- ------------------- (1) PXRE Group Ltd. 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 Corporation,
a publicly held Delaware holding company ("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 market place. 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.
(2) In the fourth quarter of 1999, PXRE changed the reporting period for its U.K. operations from a fiscal year ending September 30 to a calendar year ending December 31. The results of operations for the period from October 1, 1998 to December 31, 1998 amounted to a loss of approximately $140,000. This loss was charged to retained earnings during the year in order to report only twelve months operating results. The U.K. operations of PXRE Limited and PXRE Managing Agency are included in the consolidated results on a one quarter lag basis from 1997 through the third quarter of 1999.
(4) During 1995, all of PXRE's outstanding shares of Series A Cumulative Convertible Preferred Stock were converted into shares of PXRE's common stock.
(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 U.S. GAAP.
PXRE Group Ltd. ("PXRE" or the "Company") - with operations principally in Bermuda, Barbados, the United States, the United Kingdom 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 brokerbased and direct-writing distribution capabilities. PXRE also provides marine and aerospace reinsurance products and services. The Company's shares trade on the New York Stock Exchange under the symbol PXT. On October 5, 1999 PXRE Corporation, a Delaware holding company ("PXRE Delaware") completed a reorganization that resulted in the formation of the Company which became the ultimate parent holding company of PXRE Delaware. Holders of PXRE Delaware common stock automatically became holders of the same number of PXRE common shares. The reorganization also involved the establishment of a Bermuda based reinsurance company, PXRE Reinsurance Ltd. ("PXRE Bermuda"), and operations in Barbados through PXRE (Barbados) Ltd ("PXRE Barbados").
The Company conducts its business primarily through its principal operating subsidiaries, PXRE Delaware, PXRE Reinsurance Company ("PXRE Reinsurance"), PXRE Solutions Inc. ("PXRE Solutions"), PXRE Bermuda, PXRE Barbados, PXRE Managing Agency Limited ("PXRE Managing Agency"), PXRE Limited, the sole member of PG Butler Syndicate 1224 ("PXRE Lloyd's Syndicate"), and Transnational Insurance Company ("Transnational Insurance"). The term "PXRE" as used herein, refers to one or more of PXRE Delaware, PXRE Reinsurance, PXRE Solutions, PXRE Bermuda, PXRE Barbados, PXRE Managing Agency, PXRE Lloyd's Syndicate and Transnational Insurance in discussions of these entities' businesses and refers to PXRE Group Ltd. in all other circumstances.
Since its formation more than a decade ago, PXRE has specialized in property reinsurance, including a strong focus on catastrophe-type products. Coverage terms for these products have deteriorated in recent years, and PXRE has reduced commitments on marginally priced business.
- the establishment of a direct presence in the Lloyd's market;
- the start-up of an excess and surplus lines insurance company;
- an acceleration of business offerings to one of its managed business participants;
At December 31, 1999, PXRE was a party to retrocessional arrangements with a number of insurers and reinsurers. Under these arrangements, PXRE cedes some of its underwritten risks to the participants, subject to maximum aggregate liabilities per reinsurance program. PXRE receives a management fee or commission, initially based on premium volume, adjusted in some cases through contingent profit commissions related to underwriting results measured over a period of years. Future management fee income is dependent upon the amount of business ceded to the participants and the profitability of that business. Another arrangement with Select Reinsurance Ltd. ("Select Re"), a Bermuda reinsurer, formerly Investors Reinsurance Ltd., involves a multi-year fee based undertaking by PXRE through the year ending December 31, 2003 to produce and underwrite business with Select Re. Gerald Radke (Chairman, President and Chief Executive Officer of PXRE) and Jeffrey Radke (Executive Vice President of PXRE and President of PXRE Bermuda) are on the Board of Directors of Select Re and are shareholders of Select Re. Gerald Radke is Co-Vice Chairman of Select Re and Jeffrey Radke was formerly the President of Select Re.
PXRE also purchases catastrophe retrocessional coverage for its own protection, depending on market conditions. PXRE significantly increased its purchases of such coverage in 1998 and 1999 in light of the continued general deterioration in catastrophe reinsurance pricing and the opportunity to buy protection at more favorable terms than in previous years.
In addition, the potential for uncertainty for recent underwriting years is greater than in past years because of the increased casualty exposures assumed by PXRE. 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 its recent expansion of casualty business, PXRE does not have an established historical loss pattern that can be used to establish casualty loss liabilities. PXRE must therefore rely on the inherently less reliable historical loss patterns reported by ceding companies and industry loss standards in calculating its liabilities.
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.
In 1999, catastrophe coverage and other reinsurance ceded premiums written increased due to PXRE fronting certain business on behalf of other reinsurers, to additional coverage associated with new operations and to opportunistic purchases of catastrophe retrocessional protection. PXRE's property business is protected by a series of retrocessional agreements which currently provide protection principally against unusual severity of loss and are not designed to protect PXRE's exposure to smaller, more frequent loss occurrences.
Management fee income from all sources for the year ended December 31, 1999 increased 65.3% to $3,590,000 from $2,172,000 for 1998, reflecting higher ceded premiums written, including higher management fee income earned from Select Re, offset in part by reduced profit commission from 1999 catastrophe losses.
The loss ratio was 123.9% for 1999 compared with 62.6% for 1998 largely due to fifteen catastrophe events in 1999, primarily in the fourth quarter when $59,635,000 of the $79,465,000 in net catastrophe losses for 1999 occurred. The loss ratio for 1999 reflected incurred catastrophe losses of $170,477,000 gross and $92,687,000 net. In comparison, the loss ratio for 1998 reflected incurred catastrophe losses of $55,564,000 gross and $29,437,000 net largely due to Hurricane Georges and two aerospace catastrophes.
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 gain of $442,000 for 1999 compared to a loss of $675,000 for 1998.
The following table summarizes the 1999 and 1998 underwriting profit and loss by segment:
Underwriting operations include premiums earned, losses incurred and commission and brokerage net of management fees, but do not include investment income, realized gains or losses, interest expense, operating expenses, unrealized foreign exchange gains or losses incurred or management fees on weather contracts.
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%. See "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')
Net investment income for the year ended December 31, 1999 increased, 140.5% to $47,173,000 from $19,612,000 for 1998. The increase in net investment income was caused primarily by strong limited partnership investment returns amounting to $25,700,000 (which are carried on the equity method). PXRE's pre-tax investment yield was 10.4% for 1999 compared with 4.3% for 1998, both calculated using amortized cost and investment income before investment expenses. Net realized investment losses for 1999 were $3,766,000, reflecting losses from trading of weather contracts compared to losses of $3,862,000 for 1998 from volatile emerging market bonds offset, in part, by net gains from sale of other securities.
The net effects of foreign currency exchange fluctuations were losses of $394,000 in 1999, as compared to losses of $471,000 for 1998.
Management fee income from all sources for the year ended December 31, 1998 decreased 27.7% to $2,172,000 from $3,006,000 for 1997, reflecting a reduced profit commission primarily associated with Hurricane Georges and the two aerospace catastrophes discussed below and a higher combined ratio on the change in business mix reflected in the higher ceded premiums written, offset, in part, by an increase in management fee income earned from Select Re.
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 $675,000 for 1998 compared to a gain of $627,000 for 1997.
During 1998, PXRE experienced savings of $532,000 net for prior-year loss and loss expenses primarily related to the triggering of a retrocessional recovery on a 1994 aviation loss offset in part by adverse development due to the 1997 German, Polish and Czech floods. The loss ratio for 1997 was favorably affected by decreases to reserves of $3,917,000 net for prior-year loss and loss expenses primarily related to the Eurotunnel fire and Hurricane Fran where redundant reserves were recognized in 1997 of approximately $1,644,000 and $1,440,000 respectively. In addition, included in the savings of $3,917,000 were prior-year losses originally thought to have triggered market loss coverage thresholds which proved to be redundant by approximately $1,800,000, offset in part by development on prior year facultative losses.
As a result of the above, the combined ratio was 103.5% for 1998 compared with 48.5% for 1997.
Other operating expenses increased to $19,313,000 for the year ended December 31, 1998 from $15,716,000 in 1997. The increase was mainly due to salary and benefits expenses associated with new operations. Included in other operating expenses were foreign currency exchange gains of $204,000 for 1998 compared to losses of $1,221,000 for the corresponding period of 1997.
As amended, loans under the Credit Agreement bear interest at an annual rate equal to First Union's base rate, as in effect from time to time, for base rate loans or at a margin (1.00% as of December 31, 1999) over First Union's Eurodollar rate for periods of 30, 60, 90 or 180 days for LIBOR loans. 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 of 6.34%. The remaining $25,000,000, was borrowed at a variable annual rate of 7.12%. 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
PXRE Delaware has used the net proceeds from the sale of the Capital Securities for general corporate purposes, including the redemption and the purchase of outstanding indebtedness and common stock of PXRE Delaware.
Net cash flow provided by operations was $17,512,000 in 1999 compared with $4,955,000 during 1998, due to the effects of timing of collection of receivables and reinsurance recoverables and payments of losses.
PXRE's management has established general procedures and guidelines for its investment portfolio and oversees investment management carried out by Phoenix Investment Partners, Limited, a public majority-owned subsidiary of Phoenix Home Life Mutual Insurance Company, and by Mariner Investment Group, Inc. ("Mariner") the sole shareholder of which is the Chairman of the Board and a founding shareholder of Select Re. PXRE's invested assets consist primarily of fixed maturities and limited partnerships, but also include equities, REITS and short term investments. PXRE investments are subject to market-wide risks and fluctuations, as well as to risk inherent in particular securities. As at December 31, 1999, 72.9% of PXRE's investment portfolio, at fair value, consisted of fixed maturities and short-term investments, while the balance was in various mutual funds, limited partnerships and equity securities. The limited partnerships primarily include a fund of funds investing in a multiple number of hedge strategies. The investment policies of PXRE are approved by its Board of Directors.
Fixed maturity and equity investments are reported at fair value, with the net unrealized gain or loss, net of tax, reported as a separate component of stockholders' equity. PXRE recorded directly to stockholders' equity a $6,752,000 after-tax unrealized loss in the value of its investment portfolio at December 31,1999 primarily due to an increase in interest rates.
Dividends declared in 1999 were $7,629,925 compared to $13,585,333 in 1998, as a result of the decrease in the per share quarterly dividend from $.26 to $.06 in the third quarter of 1999 in anticipation of the Bermuda redomestication as well as share repurchases in 1999. The expected annual dividend based on shares outstanding at December 31, 1999 is approximately $2,803,000.
During 1999, PXRE acquired 884,700 shares of common stock under its stock repurchase program. In December 1999, PXRE announced a new stock
In connection with the capitalization of PXRE Lloyd's Syndicate, PXRE has placed on deposit $46,587,000 par value of U.S. government securities and municipal bonds as collateral for Lloyd's. In addition, PXRE issued a letter of credit for the benefit of Lloyd's in the amount of $15,355,000, which is collateralized by municipal bonds of approximately $17,835,000. All invested assets of PXRE Lloyd's Syndicate amounting to $11,253,000 at December 31, 1999 are restricted from being paid as a dividend for at least three years. In addition, PXRE Reinsurance has provided a 'L'5,000,000 ($8,091,000 at December 31, 1999 exchange rates) line of credit to PXRE Managing Agency for liquidity purposes of which $7,111,000 had been drawn.
In September 1997, PXRE and Phoenix Home Life completed the formation of 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, 1999.
PXRE's investments in emerging market debt securities are subject to interest rate risk which is included in the analysis below. During 1999, PXRE substantially reduced its investment in emerging market debt securities to less than 4% 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 diminimus. The average maturity of these investments is under one year.
PXRE's exposure to potential loss due to changes in credit spreads was simulated through a sensitivity analysis assuming an increase in credit spreads of 200 basis points with respect to the emerging market securities holdings.
To compare the magnitude of changes in fair value due to interest rate changes with those of other risk factors in the investment portfolio, reference is made to Note 3 of Notes to Consolidated Financial Statements related to realized and unrealized gains and losses on investments.
The tax benefit in 1999 was offset, in part, by non recurring charges including approximately $1.8 million in connection with the Bermuda redomestication related to the cancellation of shares of PXRE Delaware held by its subsidiary and by $2.3 million in connection with the redomestication related to dividends paid by PXRE Delaware. Tax expense in 1997 differed from the statutory rate principally due to the relative proportion of underwriting and taxable income versus tax exempt income and negative goodwill amortization. See Note 5 of Notes to Consolidated Financial Statements.
PXRE's Year 2000 Readiness Project was successfully concluded prior to December 31, 1999. The Company did not experience any Y2K-related problems at year-end or thereafter.
PXRE contacted and where appropriate re-contacted its material business partners to determine their Year 2000 date processing capabilities. To date none of these partners has reported or evidenced any date-related difficulty.
PXRE continues to maintain disaster recovery procedures and the ability to re-deploy computer and staff to a remote hot site.
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 will 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.
Readers are cautioned that forward-looking statements contained in this Year 2000 Update should be read in conjunction with the Company's disclosures under the heading: "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS."
This report contains various forward-looking statements and includes assumptions concerning PXRE's operations, future results and prospects. Statements included herein, as well as statements made by or on behalf of PXRE in press releases, written statements or other documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, which are not historical in nature are intended to be, and are hereby identified as, "forward-looking statements" for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements, identified by words such as "intend", "believe", or "expects" or variations of such words or similar expressions are based on current expectations and are subject to risk and uncertainties. PXRE cautions investors and analysts that actual results or events could differ materially from those set forth or implied by the forward-looking statements and related assumptions, depending on the outcome of certain important factors including, but not limited to, the following: (i) the
frequency and severity of catastrophic events; (ii) changes in the level of competition in the reinsurance or primary insurance markets that impact the volume or profitability of business (these changes include, but are not limited to, the intensity of price competition, the entry of new competitors, existing competitors exiting the market and competitors'development of new products); (iii) changes in the demand for reinsurance, including changes in the amount of ceding companies' retentions and changes in the demand for excess and surplus lines insurance coverages; (iv) the ability of PXRE to execute its diversification initiatives in markets in which PXRE has not had a significant presence; (v) adverse development on loss reserves related to business written in prior years; (vi) lower than estimated retrocessional recoveries on unpaid losses, including the effects of losses due to a decline in the creditworthiness of PXRE's retrocessionaires; (vii) increases in interest rates, which cause a reduction in the market value of PXRE's interest rate sensitive investments, including its fixed income investment portfolio; (viii) decreases in interest rates causing a reduction of income earned on new cash flow from operations and the reinvestment of the proceeds from sales, calls or maturities of existing investments; (ix) market fluctuations in equity securities and securities underlying limited partnership investments; (x) foreign currency fluctuations resulting in exchange gains or losses; (xi) changes in the composition of PXRE's investment portfolio; (xii) changes in tax laws, tax treaties, tax rules and interpretations; and (xiii) changes in management's evaluation of the impact of the Year 2000 problem on its operations.
In addition to the factors outlined above that are directly related to PXRE's business, PXRE is also subject to general business risks, including, but not limited to, adverse U.S. state and federal or non-U.S. legislation and regulation, adverse publicity or news coverage, changes in general economic factors and the loss of key employees.