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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to _______________
Commission File Number 1-15259
PXRE GROUP LTD.
(Exact name of registrant as specified in its charter)
Bermuda 98-0214719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Swan Building P.O. Box HM 1282
26 Victoria Street Hamilton HM FX
Hamilton HM 12 Bermuda
Bermuda
(Address, including zip code,
of principal executive offices) (Mailing address)
(441) 296-5858
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No /_/
As of May 5, 2003 12,181,818 common shares, $1.00 par value per share,
of the Registrant were outstanding.
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PXRE GROUP LTD.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 3
Consolidated Statements of Income and Comprehensive Income for the three
months ended March 31, 2003 and 2002 4
Consolidated Statements of Stockholders' Equity for the three months
ended March 31, 2003 and 2002 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 34
Item 4. Controls and Procedures 34
PART II. OTHER INFORMATION 34
Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
PXRE Consolidated Balance Sheets
Group Ltd. (Dollars in thousands, except par value per share)
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2003 2002
---- ----
(Unaudited)
Assets Investments:
Fixed maturities:
Available-for-sale (amortized cost $434,076 and $465,963, respectively) $ 447,216 $ 478,878
Trading (cost $25,210 and $19,521, respectively) 28,039 21,871
Short-term investments 217,794 133,318
Hedge funds (cost $82,727 and $84,915, respectively) 111,479 113,105
Other invested assets (cost $10,284 and $10,522, respectively) 11,420 11,529
------------ -------------
Total investments 815,948 758,701
Cash 52,676 46,630
Accrued investment income 5,582 5,788
Premiums receivable, net 69,475 77,290
Other receivables 35,714 27,052
Reinsurance recoverable on paid losses 29,611 29,653
Reinsurance recoverable on unpaid losses 174,035 207,444
Ceded unearned premiums 16,032 10,496
Deferred acquisition costs 15,648 22,721
Other assets 50,868 51,367
------------ -------------
Total assets $ 1,265,589 $ 1,237,142
============ =============
Liabilities Losses and loss expenses $ 437,612 $ 447,829
Unearned premiums 77,864 63,756
Debt payable 10,000 30,000
Reinsurance balances payable 76,596 81,090
Deposit liabilities 66,086 35,149
Income tax payable 858 2,486
Other liabilities 24,358 29,033
------------ -------------
Total liabilities 693,374 689,343
------------ -------------
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 94,337 94,335
------------ -------------
Stockholders' Serial convertible preferred stock, $1.00 par value, $10,000
Equity stated value -- 10 million shares authorized, 0.02 million shares
issued and outstanding 162,259 159,077
Common stock, $1.00 par value -- 50 million shares
authorized, 12.2 million and 12.0 million shares issued
and outstanding, respectively 12,177 12,030
Additional paid-in capital 172,271 168,866
Accumulated other comprehensive income net of deferred income
tax expense of $3,317 and $2,866, respectively 8,198 7,142
Retained earnings 127,755 108,062
Restricted stock at cost (0.2 million and 0.2 million shares, respectively) (4,782) (1,713)
------------ -------------
Total stockholders' equity 477,878 453,464
------------ -------------
Total liabilities and stockholders' equity $ 1,265,589 $ 1,237,142
============ =============
The accompanying notes are an integral part of these statements.
3
PXRE Consolidated Statements of Income and Comprehensive Income
Group Ltd. (Dollars in thousands, except per share amounts)
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Three Months Ended
March 31,
2003 2002
---- ----
(Unaudited)
Revenues Net premiums earned $ 84,772 $ 59,156
Net investment income 5,475 4,087
Net realized investment (losses) gains (1) 489
Fee income 1,276 1,253
-------------- ------------
91,522 64,985
-------------- ------------
Losses and Losses and loss expenses incurred 32,854 17,223
Expenses Commissions and brokerage 20,027 12,443
Other operating expenses 9,162 8,870
Interest expense 2,259 745
Minority interest in consolidated subsidiary 2,106 2,224
-------------- ------------
66,408 41,505
-------------- ------------
Income before income taxes 25,114 23,480
Income tax provision 1,507 5,247
-------------- ------------
Net income before preferred stock dividends $ 23,607 $ 18,233
-------------- ------------
Preferred stock dividends 3,182 -
-------------- ------------
Net income available to common stockholders $ 20,425 $ 18,233
============== ============
Comprehensive Net income before preferred stock dividends $ 23,607 $ 18,233
Income, Net Net unrealized appreciation (depreciation) on investments 111 (1,415)
of Tax Net unrealized appreciation on cash flow hedge 945 202
-------------- ------------
Comprehensive income $ 24,663 $ 17,020
============== ============
Per Share Basic:
Net income before preferred stock dividends $ 1.98 $ 1.56
Preferred stock dividends (0.27) -
-------------- ------------
Net income available to common stockholders 1.71 1.56
-------------- ------------
Average shares outstanding (000's) 11,894 11,710
============== ============
Diluted:
Net income $ 1.04 $ 1.51
============== ============
Average shares outstanding (000's) 22,664 12,037
============== ============
The accompanying notes are an integral part of these statements.
4
PXRE Consolidated Statements of Stockholders' Equity
Group Ltd. (Dollars in thousands)
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Three Months Ended
March 31,
2003 2002
---- ----
(Unaudited)
Preferred Stock Balance at beginning of period $ 159,077 $ -
Dividends to preferred stockholders 3,182 -
---------- ---------
Balance at end of period $ 162,259 $ -
========== ==========
Common Stock Balance at beginning of period $ 12,030 $ 11,873
Issuance of shares, net 147 71
---------- ----------
Balance at end of period $ 12,177 $ 11,944
========== ==========
Additional Balance at beginning of period $ 168,866 $ 175,405
Paid-in Capital Issuance of shares 3,341 1,307
Other 64 (18)
---------- ----------
Balance at end of period $ 172,271 $ 176,694
========== ==========
Accumulated Balance at beginning of period $ 7,142 $ (299)
Other Change in unrealized gains (losses) 111 (1,415)
Comprehensive Change in cash flow hedge 945 202
---------- ----------
Income Balance at end of period $ 8,198 $ (1,512)
========== ==========
Retained Balance at beginning of period $ 108,062 $ 55,473
Earnings Net income before preferred stock dividends 23,607 18,233
Dividends to preferred stockholders (3,182) -
Dividends to common stockholders (732) (717)
---------- ----------
Balance at end of period $ 127,755 $ 72,989
========== ==========
Restricted Stock Balance at beginning of period $ (1,713) $ (2,672)
Issuance of restricted stock (3,845) (803)
Amortization of restricted stock 776 677
---------- ----------
Balance at end of period $ (4,782) $ (2,798)
========== ==========
Total Balance at beginning of period $ 453,464 $ 239,780
Stockholders' Issuance of shares 3,488 1,378
Equity Restricted stock, net (3,069) (126)
Unrealized appreciation (depreciation) on investments,
net of deferred income tax 111 (1,415)
Unrealized appreciation on cash flow hedge,
net of deferred income tax 945 202
Net income before preferred stock dividends 23,607 18,233
Dividends to common stockholders (732) (717)
Other 64 (18)
---------- ----------
Balance at end of period $ 477,878 $ 257,317
========== ==========
The accompanying notes are an integral part of these statements.
5
PXRE Consolidated Statements of Cash Flows
Group Ltd. (Dollars in thousands)
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Three Months Ended
March 31,
2003 2002
---- ----
(Unaudited)
Cash Flow Net income before preferred stock dividends $ 23,607 $ 18,233
from Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities:
Losses and loss expenses (10,217) (11,460)
Unearned premiums 8,572 44,469
Deferred acquisition costs 7,073 (5,185)
Receivables (1,645) (23,165)
Reinsurance balances payable (4,495) 14,687
Reinsurance recoverable 33,451 (3,130)
Income taxes (2,015) 7,753
Equity in earnings of limited partnerships (2,377) (1,701)
Trading portfolio fixed maturities and hedge funds acquired (5,688) -
Deposit liability 30,937 434
Other (1,284) (914)
-------------- ------------
Net cash provided by operating activities 75,919 40,021
-------------- ------------
Cash Flow Cost of fixed maturity investments (3,814) (203)
from Investing Fixed maturity investments matured or disposed 35,162 2,219
Activities Payable for securities 233 (94)
Cost of equity securities (76) -
Equity securities disposed - 275
Net change in short-term investments (84,475) (56,423)
Hedge funds and other invested assets disposed 8,208 33,973
Hedge funds and other invested assets purchased (4,023) -
-------------- ------------
Net cash used by investing activities (48,785) (20,253)
-------------- ------------
Cash Flow Proceeds from issuance of common stock 286 886
from Financing Cash dividends paid to common stockholders (732) (717)
Activities Repayment of debt (20,000) (10,000)
Repurchase of minority interest in consolidated subsidiary - (780)
Cost of stock repurchased (642) (452)
-------------- ------------
Net cash used by financing activities (21,088) (11,063)
-------------- ------------
Net change in cash 6,046 8,705
Cash, beginning of period 46,630 22,888
-------------- ------------
Cash, end of period $ 52,676 $ 31,593
============== ============
The accompanying notes are an integral part of these statements.
6
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
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 Solutions, S.A. ("PXRE
Europe"), Cat Fund L.P., PXRE Capital Trust I and PXRE Limited. All material
intercompany transactions have been eliminated in preparing these consolidated
financial statements.
GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The interim consolidated financial statements are unaudited; however,
in the opinion of management, such consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods. These interim statements
should be read in conjunction with the 2002 audited consolidated financial
statements and related notes. The preparation of interim consolidated financial
statements relies significantly upon estimates. Use of such estimates, and the
seasonal nature of a portion of the reinsurance business, necessitate caution in
drawing specific conclusions from interim results.
Certain reclassifications have been made for 2002 to conform to the
2003 presentation.
Stock-Based Compensation
At March 31, 2003, PXRE has stock option plans, which are accounted for
under the recognition and measurement principles of the Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based compensation cost is reflected in net income, as
all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if PXRE had applied
the fair value recognition provisions of the Financial Accounting Standards
Board ("FASB") in the Statement of Financial Accounting Standards ("SFAS") No.
123, Accounting for Stock-Based Compensation to stock-based employee
compensation.
7
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended
March 31,
----------------------------------------
($000's, except per share data) 2003 2002
------------------ ------------------
Net income:
As reported $ 23,607 $ 18,233
Deduct:
Total stock-based compensation expense determined under fair
value based method for all awards, net of related tax effects
(788) (870)
------------------ ------------------
Pro-forma $ 22,819 $ 17,363
================== ==================
Basic income per share:
As reported $ 1.71 $ 1.56
Pro-forma $ 1.65 $ 1.48
Diluted income per share:
As reported $ 1.04 $ 1.51
Pro-forma $ 1.01 $ 1.44
2. Reinsurance
PXRE purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. In the event that retrocessionaires
are unable to meet their contractual obligations, PXRE would remain liable for
the underlying covered claims. The effects of such retrocessional coverage on
premiums written and earned are as follows:
Three Months Ended Increase
March 31, (Decrease)
----------------------------------
($000's) 2003 2002 %
------------- -------------- ------------
Premiums written
Gross premiums written $ 112,470 $ 125,357
Ceded premiums written (19,126) (21,696)
------------- --------------
Net premiums written $ 93,344 $ 103,661 (10)
============= ==============
Premiums earned
Gross premiums earned $ 98,362 $ 78,007
Ceded premiums earned (13,590) (18,851)
------------- --------------
Net premiums earned $ 84,772 $ 59,156 43
============= ==============
8
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
3. Earnings Per Share
The table below presents the computation of basic and diluted earnings
per share:
Three Months Ended
March 31,
-------------------------------------
($000's, except per share data) 2003 2002
--------------- ---------------
Net income available to common stockholders:
Income before preferred stock dividends $ 23,607 $ 18,233
Preferred stock dividends (3,182) -
--------------- ---------------
Net income available to common stockholders $ 20,425 $ 18,233
=============== ===============
Weighted average shares of common stock outstanding:
Weighted average shares of common stock outstanding 11,894 11,710
Equivalent shares of stock options 320 211
Equivalent shares of restricted stock 76 116
Equivalent shares of convertible preferred stock 10,374 -
--------------- ---------------
Weighted average common equivalent shares (diluted) 22,664 12,037
=============== ===============
Per share amounts:
Basic:
Net income before preferred stock dividends $ 1.98 $ 1.56
Preferred stock dividends (.27) -
--------------- ---------------
Net income available to common stockholders $ 1.71 $ 1.56
=============== ===============
Diluted:
Net income before preferred stock dividends $ 1.04 $ 1.51
=============== ===============
4. Income Taxes
The Company is incorporated under the laws of Bermuda and, under
current Bermuda law, is not obligated to pay any taxes in Bermuda based upon
income or capital gains. The Company has received an undertaking from the
Supervisor of Insurance in Bermuda pursuant to the provisions of the Exempted
Undertakings Tax Protection Act, 1966, which exempts the Company from any
Bermuda taxes computed on profits, income or any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax, at
least until the year 2016.
The Company does not consider itself to be engaged in a trade or
business in the United States and accordingly does not expect to be subject to
direct United States income taxation.
The United States subsidiaries of PXRE file a consolidated U.S. federal
income tax return.
9
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
5. Stockholders' Equity
On April 4, 2002, the Company raised $150 million of additional capital
through the issuance of 15,000 Convertible Voting Preferred Shares (the
"Preferred Share Investment"). The Preferred Share Investment occurred pursuant
to a Share Purchase Agreement, dated as of December 10, 2001, between the
Company and Capital Z Financial Services Fund II, L.P., Capital Z Financial
Services Private Fund II, L.P., Reservoir Capital Master Fund, L.P., Reservoir
Capital Partners, L.P. and Richard E. Rainwater. The capital infusion from the
Preferred Share Investment is enabling PXRE to increase underwriting capacity
and therefore maximize participation in the hardening reinsurance market
following the September 11, 2001 terrorist attacks. On February 12, 2002, the
stockholders approved the sale and issuance of three series of convertible
preferred shares pursuant to the Share Purchase Agreement, including 7,500
Series A Convertible Preferred Shares, 5,000 Series B Convertible Preferred
Shares, and 2,500 Series C Convertible Preferred Shares. Proceeds, net of
offering expenses of $9.1 million, amounted to $140.9 million.
The Preferred Shares accrue cumulative dividends per share at the rate
per annum of 8% of the sum of the stated value of each share plus any accrued
and unpaid dividend thereon, payable on a quarterly basis. The stockholders also
voted to approve the division of 20 million of PXRE's 50 million authorized
common shares into three new classes of convertible common shares including 10
million Class A Convertible Voting Common Shares ("Class A Common Shares"),
6,666.667 Class B Convertible Voting Common Shares ("Class B Common Shares"),
and 3,333.333 Class C Convertible Voting Common Shares ("Class C Common
Shares").
Preferred shares are convertible into convertible common shares at the
option of the holder at any time equal to the original purchase cost plus
accrued but unpaid dividends at a conversion price equal to $15.69 provided that
such conversion price is subject to adjustment if the Company experiences
adverse loss development in excess of a $7 million after-tax threshold. As of
March 31, 2003, the Company has incurred $10.7 million of net adverse
development above this $7 million threshold resulting in an adjusted conversion
price of $14.97. Preferred shares mandatorily convert at the third anniversary
of the issuance for two thirds of the shares issued, and the balance at the
sixth anniversary. Preferred shares vote on a fully converted basis on all
matters other than the election of directors.
6. Segment Information
PXRE operates in four reportable property and casualty reinsurance
segments - catastrophe and risk excess, finite business, other lines and exited
lines - based on PXRE's approach to managing the business. Commencing with the
2002 underwriting renewal season, PXRE returned its focus to its core
catastrophe and risk excess and finite businesses. Businesses that were not
renewed in 2002 are reported as exited lines. In addition, PXRE operates in two
geographic segments - North American representing North American based risks
written by North American based clients and International (principally the
United Kingdom, Continental Europe, Latin America, the Caribbean, Australia and
Asia) representing all other premiums written.
10
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
There are no significant differences among the accounting policies of
the segments as compared to PXRE's consolidated financial statements.
PXRE does not maintain separate balance sheet data for each of its
operating segments nor does it allocate net investment income, net realized
investment gains, operating expenses, and financing costs to these segments.
Accordingly, PXRE does not review and evaluate the financial results of its
operating segments based upon balance sheet data and these other income
statement items.
The following tables summarize the net written and earned premiums by
PXRE's business segments:
Net Premiums Written
Three Months Ended March 31,
2003 2002
---------------------- -----------------------
($000's, except percentages) Amount Percent Amount Percent
------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 15,876 $ 12,760
International 78,979 55,837
Excess of Loss Cessions (8,088) (4,430)
----------- ------------
86,767 93% 64,167 62%
----------- ------------
Finite Business
North American 2,362 30,362
International - -
----------- ------------
2,362 2 30,362 29
----------- ------------
Other Lines
North American 2,544 1,809
International - 41
----------- ------------
2,544 3 1,850 2
----------- ------------
Exited Lines
North American 297 7,786
International 1,374 (504)
----------- ------------
1,671 2 7,282 7
----------- --- ------------ ---
Total $ 93,344 100% $ 103,661 100%
=========== === ============ ===
11
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
Net Premiums Earned
Three Months Ended March 31,
2003 2002
---------------------- -----------------------
($000's, except percentages) Amount Percent Amount Percent
------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 14,783 $ 9,803
International 52,158 32,175
Excess of Loss Cessions (6,384) (4,711)
----------- ------------
60,557 71% 37,267 63%
----------- ------------
Finite Business
North American 20,850 8,573
International - -
----------- ------------
20,850 25 8,573 15
----------- ------------
Other Lines
North American 1,142 2,421
International - 99
----------- ------------
1,142 1 2,520 4
----------- ------------
Exited Lines
North American 795 8,068
International 1,428 2,728
----------- ------------
2,223 3 10,796 18
----------- --- ------------ ---
Total $ 84,772 100% $ 59,156 100%
=========== === ============ ===
12
PXRE
Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
The following table summarizes the underwriting income (loss) by
segment:
Underwriting Income (Loss)
Three Months Ended March 31,
2003 2002
---------------------- -----------------------
($000's, except percentages) Amount Percent Amount Percent
------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 11,288 $ 11,377
International 39,125 21,754
Excess of Loss Cessions (9,978) (1,668)
----------- ------------
40,435 127% 31,463 104%
----------- ------------
Finite Business
North American (2,925) 2,863
International - -
----------- ------------
(2,925) (9) 2,863 9
----------- ------------
Other Lines
North American 367 178
International 46 315
----------- ------------
413 1 493 2
----------- ------------
Exited Lines
North American (2,704) (3,687)
International (3,435) (720)
----------- ------------
(6,139) (19) (4,407) (15)
----------- --- ------------ ---
Total $ 31,784 100% $ 30,412 100%
=========== === ============ ===
The following table reconciles the underwriting income (loss) for the
operating segments to income before income taxes as reported in the Consolidated
Statements of Income and Comprehensive Income:
Three Months Ended
March 31,
-------------------------------
($000's) 2003 2002
------------ -------------
Net underwriting income $ 31,784 $ 30,412
Net investment income 5,475 4,087
Net realized investment (losses) gains (1) 489
Interest expense (2,259) (745)
Minority interest in consolidated subsidiary (2,106) (2,224)
Other operating expenses (9,162) (8,870)
Unrealized foreign exchange gains on losses 1,403 365
incurred
Other loss (20) (34)
------------ -------------
Income before income taxes $ 25,114 $ 23,480
============ =============
13
7. 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 had denied coverage, contending that its
Managing General Agent had no authority to issue these policies.
PXRE Delaware disagreed with Terra Nova's denial and filed suit against
Terra Nova in the United States District Court for the District of New Jersey.
On June 10, 2002, PXRE Delaware was awarded a verdict of $8.3 million plus
accumulated interest of $1.5 million by a jury at the conclusion of the trial of
this dispute. The aggregate sum of $9.8 million is included in Other Assets.
Terra Nova has appealed this verdict to the United States Court of Appeals for
the Third Circuit, but management has concluded that the sum of $9.8 million is
realizable and that no valuation allowance is necessary. The appeal is expected
to be submitted to the Third Circuit on June 3, 2003.
8. Subsequent Event
Subsequent to March 31, 2003, PXRE Statutory Capital Trust II, a
wholly-owned subsidiary of the Company, entered into an agreement to sell, to an
off-shore entity in a private transaction, $17.5 million principal amount of
fixed/floating rate deferrable interest capital securities based on an equal
principal amount of the Company's fixed/floating rate junior subordinated
deferrable interest debentures due May 15, 2033. The securities bear interest at
an initial rate of 7.35%. The Company intends to use the net proceeds of the
sale to repay the balance of $10 million outstanding under its Credit Agreement,
and to provide additional capital to PXRE Bermuda. It is expected that this
issue will close on or about May 15, 2003.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Unless the context otherwise requires, references in this Form 10-Q to
"PXRE", "we", the "Company", "us" and "our" include PXRE Group Ltd., a Bermuda
company and its subsidiaries, which principally include PXRE Corporation ("PXRE
Delaware"), PXRE Reinsurance Company ("PXRE Reinsurance"), PXRE Reinsurance Ltd.
("PXRE Bermuda"), PXRE Reinsurance (Barbados) Ltd. ("PXRE Barbados"), PXRE
Solutions Inc. ("PXRE Solutions") and PXRE Solutions, S.A. ("PXRE Europe").
References to GAAP refer to accounting principles generally accepted in the
United States ("GAAP"). References to SAP refer to statutory accounting
principles ("SAP") in either the State of Connecticut where PXRE Reinsurance is
domiciled or Bermuda where PXRE Bermuda is domiciled.
The following is a discussion and analysis of the Company's results of
operations for the three months ended March 31, 2003 compared with the three
months ended March 31, 2002, and also a discussion of our financial condition as
of March 31, 2003. This discussion and analysis should be read in conjunction
with the attached unaudited consolidated financial statements and notes thereto
and the Company's Annual Report on Form 10-K for the year ended December 31,
2002 (the "10-K"), including the audited consolidated financial statements and
notes thereto and the discussion of Certain Risks and Uncertainties (including
the discussion of Critical Accounting Policies) contained in the 10-K.
Overview
The Company provides reinsurance products and services to a worldwide
marketplace through subsidiary operations in the United States, Europe, Bermuda
and Barbados. Our primary focus is providing property catastrophe reinsurance
and retrocessional coverage to a worldwide group of clients, 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 clients' claims
until their claims exceed a certain specified amount and our obligation to pay
those claims is limited to a specified aggregate amount.
We also offer our clients property-per-risk, marine and 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 and marine and aviation
business is also written on an excess-of-loss basis with aggregate limits on our
exposure to losses.
15
We also provide our clients with finite reinsurance products. Finite
reinsurance contracts are highly customized for each transaction. If the loss
experience with respect to the risks assumed by us is as expected or better than
expected, our finite clients may share in the profitability of the underlying
business through premium adjustments or profit commissions. If the loss
experience is worse than expected, our finite clients may participate in this
negative outcome to a certain extent. In addition, we offer finite reinsurance
products where investment returns on the funds transferred to us affect the
profitability of the contract and the magnitude of any premium or commission
adjustments.
Cautionary Statement Regarding Forward-Looking Statements
This report contains various forward-looking statements and includes
assumptions concerning our operations, future results and prospects. Statements
included herein, as well as statements made by or on our behalf in press
releases, written statements or other documents filed with the Securities and
Exchange Commission (the "SEC"), or in our communications and discussions with
investors and analysts in the normal course of business through meetings, phone
calls and conference calls, which are not historical in nature are intended to
be, and are hereby identified as, "forward-looking statements" for purposes of
the safe harbor provided by Section 21E of the Securities Exchange Act of 1934
as amended. These forward-looking statements, identified by words such as
"intend," "believe," "anticipate," or "expects" or variations of such words or
similar expressions are based on current expectations and are subject to risks
and 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 amount of which are difficult to
predict;
(ii) changes in the level of competition in the reinsurance or
primary insurance markets that impact the volume or
profitability of business (these changes include, but are not
limited to, the intensification of price competition, the
entry of new competitors, existing competitors exiting the
market and competitors' development of new products);
(iii) the lowering or loss of one of the financial or claims paying
ratings of ours or one or more of our subsidiaries;
16
(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;
(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) a contention by the United States Internal Revenue Service
that the Company or our offshore subsidiaries are subject to
U.S. taxation; and
(xiii) changes in tax laws, tax treaties, tax rules and
interpretations.
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.
17
We undertake no obligation to release publicly the results of any
future revisions we may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Comparison of First Quarter Results for 2003 with 2002
For the quarter ended March 31, 2003, net income before preferred stock
dividends was $23.6 million compared to net income of $18.2 million for the
comparable period of 2002. The diluted net income per common share was $1.04 for
the first quarter of 2003 compared to a diluted net income per share of $1.51
for the first quarter of 2002, based on diluted average shares outstanding of
approximately 22.7 million in the first quarter of 2003 and 12.0 million in the
first quarter of 2002.
Gross and net written premiums for the first quarter of 2003 and 2002
were as follows:
Three Months Ended March 31,
---------------------------------------
% Increase
($000's) 2003 2002 (Decrease)
----------------- ----------------- ----------
Gross premiums written $ 112,470 $ 125,357 (10)
Ceded premiums written (19,126) (21,696) (12)
----------------- -----------------
Net premiums written $ 93,344 $ 103,661 (10)
================= =================
The decrease in gross and net premiums written primarily reflects a
decline in both the Finite and Exited Lines segments offset, in part, by growth
in the Catastrophe and Risk Excess segment. Improved pricing, increased
participation with long-standing clients and substantial amounts of new business
in our core Catastrophe and Risk Excess segment resulted in a 38% increase in
net premiums written for the quarter, before the effects of excess of loss
reinsurance ceded, in this key segment as compared to the corresponding
prior-year period. The Finite segment decreased 92% during the first quarter of
2003 versus the prior-year comparable quarter on a net written basis primarily
due to one large finite reinsurance contract. With respect to our Finite
segment, we take an opportunistic approach to this business and do not believe
this business is best measured by premiums written or earned from quarter to
quarter. Compared to our other lines of business, our finite business involves a
relatively small number of large reinsurance contracts. We therefore expect that
the Finite segment premiums written and earned will vary widely from quarter to
quarter reflecting this strategy. The Exited Lines segment decreased 77% on a
net written basis compared to the corresponding period of 2002. Since we have
decided to re-focus on our core Catastrophe and Risk Excess segment and to
discontinue the businesses we have classified as Exited Lines, we do not expect
to report material premiums written and earned in the Exited Lines segment
during 2003. On an overall basis, reinsurance premiums ceded decreased by 12% to
$19.1 million for the first quarter of 2003 compared to $21.7 million for the
first quarter of 2002, primarily as a result of the decrease in finite contracts
ceded and cessions on the per-risk portion of the Catastrophe and Risk Excess
segment, offset by an increase in ceded excess of loss business written.
18
Finite contracts that do not meet 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. We have entered into contracts in 2001, 2002 and 2003 that have $66.1
million of deposit liabilities to ceding companies at March 31, 2003 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 and other accounting literature, totaling
$21.5 million in deposit assets including investment income earned to March 31,
2003. We believe these retrocessional agreements will enhance the long-term
profitability of the finite contracts to which they relate.
Gross and net earned premiums for the first quarter of 2003 and 2002
were as follows:
Three Months Ended March 31,
---------------------------------------
% Increase
($000's) 2003 2002 (Decrease)
----------------- ----------------- ----------
Gross premiums earned $ 98,362 $ 78,007 26
Ceded premiums earned (13,590) (18,851) (28)
----------------- -----------------
Net premiums earned $ 84,772 $ 59,156 43
================= =================
Gross premiums earned for the first quarter of 2003 increased 26% to
$98.4 million from $78.0 million in the first quarter of 2002. Net premiums
earned for the first quarter of 2003 increased 43% to $84.8 million from $59.2
million for the corresponding period of 2002. The Catastrophe and Risk Excess
segment increased 59% on a net earned basis, before the effects of excess of
loss reinsurance ceded, while the Finite segment increased 143% on a net earned
basis compared to the corresponding prior-year period. The Exited Lines segment
experienced a decline of 79% on a net earned basis for the first quarter of 2003
as compared to the first quarter of 2002.
A summary of our first quarter 2003 and 2002 net premiums written and
earned by business segment is included in Note 6 to the Consolidated Financial
Statements.
Fee income was $1.3 million for both the three months ended March 31,
2003 and 2002.
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 (including commission and brokerage and
other operating expenses, reduced by fee income, if any) by net premiums written
for purposes of SAP and net premiums earned for purposes of 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 GAAP basis.
19
The following table summarizes the loss ratio, expense ratio and
combined ratio for the quarters ended March 31, 2003 and 2002, respectively:
(%) Three Months Ended March 31,
----- ----------------------------
2003 2002
---- ----
Loss ratio 38.8 29.1
Expense ratio 32.9 33.9
---- ----
Combined ratio 71.7 63.0
==== ====
Our loss ratio was 38.8% for the first quarter of 2003 compared to
29.1% for the comparable prior-year period. There were no significant
catastrophes during the three months ended March 31, 2003 and 2002.
During the first quarter of 2003, we experienced net development of
$13.2 million for prior-year loss and loss expenses, $7.6 million of which was
due to loss development on our Exited Lines segment relating primarily to the
2000 and 2001 underwriting years including adverse development of $3.3 million
primarily caused by larger than expected reported claims under our direct
reinsurance contracts. The remaining exited lines development was attributable
to the late reported credit losses. We also experienced $3.9 million loss
development on our Finite segment. The loss ratio for the comparable period of
2002 was affected by net adverse development of $4.4 million for prior-year loss
and loss expenses mainly due to $3.3 million of loss development on our
discontinued direct casualty reinsurance operations.
The expense ratio was 32.9% for the first quarter of 2003 compared to
33.9% during the comparable year earlier period. The decrease is primarily due
to an increase in net premiums earned. The commission and brokerage ratio, net
of fee income, was 22.1% for the first quarter of 2003 compared with 18.9% for
the first quarter of 2002. The operating expense ratio was 10.8% for the three
months ended March 31, 2003 compared with 15% for the comparable period of 2002.
As a result of the above, our combined ratio was 71.7% for the first quarter of
2003 compared with a combined ratio of 63% for the comparable prior-year period.
Other operating expenses increased 3% to $9.2 million for the three
months ended March 31, 2003 from $8.9 million in the comparable period of 2002.
Underwriting income (loss) as described in Note 6 to the Consolidated
Financial Statements include premiums earned, losses incurred and commission and
brokerage net of management fees, but does not include investment income,
realized gains or losses, interest expense, minority interest in consolidated
subsidiary, operating expenses, or unrealized foreign exchange gains or losses
on losses incurred.
Interest expense increased to $2.3 million for the three months ended
March 31, 2003 from $0.7 million for the three months ended March 31, 2002.
Following the repayment of $20 million on March 31, 2003 under the primary bank
credit facility, the interest rate swap previously accounted for as a cash flow
hedge is no longer effective. Consequently $1.3 million has been charged as
interest expense in the quarter. This charge did not impact stockholders' equity
since it was previously recorded as a component of other comprehensive income.
In addition there was an acceleration of the amortization of expenses related to
this facility of $0.2 million in the quarter. The Company incurred minority
interest expense amounting to $2.1 million and $2.2 million related to PXRE's
$100 million of 8.85% Capital Trust Pass-through Securities`sm' ("TRUPSsm")
during the three month periods ended March 31, 2003 and 2002, respectively (see
"Liquidity and Capital Resources" below for a full description of the TRUPSsm).
20
Net investment income for the first quarter of 2003 increased 34% to
$5.5 million from $4.1 million in the first quarter of 2002 primarily as a
result of an increase in average invested balances offset in part by a decrease
in fixed income yields. The average invested balance increased due to the
proceeds of the Preferred Share Investment as well as cash flows from
operations. The fixed maturity and short-term investment portfolio book yield on
an annualized basis was approximately 4.0% during the first quarter of 2003
compared to 4.6% during the corresponding prior-year period. Investment income
related to our hedge fund portfolio decreased slightly to $2.2 million in the
first quarter of 2003 from $2.3 million in the first quarter of 2002. Investment
in hedge funds produced an annualized return of 8.2% for the quarter compared
with 9.9% in the comparable prior-year period.
Investment income for the quarter was also affected by various finite
and other reinsurance contracts where premiums payable under such contracts were
retained on a funds withheld basis. In order to reduce credit risk or to comply
with regulatory credit for reinsurance requirements a portion of premiums paid
under such reinsurance contracts are retained by the cedent pending payment of
losses or commutation of the contract. Investment income on such withheld funds
is typically for the benefit of the reinsurer and the cedent may provide a
minimum investment return on such funds. We have both ceded and assumed
reinsurance contracts that involve the withholding of premiums by the cedent. On
assumed reinsurance contracts, cedents held premiums and accrued investment
income due to us of $24.7 million as of March 31, 2003, for which we have
recognized $0.4 million of investment income for the first quarter of 2003. On
ceded reinsurance contracts, we held premiums and accrued investment income of
$129.6 million due to reinsurers as of March 31, 2003, for which we recognized a
charge to investment income of $2.3 million for the first quarter of 2003. On a
net basis, this charge to investment income was only $0.7 million, representing
the difference between the stated investment return under such contracts and the
overall yield achieved on our total investment portfolio for the quarter. The
weighted average contractual investment return on the funds held by PXRE is 7.2%
and we expect to be obligated for this contractual investment return for the
life of the underlying liabilities, which is expected to be 7 years on a
weighted average basis.
Net realized investment losses for the first quarter of 2003 were
minimal compared to net realized investment gains of $0.5 million in the first
quarter of 2002. Included in the net realized investment gains for the first
quarter of 2002 were gains of $0.7 million realized on the repurchase of $1.5
million of our TRUPSsm Securities.
21
PXRE recognized a tax expense of $1.5 million in the first quarter of
2003 compared to a tax expense of $5.2 million in the comparable prior-year
period. The tax expense in the first quarter of 2003 differed from the statutory
rate primarily due to the mix of business between the U.S. and Bermuda, as well
as tax-exempt income.
Update on Critical Accounting Policies
The Company's Annual Report on Form 10-K for the year ended December
31, 2002 discloses certain risks and uncertainties relating to critical
accounting policies (See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Risks and Uncertainties
Relating to Critical Accounting Policies contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002). This included
disclosure concerning our estimation of losses and loss expenses, the
assumptions used in making such estimation and the various factors that
contribute to uncertainty in those estimates.
In this regard, we noted as a property catastrophe reinsurer, our
estimations of losses are inherently less reliable than for reinsurers of risks
that have an established historical pattern of losses such as casualty risks. In
addition, with respect to 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 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.
In reserving for 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. The French Storm Martin that occurred on
December 27, 1999 presents an extreme example of these potential uncertainties.
We based our reserves to a significant degree on 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, a
widely used industry publication. Our gross loss estimate at December 31, 1999
for this event was $31.3 million. Our gross loss estimate at December 31, 2002
for this event was $66.0 million. Thus, the original industry loss estimate
increased by 150%, and our loss estimate has increased by 111%.
22
Excluding the extraordinary development of French Storms Martin and
Lothar in 2000, during the last 10 years, reserve development in any single year
from prior year losses, expressed as a percentage of stockholders' equity,
ranged from 15% adverse development in 1993 (primarily arising from Hurricane
Andrew) to 4% favorable development in 1996.
In addition, the risk for recent underwriting years includes the
increased casualty exposures assumed by us through our casualty and finite
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 limited experience in
the casualty and finite business, we do not have established historical loss
development patterns that can be used to establish these 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.
During the first quarter of 2003, we experienced net development of
$13.2 million for prior-year loss and loss expenses, $7.6 million of which was
due to loss development in our Exited Lines segment relating primarily to the
2000 and 2001 underwriting years including adverse development of $3.3 million
primarily caused by larger than expected reported claims under our direct
reinsurance contracts. The remaining exited lines development was attributable
to late reported credit losses. We ceased writing these businesses in September
2001. Our current estimate of net loss and loss expense liabilities for our
Exited Lines segment as of March 31, 2003 is $104.7 million, which represents
our best estimate from a range of estimates provided by alternative actuarial
assumptions and methods. The low and high end of a range of reasonable loss
reserves for our Exited Lines is $10.2 million below and $11.3 million above our
current net loss and loss expense estimate. On an overall basis, our current
estimate of net loss and loss expense liabilities for all segments as of March
31, 2003 is $263.6 million, which represents our best estimate from a range of
estimates provided by alternative actuarial assumptions and methods. The low and
high end of a range of reasonable loss reserves for all segments is $20.4
million below and $21.8 million above our current net loss and loss expense
estimate.
23
Recent Developments
On April 23, 2003, PXRE commuted its quota share reinsurance agreement
with P-1 Re Ltd. ("P-1") in consideration of a commutation fee of $1.8 million
payable by P-1 to PXRE. The commutation is effective as of January 1, 2003 and
PXRE will retain all reinsurance premiums that would have been ceded to P-1.
PXRE elected to commute this reinsurance facility because it believes that it
will earn a higher risk-adjusted profit by retaining the business ceded to P-1
than it could earn from the management fee that was payable under the P-1
reinsurance agreement.
PXRE had established the P-1 facility in December 2002 to manage the
potential for excess growth in PXRE's property-catastrophe peak zone exposures.
Under the P-1 reinsurance agreement, the quota share ceded to P-1 was determined
based upon the amount of exposure PXRE wrote in excess of certain minimum
retained amounts established by PXRE. PXRE met planned internal growth targets
during the January 1, 2003 renewal season for its property-catastrophe business,
but it did not experience significant peak zone exposure growth beyond its
internal targets and the property catastrophe quota share ceded to P-1 was only
2.74%. As a result, the bulk of the business ceded to P-1 was well rated
aviation, satellite and risk excess business. Such aviation, satellite and risk
excess business is not highly correlated to PXRE's property-catastrophe
exposures and the reassumption of this business improves the expected return on
PXRE's reinsurance portfolio.
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 distributions that PXRE Reinsurance may declare and pay
during 2003, without regulatory approval, is $45.7 million. During the three
months ended March 31, 2003, $18.6 million in dividends were paid by PXRE
Reinsurance.
The payment of dividends by PXRE Bermuda is limited under Bermuda
insurance laws, which requires PXRE Bermuda to maintain certain measures of
solvency and liquidity. At March 31, 2003, the statutory capital and surplus of
PXRE Bermuda was estimated to be $93.1 million and the amount required to be
maintained was estimated to be $9.9 million. In addition, under Bermuda law,
PXRE Bermuda may not reduce its total statutory capital of $70.6 million, as set
out in its statutory financial statement dated December 31, 2002, by 15% or more
without the prior approval of Bermuda's Minister of Finance.
24
Under Barbados law, PXRE Barbados may only pay a dividend out of the
realized profits. 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 (c) the stated capital accounts are maintained in respect of
all classes of shares.
On April 4, 2002, the Company raised $150 million of additional capital
through the issuance of 15,000 Convertible Voting Preferred Shares (the
"Preferred Share Investment"). The Preferred Share Investment occurred pursuant
to a Share Purchase Agreement, dated as of December 10, 2001, between the
Company and 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 Preferred Share
Investment involved the issuance 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). The Company's
common shareholders approved the transaction on February 12, 2002.
The issuance of the Preferred Shares is not expected to have a material
effect on our liquidity during the three-year period following the 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.
25
PXRE Delaware entered into a Credit Agreement dated as of December 30,
1998 (as amended and restated, the "Credit Agreement") with Wachovia Bank,
National Association (formerly known as First Union National Bank, "Wachovia")
as Agent and as a Lender, pursuant to which Wachovia 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, Wachovia
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 Wachovia, the "Lenders"). 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 each of March 31, 2000, 2001, 2002 and April 4, 2002 PXRE Delaware
fulfilled its commitment and made principal payments of $10 million. In
addition, PXRE Delaware paid $5 million on July 1, 2002 and $20 million on March
31, 2003, reducing the outstanding loan to $10 million, at March 31, 2003.
In connection with the Credit Agreement, PXRE Delaware and Wachovia
entered into a cash flow hedge interest rate swap which had the intended effect
of converting the $50 million borrowings by PXRE Delaware into a fixed rate
borrowing at an effective annual interest rate of 7.59%. Prior to 2003, this
interest rate swap was accounted for as a hedge. During the first quarter of
2003, we concluded that the swap was no longer effectively hedging the cash
flows associated with the Credit Agreement and, as such, recognized through
earnings the fair value of the swap. This charge did not impact stockholders'
equity since it was previously recorded as a component of other comprehensive
income.
Commitments under the Credit Agreement terminate on March 31, 2004 and
are subject to annual reductions and, unless due or paid sooner, the aggregate
principal of the loans are due and payable in full on March 31, 2004. The
outstanding commitment was reduced by $10 million on April 4, 2002 and an
additional reduction of $5 million was made on July 1, 2002. The remaining
commitment was reduced by $20 million on March 31, 2003 and will be reduced by
$10 million on March 31, 2004. In addition, commencing on June 30, 2003, 50% of
Excess Cash Flow (as defined in the Credit Agreement) shall be used to reduce
the outstanding commitment. Effective April 4, 2002, the applicable margin
percentage under the Amended Credit Agreement was increased by 100 basis points
and effective March 15, 2003 there was an additional increase of 25 basis
points.
26
The Credit Agreement contains covenants that, among other things, limit
the ability of the Company and its subsidiaries and affiliates to undertake
certain activities and require compliance with Leverage Ratio, Fixed Charge
Coverage Ratio, Risk-Based Capital Ratio and Combined Statutory Surplus
requirements. Under the Credit Agreement, the definition of Fixed Charge
Coverage Ratio has been amended to provide credit for the capital infusion
resulting from the Preferred Share Investment. In addition, 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, after which
time the Fixed Charge Coverage Ratio will return to 1.5 to 1.
On January 29, 1997, PXRE Capital Trust I ("PXRE Capital Trust"), a
Delaware statutory trust and a wholly-owned subsidiary of PXRE Delaware, issued
$100 million principal amount of its 8.85% TRUPSsm 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 SEC 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 the three months
ended March 31, 2003 and 2002 in respect of the Capital Securities (and related
Subordinated Debt Securities) amounted to $2.1 million and $2.2 million,
respectively.
We believe that the TRUPSsm are currently trading at an under-valued
price. In order to take advantage of this opportunity, we may cause one or more
of our subsidiaries to purchase some of the outstanding TRUPSsm and hold them
for investment purposes. If consummated, such a purchase is not expected to be
treated as a redemption. We did not purchase any TRUPSsm during the first
quarter of 2003.
Subsequent to March 31, 2003, PXRE Statutory Capital Trust II, a
wholly-owned subsidiary of the Company, entered into an agreement to sell, to an
off-shore entity in a private transaction, $17.5 million principal amount of
fixed/floating rate deferrable interest capital securities based on an equal
principal amount of the Company's fixed/floating rate junior subordinated
deferrable interest debentures due May 15, 2033. The securities bear interest at
an initial rate of 7.35%. The Company intends to use the net proceeds of the
sale to repay the balance of $10 million outstanding under its Credit Agreement,
and to provide additional capital to PXRE Bermuda. It is expected that this
issue will close on or about May 15, 2003.
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).
27
Investments
As of March 31, 2003, our investment portfolio, at fair value, was
allocated 84.9% in bonds and short-term investments, 13.7% in hedge funds and
1.4% in other investments.
The following table summarizes our investments at March 31, 2003 and
2002 at fair value:
Analysis of Investments
March 31, 2003 March 31, 2002
--------------------- ---------------------
($000's, except percentages) Amount Percent Amount Percent
------ ------- ------ -------
Fixed maturities:
United States treasury securities $ 47,765 5.9% $ 51,875 9.8%
Foreign denominated securities 28,039 3.4 - -
Foreign government securities 315 - 5,385 1.1
United States government sponsored agency
debentures 39,138 4.8 41,330 7.8
United States government sponsored agency
mortgage-backed securities 37,785 4.6 17,949 3.4
Other mortgage and asset-backed securities 135,123 16.6 8,559 1.6
Municipal securities 62,820 7.7 34,854 6.6
Corporate securities 124,270 15.2 55,111 10.4
--------------- ----- ------------- -----
Total fixed maturities 475,255 58.2 215,063 40.7
Short-term investments 217,794 26.7 209,927 39.8
--------------- ----- ------------- -----
Total fixed maturities and short-term investments 693,049 84.9 424,990 80.5
Hedge funds 111,479 13.7 86,047 16.3
Other investments 11,420 1.4 16,643 3.2
--------------- ----- ------------- -----
Total investment portfolio $ 815,948 100.0% $ 527,680 100.0%
=============== ===== ============= =====
At March 31, 2003, 96.7% of the fair value of our fixed maturities and
short-term investments portfolio was in obligations rated "A1" or "A" or better
by Moody's or S&P, respectively. Mortgage and asset-backed securities accounted
for 24.9% of fixed maturities and short-term investments or 21.2% of our total
investment portfolio based on fair value at March 31, 2003. The average yield on
our fixed maturity portfolio at March 31, 2003 and 2002 was 2.9% and 4.8%,
respectively.
28
In April 2002, the $140.9 million Preferred Share Investment net
proceeds were received, with $10 million repaid under the Credit Agreement, and
the remainder was primarily invested in our fixed maturity portfolio.
Fixed maturity investments, other than trading securities, are reported
at fair value, with the net unrealized gain or loss, net of tax, reported as a
separate component of stockholders' equity. Fixed maturity investments
classified as trading securities are reported at fair value, with the net
unrealized gain or loss reported as investment income. At March 31, 2003, an
after-tax unrealized gain of $8.2 million (gain of 36 cents per share, after
considering convertible preferred shares) was included in stockholders' equity.
Short-term investments are carried at amortized cost, which
approximates fair value. Our short-term investments, principally short-term
agencies and United States treasuries, were $217.8 million at March 31, 2003,
compared to $209.9 million at March 31, 2002
A principal component of our investment strategy is investing a portion
of our invested assets in a diversified portfolio of hedge funds. At March 31,
2003, total hedge fund investments amounted to $111.5 million, representing
13.7% of the total investment portfolio. At March 31, 2002, total hedge fund
investments amounted to $86 million, representing 16.3% of the total investment
portfolio. For the three months ended March 31, 2003, our hedge funds yielded an
annualized return of 8.2% as compared to 9.9% in the three months ended March
31, 2002. At March 31, 2003, hedge fund investments with fair values ranging
from $1.7 million to $15.9 million were administered by fifteen managers.
Our hedge fund managers invest in a variety of markets utilizing a
variety of strategies, generally through the medium of private investment
companies or other entities. Criteria for the selection of hedge fund managers
include, among other factors, the historical performance and/or recognizable
prospects of the particular manager and a substantial personal investment by the
manager in the investment program. However, managers without past trading
histories or substantial personal investment may also be considered. Generally,
our hedge fund managers may be compensated on terms that may include fixed
and/or performance-based fees or profit participations.
Through our hedge fund managers, we may invest or trade in any
securities or instruments including, but not limited to, U.S. and non-U.S.
equities and equity-related instruments, currencies, commodities and
fixed-income and other debt-related instruments and derivative instruments.
Hedge fund managers may use both over-the-counter and exchange traded
instruments (including derivative instruments such as swaps, futures and forward
agreements), trade on margin and engage in short sales. Substantially all hedge
fund managers are expected to employ leverage, to varying degrees, which
magnifies both the potential for gain and the exposure to loss, which may be
substantial. Leverage may be obtained through margin arrangements, as well as
repurchase, reverse repurchase, securities lending and other techniques. Trades
may be on or off exchanges and may be in thinly traded securities or
instruments, which creates the risk that attempted purchases or sales may
adversely affect the price of a particular investment or its liquidation and may
increase the difficulty of valuing particular positions.
29
While we seek capital appreciation with respect to our hedge fund
investments, we are also concerned with preservation of capital. Therefore, our
hedge fund portfolio is designed to take advantage of broad market opportunities
and diversify risk. Nevertheless, our investment policies with respect to our
hedge fund investments generally do not restrict us from participating in
particular markets, strategies or investments. Further, our hedge fund
investments may generally be deployed and redeployed in whatever investment
strategies are deemed appropriate under prevailing economic and market
conditions in an attempt to achieve capital appreciation, including, if
appropriate, a concentration of investments in a relatively small group of
strategies or hedge fund managers. Accordingly, the identity and number of hedge
fund managers is likely to change over time.
Mariner Investment Group, Inc. ("Mariner"), as investment advisor,
allocates assets to the hedge fund managers. Mariner monitors hedge fund
performance and periodically reallocates assets in its discretion. Mariner is
familiar with a number of hedge fund investment strategies utilized by our hedge
fund managers. Mariner has invested in some of these strategies and has a
varying level of knowledge of others. New strategies, or strategies not
currently known to Mariner, may come to Mariner's attention and may be adopted
from time to time.
As of March 31, 2003, our investment portfolio also included $11.4
million of other invested assets of which 96% is in two mezzanine bond funds.
The remaining aggregate cash call commitments in respect of such investments are
$1.2 million.
Hedge funds and other limited partnership investments are accounted for
under the equity method. Total investment income for the three months ended
March 31, 2003, included $2.4 million attributable to hedge funds and other
investments.
Our hedge fund and other privately held securities program should be
viewed as exposing us to the risk of substantial losses, which we seek to reduce
through our multi-asset and multi-management strategy. There can be no
assurance, however, that this strategy will prove to be successful.
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.
30
Net cash flows provided by operations were $75.9 million in the first
quarter of 2003 compared to $40.0 million provided by operations in the first
quarter of 2002 due to the effects of timing of collection of receivables and
reinsurance recoverables and payments of losses. Because of the nature of the
coverages we provide, which typically can produce infrequent losses of high
severity, it is not possible to accurately predict our future cash flows from
operating activities. As a consequence, cash flows from operating activities may
fluctuate, perhaps significantly, between individual quarters and years.
In connection with the capitalization of PXRE Lloyd's Syndicate 1224,
PXRE Reinsurance had placed on deposit a $35.6 million par value U.S. Treasury
security as collateral for Lloyd's. Cash and invested assets held by PXRE
Lloyd's Syndicate 1224, amounting to $13.1 million at March 31, 2003, are
restricted from being paid as a dividend until the run-off has been completed.
Other commitments and pledged assets include (a) letters of credit
amounting to $14 million which are secured by cash and securities amounting to
$14.3 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, (c)
securities with a fair value of $54.2 million deposited in a trust for the
benefit of a cedent in connection with certain finite reinsurance transactions,
(d) funding commitments to certain limited partnerships of $1.2 million, (e) a
commitment to lend up to $5.2 million to finance the construction of an office
building that we intend to use as our headquarters in Bermuda, and (f) a
contingent liability amounting to $1.2 million under the 1992 Restated Employee
Annual Incentive Bonus Plan plus interest; and (g) commitments under the credit
agreement discussed above.
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 had denied coverage, contending that its
Managing General Agent had no authority to issue these policies.
PXRE Delaware disagreed with Terra Nova's denial and filed suit against
Terra Nova in the United States District Court for the District of New Jersey.
On June 10, 2002, PXRE Delaware was awarded a verdict of $8.3 million plus
accumulated interest of $1.5 million by a jury at the conclusion of the trial of
this dispute. The aggregate sum of $9.8 million is included in Other Assets.
Terra Nova has appealed this verdict to the United States Court of Appeals for
the Third Circuit, but management has concluded that the sum of $9.8 is
realizable and that no valuation allowance is necessary. The appeal is expected
to be submitted to the Third Circuit on June 3, 2003.
31
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 three 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 of which $1.8 million has been advanced as of March 31,
2003. Such loans are secured by a first mortgage on the property.
We may be subject to gains and losses resulting from currency
fluctuations because substantially all of our investments are denominated in
U.S. dollars, while some of our net liability exposure is in currencies other
than U.S. dollars. We hold, and expect to continue to hold, currency positions
and have made, and expect to continue to make, investments denominated in
foreign currencies to mitigate, in part, the effects of currency fluctuations on
our results of operations. Investments in foreign denominated securities held as
part of our trading securities amount to 3.4% of our investment portfolio and,
in our opinion are sufficiently liquid for our needs.
Dividends declared to common shareholders in the first quarter of 2003
and 2002 were $0.7 million. The expected annual dividend based on common shares
outstanding at March 31, 2003 is approximately $2.9 million.
Book value per common share was $20.76 at March 31, 2003 after
considering convertible preferred shares.
Certain Transactions
PXRE Reinsurance is a party to a retrocessional agreement (as amended
from time to time, the "Select Re Quota Share Agreement") with Select Re,
pursuant to which we offer to cede a proportional share of our non-casualty
reinsurance business. In 2003 and 2002, the proportional share of our
non-casualty business ceded to Select Re under that agreement was 8.0%. As a
complement to the Select Re Quota Share Agreement, we cede an additional
proportional share to Select Re on certain agreed risks under a variable quota
share agreement. In connection with the Select Re Quota Share Agreement, we have
entered into an undertaking to use commercially reasonable efforts to present
Select Re with aggregate annual premiums equal to a minimum of 20% of Select
Re's shareholders' equity (as defined in the undertaking). This undertaking was
amended in November 2002 and extended until 2005. In return, Select Re is
obligated to pay us a management fee 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 2002 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 in 2001 that protects us
against large losses arising from a single catastrophe event and against the
accumulation of aggregate losses arising from a number of events; and (iii) we
provided Select Re with catastrophe excess of loss retrocessional coverage that
protects them in the event they incur significant losses arising from a single
catastrophe event which involved premiums of $3.2 million in 2003 and $1.7
million in 2002.
32
During the first three months of 2003, we ceded reinsurance premiums of
$7.9 million to Select Re.
As of March 31, 2003, net assets of $72.2 million were due in the
aggregate from Select Re, all of which is fully secured by way of reinsurance
trusts, 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, 2002, it had shareholders' equity of approximately $137
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 Jeffrey L. Radke, our President and Chief Operating Officer, to serve
on Select Re's board of directors. Prior to joining us in 1999, Jeffrey Radke
had served as the President of Select. Jeffrey Radke receives no remuneration
for serving on Select Re's board.
Gerald Radke, Jeffrey Radke and Halbert Lindquist, one of our
directors, each individually hold Select Re shares, but each such person holds
less than 1% of Select Re's outstanding shares. Pursuant to an agreement with
shareholders of Select Re, Gerald Radke and Jeffrey Radke have each given notice
of redemption to Select Re to sell all of their Select Re shares. The redemption
of shares was effective December 31, 2002 and will be settled by October 2003 in
accordance with the terms of the agreement.
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. Mariner acts as the investment manager for our
hedge fund and alternative investment portfolio. During the three months ended
March 31, 2003 and 2002, we incurred investment management fees of $0.2 million
and $0.1 million, respectively, relating to services provided by Mariner.
The Company's Board of Directors reviews the various transactions with
Select Re at each of its meetings. In addition, the Board of Directors requires
the prior approval of the Company's Chief Financial Officer for any transaction
entered into with Select Re.
33
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have reviewed our exposure to market risks at March 31, 2003 and the
changes in exposure since December 31, 2002. Interest rate and credit risk
remain the principal market risks we are exposed to. The additional risks
associated with our hedge fund investments are described earlier.
The composition of our fixed maturity portfolio did not materially
change during the first quarter of 2003. There was no material change in our
exposure to market risks or our risk management strategy during the first
quarter.
Item 4. Controls and Procedures
An evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of May 7, 2003 was conducted under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer. Based on that evaluation, our
management, including our chief executive officer and chief financial officer,
concluded that our disclosure controls and procedures were effective as of May
7, 2003. There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
last evaluation of such internal controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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 had denied coverage, contending that its
Managing General Agent had no authority to issue these policies.
PXRE Delaware disagreed with Terra Nova's denial and filed suit against
Terra Nova in the United States District Court for the District of New Jersey.
On June 10, 2002, PXRE Delaware was awarded a verdict of $8.3 million plus
accumulated interest of $1.5 million by a jury at the conclusion of the trial of
this dispute. The aggregate sum of $9.8 million is included in Other Assets.
Terra Nova has appealed this verdict to the United States Court of Appeals for
the Third Circuit, but management has concluded that the sum of $9.8 is
realizable and that no valuation allowance is necessary. The appeal is expected
to be submitted to the Third Circuit on June 3, 2003.
34
Item 2. Changes in Securities and Use of Proceeds.
During the quarter ended March 31, 2003, the Company issued the
following securities in transactions that were not registered under the
Securities Act of 1933, as amended (the "Act"):
(a) Securities sold. On March 31, 2003, the Company issued 318.15
Convertible Voting Preferred Shares to the existing holders of the
Company's Convertible Preferred Shares in payment of its dividend
obligation thereon. The 318.15 Convertible Voting Preferred Shares
issued were allocated among Series as follows:
i. 159.07 shares of Series A Convertible Voting Preferred Shares,
allocated to two sub-series of shares, 106.05 shares allocated
to sub-series Al and 53.02 shares allocated to sub-series A2;
ii. 106.05 shares of Series B Convertible Voting Preferred Shares,
allocated to two sub-series of shares, 70.70 shares allocated
to Series B1 and 35.35 shares allocated to Series B2; and
iii. 53.03 shares of Series C Convertible Voting Preferred Shares,
allocated to two sub-series of shares. 35.35 shares allocated
to Series Cl and 17.68 shares allocated to Series C2.
(b) Underwriters and other purchasers. No underwriter participated. The
additional Convertible Voting Preferred Shares were issued to the
holders of record on March 14, 2003 of the outstanding Convertible
Voting Preferred Shares.
(c) Consideration. The Convertible Voting Preferred Shares were issued
in satisfaction of the Company's obligation to pay a quarterly
dividend of $3,181.5 thousand to the holders of the outstanding
Convertible Voting Preferred Shares.
(d) Exemption from registration claimed. Exemption from registration
under the Act was claimed based upon Section 4(2) of the Act as a
sale by an issuer not involving a public offering.
(e) Terms of conversion and exercise. The description of the terms of
the Preferred Shares contained in Part II, Item 5 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2002 is
incorporated herein by reference.
(f) Use of proceeds. Not applicable.
35
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
99.1 Certification by the Chief Executive Officer and Chief Financial
Officer Relating to a Periodic Report Containing Financial Statements.
b. Current Reports on Form 8-K
On April 29, 2003, the Company filed a Current Report on Form 8-K
with the SEC relating to the commutation of its quota share
reinsurance agreement with P-1 in consideration of a commutation fee
of $1.8 million payable by P-1 to PXRE. The April 29, 2003 Form 8-K
discussed the Company's decision to commute the contract effective
as of January 1, 2003 and to retain all reinsurance premiums that
would have been ceded to P-1.
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
99.1 Certification by the Chief Executive Officer and Chief
Financial Officer Relating to a Periodic Report Containing
Financial Statements.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report or amendment thereto to be signed on
its behalf by the undersigned thereunto duly authorized.
PXRE GROUP LTD.
May 8, 2003 By:/s/ John M. Modin
-----------------
John M. Modin
Senior Vice President
and Chief Financial Officer
37
Certifications
- --------------
I, Gerald L. Radke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PXRE Group Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
38
Date: May 8, 2003
/s/ Gerald L. Radke
---------------------------
Gerald L. Radke
Chief Executive Officer
39
I, John M. Modin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PXRE Group Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
40
Date: May 8, 2003
/s/ John M. Modin
---------------------------
John M. Modin
Chief Financial Officer
41