<PAGE>
<PAGE>
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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 SEPTEMBER 30, 1996
___________________
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 0-15428
PXRE CORPORATION
(FORMERLY PHOENIX RE CORPORATION)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1183996
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
399 THORNALL STREET
EDISON, NEW JERSEY 08837
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(908) 906-8100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 November 13, 1996, 8,268,150 shares of common stock, $.01 par
value per share, of the Registrant were outstanding.
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<PAGE>
<PAGE>
PXRE CORPORATION
INDEX
<TABLE>
PART I. FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets at September 30, 1996
and December 31, 1995 3
Consolidated Statements of Income for the three and
nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity for the three and
nine months ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flow for the three and
nine months ended September 30, 1996 and 1995 6
Notes to Consolidated Interim Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION 25
2
<PAGE>
<PAGE>
PXRE Consolidated Balance Sheets
Corporation (Unaudited)
- --------------------------------------------------------------------------------
September 30, December 31,
1996 1995
---- ----
<S> <C> <C> <C>
Assets Investments:
Fixed maturities, available for sale, at fair value (amortized
cost $232,249,000 and $216,348,000, respectively) $ 229,948,303 $ 221,356,767
Equity securities, at fair value (cost $6,447,000 and $5,000,000) 7,073,543 5,172,428
Short-term investments 19,407,202 41,721,656
-------------- --------------
Total investments 256,429,048 268,250,851
Cash 8,462,212 838,548
Accrued investment income 4,069,370 3,343,505
Receivables:
Unreported premiums 17,219,628 23,376,727
Balances due from intermediaries and brokers 5,916,878 6,335,593
Other receivables 5,260,373 4,175,443
Reinsurance recoverable: TREX 13,263,663 8,966,592
Non-affiliates 20,143,236 25,130,816
Ceded unearned premiums 7,858,440 5,433,030
Deferred acquisition costs 1,741,237 1,564,926
Income tax recoverable 2,500,927 479,473
Investment in equity of TREX 38,439,176 36,003,384
Receivable from TREX 292,450 446,799
Other assets 8,946,525 9,119,750
-------------- --------------
Total assets $390,543,163 $ 393,465,437
============== ==============
Liabilities Losses and loss expenses $ 65,175,662 $ 72,718,914
Unearned premiums 19,667,755 13,685,391
Reinsurance balances payable: TREX 6,387,121 5,647,532
Non-affiliates 7,006,461 8,698,862
Notes payable 64,725,000 67,775,000
Deferred income tax payable 1,347,369 3,653,102
Payable for securities 0 2,496,232
Other liabilities 5,523,600 7,628,228
-------------- --------------
Total liabilities 169,832,968 182,303,261
-------------- --------------
Stockholders' Serial preferred stock, $.01 par value --
equity 500,000 shares authorized; 0 shares issued and outstanding 0 0
Common stock, $.01 par value --
20,000,000 shares authorized; 9,017,851 and 8,983,896 shares issue 90,179 89,839
Additional paid-in capital 118,540,350 117,668,048
Net unrealized (depreciation) appreciation on investments, net of
deferred income tax (benefit) expense of ($586,000) and $1,813,000 (1,112,354) 3,782,500
Retained earnings 111,258,486 91,882,834
Treasury stock at cost (462,476 and 238,755 shares) (7,320,739) (1,719,459)
Restricted stock at cost (53,279 and 34,000 shares) (745,727) (541,586)
-------------- --------------
Total stockholders' equity 220,710,195 211,162,176
-------------- --------------
Total liabilities and stockholders' equity $ 390,543,163 $ 393,465,437
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
<PAGE>
PXRE Consolidated Statements of Income
Corporation (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Revenues Net premiums earned $ 17,793,201 $ 24,320,379 $54,312,964 $73,018,528
Net investment income 4,065,756 3,874,380 12,175,914 10,805,037
Net realized investment (losses) gains (44,575) 282,068 (220,264) (486,212)
Management fees : TREX 674,342 924,618 2,016,103 2,596,881
Non-affiliate 868,581 730,669 3,266,320 2,406,821
------------ ------------ ----------- -----------
23,357,305 30,132,114 71,551,037 88,341,055
------------ ------------ ----------- -----------
Losses and Losses and loss expenses incurred 6,072,159 12,050,871 15,172,580 27,051,454
expenses Commissions and brokerage 3,015,707 3,159,969 9,654,928 9,726,620
Other operating expenses 2,623,326 3,007,294 9,149,658 8,068,649
Interest expense 1,713,471 1,891,543 5,317,709 5,423,472
------------ ------------ ----------- -----------
13,424,663 20,109,677 39,294,875 50,270,195
------------ ------------ ----------- -----------
Income before income taxes and equity in net
earnings of TREX 9,932,642 10,022,437 32,256,162 38,070,860
Equity in net earnings of TREX 1,159,611 1,406,155 3,143,731 4,451,849
Income tax provision 3,477,000 3,555,000 11,290,000 13,325,000
------------ ------------ ----------- -----------
Net income $ 7,615,253 $ 7,873,592 $24,109,893 $29,197,709
============ ============ =========== ===========
Preferred stock dividend $ 0 $ 0 $ 0 $ 598,928
============ ============ =========== ===========
Operating income available to common
stockholders $ 7,615,253 $ 7,873,592 $24,109,893 $28,598,781
============ ============ =========== ===========
Per share Primary:
Net income $ 0.86 $ 0.89 $ 2.73 $ 3.54
============ ============ =========== ===========
Average shares outstanding 8,820,090 8,860,923 8,844,660 8,077,213
============ ============ =========== ===========
Fully diluted:
Net income $ 0.86 $ 0.89 $ 2.72 $ 3.29
============ ============ =========== ===========
Average shares outstanding 8,820,090 8,887,193 8,851,023 8,877,290
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
<PAGE>
PXRE Consolidated Statements of Stockholders' Equity
Corporation (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Common stock: Balance at beginning of period $ 90,164 $ 89,616 $ 89,839 $ 69,216
Issuance of shares 15 214 340 20,614
------------ ------------ ------------ ------------
Balance at end of period $ 90,179 $ 89,830 $ 90,179 $ 89,830
============ ============ ============ ============
Preferred stock: Balance at beginning of period $ 0 $ 0 $ 0 $ 100
Conversion of shares $ 0 $ 0 $ 0 $ (100)
------------ ------------ ------------ ------------
Balance at end of period $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============
Paid-in capital: Balance at beginning of period $118,509,473 $117,292,178 $117,668,048 $116,888,369
Issuance of common shares 30,877 261,798 715,175 674,956
Conversion of preferred shares 0 0 0 (20,260)
Other 0 96,159 157,127 107,070
------------ ------------ ------------ ------------
Balance at end of period $118,540,350 $117,650,135 $118,540,350 $117,650,135
============ ============ ============ ============
Unrealized Balance at beginning of period ($ 1,568,130) $ 1,102,208 $ 3,782,500 ( $5,976,354)
appreciation Change in fair value for the period 389,537 280,672 (4,455,868) 6,479,010
(depreciation) Equity in net change in TREX
on investments: appreciation (depreciation) 66,239 133,098 (438,986) 1,013,322
------------ ------------ ------------ ------------
Balance at end of period ($ 1,112,354) $ 1,515,978 ($ 1,112,354) $1,515,978
============ ============ ============ ============
Retained earnings: Balance at beginning of period $105,220,515 $ 76,306,357 $ 91,882,834 $ 57,933,848
Net income 7,615,253 7,873,592 24,109,893 29,197,709
Dividends paid to common stockholders (1,577,282) (1,310,778) (4,734,241) (3,663,458)
Dividends accrued to preferred stockholders 0 0 0 (598,928)
------------ ------------ ------------ ------------
Balance at end of period $111,258,486 $ 82,869,171 $111,258,486 $ 82,869,171
============ ============ ============ ============
Restricted stock: Balance at beginning of period ($ 860,619) ($ 681,410) ($ 541,586) ($ 283,550)
Issuance of restricted stock 0 0 ( 501,027) (499,005)
Amortization of restricted stock 114,892 69,912 296,886 171,057
------------ ------------ ------------ ------------
Balance at end of period ($ 745,727) ($ 611,498) ($ 745,727) ($ 611,498)
============ ============ ============ ============
Treasury stock: Balance at beginning of period ($ 2,177,714) ($ 1,719,459) ($ 1,719,459) ($ 1,860,687)
Repurchase of common stock (5,143,025) 0 (5,768,025) 0
Issuance of treasury stock 0 0 166,745 141,228
------------ ------------ ------------ ------------
Balance at end of period ($ 7,320,739) ($ 1,719,459) ($ 7,320,739) ($ 1,719,459)
============ ============ ============ ============
Total Balance at beginning of period $219,213,689 $192,389,490 $211,162,176 $166,770,942
stockholders' Issuance of common shares 30,892 262,012 715,515 695,570
equity: Conversion of preferred stock 0 0 0 (20,360)
Issuance of treasury stock 0 0 166,745 141,228
Repurchase of common stock (5,143,025) 0 (5,768,025) 0
Restricted stock 114,892 69,912 (204,141) (327,948)
Unrealized appreciation (depreciation)
on investments net of deferred income tax 455,776 413,770 (4,894,854) 7,492,332
Net income 7,615,253 7,873,592 24,109,893 29,197,709
Dividends (1,577,282) (1,310,778) (4,734,241) (4,262,386)
Other 0 96,159 157,127 107,070
------------ ------------ ------------ ------------
Balance at end of period $220,710,195 $199,794,157 $220,710,195 $199,794,157
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
<PAGE>
PXRE Consolidated Statements of Cash Flow
Corporation (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C> <C>
Cash flow Net income $7,615,253 $7,873,592 $24,109,893 $29,197,709
from operating Adjustments to reconcile net
activities income to net cash provided
by operating activities:
Losses and loss expenses (1,333,491) 997,332 (7,543,252) (5,684,535)
Unearned premiums 3,989,857 4,495,069 3,556,954 9,503,587
Deferred acquisitions costs (502,455) (575,489) (176,311) (1,379,829)
Receivables 1,805,774 4,028,013 5,645,233 (3,816,254)
Reinsurance balances payable (697,260) 3,023,670 (952,812) (147,086)
Reinsurance recoverable (307,426) 2,563,220 690,509 9,347,422
Income tax recoverable/payable 1,198,881 (1,167,989) (516,959) (1,875,420)
Equity in net earnings of TREX (1,064,751) (1,365,110) (2,874,777) (4,357,155)
Other (1,545,053) (1,335,035) (3,063,211) (4,253,155)
Net cash provided by operating ---------- ---------- ----------- -----------
activities 9,159,329 18,537,273 18,875,267 26,535,284
---------- ---------- ----------- -----------
Cash flow Cost of fixed maturity investments (35,820,983) (23,859,953) (66,014,903) (101,575,297)
from investing Fixed maturity investments
activities matured/disposed 36,707,441 9,400,487 49,748,611 101,366,386
Payable for securities 0 10,638,750 (2,496,232) 10,638,750
Cost of equity securities (1,447,250) (3,000,000) (1,447,250) (3,000,000)
Investment in joint venture 0 0 0 (2,000,000)
Net change in short-term
investments 3,574,616 (9,810,967) 22,314,454 (23,681,189)
---------- ---------- ---------- -----------
Net cash provided (used) by
investing activities 3,013,824 (16,631,683) 2,104,680 (18,251,350)
---------- ---------- ---------- -----------
Cash flow Proceeds from issuance of common
from financing stock 30,892 262,012 381,233 317,444
activities Cash dividends paid to preferred
stockholders 0 0 0 (933,061)
Cash dividends paid to common
stockholders (1,577,282) (1,310,731) (4,734,241) (3,663,458)
Repurchase of debt (794,375) (2,016,188) (3,235,250) (2,016,188)
Cost of treasury stock (5,143,025) 0 (5,768,025) 0
----------- ----------- ----------- -----------
Net cash used by financing
activities (7,483,790) (3,064,907) (13,356,283) (6,295,263)
----------- ----------- ----------- -----------
Net change in cash 4,689,363 (1,159,317) 7,623,664 1,988,671
Cash, beginning of period 3,772,849 3,537,237 838,548 389,249
---------- ----------- ----------- -----------
Cash, end of period 8,462,212 $ 2,377,920 $ 8,462,212 $2,377,920
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE>
<PAGE>
PXRE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Corporation
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP").
These statements reflect the consolidated operations of PXRE Corporation and its
subsidiaries PXRE Reinsurance Company ("PXRE Reinsurance") and PXRE Trading
Corporation (collectively referred to as "PXRE"). All material transactions
between the consolidated companies have been eliminated in preparing these
financial statements.
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 period. These
interim statements should be read in conjunction with the 1995 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.
2. PREMIUMS ASSUMED AND CEDED
Premiums on reinsurance business assumed are recorded as earned on a pro
rata basis over the contract period based on estimated subject premiums.
Adjustments based on actual and subject premium are recorded once ascertained.
The portion of premiums written relating to unexpired coverages at the end of
the period is recorded as unearned premiums. Reinsurance premiums ceded are
recorded as incurred on a pro rata basis over the contract period.
3. LOSSES AND LOSS EXPENSE LIABILITIES
Liabilities for losses and loss expenses are established in amounts
estimated to settle incurred losses. Losses and loss expense liabilities are
based on individual case estimates provided for reported losses for known events
and estimates of incurred but not reported losses. Losses and loss expense
liabilities are necessarily based on estimates and the ultimate liabilities may
vary from such estimates primarily because of the significant delay in losses
being reported to insurance carriers and reinsurers, such as PXRE. Any
adjustments to these estimates are reflected in income when known. Reinsurance
recoverable on paid losses and reinsurance recoverable on unpaid losses are
reported as assets.
7
<PAGE>
<PAGE>
PXRE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Corporation
- --------------------------------------------------------------------------------
Reinsurance recoverable on paid losses represent amounts recoverable from
retrocessionaires at the end of the period for gross losses previously paid.
Provisions are established for all reinsurance recoveries which are considered
doubtful.
4. INVESTMENTS
Fixed maturity investments and unaffiliated equity securities are
considered available for sale and are reported at fair value. Unrealized gains
and losses as a result of temporary changes in fair value over the period such
investments are held are reflected net of income taxes in stockholders' equity.
Unrealized losses which are not temporary are charged to operations. Short-term
investments are carried at amortized cost which approximates fair value.
Realized gains or losses on disposition of investments are determined on the
basis of specific identification. The amortization of premiums and accretion of
discounts for fixed maturity investments are computed utilizing the interest
method. The effective yield under the interest method is adjusted for
anticipated prepayments.
Investments in affiliated companies (20% to 50% owned) are accounted for
under the equity method.
5. MANAGEMENT FEES
Management fees are recorded as earned under various arrangements,
whereby PXRE Reinsurance Company acts as underwriting manager for other insurers
and reinsurers. These fees are initially based on premium volume, but are
adjusted through contingent profit commissions related to underwriting results
measured over a period of years.
6. DEFERRED ACQUISITION COSTS
Acquisition costs consist of commissions and brokerage expenses incurred
in connection with contract issuance, net of acquisition costs ceded. These
costs are deferred and amortized over the period in which the related premiums
are earned. Deferred acquisition costs are reviewed periodically to determine
that they do not exceed recoverable amounts after allowing for anticipated
investment income.
8
<PAGE>
<PAGE>
PXRE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Corporation
- --------------------------------------------------------------------------------
7. TREASURY STOCK
In April 1995, PXRE was authorized to repurchase up to 700,000 shares of
its stock. From inception of this repurchase plan through September 30, 1996,
PXRE repurchased 243,000 of the 700,000 shares authorized at a cost of
$5,768,000.
8. PROPOSED TRANSACTION
PXRE and Transnational Re Corporation ("Transnational Re") announced on
August 22, 1996 that they had signed a definitive Agreement and Plan of Merger,
pursuant to which Transnational Re will merge with and into PXRE. After the
merger, which is designed to be on a tax-free basis, is consummated,
Transnational Re will cease to exist and PXRE will continue as the surviving
corporation. As a result of the merger, Transnational Re's reinsurance
subsidiary, Transnational Reinsurance, will become a subsidiary of PXRE
Reinsurance Company, the reinsurance underwriting subsidiary of PXRE.
Under the merger agreement, each share of common stock of Transnational
Re will be exchanged for 1.0575 shares of PXRE common stock and cash in lieu of
fractional shares.
Proxy materials related to the proposed merger of Transnational Re with
and into PXRE were mailed to stockholders on or about November 1, 1996, in
anticipation of a special meeting to be held on December 9, 1996, to consider
the merger. PXRE currently expects to complete the merger before year end,
subject to stockholder and regulatory approval as well as certain other
customary conditions.
It is anticipated that the merger will be accounted for as a purchase
transaction.
9
<PAGE>
<PAGE>
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Corporation FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
PXRE provides reinsurance products and services to a domestic and
international marketplace, with principal emphasis on commercial and personal
property risks and marine and aviation risks, and with a particular focus on
catastrophe related coverages.
PXRE exercises discipline in committing and withholding its underwriting
capacity and altering its mix of business to concentrate its underwriting
capacity at any given point in time on those types of businesses where
management believes that above average underwriting results can be achieved.
PXRE has been pursuing a strategy of focusing on catastrophe related coverages
in both the international and domestic markets.
PXRE also generates management fee income by managing business for other
insurers and reinsurers, either by accepting additional amounts of coverage on
underwritten risks and retroceding such additional amounts to participants
through various retrocessional arrangements or, in one case, by managing the
underwriting and other day-to-day operations of a publicly-owned reinsurance
group.
At September 30, 1996, PXRE was a party to three such retrocessional
arrangements. One such arrangement is with a group of insurers and reinsurers
referred to as the AMA, another is with Trenwick America Reinsurance Corporation
("Trenwick Group") and a third arrangement is with Investors Reinsurance Ltd.
("Investors Re"), a Barbados company. Under these arrangements which were
renewed or commenced effective January 1, 1996, PXRE cedes some of its
underwritten risks to the participants, subject to maximum aggregate liabilities
per reinsurance program (approximately $1,200,000 in the case of the AMA,
approximately $3,000,000 in the case of Trenwick Group and $620,000 in the case
of Investors Re). PXRE receives a management fee or commission of 5% of premiums
ceded (4.2% for Investors Re) and a percentage of any ultimate underwriting
profits in connection with the reinsurance ceded. Such percentage of ultimate
underwriting profits is subject to adjustment based on cumulative experience.
Future management fee income is dependent upon the amount of business ceded to
the participants and the profitability of that business.
In the past, PXRE has entered into other retrocessional arrangements
providing catastrophic protection. In recent years, PXRE reduced, upon renewal,
its own catastrophe retrocessional facilities and has borne the associated
increase in net exposures. Although PXRE elected not to purchase any significant
retrocessional coverage in 1995, as the cost of catastrophe retrocessional
facilities has declined, PXRE has again commenced selectively to purchase such
coverages in 1996.
10
<PAGE>
<PAGE>
Since November 8, 1993, PXRE has been party to a management agreement
(the "Management Agreement") under which PXRE has responsibility for the
day-to-day operations of Transnational Re Corporation ("TREX") and its
subsidiaries, including all the reinsurance operations of Transnational
Reinsurance Company ("Transnational"). TREX and Transnational do not have any
operating properties, systems or paid employees. Pursuant to the Management
Agreement, PXRE provides all the operating facilities, systems, equipment and
management and clerical employees required to conduct the businesses of TREX and
its subsidiaries.
Under the terms of the Management Agreement, Transnational shares in
certain specified business of PXRE that is classified as property retrocessional
reinsurance business, marine and aviation retrocessional reinsurance or marine
and aviation reinsurance and facultative reinsurance. Transnational is also
entitled to share similarly in other property reinsurance business, if any,
which PXRE may, from time-to-time, propose that Transnational underwrite and
which Transnational's Board of Directors may approve.
Transnational pays PXRE an annual basic management fee under the
Management Agreement equal to 5% of gross premiums written (including
reinstatement premiums less return premiums) of Transnational and its
consolidated subsidiaries (if any) as reflected in Transnational's statutory
quarterly and annual statements filed with state insurance authorities. In
addition, PXRE is entitled to receive from TREX a contingent fee equal to 20% of
"net income" (as defined) in excess of a 20% "return on equity" (as defined) of
TREX for each year, or part thereof, that the Management Agreement remains
effective (the first such year having commenced on January 1, 1994). TREX and
Transnational also pay all expenses directly attributable to them, including a
proportionate share of PXRE's rental expenses with respect to office space based
on gross premiums written for the management year and time spent by officers and
employees of PXRE in connection with the preparation of reports filed by TREX
with the SEC and proxy materials and annual reports sent to TREX shareholders.
The Management Agreement has an initial term ending December 31, 1998,
and is scheduled to renew for successive three-year terms unless either PXRE
gives or TREX and Transnational give at least one year advance written notice of
non-renewal. The Management Agreement may be terminated by TREX and
Transnational if Transnational's gross premiums written for a calendar year fall
below specified levels.
11
<PAGE>
<PAGE>
CERTAIN RISKS AND UNCERTAINTIES
As a reinsurer principally of property and catastrophe related coverages
in both the international and domestic markets, 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.
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 PXRE's liabilities for losses
and loss expenses could prove to be inadequate, with a consequent adverse impact
on future earnings and stockholders' equity. Additionally, as a consequence of
its emphasis on property reinsurance, PXRE may forgo potential investment income
because property losses are typically settled within a short period of time.
PXRE maintains only minimal catastrophe retrocessional coverage. In view
of the increased underwritings of catastrophe related reinsurance and the net
exposure being retained by PXRE, the occurrence of one or more major
catastrophes in any given period (such as Hurricanes Andrew and Iniki in 1992
and the Northridge Earthquake in 1994) could 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.
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 event 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.
12
<PAGE>
<PAGE>
Although PXRE's investment guidelines stress conservation of principal,
diversification of risk, and liquidity, investments are subject to market-wide
risks and fluctuations, as well as to risk inherent in particular securities.
Accordingly, the estimated fair value of PXRE's investments does not necessarily
represent the amount which could be realized upon future sale particularly if
PXRE were required to liquidate a substantial portion of its portfolio to fund
catastrophic losses. In addition, PXRE's investment in and receivables from TREX
amount to approximately $51,995,000 at September 30, 1996, which represent 13.3%
of its total assets and 23.6% of its stockholders' equity.
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 the effects of currency
fluctuations on its results of operations, it does not hedge its currency
exposures before a catastrophic event which may produce a claim.
PXRE Corporation (parent company) relies primarily on cash dividends and
net tax allocation payments from its subsidiary PXRE Reinsurance to pay its
operating expenses, to meet its debt service obligations and to pay common stock
dividends to PXRE's stockholders. The payment of dividends by PXRE Reinsurance
to PXRE Corporation (parent company) is subject to limits imposed under the
insurance laws and regulations of Connecticut, the state of incorporation and
domicile of PXRE Reinsurance, as well as, certain restrictions arising in
connection with PXRE Corporation's (parent company) outstanding indebtedness.
In the event the amount of dividends available, together with other
sources of funds, are not sufficient to permit PXRE Corporation (parent company)
to meet its debt service, other obligations and to pay cash dividends, it would
be necessary to obtain the approval of the Connecticut Insurance Commissioner
prior to PXRE Reinsurance's payment of additional dividends. If such approval
were not obtained, PXRE Corporation (parent company) 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.
The reinsurance business is increasingly competitive and is undergoing a
variety of challenging developments. The industry has in recent years moved
toward greater consolidation as ceding companies have placed increased
importance on size and financial strength in the selection of reinsurers.
Additionally, reinsurers are tapping new markets and complementing their range
of traditional reinsurance products with innovative new products which bring
together capital markets and reinsurance experience. PXRE competes with numerous
major international and domestic reinsurance and insurance companies, many of
which have substantially greater financial, marketing and management resources
than PXRE.
13
<PAGE>
<PAGE>
COMPARISON OF THIRD QUARTER RESULTS FOR
1996 WITH 1995
<TABLE>
<CAPTION>
Three Months Ended Increase/
September 30, (Decrease)
1996 1995 %
---- ---- -
(in thousands)
<S> <C> <C> <C>
Gross premiums written $ 36,282 $ 45,720 (20.6)
Ceded premiums:
Managed business participants 6,947 8,409 (17.4)
TREX Management Agreement 6,329 7,082 (10.6)
Catastrophe coverage 1,221 1,411 (13.5)
Other 2 3 (33.3)
--------- ---------
Total reinsurance premiums ceded 14,499 16,905 (14.2)
--------- ---------
Net premiums written $ 21,783 $ 28,815 (24.4)
========= =========
</TABLE>
Net premiums written for the three months ended September 30, 1996
decreased 24.4% to $21,783,000 from $28,815,000 for the corresponding period of
1995. Gross premiums written for the third quarter of 1996 decreased 20.6% to
$36,282,000 from $45,720,000 for the comparable period of 1995. Net premiums
earned for the third quarter of 1996 decreased 26.8% to $17,793,000 from
$24,320,000 in the year-earlier period. Gross written, net written and net
earned premiums for the third quarter of 1996 declined from prior-year levels as
PXRE continued its planned response to the increased competitive trends that
have characterized the property catastrophe and marine reinsurance markets since
the end of 1994. Third quarter net written premiums were, as expected,
significantly greater than those of the second quarter as a substantial portion
of PXRE's written premiums in the first and third quarters represent semi-annual
premium payments.
Premiums ceded by PXRE to its managed business participants decreased
17.4% to $6,947,000 for the third quarter of 1996 compared with $8,409,000 for
the corresponding period of 1995. The decrease in premiums ceded to these
programs was due to the general decrease in the amount of premiums written by
PXRE. During the third quarter of 1996, pursuant to the Management Agreement,
PXRE also ceded $6,329,000 of premiums to Transnational in lieu of direct
reinsurance writings by Transnational as compared with $7,082,000 in the same
period of 1995. Management fee income from all sources for the third quarter of
1996 decreased 6.8% to $1,543,000 from $1,655,000 for the corresponding period
of 1995. The decrease reflects lower premium volume offset in part by higher
profit commissions resulting from a lower level of loss activity for the
quarter.
14
<PAGE>
<PAGE>
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 statutory accounting practices ("SAP") and
net premiums earned for purposes of 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 GAAP basis.
The loss ratio declined to 34.1% for the third quarter of 1996 compared
with 49.6% for the comparable quarter in 1995. The loss ratio for the third
quarter of 1996 reflected incurred catastrophe losses of $5,572,000 gross and
$3,369,000 net for 1996 and prior accident years as compared with $9,612,000
gross and $8,068,000 net in the same period of 1995 for 1995 and prior accident
years.
Significant losses affecting the third quarter 1996 loss ratio are as
follows:
<TABLE>
<CAPTION>
Amount of Losses
Loss Event Gross Net
---------- ----- ---
(in thousands)
<S> <C> <C>
Hurricane Fran $3,943 $2,993
Significant losses affecting the third quarter 1995 loss ratio are as
follows:
<CAPTION>
Amount of Losses
Loss Event Gross Net
---------- ----- ---
(in thousands)
<S> <C> <C>
Hurricane Marilyn $10,317 $ 8,150
Hurricane Luis 3,544 2,800
Risk Losses 2,250 1,832
Kobe, Japan Earthquake (3,856) (3,055)
</TABLE>
During the third quarter of 1995, PXRE partially reversed its first
quarter provision for loss of $4.0 million for the Kobe, Japan Earthquake based
upon current reports of losses and industry estimates.
15
<PAGE>
<PAGE>
The provision for losses and loss expenses includes the effect of
foreign exchange movements on PXRE's liability for losses and loss expenses,
resulting in a foreign currency exchange gain of $56,000 for the third quarter
of 1996 compared to a gain of $123,000 for the third quarter of 1995.
During the third quarter of 1996, PXRE experienced a savings of $430,000
net for prior year losses and loss expenses primarily due to favorable
development on Hurricane Marilyn. The loss ratio for the comparable quarter in
1995 was favorably affected by decreases to reserves of $316,000 net for prior
year losses and loss expenses.
The underwriting expense ratio was 23.0% for the third quarter of 1996
compared with 18.6% for the comparable quarter of 1995. The increase was
substantially due to the decline in premiums earned. As a result of the above,
the combined ratio was 57.1% for the third quarter of 1996 compared with 68.2%
for the comparable period of 1995.
Other operating expenses decreased to $2,623,000 for the third quarter
of 1996 from $3,007,000 in the comparable period of 1995. Included in other
operating expenses were foreign currency exchange gains of $105,000 for the
third quarter of 1996 compared to losses of $409,000 for the corresponding
period of 1995.
Interest expense decreased to $1,713,000 in the third quarter of 1996
compared to $1,892,000 in the same period of 1995 due to PXRE Reinsurance's
purchase of $3,050,000 par value of its parent company's 9.75% Senior Notes
during the second and third quarters of 1996 at a premium above par of $185,000.
Net investment income for the third quarter of 1996 increased 5.0% to
$4,066,000 from $3,874,000 for the same period of 1995. The increase in net
investment income was caused primarily by an increase in average investments for
the third quarter of 1996 compared with the corresponding quarter in the
previous year, and by an increase in PXRE's pre-tax investment yield to 6.6% for
the third quarter of 1996 compared with 6.3% for the same period of 1995, both
calculated using amortized cost and investment income gross of investment
expenses. The increase is due in part to the sale of municipal securities in the
fourth quarter of 1995 and reinvestment in taxable securities. Net realized
investment losses for the third quarter of 1996 were $45,000 compared to gains
of $282,000 for the third quarter of 1995.
The net effects of foreign currency exchange fluctuations were gains of
$161,000 in the third quarter of 1996 and losses of $286,000 for the comparable
quarter of 1995.
Net income for the three months ended September 30, 1996 includes
$1,160,000 which represents PXRE's approximately 22.2% equity share of TREX's
net earnings as compared with $1,406,000 representing PXRE's approximately 21.9%
share of TREX's net earnings for the third quarter of 1995.
16
<PAGE>
<PAGE>
For the reasons discussed above, net income was $7,615,000 for the third
quarter of 1996 compared to net income of $7,874,000 for the comparable quarter
of 1995. Primary net income per common share was $0.86 for the third quarter of
1996 compared to net income per common share of $0.89 for the comparable quarter
of 1995 based on average shares outstanding of approximately 8,820,100 in the
third quarter of 1996 compared to 8,860,900 in the comparable quarter of 1995.
Fully diluted net income per common share was $0.86 for the third quarter of
1996 compared to net income per common share of $0.89 for the comparable quarter
of 1995 based on average shares outstanding of approximately 8,820,100 in the
third quarter of 1996 and 8,887,200 in the comparable quarter of 1995.
COMPARISON OF YEAR-TO-DATE RESULTS FOR
1996 WITH 1995
<TABLE>
<CAPTION>
Nine Months Ended September 30, Increase/
-------------------------------
1996 1995 (Decrease)
---- ---- ----------
(in thousands) %
<S> <C> <C> <C>
Gross premiums written $ 97,934 $ 128,953 (24.1)
Ceded premiums:
Managed business participants 18,408 22,388 (17.8)
TREX Management Agreement 17,833 19,539 (8.7)
Catastrophe coverage 3,839 4,878 (21.3)
Other (16) (176) (90.9)
-------- ---------
Total reinsurance premiums ceded 40,064 46,629 (14.1)
-------- ---------
Net premiums written $ 57,870 $ 82,324 (29.7)
========== =========
</TABLE>
Net premiums written for the nine months ended September 30, 1996
decreased 29.7% to $57,870,000 from $82,324,000 for the corresponding period of
1995. Gross premiums written for the nine months of 1996 decreased 24.1% to
$97,934,000 from $128,953,000 for the comparable period of 1995. Net premiums
earned for the nine months ended September 30, 1996 decreased 25.6% to
$54,313,000 from $73,019,000 in the year-earlier period. Gross written, net
written and net earned premiums for the nine months of 1996 declined from
prior-year levels as PXRE continued its planned response to the increased
competitive trends that have characterized the property catastrophe and marine
reinsurance markets since the end of 1994. Net premiums written and earned were
also adversely affected by a $2,667,000 reduction in reinstatement premiums
resulting from a reduced level of loss activity in the nine months of 1996, as
well as by $2,137,000 of cessions related to the new retrocessional arrangement
with Investors Re.
17
<PAGE>
<PAGE>
Premiums ceded by PXRE to its managed business participants decreased
17.8% to $18,408,000 for the first nine months of 1996 compared with $22,388,000
for the similar period of 1995. The decrease in premiums ceded to these programs
was due to the general decrease in the amount of premiums written by PXRE.
During the nine months of 1996, pursuant to the Management Agreement, PXRE also
ceded $17,833,000 of premiums compared to $19,539,000 during the corresponding
period of 1995 to Transnational in lieu of direct reinsurance writings by
Transnational. Management fee income from all sources for the nine months ended
September 30, 1996 increased 5.6% to $5,282,000 from $5,004,000 for the
comparable period of 1995 because prior-year loss activity reduced the
profitability of business managed for other companies.
The loss ratio was 27.9% for the nine months of 1996 compared with 37.0%
for the corresponding period of 1995. The loss ratio for the nine months of 1996
reflected incurred catastrophe losses of $17,159,000 gross and $8,179,000 net
for 1996 and prior accident years as compared with $20,067,000 gross and
$15,133,000 net in the same period of 1995 for 1995 and prior accident years.
Significant losses affecting the nine months ended September 30, 1996
loss ratio are as follows:
<TABLE>
<CAPTION>
Amount of Losses
----------------
Loss Event Gross Net
---------- ----- ---
(in thousands)
<S> <C> <C>
Hurricane Fran $3,943 $2,993
Hurricane Luis 6,931 2,698
Three risk losses 4,743 1,541
Significant losses affecting the same period of 1995 loss ratio are as
follows:
<CAPTION>
Amount of Losses
----------------
Loss Event Gross Net
---------- ----- ---
(in thousands)
<S> <C> <C>
Hurricane Marilyn $10,317 $ 8,150
Risk Losses 6,850 5,667
Northridge Earthquake 5,145 3,489
Hurricane Luis 3,544 2,800
Kobe, Japan Earthquake 1,208 945
</TABLE>
18
<PAGE>
<PAGE>
The provision for losses and loss expenses includes the effect of
foreign exchange movements on PXRE's liability for losses and loss expenses,
resulting in a foreign currency exchange gain of $140,000 for the first nine
months of 1996 compared to a loss of $20,000 for the corresponding period of
1995.
During 1996, PXRE experienced a deficiency of $3,984,000 net for prior
year losses and loss expenses primarily due to development on Hurricanes Marilyn
and Luis and the Northridge Earthquake. The loss ratio for the comparable period
in 1995 was unfavorably affected by increases to reserves of $2,440,000 net for
prior year losses and loss expenses.
The underwriting expense ratio was 24.9% for the nine months ended
September 30, 1996 compared with 17.5% for the comparable period of 1995. The
increase was substantially due to the increased operating expenses discussed
below and the decline in premiums earned. As a result of the above, the combined
ratio was 52.8% for the nine months of 1996 compared with 54.5% for the
corresponding period of 1995.
Other operating expenses increased to $9,150,000 for the nine months
ended September 30, 1996, from $8,069,000 in the comparable period of 1995. The
operating expense increase reflects an increase of $359,000 related to changes
in benefit plans, additional staff salaries and increases in other related
employee benefits. Included in other operating expenses were foreign currency
exchange losses of $61,000 for 1996 compared to gains of $440,000 for the
corresponding period of 1995.
Interest expense decreased to $5,318,000 in the nine months ended
September 30, 1996 compared to $5,423,000 in the same period of 1995 due to PXRE
Reinsurance Company's purchase of $3,050,000 par value of its parent company's
9.75% Senior Notes during the second and third quarters of 1996 at a premium
above par of $185,000.
Net investment income for the nine months ended September 30, 1996
increased 12.7% to $12,176,000 from $10,805,000 for the same period of 1995. The
increase in net investment income was caused primarily by an increase in average
investments for the nine months of 1996 compared with the corresponding period
in the previous year, and by an increase in PXRE's pre-tax investment yield to
6.5% for the first nine months of 1996 compared with 5.9% in the similar period
of 1995, both calculated using amortized cost and investment income gross of
investment expenses. The increase is due in part to the sale of municipal
securities in the fourth quarter of 1995 and reinvestment in taxable securities.
Net realized investment losses for the nine months ended September 30, 1996 were
$220,000 compared with net realized losses of $486,000 for the comparable period
in 1995.
The net effects of foreign currency exchange fluctuations were gains of
$79,000 in the nine months ended September 30, 1996 and gains of $420,000 for
the comparable period of 1995.
Net income for the nine months ended September 30, 1996 includes
$3,144,000 which represents PXRE's approximately 22.1% equity share of TREX's
net earnings as compared with $4,452,000 representing PXRE's approximately 21.6%
share of TREX's net earnings for the comparable period of 1995.
19
<PAGE>
<PAGE>
For the reasons discussed above, net income was $24,110,000 for the nine
months ended September 30, 1996 compared to net income of $29,198,000 for the
comparable period of 1995. Primary net income per common share was $2.73 for the
nine months ended September 30, 1996 compared to net income per common share of
$3.54 for the comparable period of 1995 (after provision for cumulative
dividends of $598,928 on the Series A Preferred Stock). Because PXRE converted
its Series A Preferred Stock into shares of common stock during the second
quarter of 1995 there is no preferred dividend in the nine months of 1996, and
average shares outstanding were approximately 8,844,700 in the nine months ended
September 30, 1996 compared to 8,077,200 in the comparable period of 1995. Fully
diluted net income per common share was $2.72 for the nine months ended
September 30 1996 compared to net income per common share of $3.29 for the
comparable period of 1995 based on average shares outstanding of approximately
8,851,000 in 1996 and 8,877,300 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
PXRE Corporation (parent company) relies primarily on cash dividends and
net tax allocation payments from its subsidiary PXRE Reinsurance to pay its
operating expenses and income taxes, to meet its debt service obligations and to
pay dividends to PXRE stockholders. The payment of dividends by PXRE Reinsurance
to PXRE Corporation is subject to limits imposed under the insurance laws and
regulations of Connecticut, the state of incorporation and domicile of PXRE
Reinsurance, as well as certain restrictions arising in connection with PXRE
Corporation's Senior Notes discussed below. Connecticut insurance law provides
that the maximum amount of dividends or other distributions that PXRE
Reinsurance may declare or pay to PXRE Corporation within any twelve-month
period, without regulatory approval, is limited to the lesser of (a) earned
surplus or (b) the greater of 10% of policyholders' surplus at December 31 of
the preceding year or 100% of net income for the twelve-month period ending
December 31 of the preceding year, all determined in accordance with SAP.
Accordingly, the Connecticut insurance laws could limit the amount of dividends
available for distribution by PXRE Reinsurance 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. As of December 31, 1995, PXRE Reinsurance had
earned surplus of $81,382,000, as defined, and a policyholders' surplus of
$250,231,000 and its net income for 1995 was $37,996,000. The maximum amount of
dividends or distributions that PXRE Reinsurance may declare and pay in 1996,
without regulatory approval, is therefore $37,996,000. During the nine months of
1996, $9,000,000 in dividends were approved and paid by PXRE Reinsurance to PXRE
Corporation.
Other sources of funds available to PXRE Corporation (parent company)
include investments retained by PXRE to provide support for debt service on its
Senior Notes. Net tax allocation payments by PXRE Reinsurance are also expected
to be a source of funds available to PXRE Corporation (parent company).
20
<PAGE>
<PAGE>
In the event the amount of dividends available, together with other
sources of funds, are not sufficient to permit PXRE Corporation (parent company)
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 PXRE Reinsurance's payment of additional dividends. If
such approval were not obtained, PXRE Corporation (parent company) 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 Corporation (parent company) 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 Corporation (parent
company) 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.
In August 1993, PXRE Corporation (parent company) completed a public
offering of $75,000,000 principal amount of 9.75% Senior Notes due August 15,
2003. Interest is payable on the Senior Notes semi-annually. Interest expense,
including amortization of debt offering costs, for 1995 in respect of the Senior
Notes amounted to approximately $7,143,000. Interest expense for 1996 will
amount to approximately $6,958,000. On and after August 15, 1998, the Senior
Notes may be redeemed at the option of PXRE, in whole or in part, at redemption
prices (expressed as percentages of the principal amount), plus accrued and
unpaid interest to the date fixed for redemption, of 103.656% at August 15,
1998, declining to 100% at August 15, 2001 and thereafter. The Indenture
governing the Senior Notes contains covenants which, among other things, limit
the ability of PXRE and its Restricted Subsidiaries (including PXRE
Reinsurance): (a) to incur additional indebtedness (except for the incurrence of
Permitted Indebtedness and the incurrence of other Indebtedness by PXRE in
circumstances where no Default or Event of Default exists and the Consolidated
Fixed Charge Coverage Ratio of PXRE would be greater than 2:1 after giving
effect to the incurrence) and, in the case of the Restricted Subsidiaries, to
issue preferred stock; (b) to pay dividends, repurchase stock and to make
certain other Restricted Payments (other than, among other things, if no Default
or Event of Default exists (x) Restricted Payments after August 31, 1993, not
exceeding in the aggregate the sum of $3,000,000 plus 50% of Consolidated Net
Income (or minus 100% of any loss) from such date (with certain adjustments),
plus the amounts of certain equity proceeds and certain reductions in
Investments in Unrestricted Subsidiaries, provided, that at the time of such
Restricted Payment the Consolidated Fixed Charge Coverage Ratio is greater than
2.0, and (y) in addition to permitted Restricted Payments referred to in clause
(x), the payment of cash dividends on Qualified Capital Stock after August 31,
1993 of up to an aggregate of $6,000,000, provided, that such dividends on
Common Stock do not exceed $0.25 per share in any year); (c) to sell or permit
the issuance of any stock of PXRE Reinsurance or any other Principal Insurance
Subsidiary; (d) to sell or transfer other assets (other than for at least Fair
Market Value and generally for not less than 75% in cash or Cash Equivalents);
(e) to create liens upon the properties or assets of PXRE or its Restricted
Subsidiaries; or (f) to engage in any business other than the insurance and
reinsurance businesses and other businesses incidental and related thereto. The
Indenture also provides that within 30 days after a Change of Control of PXRE,
PXRE will offer to purchase all the Senior Notes then outstanding at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of such purchase.
21
<PAGE>
<PAGE>
In the fourth quarter of 1994, PXRE's Board of Directors authorized the
repurchase of up to $20 million principal amount of Senior Notes in any one
calendar year at below par prices in negotiated or open market transactions. In
April 1995, PXRE's Board of Directors authorized such Senior Note repurchases to
be made at or above par prices. By December 31, 1995, PXRE or PXRE Reinsurance
had repurchased $7,225,000 principal amount of Senior Notes. In 1996, PXRE
Reinsurance purchased $3,050,000 par value of PXRE's Senior Notes at a premium.
PXRE Corporation (parent company) files federal income tax returns for
itself and all of its direct or indirect domestic subsidiaries that satisfy the
stock ownership requirements for consolidation for federal income tax purposes
(collectively, the "Subsidiaries"). PXRE Corporation (parent company) is party
to an Agreement Concerning Filing of Consolidated Federal Income Tax Returns
(the "Tax Allocation Agreement") pursuant to which each Subsidiary makes tax
payments to PXRE Corporation (parent company) 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 Corporation
(parent company) 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 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 (or receive a credit
if payments exceed the separate return tax liability) to PXRE Corporation
(parent company).
The primary sources of liquidity for PXRE Reinsurance are net cash flow
from operating activities (including interest income from investments), the
maturity or sale of investments, borrowings, capital contributions and advances
from PXRE Corporation (parent company). 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 provided by operations was $18,875,000 for the nine
months of 1996, compared with $26,535,000 during the corresponding period of
1995, due to the lower level of premiums written.
PXRE's management has established general procedures and guidelines for
its investment portfolio and oversees investment management carried out by
Phoenix Duff & Phelps Corporation, a public majority-owned subsidiary of Phoenix
Home Life Mutual Insurance Company. Although these investment guidelines stress
conservation of principal, diversification of risk and liquidity, investments
are subject to market-wide risks and fluctuations, as well as to risk inherent
in particular securities. At September 30, 1996, 97.2% of PXRE's investment
portfolio consisted of fixed maturities and short-term investments while the
balance was in equity securities. The investment policies and all investments of
PXRE are approved by its Board of Directors.
22
<PAGE>
<PAGE>
Of PXRE's fixed maturities portfolio at September 30, 1996, 98.7% of the
fair value was in obligations rated "Aaa" or "AAA" by Moody's Investors Service
Inc. or Standard & Poor's Corporation, respectively, or in government or
government-backed securities. Mortgage-backed and asset-backed securities
(principally GNMAs) accounted for 36.4% of fixed maturities based on fair value
at September 30, 1996. PXRE has no investments in real estate or commercial
mortgage loans. The average market yield to maturity of PXRE's fixed maturities
portfolio at September 30, 1996 and 1995 was 6.0% and 5.0%, respectively.
Fixed maturity investments are reported at fair value, with the net
unrealized gain or loss, net of tax, reported as a separate component of
stockholders' equity. PXRE recorded directly to equity a $4,895,000 after-tax
unrealized decline in the value of its investment portfolio ($0.57 book value
per share) during the nine months ended September 30, 1996, including an
after-tax unrealized gain of $456,000 in the third quarter of 1996 ($0.05 book
value per share), the latter reflecting a decrease in interest rates during the
period. Short-term investments are carried at amortized cost which approximates
fair value. PXRE's short-term investments, principally high grade commercial
paper, were $19,407,000 at September 30, 1996 compared to $41,722,000 at
December 31, 1995. The decrease at September 30, 1996 was principally due to the
cash flow requirements arising at the end of 1995 from the August 1995
Hurricanes Marilyn and Luis.
Book value per common share was $25.80 at September 30, 1996.
In November 1993, an initial public offering by TREX, a subsidiary of
PXRE, of 5,750,000 shares of Class A Common Stock at $20 per share, was
completed. In connection with this offering, PXRE contributed all of the capital
stock of Transnational to TREX. TREX, through Transnational, now specializes
principally in providing brokered property retrocessional reinsurance and marine
and aviation retrocessional reinsurance in the United States and international
markets pursuant to the Management Agreement with PXRE. At September 30, 1996,
PXRE owned approximately 22.3% of the total issued and outstanding common stock
of TREX and is entitled to designate two of TREX's five directors.
During October 1996, PXRE raised the quarterly dividend on its Common
Stock from $0.18 per share to $0.21 per share. The increase in the dividend will
result in an annual additional outlay of approximately $1,027,700. The expected
annual dividend based on shares outstanding at September 30, 1996 will be
approximately $7,187,000.
In April 1995, PXRE's Board of Directors authorized the repurchase of up
to 700,000 shares of its common stock from time-to-time in open market or
private block purchase transactions. From inception of this repurchase plan
through September 1996, PXRE repurchased 243,000 of the 700,000 shares
authorized at a cost of $5,768,000. Since October 1, 1996, PXRE repurchased
288,400 shares at a cost of $6,770,000.
23
<PAGE>
<PAGE>
In June 1995, PXRE and TREX entered into a joint venture arrangement to
trade in catastrophe futures and options contracts on the Chicago Board of Trade
("CBOT"). PXRE and TREX have each committed $2.5 million to this venture.
Although the joint venture has developed a number of trading strategies, the low
level of activity in the CBOT market for catastrophe futures has kept trade
volume to a minimum through September 30, 1996.
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 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.
All amounts classified as reinsurance recoverable at September 30, 1996,
are considered by management of PXRE to be collectible in all material respects.
INCOME TAXES
PXRE's effective tax rate for the nine months ended September 30, 1996
and 1995 was 31.9% and 31.3%, respectively, which differs from the statutory
rate principally due to the dividend received deduction, state and local taxes
and in 1995 tax exempt income.
24
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the Form 10-Q for the quarter ended June 30, 1996, on May
15, 1996, a putative class action lawsuit (the "Action") was filed in the Court
of Chancery of the State of Delaware which names Transnational Re, the directors
of Transnational Re and PXRE as defendants. On or about August 23, 1996, an
agreement in principle was reached to settle the Action pursuant to terms
reflected in a memorandum of understanding and subject to agreement upon final
settlement documentation, confirmatory discovery and Court approval (the
"Settlement"). A Stipulation of Settlement reflecting the terms of the
Settlement was filed with the court on October 28, 1996. On October 29, 1996,
the Court issued an Order (i) preliminarily certifying the Action as a class
action by the named representative for settlement purposes only, (ii) scheduling
a hearing to be held on December 10, 1996 to (a) determine whether Plaintiff
adequately represents the Class and whether the Action can be maintained as a
class action, (b) consider any objections to the Settlement and determine
whether it is fair, reasonable and adequate to the stockholders of Transnational
Re and (c) consider class counsel's application for attorney's fees, (iii)
directing the provision of notice of the Action and the Settlement (including
the release contemplated being effected by the entry of a final judgment in the
Action) to the record holders of Transnational Re stock from May 10, 1996
through the date of the mailing of notice, and (iv) enjoining class members,
pending the final determination of whether the Settlement should be approved and
a final judgment issued, from instituting or prosecuting any claim contemplated
being released by the Settlement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
PXRE filed a Current Report on Form 8-K with the Securities and Exchange
Commission on August 22, 1996 containing, under the heading "Other Events", a
description of the proposed merger between PXRE and Transnational Re.
PXRE filed a Current Report on Form 8-K with the Securities and Exchange
Commission on August 26, 1996, indicating, under the head "Other Events", that
an agreement in principle had been reached to settle the lawsuit described in
Item 1 above.
25
<PAGE>
<PAGE>
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 CORPORATION
November 13, 1996 By:/s/ Sanford M. Kimmel
------------------------
Sanford M. Kimmel
Senior Vice President, Treasurer
and Chief Financial Officer
26
<PAGE>
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