<PAGE>
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________TO _______________
COMMISSION FILE NUMBER 1-15259
PXRE GROUP LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
BERMUDA 98-0214719
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
99 FRONT STREET SUITE 231
HAMILTON HM 12 12 CHURCH STREET
BERMUDA HAMILTON HM 11
BERMUDA
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES) (MAILING ADDRESS)
(441) 296-5858
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
As of August 8, 2000, 11,776,859 common shares, $1.00 par value per
share, of the Registrant were outstanding.
--------------------------------------------------------------------------------
<PAGE>
PXRE GROUP LTD.
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets at June 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations and Comprehensive Income
for the three and six months ended June 30, 2000 and 1999 4
Consolidated Statements of Stockholders' Equity for the three and six
months ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the three and six months
ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION 36
</TABLE>
2
<PAGE>
PXRE CONSOLIDATED BALANCE SHEETS
GROUP LTD.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C> <C>
(UNAUDITED)
Assets Investments:
Available for sale:
Fixed maturities, available-for-sale, at fair value (amortized
cost $285,801,000 and $329,962,000, respectively) $278,771,746 $321,247,527
Equity securities, at fair value (cost $16,100,000 and $26,214,000) 16,544,657 24,840,360
Short-term investments 55,364,224 50,004,473
Trading securities (cost $26,000,000 and $26,000,000) 29,888,465 27,806,209
Limited partnerships, at equity (cost $82,083,000 and $67,147,000) 104,594,595 85,669,508
------------- -------------
Total investments 485,163,687 509,568,077
Cash 23,158,005 14,735,040
Accrued investment income 4,241,002 4,186,849
Receivables:
Unreported premiums 50,592,433 40,216,340
Balances due from intermediaries and brokers, net 16,802,885 21,549,113
Other receivables 25,698,053 22,971,088
Reinsurance recoverable 146,134,920 106,702,307
Ceded unearned premiums 19,927,781 19,582,260
Deferred acquisition costs 10,461,667 7,809,971
Current income tax recoverable 0 12,628,414
Deferred tax asset 23,174,542 11,531,000
Other assets 17,035,225 8,699,650
------------- -------------
Total assets $822,390,200 $780,180,109
============= =============
Liabilities Losses and loss expenses $291,321,518 $261,551,353
Unearned premiums 66,947,989 42,218,837
Debt payable 65,000,000 75,000,000
Current income tax payable 1,012,701 0
Other liabilities 52,835,150 38,609,857
------------- -------------
Total liabilities 477,117,358 417,380,047
------------- -------------
Minority interest in consolidated subsidiary:
Company-obligated mandatorily redeemable capital trust
pass-through securities of subsidiary trust holding solely a
company-guaranteed related subordinated debt 99,523,181 99,521,079
Stockholders' Serial preferred stock, $1.00 par value -- 10,000,000 shares authorized
Equity respectively; 0 shares issued and outstanding 0 0
Common stock, $1.00 par value -- 50,000,000 shares
authorized, 11,766,265 and 11,679,769 shares issued, respectively 11,766,265 11,679,769
Additional paid-in capital 174,530,456 173,682,802
Accumulated other comprehensive income:
Net unrealized depreciation on investments, net of deferred
income tax benefit of $2,297,000 and $3,520,000, respectively (4,444,679) (6,752,002)
Retained earnings 69,001,226 89,932,620
Restricted stock at cost ( 389,471 and 369,483 shares) (5,103,607) (5,264,206)
------------- -------------
Total stockholders' equity 245,749,661 263,278,983
------------- -------------
Total liabilities and stockholders' equity $822,390,200 $780,180,109
============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
PXRE CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
GROUP LTD. (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues Net premiums earned $ 43,639,562 $ 28,694,483 $ 79,381,138 $ 52,525,433
Net investment income 5,738,651 10,922,120 17,682,469 18,122,712
Net realized investment gains (losses) 73,765 1,193,499 (462,097) (1,382,512)
Management fees 1,778,920 403,699 3,573,231 1,300,315
------------ ----------- ------------ -----------
51,230,898 41,213,801 100,174,741 70,565,948
------------ ----------- ------------ -----------
Losses and Losses and loss expenses incurred 68,659,875 17,969,860 92,355,532 36,867,922
Expenses Commissions and brokerage 8,875,475 6,138,823 16,736,876 12,545,751
Other operating expenses 8,593,333 7,079,920 18,398,380 13,317,713
Interest expense 1,149,198 842,700 2,429,243 1,673,985
Minority interest in consolidated subsidiary 2,218,719 2,218,328 4,437,351 4,326,769
------------ ----------- ------------ -----------
89,496,600 34,249,631 134,357,382 68,732,140
------------ ----------- ------------ -----------
(Loss) Income before income taxes (38,265,702) 6,964,170 (34,182,641) 1,833,808
Income tax benefit (provision) 14,738,500 (1,918,000) 14,664,000 450,000
------------ ----------- ------------ -----------
Net (loss) income $(23,527,202) $ 5,046,170 $(19,518,641) $ 2,283,808
Comprehensive Other comprehensive income (loss), net of tax:
Income Net unrealized appreciation (depreciation) on
investments 1,123,916 (3,068,383) 2,307,323 (6,504,339)
------------ ----------- ------------ -----------
Compreshensive (loss) income $(22,403,286) $ 1,977,787 $(17,211,318) $(4,220,531)
============ =========== ============ ===========
Per Share Basic: ------------ ----------- ------------ -----------
Net (loss) income $ (2.07) $ 0.44 $ (1.71) $ 0.20
============ =========== ============ ===========
Average shares outstanding 11,383,097 11,439,018 11,384,085 11,694,417
============ =========== ============ ===========
Diluted: ------------ ----------- ------------ -----------
Net (loss) income $ (2.07) $ 0.44 $ (1.71) $ 0.19
============ =========== ============ ===========
Average shares outstanding 11,383,097 11,584,551 11,384,085 11,809,238
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PXRE CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
GROUP LTD. (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Common Stock: Balance at beginning of period $ 11,758,174 $ 151,314 $ 11,679,769 $ 149,382
Issuance of shares, net 8,091 314 86,496 2,246
------------ ------------ ------------ -------------
Balance at end of period $ 11,766,265 $ 151,628 $ 11,766,265 $ 151,628
============ ============ ============ =============
Additional Balance at beginning of period $174,559,921 $262,909,165 $173,682,802 $ 259,147,554
Paid-in Capital: Issuance of common shares 178,596 603,096 1,355,177 4,504,173
Other (208,061) (17,946) (507,523) (157,412)
------------ ------------ ------------ -------------
Balance at end of period $174,530,456 $263,494,315 $174,530,456 $ 263,494,315
============ ============ ============ =============
Treasury Stock: Balance at beginning of period $ 0 $(75,326,133) $ 0 $ (61,420,025)
Repurchase of common stock (6,888) (2,289,569) (6,888) (16,195,677)
Cancelation of common stock 6,888 (46,600) 6,888 (46,600)
------------ --------- ------------ -------------
Balance at end of period $ 0 $(77,662,302) $ 0 $ (77,662,302)
============= ============ ============ =============
Unrealized Balance at beginning of period $ (5,568,595) $ (3,429,703) $ (6,752,002) $ 6,253
Appreciation Change in fair value for the period 1,123,916 (3,068,383) 2,307,323 (6,504,339)
(Depreciation) ------------ ------------ ------------ ------------
on Investments: Balance at end of period $ (4,444,679) $ (6,498,086) $ (4,444,679) $ (6,498,086)
============ ============ ============ ============
Retained Balance at beginning of period $ 93,235,211 $133,917,715 $ 89,932,620 $139,842,939
Earnings: Net (loss) income (23,527,202) 5,046,170 (19,518,641) 2,283,808
Dividends paid to common stockholders (706,783) (3,055,709) (1,412,753) (6,218,571)
------------ ------------ ------------ ------------
Balance at end of period $ 69,001,226 $135,908,176 $ 69,001,226 $135,908,176
============ ============ ============ ============
Restricted Stock: Balance at beginning of period $ (5,820,754) $ (6,579,063) $ (5,264,206) $ (3,350,597)
Issuance of restricted stock (118,320) (474,750) (1,276,445) (4,224,844)
Amortization of restricted stock 670,054 616,217 1,271,631 1,137,845
Other 165,413 46,600 165,413 46,600
------------ ------------ ------------ ------------
Balance at end of period $ (5,103,607) $ (6,390,996) $ (5,103,607) $ (6,390,996)
============ ============ ============ ============
Total Balance at beginning of period $268,163,957 $311,643,295 $263,278,983 $334,375,506
Stockholders' Issuance of common shares 186,687 603,410 1,441,673 4,506,419
Equity: Repurchase of common stock (6,888) (2,289,569) (6,888) (16,195,677)
Restricted stock, net 551,734 141,467 (4,814) (3,086,999)
Unrealized (depreciation)
appreciation on investments net
of deferred income tax 1,123,916 (3,068,383) 2,307,323 (6,504,339)
Net (loss) income (23,527,202) 5,046,170 (19,518,641) 2,283,808
Dividends (706,783) (3,055,709) (1,412,753) (6,218,571)
Other (35,760) (17,945) (335,222) (157,412)
------------ ------------ ------------ ------------
Balance at end of period $245,749,661 $309,002,735 $245,749,661 $309,002,735
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
PXRE CONSOLIDATED STATEMENTS OF CASH FLOWS
GROUP LTD. (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash Flows Net (loss) income $(23,527,202) $ 5,046,170 $(19,518,641) $ 2,283,808
from Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities:
Losses and loss expenses 40,742,981 10,232,478 29,770,161 (952,025)
Unearned premiums 9,782,138 79,076 24,383,631 15,075,881
Deferred acquisition costs 1,235,258 (743,093) (2,651,696) (3,949,122)
Receivables 11,159,827 20,621,140 6,464,268 (11,271,839)
Reinsurance balances payable (3,060,035) (7,557,935) 2,207,062 (1,315,563)
Reinsurance recoverable (39,415,614) (3,990,836) (44,618,829) 3,586,488
Income tax recoverable 2,539,632 2,581,378 2,786,703 10,476,378
Equity in earnings of limited partnerships (1,134,574) (5,508,581) (7,820,649) (7,634,399)
Other (8,299,743) (14,498,736) (3,637,306) (2,636,336)
------------ ------------ ------------ -----------
Net cash (used) provided by operating
activities (9,977,332) 6,261,061 (12,635,296) 3,663,271
------------ ------------ ------------ -----------
Cash Flows Cost of fixed maturity investments (8,588,687) (39,296,734) (17,381,209) (82,611,245)
from Investing Fixed maturity investments matured/disposed 20,785,381 15,298,682 60,046,467 52,803,814
Activities Payable for securities 108,927 (579,098) (1,915,223) 10,220,990
Cost of equity securities (1,481,735) (1,045,999) (2,751,347) (6,950,398)
Equity securities disposed 1,278,290 1,603,831 13,199,390 22,299,690
Net change in short-term investments (7,853,681) 29,803,859 (3,642,333) 14,445,804
Limited partnerships disposed 1,714,006 222,996 2,464,814 11,245,712
Limited partnerships purchased (9,173,305) (9,979,202) (17,400,928) (14,283,942)
------------ ------------ ------------ -----------
Net cash (used) provided by investing
activities (3,210,804) (3,971,665) 32,619,631 7,170,425
------------ ------------ ------------ -----------
Cash Flows Proceeds from issuance of common stock 75,290 63,295 165,177 216,210
from Financing Cash dividends paid to common stockholders (706,783) (3,055,710) (1,412,753) (6,218,572)
Repurchase of debt 0 0 (10,000,000) 0
Cost of stock repurchased (6,888) (2,289,569) (313,794) (16,195,677)
------------ ------------ ------------ -----------
Net cash (used) provided by financing
activities (638,381) (5,281,984) (11,561,370) (22,198,039)
------------ ------------ ------------ -----------
Net change in cash (13,826,517) (2,992,588) 8,422,965 (11,364,343)
Cash, beginning of period 36,984,522 7,745,718 14,735,040 16,117,473
------------ ------------ ------------ -----------
Cash, end of period $ 23,158,005 $ 4,753,130 $ 23,158,005 $ 4,753,130
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GROUP LTD.
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
On October 5, 1999, PXRE completed a reorganization that involved the
formation of PXRE Group Ltd., a Bermuda-based holding company which became the
holding company for PXRE Corporation and its other operations. The
reorganization also involved the establishment of a Bermuda-based reinsurance
subsidiary, PXRE Reinsurance Ltd., and operations in Barbados through PXRE
(Barbados) Ltd. The accompanying consolidated financial statements have been
prepared in U.S. dollars in conformity with generally accepted accounting
principles ("GAAP") in the United States. These statements reflect the
consolidated operations of PXRE Group Ltd. (collectively referred to as "PXRE"),
and its subsidiaries PXRE Corporation, PXRE Reinsurance Company ("PXRE
Reinsurance"), PXRE Solutions Inc., PXRE Direct Underwriting Managers, Inc.,
Transnational Insurance Company ("Transnational"), PXRE Trading Corporation,
TREX Trading Corporation, Cat Fund L.P., PXRE Capital Trust I, PXRE Limited,
PXRE Managing Agency Limited, PXRE Reinsurance Ltd., and PXRE (Barbados) Ltd.
The financial statements for the six months ended June 30, 2000, reflect the
financial position and results of operations of PXRE Group Ltd. and
subsidiaries.
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 U.K. operations are included in the consolidated results
on a one-quarter lag basis through the end of the third quarter of 1999.
PXRE, through its wholly-owned subsidiaries, principally provides
property and casualty reinsurance products and services through broker-based and
direct-writing distribution capabilities. PXRE also provides marine and
aerospace reinsurance products and services. All material transactions between
the consolidated companies have been eliminated in preparing these consolidated
financial statements.
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The interim consolidated financial statements are unaudited; however,
in the opinion of management, the foregoing consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. These
interim statements should be read in conjunction with the 1999 audited
consolidated financial statements and related notes. The preparation of interim
consolidated financial statements relies significantly upon estimates. Use of
such estimates, and the seasonal nature of a portion of the reinsurance
business, necessitates caution in drawing specific conclusions from interim
results.
Certain amounts in 1999 were reclassified to be consistent with the
2000 presentation.
7
<PAGE>
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GROUP LTD.
--------------------------------------------------------------------------------
2. REINSURANCE
PXRE purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. In the event that retrocessionaires
are unable to meet their contractual obligations, PXRE would be liable for such
defaulted amounts. The effects of reinsurance on premiums written and earned are
as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
($000's)
<S> <C> <C> <C> <C>
Premiums written
Assumed $70,621 $38,669 $152,868 $100,319
Direct 1 575 98 1,133
------- ------- -------- --------
Gross premiums written 70,622 39,244 152,966 101,452
Ceded premiums written (26,909) (10,470) (52,368) (33,851)
------- ------- -------- --------
Net premiums written $43,713 $28,774 $100,598 $ 67,601
======= ======= ======== ========
Premiums earned
Assumed $68,099 $42,152 $124,037 $ 77,606
Direct 470 525 1,381 706
Ceded (24,930) (13,983) (46,037) (25,787)
------- ------- -------- --------
Net premiums earned $43,639 $28,694 $ 79,381 $ 52,525
======= ======= ======== ========
</TABLE>
In the second quarter of 2000 PXRE assumed a retroactive reinsurance
contract. Gross premiums written and earned under the contract were both
$20,024,000. The excess of recorded liabilities over premiums assumed of
$7,515,000 is recorded as other receivables and is being amortized into income
over the expected settlement period of the underlying liabilities using the
interest method. Concurrently, PXRE ceded 50% of this contract. The ceded
liability in excess of amounts paid for reinsurance coverage, amounting to
$3,872,000, is deferred and amortized into income in the same manner as the
assumed contract.
8
<PAGE>
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GROUP LTD.
--------------------------------------------------------------------------------
3. EARNINGS PER SHARE
The table below presents the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(000's)
<S> <C> <C> <C> <C>
Net (loss) income available to
common stockholders $(23,527) $ 5,046 $(19,519) $ 2,284
========= ======= ========= =======
Weighted average shares of common
stock outstanding:
Weighted average shares of common
outstanding (basic) 11,383 11,439 11,384 11,694
Equivalent shares of stock options 115 24 72 27
Equivalent shares of restricted stock 194 122 199 88
-------- ------- -------- -------
Weighted average common
equivalent shares (diluted) 11,692 11,585 11,655 11,809
====== ====== ====== ======
Weighted average common
equivalent shares when anti-dilutive 11,383 11,585 11,384 11,809
====== ====== ====== ======
Per share amounts:
Basic net (loss) income $ (2.07) $ 0.44 $ (1.71) $ 0.20
Diluted net (loss) income $ (2.07) $ 0.44 $ (1.71) $ 0.19
</TABLE>
4. INCOME TAXES
PXRE is incorporated under the laws of Bermuda and, under current
Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or
capital gains. The company has received an undertaking from the Minister of
Finance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax
Protection Act, 1966, which exempts the company, from any Bermuda taxes computed
on profits, income or any capital asset, gain or appreciation, or any tax in the
nature of estate duty or inheritance tax, at least until the year 2016.
PXRE does not consider itself to be engaged in a trade or business in
the United States and accordingly does not expect to be subject to direct United
States income taxation.
The United States subsidiaries of PXRE file a consolidated U.S. federal
income tax return.
5. LOSSES AND LOSS EXPENSE LIABILITIES
In the second quarter of 2000, PXRE commenced assuming structured
product contracts in PXRE Reinsurance Ltd, which is a new line of business for
PXRE. Such contracts are recorded on a discounted basis. At June 30, 2000
reserves related to these contracts were discounted by $1,663,000.
9
<PAGE>
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GROUP LTD.
--------------------------------------------------------------------------------
6. SEGMENT INFORMATION
PXRE operates in four reportable property and casualty segments -
catastrophe and risk excess, casualty, structured/finite business and all other
lines - based on PXRE's method of internal management reporting. In addition,
PXRE operates in two geographic segments - North American representing North
American based risks written by North American based reinsureds and
International (principally the United Kingdom, Continental Europe, Australia and
Asia) representing all other premiums written. The reportable segments were
redefined during 1999.
There are no significant differences among the accounting policies of
the segments as compared to PXRE's consolidated financial statements.
PXRE does not maintain separate balance sheet data for each of its
operating segments. Accordingly, PXRE does not review and evaluate the financial
results of its operating segments based upon balance sheet data.
The following table summarizes the underwriting (loss) and profit by
segment for the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Underwriting
($000's) Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Catastrophe and Risk Excess
North American $ 3,378 $1,090 $ 6,027 $ 806
International (25,782) 5,487 (20,182) 5,474
Excess of loss cessions (3,227) (1,944) (3,424) (2,388)
-------- ------ -------- -------
Subtotal (25,631) 4,633 (17,579) 3,892
-------- ------ -------- -------
Casualty
North American (544) (187) (595) (329)
International (712) 247 (1,063) 133
-------- ------ -------- -------
(1,256) 60 (1,658) (196)
-------- ------ -------- -------
Structured/Finite Business
North American 0 0 0 0
International 202 0 358 0
-------- ------ -------- -------
202 0 358 0
-------- ------ -------- -------
Other Lines
North American (1,522) 588 (2,137) 383
International (4,544) (246) (5,759) 213
-------- ------ -------- -------
(6,066) 342 (7,896) 596
-------- ------ -------- -------
Total $(32,751) $5,035 $(26,775) $(4,292)
========= ====== ========= =======
</TABLE>
10
<PAGE>
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GROUP LTD.
--------------------------------------------------------------------------------
The following table reconciles the underwriting operations for the
operating segments to income before tax as reported in the consolidated
statements of operations and comprehensive income:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
($000's) ($000's)
<S> <C> <C> <C> <C>
Net underwriting (loss) profit $(32,751) $ 5,035 $(26,775) $ 4,292
Net investment income 5,738 10,922 17,682 18,123
Net realized investment gains (losses) 74 1,193 (462) (1,383)
Interest expense (1,149) (843) (2,429) (1,674)
Minority interest in consolidated subsidiary (2,219) (2,218) (4,437) (4,327)
Operating expenses (8,593) (7,080) (18,398) (13,318)
Other income 634 (45) 636 121
--------- ------- --------- -------
(Loss) income before income taxes $(38,266) $ 6,964 $(34,183) $ 1,834
========= ======= ========= =======
</TABLE>
Premiums written were assumed principally through reinsurance brokers or
intermediaries. As of June 30, 2000 four reinsurance intermediaries individually
accounted for more than 10% of gross premiums written, and collectively
accounted for approximately 61% of gross premiums written.
7. CONTINGENCIES
Lloyd's of London regulators have imposed additional capital
requirements on PXRE Managing Agency, PXRE LLoyd's Syndicate and three other
syndicates managed by PXRE Managing Agency, and have restricted their ability
to expand their respective businesses, effective for the 2001 year of account.
Management of PXRE believes these actions by Lloyd's regulators are unwarranted
and will endeavor to have the additional requirements and restrictions lifted as
soon as practicable as they could adversely impact PXRE's ability to compete
in the Lloyd's of London market. No assurance can be given that PXRE will be
successful in such endeavors.
PXRE entered into weather option agreements in May 1999 with two
counteparties. In April 2000 these counter parties submitted invoices to PXRE
Delaware in the aggregate sum of $8,252,500 seeking payment under the weather
option agreements, which invoices have been paid. PXRE Delaware insured its
obligations under these weather option agreements through two Commercial
Inland Marine Weather Insurance Policies issued by Terra Nova Insurance Company
Limited ("Terra Nova"). PXRE Delaware submitted claims under these policies to
Terra Nova in April 2000. Terra Nova has denied coverage, contending that its
Managing General Agent had no authority to issues these policies. PXRE Delaware
disagrees with Terra Nova's denial and will pursue its available legal
remedies to collect the sums due under these policies.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
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 broker based 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.
The property and casualty reinsurance industry has been experiencing an
extended period of soft market conditions characterized by inadequate pricing.
The industry is also consolidating through mergers and other acquisitions. PXRE
competes with numerous companies, many of which have substantially greater
financial, marketing and management resources.
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.
Meanwhile, PXRE has adopted an ambitious diversification strategy
involving:
the addition of a reinsurance platform offering primarily casualty
products directly to customers;
12
<PAGE>
the enhancement of its international broker market reinsurance
platform to include additional lines of business including casualty
risks;
an acceleration of business offerings to one of its managed business
participants;
the formation of a finite reinsurance unit;
the establishment of a direct presence in the Bermuda market; and
the establishment of a direct presence in the Lloyd's market.
At June 30, 2000, 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 1999 and 2000 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.
CERTAIN RISKS AND UNCERTAINTIES
As a reinsurer of property catastrophe-type coverages in the worldwide
market place, PXRE's operating results in any given period depend to a large
extent on the number and magnitude of natural and man-made catastrophes such as
hurricanes, windstorms, floods, earthquakes, spells of severely cold weather,
fires and explosions. While PXRE may, depending on market conditions, purchase
catastrophe retrocessional coverage for its own protection, the occurrence of
one or more major catastrophes in any given period could nevertheless have a
material adverse impact on PXRE's results of operations and financial condition
and result in substantial liquidation of investments and outflows of cash as
losses are paid.
The estimation of losses for catastrophe reinsurers is inherently less
reliable than for reinsurers of risks which have an established historical
pattern of losses. In addition, insured events which occur near the end of a
reporting period, as well as with respect to PXRE's retrocessional book of
business, the significant delay in losses being reported to insurance carriers,
reinsurers and finally retrocessionaires require PXRE to make estimates of
losses based on limited information from ceding companies and based on its own
underwriting data. Because of the uncertainty in the process of estimating its
losses from insured events, there is a risk that
13
<PAGE>
PXRE's liabilities for losses and loss expenses could prove to be inadequate,
with a consequent adverse impact on future earnings and shareholders' equity.
Additionally, as a consequence of its emphasis on property reinsurance, PXRE may
forego potential investment income because property losses are typically settled
within a shorter period of time than casualty losses.
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.
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 events based on historical data; however, no assurance
can be given that these maximums will not be exceeded in some future
catastrophe.
Premiums on reinsurance business assumed are recorded as earned on a
pro rata basis over the contract period based upon estimated subject premiums.
Management must estimate the subject premiums associated with the treaties in
order to determine the level of earned premiums for a reporting period. Such
estimates are based on information from brokers, which can be subject to change
as new information becomes available. Because of the inherent uncertainty in
this process, there is the risk that premiums and related receivable balances
may turn out to be higher or lower than reported.
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.
PXRE and its non-U.S. subsidiaries intend to operate their business in
a manner that will not cause them to be treated as engaged in a trade or
business in the United States and, thus, will not require them to pay U.S.
federal corporate income taxes (other than withholding taxes on certain U.S.
source investment income and excise taxes on reinsurance premiums). However,
because there is uncertainty as to the activities which constitute being engaged
in a trade or business within the United States, there can be no assurances that
the U.S. Internal Revenue Service will not contend successfully that PXRE Group
or a non-U.S. subsidiary is engaged in a trade or business in the United States.
The Company understands that certain U.S.-based
14
<PAGE>
insurance companies are advocating an amendment to the U.S. Internal Revenue
Code which would impose U.S. federal income tax on a domestic insurer which is
controlled by a foreign reinsurer on the deemed investment income on its
reserves on U.S. risks ceded to one or more foreign reinsurers. At this point,
the Company is unable to predict whether this legislative effort will be
successful, what form any such legislation may ultimately take and what impact
any such legislation would have on the Company. If PXRE Group or any of its
non-U.S. subsidiaries were subject to U.S. income tax, PXRE Group's
shareholders' equity and earnings could be materially adversely affected.
PXRE's invested assets consist primarily of fixed maturities and a
diversified portfolio of hedge funds, but also include mezzanine bond and equity
limited partnerships, real estate investment trusts ("REITS") and short
term-investments. PXRE's investments are subject to market-wide risks and
fluctuations, as well as to risk inherent in particular securities. Although
PXRE seeks to preserve its capital by investing in a portfolio of hedge funds
and other privately held securities designed to provide diversification of risk,
such investments entail substantial risks. Portfolio performance may be
adversely impacted by equity and credit market conditions. A generally strong
equity market in 1999 and 2000 may have resulted in portfolio returns that are
unlikely to be achieved prospectively. There can be no assurance that the
investment objectives of PXRE will be achieved, and results may vary
substantially over time. In addition, although PXRE seeks to employ investment
strategies that are not correlated with its reinsurance exposures, losses in
PXRE's investment portfolio may occur at the same time as underwriting losses
and, therefore, exacerbate such losses' adverse effect on PXRE. To PXRE's
knowledge, other publicly traded reinsurers generally do not follow PXRE's
strategy of investing a significant portion of its invested assets in hedge
funds and other privately held securities. See "Investments."
PXRE's portfolio of hedge funds and other privately held securities is
subject to some or all of the following categories of risk: leverage;
concentration of investments; lack of liquidity; market fluctuations and
direction (including as a result of interest rate fluctuations and direction,
with respect to price levels and volatility); currency fluctuations; credit risk
of the securities issuer; yield curve risk; political risk for emerging market
investments; and spread risk between two or more similar securities. In
addition, PXRE is subject to counter-party risk, the risk, when transactions
settle on foreign exchanges, the protections afforded on U.S. exchanges will be
absent, the risk of exchange controls and the risk that one or more of its hedge
fund managers mishandles trading, hedging or deviates from the agreed upon
strategy, resulting in loss.
Fair values for PXRE's investments in hedge funds and other privately
held securities generally are established on the basis of the valuations
provided 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
15
<PAGE>
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) on such investments may
have a greater effect on PXRE's results of operations at the end of any fiscal
period than would be the case for other insurance and/or reinsurance companies.
INVESTMENTS
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 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. The investment policies of
PXRE are approved by PXRE's Board of Directors and the performance of Phoenix
Investment Partners and Mariner is monitored by the Investment Committee of
PXRE's Board of Directors.
PXRE's invested assets consist primarily of fixed maturities and a
diversified portfolio of hedge funds, but also include mezzanine bond and equity
limited partnerships, REITS and short-term investments. As of June 30, 2000,
68.9% of PXRE's investment portfolio, at fair value, consisted of fixed
maturities and short-term investments.
Of PXRE's fixed maturities portfolio at June 30, 2000, 87.8% of the
fair value was in obligations rated "A2" or "A" or better by Moody's or S&P,
respectively. Mortgage and asset-backed securities accounted for 33.0% of fixed
maturities based on fair value at June 30, 2000. The average market yield to
maturity of PXRE's fixed maturities portfolio at June 30, 2000 and 1999, was
6.6% in each period.
PXRE had no investments in real estate or commercial mortgage loans as
of June 30, 2000; however, PXRE has invested in common and preferred shares of
publicly traded REITS with a market value of $15,911,000 at June 30, 2000.
16
<PAGE>
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
shareholders' equity. During the first six months of 2000, PXRE recorded
directly to equity an after-tax unrealized gain of $2,307,000 ($0.20 book value
per share) in the value of its investment portfolio.
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 $55,364,000
at June 30, 2000, compared to $50,004,000 at December 31, 1999 including one
hedge fund amounting to $22,315,000 at June 30, 2000 compared to $20,620,000 at
December 31, 1999.
A principal component of PXRE's investment strategy is investing a
significant portion of PXRE's invested assets in a diversified portfolio of
hedge funds. As at June 30, 2000, hedge fund investments held by PXRE amounted
to approximately $109,099,000, representing 44.4% of June 30, 2000 shareholders'
equity. As at June 30, 2000, hedge fund investments were allocated among
nineteen managers, with market values ranging from $1,260,000 to $28,046,000. At
that date, an investment in a "fund-of-funds" entity affiliated with Mariner
amounted to approximately $28,046,000, or 25.7% of total hedge fund investments.
Hedge funds in which PXRE is invested that utilize a strategy relating to
equities 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 is invested are on an aggregate basis less
correlated to the direction of interest rates based on the recent performance of
such funds.
PXRE's hedge fund managers invest in a variety of markets utilizing a
variety of strategies, generally through the medium of private investment
companies or other entities. Criteria for the selection of hedge fund managers
include, among other factors, the historical performance and/or recognizable
prospects of the particular manager and a substantial personal investment by the
manager in the investment program. However, managers without past trading
histories or substantial personal investment may also be considered. Generally,
PXRE's hedge fund managers are compensated or receive profit participations on
terms that may include fixed and/or performance-based fees or profit
participations.
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, 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.
17
<PAGE>
While PXRE seeks capital appreciation with respect to its hedge fund
investments, it is also concerned with preservation of capital. For that reason,
its hedge fund portfolio is designed to take advantage of broad market
opportunities and diversify risk. PXRE does not follow a rigid investment policy
with respect to its hedge fund investments that would restrict it from
participating in particular markets, strategies or investments. In fact, its
hedge fund investments may be deployed and redeployed in whatever investment
strategies are deemed appropriate under prevailing economic and market
conditions in an attempt to achieve capital appreciation, including, if
appropriate, a concentration of investments in a small group of strategies or
hedge fund managers. Accordingly, the identity and number of hedge fund managers
is likely to change over time.
Mariner, as investment advisor, allocates assets to the hedge fund
managers. Mariner monitors hedge fund performance and periodically reallocates
assets in its discretion. Mariner is familiar with a number of hedge fund
investment strategies utilized by PXRE's hedge fund managers. Mariner has
invested in some of these strategies and has a varying level of knowledge of
others. New strategies, or strategies not currently known to Mariner, may come
to Mariner's attention and may be adopted from time to time.
As at June 30, 2000 PXRE's investment portfolio also included
approximately $47,700,000 of mezzanine bond and equity limited partnership
investments, with market values ranging from $6,000,000 to $10,500,000, and
remaining aggregate cash call commitments in respect of such investments of
$4,559,000. Mariner also monitors the performance of these investments.
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 six months ended June 30, 2000 included $7,951,000 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.
COMPARISON OF SECOND QUARTER RESULTS FOR 2000 WITH 1999
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
Increase
2000 1999 (Decrease)
---- ---- ----------
(000's) %
<S> <C> <C> <C>
Gross premiums written $70,622 $39,245 79.9
Ceded premiums:
Managed business participants 22,004 5,309 314.5
Catastrophe coverage and surplus reinsurance 4,905 5,162 (5.0)
------- -------
Total reinsurance premiums ceded 26,909 10,471 156.9
------- -------
Net premiums written $43,713 $28,774 51.9
======= =======
</TABLE>
18
<PAGE>
Gross premiums written for the three months ended June 30, 2000,
increased 79.9% to $70,622,000 from $39,245,000 for the corresponding period of
1999. Net premiums written for the second quarter of 2000, increased 51.9% to
$43,713,000 from $28,774,000 for the corresponding period of 1999. Net premiums
earned for the second quarter of 2000, increased 52.1% to $43,640,000 from
$28,694,000 for the comparable period of 1999. Gross written, net written and
net earned premium for the three months ended June 30, 2000 increased from
prior-year levels reflecting higher premiums in all business segments shown
below, with the exception of other lines. The increases include one
retrospectively rated finite contract written in the second quarter of 2000,
which resulted in gross premiums written of $20,024,000, ceded premiums written
of $10,012,000 and net premiums written and earned of $10,012,000.
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 U.K. operations are included in the consolidated results
on a one-quarter lag basis through the end of the third quarter of 1999.
Premiums ceded by PXRE to its managed business participants increased
314.5% to $22,004,000 for the second quarter of 2000 compared with $5,309,000
for the corresponding period of 1999. The increase in premiums ceded to these
programs was due primarily to the increase in gross premiums written, including
the cession of 50% of the finite transaction discussed above.
During the second quarter of 2000, catastrophe coverage and other
reinsurance ceded premiums written decreased due to PXRE fronting less business
on behalf of other reinsurers offset by 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
June 30, 2000 these protections did not protect PXRE against exposure to
smaller, more frequent loss occurrences.
19
<PAGE>
The following tables summarize the second quarter of 2000 and 1999 net
written and earned premium by PXRE's business segments:
<TABLE>
<CAPTION>
Net Premiums Written Three Months Ended Three Months Ended
($000's) June 30, June 30,
2000 % 1999 %
---- - ---- -
<S> <C> <C> <C> <C>
Catastrophe and Risk Excess
North American $ 4,297 $ 3,392
International 11,912 10,433
Excess of loss cessions (1,701) (605)
------- -------
Subtotal 14,508 33.2 13,220 45.9
------- -------
Casualty
North American 4,712 3,005
International 2,475 2,009
------- -------
7,187 16.4 5,014 17.4
------- -------
Structured/Finite Business
North American 0 0
International 15,346 0
------- -------
15,346 35.1 0 0.0
------- -------
Other Lines
North American 183 3,549
International 6,489 6,991
------- -------
6,672 15.3 10,540 36.7
------- ---- ------- ----
Total $43,713 100% $28,774 100 %
======= === ======= =====
<CAPTION>
Net Premiums Earned Three Months Ended Three Months Ended
($000's) June 30, June 30,
2000 % 1999 %
---- - ---- -
<S> <C> <C> <C> <C>
Catastrophe and Risk Excess
North American $ 4,730 $ 4,540
International 17,316 13,689
Excess of loss cessions (3,636) (3,199)
------- -------
Subtotal 18,410 42.2 15,030 52.4
------- -------
Casualty
North American 4,458 3,394
International 2,100 1,877
------- -------
6,558 15.0 5,271 18.4
------- -------
Structured/Finite Business
North American 0 0
International 12,358 0
------- -------
12,358 28.3 0 0.0
------- -------
Other Lines
North American 107 3,542
International 6,207 4,851
------- -------
6,314 14.5 8,393 29.2
------- ---- ------- -----
Total $43,640 100 % $28,694 100 %
======= ===== ======= =====
</TABLE>
20
<PAGE>
Management fee income from all sources for the three months ended June
30, 2000, increased to $1,778,000 from $404,000 for the corresponding period of
1999, reflecting higher ceded premiums written, including higher management fee
income earned from Select Re.
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. 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.
The loss ratio was 157.3% for the second quarter of 2000 compared with
62.6% for the comparable period of 1999. The loss ratio for the first three
months of 2000 reflected incurred catastrophe losses of $54,806,000 gross and
$39,535,000 net. In comparison, the loss ratio for the second quarter of 1999
reflected incurred catastrophe losses of $8,977,000 gross and $4,469,000 net
for 1999 and prior accident years.
Significant catastrophe losses affecting the three months ended June 30, 2000
loss ratio are as follows:
<TABLE>
<CAPTION>
Amount of Losses
----------------
Loss Event Gross Net
---------- ----- ---
($000's)
<S> <C> <C>
French Storm Lothar $28,448 $20,427
French Storm Martin 10,017 7,134
Hurricane Floyd 6,983 5,482
Hurricane Lenny 2,672 1,907
Typhoon Bart 2,019 1,559
</TABLE>
Significant catastrophe and risk losses affecting the three months ended
June 30, 1999 loss ratio are as follows:
<TABLE>
<CAPTION>
Amount of Losses
----------------
Loss Event Gross Net
---------- ----- ---
($000's)
<S> <C> <C>
Hurricane Georges $5,298 $3,463
One Risk Loss 2,735 802
</TABLE>
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 $448,000 for the
three months ended June 30, 2000 compared to a
21
<PAGE>
gain of $72,000 for the corresponding period of 1999.
During the second quarter of 2000, PXRE experienced adverse development
of $43,507,000 net largely due to the French storms Lothar and Martin. The loss
ratio for the comparable period of 1999 was adversely affected by the
development of $4,909,000 net for prior-year loss and loss expenses primarily
related to Hurricane Georges.
The underwriting expense ratio was 36.0% for the second quarter of 2000
compared with 44.7% for the comparable period of 1999. The decrease in
underwriting expense ratio was substantially due to the increase in premiums
earned and management fee income.
As a result of the above, the combined ratio was 193.3% for the second
quarter of 2000 compared with 107.3% for the comparable period of 1999. The
commission and brokerage ratio net of management fee income was 16.2% in the
second quarter of 2000 and 20.0% for the comparable period of 1999. The
operating expense ratio was 19.8% in the second quarter of 2000 compared with
24.7% in the year earlier period due to higher premiums earned. The increase in
PXRE's GAAP combined ratio was primarily caused by the higher loss ratio from
prior years loss development.
The following table summarizes the underwriting (loss) and profit by
segment for the three months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Underwriting
($000's) Three Months Ended Three Months Ended
June 30, June 30,
2000 % 1999 %
---- - ---- -
<S> <C> <C> <C> <C>
Catastrophe and Risk Excess
North American $ 3,378 $1,090
International (25,782) 5,487
Excess of loss cessions (3,227) (1,944)
-------- -------
Subtotal (25,631) 78.3 4,633 92.0
-------- -------
Casualty
North American (544) (187)
International (712) 247
-------- -------
(1,256) 3.8 60 1.2
-------- -------
Structured/Finite Business
North American 0 0
International 202 (0.6) 0
--- -------
202 0 0.0
--- -------
Other Lines
North American (1,522) 588
International (4,544) (246)
-------- -------
(6,066) 18.5 342 6.8
-------- ---- ------- ---
Total $(32,751) 100 % $5,035 100 %
========= ===== ====== =====
</TABLE>
22
<PAGE>
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 or syndicate agency management.
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.
Other operating expenses increased to $8,593,000 for the three months
ended June 30, 2000 from $7,080,000 in 1999, as a result of the costs incurred
to implement PXRE's planned diversification as well as amortization of negative
goodwill in 1999 that did not continue in 2000. Included in other operating
expenses were foreign currency exchange gains of $399,000 for 2000 compared to
losses of $168,000 for the corresponding period of 1999.
During the second quarter of 2000, interest expense increased to
$1,149,000 compared to $843,000 in the corresponding period in 1999. The
increase in interest expense relates to a drawdown of $25,000,000 under a credit
facility in the fourth quarter of 1999. The variable annual rate on the
$25,000,000 was 7.28% at June 30, 2000. See "Liquidity and Capital Resources".
In addition, during the three months ended June 30, 2000, PXRE incurred minority
interest expense amounting to $2,219,000 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 $2,218,000 in 1999.
Net investment income for the three months ended June 30, 2000
decreased 47.5% to $5,739,000 from $10,922,000 for the comparable period of
1999. The decrease in net investment income in the three months ended June 30,
2000 was caused primarily by the non hedge portion of the limited partnership
investments and trading portfolio, (which are carried on the equity method or as
a trading portfolio, for which the unrealized gains and losses in each case are
recorded through the income statement) amounting to a loss of $1,201,000 for the
three months ended June 30, 2000 compared to income of $2,319,000 for the three
months ended June 30, 1999, reflecting a loss in one partnership primarily from
technology issues. PXRE's pre-tax annualized investment yield was 5.1% for the
second quarter of 2000 compared with 9.6% for the corresponding quarter in 1999,
both calculated using amortized cost and investment income before investment
expenses. Net realized investment gains for the second quarter of 2000 were
$74,000 compared to gains of $1,193,000 in the second quarter of 1999.
The net effect of foreign currency exchange fluctuations were losses of
$49,000 in the second quarter of 2000, compared to losses of $96,000 for 1999.
For the reasons discussed above, net loss was $23,527,000 for the three
months ended June 30, 2000 compared to net income of $5,046,000 for the
comparable period of 1999. The diluted loss per common share was $2.07 for the
second quarter of 2000 compared to a net income per share of $0.44 for the
second quarter of 1999, based on diluted average shares outstanding of
approximately 11,383,000 in 2000 and 11,585,000 in 1999.
23
<PAGE>
COMPARISON OF YEAR-TO-DATE RESULTS FOR
2000 WITH 1999
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
Increase
2000 1999 (Decrease)
---- ---- ----------
(000's) %
<S> <C> <C> <C>
Gross premiums written $152,966 $101,452 50.8
Ceded premiums:
Managed business participants 34,005 12,684 168.1
Catastrophe coverage and
surplus reinsurance 18,363 21,167 (13.2)
-------- --------
Total reinsurance premiums ceded 52,368 33,851 54.7
-------- --------
Net premiums written $100,598 $ 67,601 48.8
======== ========
</TABLE>
Gross premiums written for the first six months of 2000 increased 50.8%
to $152,966,000 from $101,452,000 for the comparable period of 1999. Net
premiums written for the six months ended June 30, 2000 increased 48.8% to
$100,598,000 from $67,601,000 for the corresponding period of 1999. Net premiums
earned for the first six months of 2000 increased 51.1% to $79,381,000 from
$52,525,000 in the corresponding period of 1999. Gross written, net written and
net earned premium for the six months ended June 30, 2000 increased from
prior-year levels reflecting new international, casualty and direct writing
business written by PXRE's new teams of underwriters as well as one
retrospectively rated finite contract written amounting to $20,024,000 gross
premiums written. $10,012,000 of ceded premiums written and net premiums written
and earned of $10,012,000. PXRE's decision to buy additional retrocessional
coverage reduced the level of increase in net written and net earned premium.
Underwriting results related to PXRE Lloyd's Syndicate are included in the
consolidated results on a one-quarter lag basis through the end of the third
quarter of 1999.
PXRE decided during the first quarter of 2000 to withdraw from the
excess and surplus lines and property facultative markets. These units were
unable to write the planned amounts of profitable, complementary non-catastrophe
business without adding unacceptable amounts of uncapped catastrophe exposure.
Net premiums earned on this business were not material in 1999.
Catastrophe written premiums ceded decreased due to PXRE fronting less
business on behalf of other reinsurers offset by additional retrocessional
coverage purchases.
Premiums ceded by PXRE to its managed business participants increased
168.1% to $34,005,000 for the first six months of 2000 compared with $12,684,000
for the corresponding period of 1999. The increase in premiums ceded to these
programs was due primarily to increased amounts of premiums written by PXRE as
well as the cession of 50% of the finite transaction mentioned earlier.
24
<PAGE>
The following tables summarize the net written and earned premium by
PXRE's business segments for the six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Net Premiums Written Six Months Ended
($000's) June 30, June 30,
2000 % 1999 %
---- --- ---- ---
<S> <C> <C> <C> <C>
Catastrophe and Risk Excess
North American $ 9,257 $ 8,692
International 40,806 33,084
Excess of loss cessions (6,783) (7,065)
-------- -------
Subtotal 43,280 43.0 34,711 51.4
-------- -------
Casualty
North American 13,300 9,852
International 6,532 5,172
-------- -------
19,832 19.7 15,024 22.2
-------- -------
Structured/Finite Business
North American 0 0
International 17,925 0
-------- -------
17,925 17.8 0 0.0
-------- -------
Other Lines
North American 24 4,172
International 19,537 13,694
-------- -------
19,561 19.5 17,866 26.4
-------- ---- ------- ----
Total $100,598 100% $67,601 100%
======== ==== ======= ====
<CAPTION>
Net Premiums Earned Six Months Ended
($000's) June 30, June 30,
2000 % 1999 %
---- --- ---- ---
<S> <C> <C> <C> <C>
Catastrophe and Risk Excess
North American $ 9,542 $ 8,472
International 37,020 26,942
Excess of loss cessions (9,950) (5,339)
-------- -------
Subtotal 36,612 46.1 30,075 57.3
-------- -------
Casualty
North American 8,554 5,599
International 4,312 2,937
-------- -------
12,866 16.2 8,536 16.3
-------- -------
Structured/Finite Business
North American 0 0
International 12,582 0
-------- -------
12,582 15.9 0 0.0
-------- -------
Other Lines
North American 465 4,310
International 16,856 9,604
-------- -------
17,321 21.8 13,914 26.4
-------- ---- -------
Total $ 79,381 100% $52,525 100%
======== ==== ======= ====
</TABLE>
25
<PAGE>
Management fee income from all sources for the six months ended June
30, 2000 increased 174.8% to $3,573,000 from $1,300,000 for the corresponding
period of 1999 reflecting higher premiums ceded to managed business
participants.
The loss ratio was 116.3% for the six months ended June 30, 2000
compared with 70.2% for the corresponding period of 1999 largely due to French
storms Lothar and Martin. The loss ratio for the first half of 2000 reflected
incurred catastrophe losses of $69,417,000 gross and $48,912,000 net for the
2000 and prior accident years. The loss ratio for the corresponding period of
1999 reflected incurred catastrophe losses of $23,786,000 gross and $13,428,000
net for the 1999 and prior accident years.
Significant catastrophe losses affecting the six months ended June 30,
2000 loss ratio are as follows:
<TABLE>
<CAPTION>
Amount of Losses
-----------------
Loss Event Gross Net
---------- ----- ---
(000's)
<S> <C> <C>
French Storm Lothar $28,443 $19,033
French Storm Martin 25,588 18,806
Hurricane Lenny 4,936 3,256
Taiwan Earthquake 4,729 2,547
Hurricane Georges 2,648 2,357
Hurricane Floyd 1,852 1,975
</TABLE>
Significant catastrophe losses affecting the six months ended June 30,
1999 loss ratio are as follows:
<TABLE>
<CAPTION>
Amount of Losses
----------------
Loss Event Gross Net
---------- ----- ---
(000's)
<S> <C> <C>
Hurricane Georges $13,834 $9,319
One Risk Loss 4,880 2,044
Hurricane Mitch 2,529 1,329
</TABLE>
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 $59,000 for the first
six months of 2000 compared to a gain of $531,000 for the corresponding period
of 1999.
During 2000, PXRE experienced adverse development of $51,756,000 net
for prior-year loss and loss expenses primarily related to the French Storms
Lothar and Martin. The loss ratio for the comparable period of 1999 experienced
adverse development of $14,105,000 net for prior-year loss and loss expenses
primarily related to Hurricane Georges and Mitch.
The underwriting expense ratio was 39.8% for the six months ended June
30, 2000 compared with 46.8% for the comparable period of 1999. The expense
ratio reflects higher commissions from new business as well as an increase in
salary and benefits incurred in building the diversified business. The
commission and brokerage ratio net of management fee was 16.6% in the first half
of 2000, compared with 21.4% in the prior year period reflecting higher
management fees in the current
26
<PAGE>
period. The operating expense ratio was 23.2% in the first half of 2000,
compared to 25.4% in the year earlier period, due to higher premiums earned. The
combined ratio was 156.1% for the first six months of 2000 compared with 117.0%
for the corresponding period of 1999.
The following tables summarize the underwriting (loss) and profit by
segment for the six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Underwriting Six Months Ended
($000's) June 30, June 30,
2000 % 1999 %
---- --- ---- ---
<S> <C> <C> <C> <C>
Catastrophe and Risk Excess
North American $ 6,027 $ 806
International (20,182) 5,474
Excess of loss cessions (3,424) (2,388)
-------- -------
Subtotal (17,579) 65.7 3,892 90.7
-------- -------
Casualty
North American (595) (329)
International (1,063) 133
-------- -------
(1,658) 6.2 (196) (4.6)
-------- -------
Structured/Finite Business
North American 0 0
International 358 0
-------- -------
358 (1.3) 0 0.0
-------- -------
Other Lines
North American (2,137) 383
International (5,759) 213
-------- -------
(7,896) 29.4 596 13.9
-------- ----
------- ----
Total $(26,775) 100% $ 4,292 100%
======== ==== ======= ====
</TABLE>
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 or syndicate agency management.
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.
Other operating expenses increased to $18,398,000 for the six months
ended June 30, 2000 from $13,318,000 in the comparable period of 1999. The
increase was primarily related to salaries and benefits associated with PXRE's
new underwriting teams as part of the planned diversification efforts as well
amortization of negative goodwill in 1999 that did not continue in 2000.
Included in other operating expenses were foreign currency exchange losses of
$61,000 for the first six months of 2000 compared to losses of $632,000 for the
corresponding period of 1999.
27
<PAGE>
During the first six months of 2000, interest expense increased to
$2,429,000 compared to $1,674,000 in the corresponding period in 1999. The
increase in interest expenses relates to a drawdown of $25,000,000 principal
balance in the fourth quarter 1999. The variable annual interest rate on this
portion was 7.28% at June 30, 2000. This is part of PXRE's Credit Agreement with
a syndicate of lenders (as described under "Liquidity and Capital Resources").
In addition, in the first six months of 2000 PXRE incurred minority interest
expense amounting to $4,437,000 related to the $100 million of 8.85% Capital
Trust Pass-through Securities `sm' (TRUPS `sm') (as described below under
"Liquidity and Capital Resources") compared to $4,327,000 in the similar period
of 1999.
Net investment income for the six months ended June 30, 2000 decreased
2.4% to $17,682,000 from $18,123,000 for the same period of 1999. The decrease
in net investment income in the six months ended June 30, 2000 was caused
primarily by the non hedge portion of the limited partnership investments and
trading portfolio, (which are carried on the equity method or as a trading
portfolio, for which the unrealized gains and losses in each case are recorded
through the income statement) amounting to an income of $402,000 for the six
months ended June 30, 2000 compared to $1,689,000 for the six months ended June
30, 1999, reflecting a loss in one partnership primarily from technology issues.
PXRE's pre-tax annualized investment yield was 7.3% for the six months ended
June 30, 2000 compared with 8.2% for the corresponding period in 1999, both
calculated using amortized cost and investment income before investment
expenses. Net realized investment losses for the first six months of 2000 were
$462,000 compared to losses of $1,383,000 for the corresponding period of 1999
reflecting losses from trading of weather contracts in the first quarter of 1999
offset, in part, by net gains from sale of securities.
The net effects of foreign currency exchange fluctuations were losses
of $2,000 in the six months ended June 30, 2000, compared to losses of $101,000
for the comparable period of 1999.
For the reasons discussed above, net loss was $19,519,000 for the six
months ended June 30, 2000 compared to net income of $2,284,000 for the
corresponding period of 1999. Diluted net loss per common share was $1.71 for
the six months ended June 30, 2000 compared to net income of $0.19 for the
corresponding period of 1999 based on diluted average shares outstanding of
approximately 11,384,000 in the first six months of 2000 and 11,809,000 in the
comparable period of 1999. The decrease in shares outstanding was due to a share
repurchase program.
LIQUIDITY AND CAPITAL RESOURCES
PXRE relies primarily on cash dividends and net tax allocation payments
from its subsidiaries, including PXRE Reinsurance, Transnational Insurance 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 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, and that Transnational Insurance may declare or pay to PXRE
Reinsurance, within any twelve-month
28
<PAGE>
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 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
2000, without regulatory approval, is $39,901,000. Transnational Insurance may
not declare or pay any dividend to PXRE Reinsurance in 2000 without regulatory
approval. During the first six months of 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. PXRE Bermuda is also required to maintain statutory assets in an
amount that permits it to meet the prescribed minimum solvency margin for the
net premium income level of its business from time to time. In addition, any
dividend paid cannot be in an amount that will reduce the reserves of PXRE
Bermuda to a level that is not sufficient to meet the reserve requirements of
its business.
Dividends and other permitted payments from PXRE Delaware to PXRE
Barbados are expected to be subject to U.S. withholding taxes at the rate of 5%
(reduced from 30% under the tax convention between the United States and
Barbados) and a 2.5% Barbados corporate income tax.
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 Transnational Insurance) 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 at all. In the
event that PXRE 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 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.
PXRE Delaware entered into a Credit Agreement dated as of December 30,
1998 (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
29
<PAGE>
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.
The terms of the Credit Agreement have been amended four times. The
First Amendment increased the applicable margin percentage for LIBOR loans under
the Credit Agreement by 1/8% and changed the governing law from North Carolina
to New York law. The Second Amendment modified various covenants related to the
investments that PXRE and its subsidiaries are permitted to make under the
Credit Agreement. The First Amended and Restated Credit Agreement was undertaken
to address the Bermuda redomestication and to provide for PXRE Group Ltd. and
PXRE (Barbados) Ltd. as guarantors of the loan obligation. The First Amendment
to the First Amended and Restated Credit Agreement clarified certain
definitions.
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%) as of June 30, 2000, 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 which at June 30, 2000 was 7.28%.
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
(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 companies' investment policies 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 unrelated
business; (h) to enter into or remain a party to certain ceded reinsurance
agreements; or (i) to consolidate, merge or otherwise combine (or agree to do
any of the foregoing) unless, among other things, (1) PXRE Group Ltd. 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 compliance with Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based
Capital
30
<PAGE>
Ratio and Combined Statutory Surplus requirements. As at June 30, 2000, there
was no default under the Credit Agreement.
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 Group Ltd. representing 20% or more of the combined voting
power of the then outstanding securities of PXRE Group Ltd. ordinarily having
the right to vote in the election of directors; or (2) the Board of Directors of
PXRE Group Ltd. ceases to consist of a majority of the individuals who
constituted the Board as of the date of the Credit Agreement or who subsequently
become members after having been nominated, or otherwise approved in writing, by
at least a majority of individuals who constituted the Board as of the date of
the Credit Agreement (or their approved replacements).
On January 29, 1997, PXRE Capital Trust I ("PXRE Capital Trust"), a
Delaware statutory business trust and a wholly-owned subsidiary of PXRE
Delaware, 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 Delaware's 8.85% Junior
Subordinated Deferrable Interest Debentures due February 1, 2027 (the
"Subordinated Debt Securities"). On April 23, 1997, PXRE Delaware 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 the six months ended
June 30, 2000 in respect of the Capital Securities (and related Subordinated
Debt Securities) amounted to $4,437,000. On or after February 1, 2007, PXRE
Delaware 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 Delaware 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 Delaware's extension of any 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
Delaware exercises its right to extend an interest payment period, then during
any Extension Period, subject to certain exceptions, (i) PXRE Delaware may 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 Delaware may 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 Delaware 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 Delaware may commence a new Extension Period, subject to
certain requirements.
31
<PAGE>
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.
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).
The primary sources of liquidity for PXRE's principal operating
subsidiaries are net cash flow from operating activities (including interest
income from investments), the maturity or sale of investments, borrowings,
capital contributions and advances and in the case of PXRE Reinsurance,
dividends (to the extent allowed) from Transnational Insurance. Funds are
applied primarily to the payment of claims, operating expenses, income taxes and
to the purchase of investments. Premiums are typically received in advance of
related claim payments.
Net cash flow used by operations was $9,977,000 during the second
quarter of 2000 compared with net cash flow provided by operations of $6,261,000
during the corresponding period of 1999, due to the effects of timing of
collection of receivables and reinsurance recoverables and payments of losses.
Dividends declared in the second quarter of 2000 were $707,000 compared
to $3,056,000 in the corresponding period of 1999, as a result of the decrease
in the per share quarterly dividend from $0.26 to $0.06 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 June 30,
2000 is approximately $2,824,000.
Book value per common share was $20.89 at June 30, 2000.
In December 1999, PXRE announced a new stock repurchase program of up
to 1,000,000 shares. PXRE had approximately 11,766,265 common shares outstanding
as of June 30, 2000.
PXRE may be subject to gains and losses resulting from currency
fluctuations because 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
32
<PAGE>
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 $46,584,000 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.
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.
All amounts classified as reinsurance recoverable at June 30, 2000 are
considered by management of PXRE to be collectible in all material respects.
MARKET RISK
PXRE has reviewed the change in its exposure to market risks
since December 31, 1999. The components of PXRE's holdings in derivatives and
other financial instruments have not materially changed. PXRE's risk management
strategy and objectives have not materially changed. PXRE believes that the
potential for loss in each market risk sector described at year-end has not
materially changed; however, PXRE has sold its remaining exposures to emerging
market bonds and reduced its equity holdings, thereby reducing credit, market
and interest risk further from 1999 year end levels. PXRE's potential for loss
on its trading portfolio has not materially changed since year end.
PXRE has observed significant changes in volatility across
many markets during the past six months. The potential loss estimate at June 30,
2000 may not reflect the level of loss PXRE could experience under certain
circumstances in this market.
INCOME TAXES
PXRE recognized a tax benefit of $14,739,000 in the second quarter of
2000 compared to tax expense of $1,918,000 in the corresponding period of 1999.
The tax benefit in 2000 differed from the statutory rate primarily due to
underwriting losses, tax exempt income and the dividends received deduction. The
tax expense reported in 1999 differed from the statutory rate primarily
attributable to tax exempt income and the amortization of negative goodwill.
CONTINGENCIES
Lloyd's of London regulators have imposed additional capital
requirements on PXRE Managing Agency, PXRE Lloyd's Syndicate and three other
syndicates managed by PXRE Managing Agency, and have restricted their ability to
expand their respective businesses, effective for the 2001 year of account.
Management of PXRE believes these actions by Lloyd's regulators are
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unwarranted and will endeavor to have the additional requirements and
restrictions lifted as soon as practicable as they could adversely impact PXRE's
ability to compete in the Lloyd's of London market. No assurance can be given
that PXRE will be successful in such endeavors.
PXRE entered into weather option agreements in May 1999 with two
counterparties. In April 2000 these counter parties submitted invoices to PXRE
Delaware in the aggregate sum of $8,252,500 seeking payment under the weather
option agreements, which invoices have been paid. PXRE Delaware insured its
obligations under these weather option agreements through two Commercial Inland
Marine Weather Insurance Policies issued by Terra Nova Insurance Company Limited
("Terra Nova"). PXRE Delaware submitted claims under these policies to Terra
Nova in April 2000. Terra Nova has denied coverage, contending that its Managing
General Agent had no authority to issues these policies. PXRE Delaware disagrees
with Terra Nova's denial and will pursue its available legal remedies to collect
the sums due under these policies.
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)
significant catastrophe losses or losses under other coverages, the timing and
extent of which are difficult to predict; (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 intensification 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; (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 and potential underperformance
in PXRE's structured/finite coverages; (viii) decreases in interest rates
causing a reduction of income earned on net cash flow from operations and the
reinvestment of the proceeds from sales, calls or maturities of existing
investments and short falls in cash flows necessary to pay fixed rate amounts
due to structured contract counterparties; (ix) market fluctuations in equity
securities and with respect to PXRE's portfolio of hedge funds
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and other privately held securities: leverage, concentration of investments,
lack of liquidity, market fluctuations and direction (including as a result of
interest rate fluctuations and direction, with respect to price levels and
volatility thereof) currency fluctuations, credit risk, yield curve risk, spread
risk between two or more similar securities, political risk, counterparty risk
and risks relating to settlements on foreign exchanges; (x) foreign currency
fluctuations resulting in exchange gains or losses; (xi) changes in the
composition of PXRE's investment portfolio; and (xii) changes in tax laws, tax
treaties, tax rules and interpretations.
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 state, federal or foreign legislation and regulation,
adverse publicity or news coverage, changes in general economic factors and the
loss of key employees.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At PXRE's Annual Meeting of Shareholders held on May 16, 2000, the holders
of Common Shares of PXRE approved the following:
(i) The election of three Class II directors to serve until the
2003 Annual Meeting of Shareholders and until their successors
have been elected and have qualified:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
Robert W. Fiondella 7,954,817 807,154
Philip R. McLoughlin 8,533,117 228,854
Wilson Wilde 8,533,018 228,953
</TABLE>
(ii) The appointment of PricewaterhouseCoopers as PXRE's
independent auditors for the fiscal year ending December 31,
2000, and referral to the Board of the determination of their
remuneration by the vote of 8,596,859 votes for, 161,612 votes
against.
(iii) The adoption of amendments to the PXRE Employee Annual
Incentive Bonus Plan, by the vote of 3,126,819 votes for,
2,480,754 votes against.
(iv) The adoption of amendments to the PXRE 1992 Officer Incentive
Plan by a vote of 2,915,332 votes for, 2,541,891 votes
against.
(v) The adoption of amendments to the PXRE Employee Stock Purchase
Plan by a vote of 5,438,702 votes for, 168,022 votes against.
(vi) The adoption of amendments to the PXRE Director Stock Option
Plan by a vote of 5,239,328 votes for, 2,426,955 votes
against.
(vii) The adoption of amendments to the PXRE Director Equity and
Deferred Compensation Plan by a vote of 5,447,186 votes for,
2,370,147 votes against.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report or amendment thereto to be signed on its
behalf by the undersigned thereunto duly authorized.
PXRE GROUP LTD.
August 14, 2000 By:\s\ James F. Dore
-----------------
James F. Dore
Executive Vice President
and Chief Financial Officer
37
