PXRE leases a total of approximately 81,000 square feet of office space in Hamilton, Bermuda (the Company's corporate headquarters); Edison, New Jersey; Norwalk, Connecticut; New York, New York; Larkspur, California; London, England and Brussels, Belgium. The Hamilton, Bermuda lease, which covers approximately 2,618 square feet of office space, was signed in 1999 and is for a term of two years at a fixed annual rent of approximately $102,000 and additional rents on account of PXRE's proportionate share of services. The Edison, New Jersey space is comprised of (i) a 1994 lease of approximately 24,000 square feet of office space, for a term of 15 years at a fixed annual rent of approximately $370,000 and additional rents on account of PXRE Delaware's proportionate share of increases in building operating expenses and property taxes over calendar year 1994, and (ii) a November 1999 lease of approximately 24,000 square feet of additional office space for a term of 10 years expiring on October 31, 2009, at fixed rentals of approximately $582,000 for years 1-5 of the term and $676,000 for years 6-10 of the term, in each case plus additional rents on account of PXRE Delaware's proportionate share of taxes and operating expenses attributable to the building. Additionally, in February 2000, PXRE Delaware subleased approximately 11,000 square feet of the additional space covered by the November 1999 lease for a three year term ending on the 36th month next following the date that the premises are delivered to the subtenant. The sublease provides for the subtenant to pay fixed rent to PXRE Delaware at the rate of approximately $274,000 per annum, together with electricity at the rate of approximately $16,500 per annum. The subtenant is additionally required to pay PXRE Delaware a proportionate share of taxes and operating expenses payable by PXRE Delaware under the lease.
- - ------------------- (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
(2) In the fourth quarter of 1999, the Company 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 1999 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.
(5) 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 conducts its business primarily through its principal operating subsidiaries, PXRE Delaware, PXRE Reinsurance Company ("PXRE Reinsurance"), PXRE Solutions, PXRE Bermuda and PXRE Barbados.
PXRE has for many years specialized in property reinsurance, including a strong focus on catastrophe-type products. In recent years, PXRE has diversified its business through:
o an acceleration of business offerings to one of its managed business participants;
At December 31, 2000, PXRE was a party to retrocessional arrangements with a number of insurers and reinsurers. Under these arrangements, PXRE cedes a portion of its underwritten risks to the participants, subject to a maximum aggregate liability 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 on behalf of 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. At December 31, 2000, Select Re owned 1,112,200 of the Company's common shares, representing 9.4% of the Company's outstanding common shares.
years. The reduction in expenses that will result from actions taken to date, relative to the cost of administering the existing book, is expected to be accretive to earnings in 2001. With PXRE's expanded Bermuda presence, PXRE believes it can write the types of business offered in the Lloyd's market without the cost structure associated with Lloyd's.
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 through its 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 its recent expansion of casualty and finite 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.
Fair values for PXRE's investments in hedge funds and other privately held securities generally are established on the basis of the valuations provided monthly or quarterly by the managers of such investments. These valuations are determined based upon the valuation criteria established by the governing documents of such investments. Such valuations may differ significantly from the values that would have been used had ready markets existed and the differences could be material.
PXRE utilizes the valuations provided to it by managers of its hedge funds and other privately held securities in preparing the financial statements of PXRE. The carrying values used in such financial statements may not reflect the value received by PXRE when liquidating its 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 PXRE's investment occurs by virtue of a liquidation of a hedge fund or other privately held securities, PXRE 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 PXRE's hedge fund and other privately held investments does not necessarily represent the amount which could be realized upon future sale, including in the event PXRE required liquidity to fund catastrophic losses.
As PXRE's investment strategy is to invest a significant portion of its investment portfolio in hedge funds and other privately held securities, which are accounted for under the equity method, or in some cases as a trading portfolio, net realized and unrealized gains (losses)
PXRE's management has established general investment procedures and guidelines for PXRE's investment portfolio carried out by Phoenix Investment Partners, Limited ("Phoenix Investment Partners"), a subsidiary of Phoenix Home Life Mutual Insurance Company, and by Mariner Investment Group, Inc. ("Mariner") the sole shareholder of which is also the Chairman of the Board and a founding shareholder of Select Re. The investment policies of PXRE are approved by the Company's Board of Directors and the performance of Phoenix Investment Partners and Mariner is monitored by the Investment Committee of the Company's Board of Directors.
As of December 31, 2000, 72.7% of PXRE's investment portfolio, at fair value, consisted of fixed maturities and short-term investments.
PXRE had no investments in real estate or commercial mortgage loans as of December 31, 2000; however, PXRE has invested in common and preferred shares of publicly traded REITs with a market value of $14,933,000 at December 31, 2000.
Short-term investments are carried at amortized cost, which approximates fair value. PXRE's 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 $71,468,000 at December 31, 2000, compared to $50,004,000 at December 31, 1999 including one hedge fund amounting to $23,365,000 at December 31, 2000 compared to $20,620,000 at December 31, 1999.
amounted to approximately $50,226,000, or 45.8% of total hedge fund investments and were comprised of funds managed by sixteen of the twenty-two managers. Hedge funds in which PXRE invests utilize a strategy relating to equities that are, based on the recent history for such funds, more likely on an aggregate basis to appreciate in upwardly trending markets and more likely to depreciate in downwardly trending markets, whereas hedge funds utilizing fixed income strategies in which PXRE invests are on an aggregate basis less correlated to the direction of interest rates based on the recent performance of such funds.
Through its hedge fund managers, PXRE may invest or trade in any securities or instruments including, but not limited to, U.S. and non-U.S. equities and equity-related instruments, currencies, commodities and fixed-income and other debt-related instruments and derivative instruments. Hedge fund managers may use both over-the-counter and exchange traded instruments (including derivative instruments such as swaps, futures and forward agreements), trade on margin and engage in short sales. Substantially all strategies hedge fund managers are expected to adopt employ leverage, to varying degrees, which magnifies both the potential for gain and the exposure to loss, which may be substantial. Leverage may be obtained through margin arrangements, as well as repurchase, reverse repurchase, securities lending and other techniques. Trades may be on or off exchanges and may be in thinly traded securities or instruments, which creates the risk that attempted purchases or sales may adversely affect the price of a particular investment or its liquidation and may increase the difficulty of valuing particular positions.
Hedge funds and other privately held securities are accounted for under the equity method or as part of a trading portfolio. Total investment income for the twelve months ended December 31, 2000, included $9,630,000 attributable to hedge funds and other privately held securities.
PXRE's hedge fund and other privately held securities program should be viewed as exposing it to the risk of substantial losses, which PXRE seeks to reduce through its multi-asset and multi-management strategy. There can be no assurance, however, that this strategy will prove to be successful.
Catastrophe coverage, surplus and other ceded premiums written decreased in 2000 from 1999 due to PXRE fronting less business on behalf of other reinsurers and lower reinstatement premiums which in 1999 were driven by the December 1999 French Storms, offset in part by additional retrocessional coverage.
In 2000, PXRE made additional retrocessional coverage purchases. PXRE's property business is protected by a series of retrocessional agreements which provide protection against unusual severity of loss. Through 1999 these protections did not protect PXRE against exposure to smaller, more frequent loss occurrences; however, additional purchases in 2000 provided more protection against such loss occurrences.
The following tables summarize the 2000 and 1999 net premiums written and earned by PXRE's business segments:
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 U.S. statutory accounting practices ("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.
During 2000, PXRE experienced adverse development of $58,231,000 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 $19,781,000 net for prior-year loss and loss expenses.
The following table summarizes the 2000 and 1999 underwriting profit and (loss) by segment:
For the reasons discussed above, the net loss was $10,800,000 for 2000 compared to net loss of $42,138,000 for 1999. The diluted net loss per common share was $0.95 for 2000 compared to a net loss per share of $3.64 for 1999, based on diluted average shares outstanding of approximately 11,394,000 in 2000 and 11,568,000 in 1999.
The provision for losses and loss expenses and the loss ratio included 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.
As a result of the above, the combined ratio was 166.9% for 1999 compared with 103.5% for 1998. The increase in PXRE's GAAP combined ratio was primarily caused by the catastrophe activity previously discussed.
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 on losses incurred or management fees on weather contracts.
The catastrophe and risk excess underwriting portfolio can be characterized on a longer term basis as being comprised of coverages involving higher margins and greater volatility than other coverages written by PXRE. Over the periods indicated pricing and other coverage terms deteriorated and in response PXRE moved to layers of risk less affected by competitive pressure; or reduced commitments. Notwithstanding these moves, in 1999 this portfolio produced an underwriting loss as a result of major events.
Other operating expenses increased to $30,052,000 for the year ended December 31, 1999 from $19,313,000 in 1998, as a result of the costs incurred to implement PXRE's planned diversification including an increase in salary and related benefit costs of $6,329,000 and data processing costs of $1,462,000. Included in other operating expenses were foreign currency exchange losses of $836,000 for 1999 compared to gains of $204,000 for the corresponding period of 1998. In addition, PXRE incurred charges of approximately $1,087,000 after-tax in connection with the redomestication as well as tax charges discussed below. Also in 1999, PXRE incurred $695,000 in after-tax expenses associated with a change in accounting in
In 1999, PXRE changed the reporting period for its UK 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 12 months of operating results. The increase in losses in the fourth quarter of 1999 amounted to $3,517,000, primarily related to the European storms.
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 PXRE 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 U.S. 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 2001, without regulatory approval, is $34,886,000. During 2000, $16,252,000 in dividends were paid by PXRE Reinsurance. Under Bermuda law, PXRE Bermuda may not pay a dividend unless after payment of the dividend it is able to pay its liabilities as they become due, and the realizable value of its assets are greater than the aggregate value of its liabilities, issued share capital and share premium accounts.
In the event the amount of dividends available, together with other sources of funds, are not sufficient to permit PXRE 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 the payment of additional dividends by PXRE Reinsurance or the approval of the Bermuda Minister of Finance prior to the payment of additional dividends by PXRE Bermuda. If such approval were not obtained, PXRE 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
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 $75,000,000 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 $50,000,000, and in October 1999, the remaining $25,000,000 was borrowed. On March 31, 2000, PXRE Delaware fulfilled its commitment and made a principal payment of $10,000,000, reducing the outstanding loan to $65,000,000.
compliance with Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based Capital Ratio and Combined Statutory Surplus requirements. As at December 31, 2000, there was no default under the Credit Agreement.
PXRE Delaware files U.S. income tax returns for itself and all of its direct or indirect subsidiaries that satisfy the stock ownership requirements for consolidation (collectively, the "Subsidiaries"). PXRE Delaware is party to an Agreement Concerning Filing of Consolidated Federal Income Tax Returns (the "Tax Allocation Agreement") pursuant to which each U.S. Subsidiary makes tax payments to PXRE Delaware 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 Delaware 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 U.S. 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 to PXRE Delaware (or will be entitled to receive a credit if payments exceed the separate return tax liability of the Subsidiary).
Book value per common share was $21.94 at December 31, 2000.
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's Lloyd's Syndicate amounting to $18,908,000 at December 31, 2000 are restricted from being paid as a dividend through June, 2003.
The investment portfolio of PXRE is summarized in Item 14, Notes to the Financial Statements; Item 7, Management's Discussion and Analysis; and Item 1, Business.
(Bank Debt and Trust Preferred) and a related interest rate swap. PXRE's holdings subject it 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.
PXRE believes that reinsurance receivables and payables do not expose it to significant interest rate risk and are excluded from the analysis below.
In order to measure PXRE's exposure to changes in interest rates a sensitivity analysis was performed. Potential loss is measured as a change in fair value. The fair value of the fixed maturity portfolio, borrowings and related interest rate swap at year-end was re-measured from the fair values reported in the financial statements assuming a 10% increase in interest rates using a Salomon Analytics "Yield Book." The potential loss in fair value due to interest rate exposure was estimated at $1.7 million at December 31, 2000 and $3 million at December 31, 1999.
PXRE significantly reduced its investments in emerging market securities in 1999 and 2000. The credit risk related to such investments was not material at December 31, 2000.
PXRE's risk management strategy includes investments that are expected to reflect offsetting changes in fair value in response to various changes in market risks. PXRE's exposure to interest rate risk in its fixed income portfolio is expected to be offset in part by the change in value of its REITs. PXRE also invests in REITs to limit the potential loss due to exposures to changes in interest rates; this loss limit is based on the expected minimum value of the real estate holdings of the trusts.
PXRE also holds other investments that are excluded from this disclosure that are expected to provide positive returns under most market conditions representing adverse changes in interest rates and other market factors (See Note 3 of Notes to Consolidated Financial Statements).