Despite soft market conditions, PXRE has taken advantage of both the availability of capital in the financial markets and new opportunities in the business. PXRE has raised additional capital for its reinsurance operations to increase its capacity to underwrite risks and to position PXRE to take advantage of market opportunities. Since its formation more than a decade ago, PXRE has specialized in property reinsurance, including a strong focus on catastrophe-related products. Although catastrophe-related coverages experienced substantial improvements in pricing in 1993 to 1994 and other terms following high levels of catastrophic loss activity experienced by the worldwide insurance industry, coverage terms have been deteriorating since the beginning of 1995. In response, PXRE has moved to layers of risk that are less affected by competitive pressures and has reduced commitments on marginally priced business. Meanwhile, PXRE has taken a number of initiatives to enable it to write new business, and position itself for renewed growth during the current soft market. In late 1996, PXRE completed the organization of PXRE Managing Agency and PXRE Lloyd's Syndicate, thereby establishing a direct presence in the Lloyd's market and accessing specialty types of insurance and reinsurance on a worldwide basis. Underwriting premium volume and loss experience related to the business of PXRE Lloyd's Syndicate is included in PXRE's consolidated results on a quarter lag basis, commencing in the quarter ended June 30, 1997. In addition, in the first quarter of 1998 Transnational Insurance (formerly Transnational Reinsurance), PXRE's newly established excess and surplus lines carrier, commenced operations, specializing in non-standard and excess property insurance risks. In mid-1998, PXRE added teams of direct writing reinsurance professionals to establish a direct writing reinsurance unit and international reinsurance executives both to complement PXRE's existing brokerage-based reinsurance operations and to provide excess of loss short tail casualty products for casualty markets, primarily commencing with January 1999 renewals. PXRE has not previously had a significant presence in any casualty markets. These steps are expected over time to reduce the volatility associated with PXRE's catastrophe coverages which are expected to fall below 50% of gross premiums written in 1999. Also in 1998, PXRE further strengthened its Lloyd's unit with additional professionals and that unit is now expanding into the provision of services to start-up syndicates and captives at Lloyd's.
The Credit Agreement contains covenants which, among other things, limit the ability of PXRE and its subsidiaries (including PXRE Reinsurance, Transnational Insurance and PXRE Limited): (a) to incur additional Indebtedness (other than certain permitted Indebtedness); (b) to create Liens upon their properties or assets (other than Permitted Liens); (c) to sell, transfer or otherwise dispose of their assets, business or properties (other than certain permitted dispositions); (d) to make additional Investments (other than certain permitted Investments, including Permitted Acquisitions and other Investments in compliance with, among other things, applicable law and the limitations set forth in the investment policy of PXRE Reinsurance in effect on December 30, 1998 and not exceeding specified limits); (e) to pay dividends or repurchase stock if after giving effect thereto a Default or Event of Default exists or the Fixed Charge Coverage Ratio would be less than 1.5 to 1.0 as defined in the Credit Agreement; (f) to enter into certain transactions with Affiliates; (g) to engage in any business other than (1) the businesses engaged in on December 30, 1998 and businesses and activities reasonably related thereto or (2) in the case of any Insurance Subsidiary, the sale of any property and casualty insurance or reinsurance products; (h) to enter into or remain a party to certain ceded reinsurance agreements (1) with certain reinsurers that are neither rated "A-" or better by A.M. Best nor have financial strength ratings of "A-" or better by S&P or Moody's unless such reinsurers are Lloyd's syndicates and Lloyd's maintains a rating of "A-" or better by A.M. Best or S&P or such reinsurers have provided appropriate collateral in respect of their obligations, or (2) which constitute Surplus Relief Agreements and which increase Combined Statutory Capital and Surplus by more than 5% as of the most recent fiscal year end; or (i) to consolidate, merge or otherwise combine (or agree to do any of the foregoing) unless, among other things, (1) PXRE is the surviving entity in such merger or consolidation, (2) such merger or consolidation constitutes a Permitted Acquisition and the conditions and requirements of the Credit Agreement are complied with and (3) immediately thereafter no Default or Event of Default exists. The Credit Agreement also requires PXRE and PXRE Reinsurance where applicable to meet Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based Capital Ratio and Combined Statutory Surplus requirements. As at December 31, 1998 PXRE was in compliance with the covenants contained in the Credit Agreement.
PXRE risk management strategy is to accept certain levels of market risks, principally through its investment activities, in order to offset its insurance exposures that may be considered actuarial rather than financial. The objectives of PXRE's investment activities are to generate the required return from selected market sectors and limit its exposures to market risks that may prevent PXRE from servicing its insurance obligations. PXRE's Board of Directors approves investment guidelines and the selection of external investment advisers who manage PXRE's portfolios. The investment managers make tactical investment decisions within the established guidelines. Management monitors the external advisers through written reports that are reviewed and approved by the Board of Directors. Management also manages diversification strategies across the portfolios in order to limit PXRE's potential loss from any single market risk. The performance and risk profiles of the portfolio are reported in various forms throughout the fiscal year to management, the Board of Directors, rating agencies,
PXRE has replaced or upgraded, as part of its normal upgrade of hardware and software, most of its mission critical servers, personal computers and related desktop or network software to Year 2000 compliant versions. The cost of replacing or upgrading any remaining non-compliant equipment is not expected to be material. PXRE budgeted and expended $300,000 in 1998 for the upgrade and replacement of software systems and hardware for this purpose. Management of PXRE does not anticipate any material expenditures to replace or upgrade hardware or software in 1999 related to Year 2000 compliance.