- -------------------- (1) Effective January 1, 1993, PXRE adopted the FASB's SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts". As a result of such adoption, PXRE effected a December 31, 1992 and 1991 balance sheet reclassification to assets of $53,314,969 and $25,369,685 of reinsurance recoverables on losses and loss expense liabilities and $5,529,292 and $3,395,276 of ceded unearned premiums in 1992 and 1991, respectively, both of which were previously deducted from liabilities. The adoption of SFAS No. 113 had no effect on PXRE's net income for the years ended December 31, 1993 or 1992.
(3) The FASB's Emerging Issues Task Force ("EITF") reached a consensus on July 22, 1993 regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively-Rated Contracts by Ceding and Assuming Enterprises". The EITF consensus requires that affected companies should accrue the lesser of termination penalties or the effect of prospective adjustments in rates or coverages triggered by the loss event in the period that a loss is recorded. The EITF mandate required adoption of this consensus no later than the third quarter of 1993. As described in Note 2 to PXRE's Consolidated Financial Statements for the year ended December 31, 1993, PXRE had certain retrocessional catastrophe coverage for its principal types of business. Certain of these contracts provided for terms of three or more years and had contractual adjustments regarding rates and/or coverages when losses are recovered under these contracts. Although PXRE was provided with the opportunity to cancel some of these contracts without penalty, PXRE chose to continue the contracts to obtain the coverage provided thereunder. Accordingly, PXRE believed that the appropriate application of the EITF's consensus was to record in the third quarter of 1992 incremental premiums that resulted from Hurricane Andrew loss recoveries under these contracts. This change increased 1992 third quarter ceded earned premiums by $5,772,000, deferred income tax benefit by $1,962,000, net loss by $3,810,000 and loss per common share by $0.99. These adjustments were determined on the basis of losses estimated by PXRE at December 31, 1992. The financial statements for years prior to 1992 are not affected. Also, due to additional information received during the first six months of 1993 with respect to Hurricane Andrew losses, PXRE reported, in the second quarter of 1993, an additional $2,500,000 of ceded premium expenses through the application of the EITF consensus. The statutory capital and surplus of PXRE Reinsurance has not been adjusted.
(4) Until the fourth quarter of 1993, Transnational Reinsurance was a wholly-owned subsidiary of PXRE Reinsurance. On November 1, 1993, a registration statement relating to an initial public offering (the "Offering") by TREX of 5,750,000 shares of Class A common stock at $20.00 per share was declared effective. In conjunction with the formation of TREX and registration of TREX's Class A common stock in the Offering, all of the outstanding capital stock of Transnational Reinsurance was contributed by PXRE Reinsurance to TREX in exchange for the issuance of 1,535,848 shares of TREX's Class B common stock which caused PXRE Reinsurance's holdings of TREX's Class B common stock (when combined with the 100 shares of Class B common stock contributed to PXRE Reinsurance by PXRE in connection with the closing of the Offering) to constitute approximately 21% of all of the outstanding common stock of TREX immediately after the Offering. TREX, through Transnational Reinsurance, now specializes principally in providing brokered property retrocessional reinsurance and marine and aviation retrocessional reinsurance in the United States and international markets pursuant to a Management Agreement with PXRE Reinsurance. As a result of this transaction, PXRE recorded a gain on sale in the fourth quarter of 1993 amounting to $10,564,000 on a pre-tax basis, representing the difference between PXRE Reinsurance's interest in the net assets of Transnational Reinsurance immediately after the Offering and the historical book value of its investment in Transnational Reinsurance. Subsequent to the Offering, PXRE accounts for its investment in TREX on the equity method.
PXRE provides reinsurance products and services to a domestic and international marketplace, with principal emphasis on commercial and personal property risks and marine and aviation risks, and with a particular focus on catastrophe related coverages.
PXRE exercises discipline in committing and withholding its underwriting capacity and altering its mix of business to concentrate its underwriting capacity at any given point in time on those types of businesses where management believes that above average underwriting results can be achieved. PXRE has been pursuing a strategy of focusing on catastrophe related coverages in both the international and domestic markets. This strategy has been designed to capitalize on the substantial improvements in pricing and other terms of these coverages which evolved following the high levels of catastrophic loss activity, in terms of both frequency and severity of loss, experienced by the worldwide reinsurance industry since 1987, but which have moderated since the beginning of 1995. In the fourth quarter of 1992, PXRE decided to reduce significantly its writing of traditional pro rata and risk excess reinsurance business due to management's unfavorable evaluation of the condition of such business. Since that time, PXRE has also increased its writing of marine and aviation business.
profits is in each case paid over a three-year period and is subject to adjustment based on cumulative experience. Future management fee income is dependent upon the amount of business ceded to the participants and the profitability of that business.
Since November 8, 1993, PXRE has been party to the Management Agreement under which PXRE has responsibility for the day-to-day operations of TREX and its subsidiary Transnational, including all the reinsurance operations of Transnational. TREX and Transnational do not have any operating properties, systems or paid employees. Pursuant to the Management Agreement, PXRE provides all the operating facilities, systems, equipment and management and clerical employees required to conduct the businesses of TREX and Transnational.
Under the terms of the Management Agreement, Transnational shares in certain specified business of PXRE that is classified as property retrocessional reinsurance business, marine and aviation retrocessional reinsurance or marine and aviation reinsurance and facultative reinsurance. Transnational is also entitled to share similarly in other property reinsurance business, if any, which PXRE may, from time-to-time, propose that Transnational underwrite and which Transnational's Board of Directors may approve.
Transnational pays PXRE an annual basic management fee under the Management Agreement equal to 5% of gross premiums written (including reinstatement premiums less return premiums) of Transnational and its consolidated subsidiaries (if any) as reflected in Transnational's statutory quarterly and annual statements filed with state insurance authorities. In addition, PXRE is entitled to receive from TREX a contingent fee equal to 20% of "net income" (as defined) in excess of a 20% "return on equity" (as defined) of TREX for each year, or part thereof, that the Management Agreement remains effective (the first such year having commenced on January 1, 1994). TREX and Transnational also pay all expenses directly attributable to them, including a proportionate share of PXRE's rental expenses with respect to
As PXRE underwrites 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. PXRE has developed systems and software tools to monitor and manage the accumulation of its exposure to such losses. Management has established guidelines for maximum tolerable losses from a single or multiple catastrophic event based on historical data, however no assurance can be given that these maximums will not be exceeded in some future catastrophe.
Premiums receivable and loss reserves include business denominated in currencies other than U.S. dollars. PXRE is exposed to the possibility of significant claims in currencies other than U.S. dollars. While PXRE holds positions denominated in foreign currencies to mitigate the effects of currency fluctuations on its results of operations, it does not hedge its currency exposures before a catastrophic event which may produce a claim.
PXRE Corporation (parent company) relies primarily on cash dividends and net tax allocation payments from its subsidiary PXRE Reinsurance to pay its operating expenses, to meet its debt service obligations and to pay common stock dividends to PXRE's 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 outstanding indebtedness.
In the event the amount of dividends available, together with other sources of funds, are not sufficient to permit PXRE Corporation (parent company) to meet its debt service, other obligations and to pay cash dividends, it would be necessary to obtain the approval of the Connecticut Insurance Commissioner prior to PXRE Reinsurance's payment of additional dividends. If such approval were not obtained, PXRE Corporation (parent company) 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.
Premiums ceded by PXRE to its managed business participants decreased 10.3% to $26,774,000 for 1995 compared with $29,842,000 for 1994. The decrease in premiums ceded to these programs was due to the decrease in the amount and percentage of gross premiums written by PXRE on behalf of the managed business participants. During 1995, pursuant to the Management Agreement, PXRE also ceded
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 gain of $39,000 for 1995 compared to a loss of $338,000 for 1994.
Interest expense decreased to $7,143,000 in 1995, from $7,789,000 in 1994 due to repurchase of $5,300,000 par value of PXRE's 9.75% Senior Notes, at prices from 99.25 to 99.625 during the fourth quarter of 1994 and the repurchase of $1,925,000 par value of Senior Notes at prices ranging from
104.625 to 105.0 during the third quarter of 1995. The loss on repurchase was not material.
For the reasons discussed above, net income was $39,786,000 for the year ended December 31, 1995, compared to net income of $34,829,000 for the year ended December 31, 1994. Primary net income per common share was $4.74 for 1995 (after provision for cumulative dividends of $598,900 on the Series A Preferred Stock) compared to primary net income per common share of $4.89 for 1994 (after provision for cumulative dividends of $2,005,000 on the Series A Preferred Stock) based on average shares outstanding of 8,275,000 in 1995 and 6,710,000 in 1994. The change in the number of shares outstanding relates primarily to the conversion of all the remaining convertible preferred shares to common shares in May 1995. Fully diluted net income per common share was $4.48 for 1995 compared to $3.94 for 1994 based on average shares outstanding of 8,874,000 in 1995 and 8,847,000 in 1994.
Net premiums written for the year ended December 31, 1994 increased 40% to $108,518,000 from $77,506,000 for the corresponding period of 1993. Gross premiums written for the year 1994 increased 54% to $179,684,000 from $116,975,000 for the same period of 1993. The increase in net and gross premiums written resulted principally from increased participations on renewal business and new business written for new and existing reinsureds, the majority of which was catastrophe related. Premium growth also occurred in PXRE's marine, aviation, facultative and treaty risk excess reinsurance accounts. PXRE experienced reduced written premiums in pro rata in 1994 because of inadequate premium rates and terms caused by the continuing competition in these lines. Net premiums earned for 1994 increased 40% to $110,601,000 from $78,928,000 in 1993 because of the increase in net premiums written.
Premiums ceded by PXRE to its managed business participants increased 28% to $29,842,000 (17% of gross premiums written) for 1994 compared with $23,387,000 (20% of gross premiums written) for 1993. The increase in gross premiums written ceded to these programs was due principally to the increase in the amount of premiums written by PXRE to accommodate the larger participation of Trenwick Group starting January 1, 1994. Pursuant to the Management Agreement, in 1994 PXRE also ceded $28,722,000 of premiums to Transnational in lieu of Transnational directly assuming reinsurance writings.
AMA) and the business written for Transnational pursuant to the Management Agreement.
Significant events affecting the same period of 1993 included the following:
loss development on a number of marine pro rata reinsurance contracts and losses from the 1993 Midwest floods. During 1993, PXRE incurred losses and loss expenses of $10,499,000 net for prior years' losses and loss expenses, of which approximately $5,394,000 were due to additional information received with respect to hurricanes Andrew and Iniki, approximately $3,330,000 were the result of losses under a number of pro rata reinsurance treaties and the remainder were principally attributable to the other 1993 catastrophes.
The underwriting expense ratio was 14.8% for 1994 compared with 24.2% in 1993. The decrease was substantially due to the increase in net premiums earned, as well as a decrease in the amount of pro rata reinsurance written, which carries higher commissions than the excess of loss business which replaced it. As a result of the above, the combined ratio was 62.4% for 1994, compared with 75.6% for 1993.
Interest expense increased to $7,789,000 in 1994 from $2,740,000 in 1993 reflecting the public offering in September 1993 of $75 million of 9.75% Senior Notes. In December 1994, PXRE Corporation (parent company) repurchased $5,300,000 par value of its Senior Notes at prices from 99.25 to 99.625.
Net investment income for 1994 increased 72% to $13,786,000 from $8,011,000 for 1993. The increase in net investment income was caused by an increase in average investments for 1994 compared with the previous year, and in part by an increase in PXRE's pre-tax investment yield to 5.8% for 1994 compared with 5.0% for 1993. The increase in average investments reflects investment of the proceeds of the public offerings of 9.75% Senior Notes during the third quarter of 1993 (net proceeds of approximately $72,150,000) and of Common Stock during the first quarter of 1993 (net proceeds of approximately $46,942,000). The pre-tax yield increased principally because of investment and reinvestment of available funds at generally higher interest rates during 1994. Additionally, net investment income was increased by a retroactive adjustment of $1,603,000 to the amortization of premiums on Government National Mortgage Association mortgage-backed securities ("GNMAs") because of a significant slowing of prepayments on those securities. Net realized investment
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. As of December 31, 1995, PXRE Reinsurance had earned surplus of $81,382,000, as defined, and a policyholders' surplus of $250,231,000 and its net income for 1995 was $37,996,000. The maximum amount of dividends or distributions that PXRE Reinsurance may declare and pay in 1996, without regulatory approval, is therefore $37,996,000. During 1995, $6,000,000 in dividends was approved and paid by PXRE Reinsurance to PXRE Corporation.
Other sources of funds available to PXRE Corporation (parent company) include investments retained by PXRE to provide support for debt service on its Senior Notes. Net tax allocation payments by PXRE Reinsurance are also expected to be a source of funds available to PXRE Corporation (parent company).
In the event the amount of dividends available, together with other sources of funds, are not sufficient to permit PXRE Corporation (parent company) 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 PXRE Reinsurance's payment of additional dividends. If such approval were not obtained, PXRE (parent company) 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 Corporation (parent company) 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 Corporation (parent company) 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 August 1993, PXRE Corporation (parent company) 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 1995 in respect of the Senior Notes amounted to approximately
$7,143,000. Interest expense for 1996 will amount to approximately $6,869,000. 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 time of such Restricted Payment the Consolidated Fixed Charge Coverage Ratio is greater than 2.0, and (y) in addition to permitted Restricted Payments referred to in clause (x), the payment of cash dividends on Qualified Capital Stock after August 31, 1993 of up to an aggregate of $6,000,000, provided, that such dividends on Common Stock do not exceed $0.25 per share in any year); (c) to sell or permit the issuance of any stock of PXRE Reinsurance or any other Principal Insurance Subsidiary; (d) to sell or transfer other assets (other than for at least Fair Market Value and generally for not less than 75% in cash or Cash Equivalents); (e) to create liens upon the properties or assets of PXRE or its Restricted Subsidiaries; or (f) to engage in any business other than the insurance and reinsurance businesses and other businesses incidental and related thereto. The Indenture also provides that within 30 days after a Change of Control of PXRE, PXRE will offer to purchase all the Senior Notes then outstanding at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of such purchase.
principal amount of its Senior Notes at an aggregate cost of $5,275,000. In April 1995, PXRE's Board of Directors authorized such Senior Note repurchases to be made at or above par prices. During the third quarter of 1995, PXRE Reinsurance Company purchased $1,925,000 principal amount of its parent company's Senior Notes at an aggregate cost of $2,016,000.
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 Corporation (parent company). Funds are applied primarily to the payment of claims, operating expenses, income taxes and to the purchase of fixed maturity and short-term investments. Premiums are typically received in advance of related claim payments. Net cash flow provided by operations was $32,412,000 during 1995, compared with net cash flow provided by operations of $30,988,000 and $35,792,000 during 1994 and 1993, respectively, due to the effects of timing of collection of receivables and reinsurance recoverables and payments of losses.
are subject to market-wide risks and fluctuations, as well as to risk inherent in particular securities. As at December 31, 1995, PXRE's investment portfolio consisted primarily of fixed maturities and short-term investments. During the latter part of 1995, PXRE invested $5,000,000 in equities. The investment policies and all investments of PXRE are approved by its Board of Directors.
In April 1995, PXRE's Board of Directors authorized the repurchase of up to 700,000 shares of its common stock from time-to-time in open market or private block purchase transactions. From inception of this repurchase plan through March 1996, PXRE repurchased 25,000 of the 700,000 shares authorized at a cost of $625,000.
PXRE may be subject to gains and losses resulting from currency fluctuations because substantially all of its investments are denominated in United States dollars, while some of its net liability exposure is in currencies other than U.S. dollars. PXRE holds, and expects to continue to hold, currency positions and has made, and expects to continue to
All amounts classified as reinsurance recoverable at December 31, 1995, are considered by management of PXRE to be collectible in all material respects.
In May 1994, PXRE signed a lease for approximately 24,000 square feet of office space in Edison, New Jersey, for a term of 15 years at a fixed annual rental of approximately $370,000. In conjunction with its relocation to that facility in April 1995, PXRE incurred capital expenditures of approximately $3,200,000 for construction costs and furniture and related electronic data processing equipment. The lease on PXRE's New York office space expires in July 1996. PXRE presently plans to continue utilization of the space until such expiration date.
PXRE's effective tax rate for 1995, 1994 and 1993 was 31.4%, 31.1% and 32.7%, respectively, which differs from the statutory rate principally due to tax exempt income and state and local taxes. The change in the effective rate in 1995 reflects the higher relative proportion of underwriting activities compared to tax exempt municipal bond income.