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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 JUNE 30, 2004
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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.)
PXRE HOUSE P.O. BOX HM 1282
110 PITTS BAY ROAD HAMILTON HM FX
PEMBROKE HM 08 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
- -
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes x No
--- ---
As of August 3, 2004 14,416,571 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 June 30, 2004 and December 31, 2003....................................3
Consolidated Statements of Income and Comprehensive Income for the three and six months ended
June 30, 2004 and 2003..........................................................................4
Consolidated Statements of Shareholders' Equity for the three and six months ended June 30,
2004 and 2003...................................................................................5
Consolidated Statements of Cash Flows for the three and six months ended June 30, 2004 and 2003..........6
Notes to Consolidated Financial Statements...............................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................................38
ITEM 4. CONTROLS AND PROCEDURES.................................................................................38
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................................................................39
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...............................................................39
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.........................................................................40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................40
ITEM 5. OTHER INFORMATION.......................................................................................41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................................41
2
PXRE CONSOLIDATED BALANCE SHEETS
GROUP LTD. (Dollars in thousands, except par value per share)
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JUNE 30, DECEMBER 31,
2004 2003
---- ----
(Unaudited)
ASSETS Investments:
Fixed maturities:
Available-for-sale (amortized cost $594,109 and $613,833, respectively) $ 584,559 $ 617,658
Trading (cost $20,370 and $20,370, respectively) 20,931 21,451
Short-term investments 297,092 175,771
Hedge funds (cost $88,433 and $87,691, respectively) 124,710 121,466
Other invested assets (cost $6,944 and $9,365, respectively) 7,922 10,173
---------- ----------
Total investments 1,035,214 946,519
Cash 21,730 65,808
Accrued investment income 5,458 5,490
Premiums receivable, net 66,999 79,501
Other receivables 46,155 30,695
Reinsurance recoverable on paid losses 9,627 15,494
Reinsurance recoverable on unpaid losses 132,203 146,924
Ceded unearned premiums 6,118 10,454
Deferred acquisition costs 2,192 2,495
Income tax recoverable 23,248 14,133
Other assets 47,297 42,134
---------- ----------
Total assets $1,396,241 $1,359,647
========== ==========
LIABILITIES Losses and loss expenses $ 428,469 $ 450,635
Unearned premiums 19,274 21,566
Subordinated debt 167,072 -
Reinsurance balances payable 42,684 53,373
Deposit liabilities 72,765 80,583
Other liabilities 30,773 32,133
---------- ----------
Total liabilities 761,037 638,290
---------- ----------
Minority interest in consolidated subsidiaries:
Company-obligated mandatorily redeemable capital trust
pass-through securities of subsidiary trusts holding solely a
company-guaranteed related subordinated debt - 156,841
---------- ----------
SHAREHOLDERS' Serial convertible preferred shares, $1.00 par value, $10,000 stated
EQUITY value -- 10 million shares authorized, 0.02 million shares
issued and outstanding 179,147 172,190
Common shares, $1.00 par value -- 50 million shares
authorized, 14.4 million and 13.3 million shares issued
and outstanding, respectively 14,384 13,277
Additional paid-in capital 214,703 192,078
Accumulated other comprehensive income net of deferred income
tax (benefit) expense of $(1,426) and $1,242, respectively (7,673) 1,692
Retained earnings 243,297 188,670
Restricted shares at cost (0.4 million and 0.3 million shares, respectively) (8,654) (3,391)
---------- ----------
Total shareholders' equity 635,204 564,516
---------- ----------
Total liabilities and shareholders' equity $1,396,241 $1,359,647
========== ==========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
(Unaudited)
REVENUES Net premiums earned $ 69,565 $84,015 $138,517 $168,788
Net investment income 4,915 8,557 11,784 14,032
Net realized investment (losses) gains (38) 110 51 109
Fee income 262 1,108 861 2,384
-------- ------- -------- --------
74,704 93,790 151,213 185,313
-------- ------- -------- --------
LOSSES AND Losses and loss expenses incurred 18,077 44,654 36,216 77,254
EXPENSES Commissions and brokerage 10,214 14,618 19,386 34,645
Operating expenses 9,868 10,488 22,488 19,664
Foreign exchange losses (gains) 94 (492) 360 (252)
Interest expense 3,455 245 7,130 2,504
Minority interest in consolidated subsidiaries - 2,428 - 4,533
-------- ------- -------- --------
41,708 71,941 85,580 138,348
-------- ------- -------- --------
Income before income taxes and cumulative effect of
accounting change 32,996 21,849 65,633 46,965
Income tax provision 660 371 1,313 1,880
-------- ------- -------- --------
Income before cumulative effect of accounting change and
convertible preferred share dividends 32,336 21,478 64,320 45,085
Cumulative effect of accounting change, net of $0.2 million
tax expense - - (1,053) -
-------- ------- -------- --------
Net income before convertible preferred share dividends $ 32,336 $21,478 $ 63,267 $ 45,085
-------- ------- -------- --------
Convertible preferred share dividends 3,513 3,245 6,956 6,427
-------- ------- -------- --------
Net income available to common shareholders $ 28,823 $18,233 $ 56,311 $ 38,658
======== ======= ======== ========
COMPREHENSIVE Net income before convertible preferred share dividends $ 32,336 $21,478 $ 63,267 $ 45,085
INCOME, NET Net unrealized (depreciation) appreciation on investments (14,888) 1,635 (9,365) 1,746
OF TAX Net unrealized appreciation on cash flow hedge - - - 946
-------- ------- -------- --------
Comprehensive income $ 17,448 $23,113 $ 53,902 $ 47,777
======== ======= ======== ========
PER SHARE Basic:
Income before cumulative effect of accounting change and
convertible preferred share dividends $ 2.34 $ 1.80 $ 4.72 $ 3.79
Cumulative effect of accounting change - - (0.08) -
Convertible preferred share dividends (0.25) (0.27) (0.51) (0.54)
-------- ------- -------- --------
Net income available to common shareholders $ 2.09 $ 1.53 $ 4.13 $ 3.25
======== ======= ======== ========
Average shares outstanding (000's) 13,822 11,921 13,632 11,911
======== ======= ======== ========
Diluted:
Income before cumulative effect of accounting change $ 1.20 $ 0.93 $ 2.41 $ 1.96
Cumulative effect of accounting change - - (0.04) -
-------- ------- -------- --------
Net income $ 1.20 $ 0.93 $ 2.37 $ 1.96
======== ======= ======== ========
Average shares outstanding (000's) 27,021 23,183 26,664 22,959
======== ======= ======== ========
The accompanying notes are an integral part of these statements.
4
PXRE CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
GROUP LTD. (Dollars in thousands)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
(Unaudited)
CONVERTIBLE Balance at beginning of period $175,634 $162,259 $172,190 $159,077
PREFERRED SHARES Dividends to convertible preferred shareholders 3,513 3,245 6,957 6,427
-------- -------- -------- --------
Balance at end of period $179,147 $165,504 $179,147 $165,504
======== ======== ======== ========
COMMON SHARES Balance at beginning of period $ 14,101 $ 12,177 $ 13,277 $ 12,030
Issuance of shares, net 283 (8) 1,107 139
-------- -------- -------- --------
Balance at end of period $ 14,384 $ 12,169 $ 14,384 $ 12,169
======== ======== ======== ========
ADDITIONAL Balance at beginning of period $209,717 $172,271 $192,078 $168,866
PAID-IN CAPITAL Issuance of shares 4,334 (201) 21,217 3,140
Other 652 26 1,408 90
-------- -------- -------- --------
Balance at end of period $214,703 $172,096 $214,703 $172,096
======== ======== ======== ========
ACCUMULATED Balance at beginning of period $ 7,215 $ 8,198 $ 1,692 $ 7,142
OTHER Change in unrealized gains (14,888) 1,636 (9,365) 1,746
COMPREHENSIVE Change in cash flow hedge - - - 946
INCOME -------- -------- -------- --------
Balance at end of period $ (7,673) $ 9,834 $ (7,673) $ 9,834
======== ======== ======== ========
RETAINED Balance at beginning of period $215,322 $127,755 $188,670 $108,062
EARNINGS Net income before convertible preferred share dividends 32,336 21,478 63,267 45,085
Dividends to convertible preferred shareholders (3,513) (3,245) (6,957) (6,427)
Dividends to common shareholders (848) (732) (1,683) (1,464)
-------- -------- -------- --------
Balance at end of period $243,297 $145,256 $243,297 $145,256
======== ======== ======== ========
RESTRICTED Balance at beginning of period $ (9,007) $ (4,782) $ (3,391) $ (1,713)
SHARES Issuance of restricted shares (370) (764) (7,336) (4,609)
Amortization of restricted shares 723 1,218 2,073 1,994
-------- -------- -------- --------
Balance at end of period $ (8,654) $ (4,328) $ (8,654) $ (4,328)
======== ======== ======== ========
TOTAL Balance at beginning of period $612,982 $477,878 $564,516 $453,464
SHAREHOLDERS' Issuance of shares 4,618 (209) 22,325 3,279
EQUITY Restricted shares, net 352 454 (5,264) (2,615)
Unrealized (depreciation) appreciation on investments, net of
deferred income tax (14,888) 1,636 (9,365) 1,746
Unrealized appreciation on cash flow hedge, net of deferred
income tax - - - 946
Net income before convertible preferred share dividends 32,336 21,478 63,267 45,085
Dividends to common shareholders (848) (732) (1,683) (1,464)
Other 652 26 1,408 90
-------- -------- -------- --------
Balance at end of period $635,204 $500,531 $635,204 $500,531
======== ======== ======== ========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
(Unaudited)
CASH FLOW Premiums collected, net of reinsurance $ 50,659 $ 54,529 $142,375 $151,194
FROM OPERATING Loss and loss adjustment expenses paid, net of reinsurance (17,288) (24,099) (37,793) (33,719)
ACTIVITIES Commission and brokerage paid, net of fee income (8,958) (5,665) (17,571) (18,141)
Operating expenses paid (8,597) (4,579) (21,693) (15,240)
Net investment income received 6,373 1,808 9,281 5,184
Interest paid (1,572) (46) (7,368) (4,794)
Income taxes paid (4,709) (8,100) (5,961) (11,623)
Trading portfolio purchased - - - (5,688)
Trading portfolio disposed - 8,496 - 8,496
Deposit (paid) received (3,043) 3,281 (7,818) 34,218
Other (3,381) 5,866 (14,698) (2,477)
-------- -------- -------- --------
Net cash provided by operating activities 9,484 31,491 38,754 107,410
-------- -------- -------- --------
CASH FLOW Fixed maturities available for sale purchased (42,108) (150,645) (217,057) (154,459)
FROM INVESTING Fixed maturities available for sale disposed or matured 136,250 29,414 238,720 64,576
ACTIVITIES Hedge funds purchased (5,000) (3,000) (5,000) (7,000)
Hedge funds disposed 1,005 9,005 6,033 16,841
Other invested assets purchased - (16) - (121)
Other invested assets disposed 1,767 660 2,658 1,038
Net change in short-term investments (100,729) 74,027 (121,321) (10,448)
Payable for securities - 37,138 (18) 37,371
-------- -------- -------- --------
Net cash used by investing activities (8,815) (3,417) (95,985) (52,202)
-------- -------- -------- --------
CASH FLOW Proceeds from issuance of common shares 4,360 256 15,742 542
FROM FINANCING Cash dividends paid to common shareholders (848) (732) (1,683) (1,464)
ACTIVITIES Proceeds from issuance of minority interest in consolidated
subsidiaries - 32,500 - 32,500
Repayment of debt - (10,000) - (30,000)
Cost of shares repurchased (263) (1,230) (906) (1,872)
-------- -------- -------- --------
Net cash provided by financing activities 3,249 20,794 13,153 (294)
-------- -------- -------- --------
Net change in cash 3,918 48,868 (44,078) 54,914
Cash, beginning of period 17,812 52,676 65,808 46,630
-------- -------- -------- --------
Cash, end of period $ 21,730 $101,544 $ 21,730 $101,544
======== ======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income before convertible preferred share dividends $ 32,336 $ 21,478 $ 63,267 $ 45,085
Adjustments to reconcile net income to net cash
provided by operating activities:
Losses and loss expenses (8,211) 5,386 (22,166) (4,831)
Unearned premiums (18,528) (25,971) 2,044 (17,399)
Deferred acquisition costs 337 6,221 303 13,294
Receivables (10,642) 11,206 (2,957) 9,561
Reinsurance balances payable (5,789) (10,093) (10,689) (14,588)
Reinsurance recoverable 8,998 14,916 20,588 48,367
Income taxes (4,037) (7,727) (4,647) (9,742)
Equity in earnings of limited partnerships (1,261) (5,472) (4,685) (7,849)
Trading portfolio purchased - - - (5,688)
Trading portfolio disposed - 8,496 - 8,496
Deposit liability (3,043) 3,281 (7,818) 34,218
Other 19,324 9,770 5,514 8,486
-------- -------- -------- --------
Net cash provided by operating activities $ 9,484 $ 31,491 $ 38,754 $107,410
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
6
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
PXRE Group Ltd. (the "Company" or collectively with its subsidiaries,
"PXRE") is an insurance holding company incorporated in Bermuda. PXRE provides
reinsurance products and services to a worldwide marketplace through subsidiary
operations in Bermuda, Barbados, Europe and the United States. PXRE's primary
focus is providing property catastrophe reinsurance and retrocessional coverage.
PXRE also provides marine, aviation and aerospace products and services.
The Company was formed in 1999 as part of the reorganization of PXRE
Corporation, a Delaware corporation ("PXRE Delaware"). Prior to the
reorganization, PXRE Delaware was the ultimate parent holding company of the
various PXRE companies and its common shares were publicly traded on the New
York Stock Exchange. As a result of the reorganization, the Company became the
ultimate parent holding company of PXRE Delaware and the holders of PXRE
Delaware common stock automatically became holders of the same number of the
Company's common shares. The reorganization was consummated at the close of
business on October 5, 1999 and, on October 6, 1999 the Company's common shares
commenced trading on the New York Stock Exchange under the symbol "PXT." The
reorganization also involved the establishment of a Bermuda based reinsurance
subsidiary, PXRE Reinsurance Ltd. ("PXRE Bermuda") and a Barbados based
reinsurance subsidiary, PXRE Reinsurance (Barbados) Ltd. ("PXRE Barbados").
2. 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 the Company and its wholly owned subsidiaries, including PXRE
Delaware, PXRE Reinsurance Company ("PXRE Reinsurance"), PXRE Bermuda, PXRE
Barbados, PXRE Solutions, Inc., PXRE Solutions, S.A. ("PXRE Europe") and PXRE
Limited. All material inter-company transactions have been eliminated in
preparing these consolidated financial statements.
GAAP requires management to make estimates and assumptions that affect
the reported amounts 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. 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 2003 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 the reinsurance business necessitate caution in drawing
specific conclusions from interim results.
7
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Certain reclassifications have been made for 2003 to conform to the
2004 presentation.
Share-Based Compensation
At June 30, 2004, PXRE has share 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 share-based compensation cost related to the options granted
under the plans is reflected in net income, as the options granted had an
exercise price equal to the market value of the underlying common shares 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") Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
to share-based employee compensation:
THREE MONTHS ENDED SIX MONTHS ENDED
($000'S, EXCEPT PER SHARE DATA) JUNE 30, JUNE 30,
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income before convertible preferred share dividends:
As reported $ 32,336 $ 21,478 $ 63,267 $ 45,085
Deduct:
Total share-based compensation expense determined
under fair value based method for all awards, net
of related tax effects (363) (1,410) (1,333) (1,973)
---------- ---------- --------- ----------
Pro-forma $ 31,973 $ 20,068 $ 61,934 $ 43,112
========== ========== ========= ==========
Basic income per share:
As reported $ 2.09 $ 1.53 $ 4.13 $ 3.25
Pro-forma $ 2.06 $ 1.41 $ 4.03 $ 3.08
Diluted income per share:
As reported $ 1.20 $ 0.93 $ 2.37 $ 1.96
Pro-forma $ 1.18 $ 0.87 $ 2.32 $ 1.88
Debt and Equity Classification
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within the scope of the statement as a liability or an asset in some
circumstances. PXRE adopted this statement during the quarter ended September
30, 2003, however, due to certain parts of this statement being deferred by the
FASB, the adoption of this statement did not have any impact on PXRE's
Consolidated Financial Statements, financial position or results of operations
until the quarter ended March 31, 2004. Accordingly, as of March 31, 2004,
PXRE's mandatorily redeemable capital trust pass-through securities were
reclassified on its Consolidated Balance Sheet to liabilities and entitled
"Subordinated debt." In PXRE's Consolidated Statements of Income and
Comprehensive Income for the three and six months ended June 30, 2004, the
interest expense related to these securities was included with "Interest
expense," whereas for the three and six months ended June 30, 2003 it was
included with "Minority interest in consolidated subsidiaries" as SFAS 150 did
not permit these changes to be made retroactively.
8
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidation of Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which requires
consolidation of all "Variable Interest Entities" ("VIEs") by the "primary
beneficiary," as these terms are defined in FIN 46, and on October 9, 2003 the
FASB issued FASB Staff Position FIN 46-6, "Effective Date of FASB Interpretation
No. 46, Consolidation of VIE's", which required PXRE to implement FIN 46 during
the quarter ended March 31, 2004. The adoption of this statement resulted in
PXRE deconsolidating the five special purpose trusts which issued PXRE's trust
preferred securities. As a result, the subordinated loans from the trusts are
reflected as liabilities under the caption "Subordinated debt" on PXRE's June
30, 2004 Consolidated Balance Sheet, while PXRE's minority investments of
approximately $5.2 million in such trusts in the form of equity, which prior to
March 31, 2004 were eliminated on consolidation, are reflected as assets under
the caption "Other assets" with a corresponding increase in liabilities under
the caption "Subordinated debt". FIN 46 did not permit these changes to be made
retroactively. In addition, gains on the repurchase of $5.2 million of PXRE's
trust preferred securities in prior periods of $1.1 million, net of tax, that
were previously accounted for as extinguishments of debt, were reversed during
the quarter ended March 31, 2004 and presented as a cumulative effect of an
accounting change in PXRE's Consolidated Statement of Income and Comprehensive
Income during 2004. These repurchased securities are reflected in PXRE's June
30, 2004 Consolidated Balance Sheet under the caption "Fixed Maturities:
Available-for-sale."
Consolidated Statement of Changes in Cash Flow
In the first quarter of 2004, the Company changed the presentation of
its Consolidated Statement of Changes in Cash Flow to the direct cash flow
method, replacing the indirect cash flow method as previously presented. Amounts
presented for the three and six months ended June 30, 2003 were reclassified to
be consistent with the new presentation.
9
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. UNDERWRITING
Premiums written and earned for the three and six months ended June 30,
2004 and 2003 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, % JUNE 30, %
------------------------- INCREASE ------------------------- INCREASE
($000'S) 2004 2003 (DECREASE) 2004 2003 (DECREASE)
----------- ----------- ---------- ----------- ----------- ----------
Premiums written
Gross premiums written $ 52,914 $ 66,378 $ 160,317 $ 178,848
Ceded premiums written (1,690) (8,333) (19,381) (27,459)
----------- ----------- ----------- -----------
Net premiums written $ 51,224 $ 58,045 (12) $ 140,936 $ 151,389 (7)
=========== =========== =========== ===========
Premiums earned
Gross premiums earned $ 80,078 $ 100,795 $ 162,234 $ 199,157
Ceded premiums earned (10,513) (16,780) (23,717) (30,369)
----------- ----------- ----------- -----------
Net premiums earned $ 69,565 $ 84,015 (17) $ 138,517 $ 168,788 (18)
=========== =========== =========== ===========
PXRE from time to time purchases catastrophe retrocessional coverage
for its own protection, depending on market conditions. PXRE purchases
reinsurance primarily to reduce its exposure to severe losses related to any one
event or catastrophe. PXRE currently has reinsurance treaties in place with
several different coverages, territories, limits and retentions that serve to
reduce a large gross loss emanating from any one event. In addition, primarily
related to PXRE's exposure assumed on per-risk treaties, PXRE purchases clash
reinsurance protection which allows PXRE to recover losses ceded by more than
one reinsured related to any one particular property. In the event that
retrocessionaires are unable to meet their contractual obligations, PXRE would
remain liable for the underlying covered claims.
4. INVESTMENTS
The following table summarizes investments with unrealized losses at
fair value by length of continuous unrealized loss position as of June 30, 2004:
ONE YEAR OR LESS OVER ONE YEAR
-------------------------- ---------------------------
UNREALIZED UNREALIZED
($000'S) FAIR VALUE LOSS FAIR VALUE LOSS
---------- ---------- ---------- ----------
United States government securities $ 49,209 $ (795) $ - $ -
United States government sponsored agency debentures 56,096 (1,282) - -
United States government sponsored agency mortgage-backed
securities 100,211 (1,297) 6,831 (304)
Other mortgage and asset-backed securities 114,027 (3,856) 4,922 (346)
Obligations of states and political subdivisions 755 (8) - -
Corporate securities 140,721 (4,767) 2,999 (142)
----------- ----------- ----------- -----------
Total temporarily impaired securities $ 461,019 $ (12,005) $ 14,752 $ (792)
=========== =========== =========== ===========
10
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. EARNINGS PER SHARE
The table below presents the computation of basic and diluted earnings
per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
($000'S, EXCEPT PER SHARE DATA) 2004 2003 2004 2003
------------ ------------ ----------- ------------
Net income available to common shareholders:
Income before cumulative effect of accounting
change and convertible preferred share
dividends $ 32,336 $ 21,478 $ 64,320 $ 45,085
Cumulative effect of accounting change, net of tax - - (1,053) -
------------ ------------ ----------- ------------
Net income before convertible preferred share
dividends 32,336 21,478 63,267 45,085
Convertible preferred share dividends (3,513) (3,245) (6,956) (6,427)
------------ ------------ ----------- ------------
Net income available to common shareholders $ 28,823 $ 18,233 $ 56,311 $ 38,658
============ ============ =========== ============
Weighted average common shares outstanding:
Weighted average common shares outstanding
(basic) 13,822 11,921 13,632 11,911
Equivalent shares of underlying options 394 236 471 280
Equivalent number of restricted shares 142 75 116 103
Equivalent number of convertible preferred shares 12,663 10,951 12,445 10,665
------------ ------------ ----------- ------------
Weighted average common equivalent shares
(diluted) 27,021 23,183 26,664 22,959
============ ============ =========== ============
Per share amounts:
Basic:
Income before cumulative effect of accounting
change and convertible preferred share dividends $ 2.34 $ 1.80 $ 4.72 $ 3.79
Cumulative effect of accounting change - - (0.08) -
Convertible preferred share dividends (0.25) (0.27) (0.51) (0.54)
------------ ------------ ----------- ------------
Net income available to common shareholders $ 2.09 $ 1.53 $ 4.13 $ 3.25
============ ============ =========== ============
Diluted:
Net income before cumulative effect of accounting
change $ 1.20 $ 0.93 $ 2.41 $ 1.96
Cumulative effect of accounting change - - (0.04) -
------------ ------------ ----------- ------------
Net income $ 1.20 $ 0.93 $ 2.37 $ 1.96
============ ============ =========== ============
6. 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.
11
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 the Company file a consolidated U.S.
federal income tax return.
7. SHAREHOLDERS' EQUITY
On December 16, 2003, the Company completed a public offering of 2.2
million of its common shares at $21.75 per share, pursuant to a Shelf
Registration Statement on Form S-3 that was filed in 2003 for up to $150.0
million of various types of securities. Of the 2.2 million shares sold, 1.1
million were offered by PXRE and 1.1 million were offered by Phoenix Life
Insurance Company ("Phoenix"), one of the Company's common shareholders. The
underwriters were given an option to purchase up to an additional 0.3 million
common shares from the Company, which they exercised on January 22, 2004. As a
result of the offering and the exercise of the option, the Company received
total net proceeds of approximately $26.9 million. The Company did not receive
any of the proceeds from the sale of shares by Phoenix.
On April 4, 2002, the Company issued $150.0 million of additional
capital comprised of 15,000 convertible voting preferred shares in a private
placement not involving a public offering under Section 4(2) of the Securities
Act of 1933, as amended. The convertible preferred share investment occurred
pursuant to a share purchase agreement, dated as of December 10, 2001, between
the Company and certain investors. On February 12, 2002, the shareholders
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 of the offering of the convertible
preferred shares, net of offering expenses of $9.1 million, amounted to $140.9
million. As of June 30, 2004, 17,915 convertible preferred shares were issued
and outstanding.
The convertible 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
shareholders also voted to approve the division of 20.0 million of PXRE's 50.0
million authorized common shares into three new classes of convertible common
shares including 10.0 million Class A convertible voting common shares, 6.7
million Class B convertible voting common shares, and 3.3 million Class C
convertible voting common shares. No convertible voting common shares of any
class are currently outstanding.
Convertible preferred shares are convertible into convertible common
shares at the option of the holder at any time at a conversion price equal to
the original conversion price, subject to adjustment if PXRE experiences adverse
development on losses incurred prior to September 30, 2001 in excess of a $7.0
million after-tax threshold. The number of convertible common shares issued upon
the conversion of each convertible preferred share would be equal to the sum of
the original purchase price ($10,000) of such convertible preferred share plus
accrued but unpaid dividends divided by the adjusted conversion price. Certain
adverse development, excluding that related to most of the adverse development
on loss reserves within the exited lines segment and all of the losses arising
from the events of September 11, 2001, is subject to a cap of $12.0 million
after-tax. Adverse development on the reserves excluded is not subject to any
cap or limit. As of June 30, 2004, after giving effect to the $12.0 million cap
referred to above, PXRE has incurred $28.2 million of net after-tax adverse
development above this $7.0 million threshold, resulting in an adjusted
conversion price of $13.80 as of June 30, 2004. Two-thirds of the convertible
preferred shares mandatorily convert by April 4, 2005, and the balance by April
4, 2008. Convertible preferred shares vote on a fully converted basis on all
matters brought before the shareholders other than the election of directors.
12
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. SEGMENT INFORMATION
PXRE operates in two reportable property and casualty segments -
catastrophe and risk excess 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 property catastrophe and risk excess
business. Businesses that were not renewed in 2002 are reported as exited lines.
Commencing with the 2004 underwriting renewal season, PXRE is reporting its
previously existing "other lines" segment, which in the past has consisted of a
single pro rata treaty, with its catastrophe and risk excess segment. In
addition, PXRE is reporting its previously existing "finite business" segment
with its exited lines segment to reflect its decision during the second quarter
to run-off the in-force finite business and not enter into any new finite
transactions subsequent to March 31, 2004. PXRE's segments for 2003 were
restated to be comparable to the two 2004 segments discussed above. As a result
of the above, the exited lines segment now includes business previously written
and classified by the Company as direct casualty, Lloyd's of London ("Lloyd's"),
international casualty and finite. 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.
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 or losses, operating expenses, foreign exchange gains or losses
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 premiums written and net
premiums earned by PXRE's business segments. The amounts shown for the North
American and International geographic segments are presented net of proportional
reinsurance but gross of corporate catastrophe excess of loss reinsurance
cessions, which are separately itemized where applicable.
13
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NET PREMIUMS WRITTEN
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ---------------------------------------------
($000'S, EXCEPT PERCENTAGES) 2004 2003 2004 2003
-------------------- ------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
Catastrophe and Risk Excess
North American $18,084 $16,724 $ 38,761 $ 35,388
International 30,654 38,481 113,840 119,014
Excess of Loss Cessions (257) (2,108) (15,278) (11,994)
------- ------- --------- --------
48,481 95% 53,097 91% 137,323 97% 142,408 94%
------- ------- --------- --------
Exited Lines
North American 2,745 3,653 3,551 6,310
International (2) 1,295 62 2,671
------- ------- --------- --------
2,743 5 4,948 9 3,613 3 8,981 6
------- --- ------- --- --------- --- -------- ---
Total $51,224 100% $58,045 100% $140,936 100% $151,389 100%
======= === ======= === ======== === ======== ===
NET PREMIUMS EARNED
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ---------------------------------------------
($000'S, EXCEPT PERCENTAGES) 2004 2003 2004 2003
-------------------- ------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 21,553 $ 20,215 $ 39,741 $ 36,193
International 53,281 56,671 111,118 109,448
Excess of Loss Cessions (8,647) (8,265) (18,477) (15,321)
------- ------- --------- --------
66,187 95% 68,621 82% 132,382 96% 130,320 77%
------- ------- --------- --------
Exited Lines
North American 3,380 14,100 6,072 35,745
International (2) 1,294 63 2,723
------- ------- --------- --------
3,378 5 15,394 18 6,135 4 38,468 23
------- --- ------- --- --------- --- -------- ---
Total $ 69,565 100% $ 84,015 100% $ 138,517 100% $168,788 100%
========= === ========= === ========= === ======== ===
14
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the underwriting income (loss) by
segment. The amounts shown in the North American and International geographic
segments are presented net of proportional reinsurance but gross of corporate
catastrophe excess of loss reinsurance cessions, which are separately itemized
where applicable. Underwriting income (loss) includes premiums earned, losses
incurred and commission and brokerage, net of fee income, but does not include
investment income, net realized investment gains or losses, interest expense,
operating expenses or foreign exchange gains or losses.
UNDERWRITING INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ---------------------------------------------
($000'S, EXCEPT PERCENTAGES) 2004 2003 2004 2003
-------------------- ------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
Catastrophe and Risk Excess
North American $ 15,999 $ 5,953 $ 30,996 $ 17,657
International 36,890 34,667 73,400 76,115
Excess of Loss Cessions (9,661) (8,067) (19,132) (18,717)
--------- --------- --------- ---------
43,228 104% 32,553 126% 85,264 102% 75,055 127%
--------- --------- --------- ---------
Exited Lines
North American (4,089) (7,714) (6,300) (13,339)
International 2,397 1,012 4,812 (2,422)
--------- --------- --------- ---------
(1,692) (4) (6,702) (26) (1,488) (2) (15,761) (27)
--------- --- --------- --- --------- --- --------- ---
Total $ 41,536 100% $ 25,851 100% $ 83,776 100% $ 59,294 100%
========= === ========= === ========= === ========= ===
15
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table reconciles the net underwriting income for the
operating segments to income before income taxes and cumulative effect of
accounting change as reported in the Consolidated Statements of Income and
Comprehensive Income.
THREE MONTHS ENDED SIX MONTHS ENDED
($000'S) JUNE 30, JUNE 30,
---------------------------- --------------------------
2004 2003 2004 2003
------------- ---------- ---------- ----------
Net underwriting income $ 41,536 $ 25,851 $ 83,776 $ 59,294
Net investment income 4,915 8,557 11,784 14,032
Net realized investment (losses) gains (38) 110 51 109
Other operating expenses (9,868) (10,488) (22,488) (19,664)
Foreign exchange (losses) gains (94) 492 (360) 252
Interest expense (3,455) (245) (7,130) (2,504)
Minority interest in consolidated
subsidiaries - (2,428) - (4,533)
Other - - - (21)
------------- ---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting change $ 32,996 $ 21,849 $ 65,633 $ 46,965
============= ========== ========== ==========
9. SUBORDINATED DEBT
Trust preferred securities were classified as minority interest in
consolidated subsidiaries prior to 2004. Trust preferred securities are
mandatorily redeemable subordinated debt securities issued to separate special
purpose trusts holding solely those securities. As discussed in Note 2,
following the implementation of SFAS 150 and FIN 46 during the quarter ended
March 31, 2004, these trusts are no longer consolidated and the securities
issued to these trusts by PXRE (rather than the securities issued by the trusts
as was done previously) are now classified as liabilities on PXRE's June 30,
2004 Consolidated Balance Sheet. The subordinated debt securities are as
follows:
JUNE 30, 2004 DECEMBER 31, 2003
($000'S) ------------------- -----------------
$103.1 million 8.85% fixed rate due February 1, 2027 $ 102,637 $ 94,341
$18.0 million 7.35% fixed/floating rate due May 15, 2033 18,042 17,500
$15.5 million 9.75% fixed rate due May 23, 2033 15,464 15,000
$20.6 million 7.70% fixed/floating rate due October 29, 2033 20,619 20,000
$10.3 million 7.58% fixed/floating rate due September 30, 2033 10,310 10,000
------------ -------------
$ 167,072 $ 156,841
============ =============
The 8.85% fixed rate capital trust pass-through securities pay interest
semi-annually and are redeemable by PXRE from February 1, 2007 at 104.180%
declining to 100.418% at February 1, 2016, and at par thereafter. The 7.35%
fixed/floating rate capital trust pass-through securities initially pay interest
quarterly at a fixed rate of 7.35% for 5 years and then at a floating rate of 3
month LIBOR plus 4.1% reset quarterly thereafter, and are redeemable by PXRE at
par on or after May 15, 2008. The 9.75% fixed rate capital trust pass-through
securities pay interest quarterly and are redeemable by PXRE from May 23, 2008
at 104.875% declining to 100.975% at May 23, 2013, and at par thereafter. The
7.70% fixed/floating rate capital trust pass-through securities initially pay
interest quarterly at a rate of 7.70% for 5 years and then at a floating rate of
3 month LIBOR plus 3.85% reset quarterly thereafter, and are redeemable by PXRE
at par on or after October 29, 2008. The 7.58% fixed/floating rate capital trust
pass-through securities initially pay interest quarterly at a rate of 7.58% for
5 years and then at a floating rate of 3 month LIBOR plus 3.90% reset quarterly
thereafter, and are redeemable by PXRE at par on or after September 30, 2008.
16
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PXRE has the option to defer interest payments on the capital trust
pass-through securities and redeem them earlier than the due dates, subject to
limits and penalties as set out in the relevant indentures.
10. EMPLOYEE BENEFITS
The qualified and non-qualified defined benefit pension plans were
curtailed effective March 31, 2004.
The components of net pension expense for these company-sponsored plans
are as follows:
($000'S) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2004 2003 2004 2003
-------- -------- -------- --------
COMPONENTS OF NET PERIODIC COST:
Service cost $ - $ 245 $ 303 $ 490
Interest cost 93 139 229 278
Expected return on assets (109) (107) (212) (214)
Amortization of prior service costs - 50 68 100
Recognized net actuarial costs - (11) - (22)
Settlement - 149 - 298
Curtailment - - (486) -
-------- -------- -------- --------
Net periodic benefit costs $ (16) $ 465 $ (98) $ 930
======== ======== ======== ========
During the six months ended June 30, 2004, the Company made no
contributions to its pension plans and expects no significant contributions
during 2004.
11. CONTINGENCIES
In April 2000, PXRE Reinsurance entered into an aggregate excess of
loss retrocessional reinsurance agreement with a U.S. based cedent. In the
agreement, PXRE Reinsurance reinsured a portfolio of treaties underwritten by a
former business unit of the cedent, which had been divested. Pursuant to this
excess of loss retrocessional agreement, PXRE Reinsurance agreed to indemnify
the cedent for losses in excess of a 75% paid loss ratio on this underlying
portfolio of treaties up to a 100% paid loss ratio, subject to an aggregate
limit of liability of $50.0 million. The latest loss reports related to the
agreement provided by the cedent forecast an ultimate net loss ratio in excess
of 100%, which could result in a full limit loss to PXRE.
In June 2003, PXRE Reinsurance performed an audit of this portfolio of
treaties reinsured under the agreement. As a result of this audit, management
identified problems and believes that the cedent breached its contractual
obligations and fiduciary duties under the agreement. PXRE Reinsurance therefore
filed suit against the cedent on July 24, 2003 in a United Stated District Court
seeking rescission of the agreement and/or compensatory and punitive damages.
17
PXRE GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Although the ultimate outcome of the litigation cannot presently be
determined, management believes that PXRE Reinsurance's claims are meritorious
and intends to vigorously prosecute its suit. As of June 30, 2004, the Company
has recorded $34.9 million of loss reserves related to the agreement. If the
Company's lawsuit is unsuccessful, the Company could potentially incur
additional losses under the agreement of up to $9.9 million on an after-tax
basis.
18
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
the "Company" refer to PXRE Group Ltd. a Bermuda holding company, while "PXRE",
"we", "us" and "our" include PXRE Group Ltd. 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"), PXRE
Solutions, S.A. ("PXRE Europe") and PXRE Limited. 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, as applicable.
The following is a discussion and analysis of PXRE's results of
operations for the three and six months ended June 30, 2004 compared with the
three and six months ended June 30, 2003, and also a discussion of our financial
condition as of June 30, 2004. This discussion and analysis should be read in
conjunction with the attached unaudited consolidated financial statements and
notes thereto and PXRE's Annual Report on Form 10-K for the year ended December
31, 2003 (the "10-K"), including the audited consolidated financial statements
and notes thereto, the discussion of Certain Risks and Uncertainties and the
discussion of Critical Accounting Policy Disclosures contained in the 10-K.
OVERVIEW
PXRE Group Ltd. is an insurance holding company domiciled in Bermuda.
We provide reinsurance products and services to a worldwide marketplace through
our wholly owned subsidiary operations located in Bermuda, Barbados, Europe and
the United States. Our primary business is catastrophe and risk excess
reinsurance, which accounted for 95% of net premiums written and substantially
all of our underwriting income for the three months ended June 30, 2004. Our
catastrophe and risk excess business includes property catastrophe excess of
loss, property catastrophe retrocessional, property risk excess, marine excess
and aerospace excess and pro rata reinsurance products.
We generated net income before convertible preferred share dividends of
$32.3 million in the quarter ended June 30, 2004, which represented a 51%
increase over the $21.5 million net income generated in the second quarter of
2003. This strong increase in net income was primarily driven by the continued
strength of our core catastrophe and risk excess segment and the low level of
catastrophe losses during the quarter.
Our ability and willingness to generate significant premium growth is
highly dependent upon the premium pricing levels in the reinsurance market.
Pricing in our catastrophe and risk excess business was healthy during the
second quarter of 2004 following the significant rate increases experienced in
2002 and 2003. During 2004, pricing has been generally flat to up slightly in
our North America property catastrophe and world-wide retrocessional businesses.
We experienced single digit rate decreases in our international property
catastrophe business.
19
COMPARISON OF SECOND QUARTER RESULTS FOR 2004 WITH 2003
For the quarter ended June 30, 2004, net income before convertible
preferred share dividends increased by 51% to $32.3 million from $21.5 million
for the comparable period of 2003. Net income per diluted common share was $1.20
for the second quarter of 2004 compared to $0.93 for the second quarter of 2003,
based on diluted average shares outstanding of approximately 27.0 million in the
second quarter of 2004 and 23.2 million in the second quarter of 2003.
PREMIUMS
Gross and net premiums written for the second quarter of 2004 and 2003
were as follows:
($000'S) THREE MONTHS ENDED JUNE 30,
--------------------------- % INCREASE
2004 2003 (DECREASE)
-------- -------- ----------
Gross premiums written $ 52,914 $ 66,378 (20)
Ceded premiums written (1,690) (8,333) (80)
-------- --------
Net premiums written $ 51,224 $ 58,045 (12)
======== ========
Gross premiums written for the second quarter of 2004 decreased 20% to
$52.9 million from $66.4 million in the second quarter of 2003. Gross premiums
written in our core catastrophe and risk excess segment decreased $10.4 million,
or 17%, compared to the corresponding period of 2003 due primarily to rate
decreases in our international property catastrophe business and the non-renewal
of several programs due to decreases in market pricing. Gross reinstatement
premiums written related to the catastrophe and risk excess business decreased
by $1.9 million compared to the corresponding period of 2003 due to lower
incurred losses. In addition, there was a planned decrease in our exited lines
segment of $3.1 million, or 54%, compared to the year earlier period.
As part of our efforts to return to our core catastrophe and risk
business, we have intentionally de-emphasized our finite business, and during
the quarter ended June 30, 2004 we began to include the results of this business
in our exited lines segment. During the year ended December 31, 2003 and the
quarter ended March 31, 2004, this business was focused on a limited group of
cedents and on policies that did not contain significant risk transfer. Finite
contracts that do not contain sufficient risk transfer are not recorded as
reinsurance arrangements but are treated as deposits for accounting purposes. As
such, the income related to these transactions is recorded as fee income, and
liabilities, if any, are recorded as deposit liabilities. There will be an
insignificant amount of finite premiums earned in future periods.
Ceded premiums written decreased 80% to $1.7 million for the second
quarter of 2004 from $8.3 million for the second quarter of 2003, primarily as a
result of a decrease of $3.5 million of ceded premiums written to Select
Reinsurance Company ("Select Re") under a quota share retrocessional contract
that was in place in 2003 but was not renewed at January 1, 2004.
20
Net premiums written for the second quarter of 2004 decreased 12% to
$51.2 million from $58.0 million in the second quarter of 2003. Net premiums
written in our catastrophe and risk excess segment decreased $4.6 million, or
9%, during the second quarter of 2004 compared to the comparable prior year
period. Net premiums written in the exited lines segment decreased $2.2 million,
or 45%, during the second quarter of 2004 versus the prior-year comparable
quarter. The decreases in these segments are due to the same factors that caused
the decreases in gross premiums written as explained above.
Gross and net premiums earned for the second quarter of 2004 and 2003
were as follows:
($000'S) THREE MONTHS ENDED JUNE 30,
--------------------------- % INCREASE
2004 2003 (DECREASE)
--------- ---------- ----------
Gross premiums earned $ 80,078 $ 100,795 (21)
Ceded premiums earned (10,513) (16,780) (37)
--------- ---------
Net premiums earned $ 69,565 $ 84,015 (17)
========= =========
Gross premiums earned for the second quarter of 2004 decreased 21% to
$80.1 million from $100.8 million in the second quarter of 2003. This decrease
is primarily due to the decrease in our exited lines segment of $12.9 million,
or 80%, compared to the corresponding period of 2003. Gross premiums earned in
our catastrophe and risk excess segment decreased $7.8 million, or 9% to $76.8
million in the second quarter of 2004 compared to $84.6 million in the
corresponding period of 2003. The changes in these segments are due to similar
factors as those discussed above in gross and net premium written.
Ceded premiums earned decreased 37% to $10.5 million for the second
quarter of 2004 from $16.8 million for the second quarter of 2003, primarily as
a result of a decrease of $5.1 million of ceded earned premiums to Select Re
under the quota share retrocessional contract discussed above that was not
renewed at January 1, 2004.
Net premiums earned for the second quarter of 2004 decreased 17% to
$69.6 million from $84.0 million for the corresponding period of 2003. Net
premiums earned in the exited lines segment decreased $12.0 million, or 78%, for
the second quarter of 2004 as compared to the second quarter of 2003. Net
premiums earned in the catastrophe and risk excess segment decreased $2.4
million, or 4%, for the second quarter of 2004 as compared to the corresponding
prior-year period. The changes in these segments are due to similar factors as
those discussed above in gross premiums written.
A summary of our net premiums written and earned by business segment
for the three months ended June 30, 2004 and 2003 is included in Note 8 to the
Consolidated Financial Statements.
RATIOS
The underwriting results of a property and casualty insurer are
discussed frequently by reference to its loss ratio, expense ratio (including
the commission and brokerage ratio, net of fee income, if any, and the operating
expense ratio) and combined ratio. The loss ratio is the result of dividing
losses and loss expenses incurred by net premiums earned. The expense ratio is
the result of dividing underwriting expenses (including commission and
brokerage, net of fee income, if any, and the operating expenses) by net
premiums earned. The combined ratio is the sum of the loss ratio and the expense
ratio. A combined ratio less than 100% indicates underwriting profits and a
combined ratio greater than 100% indicates underwriting losses. The combined
ratio does not reflect the effect of investment income on underwriting results.
The ratios discussed below have been calculated on a GAAP basis.
21
The following table summarizes the loss ratio, expense ratio and
combined ratio for the quarters ended June 30, 2004 and 2003, respectively:
(%) THREE MONTHS ENDED JUNE 30,
---------------------------
2004 2003
---- ----
Loss ratio 26.0 53.1
Expense ratio 28.5 28.6
---- ----
Combined ratio 54.5 81.7
==== ====
Catastrophe and risk excess loss ratio 21.3 42.1
==== ====
LOSSES AND LOSS EXPENSES
Losses and loss expenses incurred amounted to $18.1 million in the
second quarter of 2004 compared to $44.7 million in the second quarter of 2003.
The loss ratio was 26.0% for the second quarter of 2004 compared to 53.1% for
the comparable prior-year period. There were no significant catastrophes during
the three months ended June 30, 2004. During the quarter ended June 30, 2003,
the 2003 Midwest storms caused $6.3 million in incurred losses.
During the second quarter of 2004, we experienced net unfavorable
development of $1.7 million for prior-year losses and loss expenses, primarily
due to $2.6 million of unfavorable development on a 1999 catastrophe event after
a cedent lost a court case contesting a claim. During the second quarter of
2003, we experienced net adverse development of $17.9 million for prior-year
loss and loss expenses, $6.4 million of which was due to adverse loss
development on our exited direct casualty reinsurance operations and $6.5
million of adverse loss development from aerospace claims primarily from the
Company's first receipt of notice that the increase in industry losses related
to a 1998 air crash had resulted in the exhaustion of deductibles under three
aerospace contracts between the Company and Reliance Insurance Company.
UNDERWRITING EXPENSES
The expense ratio was 28.5% for the second quarter of 2004 compared to
28.6% during the comparable year-earlier period. The commission and brokerage
ratio, net of fee income, was 14.3% for the second quarter of 2004 compared with
16.1% for the second quarter of 2003, with the prior year ratio affected by the
higher proportion of exited lines premium. The exited lines commission and
brokerage ratio, net of fee income, was 32.2%, during the second quarter of 2004
and 41.3% during the comparable prior year period. The catastrophe and risk
excess commission and brokerage ratio, net of fee income, was 13.4% for the
second quarter of 2004 compared to 10.4% for the second quarter of 2003.
The operating expense ratio was 14.2% for the three months ended June
30, 2004 compared with 12.5% for the comparable period of 2003, increasing as a
result of decreased net premiums earned. Other operating expenses decreased 6%
to $9.9 million for the three months ended June 30, 2004 from $10.5 million in
the comparable period of 2003. This decrease is a result of non-recurring
compensation costs of $1.2 million in the second quarter of 2003 relating to the
retirement of the Company's former Chief Executive Officer, Gerald L. Radke, on
June 30, 2003 and his transition into a consulting role, offset to some extent
by additional employee incentive compensation costs in 2004.
22
INTEREST EXPENSE AND MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
Interest expense, including minority interest in consolidated
subsidiaries, increased to $3.5 million for the three months ended June 30, 2004
from $2.7 million in the comparable period of 2003. This increase is due to $0.6
million of additional interest on $30.9 million of trust preferred securities
issued since June 30, 2003, and the effect of a full quarter's interest expense
on the $33.5 million of trust preferred securities issued during the quarter
ended June 30, 2003. As discussed in Note 2 to the Consolidated Financial
Statements, following the implementation of SFAS 150 and FIN 46 during the
quarter ended March 31, 2004, the interest on trust preferred securities is now
shown as interest expense, whereas it was previously recorded as minority
interest in consolidated subsidiaries.
NET INVESTMENT INCOME
Net investment income for the second quarter of 2004 decreased 43% to
$4.9 million from $8.6 million in the second quarter of 2003, primarily as a
result of a $4.4 million decrease in income from our hedge fund portfolio,
offset by $1.0 million additional income from the fixed maturity and short-term
investment portfolios. Investment income related to our hedge fund portfolio
decreased to $0.8 million in the second quarter of 2004 from $5.3 million in the
second quarter of 2003 as investments in hedge funds produced a return of 0.7%
for the second quarter of 2004 compared with 4.7% in the comparable prior-year
period. Offsetting this decrease was an increase in the balance of our fixed
maturities and short-term investment portfolios partially offset by a decrease
in the book yield to 3.2% during the second quarter of 2004 from 3.6% during the
comparable prior-year period on an annualized basis.
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 is 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 $27.3 million and $25.5 million as of June 30, 2004 and
2003, respectively, for which we have recognized $0.5 million and $0.4 million
of investment income for the second quarter of 2004 and 2003, respectively. On
ceded reinsurance contracts, we held premiums and accrued investment income of
$125.0 million and $124.8 million due to reinsurers as of June 30, 2004 and
2003, respectively, for which we recognized a charge to investment income of
$2.2 million and $2.3 million for the second quarter of 2004 and 2003,
respectively. On a net basis, this reduction to investment income was $0.9
million and $0.3 million for the quarters ended June 30, 2004 and 2003,
respectively, 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 7.4% and 6.8% for the quarters ended June 30, 2004 and
2003, respectively, and we expect to be obligated for this contractual
investment return for the life of the underlying liabilities, which is expected
to be five years as of June 30, 2004 on a weighted average basis.
23
INCOME TAXES
PXRE recognized a tax expense of $0.7 million in the second quarter of
2004 compared to a tax expense of $0.4 million in the comparable prior-year
period. The tax expense in the second quarter of 2004 differed from the U.S.
statutory rate primarily due to the reinsurance business written in our Bermuda
reinsurance subsidiary.
COMPARISON OF YEAR-TO-DATE RESULTS FOR 2004 WITH 2003
For the six months ended June 30, 2004, net income before convertible
preferred share dividends increased by 40% to $63.3 million from $45.1 million
for the comparable period of 2003. Net income per diluted common share was $2.37
for the first six months of 2004 compared to $1.96 for the first six months of
2003, based on diluted average shares outstanding of approximately 26.7 million
in the first six months of 2004 and 23.0 million in the first six months of
2003.
PREMIUMS
Gross and net premiums written for the six months ended June 30, 2004
and 2003 were as follows:
($000'S) SIX MONTHS ENDED JUNE 30,
-------------------------- % INCREASE
2004 2003 (DECREASE)
---------- ---------- ----------
Gross premiums written $ 160,317 $ 178,848 (10)
Ceded premiums written (19,381) (27,459) (29)
---------- ----------
Net premiums written $ 140,936 $ 151,389 (7)
========== ==========
Gross premiums written for the six month period ended June 30, 2004
decreased 10% to $160.3 million from $178.8 million in the corresponding
prior-year period. Gross premiums written in our core catastrophe and risk
excess segment decreased $12.7 million, or 7%, compared to the corresponding
period of 2003 due primarily to rate decreases in our international property
catastrophe business and the non-renewal of several programs due to decreases in
market pricing. In addition, there was a planned decrease in our exited lines
segment of $5.9 million, or 61%, compared to the year earlier period.
As part of our efforts to return to our core catastrophe and risk
business, we have intentionally de-emphasized our finite business, and during
the quarter ended June 30, 2004 we began to include the results of this business
in our exited lines segment. During the year ended December 31, 2003 and the
quarter ended March 31, 2004, this business was focused on a limited group of
cedents and on policies that did not contain significant risk transfer. Finite
contracts that do not contain sufficient risk transfer are not recorded as
reinsurance arrangements but are treated as deposits for accounting purposes. As
such, the income related to these transactions is recorded as fee income, and
liabilities, if any, are recorded as deposit liabilities. There will be an
insignificant amount of finite premiums earned in future periods.
24
Ceded premiums written decreased by 29% to $19.4 million for the six
month period ended June 30, 2004 from $27.5 million for the corresponding
prior-year period, primarily as a result of a decrease of $9.2 million of ceded
premiums written to Select Re in 2003 under a quota share retrocessional
contract that was in place in 2003 but was not renewed at January 1, 2004.
Offsetting this decrease, in part, was an increase in ceded premiums written
related to excess of loss retrocessional catastrophe treaties.
Net premiums written for the six month period ended June 30, 2004
decreased 7% to $140.9 million from $151.4 million in the corresponding
prior-year period. Net premiums written in the exited lines segment decreased
$5.4 million, or 60%, during the six month period ended June 30, 2004 versus the
prior-year comparable period. Net premiums written in our catastrophe and risk
excess segment decreased $5.1 million, or 4%, to $137.3 million in the first six
months of 2004 from $142.4 million in the first six months of 2003. The changes
in these segments are due to similar factors that caused the decrease in gross
premiums written as explained above.
Gross and net premiums earned for the six month period ended June 30,
2004 and 2003 were as follows:
($000'S) SIX MONTHS ENDED JUNE 30,
-------------------------- % INCREASE
2004 2003 (DECREASE)
---------- ---------- ----------
Gross premiums earned $ 162,234 $ 199,157 (19)
Ceded premiums earned (23,717) (30,369) (22)
---------- ----------
Net premiums earned $ 138,517 $ 168,788 (18)
========== ==========
Gross premiums earned for the first six months of 2004 decreased 19% to
$162.2 million from $199.2 million in the first six months of 2003. This
decrease is primarily due to a decrease in our exited lines segment of $32.8
million, or 84%, compared to the corresponding period of 2003. Gross premiums
earned in our catastrophe and risk excess segment decreased $4.1 million, or 3%,
to $156.0 million in the first six months of 2004 from $160.0 million in the
corresponding period of 2003. The changes in these segments are due to similar
factors as those discussed above in gross and net premium written.
Ceded premiums earned decreased 22% to $23.7 million for the six month
period ended June 30, 2004 from $30.4 million for the corresponding prior-year
period, primarily as a result of a decrease of $7.3 million of ceded earned
premiums to Select Re under the quota share retrocessional contract discussed
above that was not renewed at January 1, 2004. Offsetting this decrease, in
part, was an increase in ceded premiums earned related to excess of loss
catastrophe retrocessional treaties.
25
Net premiums earned for the first six months of 2004 decreased 18% to
$138.5 million from $168.8 million for the corresponding period of 2003. Net
premiums earned in the exited lines segment decreased $32.3 million, or 84%, for
the first six months of 2004 as compared to the first six months of 2003. The
change in this segment is due to the same factors as those discussed above in
gross and net premiums written. Net premiums earned in the catastrophe and risk
excess segment increased $2.1 million, or 2% to $132.4 million for the six
months ended June 30, 2004 from $130.3 million in the corresponding prior-year
period.
A summary of our net premiums written and earned by business segment
for the six months ended June 30, 2004 and 2003 is included in Note 8 to the
Consolidated Financial Statements.
RATIOS
The following table summarizes the loss ratio, expense ratio and
combined ratio for the six months ended June 30, 2004 and 2003, respectively:
(%) SIX MONTHS ENDED JUNE 30,
-------------------------
2004 2003
---- ----
Loss ratio 26.2 45.8
Expense ratio 29.6 30.8
---- ----
Combined ratio 55.8 76.6
==== ====
Catastrophe and risk excess loss ratio 23.5 29.2
==== ====
LOSSES AND LOSS EXPENSES
Losses and loss expenses incurred amounted to $36.2 million for the six
months ended June 30, 2004 compared to $77.3 million in the corresponding
prior-year period. Our loss ratio was 26.2% for the first six months of 2004
compared to 45.8% for the comparable prior-year period. There were no
significant catastrophes during the six months ended June 30, 2004. During the
six months ended June 30, 2003, the 2003 Midwest storms caused $6.3 million in
incurred losses.
During the first six months of 2004, we experienced net favorable
development of $0.6 million for prior-year losses and loss expenses, due to $0.6
million of favorable development on our exited lines segment. During the first
six months of 2003, we experienced net adverse development of $30.8 million for
prior-year loss and loss expenses, $9.7 million of which was due to adverse loss
development on our exited direct casualty reinsurance operations, $9.5 million
adverse loss development from aerospace claims including the Company's first
receipt of notice that the increase in industry losses related to a 1998 air
crash had resulted in the exhaustion of deductibles under three aerospace
contracts between the Company and Reliance Insurance Company and $4.6 million of
adverse loss development from credit losses.
UNDERWRITING EXPENSES
The expense ratio was 29.6% for the first six months of 2004 compared
to 30.8% during the comparable year-earlier period. The commission and brokerage
ratio, net of fee income, was 13.4% for the first six months of 2004 compared
with 19.1% for the comparable prior-year period, with the prior year ratio
affected by the higher proportion of exited lines premium. The catastrophe and
risk excess commission and brokerage ratio, net of fee income, was 12.1% for the
first six months of 2004 compared with 13.2% for the first six months of 2003,
primarily due to $4.0 million of structuring fees related to a reinsurance
agreement with P-1 Re Ltd. and the subsequent commutation thereof in the first
six months of 2003. The exited lines commission and brokerage ratio, net of fee
income, was 41.2% and 38.9% during the first six months of 2004 and 2003,
respectively.
26
The operating expense ratio was 16.2% for the first six months of 2004
compared with 11.7% for the comparable period of 2003, increasing, in part, due
to the decrease in net premiums earned. Other operating expenses increased 14%
to $22.5 million for the six months ended June 30, 2004 from $19.7 million in
the comparable period of 2003. This increase is primarily due to severance
expenses, net of a pension gain during the six months ended June 30, 2004
related to a 10% reduction in personnel and curtailment of the Company's
retirement plans which in total amounted to $1.3 million. In addition, in the
first six months of 2004, the Board of Directors terminated the Restated
Employee Annual Incentive Bonus Plan and approved the Bonus Incentive
Compensation Plan. As a result, a contingent bonus liability at December 31,
2003 related to the Restated Employee Annual Incentive Bonus Plan was approved
for payment in three equal annual installments in 2004, 2005 and 2006 to
officers and in a single lump sum in 2004 for non-officers, resulting in a
charge in the first six months of 2004 of $1.3 million. Furthermore, in the
first six months of 2004, the operating expenses reflect additional employee
incentive compensation costs. Lastly, there was an increase in various expenses
amounting to $0.8 million in the first six months of 2004 compared to the first
six months of 2003 due to the relocation of underwriters to our Bermuda offices,
in the second quarter of 2003. These factors which increased operating expenses
were offset to some extent by non-recurring compensation costs of $1.2 million
in the comparable prior year period relating to the retirement of the Company's
former Chief Executive Officer, Gerald L. Radke, on June 30, 2003 and his
transition into a consulting role.
INTEREST EXPENSE AND MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
Interest expense, including minority interest in consolidated
subsidiaries, increased to $7.1 million for the six months ended June 30, 2004
from $7.0 million in the comparable period of 2003. This increase is due to $2.6
million of additional interest on $64.4 million of trust preferred securities
which replaced $30.0 million of bank debt, offset by the non-recurrence of $1.5
million of expense reflected in 2003 from an interest rate swap that became
ineffective as a hedging instrument during the quarter ended March 31, 2003. As
discussed in Note 2 to the Consolidated Financial Statements, following the
implementation of SFAS 150 and FIN 46 during the quarter ended March 31, 2004,
the interest on trust preferred securities is now shown as interest expense,
whereas it was previously recorded as minority interest in consolidated
subsidiaries.
NET INVESTMENT INCOME
Net investment income for the first six months of 2004 decreased 16% to
$11.8 million from $14.0 million in the comparable prior-year period primarily
as a result of a $3.2 million decrease in income from our hedge fund portfolio,
offset by a $1.8 million increase in income from our fixed maturity and
short-term investment portfolios. Investment income related to our hedge fund
portfolio decreased to $4.3 million in the first six months ended June 30, 2004
from $7.5 million in the comparable prior-year period as investments in hedge
funds produced a return of 3.5% for the first six months of 2004 compared with
6.7% in the comparable prior-year period. Offsetting this decrease was an
increase in the balance of our fixed maturity and short-term investment
portfolios partially offset by a decrease in the book yield to 3.3% during the
first six months of 2004 from 3.8% on an annualized basis during the comparable
prior-year period.
27
Investment income for the first six months of 2004 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 is 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 $27.3 million and $25.5 million as of June 30,
2004 and 2003, respectively, for which we have recognized $0.9 million and $0.8
million of investment income for the first six months of 2004 and 2003,
respectively. On ceded reinsurance contracts, we held premiums and accrued
investment income of $125.0 million and $124.8 million due to reinsurers as of
June 30, 2004 and 2003, respectively, for which we recognized a charge to
investment income of $4.4 million and $4.7 million for the first six months of
2004 and 2003, respectively. On a net basis, this reduction to investment income
was $1.6 million and $1.0 million for the six months ended June 30, 2004 and
2003, respectively, representing the difference between the stated investment
return under such contracts and the overall yield achieved on our total
investment portfolio for the six month period. The weighted average contractual
investment return on the funds held by PXRE is 7.3% and 7.1% for the six months
ended June 30, 2004 and 2003, respectively, and we expect to be obligated for
this contractual investment return for the life of the underlying liabilities,
which is expected to be five years as of June 30, 2004 on a weighted average
basis.
INCOME TAXES
PXRE recognized a tax expense of $1.3 million in the first six months
of 2004 compared to a tax expense of $1.9 million in the comparable prior-year
period. The tax expense in the first six months of 2004 differed from the U.S.
statutory rate primarily due to the reinsurance business written in our Bermuda
reinsurance subsidiary.
28
CUMULATIVE ADJUSTMENT
The Company adopted the provisions of FIN 46 during the first quarter
of 2004. The cumulative effect of this accounting pronouncement reduced net
income for the six months ended June 30, 2004 by $1.1 million but did not
materially impact shareholders' equity.
FINANCIAL CONDITION
CAPITAL RESOURCES
The Company relies primarily on dividend payments from its
subsidiaries, including PXRE Reinsurance and PXRE Bermuda, to pay its operating
expenses, to meet its debt service obligations and to pay dividends. During the
six months ended June 30, 2004, PXRE Reinsurance paid $5.0 million in dividends.
PXRE Bermuda did not pay any dividends during the same period. Based on the
statutory surplus as of December 31, 2003, the aggregate dividends that are
available to be paid during 2004, without prior regulatory approval, by PXRE
Reinsurance and PXRE Bermuda are $197.6 million. We anticipate that this
available dividend capacity will be sufficient to fund our liquidity needs
during 2004.
LIQUIDITY
The primary sources of liquidity for PXRE Reinsurance and PXRE Bermuda,
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, the
purchase of investments and payment of capital costs. Premiums are typically
received in advance of related claim payments.
Financings
As of June 30, 2004, PXRE had $167.1 million in subordinated debt
securities outstanding as follows:
($000'S) JUNE 30, 2004
-------------
$103.1 million 8.85% fixed rate due February 1, 2027 $ 102,637
$18.0 million 7.35% fixed/floating rate due May 15, 2033 18,042
$15.5 million 9.75% fixed rate due May 23, 2033 15,464
$20.6 million 7.70% fixed/floating rate due October 29, 2033 20,619
$10.3 million 7.58% fixed/floating rate due September 30, 2033 10,310
----------
$ 167,072
==========
Share Dividends and Book Value
Dividends to common shareholders declared in the second quarter of 2004
and 2003 were $0.8 million and $0.7 million, respectively. The expected annual
dividend based on common shares outstanding at June 30, 2004 is approximately
$3.4 million. Book value per common share was $23.21 at June 30, 2004 after
considering convertible preferred shares.
29
The convertible 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. As of June
30, 2004, 17,915 convertible preferred shares were issued and outstanding.
Dividends to preferred shareholders, paid in kind, during the second quarter of
2004 and 2003 amounted to $3.5 million and $3.2 million, respectively.
On December 16, 2003, the Company completed an offering of 2.2 million
of its common shares at $21.75 per share, pursuant to a Shelf Registration on
Form S3, filed in 2003 for $150.0 million. Of the 2.2 million shares sold, 1.1
million were offered by PXRE and 1.1 million were offered by Phoenix Life
Insurance Company ("Phoenix"), one of the Company's common shareholders. The
Company did not receive any of the proceeds from the sale of shares by Phoenix.
On January 22, 2004, the underwriters of the above mentioned share offering
exercised in-full the over-allotment option to purchase 0.3 million additional
common shares at $21.75 per share. As a result of the exercise of the option,
the Company received additional proceeds, net of offering costs, of $6.5
million. We used the net proceeds for general corporate purposes, including
contributions to the capital of PXRE Bermuda. After giving effect to the sale of
the over-allotment shares, a total of 2.5 million shares were sold in the
offering.
Cash Flows
Net cash flows provided by operations were $9.5 million in the second
quarter of 2004 compared to $31.5 million in the second quarter of 2003 due to
the timing of collection of reinsurance recoverables, the sale of trading
investment portfolio assets in second quarter of 2003 without any similar
disposals in the second quarter of 2004 and the payment of funds under deposit
contracts during the second quarter of 2004 as opposed to the receipt of funds
associated with deposit contracts in the second quarter of 2003. Because of the
nature of the coverages we provide, which typically can produce infrequent
losses of high severity, it is not possible to predict accurately our future
cash flows from operating activities. As a consequence, cash flows from
operating activities may fluctuate, perhaps significantly, between individual
quarters and years.
Net cash used by investing activities were $8.8 million in the second
quarter of 2004 compared to $3.4 million in the second quarter of 2003 due
primarily to purchases of securities for investment partially offset by proceeds
received on sale or maturity of investments.
Commitments and Contingencies
As of June 30, 2004, other commitments and pledged assets include (a)
letters of credit of $15.3 million which are secured by cash and securities
amounting to $17.6 million, (b) securities with a par value of $10.6 million on
deposit with various state insurance departments in order to comply with
insurance laws, (c) securities with a fair value of $65.2 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 $0.3
million, (e) a commitment to lend a further $0.1 million to finance the
construction of an office building that we use as our headquarters in Bermuda,
(f) a contingent liability amounting to $1.5 million under the Restated Employee
Annual Incentive Bonus Plan plus interest, (g) commitments under the capital
trust pass-through securities discussed above, and (h) commitment fees of $0.2
million per annum under a Letter of Credit Facility Agreement, dated June 25,
2004, between PXRE Bermuda and Barclays Bank PLC.
30
In connection with the capitalization of PXRE Lloyd's Syndicate 1224,
PXRE Reinsurance has on deposit a $31.1 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 $13.3 million at June 30, 2004, are restricted from
being paid as a dividend until the run-off of our exited Lloyd's business has
been completed.
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 $7.0 million to Barr's Bay to finance the construction of the
subject office building, $6.9 million of which has been advanced as of June 30,
2004. The loans are secured by a first mortgage on the property.
In April 2000, PXRE Reinsurance entered into an aggregate excess of
loss retrocessional reinsurance agreement with a U.S. based cedent. In the
agreement, PXRE Reinsurance reinsured a portfolio of treaties underwritten by a
former business unit of the cedent, which had been divested. Pursuant to this
excess of loss retrocessional agreement, PXRE Reinsurance agreed to indemnify
the cedent for losses in excess of a 75% paid loss ratio on this underlying
portfolio of treaties up to a 100% paid loss ratio, subject to an aggregate
limit of liability of $50.0 million. The latest loss reports related to the
agreement provided by the cedent forecast an ultimate net loss ratio in excess
of 100%, which could result in a full limit loss to PXRE.
In June 2003, PXRE Reinsurance performed an audit of this portfolio of
treaties reinsured under the agreement. As a result of this audit, management
identified problems and believes that the cedent breached its contractual
obligations and fiduciary duties under the agreement. PXRE Reinsurance therefore
filed suit against the cedent on July 24, 2003 in a United Stated District Court
seeking rescission of the agreement and/or compensatory and punitive damages.
Although the ultimate outcome of the litigation cannot presently be
determined, management believes that PXRE Reinsurance's claims are meritorious
and intends to vigorously prosecute its suit. As of June 30, 2004, we have
recorded $34.9 million of loss reserves related to the agreement. If our lawsuit
is unsuccessful, we could potentially incur additional losses under the
agreement of up to $9.9 million on an after-tax basis.
INVESTMENTS
As of June 30, 2004, our investment portfolio, at fair value, was
allocated 58.5% in fixed maturities, 28.7% in short-term investments, 12.0% in
hedge funds and 0.8% in other investments.
31
The following table summarizes our investments at June 30, 2004 and
December 31, 2003 at fair value:
ANALYSIS OF INVESTMENTS
--------------------------------------------------------------
JUNE 30, 2004 DECEMBER 31, 2003
--------------------------- ----------------------------
($000'S, EXCEPT PERCENTAGES) AMOUNT PERCENT AMOUNT PERCENT
------------- ------- ------------ --------
Fixed maturities:
United States treasury securities $ 49,745 4.8% $ 40,237 4.2%
Foreign denominated securities 20,931 2.0 21,451 2.3
United States government sponsored agency debentures 63,248 6.1 115,440 12.2
United States government sponsored agency
mortgage-backed securities 109,440 10.6 134,323 14.2
Other mortgage and asset-backed securities 172,779 16.7 146,196 15.4
Municipal securities 1,579 0.2 18,584 2.0
Corporate securities 187,768 18.1 162,878 17.2
------------- ----- ------------ -----
Total fixed maturities 605,490 58.5 639,109 67.5
Short-term investments 297,092 28.7 175,771 18.6
------------- ----- ------------ -----
Total fixed maturities and short-term investments 902,582 87.2 814,880 86.1
Hedge funds 124,710 12.0 121,466 12.8
Other investments 7,922 0.8 10,173 1.1
------------- ----- ------------ -----
Total investment portfolio $ 1,035,214 100.0% $ 946,519 100.0%
============= ===== ============ =====
At June 30, 2004, 98.2% of the fair value of our fixed maturities and
short-term investments portfolio was in obligations rated "A" (strong) or better
by Moody's or S&P. Mortgage and asset-backed securities accounted for 31.1% of
fixed maturities and short-term investments or 27.3% of our total investment
portfolio based on fair value at June 30, 2004.
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 shareholders' 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 June 30, 2004, an
after-tax unrealized loss of $7.7 million was included in shareholders' 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, amounted to $297.1 million at June 30,
2004, compared to $175.8 million at December 31, 2003.
A significant component of our investment strategy is investing a
portion of our invested assets in a diversified portfolio of hedge funds. At
June 30, 2004, total hedge fund investments amounted to $124.7 million,
representing 12.0% of the total investment portfolio. At December 31, 2003,
total hedge fund investments amounted to $121.5 million, representing 12.8% of
the total investment portfolio. For the six months ended June 30, 2004, our
hedge funds yielded a return of 3.5% compared to 6.7% in the six months ended
June 30, 2003. At June 30, 2004, hedge fund investments with fair values ranging
from $1.1 million to $16.9 million were administered by eighteen managers.
32
As of June 30, 2004, our investment portfolio also included $7.9
million of other invested assets of which 99% is in two mezzanine bond funds.
The remaining aggregate cash call commitments in respect of such investments are
$0.3 million.
Hedge funds and other limited partnership investments are accounted for
under the equity method. Total investment income for the six months ended June
30, 2004, included $4.7 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.
TAXES
PXRE Delaware files U.S. income tax returns for itself and all of its
direct or indirect U.S. subsidiaries that satisfy the stock ownership
requirements for consolidation. PXRE Delaware is party to a tax allocation
agreement concerning filing of consolidated federal income tax returns pursuant
to which each of these U.S. subsidiaries makes tax payments to PXRE Delaware in
an amount equal to the federal income tax payment that would have been payable
by the relevant U.S. subsidiary for the year if it had filed a separate income
tax return for that year. PXRE Delaware is required to provide 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 one of these U.S. subsidiaries is
less than (or greater than) the annual tax liability for that U.S. subsidiary on
a stand-alone basis for that year, the U.S. subsidiary will be required to make
up the deficiency to PXRE Delaware (or will be entitled to receive a credit if
payments exceed the separate return tax liability of that U.S. subsidiary).
CERTAIN RELATED PARTY TRANSACTIONS
Since 1997, PXRE has been a party to a retrocessional agreement (the
"Obligatory Quota Share Treaty") with Select Re, pursuant to which we have ceded
varying proportional shares of our non-casualty reinsurance business ranging
from a high of 16.5% in 2001 to as low as 2.62% in 1997. These cessions
satisfied an undertaking we entered into with Select Re 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 of 15% based
on the gross premiums ceded to them under the Obligatory Quota Share Treaty,
which resulted in fee income of $0.5 million for the six months ended June 30,
2004.
Commencing on January 1, 2004, the cession percentage under the
Obligatory Quota Share Treaty was reduced to 0% and the parties agreed that
PXRE's undertaking would be satisfied through cessions under two other
retrocessional contracts. The first contract is a pro rata retrocessional
contract (the "Specific Pro Rata Contract") which is effective for the period
January 1, 2004 to December 31, 2004 and pursuant to which PXRE Bermuda will
cede a 53% proportional share of the risks assumed by PXRE Bermuda under one
large retrocessional contract. Premiums ceded to Select Re under the Specific
Pro Rata Contract are expected to be approximately $2.6 million, subject to a
22% underwriting commission. The second contract is an excess of loss
reinsurance agreement (the "XOL Contract") which is effective for the period
April 1, 2004 to March 31, 2006 and pursuant to which Select Re will indemnify
PXRE Bermuda for up to $30.0 million in the event that losses arising from a
single catastrophe loss event exceed $280.0 million. The reinsurance premium
under the XOL Contract is $20.0 million, $5.5 million of which is payable at the
inception of the contract. The remaining balance of $14.5 million is payable on
a funds withheld basis, provided that if no loss is ceded to Select Re during
the term of the XOL Contract, PXRE Bermuda will receive a profit commission of
$14.5 million. In connection with these two retrocessional contracts, Select Re
has agreed to deposit collateral equal to $20.9 million into a trust for the
benefit of PXRE Bermuda.
33
Overall, in connection with the foregoing contracts and other in-force
reinsurance contracts, ceded earned reinsurance premiums were $5.6 million to
Select Re during the six months ended June 30, 2004 and net assets of $61.6
million were due to us in the aggregate from Select Re, all of which were fully
secured by way of reinsurance trusts. 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. In the event we do
not designate a member to Select Re's board (which as of August 5, 2004 we have
not), we have the right to send an observer to the Select Re board meetings.
Mr. William Michaelcheck is a member of the Board of Select Re and also
one of its founding shareholders. Mr. Michaelcheck is also the President and a
major shareholder of Mariner Investment Group, Inc. ("Mariner"), which acts as
the investment manager for our hedge fund and alternative investment portfolio.
During the six months ended June 30, 2004 and 2003, we incurred investment
management fees of $0.6 million and $0.4 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.
UPDATE ON CRITICAL ACCOUNTING POLICY DISCLOSURES
The Company's Annual Report on Form 10-K for the year ended December
31, 2003 contains a discussion concerning critical accounting policy disclosures
(See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations -Critical Accounting Policy Disclosures contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003). We
disclose our significant accounting policies in the notes to the Consolidated
Financial Statements which should be read in conjunction with the notes to the
interim Consolidated Financial Statements and the 2003 audited Consolidated
Financial Statements and notes. Several of these policies are critical to the
portrayal of our financial condition and results since they require management
to establish estimates based on complex and subjective judgments. This included
disclosure concerning our estimation of losses and loss expenses.
34
Estimation of Loss and Loss Expenses
As a property catastrophe reinsurer, incurred losses are inherently
more volatile than for reinsurers of risks that have an established historical
pattern of losses. In addition, with respect to insured events that 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 requires 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 shareholders' equity.
In reserving for catastrophe losses, our estimates are influenced by
underwriting information provided by our clients, industry catastrophe models
and our internal analyses of this information. This reserving approach 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 own
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 industry
estimates, which were 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 June 30, 2004 for this event was $67.6 million. Thus, the
original industry loss estimate increased by 150%, and our loss estimate
increased by 116%.
In reserving for non-catastrophe losses for recent periods, we are
required to make assumptions concerning the expected loss ratio usually for
broad lines of business, but sometimes on an individual contract basis. We
consider historical loss ratios for each line of business and utilize
information provided by our clients and estimates provided by underwriters and
actuaries concerning the impact of pricing and coverage changes. As experience
emerges, we will revise our prior estimates concerning pricing adequacy and
non-catastrophe loss potential for our coverages and we will eventually rely
solely on our estimated development pattern in projecting ultimate losses.
Excluding the extraordinary development of 1999 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 shareholders' 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
businesses. 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 businesses, 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.
35
During the second quarter of 2004, we experienced net adverse loss
development of $1.7 million for prior-year loss and loss expenses, primarily due
to $2.6 million of unfavorable development on a 1999 catastrophe event after a
cedent lost a court case contesting a claim. The loss ratio for the comparable
period of 2003 was affected by net adverse development of $17.9 million for
prior-year loss and loss expenses mainly due to $6.4 million of adverse
development on our exited direct casualty reinsurance operations and $6.5
million of adverse development from aerospace claims.
PXRE's loss reserve estimation process takes into consideration the
facts and circumstances related to reported losses; however, for immature
accident years, reported casualty losses are relatively insignificant when
compared to ultimate losses. As such, it is difficult to determine how facts and
circumstances related to early-notified claims will impact future reported
losses. When reported losses grow to a magnitude at which they suggest a trend,
PXRE can, and does, re-estimate loss reserves.
Loss and loss expense liabilities as estimated by PXRE's actuaries and
recorded by management in the statement of financial position as of June 30,
2004 were as follows:
($000'S) GROSS NET
---------- ----------
Catastrophe and Risk Excess $ 193,838 $ 104,858
Exited Lines 234,631 191,408
---------- ----------
Total $ 428,469 $ 296,266
========== ==========
On an overall basis, the low and high ends of a range of reasonable net
loss reserves are $32.1 million below and $35.9 million above the $296.3 million
best estimate displayed above. Note that the range around the overall estimate
is not the sum of the ranges about the component segments due to the impact of
diversification when the reserve levels are considered in total. The low and
high ends of a range of reasonable net loss reserves around the best estimate
displayed in the table above with respect to each segment are as follows:
($000'S) LOW END NET HIGH END
--------- ---------- ----------
Catastrophe and Risk Excess $ 89,374 $ 104,858 $ 122,020
Exited Lines 166,955 191,408 218,812
36
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, speak only as of the date
hereof, and are subject to risk and uncertainties. In light of the risks and
uncertainties inherent in all future projections, these 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) because of exposure to catastrophes, our financial results may
vary significantly from period to period;
(ii) we may be overexposed to losses in certain geographic areas for
certain types of catastrophe events;
(iii) we operate in a highly competitive environment;
(iv) reinsurance prices may decline, which could affect our
profitability;
(v) underwriting reinsurance includes the application of judgment,
the assessment of probabilities and outcomes, and assumption of
correlations, which are subject to inherent uncertainties;
(vi) reserving for losses includes significant estimates which are
also subject to inherent uncertainties;
(vii) a decline in the credit rating assigned to our claim-paying
ability may impact our potential to write new or renewal
business;
(viii) a decline in our ratings may require us to transfer premiums
retained by us into a beneficiary trust or may allow clients to
terminate their contract with us;
(ix) our investment portfolio is subject to market and credit risks
which could result in a material adverse impact on our
financial position or results;
(x) because we depend on a few reinsurance brokers for a large
portion of revenue, loss of business provided by them could
adversely affect us; and our reliance on reinsurance brokers
exposes us to their credit risk;
(xi) we may be adversely affected by foreign currency fluctuations;
(xii) retrocessional reinsurance subjects us to credit risk and may
become unavailable on acceptable terms;
37
(xiii) the impairment of our ability to provide collateral to cedents
could affect our ability to offer reinsurance in certain
markets;
(xiv) the reinsurance business is historically cyclical, and we may
experience periods with excess underwriting capacity and
unfavorable premium rates; conversely, we may have a shortage
of underwriting capacity when premium rates are strong;
(xv) regulatory constraints may restrict our ability to operate our
business;
(xvi) contention by the United States Internal Revenue Service that
we or our offshore subsidiaries are subject to U.S. taxation
could result in a material adverse impact on our financial
position or results; and
(xvii) changes in tax laws, tax treaties, tax rules and
interpretations could result in a material adverse impact on
our financial position or results.
In addition to the factors outlined above that are directly related to
our business, we are also subject to general business risks, including, but not
limited to, adverse state, federal or foreign legislation and regulation,
adverse publicity or news coverage, changes in general economic factors and the
loss of key employees. The factors listed above should not be construed as
exhaustive.
We undertake no obligation to release publicly the results of any
future revisions we may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have reviewed our exposure to market risks at June 30, 2004 and the
changes in exposure since December 31, 2003. The principal market risks which we
are exposed to, continue to be interest rate and credit risk.
The composition of our fixed maturity portfolio did not change
materially during the second quarter of 2004. There were no material changes in
our exposure to market risks or our risk management strategy during the second
quarter of 2004.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended) was carried out under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective as of the end of the period
covered by this report.
38
No change in our internal control over financial reporting (as defined
in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended) occurred
during the period covered by this report that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to litigation and arbitration in the ordinary course of
business. Except as disclosed below, management does not believe that the
eventual outcome of any such pending litigation or arbitration is likely to have
a material effect on our financial condition or business. Pursuant to our
insurance and reinsurance arrangements, disputes are generally required to be
finally settled by binding arbitration.
In April 2000, PXRE Reinsurance entered into an aggregate excess of
loss retrocessional reinsurance agreement with a U.S. based cedent. In the
agreement, PXRE Reinsurance reinsured a portfolio of treaties underwritten by a
former business unit of the cedent, which had been divested. Pursuant to this
excess of loss retrocessional agreement, PXRE Reinsurance agreed to indemnify
the cedent for losses in excess of a 75% paid loss ratio on this underlying
portfolio of treaties up to a 100% paid loss ratio, subject to an aggregate
limit of liability of $50.0 million. The latest loss reports related to the
agreement provided by the cedent forecast an ultimate net loss ratio in excess
of 100%, which could result in a full limit loss to PXRE.
In June 2003, PXRE Reinsurance performed an audit of this portfolio of
treaties reinsured under the agreement. As a result of this audit, management
identified problems and believes that the cedent breached its contractual
obligations and fiduciary duties under the agreement. PXRE Reinsurance therefore
filed suit against the cedent on July 24, 2003 in a United Stated District Court
seeking rescission of the agreement and/or compensatory and punitive damages.
Although the ultimate outcome of the litigation cannot presently be
determined, management believes that PXRE Reinsurance's claims are meritorious
and intends to vigorously prosecute its suit. As of June 30, 2004, we have
recorded $34.9 million of loss reserves related to the agreement. If our lawsuit
is unsuccessful, we could potentially incur additional losses under the
agreement of up to $9.9 million on an after-tax basis.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the quarter ended June 30, 2004, the Company issued the
following equity securities in transactions that were not registered under the
Securities Act of 1933, as amended (the "Act"):
(a) Securities sold. On June 30, 2004, the Company issued 351.268
Convertible Voting Preferred Shares to the existing holders of the
Company's Convertible Preferred Shares in payment of its dividend
obligation thereon. The 351.268 Convertible Voting Preferred Shares
issued were allocated among Series as follows:
i. 175.63 shares of Series A convertible voting preferred shares,
allocated to two sub-series of shares, 117.09 shares allocated
to sub-series Al and 58.54 shares allocated to sub-series A2;
39
ii. 117.09 shares of Series B convertible voting preferred shares,
allocated to two sub-series of shares, 78.06 shares allocated
to Series B1 and 39.03 shares allocated to Series B2; and
iii. 58.54 shares of Series C convertible voting preferred shares,
allocated to two sub-series of shares, 39.03 shares allocated
to Series Cl and 19.51 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 June 15, 2004 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 $3.5 million 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, 2003 is
incorporated herein by reference.
(f) Use of proceeds. Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Annual General Meeting of Shareholders held on May 5,
2004, the Company's shareholders approved the following:
(i) The election of three Class III directors to serve until the 2007
Annual Meeting of Shareholders and until their successors have
been elected and have qualified:
NOMINEE VOTES FOR VOTES WITHHELD
--------- --------------
F. Sedgwick Browne 10,481,810 414,804
Gerald L. Radke 10,566,010 330,604
(ii) The appointment of KPMG as PXRE's independent auditors for the
fiscal year ending December 31, 2004, and referral to the Board
of the determination of their remuneration by the vote of
22,148,461 votes for, 258,907 votes against, 2,867 votes
abstaining;
40
(iii) The adoption of the PXRE 2004 Incentive Bonus Plan by a vote of
18,315,370 votes in favor to 1,092,541 votes against and 363,891
votes abstaining.
(iv) The adoption of various amendments to the PXRE Director Stock
Plan by the shareholders by a vote of 20,887,313 votes in favor
to 1,166,773 votes against and 356,149 votes abstaining.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. EXHIBITS
A list of exhibits required to be filed as part of this report is set
forth in the Exhibit Index of this Form 10-Q, which immediately precedes such
exhibits, and is incorporated herein by reference.
b. CURRENT REPORTS ON FORM 8-K
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 25, 2004; Letter of Credit Facility Agreement, dated June 25,
2004, between PXRE Reinsurance Ltd., as Borrower, and Barclays Bank PLC, as
Issuer; and Security Agreement, dated June 25, 2004, between Barclays Bank PLC,
as Secured Party, and PXRE Reinsurance Ltd., as Borrower.
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
10.1 Letter of Credit Facility Agreement, dated June 25, 2004,
between PXRE Reinsurance Ltd., as Borrower, and Barclays Bank
PLC, as Issuer (Exhibit 10.1 to PXRE Group Ltd.'s 8-K filed
June 25, 2004).
10.2 Security Agreement, dated June 25, 2004, between Barclays Bank
PLC, as Secured Party, and PXRE Reinsurance Ltd., as Borrower
(Exhibit 10.2 to PXRE Group Ltd.'s 8-K filed June 25, 2004).
10.3 Deed of Trust for The Patriot 2004 Trust, dated June 30, 2004,
between Select Reinsurance Ltd. and PXRE Reinsurance Ltd.*
31.1 Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements pursuant to
Section 302 of the Sarbanes-Oxley Act of 2003.*
31.2 Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2003.*
32.1 Certification of Periodic Report Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2003.*
* Filed Herewith
41
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.
August 5, 2004 By: /s/ John M. Modin
------------------------
John M. Modin
Executive Vice President
and Chief Financial Officer
42