- ------------------- (1) The Company was incorporated on June 1, 1999 as a Bermuda holding company and a wholly owned subsidiary of PXRE Purpose Trust, a purpose trust established under the laws of Bermuda. On October 5, 1999, PXRE Delaware completed a reorganization pursuant to which the Company became the ultimate parent holding company of PXRE Delaware. PXRE Delaware and its subsidiaries provide property and 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 loss, underwriting expense and combined ratios included under "Other Operating Data" have been derived from the audited consolidated statements of income of the Company prepared in accordance with U.S. GAAP.
The Company was formed in 1999 as part of the reorganization of PXRE 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 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 Reinsurance (Barbados) Ltd. ("PXRE Barbados"), and the formation of a reinsurance intermediary, PXRE Solutions Inc. ("PXRE Solutions").
On December 10, 2001, we signed a definitive agreement with Capital Z Financial Services Fund II, investment funds managed by Reservoir Capital Group, and Richard Rainwater, to invest $150 million in new equity capital in the form of convertible preferred stock (the "Preferred Stock Investment"). The capital infusion from the Preferred Stock Investment will enable us to increase underwriting capacity and therefore maximize participation in the hardening reinsurance market following the September 11th terrorist attacks. The closing of the Preferred Stock Investment is subject to customary closing conditions, including regulatory approval. The Company's shareholders approved the transaction on February 12, 2002. The State of Connecticut Insurance Department held a hearing to consider the investment on March 13, 2002 and, under Connecticut law, the Connecticut Insurance Commissioner is required to render her decision on the matter within thirty days of the conclusion of the hearing.
We conduct our business primarily through our principal operating subsidiaries, PXRE Reinsurance, PXRE Bermuda, PXRE Barbados and PXRE Solutions. PXRE Reinsurance is a brokerage-market reinsurer with approximately $331.9 million of statutory capital and surplus as of December 31, 2001, which principally underwrites treaty reinsurance for property (including marine and aerospace) and casualty risks. PXRE Reinsurance is licensed, accredited or permitted to transact business in all states and the District of Columbia, Puerto Rico, Colombia and Mexico and operates a branch in Belgium ("PXRE's Brussels Branch").
As a reinsurer of property catastrophe-type coverages in the worldwide market place, our 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, hailstorms, earthquakes, volcanic eruptions, fires, industrial explosions, freezes, riots and floods. While we may, depending on market conditions, purchase catastrophe retrocessional coverage for our own protection, the occurrence of one or more major catastrophes in any given period could nevertheless have a material adverse impact on our results of operations and financial condition and result in substantial liquidation of investments and outflows of cash as losses are paid.
As we underwrite risks from a large number of insurers based on information generally supplied by reinsurance brokers, there is a risk of developing a concentration of exposure to loss in certain geographic areas prone to specific types of catastrophes. We have developed systems and software tools to monitor and manage the accumulation of our exposure to such losses. We have established guidelines for maximum tolerable losses from a single or multiple catastrophic events based on historical data; however, no assurance can be given that these maximums will not be exceeded in some future catastrophe.
Premium receivables and loss reserves include business denominated in currencies other than U.S. dollars. We are exposed to the possibility of significant claims in currencies other than U.S. dollars. While we hold positions denominated in foreign currencies to mitigate, in part, the effects of currency fluctuations on our results of operations, we currently do not hedge our currency exposures before a catastrophic event which may produce a claim.
The reinsurance industry has been consolidating in recent years through mergers and other acquisitions. We compete with numerous companies, many of which have substantially greater financial, marketing and management resources. The level of competition has increased in the wake of the September 11th terrorist attacks with the formation of a number of large and well-capitalized Bermuda reinsurance companies. In addition, a number of our pre-existing competitors were successful in raising substantial levels of additional capital. Although we expect to increase our capital as well through the Preferred Stock Investment, we will remain smaller than most of our competitors.
Our 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, we are 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 our hedge fund managers mishandles trading, hedging or deviates from the agreed upon strategy, resulting in loss.
The Company's financial statements disclose in footnotes its significant accounting policies. Certain of these policies are critical to the portrayal of the Company's financial condition and results since they require management to establish estimates based on complex and subjective judgments. The Company's critical accounting policies include liabilities for loss and loss expenses, premiums assumed and ceded and investments.
In reserving for non-catastrophe losses from recent years, we are required to make assumptions concerning the expected loss ratio usually for broad lines of business but sometimes by contract. We consider historical loss ratios for each line of business and estimates provided by underwriters and actuaries concerning the impact of pricing and coverage changes. We also utilize information provided by our clients when we reserve heterogeneous lines by selecting expected loss ratios based upon loss ratio projections from pricing analyses. As experience emerges, we 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.
In addition, the potential for uncertainty for recent underwriting years is greater than in past years because of the increased casualty exposures assumed by us through our casualty and finite business. Unlike property losses that tend to be reported more promptly and usually are settled within a shorter time period, casualty losses are frequently slower to be reported and may be determined only through the lengthy, unpredictable process of litigation. Moreover, given our recent expansion of casualty and finite business, we do not have established historical loss development patterns that can be used to establish casualty 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.
Our 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.
The premiums on reinsurance business ceded are recorded as incurred on a pro rata basis over the contract period. Certain ceded reinsurance contracts contain provisions requiring us to pay additional premiums or reinstatement premiums in the event that losses of a significant magnitude are ceded under such contracts. Under U.S. GAAP, we are not permitted to establish reserves for potential additional premiums or record such amounts until a loss occurs that would trigger the obligation to pay such additional or reinstatement premiums. As a result, the net amount recoverable from our reinsurers in the event of a loss may be reduced by the payment of additional premiums and reinstatement premiums. In many cases, the impact of such premiums will be offset by additional premiums and reinstatement premiums payable to us by our clients on our assumed reinsurance business. No assurance can be given, however, that assumed reinstatement and additional premiums will offset ceded reinstatement and additional premiums. For example, in the case of the September 11th terrorist attacks, our net premiums earned during 2001 were reduced by $26.3 million as a result of additional premiums and reinstatement premiums payable due to that loss.
We utilize the valuations provided to us by managers of our hedge funds and other privately held securities in preparing our financial statements. The carrying values used in such financial statements may not reflect the value we receive when liquidating our investment in a hedge fund or other privately held security. If liquidity is by redemption, the valuations supplied quarterly by the manager of the hedge fund or other privately held security will generally be the value used by the manager to set the redemption price. However, to the extent a manager has discretion in pricing holdings, should substantial redemptions occur in a limited period of time that discretion may be used to price at lower values than would otherwise be used, thus reducing the redemption price. If liquidation of our investment occurs by virtue of a liquidation of a hedge fund or other privately held securities, we may receive substantially less than the valuation method used by the manager since the valuation method used by the manager is unlikely to use liquidation values. Accordingly, the estimated fair value of our hedge fund and other privately held investments does not necessarily represent the amount which could be realized upon future sale, including in the event we need liquidity to fund catastrophic losses.
For the year ended December 31, 2001, the net loss was $17.9 million compared to a net loss of $10.8 million for 2000. The diluted net loss per common share was $1.55 for 2001 compared to a diluted net loss per share of $0.95 for 2000, based on diluted average shares outstanding of approximately 11,578,000 in 2001 and 11,394,000 in 2000.
Premiums ceded to our managed business participants increased 38.7% to $50.3 million for 2001 compared with $36.2 million for 2000. The percentage increase in premiums ceded to these programs was higher than for gross premiums written due primarily to increases in reinstatement premiums ceded in connection with the September 11th terrorist attacks.
A summary of our 2001 and 2000 net premiums written and earned by business segment is included in Note 10 to the Consolidated Financial Statements.
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 for purposes of SAP and net premiums earned for purposes of U.S. 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 U.S. GAAP basis.
Our loss ratio was 93.6% for the year ended December 31, 2001 compared with 86% for 2000. Excluding the effects of the September 11th terrorist attacks, our loss ratio was 66.7%. Our loss ratio for the year ended December 31, 2001 reflected incurred catastrophe and risk excess losses of $225.8 million gross and $56 million net for the 2001 and prior accident years. Our loss ratio for 2000 reflected incurred catastrophe and risk excess losses of $78.1 million gross and $51.9 million net.
During 2001, we experienced adverse development of $17.9 million net for prior-year loss and loss expenses primarily due to strengthening of reserves in casualty, marine and aerospace lines of business, and development on a number of historical catastrophe events. The loss ratio for 2000 was adversely affected by development of $58.2 million net for prior-year loss and loss expenses largely due to the French storms Lothar and Martin.
During 2001, interest expense decreased to $4.4 million compared to $4.8 million in 2000. The decrease in interest expense reflects the repayments of $10 million on our primary credit facility at each of March 31, 2001 and 2000 (as described under "Liquidity and Capital Resources"). As of December 31, 2001, $55 million remains outstanding under this credit facility. The interest rate on $36.7 million of the $55 million outstanding is fixed at 6.34% as a result of a cash flow hedge interest rate swap. The interest rate on the remaining $18.3 million outstanding is variable and was 3.59% at December 31, 2001. This is part of PXRE Delaware's Credit Agreement with a syndicate of lenders. In addition, the Company recorded income of $0.3 million, after tax in the first quarter of 2001, for the cumulative effect of adoption of a change of accounting principle under SFAS No. 133. Included in other comprehensive income is a decrease in the fair value of the cash flow hedge for the period from July 1, 2001 to December 31, 2001 of $0.7 million, net of tax. We incurred minority interest expense amounting to $8.9 million related to our $100 million of 8.85% Capital Trust Pass-through Securities `sm' (TRUPS `sm') during 2001 and in 2000 (See "Liquidity and Capital Resources" below for a full description of the TRUPS).
Net investment income of $30 million for 2001 was virtually unchanged from 2000. Our pre-tax gross annualized investment yield based on quarterly investment balances was 6.3% for 2001 compared with 6.1% for 2000, both calculated using amortized cost and investment income before interest expense on funds held and investment expenses. Interest expense on funds held amounted to $2.2 million in the fourth quarter representing an allocation of investment income principally in relation to reinsurance recoveries arising from the September 11th terrorist attacks. Net realized investment gains for 2001 were $4 million, compared to gains of $3.2 million for 2000, resulting from the liquidation of bonds in 2001 to raise cash in preparation for paying claims from the September 11th terrorist attacks. In 2000, realized gains included a $1.5 million gain from the sale of Transnational Insurance Company.
The net effect of foreign currency exchange fluctuations were gains of $0.3 million in 2001 compared to losses of $1.8 million for 2000.
Our London operations, which are winding down, resulted in a loss before taxes of $6.5 million for 2001 compared to a loss before taxes of $11.1 million in 2000.
We recognized a tax benefit of $4.5 million in 2001 compared to a benefit of $12 million in 2000.
In 2000, we made additional retrocessional coverage purchases. Our property business is protected by a series of retrocessional agreements that provide protection against unusual severity of loss. Through 1999 these protections did not protect us against exposure to smaller, more frequent loss occurrences; however, additional purchases in 2000 provided more protection against such loss occurrences.
Management fee income from all sources for the year ended December 31, 2000 increased 52.8% to $5.5 million from $3.6 million for 1999, reflecting higher premiums ceded to managed business participants and fees from PXRE Lloyd's Syndicate and PXRE Managing Agency.
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 $78.1 million gross and $51.9 million net for the 2000 and prior accident years. The loss ratio for 1999 reflected incurred catastrophe losses of $170.5 million gross and $92.7 million net for 1999 and prior accident years.
The provision for losses and loss expenses and the loss ratio includes the effect of foreign exchange movements on our liability for losses and loss expenses, resulting in a foreign currency exchange loss of $1.2 million for 2000 compared to an exchange gain of $0.4 million for 1999.
During 2000, we experienced adverse development of $58.2 million net for prior-year loss and loss expenses primarily related to the French Storms Lothar and Martin. The loss ratio for 1999 was adversely affected by the development of $19.8 million net for prior-year loss and loss expenses.
Our underwriting expense ratio was 40.5% for 2000 compared with 43% for 1999. The decrease in underwriting expense ratio was substantially due to the increase in premiums earned and management fee income. Our commission and brokerage ratio net of management fee income was 18.4% for 2000 compared with 18.8% for 1999. Our 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, our combined ratio was 126.5% for 2000 compared with 166.9% for 1999. The decrease in our U.S. GAAP combined ratio was due to reduced catastrophe activity.
Also in 1999, we incurred $0.7 million 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.
The tax benefit in 1999 includes a one-time income tax charge in connection with the Bermuda redomestication of approximately $1.8 million related to the cancellation of shares of PXRE Delaware held by its subsidiary. In addition, in 1999 we incurred a tax charge of $2.3 million upon payment of a dividend by PXRE Delaware in connection with the redomestication.
The Company relies primarily on dividend payments and net tax allocation payments from its subsidiaries, including PXRE Reinsurance and PXRE Bermuda, to pay its operating expenses and income taxes, to meet its debt service obligations and to pay dividends. The payment of dividends by PXRE Reinsurance to PXRE Delaware is subject to limits imposed under the insurance laws and regulations of Connecticut, the state of incorporation and domicile of PXRE Reinsurance, as well as certain restrictions arising in connection with our indebtedness discussed below. Under the Connecticut insurance law, the maximum amount of dividends or other distributions that PXRE Reinsurance may declare or pay, 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 Connecticut insurance laws could limit the amount of dividends available for distribution by PXRE Reinsurance without prior regulatory approval, depending upon a variety of factors outside the control of PXRE, including the frequency and severity of catastrophe and other loss events and changes in the reinsurance market, in the insurance regulatory environment and in general economic conditions. The maximum amount of dividends or distributions that PXRE Reinsurance may declare and pay during 2002, without regulatory approval, is $33.2 million. During 2001, $30.1 million in dividends were paid by PXRE Reinsurance.
Under Barbados law, PXRE Barbados may only pay a dividend out of the realized profits of the company. PXRE Barbados may not pay a dividend unless (a) after payment of the dividend it is able to pay its liabilities as they become due, and (b) the realizable value of its assets is greater than the aggregate value of its liabilities, and the stated capital accounts maintained in respect of all classes of shares.
The capital infusion from the issuance of the Preferred Shares will enable us to increase underwriting capacity and therefore maximize participation in the new market environment. The closing of the Preferred Stock Investment is subject to customary closing conditions, including regulatory approval. The Company's shareholders approved the transaction on February 12, 2002. The State of Connecticut Insurance Department held a hearing to consider the investment on March 13, 2002 and, under Connecticut law, the Connecticut Insurance Commissioner is required to render her decision on the matter within thirty days of the conclusion of the hearing.
The issuance of the Preferred Shares is not expected to have a material effect on our liquidity during the three-year period following their issuance. In this regard, the Preferred Shares will be entitled to receive, when, as and if declared by our Board of Directors and to the extent of funds legally available for the payment of dividends, cumulative dividends per share at the rate per annum of 8% of the sum of the stated value on each share plus any accrued and unpaid dividends thereon, payable on a quarterly basis. To the extent such dividends are not paid when due, dividends shall be payable and accrue at the rate of 10% per annum compounded quarterly until paid. Such dividends, if declared by our Board of Directors, shall be payable in additional Preferred Shares prior to the third anniversary of the closing and cash thereafter. We, at our sole election, may decide, in substitution in whole or in part for dividends payable in shares, to pay dividends in cash to the extent of any dividends that, if paid in additional shares of Preferred Shares, would otherwise cause the Purchasers and their affiliates to own more than 49.9% of the capital stock of the Company on a fully-diluted and fully-converted basis.
The A1 Preferred Shares, B1 Preferred Shares and C1 Preferred Shares will be mandatorily convertible into Class A Common Shares, Class B Common Shares and Class C Common Shares, respectively, on the third anniversary of the date of issuance, and all remaining Preferred Shares will be mandatorily convertible into Convertible Common Shares on the sixth anniversary of the date of issuance. Notwithstanding the foregoing, on any conversion date, to the extent necessary to prevent the initial Purchasers of Preferred Shares and their affiliates from owning more than 49.9% of the capital shares of the Company following conversion, we shall have the right (but not the obligation) to make a cash payment in lieu of Convertible Common Shares equal to the fair market value of the Convertible Common Shares that would have been received in excess of the 49.9% limitation in connection with any conversion, plus an additional tax gross up amount to take into account in appropriate circumstances the difference between the federal income tax rate on long-term capital gains and the federal ordinary income tax rate that might apply to the recipient on the receipt of a cash payment in lieu of Convertible Common Shares. If the A2 Preferred Shares, B2 Preferred Shares and C2 Preferred Shares are not voluntarily converted on or prior to the third anniversary of their issuance, an annual 8% dividend, payable in cash, will accrue until these Preferred Shares are converted.
PXRE Delaware entered into a Credit Agreement dated as of December 30, 1998 (as amended and restated in connection with the reorganization of PXRE Delaware, the "Credit Agreement") with First Union National Bank ("First Union") as Agent and as a Lender, pursuant to which First Union agreed to make available to PXRE Delaware a $75 million revolving credit facility. On May 18, 1999, pursuant to various Joinder Agreements and Assignment and Acceptance Agreements, First Union syndicated the revolving credit facility, joining Fleet National Bank, Credit Lyonnais New York Branch and Bank One (formerly, The First National Bank of Chicago) as additional lenders (collectively with First Union, the "Lenders"). As at December 31, 1998, PXRE Delaware had outstanding borrowings under the Credit Agreement of $50 million, and in October 1999, the remaining $25 million was borrowed. On March 1, 2000 and March 31, 2001, PXRE Delaware fulfilled its commitment and made principal payments of $10 million each, reducing the outstanding loan to $55 million, at December 31, 2001.
The Preferred Stock Investment would trigger an event of default under the Credit Agreement if the transaction were consummated without the consent of the Lenders. As a condition to the Lenders' consent to the Preferred Stock Investment, the Credit Agreement was amended pursuant to the Second Amendment to the First Amended and Restated Credit Agreement, dated March 12, 2002, between PXRE Delaware and the Lenders (the "Second Amendment" and together with the Credit Agreement, as amended by the Second Amendment, the "Amended Credit Agreement"). The Second Amendment will not be effective until the closing of the Preferred Stock Investment.
The Credit Agreement contains covenants which, among other things, limit the ability of the Company 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 compliance with Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based Capital Ratio and Combined Statutory Surplus requirements.
As of December 31, 2001, 73.4% of our investment portfolio, at fair value, consisted of bonds and short-term investments with fixed maturities.
At December 31, 2001, 90.0% of the fair value of our bond portfolio was in obligations rated "A1" or "A" or better by Moody's or S&P, respectively. Mortgage and asset-backed securities accounted for 13.3% of fixed maturities based on fair value at December 31, 2001. The average market yield to maturity of our bond portfolio at December 31, 2001 and 2000, was 4.5% and 5.9%, respectively.
We had no direct investments in real estate or commercial mortgage loans as of December 31, 2001.
Non-hedge fund short-term investments are carried at amortized cost, which approximates fair value. Our short-term investments, principally high-grade commercial paper, marketable fixed income securities and hedge fund investments which invest primarily in marketable fixed income securities, were $170.2 million at December 31, 2001, compared to $71.5 million at December 31, 2000. The amount of short-term investments was increased to raise cash in preparation for paying claims related to the September 11th terrorist attacks.
While we seek capital appreciation with respect to our hedge fund investments, we are also concerned with preservation of capital. For that reason, our hedge fund portfolio is designed to take advantage of broad market opportunities and diversify risk. Nevertheless, our investment policies with respect to our hedge fund investments generally do not restrict us from participating in particular markets, strategies or investments. In fact, our hedge fund investments may generally be deployed and redeployed in whatever investment strategies are deemed appropriate under prevailing economic and market conditions in an attempt to achieve capital appreciation, including, if appropriate, a concentration of investments in a relatively small group of strategies or hedge fund managers. Accordingly, the identity and number of hedge fund managers is likely to change over time.
As at December 31, 2001, our investment portfolio also included $19.1 million of mezzanine bond and equity limited partnership investments at fair values, with values ranging from $1.7 million to $8.5 million and remaining aggregate cash call commitments in respect of such investments of $1.7 million.
The primary sources of liquidity for our principal operating subsidiaries are net cash flow from operating activities (including interest income from investments), the maturity or sale of investments, borrowings, capital contributions and advances. Funds are applied primarily to the payment of claims, operating expenses, income taxes and to the purchase of investments. Premiums are typically received in advance of related claim payments.
Dividends declared in 2001 to shareholders were $2.9 million compared to $2.8 million in 2000. The expected annual dividend based on shares outstanding at December 31, 2001 is approximately $2.8 million.
Book value per common share was $20.20 at December 31, 2001.
In December 1999, we announced a stock repurchase program of up to 1,000,000 shares. We had approximately 11,873,000 common shares outstanding as of December 31, 2001. No share repurchases were made in 2001 except in connection with tax withholding on the vesting of employee stock option or restricted stock plans.
In connection with the capitalization of PXRE Lloyd's Syndicate 1224, PXRE Reinsurance has placed on deposit $36.4 million par value of agency debenture municipal securities and $11.5 million in money market funds as collateral for Lloyd's. Cash and invested assets amounting to $15.4 million at December 31, 2001, are restricted from being paid as a dividend through June, 2003.
Other commitments include a) letters of credit amounting to $20.6 million, with securities pledged as collateral amounting to $20.8 million, b) securities with a par value of $9.1 million on deposit with various state insurance departments in order to comply with insurance laws and c) securities with a fair value of $12.9 million deposited into a trust for the benefit of a cedent in connection with a finite reinsurance transaction.
In September 1997, we and Phoenix Home Life formed a joint venture, Cat Bond Investors L.L.C. ("Cat Bond"), 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. Cat Bond ceased investing in new transactions in 1999. It has one remaining transaction open, which is expected to settle in November 2002.
In January of 2000, we entered into an insurance contract outside of our normal businesses under which we guaranteed performance of a minority portion of the debt of an unrelated company, Mariner Structured Products Sub-2, Ltd. ("MSP") for the benefit of a syndicate of lenders led by Bank of America, N.A. The maximum exposure under this policy is $4.0 million. MSP's debt is expected to be outstanding for at least six more years. No payments have been made or are contemplated under this policy. The owner of MSP is a hedge fund managed by Mariner. The portion of MSP's debt not guaranteed by us is guaranteed by Select Re.
We are exposed to market risks that are principally interest rate and credit risks. The potential for losses from changes in interest rates with respect to our investments, borrowings, and a related interest rate swap exists. We are exposed to potential losses from changes in probability of default with respect to our investments. However, we believe our exposure to foreign exchange risk is not material with respect to our fixed income portfolio.
Our principal fixed maturity market risk exposure is to changes in U.S. interest rates. Changes in interest rates may affect the fair value of our fixed-maturity portfolio, borrowings (bank debt and trust preferred) and a related interest rate swap. Our holdings subject us to exposures in the treasury, municipal, and various asset-backed sectors. These sectors consist primarily of investment grade securities whose fair value is subject to interest rate, credit and prepayment risk. All fixed maturity investment positions are long with no "short" or derivative positions.
Our investments in emerging market debt securities are subject to interest rate risk which is included in the analysis below. During 1999 and 2000, we substantially reduced our investment in emerging market debt securities, and at December 31, 2001 such securities represent less than 1.7% of the fixed maturity portfolio. Therefore, the level of credit exposure associated with these securities has been substantially reduced.
We are exposed to minimal equity price risk in the form of a limited number of equity investments. At December 31, 2001, equity investments amounted to $0.7 million. Based on a 10% decrease in equity prices the potential loss in fair value is estimated to be $0.1 million and $1.6 million at December 31, 2001 and 2000, respectively. The decrease reflects the reduction in the size of the equity portfolio at December 31, 2001. In addition, in 2001, we maintained an equity-trading portfolio with a fair value of approximately $25.8 million as of December 31, 2001, which, based on a 10% decrease in fair value, represented a potential loss in fair value of $2.6 million. Our equity-trading portfolio, however, was liquidated during the first quarter of 2002.
We recognized a tax benefit of $4.5 million in 2001 compared to a benefit of $12 million in 2000. The tax benefit in 2001 differed from the statutory rate primarily due to the mix of business in the U.S. and Bermuda, underwriting losses, tax exempt income and the dividends received deduction. The tax benefit reported in 2000 differed from the statutory rate for similar reasons as in 2001.
Report of Independent Accountants for the year ended December 31, 2001
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flow for the years ended December 31, 2001, 2000 and 1999