PXRE leases a total of approximately 25,500 square feet of office space in Edison, New Jersey and Brussels, Belgium. The Edison, New Jersey lease, which covers approximately 24,000 square feet of office space, was signed in 1994 and is for a term of 15 years at a fixed annual rent of approximately $370,000 (inclusive of basic electricity) and additional rents on account of PXRE's proportionate share of increases in building operating expenses and property taxes over calendar year 1994. PXRE's lease of 21,000 square feet of office space in New York, New York expires in July 1996. PXRE plans to utilize this space until such expiration date.
(2) 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. Earnings were inadequate to cover fixed charges by $7,615,000 for the year ended December 31, 1992. 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. Earnings were inadequate to cover fixed charges and preferred dividends by $9,034,000 for the year ended December 31, 1992.
(6) The loss, underwriting expense and combined ratios included under "Other Operating Data" have been derived from the audited consolidated statements of income of PXRE prepared in accordance with GAAP.
(7) During 1995, all of the outstanding shares of Series A Preferred Stock were converted into shares of PXRE's Common Stock. To date, these convertible preferred shares were the principal reason for the difference between primary and fully diluted earnings per share.
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, by managing the underwriting and other day-to-day operations of a publicly-owned reinsurance group.
In the past, PXRE has entered into other retrocessional arrangements providing catastrophic protection. In recent years, PXRE reduced, upon renewal, its own catastrophe retrocessional facilities and has borne the associated increase in net exposures. Although PXRE elected not to purchase any significant retrocessional coverage in 1995, as the cost of catastrophe retrocessional facilities declined, PXRE has begun again selectively to purchase such coverages.
office space based on gross premiums written for the management year and time spent by officers and employees of PXRE in connection with the preparation of reports filed by TREX with the SEC and proxy materials and annual reports sent to TREX shareholders.
As a reinsurer principally of property and catastrophe related coverages in both the international and domestic markets, PXRE's operating results in any given period depend to a large extent on the number and magnitude of natural and man-made catastrophes such as hurricanes, windstorms, floods, earthquakes, spells of severely cold weather, fires and explosions.
of operations and financial condition and result in substantial liquidation of investments and outflows of cash as losses are paid.
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.
Although PXRE's 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. Accordingly, the estimated fair value of PXRE's investments does not necessarily represent the amount which could be realized upon future sale particularly if PXRE were required to liquidate a substantial portion of its portfolio to fund catastrophic losses. In addition, PXRE's investment in and receivables from TREX amount to approximately $45,417,000 at December 31, 1995, which represent 11.5% of its total assets and 21.5% of its stockholders' equity.
Net premiums written for the year ended December 31, 1995, decreased 10.0% to $97,636,000 from $108,518,000 for the corresponding period of 1994. Gross premiums written for 1995 decreased 13.5% to $155,380,000 from $179,684,000 for 1994. Net premiums earned for the year ended December 31, 1995, decreased 12.2% to $97,142,000 from $110,601,000 in the year-earlier period. Gross written, net written and net earned premium decreases for 1995 reflected PXRE's planned response to the continued trend of increased competition in the property catastrophe reinsurance market experienced since the end of 1994 and to recent loss activity in the aviation business. The increased level of competition continued to affect the 1996 annual renewals. During this period, PXRE experienced a reduction in premiums, based on current signed lines of approximately 19% from the 1995 renewal season which is primarily attributable to reductions in underwriting commitments and to a lesser extent rate reductions. In response to these pressures during 1995, PXRE continued to accept some price concessions when consistent with exposures, moved to layers of risk that are less affected by competitive pressures, or reduced commitments where warranted. Although the initial indications from renewals for 1996 are not necessarily representative of what premium levels may be for the full year, they do indicate that in 1996 premiums are likely to decline more than in 1995.
$24,790,000 of premiums compared to $28,722,000 during the corresponding period of 1994 to Transnational in lieu of direct reinsurance writings by Transnational. Management fee income from all sources for 1995 decreased to $6,417,000 from $6,992,000 in 1994. The decrease reflected loss activity that resulted in decreased profitability of business managed for other companies.
The underwriting results of a property and casualty insurer are discussed frequently by reference to its loss ratio, underwriting expense ratio and combined ratio. The loss ratio is the result of dividing losses and loss expenses incurred by net premiums earned. The underwriting expense ratio is the result of dividing underwriting expenses (reduced by management fees, if any) by net premiums written under SAP and net premiums earned under GAAP. The combined ratio is the sum of the loss ratio and the underwriting expense ratio. A combined ratio under 100% indicates underwriting profits and a combined ratio exceeding 100% indicates underwriting losses. The combined ratio does not reflect the effect of investment income on operating results. The ratios discussed below have been calculated on a GAAP basis.
Significant catastrophe and risk losses affecting the year ended December 31, 1995 loss ratio are as follows:
Significant events affecting the year ended December 31, 1994 loss ratio included the following:
Other operating expenses increased to $11,237,000 for 1995, from $8,365,000 in 1994. The operating expense increase for 1995 primarily reflects an increase of $1,653,000 related to changes in benefit plans, additional staff salaries, increased incentive compensation and other related benefits. Also contributing to the increases were additional costs of $216,000 under a new lease in Edison, New Jersey, and an increase in depreciation expense from the capital expenditures of $3,200,000 for PXRE's new facilities including additions to electronic data processing equipment. Included in other operating expenses were foreign currency exchange gains of $196,000 for 1995 compared to gains of $1,156,000 for 1994.
Net investment income for 1995 increased 6.8% to $14,730,000 from $13,786,000 for 1994. The increase in net investment income was caused by a 5.0% increase in average investments for 1995 compared with the previous year, as well as an increase in PXRE's pre-tax investment yield to 5.9% for 1995 compared to 5.8% for 1994. Net realized investment gains for 1995 were $85,000 compared with net realized losses of $1,164,000 for 1994. PXRE recorded directly to equity a $9,759,000 after-tax unrealized increase in the value of its investment portfolio during 1995, resulting from the decline in interest rates since December 31, 1994.
Management fee income for 1994 increased 121% to $6,992,000 from $3,158,000 in 1993. The increase was principally due to the increased amounts of business ceded to PXRE's managed business participants (Trenwick Group and the
Ceded premiums for catastrophe programs were 18% lower compared to 1993, primarily because of management's decision not to renew certain retrocessional coverages in 1994. Other ceded premiums declined principally as a result of a reduction in facultative business and termination of a pro rata retrocession of that business.
The loss ratio was 47.6% for 1994 compared with 51.4% for 1993. The 1994 loss ratio reflected incurred catastrophe losses of $69,833,000 gross and $37,213,000 net for 1994 and prior accident years as compared with $29,265,000 gross and $16,017,000 net in 1993 for 1993 and prior accident years. Significant events affecting the 1994 loss ratio included the following:
The provision for losses and loss expenses includes the effect of foreign exchange movements on PXRE's liability for losses and loss expenses, resulting in a foreign currency exchange loss of $338,000 for 1994 compared to a loss of $205,000 in 1993.
The loss ratio for 1994 was unfavorably affected by increases to reserves of $3,261,000 net for prior years' losses and loss expenses which was principally attributable to
Other operating expenses decreased to $8,365,000 for 1994 from $8,917,000 for 1993 mainly because of foreign exchange gains in 1994 offset in part by an increase in salary related expenses and incentive compensation costs. Included in other operating expenses were foreign currency exchange gains of $1,156,000 for 1994 compared to losses of $397,000 for 1993.
losses for 1994 were $1,164,000 compared with net realized losses of $1,526,000 for 1993. A gain of $10,564,000 in 1993 was attributable to the TREX initial public offering. The realized losses resulted from prepayments on mortgage-backed securities, principally GNMAs.
Net income for 1994 and 1993 included $4,141,000 and $84,000, respectively, which represented PXRE's approximately 21% equity share of TREX's net earnings.
For the reasons discussed above, net income was $34,829,000 for 1994 compared to $22,645,000 for 1993. Primary net income per common share increased to $4.89 for 1994 (after provision for cumulative dividends of $2,005,000 on the Series A Preferred Stock) compared to net income per common share of $3.34 for 1993 (after provision for cumulative dividends of $2,056,000 on the Series A Preferred Stock) based on average shares outstanding of 6,710,000 in 1994 and 6,170,000 in 1993. Fully diluted net income per common share increased to $3.94 for 1994 compared to $2.70 for 1993 based on average shares outstanding of 8,847,000 in 1994 and 8,380,000 in 1993.
PXRE Corporation (parent company) relies primarily on cash dividends and net tax allocation payments from its subsidiary PXRE Reinsurance to pay its operating expenses and income taxes, to meet its debt service obligations and to pay dividends to PXRE stockholders. The payment of dividends by PXRE Reinsurance to PXRE Corporation is subject to limits imposed under the insurance laws and regulations of Connecticut, the state of incorporation and domicile of PXRE Reinsurance, as well as certain restrictions arising in connection with PXRE Corporation's Senior Notes discussed below. Connecticut insurance law provides that the maximum amount of dividends or other distributions that PXRE Reinsurance may declare or pay to PXRE Corporation within any twelve-month period, without regulatory approval, is limited to the lesser of (a) earned surplus or (b) the greater of 10% of policyholders' surplus at December 31 of the preceding year or 100% of net income for the twelve-month period ending December 31 of the preceding year, all determined in accordance with SAP. Accordingly, the
In the fourth quarter of 1994, PXRE's Board of Directors authorized the repurchase of up to $20 million principal amount of Senior Notes in any one calendar year at below par prices in negotiated or open market transactions. As of December 31, 1994, PXRE had repurchased $5,300,000
PXRE Corporation (parent company) files federal income tax returns for itself and all of its direct or indirect domestic subsidiaries that satisfy the stock ownership requirements for consolidation for federal income tax purposes (collectively, the "Subsidiaries"). PXRE Corporation (parent company) is party to an Agreement Concerning Filing of Consolidated Federal Income Tax Returns (the "Tax Allocation Agreement") pursuant to which each Subsidiary makes tax payments to PXRE Corporation (parent company) in an amount equal to the federal income tax payment that would have been payable by such Subsidiary for such year if it had filed a separate income tax return for such year. PXRE Corporation (parent company) is required to provide for payment of the consolidated federal income tax liability for the entire group. If the aggregate amount of tax payments made in any tax year by a Subsidiary is less than (or greater than) the annual tax liability for such Subsidiary on a stand-alone basis for such year, such Subsidiary will be required to make up such deficiency (or receive a credit if payments exceed the separate return tax liability) to PXRE Corporation (parent company).
Of PXRE's fixed maturities portfolio at December 31, 1995, 100% of the fair value was in obligations rated "A1" or "A" or better by Moody's or S&P, respectively, or in government or government-backed securities. Mortgage-backed securities (principally GNMAs) accounted for 22.6% of fixed maturities based on fair value at December 31, 1995. PXRE has no investments in real estate or commercial mortgage loans. The average market yield to maturity of PXRE's fixed maturities portfolio at December 31, 1995 and 1994 was 5.3% and 5.8%, respectively.
In November 1993, an initial public offering by TREX, a subsidiary of PXRE, of 5,750,000 shares of Class A Common Stock at $20 per share, was completed. In connection with this offering, PXRE contributed all of the capital stock of Transnational to TREX. TREX, through Transnational, now specializes principally in providing brokered property retrocessional reinsurance and marine and aviation retrocessional reinsurance in the United States and international markets pursuant to the Management Agreement with PXRE. PXRE owns approximately 21.9% of the total issued and outstanding common stock of TREX and is entitled to designate two of TREX's five directors.
During the fourth quarter of 1995, PXRE raised the quarterly dividend on its Common Stock from $0.15 per share to $0.18 per share. The increase in the dividend will result in an annual additional outlay of approximately $1,049,400.
PXRE exercised its option to redeem PXRE's Series A Preferred Stock (and the related Depositary Shares) on May 1, 1995. At December 31, 1994, there were 10,009 shares of Series A Preferred Stock (1,000,900 Depositary Shares) outstanding. During the second quarter of 1995, all of the outstanding shares of Series A Preferred Stock were converted into shares of PXRE's Common Stock resulting in the issuance of approximately 1,760,000 shares of PXRE's Common Stock. Each Depositary Share had a conversion price of $12.29 per Depositary Share and was valued for conversion purposes at $25.00, resulting in approximately 2.0342 shares of Common Stock for each Depositary Share converted. As a result of this transaction, PXRE will save approximately $500,000 in dividend costs for the preferred shares each quarter. This will be offset by approximately $316,800 in additional common stock dividends on shares issued upon conversion. To date, these convertible preferred shares were the principal reason for the difference between primary and fully diluted earnings per share. Because of the conversion, that difference will be eliminated in future periods.
make, investments denominated in foreign currencies to mitigate, in part, the effects of currency fluctuations on its results of operations. Currency holdings and investments denominated in foreign currencies do not constitute a material portion of PXRE's investment portfolio and, in the opinion of PXRE's management, are sufficiently liquid for its needs.