<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 JUNE 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 August 13, 1996, 8,773,350 shares of common stock, $.01 par value
per share, of the Registrant were outstanding.
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<PAGE>
<PAGE>
PXRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Consolidated Balance Sheets at June 30, 1996
and December 31, 1995 3
Consolidated Statements of Income for the three and
six months ended June 30, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity for the three and
six months ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flow for the three and
six months ended June 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
</TABLE>
-2-
<PAGE>
<PAGE>
PXRE Consolidated Balance Sheets
Corporation (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Assets Investments:
Fixed maturities, available for sale, at fair value (amortized
cost $233,269,000 and $216,348,000, respectively) $ 230,528,548 $ 221,356,767
Equity securities, at fair value (cost $5,000,000) 5,467,402 5,172,428
Short-term investments 22,981,818 41,721,656
---------- ----------
Total investments 258,977,768 268,250,851
Cash 3,772,849 838,548
Accrued investment income 3,577,163 3,343,505
Receivables:
Unreported premiums 17,477,136 23,376,727
Balances due from intermediaries and brokers 7,616,835 6,335,593
Other receivables 5,061,245 4,175,443
Reinsurance recoverable: TREX 13,812,705 8,966,592
Non-affiliates 19,286,768 25,130,816
Ceded unearned premiums 5,586,692 5,433,030
Deferred acquisition costs 1,238,782 1,564,926
Income tax recoverable 3,312,139 479,473
Investment in equity of TREX 37,308,186 36,003,384
Receivable from TREX 339,886 446,799
Other assets 8,941,449 9,119,750
-------------- -------------
Total assets $ 386,309,603 $ 393,465,437
-------------- -------------
Liabilities Losses and loss expenses $ 66,509,153 $ 72,718,914
Unearned premiums 13,406,150 13,685,391
Reinsurance balances payable: TREX 9,183,328 5,647,532
Non-affiliates 4,907,513 8,698,862
Notes payable 65,475,000 67,775,000
Deferred income tax payable 959,700 3,653,102
Payable for securities 0 2,496,232
Other liabilities 6,655,070 7,628,228
----------- ---------
Total liabilities 167,095,914 182,303,261
-------------- -------------
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; 9,016,474 and 8,983,896 shares issued 90,164 89,839
Additional paid-in capital 118,509,473 117,668,048
Net unrealized (depreciation) appreciation on investments, net of
deferred income tax (benefit) expense of ($796,000) and $1,813,000 (1,568,130) 3,782,500
Retained earnings 105,220,515 91,882,834
Treasury stock at cost (244,476 and 238,755 shares) (2,177,714) (1,719,459)
Restricted stock at cost (53,279 and 34,000 shares) (860,619) (541,586)
----------- ------------
Total stockholders' equity 219,213,689 211,162,176
----------- ------------
Total liabilities and stockholders' equity $ 386,309,603 $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 Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues Net premiums earned $ 17,099,362 $25,142,048 $ 36,519,763 $ 48,698,149
Net investment income 4,198,688 3,503,210 8,110,158 6,930,657
Net realized investment losses (100,752) (768,280) (175,689) (768,280)
Management fees : TREX 634,933 849,319 1,341,761 1,672,263
Non-affiliate 632,341 477,956 2,397,739 1,676,152
------------- ----------- ------------ -----------
22,464,572 29,204,253 48,193,732 58,208,941
------------- ----------- ------------ -----------
Losses and Losses and loss expenses incurred 4,160,747 4,249,959 9,100,421 15,000,583
expenses Commissions and brokerage 3,083,632 3,663,308 6,639,221 6,566,651
Other operating expenses 3,341,610 3,191,706 6,526,332 5,061,355
Interest expense 1,887,115 1,779,218 3,604,238 3,531,929
------------- ----------- ------------ -----------
12,473,104 12,884,191 25,870,212 30,160,518
------------- ----------- ------------ -----------
Income before income taxes and equity
in net earnings of TREX 9,991,468 16,320,062 22,323,520 28,048,423
Equity in net earnings of TREX 690,932 1,786,463 1,984,120 3,045,694
Income tax provision 3,497,000 5,656,000 7,813,000 9,770,000
------------- ----------- ------------ -----------
Net income $ 7,185,400 $12,450,525 $16,494,640 $ 21,324,117
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
Preferred stock dividend $ 0 $ 98,478 $ 0 $ 598,928
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
Operating income available to
common stockholders $ 7,185,400 $12,352,047 $16,494,640 $ 20,725,189
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
Per share Primary:
Net income $ 0.81 $ 1.48 $ 1.86 $ 2.70
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
Average shares outstanding 8,878,482 8,341,774 8,866,591 7,684,412
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
Fully diluted:
Net income $ 0.81 $ 1.41 $ 1.86 $ 2.41
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
Average shares outstanding 8,878,482 8,842,170 8,876,136 8,835,606
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
</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 Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock: Balance at beginning of period $ 90,151 $ 72,002 $ 89,839 $ 69,216
Issuance of shares 13 17,614 325 20,400
------------ ------------ ------------ ------------
Balance at end of period $ 90,164 $ 89,616 $ 90,164 $ 89,616
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Preferred stock: Balance at beginning of period $ 0 $ 86 $ 0 $ 100
Conversion of shares 0 (86) 0 (100)
------------ ------------ ------------ ------------
Balance at end of period $ 0 $ 0 $ 0 $ 0
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Additional Balance at beginning of period $118,126,189 $116,929,101 $117,668,048 $116,888,369
paid-in capital: Issuance of common shares 383,284 378,818 684,298 413,158
Conversion of preferred shares 0 (17,514) 0 (20,260)
Other 0 1,773 157,127 10,911
------------ ------------ ------------ ------------
Balance at end of period $118,509,473 $117,292,178 $118,509,473 $117,292,178
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Unrealized Balance at beginning of period $ 282,117 $ (2,700,973) $ 3,782,500 $ (5,976,354)
appreciation Change in fair value for the period (1,656,463) 3,385,431 (4,845,405) 6,198,338
(depreciation) Equity in net change in TREX
on investments: (depreciation) appreciation (193,784) 417,750 (505,225) 880,224
------------ ------------ ------------ ------------
Balance at end of period $ (1,568,130) $ 1,102,208 $ (1,568,130) $ 1,102,208
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Retained earnings: Balance at beginning of period $ 99,617,739 $ 65,265,720 $ 91,882,834 $ 57,933,848
Net income 7,185,400 12,450,525 16,494,640 21,324,117
Dividends paid to common stockholders (1,582,624) (1,311,410) (3,156,959) (2,352,680)
Dividends accrued to preferred
stockholders 0 (98,478) 0 (598,928)
------------ ------------ ------------ ------------
Balance at end of period $105,220,515 $ 76,306,357 $105,220,515 $ 76,306,357
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Restricted stock: Balance at beginning of period $ (471,674) $ (253,772) $ (541,586) $ (283,550)
Issuance of restricted stock (501,027) (499,005) (501,027) (499,005)
Amortization of restricted stock 112,082 71,367 181,994 101,145
------------ ------------ ------------ ------------
Balance at end of period $ (860,619) $ (681,410) $ (860,619) $ (681,410)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Treasury stock: Balance at beginning of period $ (2,344,459) $ (1,860,687) $(1,719,459) $ (1,860,687)
Repurchase of common stock 0 0 (625,000) 0
Issuance of treasury stock 166,745 141,228 166,745 141,228
------------ ------------ ------------ ------------
Balance at end of period $ (2,177,714) $ (1,719,459) $(2,177,714) $ (1,719,459)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Total Balance at beginning of period $215,300,063 $ 177,451,477 $211,162,176 $166,770,942
stockholders' Issuance of common shares 383,297 396,432 684,623 433,558
equity: Conversion of preferred stock 0 (17,600) 0 (20,360)
Issuance of treasury stock 166,745 141,228 166,745 141,228
Repurchase of common stock 0 0 (625,000) 0
Restricted stock (388,945) (427,638) (319,033) (397,860)
Unrealized (depreciation) appreciation
on investments net of deferred
income tax (1,850,247) 3,803,181 (5,350,630) 7,078,562
Net income 7,185,400 12,450,525 16,494,640 21,324,117
Dividends (1,582,624) (1,409,888) (3,156,959) (2,951,608)
Other 0 1,773 157,127 10,911
------------ ------------ ------------ ------------
Balance at end of period $219,213,689 $ 192,389,490 $219,213,689 $192,389,490
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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 Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- -----
<S> <C> <C> <C> <C>
Cash flow Net income $ 7,185,400 $ 12,450,525 $ 16,494,640 $ 21,324,117
from operating Adjustments to reconcile net income to net cash
activities provided by operating activities:
Losses and loss expenses 1,598,017 (4,117,485) (6,209,761) (6,681,867)
Unearned premiums (6,358,973) (7,435,829) (432,903) 5,008,518
Deferred acquisition costs 714,143 676,264 326,144 (804,340)
Receivables 6,066,776 1,146,746 3,839,459 (7,844,267)
Reinsurance balances payable (4,249,699) (7,311,824) (255,552) (3,170,756)
Reinsurance recoverable (2,279,336) 1,925,610 997,935 6,784,202
Income tax recoverable/payable (6,696,230) (3,908,087) (1,715,840) (707,431)
Equity in net earnings of TREX (674,060) (1,859,930) (1,810,026) (2,992,045)
Other 3,762,288 2,806,568 (1,518,158) (2,918,120)
------------ ------------ ------------ ------------
Net cash (used) provided by operating activities (931,674) (5,627,442) 9,715,938 7,998,011
------------ ------------ ------------ ------------
Cash flow Cost of fixed maturity investments (10,615,322) (72,873,047) (30,193,920) (77,715,344)
from investing Fixed maturity investments matured/disposed 7,169,406 68,181,955 13,041,164 91,965,899
activities Payable for securities (7,359,914) 0 (2,496,226) 0
Investment in joint venture 0 0 0 (2,000,000)
Net change in short-term investments 15,661,807 13,156,849 18,739,838 (13,870,222)
------------ ------------ ------------ ------------
Net cash provided (used) by investing
activities 4,855,977 8,465,757 (909,144) (1,619,667)
------------ ------------ ------------ ------------
Cash flow Proceeds from issuance of common stock 49,015 21,055 350,341 55,432
from financing Cash dividends paid to preferred stockholders 0 (432,611) 0 (933,061)
activities Cash dividends paid to common stockholders (1,582,624) (1,311,457) (3,156,959) (2,352,727)
Repurchase of debt (2,440,875) 0 (2,440,875) 0
Cost of treasury stock 0 0 (625,000) 0
------------ ------------ ------------ ------------
Net cash used by financing activities (3,974,484) (1,723,013) (5,872,493) (3,230,356)
------------ ------------ ------------ ------------
Net change in cash (50,181) 1,115,302 2,934,301 3,147,988
Cash, beginning of period 3,823,030 2,421,935 838,548 389,249
------------ ------------ ------------ ------------
Cash, end of period $ 3,772,849 $ 3,537,237 $ 3,772,849 $ 3,537,237
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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 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. 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.
7
<PAGE>
<PAGE>
PXRE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Corporation
- --------------------------------------------------------------------------------
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.
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 June 30, 1996, PXRE
repurchased 25,000 of the 700,000 shares authorized at a cost of $625,000.
8
<PAGE>
<PAGE>
PXRE NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Corporation
- --------------------------------------------------------------------------------
8. PROPOSED TRANSACTION
In May 1996, PXRE delivered to Transnational Re Corporation
("Transnational Re") a proposal for a strategic business combination of PXRE and
Transnational Re on a tax-free basis. Under the proposal, PXRE would enter into
a merger agreement with Transnational Re pursuant to which PXRE Corporation, or
a newly organized subsidiary of PXRE, would exchange shares of PXRE common stock
for each share of Transnational Re common stock, $.01 par value.
The proposal is conditioned upon the negotiation and execution of a
definitive merger agreement mutually satisfactory to PXRE and Transnational Re
and is further conditioned upon the effectiveness of the registration of PXRE
securities to be issued in the merger, the receipt of all regulatory approvals
and third-party consents necessary or advisable to accomplish the transaction
and approvals by the boards of directors of PXRE and Transnational Re (including
a committee of Transnational Re's independent directors) and by the shareholders
of both companies.
It is anticipated that a business combination would be accounted for as
a purchase transaction.
Merger discussions are ongoing.
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. This strategy has been designed
to capitalize on the substantial improvements in pricing and other terms of
these coverages which evolved following the high levels of catastrophic loss
activity, in terms of both frequency and severity of loss, experienced by the
worldwide reinsurance industry since 1987, but which have moderated since the
end of 1994. In the fourth quarter of 1992, PXRE decided to reduce significantly
its writing of traditional pro rata and risk excess reinsurance business due to
management's unfavorable evaluation of the condition of such business. Since
that time, PXRE has also increased its writing of marine and aviation business.
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 June 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.
10
<PAGE>
<PAGE>
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.
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 $51,461,000 at June 30, 1996, which represent 13.3% of
its total assets and 23.5% 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 SECOND QUARTER RESULTS FOR
1996 WITH 1995
<TABLE>
<CAPTION>
Three Months Ended June 30, Increase/
1996 1995 (Decrease)
---- ---- ----------
(in thousands) %
<S> <C> <C> <C>
Gross premiums written $ 19,799 $ 27,038 (26.8)
Ceded premiums:
Managed business participants 3,207 4,518 (29.0)
TREX Management Agreement 4,382 3,750 16.9
Catastrophe coverage 1,487 1,257 18.3
Other (17) (193) 91.2
--------- -------
Total reinsurance premiums
ceded 9,059 9,332 (2.9)
--------- -------
Net premiums written $ 10,740 $ 17,706 (39.3)
--------- -------
--------- -------
</TABLE>
Net premiums written for the three months ended June 30, 1996 decreased
39.3% to $10,740,000 from $17,706,000 for the corresponding period of 1995.
Gross premiums written for the second quarter of 1996 decreased 26.8% to
$19,799,000 from $27,038,000 for the comparable period of 1995. Net premiums
earned for the second quarter of 1996 decreased 32.0% to $17,099,000 from
$25,142,000 in the year-earlier period. Gross written, net written and net
earned premiums for the second 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. Second quarter net premiums written were, as expected,
significantly less than those of the first quarter of 1996 since a substantial
portion of PXRE's written premiums in the first quarter represented semi-annual
premium payments.
Premiums ceded by PXRE to its managed business participants decreased
29.0% to $3,207,000 for the second quarter of 1996 compared with $4,518,000 for
the corresponding period of 1995. The decrease in premiums ceded to these
programs was due to the decrease in the amount of premiums written by PXRE on
behalf of the managed business participants. During the second quarter of 1996,
pursuant to the Management Agreement, PXRE also ceded $4,382,000 of premiums to
Transnational in lieu of direct reinsurance writings by Transnational as
compared with $3,750,000 in the same period of 1995. Management fee income from
all sources for the second quarter of 1996 decreased 4.5% to $1,267,000 from
$1,327,000 for the corresponding period of 1995. The decrease was due to both
the decline in premiums and the loss activity for the quarter which resulted in
decreased profitability of business ceded to PXRE's managed business
participants.
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 was 24.3% for the second quarter of 1996 compared with
16.9% for the comparable quarter in 1995. The loss ratio for the second quarter
of 1996 reflected incurred catastrophe losses of $10,053,000 gross and
$4,121,000 net for 1996 and prior accident years as compared with $4,127,000
gross and $2,369,000 net in the same period of 1995 for 1995 and prior accident
years.
Significant losses affecting the second quarter 1996 loss ratio are as
follows:
<TABLE>
<CAPTION>
Amount of Losses
Loss Event Gross Net
---------- ----- ---
(in thousands)
<S> <C> <C>
Hurricane Luis $6,313 $2,531
Large risk losses 2,849 961
Hurricane Marilyn 1,166 824
</TABLE>
Significant losses affecting the second quarter 1995 loss ratio are as
follows:
<TABLE>
<CAPTION>
Amount of Losses
Loss Event Gross Net
---------- ----- ---
(in thousands)
<S> <C> <C>
Northridge Earthquake $3,770 $2,313
</TABLE>
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 $25,000 for the second quarter
of 1996 compared to a gain of $157,000 for the second quarter of 1995.
15
<PAGE>
<PAGE>
During the second quarter of 1996, PXRE experienced a deficiency of
$3,434,000 net for prior year losses and loss expenses primarily due to
development on Hurricanes Marilyn and Luis, which are now expected to have
exceeded specified market loss thresholds. The loss ratio for the comparable
quarter in 1995 was unfavorably affected by increases to reserves of $1,936,000
net for prior year losses and loss expenses.
The underwriting expense ratio was 30.2% for the second quarter of 1996
compared with 22.0% for the comparable quarter of 1995. The increase was
substantially due to increased operating expenses and the decline in premiums
earned. As a result of the above, the combined ratio was 54.5% for the second
quarter of 1996 compared with 38.9% for the comparable period of 1995.
Other operating expenses increased to $3,342,000 for the second quarter
of 1996 from $3,192,000 in the comparable period of 1995. Included in other
operating expenses were foreign currency exchange losses of $129,000 for the
second quarter of 1996 compared to gains of $196,000 for the corresponding
period of 1995.
Interest expense increased to $1,887,000 in the second quarter of 1996
compared to $1,779,000 in the same period of 1995 due to PXRE Reinsurance
Company's purchase of $2,300,000 par value of its parent company's 9.75% Senior
Notes during the second quarter of 1996 at a premium above par of $141,000.
Net investment income for the second quarter of 1996 increased 19.9% to
$4,199,000 from $3,503,000 for the same period of 1995. The increase in net
investment income was caused primarily by an increase in average investments for
the second 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 second quarter of 1996 compared with 5.9% 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 second quarter of 1996 were $101,000 compared to
losses of $768,000 for the second quarter of 1995.
The net effects of foreign currency exchange fluctuations were losses of
$104,000 in the second quarter of 1996 and gains of $353,000 for the comparable
quarter of 1995.
Net income for the three months ended June 30, 1996 includes $691,000
which represents PXRE's approximately 22.2% equity share of TREX's net earnings
as compared with $1,786,000 representing PXRE's approximately 21.8% share of
TREX's net earnings for the second quarter of 1995.
16
<PAGE>
<PAGE>
For the reasons discussed above, net income was $7,185,000 for the
second quarter of 1996 compared to net income of $12,451,000 for the comparable
quarter of 1995. Primary net income per common share was $0.81 for the second
quarter of 1996 compared to net income per common share of $1.48 for the
comparable quarter of 1995 (after provision for cumulative dividends of $98,478
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 second quarter of 1996, and average shares outstanding
were approximately 8,878,500 in the second quarter of 1996 compared to 8,341,800
in the comparable quarter of 1995. Fully diluted net income per common share was
$0.81 for the second quarter of 1996 compared to net income per common share of
$1.41 for the comparable quarter of 1995 based on average shares outstanding of
approximately 8,878,500 in the second quarter of 1996 and 8,842,100 in the
comparable quarter of 1995.
COMPARISON OF YEAR-TO-DATE RESULTS FOR
1996 WITH 1995
<TABLE>
<CAPTION>
Six Months Ended June 30, Increase/
1996 1995 (Decrease)
---- ---- ----------
(in thousands) %
<S> <C> <C> <C>
Gross premiums written $ 61,652 $ 83,233 (25.9)
Ceded premiums:
Managed business participants 11,462 13,978 (18.0)
TREX Management Agreement 11,504 12,458 (7.7)
Catastrophe coverage 2,617 3,467 (24.5)
Other (18) (179) 89.9
--------- -------
Total reinsurance premiums ceded 25,565 29,724 (14.0)
--------- -------
Net premiums written $ 36,087 $ 53,509 (32.6)
--------- -------
--------- -------
</TABLE>
Net premiums written for the six months ended June 30, 1996 decreased
32.6% to $36,087,000 from $53,509,000 for the corresponding period of 1995.
Gross premiums written for the first six months of 1996 decreased 25.9% to
$61,652,000 from $83,233,000 for the comparable period of 1995. Net premiums
earned for the six months ended June 30, 1996 decreased 25.0% to $36,520,000
from $48,698,000 in the year-earlier period. Gross written, net written and net
earned premiums for the first six 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 $1,333,000 reduction in reinstatement premiums resulting from a reduced level
of loss activity in the first six months of 1996, as well as by $1,264,000 of
cessions related to the new retrocessional arrangement with Investors Re.
17
<PAGE>
<PAGE>
Premiums ceded by PXRE to its managed business participants decreased
18.0% to $11,462,000 for 1996 compared with $13,978,000 for 1995. The decrease
in premiums ceded to these programs was due to the decrease in the amount of
premiums written by PXRE on behalf of the managed business participants. During
the first six months of 1996, pursuant to the Management Agreement, PXRE also
ceded $11,504,000 of premiums compared to $12,458,000 during the corresponding
period of 1995 to Transnational in lieu of direct reinsurance writings by
Transnational. Management fee income from all sources for the six months ended
June 30, 1996 increased 11.7% to $3,740,000 from $3,348,000 for the comparable
period of 1995 reflecting higher profit commissions resulting from a lower level
of loss activity in 1996, offset by a lower level of management fee income
caused by a decline of premiums.
The loss ratio was 24.9% for the first six months of 1996 compared with
30.8% for the corresponding period of 1995. The loss ratio for the first six
months of 1996 reflected incurred catastrophe losses of $11,586,000 gross and
$4,810,000 net for 1996 and prior accident years as compared with $11,529,000
gross and $7,065,000 net in the same period of 1995 for 1995 and prior accident
years.
Significant losses affecting the six months ended June 30, 1996 loss
ratio are as follows:
<TABLE>
<CAPTION>
Amount of Losses
Loss Event Gross Net
---------- ----- ---
(in thousands)
<S> <C> <C>
Hurricane Luis $6,313 $2,531
Large risk losses 2,849 961
Hurricane Marilyn 2,149 824
</TABLE>
Significant losses affecting the same period of 1995 loss ratio are as
follows:
<TABLE>
<CAPTION>
Amount of Losses
Loss Event Gross Net
---------- ----- ---
(in thousands)
<S> <C> <C>
Northridge Earthquake $5,657 $3,482
Kobe Earthquake 5,063 4,000
Risk losses 4,600 3,835
</TABLE>
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 $84,000 for the first six
months of 1996 compared to a loss of $143,000 for the corresponding period of
1995.
18
<PAGE>
<PAGE>
During 1996, PXRE experienced a deficiency of $4,414,000 net for prior
year losses and loss expenses primarily due to development on Hurricanes Marilyn
and Luis, which are now expected to have exceeded specified market loss
thresholds. The loss ratio for the comparable period in 1995 was unfavorably
affected by increases to reserves of $2,756,000 net for prior year losses and
loss expenses.
The underwriting expense ratio was 25.8% for the six months ended June
30, 1996 compared with 17.0% 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
50.7% for the first six months of 1996 compared with 47.8% for the corresponding
period of 1995.
Other operating expenses increased to $6,526,000 for the six months
ended June 30, 1996, including non-recurring expenses amounting to $448,000,
from $5,061,000 in the comparable period of 1995. The operating expense increase
reflects an increase of $283,000 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 $166,000 for
1996 compared to gains of $849,000 for the corresponding period of 1995.
Interest expense increased to $3,604,000 in the first six months of 1996
compared to $3,532,000 in the same period of 1995 due to PXRE Reinsurance
Company's purchase of $2,300,000 par value of its parent company's 9.75% Senior
Notes during the second quarter of 1996 at a premium above par of $141,000.
Net investment income for the six months ended June 30, 1996 increased
17.0% to $8,110,000 from $6,931,000 for the same period of 1995. The increase in
net investment income was caused primarily by an increase in average investments
for the first six months of 1996 compared with the corresponding period in the
previous year, and by an increase in PXRE's pre-tax investment yield to 6.4% for
1996 compared with 5.8% for 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 six months ended
June 30, 1996 were $176,000 compared with net realized losses of $768,000 for
the comparable period in 1995.
The net effects of foreign currency exchange fluctuations were losses of
$82,000 in the six months ended June 30, 1996 and gains of $706,000 for the
comparable period of 1995.
Net income for the six months ended June 30, 1996 includes $1,984,000
which represents PXRE's approximately 22.1% equity share of TREX's net earnings
as compared with $3,046,000 representing PXRE's approximately 21.8% share of
TREX's net earnings for the comparable period of 1995.
19
<PAGE>
<PAGE>
For the reasons discussed above, net income was $16,495,000 for the six
months ended June 30, 1996 compared to net income of $21,324,000 for the
comparable period of 1995. Primary net income per common share was $1.86 for the
six months ended June 30, 1996 compared to net income per common share of $2.70
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 first six months of 1996, and average
shares outstanding were approximately 8,866,600 in the six months ended June 30,
1996 compared to 7,684,400 in the comparable period of 1995. Fully diluted net
income per common share was $1.86 for the six months ended June 30 1996 compared
to net income per common share of $2.41 for the comparable period of 1995 based
on average shares outstanding of approximately 8,876,100 in 1996 and 8,835,600
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 first six
months of 1996, $4,000,000 in dividends was 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 $6,923,000. 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
21
<PAGE>
<PAGE>
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.
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 April 1996, PXRE
Reinsurance purchased $2,300,000 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 used by operations was $932,000 during the second
quarter of 1996, compared with net cash flow used by operations of $5,627,000
during the corresponding period of 1995, due to the effects of timing of
collection of receivables and reinsurance recoverables and payments of losses.
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 June 30, 1996, PXRE's investment portfolio
consisted primarily of fixed maturities and short-term investments.
22
<PAGE>
<PAGE>
During the latter part of 1995, PXRE invested $5,000,000 in equities. The
investment policies and all investments of PXRE are approved by its Board of
Directors.
Of PXRE's fixed maturities portfolio at June 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 26.3% of fixed maturities based on fair value
at June 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 June 30, 1996 and 1995 was 6.5% and 6.0%, 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 $5,351,000 after-tax
unrealized decline in the value of its investment portfolio ($0.61 book value
per share) during the six months ended June 30, 1996 including a $1,850,000
decline in the second quarter of 1996 ($0.21 book value per share) reflecting an
increase 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 $22,982,000 at June 30, 1996
compared to $41,722,000 at December 31, 1995. The decrease at June 30, 1996 was
principally due to the cash flow requirements arising from the August 1995
hurricanes Marilyn and Luis.
Book value per common share was $24.99 at June 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 June 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 the fourth quarter of 1995, PXRE raised the quarterly dividend on
its Common Stock from $0.15 per share to $0.18 per share. The increase in the
dividend will result in an annual additional outlay of approximately $1,049,400.
The expected annual dividend based on shares outstanding at June 30, 1996 will
be approximately $6,316,000.
PXRE exercised its option to redeem PXRE's Series A Preferred Stock (and
the related Depositary Shares) on May 1, 1995. At December 31, 1994, there were
10,009 shares of Series A Preferred Stock (1,000,900 Depositary Shares)
outstanding. During the second quarter of 1995, all of the outstanding shares of
Series A Preferred Stock were converted into shares of PXRE's Common Stock
resulting in the issuance of approximately 1,760,000 shares of PXRE's Common
Stock. Each Depositary Share had a conversion price of $12.29 per Depositary
Share and was valued for conversion purposes at $25.00, resulting in
23
<PAGE>
<PAGE>
approximately 2.0342 shares of Common Stock for each Depositary Share converted.
As a result of this transaction, PXRE will save approximately $500,000 in
dividend costs for the preferred shares each quarter. This will be offset by
approximately $316,800 in additional common stock dividends on shares issued
upon conversion. To date, these convertible preferred shares were the principal
reason for the difference between primary and fully diluted earnings per share.
Because of the conversion, that difference will be eliminated in future periods.
At March 31, 1995, there were 238,755 shares of treasury stock. In
addition, 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 June 1996, PXRE repurchased 25,000 of the 700,000 shares authorized at a
cost of $625,000.
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 June 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 June 30, 1996, are
considered by management of PXRE to be collectible in all material respects.
INCOME TAXES
PXRE's effective tax rate for the second quarter of 1996 and 1995 was
32.7% and 31.2%, respectively, which differs from the statutory rate principally
due to tax exempt income, dividend received deduction and state and local taxes.
24
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 15, 1996 a putative class action lawsuit was filed in the Court
of Chancery of the State of Delaware which names PXRE, TREX and the directors of
TREX (including certain persons who are officers and/or directors of PXRE) as
defendants. The action alleges, among other things, that PXRE's proposal to
merge TREX with and into PXRE at an exchange ratio of .98 shares of PXRE Common
Stock for each publicly held share of TREX Class A Common Stock is grossly
unfair and inadequate, that the directors of TREX have violated their fiduciary
duties to TREX and that PXRE has violated its alleged fiduciary duties as a
controlling stockholder of TREX. The action seeks, among other things, to enjoin
the proposed combination of TREX and PXRE and/or to recover damages.
Item 4. Submission of Matters to a Vote of Security Holders
At PXRE's Annual Meeting of Shareholders held on June 6, 1996, the
holders of Common Stock of PXRE approved the following (in each case, with no
broker non-votes):
(i) the election of three Class I directors to serve until the 1999
Annual Meeting of Shareholders and until their successors have
been elected and have qualified:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
Wendy Luscombe 8,335,776 17,435
Gerald L. Radke 8,335,776 17,435
Wilson Wilde 8,335,776 17,435
</TABLE>
(ii) the appointment of Price Waterhouse LLP as PXRE's independent
public accountants for the fiscal year ending December 31, 1996,
by the vote of 8,330,367 votes for, 1,300 votes against and
21,544 abstentions.
25
<PAGE>
<PAGE>
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 May 17, 1996 containing, under the heading "Other Events", a
description of the lawsuit described in Item 1 above and a press release dated
May 17, 1996 regarding the same.
26
<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
August 13, 1996 By:/s/ Sanford M. Kimmel
------------------------
Sanford M. Kimmel
Senior Vice President, Treasurer
and Chief Financial Officer
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 233,269,347
<DEBT-CARRYING-VALUE> 230,528,548
<DEBT-MARKET-VALUE> 230,528,548
<EQUITIES> 5,467,402
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 258,977,768
<CASH> 3,772,849
<RECOVER-REINSURE> 33,099,473
<DEFERRED-ACQUISITION> 1,238,782
<TOTAL-ASSETS> 386,309,603
<POLICY-LOSSES> 66,509,153
<UNEARNED-PREMIUMS> 13,406,150
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 65,475,000
<COMMON> 90,164
0
0
<OTHER-SE> 219,123,525
<TOTAL-LIABILITY-AND-EQUITY> 386,309,603
36,519,763
<INVESTMENT-INCOME> 8,110,158
<INVESTMENT-GAINS> (175,689)
<OTHER-INCOME> 3,739,500
<BENEFITS> 9,100,421
<UNDERWRITING-AMORTIZATION> 6,639,221
<UNDERWRITING-OTHER> 6,526,332
<INCOME-PRETAX> 22,323,520
<INCOME-TAX> 7,813,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,494,640
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
<RESERVE-OPEN> 72,718,914
<PROVISION-CURRENT> 9,862,722
<PROVISION-PRIOR> 11,200,912
<PAYMENTS-CURRENT> 1,167,421
<PAYMENTS-PRIOR> 26,105,974
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</TABLE>
