PXRE leases a total of approximately 43,244 square feet of office space in Edison, New Jersey (PXRE's corporate headquarters), Norwalk, Connecticut, Richmond, Virginia, San Francisco, California, London, England and Brussels, Belgium. The Edison, New Jersey lease, which covers approximately 24,000 square feet of office space, was signed in 1994 and is for a term of 15 years at a fixed annual rent of approximately $370,000 (inclusive of basic electricity) and additional rents on account of PXRE's proportionate share of increases in building operating expenses and property taxes over calendar year 1994. PXRE is negotiating for an additional 24,000 square feet of office space at its corporate headquarters.
- ---------- (1) The U.K. operations of PXRE Limited and PXRE Managing Agency are included in the consolidated results on a one quarter lag basis beginning in 1997.
(2) On December 11, 1996, PXRE merged with TREX. The Merger has been accounted for as a purchase. Accordingly, TREX has been included in PXRE's consolidated results of operations from the date of acquisition, which resulted in incremental earnings of $1,253,000 in 1996. For 1994 and 1995 and for the period from January 1, 1996 until December
(3) During 1995, all of PXRE's outstanding shares of Series A Cumulative Convertible Preferred Stock were converted into shares of PXRE's common stock. To 1995, these convertible preferred shares were the principal reason for the difference between basic and diluted earnings per share.
(4) The historical ratios of earnings to fixed charges were determined by dividing consolidated earnings by total fixed charges. For purposes of these computations (i) earnings consist of consolidated income before considering income taxes, fixed charges and minority interest and (ii) fixed charges consist of interest on indebtedness and that portion of rentals which is deemed by PXRE's management to be an appropriate interest factor. The historical ratios of earnings to combined fixed charges and preferred dividends were determined by dividing consolidated earnings by total fixed charges and preferred dividends.
In addition, the potential for uncertainty for the 1998 underwriting year is greater than in the 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's 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 losses patterns reported by ceding companies and industry loss standards in calculating its liabilities.
Premium receivables 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, in part, the effects of currency fluctuations on its results of operations, it currently does not hedge its currency exposures before a catastrophic event which may produce a claim.
Year Ended December 31, Increase 1998 1997 (Decrease) ---- ---- ---------- (000's) %
In 1998, opportunistic purchases of catastrophe retrocessional protection increased catastrophe written premiums ceded partially due to a change in the payment mode, in part due to reinstatement premiums associated with Hurricane Georges and in part due to additional coverage associated with new operations. 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.
Amount of Losses ---------------- Loss Event Gross Net - ---------- ----- --- (in thousands) Hurricane Georges $49,106 $25,753 Hailstorms 4,521 3,597 Swissair and Delta 3 Satellites 4,087 3,399
During 1998, interest expense decreased to $1,395,000 as compared to $3,325,000 in 1997 due to the effect of repurchases of PXRE's 9.75% Senior Notes in open market purchases and the redemption of the remaining Senior Notes on August 15, 1998 (see "Liquidity and Capital Resources"). In addition, during 1998 PXRE incurred minority interest expense amounting to $8,928,000 related to PXRE's $100 million of 8.85% Capital Trust Pass-through Securities `sm' (TRUPS `sm') (as described below under "Liquidity and Capital Resources") compared to $8,184,000 in 1997. The increase in 1998 reflects the fact that the obligation was only outstanding during a portion of 1997.
For the reasons discussed above, net income was $2,679,000 for 1998 compared to net income of $44,253,000 for 1997. Diluted income per common share before extraordinary loss was $0.26 for 1998 compared to $3.39 for the prior year. Diluted net income per common share was $0.20 for 1998 compared to $3.19 for 1997 based on diluted average shares outstanding of approximately 13,452,000 in 1998 and 13,893,000 in 1997.
As reported previously, PXRE and TREX merged on December 11, 1996. Results for 1997 therefore reflect the consolidated operations and business of PXRE and TREX combined, whereas the 1996 results under purchase accounting reflect the historical results of PXRE as reported, excluding TREX. For comparative purposes, certain selected pro forma results are also presented for 1996 as if PXRE and TREX had merged at January 1, 1996.
Gross premiums written for 1997 increased 10.4% to $126,232,000 from $114,348,000 for 1996 as reported and decreased 12.3% from $143,987,000 on a pro forma basis in 1996. Net premiums earned for the year ended December 31, 1997, increased 25.6% to $91,415,000 from $72,796,000 for 1996 as reported, and decreased 25.7% from $123,042,000 on a pro forma basis in 1996. Net premiums written for the year ended December 31, 1997, increased 47.8% to $100,055,000 from $67,718,000 for 1996 as reported, and decreased 14.2% from $116,604,000 in 1996 on a pro forma basis. Gross written, net written and net earned premium for 1997 declined from prior-year levels on a pro forma basis reflecting a continuation of the increasingly competitive business environment which has marked recent renewal seasons. Lower reinstatement premiums as a result of reduced losses and additional reinsurance purchased at favorable rates contributed to these declines. PXRE continued its planned response to this increasingly competitive environment by withdrawing capacity from areas of coverage not offering appropriate compensation for the exposure.
Premiums ceded by PXRE to its managed business participants decreased 22.1% to $16,534,000 for 1997 compared with $21,238,000 for 1996. The decrease in premiums ceded to these programs was due to reduced amounts of premiums written by PXRE and a change in the percentage ceded as agreed with the participants. During 1996, before the Merger, PXRE ceded $19,965,000 of premiums to Transnational Reinsurance in lieu of direct reinsurance writings by Transnational Reinsurance. During 1997 PXRE increased its purchases of catastrophe retrocessional coverage for it's own protection in light of the continued general deterioration in catastrophe reinsurance pricing and the opportunity to buy protection at more favorable terms than in recent years.
Hurricanes Marilyn and Luis $8,064 $2,995 $11,978 $6,876 Hurricane Fran 4,218 2,827 5,621 3,980 Northridge earthquake 1,646 1,438 1,198 1,083 Eurotunnel fire 1,260 1,022 2,238 2,000 Credit Lyonnais fire 2,669 723 4,606 2,647
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 $627,000 for 1997 compared to a loss of $41,000 for 1996 as reported, and a loss of $56,000 for 1996 on a pro forma basis.
Other operating expenses increased to $15,716,000 for 1997 from $12,262,000 in 1996 as reported, and $15,195,000 for 1996 on a pro forma basis. Included in other operating expenses were foreign currency exchange losses of $1,221,000 for 1997 compared to gains of $143,000 for 1996 as reported, and gains of $210,000 for 1996 on a pro forma basis. Operating expenses were $17,191,000 excluding foreign exchange losses and amortization of negative goodwill of $2,696,000 in 1997 compared with $18,101,000 in 1996 pro forma results excluding the same items. This decrease was primarily due to the non recurring costs related to the TREX merger in 1996.
During 1997, interest expense decreased to $3,325,000 as compared to $6,957,000 in the prior-year as reported due to the effect of the repurchase of $43.3 million of PXRE's 9.75% Senior Notes in open market purchases through the end of the third quarter of 1997. In addition, in 1997 PXRE incurred minority interest expense amounting to $8,184,000 related to PXRE's $100 million of newly-issued 8.85% Capital Trust Pass-through Securities `sm' (TRUPS `sm') (as described below under "Liquidity and Capital Resources").
Net investment income for 1997 increased 85.9% to $31,191,000 from $16,782,000 for 1996 as reported. The increase in net investment income was caused primarily by $9,201,000 of investment income from Transnational Reinsurance, $2,213,000 from incremental total return income (including unrealized gains and losses) from higher yielding limited partnership investments from the planned repositioning of the investment portfolio and the remainder from increased average assets, which in part was due to proceeds of the 8.85% TRUPS `sm' in excess of Senior Notes repurchased in 1997. PXRE's pre-tax investment yield was 6.3% for 1997 compared with 6.4% for 1996 as reported, both calculated using amortized cost and investment income before investment expenses. Net realized investment gains for 1997 were $2,467,000 compared to gains of $94,000 for 1996 reflecting the active management of the portfolio. During 1997, PXRE recorded directly to equity an after-tax unrealized gain of $2,605,000 in the value of its investment portfolio ($0.19 book value per share), reflecting the effect of decreasing interest rates during the period.
The net effects of foreign currency exchange fluctuations were losses of $594,000 in 1997 and gains of $102,000 for 1996. See "Liquidity and Capital Resources."
Net income for the year ended December 31, 1996 included $3,898,000 which represented PXRE's approximately 22.1% equity share of TREX's net earnings before the Merger.
PXRE relies primarily on cash dividends and net tax allocation payments from its subsidiaries PXRE Reinsurance and Transnational Insurance to pay its operating expenses and income taxes, to meet its debt service obligations and to pay dividends to PXRE stockholders. The payment of dividends by PXRE Reinsurance to PXRE and by Transnational Insurance to PXRE Reinsurance is subject to limits imposed under the insurance laws and regulations of Connecticut, the state of incorporation and domicile of PXRE Reinsurance and Transnational Insurance, 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 to PXRE, and that Transnational Insurance may declare or pay to PXRE Reinsurance, 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 or Transnational Insurance 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 1999, without regulatory approval, is $44,722,900. During 1998, no dividends were paid by Transnational Insurance to PXRE Reinsurance. During 1998, $57,388,000 in dividends were paid by PXRE Reinsurance to PXRE.
The Credit Agreement enumerates various Events of Default, including but not limited to, if: (1) any Person or group becomes the "beneficial owner" of securities of PXRE representing 20% or more of the combined voting power of the then outstanding securities of PXRE ordinarily having the right to vote in the election of directors; or (2) the Board of Directors of PXRE ceases to consist of a majority of the individuals who constituted the Board as of December 30, 1998 or who subsequently become members after having been nominated, or otherwise approved in writing, by at least a majority of individuals who constituted the
On January 29, 1997, PXRE Capital Trust I, a Delaware statutory business trust and a wholly-owned subsidiary of PXRE ("PXRE Capital Trust") issued $100,000,000 principal amount of its 8.85% TRUPS `sm' due February 1, 2027 in an institutional private placement. Proceeds from the sale of these securities were used to purchase PXRE's 8.85% Junior Subordinated Deferrable Interest Debentures due February 1, 2027 (the "Subordinated Debt Securities"). On April 23, 1997, PXRE and PXRE Capital Trust completed the registration with the Securities and Exchange Commission of an exchange offer for these securities and the securities were exchanged for substantially similar securities (the "Capital Securities"). Distributions on the Capital Securities (and interest on the related Subordinated Debt Securities) are payable semi-annually, in arrears, on February 1 and August 1 of each year, commencing August 1, 1997. Minority interest expense, including amortization of debt offering costs, for 1998 in respect of the Capital Securities (and related Subordinated Debt Securities) amounted to approximately $8,928,000. On or after February 1, 2007, PXRE has the right to redeem the Subordinated Debt Securities, in whole at any time or in part from time to time, subject to certain conditions, at call prices of 104.180% at February 1, 2007, declining to 100.418% at February 1, 2016, and 100% thereafter. PXRE has the right, at any time, subject to certain conditions, to defer payments of interest on the Subordinated Debt Securities for Extension Periods (as defined in the applicable indenture), each not exceeding 10 consecutive semi-annual periods; provided that no Extension Period may extend beyond the maturity date of the Subordinated Debt Securities. As a consequence of PXRE's extension of the interest payment period on the Subordinated Debt Securities, distributions on the Capital Securities would be deferred (though such distributions would continue to accrue interest at a rate of 8.85% per annum compounded semi-annually). In the event that PXRE exercises its right to extend an interest payment period, then during any Extension Period, subject to certain exceptions, (i) PXRE shall not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock or rights to acquire such capital stock or make any guarantee payments (subject to specified exceptions) with respect to the foregoing, and (ii) PXRE shall not make any payment of interest on, or principal of (or premium, if any, on), or repay, repurchase or redeem, any debt securities issued by PXRE which rank pari passu with or junior to the Subordinated Debt Securities. Upon the termination of any Extension Period and the payment of all amounts then due, PXRE may commence a new Extension Period, subject to certain requirements.
PXRE 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.
PXRE files federal income tax returns for itself and all of its direct or indirect subsidiaries that satisfy the stock ownership requirements for consolidation for federal income tax purposes (collectively, the "Subsidiaries"). PXRE is party to an Agreement Concerning Filing of Consolidated Federal Income Tax Returns (the "Tax Allocation Agreement") pursuant to which each domestic Subsidiary makes tax payments to PXRE 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 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 domestic 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 (or will be entitled to receive a credit if payments exceed the separate return tax liability of the subsidiary).
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 and dividends from Transnational Insurance. Funds are applied primarily to the payment of claims, operating expenses and, income taxes and to the purchase of investments. Premiums are typically received in advance of related claim payments.
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 $3,167,000 after-tax unrealized loss in the value of its investment portfolio ($0.26 book value per share) at December 31, 1998, primarily from its emerging market securities and from its overall bond and common stock portfolio reflecting volatile market conditions during 1998.
Short-term investments are carried at amortized cost, which approximates fair value. PXRE's short-term investments, principally high-grade commercial paper, U.S. Treasury bills and investment in a limited partnership which invests primarily in U.S. Treasury bills, were $58,862,000 at December 31, 1998 compared to $52,905,000 at December 31, 1997. The increase at December 31, 1998 was principally due to liquidity requirements associated with the PXRE Lloyd's Syndicate operation. Other invested assets amounting to $65,164,000 at December 31, 1998, which were comprised principally of limited partnerships, were accounted for under the equity method. The amount of equity loss included in short-term investments and other invested assets at December 31, 1998 amounted to $5,029,000 primarily from limited partnership investments in commodities. During December 1998 and January 1999, PXRE divested itself of 80% of this investment.
Dividends declared in 1998 were $13,585,333 compared to $12,209,000 in 1997, as a result of the increase in the per share quarterly dividend from $0.21 to $0.25 in the fourth quarter of 1997. The expected annual dividend based on shares outstanding at December 31, 1998 will be approximately $12,817,000 reflecting a per share dividend increase to $0.26 per quarter commencing in the fourth quarter of 1998.
substantially all of its investments are denominated in U.S. 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 make, investments denominated in foreign currencies to mitigate, in part, the effects of currency fluctuations on its results of operations. Currency holdings and investments denominated in foreign currencies do not constitute a material portion of PXRE's investment portfolio and, in the opinion of PXRE's management, are sufficiently liquid for its needs.
In connection with the capitalization of PXRE Lloyd's Syndicate, PXRE has placed on deposit $46,287,000 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 for approximately $17,835,000. In addition, PXRE has provided a ('L')5,000,000 ($8.3 million at December 31, 1998 exchange rates) line of credit to PXRE Managing Agency for liquidity purposes. There has been no drawdown of these amounts through December 31, 1998.
All amounts classified as reinsurance recoverable at December 31, 1998 are considered by management of PXRE to be collectible in all material respects.
PXRE is exposed to market risks that are principally interest rate and equity price risks. PXRE is exposed to potential losses from changes in interest rates with respect to its investments, borrowings, and a related interest rate swap. PXRE is exposed to potential losses from changes in equity prices with respect to its investments. PXRE believes its exposure to foreign exchange risk and exposures to other market risks represented by weather contracts, are not currently material.
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 income 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% parallel increase in rates across the U.S. dollar yield curve. The potential loss in fair value due to interest rate exposure was estimated at $1 million.
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
PXRE's exposure to foreign exchange risk from its foreign denominated securities is not material. Only a small portion of PXRE's investment portfolio is denominated in currencies other than U.S. dollars. Additionally the carrying value of certain receivables and payables denominated in foreign currencies are carried at fair value. For these reasons, these items have been excluded from the market risk disclosure.
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 should be made to Footnote 5 to the Financial Statements related to realized and unrealized gains and losses on investments.
Two older legacy systems have been identified as not being year 2000 compliant. One is a vendor provided general ledger system, which was replaced with a new, Year 2000 certified general ledger system in December 1998. This system has been implemented, tested and converted and is working properly effective with year-end 1998. Another system, which was internally developed, was upgraded and rewritten by December 31, 1998.
Where PXRE has determined that the relationship with a business partner is material to its ability to conduct normal operations, PXRE has sent letters to that partner requesting an update on the status of its Year 2000 initiative. Where deemed necessary, PXRE is following up with the business partner to obtain additional information. Based on these assurances and PXRE's internal reviews of the information provided, PXRE has not currently identified a material business partner that will not be compliant. However, there can be no assurance that all business partners will supply accurate or up-to-date information regarding their preparedness for the Year 2000, and there can be no assurance that all material business partners will be compliant. Such non-compliance could have a material effect on PXRE's financial position and results of operations. PXRE expects to complete its review of material business partners by June 30, 1999.
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 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 the property-casualty reinsurance 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 the development of new products by new and existing competitors); (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
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996