casualty reinsurance and insurance products to a national and international marketplace. In connection with the reorganization, the Company repurchased for $1.00 per share 100% of the common shares owned by PXRE Purpose Trust and each outstanding share of PXRE Delaware common stock (other than shares held by PXRE Delaware and its subsidiaries) was converted into one common share of the Company. After the consummation of the reorganization the Company commenced carrying on the holding company functions previously conducted by PXRE Delaware.
(4) The ratios of earnings to fixed charges were determined by dividing consolidated earnings by total fixed charges. For purposes of these computations, (i) earnings consist of consolidated income before considering income taxes, fixed charges and minority interest, and (ii) fixed charges consist of interest on indebtedness and that portion of rentals which is deemed by the Company's management to be an appropriate interest factor. Earnings were inadequate to cover fixed charges by $22,806,000 and $55,288,000 for the years ended December 31, 2000 and 1999, respectively. The ratios of earnings to combined fixed charges and preferred dividends were determined by dividing consolidated earnings by total fixed charges and preferred dividends. Earnings were inadequate to cover fixed charges and preferred dividends by $22,806,000 and $55,288,000 for the years ended December 31, 2000 and 1999, respectively.
PXRE Group Ltd. (the "Company" or collectively with its various subsidiaries "PXRE")--with operations principally in Bermuda, Barbados, the United States, and Europe--provides reinsurance products and services to a worldwide market place. The Company primarily emphasizes commercial and personal property and casualty reinsurance risks and it offers both broker-based and direct-writing distribution capabilities. PXRE also provides marine and aerospace reinsurance products and services.
The Company was formed in 1999 as part of the reorganization of PXRE Corporation ("PXRE Delaware"), a Delaware corporation. Prior to the reorganization, PXRE Delaware was the ultimate parent holding company of the various PXRE companies and its common shares were publicly traded on the New York Stock Exchange. As a result of the reorganization, the Company became the ultimate parent holding company of PXRE Delaware and the holders of PXRE Delaware common stock automatically became holders of the same number of the Company's common shares. The reorganization was consummated at the close of business on October 5, 1999 and, on October 6, 1999, the Company's common shares began to trade on the New York Stock Exchange under the symbol PXT. The reorganization also involved the establishment of a Bermuda based reinsurance company, PXRE Reinsurance Ltd. ("PXRE Bermuda"), operations in Barbados through PXRE (Barbados) Ltd. ("PXRE Barbados"), and PXRE Solutions Inc. ("PXRE Solutions"), a reinsurance intermediary.
o the addition of a reinsurance platform offering primarily casualty products directly to insurance companies;
o the enhancement of its international broker market reinsurance platform to include additional lines of business, including casualty and credit risks;
During 2000, PXRE decided to wind down its excess and surplus lines insurance operations and its Lloyds' operations.
As previously reported, PXRE decided during the first quarter of 2000 to withdraw from the excess and surplus lines and property facultative markets. This business had been conducted through Transnational Insurance Company ("Transnational Insurance") and Transnational Insurance had been unable to write the planned amounts of profitable, complementary non-catastrophe business without adding unacceptable amounts of uncapped catastrophe exposure. Net premiums earned on this business were not material in 1999 and 2000.
In light of PXRE's withdrawal from the excess and surplus lines markets, PXRE transferred substantially all of the assets and liabilities of Transnational Insurance to PXRE Reinsurance through a series of transactions that are intended to qualify as a tax-free liquidation of Transnational Insurance pursuant to Section 332 of the U.S. Internal Revenue Code (the "Liquidating Transactions") leaving Transnational Insurance with only the minimum capital and surplus necessary to maintain its insurance license and surplus lines authorizations. PXRE then sold the remaining corporate shell of Transnational Insurance to United States Fire Insurance Company ("USFIC") pursuant to a Stock Purchase Agreement, dated as of October 5, 2000, in consideration of a purchase price equal to the remaining net assets of Transnational Insurance plus an additional amount as a premium for the value of the insurance licenses and surplus lines authorizations. Both the Liquidating Transactions and the sale of Transnational Insurance to USFIC were consummated during the fourth quarter of 2000.
The reinsurance industry is consolidating through mergers and other acquisitions. PXRE competes with numerous companies, many of which have substantially greater financial, marketing and management resources.
PXRE's invested assets consist primarily of fixed maturities and a diversified portfolio of hedge funds, but also include mezzanine bond and equity limited partnerships, real estate investment trusts ("REIT") and short-term investments. PXRE's investments are subject to market-wide risks and fluctuations, as well as to risk inherent in particular securities. Although PXRE seeks to preserve its capital by investing in a portfolio of hedge funds and other privately held securities designed to provide diversification of risk, such investments entail substantial risks. Portfolio performance may be adversely impacted by equity and credit market conditions. A generally strong equity market in 1999 and early in 2000 may have resulted in portfolio returns that may not be achieved in subsequent periods. There can be no assurance that the investment
objectives of PXRE will be achieved, and results may vary substantially over time. In addition, although PXRE seeks to employ investment strategies that are not correlated with its reinsurance exposures, losses in PXRE's investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate such losses' adverse effect on PXRE. To PXRE's knowledge, other publicly traded reinsurers generally do not follow PXRE's strategy of investing a significant portion of its invested assets in hedge funds and other privately held securities. See "Investments."
PXRE's portfolio of hedge funds and other privately held securities is subject to some or all of the following categories of risk: leverage; concentration of investments; lack of liquidity; market fluctuations and direction (including as a result of interest rate fluctuations and direction, with respect to price levels and volatility); currency fluctuations; credit risk of the securities issuer; yield curve risk; political risk for emerging market investments; and spread risk between two or more similar securities. In addition, PXRE is subject to a) counter-party risk, b) the risk when transactions settle on foreign exchanges, the protections afforded on U.S. exchanges will be absent, c) the risk of exchange controls and d) the risk that one or more of its hedge fund managers mishandles trading, hedging or deviates from the agreed upon strategy, resulting in loss.
on such investments may have a greater effect on PXRE's results of operations at the end of any fiscal period than would be the case for other insurance and/or reinsurance companies.
Of PXRE's fixed maturities portfolio at December 31, 2000, 94.4% of the fair value was in obligations rated "A1" or "A" or better by Moody's or S&P, respectively. Mortgage and asset-backed securities accounted for 31.4% of fixed maturities based on fair value at December 31, 2000. The average market yield to maturity of PXRE's fixed maturities portfolio, at December 31, 2000 and 1999, was 5.9% and 6.6%, respectively.
Fixed maturity and equity investments are reported at fair value, with the net unrealized gain or loss, net of tax, reported as a separate component of shareholders' equity. During 2000, PXRE recorded directly to equity an after-tax unrealized gain of $6,683,000 ($0.57 book value per share) in the value of its investment portfolio.
A principal component of PXRE's investment strategy is investing a significant portion of PXRE's invested assets in a diversified portfolio of hedge funds. As at December 31, 2000, hedge fund investments held by PXRE amounted to approximately $109,755,000, representing 14.0% of December 31, 2000 total assets. As at December 31, 2000, hedge fund investments were allocated among twenty-two managers, with market values ranging from $856,000 to $26,861,000. At that date, two investments affiliated with Mariner, including a "fund-of-funds"
While PXRE seeks capital appreciation with respect to its hedge fund investments, it is also concerned with preservation of capital. For that reason, its hedge fund portfolio is designed to take advantage of broad market opportunities and diversify risk. Nevertheless, PXRE's investment policies with respect to its hedge fund investments generally do not restrict it from participating in particular markets, strategies or investments. In fact, its hedge fund investments may generally be deployed and redeployed in whatever investment strategies are deemed appropriate under prevailing economic and market conditions in an attempt to achieve capital appreciation, including, if appropriate, a concentration of investments in a relatively small group of strategies or hedge fund managers. Accordingly, the identity and number of hedge fund managers is likely to change over time.
managers. Mariner has invested in some of these strategies and has a varying level of knowledge of others. New strategies, or strategies not currently known to Mariner, may come to Mariner's attention and may be adopted from time to time.
As at December 31, 2000 PXRE's investment portfolio also included approximately $30,252,000 of mezzanine bond and equity limited partnership investments, with market values ranging from $2,900,000 to $9,694,000 and remaining aggregate cash call commitments in respect of such investments of $1,982,000. Mariner also monitors the performance of these investments.
Premiums ceded by PXRE to its managed business participants decreased 14.8% to $36,239,000 for 2000 compared with $42,549,000 for 1999. The decrease in premiums ceded to these programs was due primarily to decreases in gross premiums written primarily on fronted business. In addition, PXRE ceded premiums of $26,814,000 from the Structured/Finite Business segment to a managed business participant, Select Re, commencing in 2000.
The loss ratio was 86.0% for 2000 compared with 123.9% for 1999 largely due to French storms Lothar and Martin in both years as well as fifteen catastrophe events in 1999. Excluding the effect of prior year loss development, the loss ratio for 2000 would have been 49.7%. The loss ratio for 2000 reflected incurred catastrophe and risk excess losses of $78,087,000 gross and $51,897,000 net for the 2000 and prior accident years. The loss ratio for 1999 reflected incurred catastrophe losses of $170,477,000 gross and $92,687,000 net for 1999 and prior accident years.
Significant catastrophe and risk losses affecting the year ended December 31, 2000 loss ratio are as follows:
Significant catastrophe and risk losses affecting the year ended December 31, 1999 loss ratio are as follows:
The provision for losses and loss expenses and the loss ratio includes the effect of foreign exchange movements on PXRE's liability for losses and loss expenses, resulting in a foreign currency exchange loss of $1,196,000 for 2000 compared to an exchange gain of $442,000 for 1999.
The underwriting expense ratio was 40.5% for 2000 compared with 43.0% for 1999. The decrease in underwriting expense ratio was substantially due to the increase in premiums earned and management fee income. The commission and brokerage ratio net of management fee income was 18.4% for 2000 compared with 18.8% for 1999. The operating expense ratio was 22.1% for 2000 compared with 24.2% for 1999 reflecting the benefit of growth in the Company's new lines of business. As a result of the above, the combined ratio was 126.5% for 2000 compared with 166.9% for 1999. The decrease in PXRE's GAAP combined ratio was due to reduced catastrophe activity.
Other operating expenses increased to $35,407,000 for the year ended December 31, 2000 from $30,052,000 in 1999. The increase was primarily related to a full year of PXRE's London agency operations as well as amortization of negative goodwill in 1999 that did not continue in 2000. Included in other operating expenses were foreign currency exchange losses of $611,000 for 2000 compared to losses of $836,000 for 1999.
Also in 1999, PXRE incurred $695,000 in after-tax expenses associated with a change in accounting in accordance with the American Institute of Certified Public Accountants Statement of Position 98-5, for organizational and start-up costs capitalized in prior years.
During 2000, interest expense increased to $4,778,000 compared to $3,915,000 in 1999. The increase in interest expense relates to a drawdown of $25,000,000 under a credit facility in the fourth quarter of 1999, partially offset by a repayment of $10,000,000 of the credit facility at March 31, 2000. The variable interest rate on this portion was 7.66% at December 31, 2000. This is part of PXRE Delaware's Credit Agreement with a syndicate of lenders (as described under "Liquidity and Capital Resources"). In addition, during 2000, PXRE incurred minority interest expense amounting to $8,875,000 related to PXRE's $100 million of 8.85% Capital Trust Pass-through Securities `sm' (TRUPS `sm') (as described below under "Liquidity and Capital Resources") compared to $8,790,000 in 1999.
The net effect of foreign currency exchange fluctuations were losses of $1,807,000 in 2000 compared to losses of $394,000 for 1999.
Gross premiums written for 1999 increased 62.5% to $221,349,000 from $136,215,000 for 1998. Net premiums written for the year ended December 31, 1999 increased 56.5% to $138,845,000 from $88,694,000 for 1998. Net premiums earned for the year ended December 31, 1999, increased 39.1% to $128,503,000 from $92,386,000 in 1998. Gross written, net written and net earned premiums for 1999 increased from prior year levels reflecting new business written through PXRE's diversification program and approximately $7,548,000 of additional reinstatement premiums generated by 1999 loss activity.
Premiums ceded by PXRE to its managed business participants increased 97.5% to $42,549,000 for 1999 compared with $21,542,000 for 1998. The increase in premiums ceded to these programs was due primarily to the increase in gross premiums written, including reinstatement premiums on 1999 catastrophe losses, and to fronting certain businesses on behalf of other reinsurers.
The following tables summarize the 1999 and 1998 net written and earned premium by PXRE's business segments:
Significant catastrophe and risk losses affecting the year ended December 31, 1999 loss ratio were as follows:
Significant catastrophe and satellite losses affecting the year ended December 31, 1998 loss ratio were as follows:
The following table summarizes the 1999 and 1998 underwriting (loss) and profit by segment:
accordance with the American Institute of Certified Public Accountants Statement of Position 98-5, for organizational and start-up costs capitalized in prior years.
During 1999, interest expense increased to $3,915,000 as compared to $1,395,000 in 1998. The increase in interest expense relates to a drawdown of $50,000,000 under a credit facility at a fixed rate of 6.34% on December 30, 1998, and a drawdown of the remaining $25,000,000 of this facility in the fourth quarter of 1999, at a variable annual rate of 7.12% (as described under "Liquidity and Capital Resources"). Interest in 1998 reflected $21,400,000 of PXRE's 9.75% Senior Debt which was retired in August 1998. In addition, during 1999, PXRE incurred minority interest expense amounting to $8,790,000 related to PXRE's $100 million of 8.85% Capital Trust Pass-through Securities `sm' (TRUPS `sm') (as described below under "Liquidity and Capital Resources") compared to $8,928,000 in 1998.
PXRE Bermuda is also required to maintain statutory assets in an amount that permits it to meet the prescribed minimum solvency margin for the net premium income level of its business from time to time. In addition, any dividend paid cannot be in an amount that will reduce the reserves of PXRE Bermuda to a level that is not sufficient to meet the reserve requirements of its business.
Dividends and other permitted payments from PXRE Delaware to PXRE Barbados are expected to be subject to U.S. withholding taxes at the rate of 5% (reduced from 30% under the tax convention between the United States and Barbados) and a 2.5% Barbados corporate income tax.
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.
In connection with the Credit Agreement, PXRE Delaware and First Union entered into an interest rate swap which, effective December 31, 1998, has the intended effect of converting the initial $50,000,000 borrowings by PXRE Delaware into a fixed rate borrowing at an annual interest rate of 6.34%. The remaining $25,000,000 was borrowed at a variable annual rate which at December 31, 2000 was 7.66%. Commitments under the Credit Agreement terminate on March 31, 2005 and are subject to annual reductions of $10,000,000 commencing March 31, 2000 and $25,000,000 on March 31, 2005, and, unless due or paid sooner, the aggregate principal of the loans are due and payable in full on March 31, 2005.
The Credit Agreement contains covenants which, among other things, limit the ability of PXRE and its subsidiaries and affiliates: (a) to incur additional Indebtedness (other than certain permitted Indebtedness); (b) to create Liens upon their properties or assets (other than Permitted Liens); (c) to sell, transfer or otherwise dispose of their assets, business or properties (other than certain permitted dispositions); (d) to make additional Investments (other than certain permitted Investments, including Permitted Acquisitions and other Investments in compliance with, among other things, applicable law and the limitations set forth in the companies' investment policies and not exceeding specified limits); (e) to pay dividends or repurchase stock if after giving effect thereto a Default or Event of Default exists or the Fixed Charge Coverage Ratio would be less than 1.5 to 1.0 as defined in the Credit Agreement; (f) to enter into certain transactions with Affiliates; (g) to engage in any unrelated business; (h) to enter into or remain a party to certain ceded reinsurance agreements; or (i) to consolidate, merge or otherwise combine (or agree to do any of the foregoing) unless, among other things, (1) the Company is the surviving entity in such merger or consolidation, (2) such merger or consolidation constitutes a Permitted Acquisition and the conditions and requirements of the Credit Agreement are complied with and (3) immediately thereafter no Default or Event of Default exists. The Credit Agreement also requires
On January 29, 1997, PXRE Capital Trust I ("PXRE Capital Trust"), a Delaware statutory business trust and a wholly-owned subsidiary of PXRE Delaware, issued $100,000,000 principal amount of its 8.85% TRUPS `sm' due February 1, 2027 in an institutional private placement. Proceeds from the sale of these securities were used to purchase PXRE Delaware's 8.85% Junior Subordinated Deferrable Interest Debentures due February 1, 2027 (the "Subordinated Debt Securities"). On April 23, 1997, PXRE Delaware and PXRE Capital Trust completed the registration with the Securities and Exchange Commission of an exchange offer for these securities and the securities were exchanged for substantially similar securities (the "Capital Securities"). Distributions on the Capital Securities (and interest on the related Subordinated Debt Securities) are payable semi-annually, in arrears, on February 1 and August 1 of each year, commencing August 1, 1997. Minority interest expense, including amortization of debt offering costs, for the year ended December 31, 2000 in respect of the Capital Securities (and related Subordinated Debt Securities) amounted to $8,875,000. On or after February 1, 2007, PXRE Delaware has the right to redeem the Subordinated Debt Securities, in whole at any time or in part from time to time, subject to certain conditions, at call prices of 104.180% at February 1, 2007, declining to 100.418% at February 1, 2016, and 100% thereafter. PXRE Delaware has the right, at any time, subject to certain conditions, to defer payments of interest on the Subordinated Debt Securities for Extension Periods (as defined in the applicable indenture), each not exceeding 10 consecutive semi-annual periods; provided that no Extension Period may extend beyond the maturity date of the Subordinated Debt Securities. As a consequence of PXRE Delaware's extension of any interest payment period on the Subordinated Debt Securities, distributions on the Capital Securities would be deferred (though such distributions would continue to accrue interest at a rate of 8.85% per annum compounded semi-annually). In the event that PXRE Delaware exercises its right to extend an interest payment period, then during any Extension Period, subject to certain exceptions, (i) PXRE Delaware may not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock or rights to acquire such capital stock or make any guarantee payments (subject to specified exceptions) with respect to the foregoing, and (ii) PXRE Delaware may not make any payment of interest on, or principal of (or premium, if any, on), or repay, repurchase or redeem, any debt securities issued by PXRE Delaware which rank pari passu with or junior to the Subordinated Debt Securities. Upon the termination of any
Extension Period and the payment of all amounts then due, PXRE Delaware may commence a new Extension Period, subject to certain requirements.
The primary sources of liquidity for PXRE's principal operating subsidiaries are net cash flow from operating activities (including interest income from investments), the maturity or sale of investments, borrowings, capital contributions and advances. Funds are applied primarily to the payment of claims, operating expenses, income taxes and to the purchase of investments. Premiums are typically received in advance of related claim payments.
Net cash flow used by operations was $24,332,000 in 2000 compared with net cash flow provided by operations of $17,512,000 during 1999, due to the effects of timing of collection of receivables and reinsurance recoverables and payments of losses.
In December 1999, the Company announced a stock repurchase program of up to 1,000,000 shares. The Company had approximately 11,820,000 common shares outstanding as of December 31, 2000. No share repurchases were made in 2000.
In September 1997, PXRE and Phoenix Home Life formed a joint venture, Cat Bond Investors L.L.C., with initial committed capital of $20 million. The joint venture specializes in investing in instruments, the returns on which are determined, in whole or in part, by the nature, magnitude and/or effects of certain catastrophe events or meteorological conditions.
PXRE is exposed to market risks that are principally interest rate and equity price risks. The potential for losses from changes in interest rates with respect to its investments, borrowings, and a related interest rate swap exists. PXRE is exposed to potential losses from changes in equity prices with respect to its investments. However, PXRE believes its exposure to foreign exchange risk and exposures to other market risks represented by weather contracts, are not currently material. PXRE has no open weather contracts as of December 31, 2000.
PXRE's risk management strategy is to accept certain levels of market risks, principally through its investment activities, in order to offset its insurance exposures that may be considered actuarial rather than financial. The objectives of PXRE's investment activities are to generate the required return from selected market sectors and limit its exposures to market risks that may prevent PXRE from servicing its insurance obligations. The Company's Board of Directors approves investment guidelines and the selection of external investment advisers who manage PXRE's portfolios. The investment managers make tactical investment decisions within the established guidelines. Management monitors the external advisers through written reports that are reviewed and approved by the Board of Directors or a committee thereof. Management also manages diversification strategies across the portfolios in order to limit PXRE's potential loss from any single market risk. The performance and risk profiles of the portfolio are reported in various forms throughout the fiscal year to management, the Board of Directors, rating agencies, regulators, and to stockholders.
PXRE's principal fixed maturity market risk exposure is to changes in U.S. interest rates. Changes in interest rates may affect the fair value of PXRE's fixed-maturity portfolio, borrowings
PXRE's investments in emerging market debt securities are subject to interest rate risk which is included in the analysis below. During 1999 and 2000, PXRE substantially reduced its investment in emerging market debt securities to less than 1.7% of the fixed maturity portfolio. Therefore, the level of credit exposure associated with these securities has been substantially reduced.
The estimated potential loss is net of prepayment risk associated with the mortgage-related securities. The mortgage sector is a minor portion of the portfolio at year-end. The estimate assumes a similar change in fair value across security sectors with no adjustment for change in value due to credit risk. The interest rate risk related to the investments of PXRE Lloyd's Syndicate is not material. The average maturity of these investments is under one year.
PXRE's exposure to foreign exchange risk from its foreign denominated securities is not material. Only a small portion of PXRE's investment portfolio is denominated in currencies other than U.S. dollars. Additionally, the carrying value of certain receivables and payables denominated in foreign currencies are carried at fair value. For these reasons, these items have been excluded from the market risk disclosure.
PXRE is exposed to equity price risk in the form of a limited number of equity investments, including holdings in the common stock of U.S. REITs. Based on a 10% decrease
in equity prices the potential loss in fair value is estimated to be $1.6 million and $2.4 million at December 31, 2000 and 1999, respectively. The decrease reflects the reduction in the size of the equity portfolio at December 31, 2000. In addition, PXRE is exposed to potential loss in fair value on its equity trading portfolio estimated to be $2.7 million.
PXRE recognized a tax benefit of $12,007,000 in 2000 compared to a benefit of $13,149,000 in 1999. The tax benefit in 2000 differed from the statutory rate primarily due to underwriting losses, tax exempt income and the dividends received deduction. The tax benefit reported in 1999 differed from the statutory rate because of underwriting losses, losses ceded to Bermuda which are not deductible for U.S. tax purposes, tax exempt income and the amortization of negative goodwill. The tax benefit in 1999 was net of a one-time income tax charge in connection with the re-organization of approximately $1,800,000 in connection with the Bermuda redomestication related to the cancellation of shares of PXRE Corporation held by its subsidiary and by $2.3 million in connection with the redomestication related to dividends paid by PXRE Delaware.
Terra Nova in April 2000. Terra Nova has denied coverage, contending that its Managing General Agent had no authority to issue these policies. PXRE Delaware disagrees with Terra Nova's denial and has filed suit against Terra Nova in the United States District Court of New Jersey. Trial of this suit is presently scheduled to commence on April 10, 2001.
PXRE continues to evaluate potential Year 2000 exposures emanating from its reinsurance business by conducting an analysis of each individual customer's risk exposures. Where appropriate, PXRE requires that an exclusion be added to the reinsurance contract or that a letter of intent be received. PXRE began adding exclusions to reinsurance contracts in early 1998. Additionally, it is PXRE's position, in common with others in the industry, that Year 2000 exposures in and of themselves are not fortuitous losses and thus are not covered under reinsurance contracts even without specific exclusions. For these reasons, PXRE believes that its exposures to Year 2000 claims wll not be material. However, as was the case with environmental exposures, changing social and legal trends may create unintended coverage for exposures by causing courts to reinterpret reinsurance contracts and related exclusions. It is impossible to predict what, if any, exposure reinsurance companies may ultimately have for Year 2000 claims whether coverage for the issue is specifically excluded or included.