,898,983 27,701,644
Other operating expenses 29,606,408 35,406,799 30,052,310
Interest expense 4,423,493 4,777,795 3,915,098
Minority interest in consolidated subsidiary 8,877,477 8,875,239 8,790,106
------------- ------------- -------------
224,960,419 221,723,754 229,718,571
------------- ------------- -------------
Loss before income taxes and cumulative
effect of accounting change (22,990,204) (22,806,473) (54,218,324)
Income tax benefit 4,703,959 12,006,500 12,774,971
------------- ------------- -------------
Loss before cumulative effect of accounting change (18,286,245) (10,799,973) (41,443,353)
Cumulative effect of accounting change, net of tax expense
(benefit) of $171,959, $0, and $(374,381), respectively 319,353 0 (695,278)
------------- ------------- -------------
Net loss $ (17,966,892) $ (10,799,973) $ (42,138,631)
============= ============= =============
Comprehensive Other comprehensive loss, net of tax:
Income Net unrealized appreciation (depreciation) on investments 492,681 6,682,855 (6,758,255)
Net unrealized depreciation on cash flow hedge (722,298) 0 0
------------- ------------- -------------
Comprehensive loss $ (18,196,509) $ (4,117,118) $ (48,896,886)
============= ============= =============
Per Share Basic:
Net loss before cumulative effect of accounting change $ (1.58) $ (0.95) $ (3.58)
Cumulative effect of accounting change 0.03 0.00 (0.06)
------------- ------------- -------------
Net loss $ (1.55) $ (0.95) $ (3.64)
============= ============= =============
Average shares outstanding 11,578,219 11,393,652 11,568,494
============= ============= =============
Diluted:
Net loss before cumulative effect of accounting change $ (1.58) $ (0.95) $ (3.58)
Cumulative effect of accounting change 0.03 0.00 (0.06)
------------- ------------- -------------
Net loss $ (1.55) $ (0.95) $ (3.64)
============= ============= =============
Average shares outstanding 11,578,219 11,393,652 11,568,494
============= ============= =============
The accompanying notes are an integral part of these statements.
F-4
PXRE
Group Ltd. Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
Years Ended December 31, 2001, 2000 and 1999
Additional
Preferred Common Paid-in Treasury
Stock Stock Capital Stock
--------------- --------------- --------------- ---------------
Balance at December 31, 1998 $ 0 $ 149,382 $ 259,147,554 $ (61,420,025)
Net loss
Unrealized depreciation on investments, net
Increase in par value upon redomestication 11,501,792 (11,501,792)
Issuance of common stock 28,595 4,928,345
Repurchase of common stock (17,169,725)
Cancellation of treasury stock (78,697,992) 78,697,992
Issuance of restricted stock
Amortization of restricted stock
Dividends paid to common stockholders
Elimination of quarter lag in results of
UK subsidiary
Other (193,313) (108,242)
--------------- --------------- --------------- ---------------
Balance at December 31, 1999 0 11,679,769 173,682,802 0
Net loss
Unrealized appreciation on investments, net
Issuance of common stock 140,310 1,802,814
Repurchase/cancellation of common stock (517,145)
Issuance of restricted stock
Amortization of restricted stock
Dividends paid to common stockholders
Other 45,843
--------------- --------------- --------------- ---------------
Balance at December 31, 2000 0 11,820,079 175,014,314 0
Net loss
Unrealized appreciation on investments, net
Unrealized depreciation on cash flow hedge, net
Issuance of common stock 52,763 3,367,665
Repurchase/cancellation of common stock (2,936,573)
Issuance of restricted stock
Amortization of restricted stock
Dividends paid to common stockholders
Other (39,858)
--------------- --------------- --------------- ---------------
Balance at December 31, 2001 $ 0 $ 11,872,842 $ 175,405,548 $ 0
=============== =============== =============== ===============
Accumulated
Other Total
Comprehensive Retained Restricted Stockholders'
Income Earnings Stock Equity
--------------- --------------- --------------- ---------------
Balance at December 31, 1998 $ 6,253 $ 139,842,939 $ (3,350,597) $ 334,375,506
Net loss (42,138,631) (42,138,631)
Unrealized depreciation on investments, net (6,758,255) (6,758,255)
Increase in par value upon redomestication 0
Issuance of common stock 4,956,940
Repurchase of common stock (17,169,725)
Cancellation of treasury stock 0
Issuance of restricted stock (4,385,780) (4,385,780)
Amortization of restricted stock 2,409,665 2,409,665
Dividends paid to common stockholders (7,629,924) (7,629,924)
Elimination of quarter lag in results of
UK subsidiary (141,764) (141,764)
Other 62,506 (239,049)
--------------- --------------- --------------- ---------------
Balance at December 31, 1999 (6,752,002) 89,932,620 (5,264,206) 263,278,983
Net loss (10,799,973) (10,799,973)
Unrealized appreciation on investments, net 6,682,855 6,682,855
Issuance of common stock 1,943,124
Repurchase/cancellation of common stock (517,145)
Issuance of restricted stock (1,276,445) (1,276,445)
Amortization of restricted stock 2,632,357 2,632,357
Dividends paid to common stockholders (2,831,123) (2,831,123)
Other 227,805 273,648
--------------- --------------- --------------- ---------------
Balance at December 31, 2000 (69,147) 76,301,524 (3,680,489) 259,386,281
Net loss (17,966,892) (17,966,892)
Unrealized appreciation on investments, net 492,681 492,681
Unrealized depreciation on cash flow hedge, net (722,298) (722,298)
Issuance of common stock 3,420,428
Repurchase/cancellation of common stock (2,936,573)
Issuance of restricted stock (1,641,926) (1,641,926)
Amortization of restricted stock 2,404,040 2,404,040
Dividends paid to common stockholders (2,862,010) (2,862,010)
Other 246,252 206,394
--------------- --------------- --------------- ---------------
Balance at December 31, 2001 $ (298,764) $ 55,472,622 $ (2,672,123) $ 239,780,125
=============== =============== =============== ===============
The accompanying notes are an integral part of these statements.
F-5
PXRE
Group Ltd. Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Years Ended December 31,
2001 2000 1999
------------- ------------- -------------
Cash Flows Net loss $ (17,966,892) $ (10,799,973) $ (42,138,631)
from Operating Adjustments to reconcile net income to net cash
Activities provided (used) by operating activities:
Losses and loss expenses 202,085,517 (9,931,716) 158,958,959
Unearned premiums (7,612,215) 13,147,010 15,512,597
Deferred acquisition costs 2,384,839 (1,887,032) (3,687,368)
Receivables (19,024,679) (10,580,718) (29,151,184)
Reinsurance balances payable 43,865,855 14,261,590 10,385,580
Reinsurance recoverable (144,918,154) (10,494,153) (70,627,866)
Income tax recoverable (5,285,417) 7,959,103 3,132,135
Equity in earnings of limited partnerships (10,628,716) (9,495,048) (23,608,098)
Other (17,804,304) (6,511,284) (1,263,685)
------------- ------------- -------------
Net cash provided (used) by operating activities 25,095,834 (24,332,221) 17,512,439
------------- ------------- -------------
Cash Flows Cost of fixed maturity investments (215,453,502) (143,346,661) (129,792,417)
from Investing Fixed maturity investments matured/disposed 282,217,794 189,268,437 103,388,412
Activities Payable for securities 104,524 (2,076,481) 2,076,557
Cost of equity securities (3,834,223) (24,235,314) (9,835,512)
Equity securities disposed 18,153,640 36,623,456 28,382,068
Net change in short-term investments (96,400,226) (18,294,998) 12,717,651
Other invested assets and trading portfolio disposed 31,893,718 23,769,726 30,391,215
Other invested assets and trading portfolio purchased (24,968,235) (20,641,691) (56,883,257)
------------- ------------- -------------
Net cash (used) provided by investing activities (8,286,510) 41,066,474 (19,555,283)
------------- ------------- -------------
Cash Flows Proceeds from issuance of common stock 1,104,443 686,943 505,795
from Financing Cash dividends paid to common stockholders (2,862,010) (2,831,121) (7,629,924)
Activities Repayment of debt (10,000,000) (10,000,000) 0
Proceeds of debt 0 0 25,000,000
Cost of stock repurchased (1,172,838) (316,218) (17,215,460)
------------- ------------- -------------
Net cash (used) provided by financing activities (12,930,405) (12,460,396) 660,411
------------- ------------- -------------
Net change in cash 3,878,919 4,273,857 (1,382,433)
Cash, beginning of period 19,008,897 14,735,040 16,117,473
------------- ------------- -------------
Cash, end of period $ 22,887,816 $ 19,008,897 $ 14,735,040
============= ============= =============
The accompanying notes are an integral part of these statements.
F-6
PXRE Notes to Consolidated Financial Statements
Group Ltd. Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Basis of Presentation and Consolidation
The consolidated financial statements have been prepared in U.S.
dollars in conformity with accounting principles generally accepted ("GAAP") in
the United States of America. These statements reflect the consolidated
operations of PXRE Group Ltd. (the "Company" or collectively with its various
subsidiaries, "PXRE") and its wholly-owned subsidiaries, including PXRE
Corporation ("PXRE Delaware"), PXRE Reinsurance Company ("PXRE Reinsurance"),
PXRE Reinsurance Ltd. ("PXRE Bermuda"), PXRE Reinsurance (Barbados) Ltd. ("PXRE
Barbados"), PXRE Solutions Inc. ("PXRE Solutions"), PXRE Direct Underwriting
Managers, Inc., PXRE Trading Corporation, TREX Trading Corporation, Cat Fund
L.P., PXRE Capital Trust I and PXRE Limited. All material intercompany
transactions have been eliminated in preparing these consolidated financial
statements.
The Company was formed in 1999 as part of the reorganization of PXRE
Delaware, a Delaware corporation. Prior to the reorganization, PXRE Delaware was
the ultimate parent holding company of the various PXRE companies and its common
shares were publicly traded on the New York Stock Exchange. As a result of the
reorganization, the Company became the ultimate parent holding company of PXRE
Delaware and the holders of PXRE Delaware common stock automatically became
holders of the same number of the Company's common shares. The reorganization
was consummated at the close of business on October 5, 1999 and, on October 6,
1999, the Company's common shares began to trade on the New York Stock Exchange
under the symbol PXT. The reorganization also involved the establishment of a
Bermuda-based reinsurance subsidiary, PXRE Bermuda, operations in Barbados
through PXRE Barbados and the formation of a reinsurance intermediary, PXRE
Solutions.
During the fourth quarter of 2000, Transnational Insurance Company
("Transnational Insurance"), an excess and surplus lines carrier which had
specialized in non-standard and excess property insurance risks, distributed
substantially all of its assets and liabilities to PXRE Reinsurance and the
remaining corporate shell was sold on December 21, 2000. The sale followed
PXRE's withdrawal from the excess and surplus lines market in the first quarter
of 2000. Net premiums earned on this business were not material in 1999 and
2000.
GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Certain reclassifications have been made for 2000 and 1999 to conform
to the 2001 presentation.
F-7
Premiums Assumed and Ceded
Premiums on reinsurance business assumed are recorded as earned on a
pro rata basis over the contract period based on estimated subject premiums.
Adjustments based on actual subject premium are recorded once ascertained. The
portion of premiums written relating to unexpired coverages at the end of the
period is recorded as unearned premiums. Reinsurance premiums ceded are recorded
as incurred on a pro rata basis over the contract period.
Assumed reinsurance and retrocessional contracts that do not both
transfer significant insurance risk and result in the reasonable possibility
that the Company or its retrocessionaires may realize a significant loss from
the insurance risk assumed are accounted for as deposits with interest income or
expense credited or charged to the contract deposits. These contract deposits
are included in other assets and other liabilities in the Consolidated Balance
Sheets.
Deferred Acquisition Costs
Acquisition costs consist of commission and brokerage expenses incurred
in connection with contract issuance, net of acquisition costs ceded and
management fees. These costs are deferred and amortized over the period in which
the related premiums are earned. Deferred acquisition costs are reviewed to
determine that they do not exceed recoverable amounts, after considering
investment income.
Management Fees
Management fees are recorded as earned on a pro-rata basis over the
contract period under various arrangements whereby PXRE acts as underwriting
manager for other insurers and reinsurers. These fees are initially based on
premium volume, but are adjusted in some cases through contingent profit
commissions related to underwriting results measured over a period of years.
Liabilities for Losses and Loss Expense
Liabilities for losses and loss expenses are established in amounts
estimated to settle incurred losses. Losses and loss expense liabilities are
based on individual case estimates provided for reported losses for known events
and estimates of incurred but not reported losses. Losses and loss expense
liabilities are necessarily based on estimates and the ultimate liabilities may
vary from such estimates. Any adjustments to these estimates are reflected in
income when known. Reinsurance recoverable on paid losses and reinsurance
recoverable on unpaid losses are reported as assets. Reinsurance recoverable on
paid losses represent amounts recoverable from retrocessionaires at the end of
the period for gross losses previously paid. Provisions are established for all
reinsurance recoveries which are considered doubtful.
In 2000, PXRE commenced assuming structured product contracts in PXRE
Bermuda, which was a new line of business for PXRE. Such contracts may be
recorded on a discounted basis. At December 31, 2001, reserves related to these
contracts amounting to $3,875,000 were discounted by $325,000 at a rate of 5.06%
over 18 years. At December 31, 2000, $4,491,000 of these reserves were
discounted by $849,000 at a rate of 6% over 21 years.
F-8
Premiums on assumed retroactive contracts are earned when written with
a corresponding liability established for the estimated loss the Company
ultimately expects to pay-out. The initial loss is deferred and amortized into
expense over the expected pay-out period using the interest method. Premiums on
ceded retroactive contracts are earned when written with a corresponding
reinsurance recoverable established for the amount of reserves ceded. The
initial gain is deferred and amortized into income over the expected pay-out
period using the interest method.
Investments
Fixed maturity investments and equity securities are considered
available-for-sale or trading and are reported at fair value. Unrealized gains
and losses associated with the available-for-sale portfolio, as a result of
temporary changes in fair value during the period such investments are held, are
reflected net of income taxes in stockholders' equity. Unrealized losses which
are deemed other than temporary are charged to operations. Unrealized gains and
losses associated with the trading portfolio, as a result of temporary changes
in fair value during the period such investments are held, are recognized in
investment income.
Short-term investments, which have an original maturity of one year or
less, are carried at amortized cost which approximates fair value. Short-term
investments also includes a limited partnership that invests primarily in
marketable fixed income securities and provides for fund withdrawals upon 30
days notice; this partnership is reported under the equity method.
Investments in limited partnerships are reported under the equity
method, which includes the cost of the investment and subsequent proportional
share of the partnership earnings. Under the equity method, earnings are
recorded in investment income. Realized gains or losses on disposition of
investments are determined on the basis of specific identification. The
amortization of premiums and accretion of discount for fixed maturity
investments is computed utilizing the interest method. The effective yield under
the interest method is adjusted for anticipated prepayments.
Fair Value of Financial Instruments
Fair values of certain assets and liabilities are based on published
market values, if available, or estimates based upon fair values of similar
issues. Fair values are reported in Notes 3 and 4.
Debt Issuance Costs
Debt issuance costs associated with the issuance of $100 million 8.85%
Capital Trust Pass-through Securities 'sm' (TRUPS 'sm') and the issuance of a
note under a $75 million Credit Agreement are being amortized over the term of
the related outstanding debt using the interest method.
F-9
Foreign Exchange
Foreign currency assets and liabilities are translated at the exchange
rate in effect at the balance sheet date. Resulting gains and losses are
reflected in income for the period.
Federal Income Taxes
Deferred tax assets and liabilities reflect the expected future tax
consequences of temporary differences between carrying amounts and the tax bases
of PXRE's assets and liabilities.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive
income. Other comprehensive income consists of the change in the net unrealized
appreciation or depreciation of investments and a cash flow hedge, net of tax.
Earnings Per Share
Basic earnings per share are determined by dividing net earnings by the
weighted average number of common shares outstanding. On a diluted basis both
net earnings and shares outstanding are adjusted to reflect the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity, unless the effect
of the assumed conversion is anti-dilutive.
Stock-Based Compensation
PXRE accounts for its stock options in accordance with the provisions
of Accounting Principles Board Opinion No. 25.
Reporting Year for U.K. Operations
In 1999, PXRE changed the reporting period for its U.K. operations from
a fiscal year ending September 30 to a calendar year ending December 31. The
results of operations for the period from October 1, 1998 to December 31, 1998
amounted to a loss of approximately $140,000. This loss was charged to retained
earnings during 1999 in order to report only 12 months' operating results.
Organizational and Start-Up Costs
Commencing in 1999, PXRE adopted Statement of Position 98-5 "Reporting
on the Costs of Start-Up Activities" issued by the American Institute of
Certified Public Accountants. This statement requires that companies expense
organizational and start-up costs as incurred, and that initial application be
reported as the cumulative effect of a change in accounting principle. As a
result, PXRE expensed $695,000 of such expenses, net after tax, in 1999.
F-10
Accounting for Derivative Instruments and Hedging Activities
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which establishes accounting and reporting standards for
derivative instruments, including certain instruments embedded in other
contracts. Accordingly, all derivatives are recognized as either assets or
liabilities in the balance sheet and measured at fair value. Gains or losses
from changes in the derivative values are accounted for based on how the
derivative was used and whether it qualifies for hedge accounting.
During the first quarter of 2001, PXRE adopted SFAS No. 133. The
cumulative effect of adoption was income of $319,000, net of tax.
2. Underwriting Programs
Premiums written and earned for the years ended December 31, 2001, 2000
and 1999 are as follows:
2001 2000 1999
--------------- --------------- ---------------
Premiums written
Assumed $ 290,213,181 $ 268,924,177 $ 218,507,032
Direct 0 65,389 2,842,139
--------------- --------------- ---------------
Gross premiums written 290,213,181 268,989,566 221,349,171
Ceded premiums written (135,735,007) (96,288,479) (82,504,050)
--------------- --------------- ---------------
Net premiums written $ 154,478,174 $ 172,701,087 $ 138,845,121
=============== =============== ===============
2001 2000 1999
--------------- --------------- ---------------
Premiums earned
Assumed $ 293,431,185 $ 259,760,642 $ 198,342,728
Direct 10,551 1,527,053 2,113,403
Ceded (131,316,677) (101,081,768) (71,953,021)
--------------- --------------- ---------------
Net premiums earned $ 162,125,059 $ 160,205,927 $ 128,503,110
=============== =============== ===============
Premiums written were assumed principally through reinsurance brokers
or intermediaries. In 2001, 2000 and 1999 four reinsurance intermediaries
individually accounted for more than 10% of gross premiums written, and
collectively accounted for approximately 60%, 56% and 43% of gross premiums
written, respectively.
Included in ceded premiums written are $57,971,000, $48,931,000 and
$29,466,000 of premiums ceded in 2001, 2000 and 1999, respectively to a
reinsurer, Select Reinsurance Ltd., whose Board of Directors includes PXRE's
Chief Executive Officer and an Executive Vice-President, both of whom are
shareholders of the reinsurer. Net assets due from the reinsurer at December 31,
2001, are $102,037,000, of which $82,140,000 are secured by a trust agreement
and funds held. PXRE also purchases retrocessional coverage for its own
protection, depending on market conditions. In the event that retrocessionaires
are unable to meet their contractual obligations, PXRE would be liable for such
defaulted amounts.
F-11
Activity in the net losses and loss expense liability for the years
ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
--------------- --------------- ---------------
Net balance at January 1 $ 155,503,178 $ 160,516,230 $ 69,242,352
Adjustment to eliminate quarter lag on U.K. subsidiary 0 0 (1,677,526)
Incurred related to:
Current year 133,851,543 79,534,035 139,478,230
Prior years 17,851,482 58,230,903 19,781,183
--------------- --------------- ---------------
Total incurred 151,703,025 137,764,938 159,259,413
--------------- --------------- ---------------
Paid related to:
Current year 46,961,138 14,708,791 17,855,659
Prior years 52,504,584 131,643,666 48,452,350
--------------- --------------- ---------------
Total paid 99,465,722 146,352,457 66,308,009
--------------- --------------- ---------------
Net asset related to retroactive reinsurance assumed 58,048 3,574,467 0
Net balance at December 31 207,798,529 155,503,178 160,516,230
Reinsurance recoverable on unpaid losses and loss expenses 245,906,623 96,116,457 101,035,123
--------------- --------------- ---------------
Gross balance at December 31 $ 453,705,152 $ 251,619,635 $ 261,551,353
=============== =============== ===============
As a result of changes in estimates of insured events in prior years,
the provision for losses and loss expenses experienced deficiencies of
$17,851,000 on a net basis in 2001, primarily due to strengthening of reserves
in casualty, marine and aerospace lines of business and development on a number
of significant catastrophes. Net losses and loss expenses were unfavorably
affected by an increase to reserves of $58,231,000 in 2000 primarily due to
French Storms Lothar and Martin and unfavorably impacted by an increase to
reserves of $19,781,000 in 1999.
F-12
3. Investments
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of investments in fixed maturities and equity securities as
of December 31, 2001 and 2000 are shown below:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
2001
United States government securities $ 48,556,940 $ 50,848 $ 194,871 $ 48,412,917
Foreign government securities 5,611,129 0 255,829 5,355,300
United States government sponsored
agency and mortgaged-backed
securities 53,564,163 969,922 0 54,534,085
Other mortgage and asset-backed
securities 20,589,497 112,444 82,367 20,619,574
Obligations of states and political
subdivisions 33,235,092 1,841,931 6,376 35,070,647
Public utilities and industrial and
miscellaneous securities 57,078,018 127,454 1,715,983 55,489,489
--------------- --------------- --------------- ---------------
Total fixed maturities $ 218,634,839 $ 3,102,599 $ 2,255,426 $ 219,482,012
=============== =============== =============== ===============
Equity securities $ 649,947 $ 0 $ 0 $ 649,947
=============== =============== =============== ===============
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
2000
United States government securities $ 48,756,503 $ 327,586 $ 325,403 $ 48,758,686
Foreign government securities 5,600,384 0 942,404 4,657,980
United States government sponsored
agency and mortgage-backed
securities 32,750,818 73,193 165,058 32,658,953
Other mortgage and asset-backed
securities 66,292,166 1,104,170 227,785 67,168,551
Obligations of states and political
subdivisions 78,359,519 2,645,971 121,964 80,883,526
Public utilities and industrial and
miscellaneous securities 49,714,409 176,277 2,296,704 47,593,982
--------------- --------------- --------------- ---------------
Total fixed maturities $ 281,473,799 $ 4,327,197 $ 4,079,318 $ 281,721,678
=============== =============== =============== ===============
Equity securities $ 16,395,580 $ 0 $ 135,491 $ 16,260,089
=============== =============== =============== ===============
There was one investment, other than in the U.S. government and agency
sectors, which exceeded 10% of stockholders' equity at December 31, 2001 and
2000, amounting to 10.4% and 10.2%, respectively.
Included in other comprehensive income in 2001 is $493,000 of net
unrealized appreciation on investments which includes $4,758,000 of unrealized
net gains arising during the year less $4,023,000 of reclassification
adjustments for net gains, included in net income.
F-13
Proceeds, gross realized gains, and gross realized losses from sales of
fixed maturity investments before maturity date or securities that prepay and
from sales of equity securities were as follows:
2001 2000 1999
--------------- --------------- ---------------
Proceeds from Sale
Fixed maturities $ 279,217,794 $ 186,380,495 $ 86,040,075
=============== =============== ===============
Equity securities $ 18,153,640 $ 36,623,456 $ 28,382,068
=============== =============== ===============
Gross Gains
Fixed maturities $ 7,307,102 $ 222,669 $ 1,936,898
Equity securities 101,224 4,999,134 4,307,178
Other 211,063 405,260 3,661,831
--------------- --------------- ---------------
7,619,389 5,627,063 9,905,907
--------------- --------------- ---------------
Gross Losses
Fixed maturities (1,814,768) (1,504,800) (6,316,161)
Equity securities (1,200,608) (929,848) (687,055)
Other (580,555) (1,558) (6,668,507)
--------------- --------------- ---------------
(3,595,931) (2,436,206) (13,671,723)
--------------- --------------- ---------------
Net realized gains (losses) $ 4,023,458 $ 3,190,857 $ (3,765,816)
=============== =============== ===============
Included in gross losses is the realized loss on the other than
temporary write down of an equity security and a fixed maturity bond in
technical default for 2001 in the amount of $750,000 and $1,642,000,
respectively.
The components of net investment income were as follows:
2001 2000 1999
--------------- --------------- ---------------
Fixed maturity investments $ 16,331,148 $ 18,207,003 $ 19,096,242
Equity securities 269,411 1,054,802 1,282,199
Short-term investments 6,736,441 3,154,791 1,984,366
Hedge funds and other limited
partnerships 10,628,716 9,629,676 25,703,702
--------------- --------------- ---------------
33,965,716 32,046,272 48,066,509
Less investment expenses 1,709,458 2,009,464 893,893
Less interest expenses on
funds held 2,220,218 0 0
--------------- --------------- ---------------
Net investment income $ 30,036,040 $ 30,036,808 $ 47,172,616
=============== =============== ===============
F-14
Investment expenses principally represent fees paid to Phoenix
Investment Partners, Ltd., a subsidiary of Phoenix Life Insurance Company
(formerly Phoenix Home Life Mutual Insurance Company) which owned 9.5%, 9.6% and
7.8% of the outstanding common stock of PXRE at December 31, 2001, 2000 and
1999, respectively, and fees paid to Mariner Investment Group. The sole
shareholder of Mariner Investment Group is the Chairman and a founding
shareholder of Select Reinsurance Ltd. which owned approximately 9.4%, 9.4% and
9.5% of the outstanding common stock of PXRE at December 31, 2001, 2000, and
1999, respectively.
Investment Maturity Distributions
The amortized cost and estimated fair value of fixed maturity
investments at December 31, 2001 by contractual maturity date is shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized Fair
Cost Value
--------------- ---------------
Fixed Maturity
One year or less $ 3,785,871 $ 3,964,571
Over 1 through 5 years 73,816,228 75,080,356
Over 5 through 10 years 93,720,618 93,141,480
Over 10 through 20 years 1,997,777 2,254,498
Over 20 years 16,166,143 15,809,031
United States government agency and
other mortgage and asset-backed securities 29,148,202 29,232,076
--------------- ---------------
Total $ 218,634,839 $ 219,482,012
=============== ===============
In addition to fixed maturities, PXRE held $153,503,000 and $48,103,000
of non-hedge short-term investments at December 31, 2001 and 2000, respectively,
comprised principally of high-grade commercial paper, U.S. Treasury bills and
other investments with original maturities of one year or less.
F-15
PXRE also held $115,569,000 and $109,755,000 of limited partnership
hedge funds and trading portfolio assets including Mariner funds at December 31,
2001 and 2000, respectively, that are accounted for under the equity method or
at fair value, as follows:
2001 2000
----------------------------------- -----------------------------------
$ Ownership % $ Ownership %
--------------- --------------- --------------- ---------------
Mariner Partners 16,736,629 11.2 23,364,843 34.7
Mariner Select L.P. 14,913,689 19.9 26,861,292 45.1
Mariner Opportunities 7,291,653 15.7 4,746,924 21.2
Mariner Atlantic 3,956,601 2.4 3,552,095 2.6
Other 72,670,957 0.2 to 11.9 51,230,209 0.1 to 10.0
--------------- ---------------
Total 115,569,529 109,755,363
=============== ===============
Restricted Assets
Under the terms of certain reinsurance agreements, irrevocable letters
of credit in the amount of $20,637,000 were issued at December 31, 2001, in
respect of reported loss reserves and unearned premiums. Investments with a par
value of $20,831,000 have been pledged as collateral with issuing banks. In
addition, securities with a par value of $9,072,000 at December 31, 2001 were on
deposit with various state insurance departments in order to comply with
insurance laws.
PXRE, in connection with PXRE's Lloyd's Syndicate 1224, has placed on
deposit $36,430,000 par value of agency debenture government securities,
municipal securities and $11,475,000 in money market funds as collateral for
Lloyd's of London. All invested assets of PXRE's Syndicate 1224 amounting to
$15,350,000 at December 31, 2001 are restricted from being paid as a dividend
through June, 2003.
PXRE has outstanding commitments for funding certain investments in
certain limited partnerships of $1,671,000 at December 31, 2001.
PXRE has deposited securities with a fair value of $12,882,000 as of
December 31, 2001 into a trust for the benefit of a cedent in connection with a
finite reinsurance transaction.
4. Notes Payable and Credit Arrangements
In January 1997, PXRE Corporation issued $100 million of 8.85% TRUPS.
The fair value of the TRUPS is $49,359,000 and $77,583,000 at December 31, 2001
and 2000, respectively. Interest is payable on the TRUPS semi-annually. The
notes are redeemable on or after February 1, 2007 at the option of PXRE
Corporation, initially at 104.180% declining to 100.418% at February 1, 2016,
and 100% thereafter.
F-16
On December 30, 1998 PXRE Corporation entered into a Credit Agreement
with First Union National Bank ("First Union") to arrange and syndicate for it a
revolving credit facility of up to $75 million. At December 31, 1998, $50
million of the total $75 million was underwritten and committed to by First
Union. The additional $25 million of the revolving credit facility was drawn
down October 6, 1999 and PXRE Group Ltd. and PXRE Reinsurance (Barbados) Ltd.
were added as guarantors under the Credit Agreement. First Union syndicated the
$75 million revolving credit facility, joining Fleet National Bank, Credit
Lyonnais, New York Branch and Bank One (formerly, The First National Bank of
Chicago) as additional lenders (collectively with First Union, the "Lenders").
The $75 million borrowings under the Credit Agreement bear interest at First
Union's base rate or at the financial institution's LIBOR rate for periods of
30, 60, 90 or 180 days plus a 1% credit margin. The interest rate charged at
December 31, 2001 and 2000 was 3.59% and 7.66%, respectively. In addition, the
Credit Agreement requires PXRE and certain subsidiaries, where applicable, to
maintain certain financial ratios including minimum fixed charge coverage,
maximum consolidated debt to total capitalization, minimum statutory capital and
surplus, and minimum risk based capital ratios. Commitments under this Credit
Agreement terminate on March 31, 2005 and are subject to annual reductions of
$10 million commencing March 31, 2000 and $25 million on March 31, 2005. See
Note 13 - Subsequent Event, below. At December 31, 2001 and 2000, $55 million
and $65 million was outstanding under this Credit Agreement.
PXRE Corporation entered into an interest rate swap agreement with
First Union that locks in the interest rate on the $36,666,000 portion of the
loan to 6.34%. The swap agreement coincides with the maturity of the Credit
Agreement. The fair value of the loan and the interest rate swap agreement at
December 31, 2001 and 2000 was approximately $53,712,000 and $64,509,000,
respectively. At December 31, 2001, the amount of the cash flow hedge, net of
tax, in accumulated other comprehensive income was depreciation of $722,000.
Interest paid, including the minority interest in consolidated
subsidiary, was $13,301,000, $13,653,000 and $12,705,000 for 2001, 2000 and
1999, respectively.
5. Income Taxes
PXRE is incorporated under the laws of Bermuda and, under current
Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or
capital gains. PXRE has received an undertaking from the Supervisor of Insurance
in Bermuda pursuant to the provisions of the Exempted Undertakings Tax
Protection Act, 1966, which exempts PXRE, from any Bermuda taxes computed on
profits, income or any capital asset, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, at least until the year 2016.
PXRE does not consider itself to be engaged in a trade or business in
the United States and accordingly does not expect to be subject to direct United
States income taxation.
The United States subsidiaries of PXRE file a consolidated U.S. Federal
income tax return.
F-17
Pretax (loss) income from operations before cumulative effect of
accounting change for the years ended December 31, under the following
jurisdictions was as follows:
2001 2000 1999
--------------- --------------- ---------------
U.S. $ (14,351,000) $ (27,713,000) $ (43,808,000)
Bermuda (5,005,000) 4,730,000 (11,437,000)
Barbados (3,634,000) 177,000 1,027,000
--------------- --------------- ---------------
Total $ (22,990,000) $ (22,806,000) $ (54,218,000)
=============== =============== ===============
The components of the benefit for income taxes for the years ended
December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
--------------- --------------- ---------------
Current
U.S. $ 44,000 $ (3,891,000) $ (12,819,000)
Foreign 1,103,000 137,000 2,314,000
--------------- --------------- ---------------
Subtotal 1,147,000 (3,754,000) (10,505,000)
Deferred U.S. (5,851,000) (8,253,000) (2,270,000)
--------------- --------------- ---------------
Income tax benefit
before change in accounting (4,704,000) (12,007,000) (12,775,000)
Income tax expense (benefit) from
change in accounting 172,000 0 (374,000)
--------------- --------------- ---------------
Income tax benefit $ (4,532,000) $ (12,007,000) $ (13,149,000)
=============== =============== ===============
Income taxes paid $ 3,103,000 $ 637,000 $ 1,930,000
=============== =============== ===============
The Company plans to carryforward $47,200,000 of the 2000 and 2001 net
operating loss to future periods which expire through 2021.
The significant components of the net deferred income tax asset
(liability) are as follows:
Deferred income tax asset: 2001 2000
--------------- ---------------
Discounted reserves and unearned premiums $ 7,297,000 $ 7,132,000
U.K. losses not currently deductible 0 10,377,000
Excess tax over book basis in invested assets 869,000 174,000
Deferred compensation and benefits 2,488,000 1,811,000
NOL carryforwards 16,701,000 2,443,000
Cash flow hedge 389,000 0
Other, net 628,000 258,000
--------------- ---------------
Total deferred income tax asset $ 28,372,000 $ 22,195,000
--------------- ---------------
Deferred income tax liability:
Retroactive reinsurance contracts (2,202,000) 0
Deferred acquisition costs (1,966,000) (2,037,000)
Excess book over tax basis in limited partnerships (1,068,000) (2,998,000)
Investments and unrealized foreign exchange (557,000) (39,000)
Market discount (1,369,000) (1,490,000)
Other, net (172,000) (629,000)
--------------- ---------------
Total deferred income tax liability (7,334,000) (7,193,000)
--------------- ---------------
Net deferred income tax asset $ 21,038,000 $ 15,002,000
=============== ===============
F-18
Management has reviewed PXRE's deferred tax asset, and has concluded
that it is realizable and no valuation allowance is necessary.
The benefit for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory Federal income tax rate of
35% to pretax income from operations as a result of the following differences.
2001 2000 1999
--------------- --------------- ---------------
Statutory U.S. rate $ (8,047,000) $ (7,982,000) $ (18,976,000)
Tax exempt interest (781,000) (1,316,000) (1,781,000)
Foreign tax credit
(recoverable) expiration (339,000) (670,000) 920,000
Bermuda loss (income) 1,752,000 (1,655,000) 4,003,000
Foreign income - Barbados 1,272,000 (62,000) (359,000)
Barbados tax 1,103,000 137,000 2,314,000
Amortization of intangibles 0 0 (753,000)
Reciprocal shares 0 0 1,815,000
Other, net 508,000 (459,000) (332,000)
--------------- --------------- ---------------
Total benefit $ (4,532,000) $ (12,007,000) $ (13,149,000)
=============== =============== ===============
6. Stockholders' Equity and Dividend Restrictions
Stockholders' Equity
PXRE was incorporated on June 1, 1999 as a Bermuda holding company and
a wholly-owned subsidiary of PXRE Purpose Trust, a purpose trust established
under the laws of Bermuda.
In connection with the reorganization, PXRE repurchased for $1.00 per
share, 100% of the common shares owned by PXRE Purpose Trust and each
outstanding share of PXRE Corporation common stock (other than shares held by
PXRE Corporation and its subsidiaries) was converted into one common share of
PXRE. In addition, PXRE retired all of its treasury shares.
On August 9, 1999 PXRE's Board of Directors unanimously approved a
resolution to increase the number of authorized shares from 12,000 to 60,000,000
consisting of 50,000,000 common shares and 10,000,000 preferred shares. In
addition, PXRE's Board of Directors authorized an increase in par value of its
common shares from $0.01 per share to $1.00 per share. See also subsequent event
Note 13.
Absent a specific waiver by PXRE's Board of Directors, the Company's
Bye-Laws restrict the ownership and voting rights of any shareholder who
directly or indirectly would own more than 9.9% of the outstanding common shares
of the Company. The restriction requires the prompt disposition of any shares
held in violation of the provision and limits the voting power of a shareholder
with more than 9.9% of the outstanding shares to the voting power of a
shareholder with 9.9% or less of the outstanding common shares.
F-19
Dividend Restrictions
The Insurance Department of the State of Connecticut, in which PXRE
Reinsurance is domiciled, recognizes as net income and surplus those amounts
determined in conformity with statutory accounting practices ("SAP") prescribed
or permitted by the department, which differ in certain respects from U.S. GAAP.
The amount of statutory capital and surplus at December 31 and statutory net
income of PXRE Reinsurance for the years then ended, as filed with insurance
regulatory authorities are as follows:
2001 2000 1999
--------------- --------------- ---------------
(Unaudited)
PXRE Reinsurance
Statutory capital and surplus $ 331,959,000 $ 348,858,000 $ 399,007,000
Statutory net loss $ (28,171,000) $ (14,569,000) $ (1,327,000)
PXRE Reinsurance is subject to state regulatory restrictions, which
limit the maximum amount of annual dividends or other distributions, including
loans or cash advances, available to stockholders without prior approval of the
Insurance Commissioner of the State of Connecticut.
As of December 31, 2001, the maximum amount of dividends and other
distributions which may be made by PXRE Reinsurance during 2002 without prior
approval is limited to approximately $33,196,000. Accordingly, the remaining
amount of its capital and surplus is considered restricted. Under the terms of
the Credit Agreement, dividends to PXRE shareholders in any year are limited as
described in Note 4 with respect to the financial covenants.
PXRE Reinsurance prepares its statutory financial statements in
conformity with accounting practices prescribed or permitted by the State of
Connecticut. Effective January 1, 2001, the State of Connecticut required that
insurance companies domiciled in the State of Connecticut prepare their
statutory basis financial statements in accordance with the NAIC Accounting
Practices and Procedures Manual - Version effective January 1, 2001 subject to
any deviations prescribed or permitted by the State of Connecticut Insurance
Commissioner. Accounting changes adopted to conform to the provisions of the
NAIC Accounting Practices and Procedures Manual - Version effective January 1,
2001 are reported as changes in accounting principles. The cumulative affect of
changes in accounting principles is reported as an adjustment to unassigned
funds (surplus) in the period of the change in accounting principle. The
cumulative effect, which decreased the surplus by $2,500,000, is the difference
between the amount of capital and surplus at the beginning of the year and the
amount of capital and surplus that would have been reported at that date if the
new accounting principles had been applied retroactively for all prior periods.
F-20
7. Earnings Per Share
A reconciliation of loss before cumulative effect of change in
accounting to earnings, and shares, which affect basic and diluted earnings per
share, is as follows:
2001 2000 1999
--------------- --------------- ---------------
Loss available to common stockholders:
Loss before cumulative effect of change
in accounting $ (18,286,245) $ (10,799,973) $ (41,443,353)
Change in accounting 319,353 0 (695,278)
--------------- --------------- ---------------
Net loss available to stockholders $ (17,966,892) $ (10,799,973) $ (42,138,631)
=============== =============== ===============
Weighted average shares of common stock outstanding:
Weighted average common shares
outstanding (basic) 11,578,219 11,393,652 11,568,494
Equivalent shares of stock options 0 0 0
Equivalent shares of restricted stock 0 0 0
--------------- --------------- ---------------
Weighted average common equivalent shares
(diluted) 11,578,219 11,393,652 11,568,494
=============== =============== ===============
Per share amounts:
Basic
Loss before cumulative effect of
change in accounting $ (1.58) $ (0.95) $ (3.58)
Net loss $ (1.55) $ (0.95) $ (3.64)
Diluted
Loss before cumulative effect of
change in accounting $ (1.58) $ (0.95) $ (3.58)
Net loss $ (1.55) $ (0.95) $ (3.64)
8. Employee Benefits
Benefit Plans
PXRE adopted a non-contributory defined benefit pension plan covering
all U.S. employees with one year or more of service and who had attained age 21.
Benefits are generally based on years of service and compensation. PXRE funds
the plan in amounts not less than the minimum statutory funding requirement nor
more than the maximum amount that can be deducted for U.S. income tax purposes.
PXRE also sponsors a supplemental executive retirement plan. This plan
is non-qualified and provides certain key employees with benefits in excess of
normal pension benefits.
F-21
The net pension expenses for the company-sponsored plans included the
following components at December 31:
2001 2000 1999
--------------- --------------- ---------------
Components of net periodic cost
Service cost $ 1,040,253 $ 680,756 $ 455,892
Interest cost 639,503 467,579 352,348
Expected return on assets (152,125) (79,371) (44,166)
Amortization of prior service costs 212,166 212,166 110,301
Recognized net actuarial costs 77,262 30,536 75,280
--------------- --------------- ---------------
Net periodic benefit costs $ 1,817,059 $ 1,311,666 $ 949,655
=============== =============== ===============
The following table sets forth the funded status of the plans and
amounts recognized in the Consolidated Balance Sheets:
2001 2000
--------------- ---------------
Reconciliation of benefit obligation
Benefit obligation January 1 $ 7,688,473 $ 5,166,894
Service cost 1,040,253 680,756
Interest cost 639,503 467,579
Amendments 0 980,637
Actuarial loss 1,241,727 392,607
--------------- ---------------
Benefit obligation December 31 $ 10,609,956 $ 7,688,473
=============== ===============
Reconciliation of plan assets
Fair value of plan assets as of January 1 $ 1,561,878 $ 802,787
Return on plan assets (130,984) 86,876
Employer contributions 786,583 672,215
--------------- ---------------
Fair value of plan assets December 31 $ 2,217,477 $ 1,561,878
=============== ===============
Reconciliation of funded status
Funded status $ (8,392,479) $ (6,126,595)
Unrecognized prior service cost 1,812,655 2,024,821
Unrecognized net loss 2,079,397 631,823
--------------- ---------------
Accrued cost $ (4,500,427) $ (3,469,951)
=============== ===============
Weighted average assumptions as of December 31:
Discount rate 7.25% 7.50%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 5.00% 5.00%
Employees of PXRE's Brussels and London operations are covered under a
defined contribution type plan. The provision for such plans is $193,000,
$454,000 and $326,000 for 2001, 2000 and 1999 respectively.
F-22
Employee Stock Purchase Plan
PXRE maintains an Employee Stock Purchase Plan under which it has
reserved 53,753 common shares for issuance to PXRE personnel. The price per
share is the lesser of 85% of the fair market value at either the date granted
or the date exercised.
9. Stock Options and Grants
In 1988, PXRE adopted a stock option plan (the "1988 Stock Option
Plan") which provides for the grant of incentive stock options and non-qualified
stock options to officers and key employees. Options granted under the 1988
Stock Option Plan have a term of 10 years and become exercisable in four equal
annual installments. The exercise price for options granted pursuant to the plan
must be equal to or exceed the fair market value of the common shares on the
date the option is granted. In 1992, the Board of Directors resolved to freeze
the 1988 Stock Option Plan as of December 31, 1992. At December 31, 2001 and
2000, options for 9,802 and 36,323 shares, respectively, are exercisable under
this plan.
In 1992, a Restated Employee Annual Incentive Bonus Plan was approved.
Incentive compensation to employees is based in part on return on equity
compared to a target return on equity and in part at the discretion of the
Restated Bonus Plan Committee.
In 1992, PXRE adopted a 1992 Officer Incentive Plan that provides for
the grant of incentive stock options, non-qualified stock options and awards of
shares subject to certain restrictions. Options granted under the plan have a
term of 10 years and generally become exercisable in four equal annual
installments commencing one year from the date of grant. The exercise price for
the incentive shares options must be equal to or exceed the fair market value of
the common shares on the date the option is granted. The exercise price for the
non-qualified options may not be less than the fair market value of the common
stock on the date of grant. At December 31, 2001 and 2000, options for 414,478
and 281,614 shares respectively, were exercisable under this plan.
In 2001, 2000 and 1999, $2,445,000, $3,750,000 and $3,170,000,
respectively was incurred under these plans, including 30% of any bonus granted
to certain levels of employees paid in restricted shares which vest in 36 or 48
months.
F-23
Information regarding the option plans described above is as follows:
Number Option Price
of Shares Per Share Range
--------------- ----------------
Outstanding at December 31, 1998 473,024 $ 8.75 - $32.94
Options granted 0 $ 0
Options exercised 13,294 $10.625 - $11.50
Options cancelled 7,256 $24.75 - $32.938
---------------
Outstanding at December 31, 1999 452,474 $ 8.75 - $32.938
Options granted 900,450 $ 12.50
Options exercised 37,057 $ 8.75
Options cancelled 65,643 $12.50 - $32.938
---------------
Outstanding at December 31, 2000 1,250,224
---------------
Options granted 907,400 $ 15.95 - $19.80
Options exercised 72,658 $10.875 - $12.50
Options cancelled 442,357 $12.50 - $32.938
---------------
Outstanding at December 31, 2001 1,642,609
===============
In 1995, PXRE adopted a non-employee Director Stock Option Plan, which
provided for an annual grant of 1,000 options per director from 1995 to 1996 and
provides for 3,000 options per director from 1997 to 1999, 5,000 options and
1,000 restricted shares per director from 2000 to 2005 inclusive as amended.
Options granted under the plan have a term of 10 years from the date of grant
and are vested and exercisable in three equal annual installments commencing one
year from the date of grant. The exercise price of the options is the fair
market value on the date of grant. As of December 31, 2001, options for 250,000
shares were authorized and 103,410 were exercisable, at exercise prices between
$14.790 and $31.063.
Beginning January 1, 1998, PXRE allowed its directors to elect to
convert their Board of Directors retainer fee to options. At December 31, 2001,
options for 250,000 shares were authorized and ten-year options for 119,011
shares were granted at prices ranging from $12.812 to $33.455 which are 100%
vested and immediately exercisable.
As of December 31, 2001 total authorized common shares reserved for
grants of employee and director stock options and restricted stock under the
above plans is 2,752,279 shares. Total shares of 646,701 relate to stock options
which are vested and exercisable at December 31, 2001, at exercise prices
between $10.875 and $33.455. All options become exercisable upon a change of
control of PXRE as defined by the plans.
F-24
As permitted by SFAS No. 123, PXRE has elected to continue to account
for its stock option plans under the accounting rules prescribed by APB 25,
under which no compensation costs are recognized as an expense. Had compensation
costs for the stock options been determined using the fair value method of
accounting as recommended by SFAS No. 123, net loss and earnings per share for
2001, 2000 and 1999 would have been reduced to the following pro forma amounts:
2001 2000 1999
--------------- --------------- ---------------
Net loss
As reported $ (17,966,892) $ (10,799,793) $ (42,138,631)
Pro forma (20,126,476) (12,138,638) (42,612,003)
Basic loss per share
As reported $ (1.55) $ (0.95) $ (3.64)
Pro forma (1.74) (1.07) (3.68)
Diluted loss per share
As reported $ (1.55) $ (0.95) $ (3.64)
Pro forma (1.74) (1.07) (3.68)
The fair value of each option granted in 2001, 2000 and 1999 was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
2001 2000 1999
--------------- --------------- ---------------
Risk-free rate 5.41% 5.23% 6.72%
Dividend yield 1.36% 1.42% 1.85%
Volatility factor 37.18% 30.65% 26.71%
Weighted average expected life 5 5 5
A summary of the status of the employee and director stock option plans
at December 31, 2001 and 2000 and changes during the years then ended is
presented below:
2001 2000
---------------------------------- ----------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
--------------- -------------- --------------- --------------
Options outstanding at beginning of year 1,485,416 $ 17.27 599,068 $ 24.80
Options granted 965,219 17.77 989,048 12.61
Options exercised 72,658 11.91 37,057 8.75
Options cancelled 442,357 15.71 65,643 20.23
--------------- ---------------
Options outstanding at end of year 1,935,620 18.06 1,485,416 17.27
--------------- ---------------
Options exercisable at end of year 646,701 22.37 490,899 23.74
--------------- ---------------
Weighted average fair value per share of options granted 8.98 5.36
F-25
Options outstanding at December 31, 2001 included:
Weighted Weighted
Range of Number Outstanding at Average Weighted Average Number Exercisable at Average
Exercise Prices December 31, 2001 Remaining Life Exercise Price December 31, 2001 Exercise Price
- --------------- ----------------- -------------- -------------- ----------------- --------------
$10.88 to $19.80 1,490,045 8.86 $15.35 217,780 $13.46
$23.25 to $33.46 445,575 4.46 $27.11 428,921 $26.90
In 1990, PXRE adopted a non-employee Director Deferred Stock Plan
granting 2,000 shares to each non-employee Board member at the time specified in
the plan. At December 31, 2001, the 10,000 shares granted to eligible
non-employee Board members will be issued to Board members at or after their
termination, depending on whether such director elected to defer receipt of such
shares following termination.
F-26
10. Segment Information
PXRE operates in four reportable property and casualty segments -
catastrophe and risk excess, casualty, structured/finite business and all other
lines based on PXRE's method of internal management reporting. In addition, PXRE
operates in two geographic segments - North American representing North American
based risks written by North American based reinsureds and International
(principally the United Kingdom, Continental Europe, Australia, Latin America,
the Caribbean and Asia) representing all other premiums written. There are no
significant differences among the accounting policies of the segments as
compared to PXRE's consolidated financial statements.
PXRE does not maintain separate balance sheet data for each of its
operating segments. Accordingly, PXRE does not review and evaluate the financial
results of its operating segments based upon balance sheet data.
2001 2000 1999
Net Premiums Written ---- ---- ----
(thousands except percentages) Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------
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%
=============== === =============== === =============== ===
F-27
2001 2000 1999
Net Premiums Earned ---- ---- ----
(thousands except percentages) Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------
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%
=============== === =============== === =============== ===
2001 2000 1999
Underwriting Operations ---- ---- ----
(thousands except percentages) Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------
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%
=============== === =============== === =============== ===
F-28
The following table reconciles the underwriting operations for the
operating segments to income before tax as reported in the Consolidated
Statements of Operations and Comprehensive Income:
(thousands) 2001 2000 1999
--------------- --------------- ---------------
Net underwriting loss $ (14,610) $ (7,429) $ (55,145)
Net investment income 30,036 30,037 47,173
Net realized investment gains (losses) 4,023 3,191 (3,766)
Interest expense (4,424) (4,778) (3,915)
Minority interest in consolidated subsidiary (8,877) (8,875) (8,790)
Operating expenses (29,606) (35,407) (30,052)
Unrealized foreign exchange on losses incurred 981 (1,196) 442
Other (loss) income (513) 1,651 (165)
--------------- --------------- ---------------
Loss before income taxes and
cumulative effect of change in accounting $ (22,990) $ (22,806) $ (54,218)
=============== =============== ===============
11. Quarterly Consolidated Results of Operations (Unaudited)
The following are unaudited quarterly results of operations on a
consolidated basis for the years ended December 31, 2001 and 2000. Quarterly
results necessarily rely heavily on estimates. This and certain other factors,
such as catastrophic losses, call for caution in drawing specific conclusions
from quarterly results. Due to changes in the number of average shares
outstanding, quarterly earnings per share may not add to the total for the year.
F-29
Three Months Ended
March 31 June 30 September 30 December 31
--------------- --------------- --------------- ---------------
2001
Net premiums written $ 56,172,000 $ 36,971,000 $ 19,076,000 $ 42,259,000
=============== =============== =============== ===============
Revenues:
Net premiums earned $ 47,939,779 $ 43,325,826 $ 17,543,330 $ 53,316,124
Net investment income 9,882,640 8,238,457 5,766,713 6,148,230
Net realized investment gains (losses) 386,077 428,707 3,425,882 (217,208)
Management fees 1,961,570 772,114 2,335,219 716,755
--------------- --------------- --------------- ---------------
Total revenues 60,170,066 52,765,104 29,071,144 59,963,901
--------------- --------------- --------------- ---------------
Losses and expenses:
Losses and loss expenses incurred 29,433,222 28,207,176 64,133,605 29,929,022
Commissions and brokerage 13,468,117 9,561,872 (3,957,510) 11,277,537
Other operating expenses 8,887,873 7,496,308 7,004,931 6,217,296
Interest expense 1,972,132 766,358 854,957 830,046
Minority interest in consolidated
subsidiary 2,219,176 2,219,271 2,219,466 2,219,564
--------------- --------------- --------------- ---------------
Total expenses 55,980,520 48,250,985 70,255,449 50,473,465
--------------- --------------- --------------- ---------------
Income (loss) before income taxes and
cumulative effect of accounting change 4,189,546 4,514,119 (41,184,305) 9,490,436
Income tax (provision) benefit (693,691) (792,350) 7,338,000 (1,148,000)
--------------- --------------- --------------- ---------------
Income (loss) before cumulative effect
of accounting change 3,495,855 3,721,769 (33,846,305) 8,342,436
Cumulative effect of accounting change,
net of $171,959 tax benefit 319,353 0 0 0
--------------- --------------- --------------- ---------------
Net income (loss) $ 3,815,208 $ 3,721,769 $ (33,846,305) $ 8,342,436
=============== =============== =============== ===============
Basic earnings (loss) per common share:
Net income (loss) $ 0.33 $ 0.32 $ (2.94) $ 0.72
=============== =============== =============== ===============
Average shares outstanding 11,481,959 11,470,253 11,501,372 11,632,272
=============== =============== =============== ===============
Diluted earnings (loss) per common share:
Net income (loss) $ 0.32 $ 0.31 $ (2.94) $ 0.70
=============== =============== =============== ===============
Average shares outstanding 11,889,726 11,877,925 11,501,372 11,961,885
=============== =============== =============== ===============
Dividends paid per common share $ 0.06 $ 0.06 $ 0.06 $ 0.06
F-30
Three Months Ended
March 31 June 30 September 30 December 31
--------------- --------------- --------------- ---------------
2000
Net premiums written $ 56,885,000 $ 43,713,000 $ 36,474,000 $ 35,629,000
=============== =============== =============== ===============
Revenues:
Net premiums earned $ 35,741,576 $ 43,639,562 $ 40,508,153 $ 40,316,636
Net investment income 11,943,818 5,738,651 6,778,407 5,575,932
Net realized investment (losses) gains (535,862) 73,765 (127,731) 3,780,685
Management fees 1,794,311 1,778,920 725,564 1,184,894
--------------- --------------- --------------- ---------------
Total revenues 48,943,843 51,230,898 47,884,393 50,858,147
--------------- --------------- --------------- ---------------
Losses and expenses:
Losses and loss expenses incurred 23,695,657 68,659,875 19,114,520 26,294,886
Commissions and brokerage 7,861,401 8,875,475 9,045,722 9,116,385
Other operating expenses 9,805,047 8,593,333 8,229,302 8,779,117
Interest expense 1,280,045 1,149,198 1,176,581 1,171,971
Minority interest in consolidated
subsidiary 2,218,632 2,218,719 2,218,899 2,218,989
--------------- --------------- --------------- ---------------
Total expenses 44,860,782 89,496,600 39,785,024 47,581,348
--------------- --------------- --------------- ---------------
Income (loss) before income taxes and
change in accounting 4,083,061 (38,265,702) 8,099,369 3,276,799
Income tax (provision) benefit (74,500) 14,738,500 (4,716,000) 2,058,500
--------------- --------------- --------------- ---------------
Net income (loss) $ 4,008,561 $ (23,527,202) $ 3,383,369 $ 5,335,299
=============== =============== =============== ===============
Basic earnings (loss) per common share:
Net income (loss) $ 0.35 $ (2.07) $ 0.30 $ 0.47
=============== =============== =============== ===============
Average shares outstanding 11,384,248 11,383,097 11,396,150 11,436,722
=============== =============== =============== ===============
Diluted earnings (loss) per common share:
Net income (loss) $ 0.35 $ (2.07) $ 0.29 $ 0.45
=============== =============== =============== ===============
Average shares outstanding 11,534,771 11,383,097 11,653,279 11,766,290
=============== =============== =============== ===============
Dividends paid per common share $ 0.06 $ 0.06 $ 0.06 $ 0.06
F-31
12. Commitments and Contingencies
In May 1999, PXRE Delaware entered into weather option agreements with
two counterparties. In April 2000, these counterparties submitted invoices to
PXRE Delaware in the aggregate sum of $8,252,500 seeking payment under the
weather option agreements, which invoices have been paid. PXRE Delaware insured
its obligations under these weather option agreements through two Commercial
Inland Marine Weather Insurance Policies issued by Terra Nova Insurance Company
Limited ("Terra Nova"). PXRE Delaware submitted claims under these policies to
Terra Nova in April 2000. Terra Nova has denied coverage, contending that its
Managing General Agent had no authority to issue these policies. PXRE Delaware
disagrees with Terra Nova's denial and has filed suit against Terra Nova in the
United States District Court for the District of New Jersey. Both parties
submitted motions of summary judgment, and the court denied both motions in an
order dated as of January 18, 2002. The trial of this matter is expected to
occur during the third quarter of 2002. The aggregate sum of $8,252,500 is
included in Other Assets; management has concluded that it is realizable and
that no valuation allowance is necessary.
In June 2001, the Company entered into a joint venture agreement to
form a Bermuda corporation, Barr's Bay Properties Limited, which will construct
an office building in Hamilton, Bermuda, in which the Company will have the
option to lease office space for three consecutive five-year terms. The Company
owns 40% of the outstanding shares of the joint venture. Under the joint venture
agreement, the Company agreed to lend up to $7 million to finance the
construction of the office space, secured by a first mortgage on the property.
In January of 2000, the Company entered into an insurance contract
outside of its normal businesses under which it guaranteed performance of a
minority portion of the debt of an unrelated company, Mariner Structured
Products Sub-2, Ltd. ("MSP") for the benefit of a syndicate of lenders led by
Bank of America, N.A. The maximum exposure under this policy is $4.0 million.
MSP's debt is expected to be outstanding for at least six more years. No
payments have been made or are contemplated under this policy. The owner of MSP
is a hedge fund managed by Mariner. The portion of MSP's debt not guaranteed by
the Company is guaranteed by Select Re.
13. Subsequent Event
On December 10, 2001, the Company 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 PXRE to increase underwriting capacity and therefore maximize
participation in the hardening reinsurance market following the September 11th
terrorist attacks. 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.
F-32
The Preferred Stock Investment would trigger an event of default under
the Credit Agreement if the transaction were consummated without the consent of
the Lenders. As a condition to the Lenders' consent to the Preferred Stock
Investment, the Credit Agreement was amended pursuant to the Second Amendment to
the First Amended and Restated Credit Agreement, dated March 12, 2002, between
PXRE Delaware and the Lenders. The Second Amendment will not be effective until
the closing of the Preferred Stock Transaction. As amended, the outstanding
commitment is reduced by $20 million on March 31, 2002, $5 million on July 1,
2002, $20 million on March 31, 2003 and by the remaining $10 million on March
31, 2004. In addition commencing on June 30, 2003, 50% of Excess Cash Flow (as
defined in the Second Amendment) shall be used to reduce the outstanding
commitment. In addition, the variable interest rate under the Amended Credit
Agreement, has been increased by 100 basis points.
In March 2002, Congress passed the Job Creation and Worker Assistance
Act of 2002 (H.R. 3090) which affords greater opportunity to use net operating
losses. The legislation allows an extension of the carryback period (pursuant to
Section 172) from two to five years. PXRE intends to avail itself of this
legislation by electing to carryback its 2001 tax loss for 5 years. This will
enable PXRE to recoup taxes paid in the prior years on 1996 taxable income
amounting to $32,167,000. The remaining losses of $15,033,000 will be carried
forward.
F-33
Parent Company Information Schedule II
PXRE Group Ltd.'s summarized financial information (parent company only) is as
follows:
December 31, December 31,
2001 2000
-------------------- ----------------------
BALANCE SHEET
Assets
Cash $ 315,979 $ 1,650,425
Fixed maturity 480,000 0
Receivable from subsidiaries 0 651,002
Note receivable from subsidiary 96,352,193 0
Equity in subsidiaries 141,318,449 258,589,337
Other assets 2,562,607 497,217
-------------------- --------------------
Total assets $ 241,029,228 $ 261,387,981
==================== ====================
Liabilities
Loan from subsidiary $ 0 $ 1,000,000
Liabilities to subsidiary 591,792 0
Other liabilities 657,311 1,001,700
-------------------- --------------------
Total liabilities 1,249,103 2,001,700
-------------------- --------------------
Stockholders' equity 239,780,125 259,386,281
-------------------- --------------------
Total liabilities and stockholders' equity $ 241,029,228 $ 261,387,981
==================== ====================
INCOME STATEMENT Years ended December 31,
------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
Investment income $ 3,861,309 $ 7,828 $ 6,361
Management fee 143,750 168,750 44,178
Other operating expenses (2,481,877) (1,891,545) (1,105,792)
---------------- ------------------ -------------------
Gain (loss) before tax benefit and cumulative
effect of accounting change 1,523,182 (1,714,967) (1,055,253)
Equity in earnings of subsidiary (19,490,074) (9,085,003) (40,388,100)
---------------- ------------------ -------------------
Net loss before cumulative effect of accounting change (17,966,892) (10,799,970) (41,443,353)
Cumulative effect of accounting change, net of tax 0 0 695,278
---------------- ----------------- -------------------
Net loss $ (17,966,892) $ (10,799,970) $ (42,138,631)
================ ================= ===================
CASH FLOW STATEMENT
Cash from operating activities:
Net loss $ (17,966,892) $ (10,799,970) $ (42,138,631)
Adjustments to reconcile net income to cash provided by
operating activities:
Equity in earnings of subsidiaries 19,490,074 9,085,003 41,083,378
Cash dividends from subsidiaries 12,567,586 2,013,000 36,235,000
Contribution of capital to subsidiaries (14,809,186) 0 (35,000,000)
Loan from subsidiary (1,000,000) 0 (1,539,886)
Notes to subsidiaries 3,647,807 0 0
Intercompany accounts 1,242,794 415,354 2,317,744
Deferred income taxes 0 0 6,741,946
Income tax recoverable 0 0 10,402,439
Other (1,061,644) 3,005,502 (3,174,770)
---------------- ----------------- -------------------
Net cash provided by operating activities 2,110,539 3,718,889 14,927,220
---------------- ----------------- -------------------
Cash flow from investing activities:
Net change in short-term investments 0 0 1,012,031
Equity securities redomesticated/disposed 0 0 3,069,554
Cost of fixed maturity acquired (514,580) 0 0
Net change in other invested assets 0 0 5,490,561
---------------- ----------------- -------------------
Net cash (used) provided by investing activities (514,580) 0 9,572,146
---------------- ----------------- -------------------
Cash flow from financing activities:
Proceeds from issuance of common stock 1,104,443 686,943 505,796
Cash dividends paid to common stockholders (2,862,010) (2,831,123) (7,629,925)
Cost of stock repurchased (1,172,838) (316,218) 0
Cost of treasury stock 0 0 (17,215,460)
---------------- ----------------- -------------------
Net cash used by financing activities (2,930,405) (2,460,398) (24,339,589)
---------------- ----------------- -------------------
Net change in cash (1,334,446) 1,258,491 159,777
Cash, beginning of period 1,650,425 391,934 232,157
---------------- ----------------- -------------------
Cash, end of period $ 315,979 $ 1,650,425 $ 391,934
================ ================= ===================
Supplemental disclosure of cash flow information:
Non cash investing activities:
Reduction of investment in subsidiary and increase
in note receivable from subsidiary $ 100,000,000 $ 0 $ 0
F-34
Schedule III
PXRE GROUP AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Column A Column B Column C Column D Column E Column F Column G
-------- -------- -------- -------- -------- -------- --------
Future
policy
benefits, Other
losses, policy
Segment- Deferred claims and Assumed claims and
property policy loss Unearned benefits Net
and acquisition expenses premiums payable Premium investment
casualty cost (caption (caption (caption revenue income
insurance (caption 7) 13-a-1) 13-a-2) 13-a-3) (caption 1) (caption 2)
--------- ----------- ------- ------- ------- ----------- -----------
2001 North American $ 95,824,000
International 125,140,000
Corporate Wide (58,839,000)
--------------------------------------------------------------------------------------------
Total $ 7,312,000 $ 453,705,000 $ 46,335,000 $ 0 $ 162,125,000 $ 30,036,000
2000 North American $ 59,347,000
International 119,973,000
Corporate Wide (19,115,000)
--------------------------------------------------------------------------------------------
Total $ 9,697,000 $ 251,620,000 $ 49,548,000 $ 0 $ 160,205,000 $ 30,037,000
1999 North American $ 49,044,000
International 94,418,000
Corporate Wide (14,958,000)
--------------------------------------------------------------------------------------------
Total $ 7,810,000 $ 261,551,000 $ 42,219,000 $ 0 $ 128,504,000 $ 47,173,000
Column A Column H Column I Column J Column K
-------- -------- -------- -------- --------
Benefits, Amortiza-
Segment- claims, tion of
property losses and deferred
and settlement policy Other
casualty expenses acquisition operating Premiums
insurance (caption 4) costs expense written
--------- ----------- ----- ------- -------
2001 North American $ 104,903,000 $ 19,390,000 $ 99,397,000
International 134,539,000 19,826,000 115,566,000
Corporate Wide (87,739,000) (8,866,000) (60,485,000)
-----------------------------------------------------------------
Total $ 151,703,000 $ 30,350,000 $29,606,000 $154,478,000
2000 North American $ 38,395,000 $ 9,910,000 $ 69,395,000
International 106,610,000 24,009,000 118,795,000
Corporate Wide (7,240,000) 980,000 (15,489,000)
-----------------------------------------------------------------
Total $ 137,765,000 $ 34,899,000 $35,407,000 $172,701,000
1999 North American $ 91,589,000 $ 7,629,000 $ 51,925,000
International 99,237,000 15,899,000 105,803,000
Corporate Wide (31,567,000) 4,174,000 (18,883,000)
-----------------------------------------------------------------
Total $ 159,259,000 $ 27,702,000 $30,052,000 $138,845,000
F-35
Schedule V
PXRE GROUP AND SUBSIDIARIES
Valuation and qualifying accounts and Reserves
Column A Column B Column C Column D Column E
Additions
-------------------------------------------
Balance (1) (2) Balance
beginning Charged to costs Charged to other Deductions end of
Description of year and expenses accounts - describe - describe year
- --------------------------------------------------------------------------------------------------------------------------
Allowance for
doubtful accounts
2001 $700,000 $500,000 $0 $0 $1,200,000
2000 $300,000 $400,000 $0 $0 $ 700,000
1999 $ 0 $300,000 $0 $0 $ 300,000
F-36
Schedule VI
PXRE GROUP AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
Column A Column B Column C Column D Column E Column F Column G
-------- -------- -------- -------- -------- -------- --------
Reserves for
unpaid
Deferred claims Discount,
Affiliation policy and claim if any Assumed Net
with acquisition adjustment deducted in Unearned Earned investment
registrant costs expenses Column C premiums premiums income
---------- ----- -------- -------- -------- -------- ------
2001 Consolidated $ 7,312,000 $ 453,705,000 $ (325,000) $46,335,000 $ 162,125,000 $ 30,036,000
2000 Consolidated 9,697,000 251,620,000 (849,000) 49,548,000 160,205,000 30,037,000
1999 Consolidated 7,810,000 261,551,000 0 42,219,000 128,504,000 47,173,000
Column A Column H Column I Column J Column K
-------- -------- -------- -------- --------
Claims and Claim Amortiza-
adjustment expenses tion of Paid
incurred related to deferred claims
Affiliation (1) (2) policy and claim
with Current Prior acquisi- adjustment Premiums
registrant year years tion costs expenses written
---------- ---- ----- ---------- -------- -------
2001 Consolidated $ 133,852,000 $ 17,851,000 $30,350,000 $ 99,466,000 $ 154,478,000
2000 Consolidated 79,534,000 58,231,000 34,899,000 146,352,000 172,701,000
1999 Consolidated 139,478,000 19,781,000 27,702,000 66,308,000 138,845,000
F-37
REPORT OF INDEPENDENT ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of PXRE Group Ltd.
Our audit of the consolidated financial statements referred to in our report
dated February 12, 2002 appearing on page F-1 of PXRE Group Ltd.'s Annual Report
on Form 10-K for the year ended December 31, 2001, also included an audit of the
Financial Statement Schedules listed in Item 14(a)(2) of this Form 10-K. In our
opinion, these Financial Statement Schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
KPMG
Hamilton, Bermuda
February 12, 2002
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-4 (No. 333-85451) of PXRE Group Ltd. of our report dated
February 12, 2002 relating to the financial statements which appear on page F-1
of this Form 10-K. We also consent to the incorporation by reference of our
report dated February 12, 2002 relating to the Financial Statement Schedules,
which appear in this Form 10-K.
KPMG
Hamilton, Bermuda
March 26, 2002
F-38
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of PXRE Group Ltd. (Successor Registrant of PXRE Corporation):
Our audit of the consolidated financial statements referred to in our report
dated February 12, 2001 appearing in PXRE Group Ltd.'s (Successor Registrant of
PXRE Corporation) Annual Report on Form 10-K for the year ended December 31,
2001, also included an audit of the Financial Statement Schedules as of December
31, 2000 and for the two years in the period ended December 31, 2000, listed in
Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PRICEWATERHOUSECOOPERS
Hamilton, Bermuda
February 12, 2001
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-4 (No. 333-85451) of PXRE Group Ltd. (Successor Registrant
of PXRE Corporation) of our report dated February 12, 2001 relating to the
financial statements as of December 31, 2000 and for the two years in the period
ended December 31, 2000, which appears in this Form 10-K. We also consent to the
incorporation by reference of our report dated February 12, 2001 relating to the
financial statement schedules, which appears in this Form 10-K.
PRICEWATERHOUSECOOPERS
Hamilton, Bermuda
March 26, 2002
F-39