recorded equity in net earnings of TREX amounting to $3,898,000. Diluted average shares outstanding reflects the 5,680,256 weighted shares issued to holders of TREX common shares in connection with the Merger. Included in management fee was $2,512,000, $3,526,000 and $3,364,000 in 1996, 1995 and 1994, respectively, earned from TREX prior to the Merger. If the Merger had taken place at the beginning of 1996 and 1995, consolidated revenues would have been $153,410,000 and $193,972,000 for 1996 and 1995, respectively. Consolidated pro forma net income and diluted net income per share would have been $49,161,000 and $3.42 in 1996 and $60,755,000 and $4.19 in 1995. Such pro forma amounts are not necessarily indicative of what the actual consolidated results might have been if the Merger had been effected prior to December 11, 1996.
(3) During the second quarter of 1992, PXRE completed an offering of 1,059,800 depository shares, each representing 1/100 of a share of PXRE's Series A Cumulative Convertible Preferred Stock. The net proceeds of $24,403,000 were contributed to PXRE Reinsurance's surplus. During the first quarter of 1993, PXRE completed an offering of 2,300,000 shares of common stock. The net proceeds of $46,942,000 (except for $5,000,000 which was retained by PXRE for general corporate purposes) were contributed to PXRE Reinsurance's surplus. During the third quarter of 1993, PXRE completed an offering of $75,000,000 principal amount of 9.75% Senior Notes due 2003. The net proceeds of $72,150,000 (except for approximately $3,938,000 which was used by PXRE to repay all amounts outstanding under and retire a term loan facility and $15,000,000 which was retained by PXRE to provide support for debt service on the Senior Notes) were contributed to PXRE Reinsurance's surplus.
(5) The historical ratios of earnings to fixed charges were determined by dividing consolidated earnings by total fixed charges. For purposes of these computations (i) earnings consist of consolidated income before considering income taxes, fixed charges and minority interest and (ii) fixed charges consist of interest on indebtedness and that portion of rentals which is deemed by PXRE's management to be an appropriate interest factor. The historical ratios of earnings to combined fixed charges and preferred dividends were determined by dividing consolidated earnings by total fixed charges and preferred dividends.
PXRE provides reinsurance products and services to a national and international marketplace, with principal emphasis on commercial and personal property risks and marine and aerospace risks, and with a particular focus on catastrophe-related coverages.
PXRE also generates management fee income by managing business for other insurers and reinsurers, either by accepting additional amounts of coverage on underwritten risks and retroceding such additional amounts to participants through various retrocessional arrangements or, in one case, until the Merger with TREX described below, by managing the underwriting and other day-to-day operations of a publicly-owned reinsurance group.
On December 11, 1996, PXRE completed the merger of TREX with and into PXRE (the 'Merger'), pursuant to which each share of common stock of TREX was converted into the right to receive 1.0575 shares of PXRE common stock. The Merger resulted from the realization by the management and Boards of Directors of both PXRE and TREX that conditions had become more competitive in the retrocessional reinsurance marketplace, and that the reinsurance markets, rating agencies and the capital markets were placing increased importance on the size and financial strength of reinsurance companies, which size and financial strength would be augmented by the Merger. Following the Merger, Transnational Reinsurance became a wholly-owned subsidiary of PXRE Reinsurance. The Merger has been accounted for using the purchase method of accounting; therefore net income of TREX (including Transnational Reinsurance) has been included in PXRE's consolidated results of operation from the date of the Merger.
In December 1996, PXRE completed an investment in Lloyd's of London, forming a new syndicate, PG Butler Syndicate 1224, and a presence in London. Underwriting premium volume and loss experience related to Syndicate 1224's different business mix is included in the consolidated results on a one quarter lag basis, commencing in the quarter ended June 30, 1997. See 'Liquidity and Capital Resources.'
Premiums on reinsurance business assumed are recorded as earned on a pro rata basis over the contract period based upon estimated subject premiums. Management must estimate the subject premiums associated with the treaties in order to determine the level of earned premiums for a reporting period. Such estimates are based on information from brokers which can be subject to change as new information becomes available. Because of the inherent uncertainty in this process, there is the risk that premiums and related receivable balances may turn out to be higher or lower than reported.
PXRE relies primarily on cash dividends and net tax allocation payments from its subsidiaries PXRE Reinsurance and Transnational Insurance to pay its operating expenses, to meet its debt service obligations and to pay dividends to PXRE's stockholders. The payment of dividends by PXRE Reinsurance to PXRE, and by Transnational Insurance to PXRE Reinsurance, is subject to limits imposed under the insurance laws and regulations of Connecticut, the state of incorporation and domicile of PXRE Reinsurance and Transnational Insurance, as well as certain restrictions arising in connection with PXRE's outstanding indebtedness.
In the event the amount of dividends available, together with other sources of funds, are not sufficient to permit PXRE to meet its debt service, its other obligations and to pay cash dividends, it would be necessary to obtain the approval of the Connecticut Insurance Commissioner prior to the payment of additional dividends by PXRE Reinsurance (or Transnational Insurance). If such approval were not obtained, PXRE would have to adopt one or more alternatives, such as refinancing or restructuring its indebtedness or seeking additional equity. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all.
Gross premiums written for 1997 increased 10.4% to $126,232,000 from $114,348,000 for the corresponding period of 1996 as reported and decreased 12.3% from $143,987,000 on a pro forma basis in the corresponding period of 1996. Net premiums earned for the year ended December 31, 1997, increased 25.6% to $91,415,000 from $72,796,000 for the comparable period of 1996 as reported, and decreased 25.7% from $123,042,000 on a pro forma basis in the corresponding period of 1996. Net premiums written for the year ended December 31, 1997, increased 47.8% to $100,055,000 from $67,718,000 for the corresponding period of 1996 as reported, and decreased 14.2% from $116,604,000 in the corresponding period of 1996 on a pro forma basis. Gross written, net written and net earned premium for 1997 declined from prior-year levels on a pro forma basis reflecting a continuation of the increasingly competitive business environment which has marked recent renewal seasons. Lower reinstatement premiums as a result of reduced losses and additional reinsurance purchased at favorable rates contributed to these declines. PXRE continued its planned
Premiums ceded by PXRE to its managed business participants decreased 22.1% to $16,534,000 for 1997 compared with $21,238,000 for the corresponding period of 1996. The decrease in premiums ceded to these programs was due to reduced amounts of premiums written by PXRE and a change in the percentage ceded as agreed with the participants. During 1996, before the Merger, PXRE ceded $19,965,000 of premiums to Transnational Reinsurance in lieu of direct reinsurance writings by Transnational Reinsurance. During 1997 PXRE increased its purchases of catastrophe retrocessional coverage for its own protection in light of the continued general deterioration in catastrophe reinsurance pricing and the opportunity to buy protection at more favorable terms than in recent years.
Management fee income from all sources for 1997 decreased to $3,006,000 from $6,032,000 for the corresponding period of 1996 as reported, reflecting a decline of premiums ceded to managed business participants, as well as management fee income of $2,512,000 earned by PXRE from TREX, before the Merger, in 1996. Management fee income decreased to $3,006,000 for 1997 from $3,520,000 for the corresponding period of 1996 on a pro forma basis, reflecting the decreased amount of ceded premium, offset in part by more profitable business.
Other operating expenses increased to $15,716,000 for 1997 from $12,262,000 in the comparable period of 1996 as reported, and $15,195,000 for the corresponding period of 1996 on a pro forma basis. Included in other operating expenses were foreign currency exchange losses of $1,221,000 for 1997 compared to gains of $143,000 for the corresponding period of 1996 as reported, and gains of $210,000 for the corresponding period of 1996 on a pro forma basis. Operating expenses were $17,191,000 excluding foreign exchange losses and amortization of negative goodwill of $2,696,000 in 1997 compared with $18,101,000 in 1996 pro forma results excluding the same items. This decrease was primarily due to the non recurring costs related to the TREX merger in 1996.
In 1997, PXRE recorded an extraordinary loss of $2,774,000, net of tax, in connection with the purchase of $43.3 million of PXRE's 9.75% Senior Notes and the associated write-off of the pro rata share of the unamortized debt issuance costs.
The net effects of foreign currency exchange fluctuations were losses of $594,000 in 1997 and gains of $102,000 for 1996. See 'Liquidity and Capital Resources.'
For the reasons discussed above, net income was $44,253,000 for 1997 compared to $33,301,000 for the comparable period of 1996 as reported, and $49,161,000 for the corresponding period of 1996 on a pro forma basis. Diluted income per common share before extraordinary loss was $3.39 for 1997 compared to $3.69 for the prior comparable period as reported, and $3.42 on a pro forma basis. Diluted net income per common share was $3.19 for 1997 compared to $3.69 for the corresponding period of 1996 as reported, and $3.42 for the corresponding period of 1996 on a pro forma basis based on average shares outstanding of approximately 13,893,000 in 1997, 9,020,000 in the comparable period of 1996 as reported, and 14,389,000 in the corresponding period of 1996 on a pro forma basis.
Interest expense decreased to $6,957,000 in 1996 from $7,143,000 in 1995 due to the purchase of approximately $3.1 million of PXRE's 9.75% Senior Notes during the second and third quarters of 1996 at an average price of 106.1%.
In the event the amount of dividends available, together with other sources of funds, are not sufficient to permit PXRE to meet its debt service and other obligations and to pay cash dividends, it would be necessary to obtain the approval of the Connecticut Insurance Commissioner prior to the payment of additional dividends by PXRE Reinsurance (or Transnational Insurance). If such approval were not obtained, PXRE would have to adopt one or more alternatives, such as refinancing or restructuring its indebtedness or seeking additional equity. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all. In the event that PXRE were unable to generate sufficient cash flow and were otherwise unable to obtain funds necessary to meet required payments of principal and interest on its indebtedness, PXRE could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all of the funds borrowed thereunder to be due and payable together with accrued and unpaid interest.
declining to 100.418% at February 1, 2016, and 100% thereafter. PXRE has the right, at any time, subject to certain conditions, to defer payments of interest on the Subordinated Debt Securities for Extension Periods (as defined in the applicable indenture), each not exceeding 10 consecutive semi-annual periods; provided that no Extension Period may extend beyond the maturity date of the Subordinated Debt Securities. As a consequence of PXRE's extension of the interest payment period on the Subordinated Debt Securities, distributions on the Capital Securities would be deferred (though such distributions would continue to accrue interest at a rate of 8.85% per annum compounded semi-annually). In the event that PXRE exercises its right to extend an interest payment period, then during any Extension Period, subject to certain exceptions, (i) PXRE shall not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock or rights to acquire such capital stock or make any guarantee payments (subject to specified exceptions) with respect to the foregoing, and (ii) PXRE shall not make any payment of interest on, or principal of (or premium, if any, on), or repay, repurchase or redeem, any debt securities issued by PXRE which rank pari passu with or junior to the Subordinated Debt Securities. Upon the termination of any Extension Period and the payment of all amounts then due, PXRE may commence a new Extension Period, subject to certain requirements.
PXRE has used, and expects to use, the net proceeds from the sale of the Capital Securities for general corporate purposes, including the redemption or the purchase, from time to time, in the open market or in privately negotiated transactions or otherwise, of outstanding indebtedness and common stock of PXRE.
In August 1993, PXRE completed a public offering of $75,000,000 principal amount of 9.75% Senior Notes due August 15, 2003. Interest is payable on the Senior Notes semi-annually. Interest expense, including amortization of debt offering costs, for 1997 in respect of the Senior Notes amounted to approximately $3,325,000. In addition, PXRE incurred an extraordinary loss of $2,774,000, net of tax, associated with the premium paid to acquire $43.3 million of the Senior Notes and the pro rata share of the debt offering costs during 1997. On and after August 15, 1998, the Senior Notes may be redeemed at the option of PXRE, in whole or in part, at redemption prices (expressed as percentages of the principal amount), plus accrued and unpaid interest to the date fixed for redemption, of 103.656% at August 15, 1998, declining to 100% at August 15, 2001 and thereafter. The Indenture governing the Senior Notes contains covenants which, among other things, limit the ability of PXRE and its Restricted Subsidiaries (including PXRE Reinsurance): (a) to incur additional indebtedness (except for the incurrence of Permitted Indebtedness and the incurrence of other Indebtedness by PXRE in circumstances where no Default or Event of Default exists and the Consolidated Fixed Charge Coverage Ratio of PXRE would be greater than 2:1 after giving effect to the incurrence) and, in the case of the Restricted Subsidiaries, to issue preferred stock; (b) to pay dividends, repurchase stock and to make certain other Restricted Payments (other than, among other things, if no Default or Event of Default exists (x) Restricted Payments after August 31, 1993, not exceeding in the aggregate the sum of $3,000,000 plus 50% of Consolidated Net Income (or minus 100% of any loss) from such date (with certain adjustments), plus the amounts of certain equity proceeds and certain reductions in Investments in Unrestricted Subsidiaries, provided, that at the
The primary sources of liquidity for PXRE Reinsurance are net cash flow from operating activities (including interest income from investments), the maturity or sale of investments, borrowings, capital contributions and advances from PXRE and dividends from Transnational Insurance. Funds are applied primarily to the payment of claims, operating expenses, income taxes and to the purchase of investments. Premiums are typically received in advance of related claim payments.
Net cash flow provided by operations was $19,626,000 during 1997 compared with net cash flow provided by operations of $28,033,000 during the corresponding period of 1996, as reported, due to the effects of timing of collection of receivables and reinsurance recoverables and payments of losses.
PXRE's management has established general procedures and guidelines for its investment portfolio and oversees investment management carried out by Phoenix Duff & Phelps, a public majority-owned subsidiary of Phoenix Home Life. Although these investment guidelines stress conservation of principal, diversification of risk and liquidity, investments are subject to market-wide risks and fluctuations, as well as to risk inherent in particular securities. At December 31, 1997, PXRE's investment portfolio consisted primarily of fixed maturities and short-term investments. As at December 31, 1997, 88.0% of PXRE's investment portfolio, at fair value, consisted of fixed maturities and short-term investments, while the balance was in equity securities and other invested assets primarily in the form of investments in various mutual funds and limited partnerships. The investment policies and all investments of PXRE are approved by its Board of Directors.
Fixed maturity and equity investments are reported at fair value, with the net unrealized gain or loss, net of tax, reported as a separate component of stockholders' equity. PXRE recorded directly to stockholders' equity a $2,605,000 after-tax unrealized gain in the value of its investment portfolio ($0.19 book value per share) at December 31, 1997 including an after-tax unrealized loss of $1,475,000 ($0.11 book value per share) during the three months ended December 31, 1997, the latter reflecting principally the value of its equity portfolio, market volatility in debt and equity securities in Asia, and the effect of an increase in interest rates during the quarter. Short-term investments are carried at amortized cost, which approximates fair value. PXRE's short-term investments, principally high-grade commercial paper, U.S. Treasury bills and investments in limited partnerships which invest primarily in U.S. Treasury bills, were $52,905,000 at December 31, 1997 compared to $59,792,000 at December 31, 1996. The decrease at December 31, 1997 was principally due to the redeployment of cash flow into new sectors. Other invested assets amounting to $42,857,000 at December 31, 1997, which were comprised of limited partnerships, were accounted for under the equity method. The amount of equity income included in short-term investments and other invested assets in 1997 amounted to $2,298,000.
Dividends incurred in 1997 were $12,209,000 compared to $6,479,000 in the corresponding period of 1996, as a result of the increased quarterly dividend from $0.18 to $0.21 in the fourth quarter of 1996, as well as the increased number of outstanding shares following the Merger with
As announced in April 1997, PXRE's Board of Directors authorized a new stock repurchase program and 1.7 million of the authorization remains. There were no repurchases of common stock since the second quarter of 1997.
In September 1997, PXRE and Phoenix Home Life completed the formation of a joint venture, Cat Bond Investors, with initial committed capital of $20 million. The joint venture specializes in investing in instruments the returns on which are determined, in whole or in part, by the nature, magnitude and/or effects of certain catastrophic events or meteorological conditions.
In November 1997 PXRE announced the formation of an excess and surplus lines operation, using Transnational Insurance. Consistent with the PXRE underwriting philosophy, this new venture, with initial capital of approximately $100 million, will specialize in short-tail property type risks to be written as insurance. PXRE is obtaining the necessary state and regulatory approvals, designing a reinsurance program and identifying potential sources of business for this operation. Its operations are expected to commence during the first quarter 1998.
All amounts classified as reinsurance recoverable at December 31, 1997 are considered by management of PXRE to be collectible in all material respects.
PXRE is in the process of evaluating the impact of the Year 2000 problem on its operations. PXRE plans to either upgrade or rewrite two existing software systems during 1998, the cost of which is not expected to be material. PXRE continues to seek assurances from third parties on whose systems and services it relies to a significant extent that such third parties' systems are or will be Year 2000 compliant. There can be no assurance that the systems of such third parties will be Year 2000 compliant or that any third party's failure to have Year 2000 compliant systems would not have a material adverse effect on PXRE's systems or operations.
In addition to the factors outlined above that are directly related to PXRE's business, PXRE is 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.