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<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 MARCH 31, 1999
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 001-12595
PXRE CORPORATION
(FORMERLY PHOENIX RE CORPORATION)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 06-1183996
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
399 THORNALL STREET
EDISON, NEW JERSEY 08837
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(732) 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 May 10, 1999, 11,708,280 shares of common stock, $.01 par value
per share, of the Registrant were outstanding.
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<PAGE>
PXRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 3
Consolidated Statements of Operations and Comprehensive Income
for the three months ended March 31, 1999 and 1998 4
Consolidated Statements of Stockholders' Equity for the three
months ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flow for the three months
ended March 31, 1999 and 1998 6
Notes to Consolidated Interim Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION 27
</TABLE>
2
<PAGE>
<PAGE>
PXRE CONSOLIDATED BALANCE SHEETS
CORPORATION (Unaudited)
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<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Assets Investments:
Fixed maturities, available-for-sale, at fair value (amortized
cost $312,911,000 and $308,658,000, respectively) $ 312,613,107 $ 309,477,075
Equity securities, at fair value (cost $30,351,000 and $41,146,000) 25,760,502 40,974,283
Short-term investments 75,391,291 58,861,983
Other invested assets, at equity (cost $59,790,000 and $66,588,000) 59,400,453 65,163,581
---------------- ----------------
Total investments 473,165,353 474,476,922
Cash 7,745,718 16,117,473
Accrued investment income 5,436,305 5,330,419
Receivables:
Unreported premiums 29,755,005 18,440,954
Balances due from intermediaries and brokers 14,094,612 14,631,140
Other receivables 40,979,730 21,293,256
Reinsurance recoverable 33,683,333 41,260,657
Ceded unearned premiums 19,779,830 8,231,130
Deferred acquisition costs 7,328,632 4,122,603
Income tax recoverable 12,870,891 19,569,364
Other assets 12,122,149 9,217,218
---------------- ----------------
Total assets $ 656,961,558 $ 632,691,136
================ ================
Liabilities Losses and loss expenses $ 91,407,891 $ 102,592,394
Unearned premiums 47,086,831 20,541,326
Debt payable 50,000,000 50,000,000
Other liabilities 57,305,577 25,664,972
---------------- ----------------
Total liabilities 245,800,299 198,798,692
---------------- ----------------
Minority interest in consolidated subsidiary:
Company-obligated mandatorily redeemable capital trust
pass-through securities of subsidiary trust holding solely a
company-guaranteed related subordinated debt 99,517,964 99,516,938
Stockholders' Serial preferred stock, $.01 par value -- 500,000 shares authorized;
Equity 0 shares issued and outstanding 0 0
Common stock, $.01 par value -- 40,000,000 shares authorized;
15,131,454 and 14,938,262 shares issued, respectively 151,314 149,382
Additional paid-in capital 262,909,165 259,147,554
Accumulated other comprehensive income:
Net unrealized (depreciation) appreciation on investments, net of
deferred income tax (benefit) expense of $(1,702,000) and $3,400 (3,429,703) 6,253
Retained earnings 133,917,715 139,842,939
Treasury stock at cost (3,303,274 and 2,614,498 shares) (75,326,133) (61,420,025)
Restricted stock at cost (340,662 and 167,832 shares) (6,579,063) (3,350,597)
---------------- ----------------
Total stockholders' equity 311,643,295 334,375,506
---------------- ----------------
Total liabilities and stockholders' equity $ 656,961,558 $ 632,691,136
================ ================
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
<PAGE>
PXRE CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
CORPORATION (Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Revenues Net premiums earned $ 23,830,950 $ 19,713,968
Net investment income 7,200,592 7,561,058
Net realized investment (losses) gains (2,576,011) 1,224,643
Management fees 896,616 825,681
---------------- -----------------
29,352,147 29,325,350
---------------- -----------------
Losses and Losses and loss expenses incurred 18,898,062 3,570,797
Expenses Commissions and brokerage 6,406,928 3,992,016
Other operating expenses 6,237,793 4,349,853
Interest expense 831,285 544,280
Minority interest in consolidated subsidiary 2,108,441 2,231,884
---------------- -----------------
34,482,509 14,688,830
---------------- -----------------
(Loss) income before income taxes (5,130,362) 14,636,520
Income tax benefit (provision) 2,368,000 (4,650,000)
---------------- -----------------
Net (loss) income $ (2,762,362) $ 9,986,520
================ =================
Comprehensive Other comprehensive (loss) income, net of tax:
Income Net unrealized (depreciation) appreciation on investments (3,435,956) 351,022
---------------- -----------------
Comprehensive (loss) income $ (6,198,318) $ 10,337,542
================ =================
Per Share Basic:
Net (loss) income $ (0.23) $ 0.73
================ =================
Average shares outstanding 11,889,636 13,744,975
================ =================
Diluted:
Net (loss) income $ (0.23) $ 0.72
================ =================
Average shares outstanding 11,889,636 13,862,678
================ =================
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
<PAGE>
PXRE CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CORPORATION (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C> <C>
Common Stock: Balance at beginning of period $ 149,382 $ 148,063
Issuance of shares 1,932 390
------------------ -------------------
Balance at end of period $ 151,314 $ 148,453
================== ===================
Additional Balance at beginning of period $ 259,147,554 $ 255,060,792
Paid-in Capital: Issuance of common shares 3,901,077 1,257,989
Other (139,466) 3,702
------------------ -------------------
Balance at end of period $ 262,909,165 $ 256,322,483
================== ===================
Accumulated
Other Balance at beginning of period $ 6,253 $ 3,173,006
Comprehensive Change in fair value for the period (3,435,956) 351,022
Income: ------------------ -------------------
Balance at end of period $ (3,429,703) $ 3,524,028
================== ===================
Retained Balance at beginning of period $ 139,842,939 $ 150,749,451
Earnings: Net income (2,762,362) 9,986,520
Dividends paid to common stockholders (3,162,862) (3,449,618)
------------------ --------------------
Balance at end of period $ 133,917,715 $ 157,286,353
================== ===================
Treasury Stock: Balance at beginning of period $ (61,420,025) $ (21,660,108)
Repurchase of common stock (13,906,108) (193,125)
Other 0 (31,353)
------------------ -------------------
Balance at end of period $ (75,326,133) $ (21,884,586)
================== ===================
Restricted Stock: Balance at beginning of period $ (3,350,597) $ (782,808)
Issuance of restricted stock (3,750,094) (1,191,240)
Amortization of restricted stock 521,628 215,986
Other - 31,353
------------------- -------------------
Balance at end of period $ (6,579,063) $ (1,726,709)
================== ===================
Total Balance at beginning of period $ 334,375,506 $ 386,688,396
Stockholders' Issuance of common shares 3,903,009 1,258,379
Equity: Repurchase of common stock (13,906,108) (193,125)
Restricted stock, net (3,228,466) (975,254)
Unrealized (depreciation) appreciation on
investments net of deferred income tax (3,435,956) 351,022
Net income (2,762,362) 9,986,520
Dividends (3,162,862) (3,449,618)
Other (139,466) 3,702
------------------ -------------------
Balance at end of period $ 311,643,295 $ 393,670,022
================== ===================
</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
March 31,
1999 1998
---- ----
<S> <C> <C> <C>
Cash Flow Net income $ (2,762,362) $ 9,986,520
from Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities:
Losses and loss expenses (11,184,503) (6,789,427)
Unearned premiums 14,996,805 8,692,991
Deferred acquisition costs (3,206,029) (931,304)
Receivables (31,892,979) (15,831,027)
Reinsurance balances payable 6,242,372 8,865,258
Reinsurance recoverable 7,577,324 360,631
Income tax recoverable 7,895,000 5,687,878
Other 9,736,582 (6,133,781)
----------------- -----------------
Net cash (used) provided by operating activities (2,597,790) 3,907,739
----------------- -----------------
Cash Flow Cost of fixed maturity investments (43,314,511) (46,714,849)
from Investing Fixed maturity investments matured/disposed 37,505,132 70,507,154
Activities Payable for securities 10,800,088 0
Cost of equity securities (5,904,399) (2,048,242)
Equity securities disposed 20,695,859 79,990
Net change in short-term investments (15,358,055) (15,092,921)
Other invested assets purchased (4,304,740) (3,882,758)
Other invested assets disposed 11,022,716 0
----------------- -----------------
Net cash provided by investing activities 11,142,090 2,848,374
----------------- -----------------
Cash Flow Proceeds from issuance of common stock 152,915 67,139
from Financing Cash dividends paid to common stockholders (3,162,862) (3,449,618)
Activities Cost of treasury stock (13,906,108) (193,125)
----------------- -----------------
Net cash used by financing activities (16,916,055) (3,575,604)
----------------- -----------------
Net change in cash (8,371,755) 3,180,509
Cash, beginning of period 16,117,473 6,277,876
----------------- -----------------
Cash, end of period $ 7,745,718 $ 9,458,385
================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
<PAGE>
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") in the United
States. These statements reflect the consolidated operations of PXRE Corporation
and its subsidiaries (collectively referred to as "PXRE"), PXRE Reinsurance
Company ("PXRE Reinsurance"), PXRE Trading Corporation, Cat Fund L.P., PXRE
Capital Trust I, PXRE Ltd., PXRE Managing Agency Limited and PXRE Direct
Underwriting Managers, Inc. The U.K. operations of PXRE Ltd. and PXRE Managing
Agency Limited are included in the consolidated results on a one quarter lag
period beginning in June 1997. In addition, following the merger of PXRE and
Transnational Re Corporation ("TREX") as described further in Note 2, the
consolidated operations include Transnational Insurance Company ("Transnational
Insurance"), formerly Transnational Reinsurance Company, and TREX Trading
Corporation since December 11, 1996. During the period from January 1, 1996 to
December 11, 1996, PXRE owned approximately 21% of TREX, which in turn owned
100% of Transnational Insurance, and accounted for this investment under the
equity method. Following the merger, Transnational Insurance became a
wholly-owned subsidiary of PXRE Reinsurance. All material transactions between
the consolidated companies have been eliminated in preparing these consolidated
financial statements.
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The interim consolidated financial statements are unaudited; however, in
the opinion of management, the foregoing consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. These
interim statements should be read in conjunction with the 1998 audited
consolidated financial statements and related notes. The preparation of interim
consolidated financial statements relies significantly upon estimates. Use of
such estimates, and the seasonal nature of a portion of the reinsurance
business, necessitates caution in drawing specific conclusions from interim
results.
Certain amounts in 1998 were reclassified to be consistent with the 1999
presentation.
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 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.
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
7
<PAGE>
<PAGE>
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
- --------------------------------------------------------------------------------
reviewed to determine that they do not exceed recoverable amounts, after
considering investment income.
MANAGEMENT FEES
Management fees are recorded as earned under various arrangements
whereby PXRE Reinsurance acts as underwriting manager for other insurers and
reinsurers. These fees are initially based on premium volume, but are adjusted
in some cases through contingent profit commissions related to underwriting
results measured over a period of years.
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. 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.
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 during the period
such investments are held, are reflected net of income taxes in stockholders'
equity. Unrealized losses which are deemed other than temporary are charged to
operations. Short-term investments, which have an original maturity of one year
or less, are carried at amortized cost which approximates fair value. Short term
investments also include limited partnerships which invest primarily in Treasury
securities and provide for fund withdrawals upon 30 days notice; these are
reported under the equity method. Other invested assets include investments in
limited partnerships reported under the equity method which includes the cost of
the investment and subsequent proportional share of the partnership earnings.
Realized gains or losses on disposition of investments are determined on the
basis of specific identification. The amortization of premiums and accretion of
discount for fixed maturity investments is computed utilizing the interest
method. The effective yield under the interest method is adjusted for
anticipated prepayments. PXRE invests in certain weather indexed contracts. Such
investments are carried at estimated fair value and such adjustments to
estimated fair value are included in realized gains and losses.
8
<PAGE>
<PAGE>
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of certain assets and liabilities are based on published
market values, if available, or estimates based upon fair values of similar
issues.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain instruments
embedded in other contracts. It requires that all derivatives be recognized as
either assets or liabilities in the balance sheet and measured at fair value.
Gains or losses from changes in the derivative values are to be accounted for
based on how the derivative was used and whether it qualifies for hedge
accounting.
The statement is effective for all fiscal periods beginning after June
15, 1999. PXRE is currently assessing the effect of adopting this statement. It
is not expected, however, that the adoption of this statement will have a
material effect on PXRE's financial position or results of operations.
DEBT ISSUANCE COSTS
Debt issuance costs associated with the issuance of $100 million 8.85%
Capital Trust Pass-through Securities 'sm' (TRUPS 'sm') and the issuance of a
note under a $50 million Credit Agreement are being amortized over the term of
the related outstanding debt on a constant yield basis.
EXCESS OF FAIR MARKET VALUE OF NET ASSETS OF BUSINESS ACQUIRED OVER COST
The excess of fair market value of net assets of TREX business acquired
over cost is included in other liabilities and is amortized on a straight-line
basis over three years.
FOREIGN EXCHANGE
Foreign currency assets and liabilities are translated at the exchange
rate in effect at the balance sheet date. Resulting gains and losses are
reflected in income for the period.
The effect of the translation adjustments for the U.K. operations will
be recorded as a cumulative translation adjustment in a separate component of
stockholders' equity, net of applicable deferred income taxes; the translation
adjustment at March 31, 1999 was not material.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities reflect the expected future tax
consequences of temporary differences between carrying amounts and the tax bases
of PXRE's assets and liabilities.
9
<PAGE>
<PAGE>
PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CORPORATION
- --------------------------------------------------------------------------------
COMPREHENSIVE INCOME
During 1998, PXRE adopted SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and presentation of comprehensive
income and its components. Comprehensive income is comprised of net income and
other comprehensive income. Other comprehensive income consists of the change in
the net unrealized appreciation or depreciation of investments, net of tax, and
the change in foreign currency translation adjustments, net of tax.
EARNINGS PER SHARE
Effective December 31, 1997, PXRE adopted SFAS No. 128, Earnings Per
Share which requires replacing primary earnings per share with basic earnings
per share disclosure and fully diluted earnings per share with diluted earnings
per share disclosure. Basic earnings per share are determined by dividing net
earnings (after deducting cumulative preferred stock dividends) by the weighted
average number of common shares outstanding. On a diluted basis both net
earnings and shares outstanding are adjusted to reflect the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity, unless the effect of the
assumed conversion is anti-dilutive. SFAS No. 128 requires restatement of all
prior period earnings per share data presented.
STOCK-BASED COMPENSATION
PXRE accounts for its stock options in accordance with the provisions of
Accounting Principles Board Opinion No. 25 ("APB").
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Effective December 31, 1998, PXRE adopted SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. This statement requires that
companies report certain information about their operating segments, including
information about the products and services from which the revenues are derived,
the geographic areas of operation, and information about major customers. The
statement defines operating segments based on internal management reporting and
management's method of allocating resources and assessing performance.
10
<PAGE>
<PAGE>
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
PXRE Corporation ("PXRE") is a Delaware holding company, with
national and international underwriting and service operations, which conducts
its business primarily through its principal operating subsidiaries, PXRE
Reinsurance Company ("PXRE Reinsurance"), PXRE Managing Agency Limited ("PXRE
Managing Agency"), PXRE Limited, the sole member of PG Butler Syndicate 1224
("PXRE Lloyd's Syndicate") and Transnational Insurance Company ("Transnational
Insurance"). The term "PXRE" as used herein, refers to one or more of PXRE
Reinsurance, PXRE Managing Agency, PXRE Lloyd's Syndicate and Transnational
Insurance in discussions of these entities' businesses and refers to PXRE
Corporation in all other circumstances.
The property and casualty reinsurance industry has been experiencing an
extended period of soft market conditions. Competition has increased in recent
years as a result of the ability of companies to raise additional capital and
the use of both traditional and non-traditional reinsurance products. The level
of excess capital has also been aided by favorable financial markets and the
lower than normal number of major catastrophe losses in recent years.
Consolidation has been, and continues to be, another dominant trend in the
reinsurance industry. Companies are now larger, offer significantly more
capacity to ceding companies and have greater access to capital through capital
markets or their parent organizations. Further, Lloyd's of London ("Lloyd's")
has rebounded from a period of uncertainty and is now aggressively competitive.
The result is an oversupply of capacity in the industry.
Despite soft market conditions, PXRE has taken advantage of both the
availability of capital in the financial markets and new opportunities in the
business. PXRE has raised additional capital for its reinsurance operations to
increase its capacity to underwrite risks and to position PXRE to take advantage
of market opportunities. Since its formation more than a decade ago, PXRE has
specialized in property reinsurance, including a strong focus on
catastrophe-related products. Although catastrophe-related coverages experienced
substantial improvements in pricing and other terms in 1993 to 1994 following
high levels of catastrophic loss activity experienced by the worldwide insurance
industry, coverage terms have been deteriorating since the beginning of 1995. In
response, PXRE has moved to layers of risk that are less affected by competitive
pressures and has reduced commitments on marginally priced business. Meanwhile,
PXRE has taken a number of initiatives to enable it to write new business, and
position itself for renewed growth during the current soft market. In late 1996,
PXRE completed the organization of PXRE Managing Agency and PXRE Lloyd's
Syndicate, thereby establishing a direct presence in the Lloyd's market and
accessing specialty types of insurance and reinsurance on a worldwide basis.
Underwriting premium volume and loss experience related to the business of PXRE
Lloyd's Syndicate is included in PXRE's consolidated results on a quarter lag
basis, commencing in the quarter ended June 30, 1997. In addition, in the first
quarter of 1998 Transnational Insurance (formerly Transnational Reinsurance
Company), PXRE's newly established excess and surplus lines carrier, commenced
operations, specializing in non-standard and excess property insurance risks. In
11
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<PAGE>
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
mid-1998, PXRE added teams of direct writing reinsurance professionals to
establish a direct writing reinsurance unit and international reinsurance
executives both to complement PXRE's existing brokerage-based reinsurance
operations and to provide excess of loss short tail casualty products for
casualty markets, primarily commencing with January 1999 renewals. PXRE has not
previously had a significant presence in any casualty markets. These steps are
expected over time to reduce the financial statement volatility associated with
PXRE's catastrophe coverages which are expected to fall below 50% of gross
premiums written in 1999. Also in 1998, PXRE further strengthened its Lloyd's
unit with additional professionals and that unit is now expanding into the
provision of services to start-up syndicates and captives at Lloyd's.
At March 31, 1999, PXRE was a party to retrocessional arrangements with
a number of insurers and reinsurers. Under these arrangements, PXRE cedes some
of its underwritten risks to the participants, subject to maximum aggregate
liabilities per reinsurance program. PXRE receives a management fee or
commission, initially based on premium volume, adjusted in some cases through
contingent profit commissions related to underwriting results measured over a
period of years. Future management fee income is dependent upon the amount of
business ceded to the participants and the profitability of that business.
Another arrangement with Select Reinsurance Ltd. ("Select Re"), a Bermuda
reinsurer, formerly Investors Reinsurance Ltd., was renegotiated in 1998, and
involves a five-year (commencing 1998) fee based undertaking to produce and
underwrite business with Select Re. The Board of Directors of Select Re includes
PXRE's Chief Executive Officer.
PXRE also purchases catastrophe retrocessional coverage for its own
protection, depending on market conditions. PXRE has significantly increased its
purchases of such coverage in 1998 and 1999 in light of the continued general
deterioration in catastrophe reinsurance pricing and the opportunity to buy
protection at more favorable terms than in recent years.
CERTAIN RISKS AND UNCERTAINTIES
As a reinsurer principally of property catastrophe-related coverages in
both the national and international 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. While PXRE may, depending
on market conditions, purchase catastrophe retrocessional coverage for its own
protection, the occurrence of one or more major catastrophes in any given period
could nevertheless have a material adverse impact on PXRE's results of
operations and financial condition and result in substantial liquidation of
investments and outflows of cash as losses are paid.
12
<PAGE>
<PAGE>
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 shorter period of time
than casualty losses.
In addition, the potential for uncertainty for the 1999 underwriting
year is greater than in past years because of the increased casualty exposures
assumed by PXRE. Unlike property losses that tend to be reported more promptly
and usually are settled within a shorter time period, casualty losses are
frequently slower to be reported and may be determined only through the lengthy,
unpredictable process of litigation. Moreover, given its recent expansion of
casualty business, PXRE does not have an established historical loss pattern
that can be used to establish casualty loss liabilities. PXRE must therefore
rely on the inherently less reliable historical loss patterns reported by ceding
companies and industry loss standards in calculating its liabilities.
As PXRE underwrites risks from a large number of insurers based on
information generally supplied by reinsurance brokers, there is a risk of
developing a concentration of exposure to loss in certain geographic areas prone
to specific types of catastrophes. PXRE has developed systems and software tools
to monitor and manage the accumulation of its exposure to such losses.
Management has established guidelines for maximum tolerable losses from a single
or multiple catastrophic events based on historical data; however, no assurance
can be given that these maximums will not be exceeded in some future
catastrophe.
Premiums on reinsurance business assumed are recorded as earned on a pro
rata basis over the contract period based upon estimated subject premiums.
Management must estimate the subject premiums associated with the treaties in
order to determine the level of earned premiums for a reporting period. Such
estimates are based on information from brokers, which can be subject to change
as new information becomes available. Because of the inherent uncertainty in
this process, there is the risk that premiums and related receivable balances
may turn out to be higher or lower than reported.
13
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PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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PXRE's invested assets consist primarily of fixed maturities and
short-term investments, but also include equities and investments in limited
partnerships, real estate investment trusts ("REITS"), emerging market debt and
other high yield bonds. PXRE's investments are subject to market-wide risks and
fluctuations, as well as to risk inherent in particular securities.
Additionally, 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. PXRE's investment guidelines stress
conservation of principal, diversification of risk and liquidity.
Premium receivables and loss reserves include business denominated in
currencies other than U.S. dollars. PXRE is exposed to the possibility of
significant claims in currencies other than U.S. dollars. While PXRE holds
positions denominated in foreign currencies to mitigate, in part, the effects of
currency fluctuations on its results of operations, it currently does not hedge
its currency exposures before a catastrophic event which may produce a claim.
PXRE relies primarily on cash dividends and net tax allocation payments
from its subsidiaries PXRE Reinsurance and Transnational Insurance to pay its
operating expenses, to meet its debt service obligations and to pay dividends to
PXRE's stockholders. The payment of dividends by PXRE Reinsurance to PXRE, and
by Transnational Insurance to PXRE Reinsurance, is subject to limits imposed
under the insurance laws and regulations of Connecticut, the state of
incorporation and domicile of PXRE Reinsurance and Transnational Insurance, as
well as certain restrictions arising in connection with PXRE's outstanding
indebtedness.
In the event the amount of dividends available, together with other
sources of funds, are not sufficient to permit PXRE to meet its debt service,
its other obligations and to pay cash dividends, it would be necessary to obtain
the approval of the Connecticut Insurance Commissioner prior to the payment of
additional dividends by PXRE Reinsurance (or Transnational Insurance). If such
approval were not obtained, PXRE would have to adopt one or more alternatives,
such as refinancing or restructuring its indebtedness or seeking additional
equity. There can be no assurance that any of these strategies could be effected
on satisfactory terms, if at all.
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 national and international reinsurance and insurance companies, many of
which have substantially greater financial, marketing and management resources
than PXRE.
14
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PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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COMPARISON OF FIRST QUARTER RESULTS FOR
1999 WITH 1998
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
Increase
1999 1998 (Decrease)
---- ---- ----------
(000's) %
<S> <C> <C> <C>
GROSS PREMIUMS WRITTEN $ 62,208 $ 40,638 53.0%
CEDED PREMIUMS:
Managed business participants 7,540 6,140 22.8
Catastrophe coverage 15,840 6,141 157.9
------ ----------
Total reinsurance premiums ceded 23,380 12,281 90.4
------ ---------
NET PREMIUMS WRITTEN $ 38,828 $ 28,357 36.9
======== ========
</TABLE>
Gross premiums written for the three months ended March 31, 1999,
increased 53.0% to $62,208,000 from $40,638,000 for the corresponding period of
1998. Net premiums written for the first quarter of 1999, increased 36.9% to
$38,828,000 from $28,357,000 for the corresponding period of 1998. Net premiums
earned for the first quarter of 1999, increased 20.9% to $23,831,000 from
$19,714,000 for the comparable period of 1998. Gross written, net written and
net earned premium for the three months ended March 31, 1999 increased from
prior-year levels reflecting new business written by PXRE's new teams of
underwriters and by PXRE Lloyd's Syndicate. PXRE's decision to buy additional
retrocessional coverage reduced the level of increase in net written and net
earned premium. Underwriting results related to PXRE Lloyd's Syndicate is
included in the consolidated results on a one quarter lag basis.
Catastrophe written premiums ceded increased in part due to additional
coverage associated with new operations and in part due to opportunistic
purchases of catastrophe protection. PXRE's property business is protected by a
series of retrocessional agreements which currently provide protection
principally against unusual severity of loss and are not designed to protect
PXRE's exposure to smaller more frequent loss occurrences.
Premiums ceded by PXRE to its managed business participants increased
22.8% to $7,540,000 for the first quarter of 1999 compared with $6,140,000 for
the corresponding period of 1998. The increase in premiums ceded to these
programs was due primarily to increased amounts of premiums written by PXRE.
Management fee income from all sources for the three months ended March
31, 1999 increased to $897,000 from $826,000 for the corresponding period of
1998, reflecting an increase of premiums ceded to managed business participants
offset, in part, by a decrease in profit commissions.
15
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PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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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 79.3% for the first quarter of 1999 compared with
18.1% for the comparable period of 1998. The loss ratio for the first quarter of
1999 is largely due to Hurricanes Georges and Mitch, some development on other
1998 loss events, continued frequency of 1999 loss events as well as higher
average loss ratios related to new business from recent diversification efforts.
The loss ratio for the first quarter of 1999 reflected incurred catastrophe
losses of $13,024,000 gross and $7,870,000 net for 1999 and prior accident
years. PXRE did not experience any significant catastrophic losses for the first
quarter of 1998.
Significant catastrophe and risk losses affecting the three months ended
March 31, 1999 loss ratio are as follows:
<TABLE>
<CAPTION>
Amount of Losses
------------------------------
Gross Net
----- ---
Loss Event (000's)
- ----------
<S> <C> <C>
Hurricane Georges $8,536 $5,649
Hurricane Mitch 2,072 1,482
One Risk Loss 2,145 1,242
Colombian Earthquake 1,943 918
</TABLE>
The provision for losses and loss expenses and the loss ratio includes
the effect of foreign exchange movements on PXRE's liability for losses and loss
expenses. This resulted in a foreign currency exchange gain of $459,000 for the
three months ended March 31, 1999 compared to a loss of $28,000 for the
corresponding period of 1998.
During the first quarter of 1999, PXRE experienced adverse development
of $9,196,000 net for prior-year loss and loss expenses primarily related to
Hurricanes Georges and Mitch. The loss ratio for the comparable period of 1998
experienced a deficiency of $744,000 net for prior-year loss and loss expenses
primarily related to the German, Poland and Czech floods.
16
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PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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The underwriting expense ratio was 49.4% for the first quarter of 1999
compared with 38.1% for the comparable period of 1998. The expense ratio
reflects higher commissions from new business as well as an increase in salary
and benefits incurred in building the diversified business. The commission and
brokerage ratio was 23.2% in the first quarter of 1999 compared with 16.1% in
the prior year period. The operating expense ratio was 26.2% in the first
quarter of 1999 compared with 22.0% in the year earlier period. As a result of
the above, the combined ratio was 128.7% for the first quarter of 1999 compared
with 56.2% for the corresponding period of 1998.
Other operating expenses increased to $6,238,000 for the three months
ended March 31, 1999 from $4,350,000 in the comparable period of 1998. The
primary reason for the increase in operating expenses was the increase in salary
and benefits. Included in other operating expenses were foreign currency
exchange losses of $465,000 for the three months ended March 31, 1999 compared
to losses of $74,000 for the corresponding period of 1998.
During the first quarter of 1999 interest expense increased to $831,000
as compared to $544,000 in the corresponding period of 1998. The increase in
interest expense relates to the interest on a loan of $50 million principal
balance at a rate of 6.215%. This is part of PXRE's new Credit Agreement with
First Union National Bank (as described below under "Liquidity and Capital
Resources"). Interest in the first quarter of 1998 reflected $21.4 million of
PXRE's 9.75% Senior Debt which was retired in August, 1998. In addition, in
the first quarter of 1999, PXRE incurred minority interest expense
amounting to $2,108,000 related to the $100 million of 8.85% Capital Trust
Pass-through Securities 'sm' (TRUPS 'sm') (as described below under "Liquidity
and Capital Resources") compared to $2,232,000 in the similar quarter of 1998.
Net investment income for the three months ended March 31, 1999
decreased 4.8% to $7,201,000 from $7,561,000 for the comparable period of 1998.
The decrease in net investment income was caused by a decrease in average
investment in bonds, following treasury stock repurchases of $35,416,000 in the
last half of 1998 and the repurchase of the remaining portion of 9.75% Senior
Debt in August 1998. In addition, payments on catastrophe losses in the fourth
quarter of 1998 and first quarter of 1999, lower yields on such bond
investments, partially offset by increased income from PXRE's limited
partnership investments, also contributed to the decline in net investment
income. PXRE's pre-tax annualized investment yield was 6.6% for the first
quarter of 1999 compared with 6.4% for the corresponding period in 1998, both
calculated using amortized cost and investment income before investment
expenses.
Net realized investment losses for the first quarter of 1999 were
$2,576,000 compared to gains of $1,225,000 for the corresponding period of 1998.
The loss reflects a $5,173,000 loss on weather contracts offset in part by
$2,597,000 in net capital gains on securities sales.
The net effects of foreign currency exchange fluctuations were losses of
$6,000 in the first
17
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PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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quarter of 1999 and losses of $102,000 for the comparable quarter of 1998. See
"Liquidity and Capital Resources."
For the reasons discussed above, net loss was $2,762,000 for the three
months ended March 31, 1999 compared to net income of $9,987,000 for the
comparable period of 1998. Diluted loss per common share was $0.23 for the first
quarter of 1999 compared to income of $0.72 for the prior comparable period,
based on average shares outstanding of approximately 11,890,000 in 1999 and
13,863,000 in the corresponding period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
PXRE relies primarily on cash dividends and net tax allocation payments
from its subsidiaries PXRE Reinsurance and Transnational Insurance to pay its
operating expenses and income taxes, to meet its debt service obligations and to
pay dividends to PXRE stockholders. The payment of dividends by PXRE Reinsurance
to PXRE and by Transnational Insurance to PXRE Reinsurance is subject to limits
imposed under the insurance laws and regulations of Connecticut, the state of
incorporation and domicile of PXRE Reinsurance and Transnational Insurance, as
well as certain restrictions arising in connection with PXRE indebtedness
discussed below. Under the Connecticut insurance law, the maximum amount of
dividends or other distributions that PXRE Reinsurance may declare or pay to
PXRE, and that Transnational Insurance may declare or pay to PXRE Reinsurance,
within any twelve-month period, without regulatory approval, is limited to the
lesser of (a) earned surplus or (b) the greater of 10% of policyholders' surplus
at December 31 of the preceding year or 100% of net income for the twelve-month
period ending December 31 of the preceding year, all determined in accordance
with SAP. Accordingly, the Connecticut insurance laws could limit the amount of
dividends available for distribution by PXRE Reinsurance or Transnational
Insurance without prior regulatory approval, depending upon a variety of factors
outside the control of PXRE, including the frequency and severity of catastrophe
and other loss events and changes in the reinsurance market, in the insurance
regulatory environment and in general economic conditions. The maximum amount of
dividends or distributions that PXRE Reinsurance may declare and pay during
1999, without regulatory approval, is $44,722,900. The maximum amount of
dividends or distributions that Transnational Insurance may declare and pay to
PXRE Reinsurance during 1999, without regulatory approval, is $2,901,000. During
the first quarter of 1999, $12,000,000 was paid by PXRE Reinsurance to PXRE and
authorization was obtained from the Connecticut Insurance Department to pay a
dividend of $10,000,000 by Transnational Insurance to PXRE Reinsurance which was
paid in the first quarter of 1999.
In the event the amount of dividends available, together with other
sources of funds, are not sufficient to permit PXRE to meet its debt service and
other obligations and to pay cash dividends, it would be necessary to obtain the
approval of the Connecticut Insurance Commissioner prior to the payment of
additional dividends by PXRE Reinsurance (or Transnational Insurance). If such
approval were not obtained, PXRE would have to adopt one or more alternatives,
such as refinancing or restructuring its indebtedness or seeking additional
18
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PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
equity. There can be no assurance that any of these strategies could be effected
on satisfactory terms, if at all. In the event that PXRE were unable to generate
sufficient cash flow and were otherwise unable to obtain funds necessary to meet
required payments of principal and interest on its indebtedness, PXRE could be
in default under the terms of the agreements governing such indebtedness. In the
event of such default, the holders of such indebtedness could elect to declare
all of the funds borrowed thereunder to be due and payable together with accrued
and unpaid interest.
In December 1998 PXRE entered into a Credit Agreement dated as of
December 30, 1998 (the "Credit Agreement") with First Union National Bank
("First Union") as Agent and as a Lender, pursuant to which First Union and
additional Lenders which may become parties thereto agree to make available to
PXRE a revolving credit facility. As at March 31, 1999, PXRE had outstanding
borrowings under the Credit Agreement of $50,000,000, the net proceeds of which
were contributed to the capital of PXRE Reinsurance. Loans under the Credit
Agreement bear interest at an annual rate equal to First Union's base rate, as
in effect from time to time, for base rate loans or at a margin (.875% as of
March 31, 1999) over First Union's Eurodollar rate for periods of 30, 60, 90 or
180 days for LIBOR loans. In connection with the Credit Agreement, PXRE and
First Union entered into an interest rate swap which, effective December
31,1998, has the intended effect of converting such $50,000,000 borrowings by
PXRE into a fixed rate borrowing at an annual interest rate of 6.215%.
Commitments under the Credit Agreement terminate on March 31, 2005 and are
subject to annual reductions of 13 1/3% commencing March 31, 2000 and 33 1/3% on
March 31, 2005, and, unless due or paid sooner, the aggregate principal of the
loans are due and payable in full on March 31, 2005.
The Credit Agreement contains covenants which, among other things, limit
the ability of PXRE and its subsidiaries (including PXRE Reinsurance,
Transnational Insurance and PXRE Limited): (a) to incur additional Indebtedness
(other than certain permitted Indebtedness); (b) to create Liens upon their
properties or assets (other than Permitted Liens); (c) to sell, transfer or
otherwise dispose of their assets, business or properties (other than certain
permitted dispositions); (d) to make additional Investments (other than certain
permitted Investments, including Permitted Acquisitions and other Investments in
compliance with, among other things, applicable law and the limitations set
forth in the investment policy of PXRE Reinsurance in effect on December 30,
1998 and not exceeding specified limits); (e) to pay dividends or repurchase
stock if after giving effect thereto a Default or Event of Default exists or the
Fixed Charge Coverage Ratio would be less than 1.5 to 1.0 as defined in the
Credit Agreement; (f) to enter into certain transactions with Affiliates; (g) to
engage in any business other than (1) the businesses engaged in on December 30,
1998 and businesses and activities reasonably related thereto or (2) in the case
of any Insurance Subsidiary, the sale of any property and casualty insurance or
reinsurance products; (h) to enter into or remain a party to certain ceded
reinsurance agreements (1) with certain reinsurers that are neither rated "A-"
or better by A.M. Best Company ("A.M. Best") nor have financial strength ratings
of "A-" or better by Standard & Poor's Corporation ("S&P") or Moody's Investors
Service Inc. ("Moody's") unless such reinsurers are Lloyd's syndicates and
Lloyd's maintains a rating of "A-" or better by A.M. Best or S&P or such
reinsurers have
19
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PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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- --------------------------------------------------------------------------------
provided appropriate collateral in respect of their obligations, or (2) which
constitute Surplus Relief Agreements and which increase Combined Statutory
Capital and Surplus by more than 5% as of the most recent fiscal year end; or
(i) to consolidate, merge or otherwise combine (or agree to do any of the
foregoing) unless, among other things, (1) PXRE is the surviving entity in such
merger or consolidation, (2) such merger or consolidation constitutes a
Permitted Acquisition and the conditions and requirements of the Credit
Agreement are complied with and (3) immediately thereafter no Default or Event
of Default exists. The Credit Agreement also requires PXRE and PXRE Reinsurance
where applicable to meet Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based
Capital Ratio and Combined Statutory Surplus requirements. As at March 31, 1999
there was no default under the Credit Agreement.
The Credit Agreement enumerates various Events of Default, including but
not limited to, if: (1) any Person or group becomes the "beneficial owner" of
securities of PXRE representing 20% or more of the combined voting power of the
then outstanding securities of PXRE ordinarily having the right to vote in the
election of directors; or (2) the Board of Directors of PXRE ceases to consist
of a majority of the individuals who constituted the Board as of December 30,
1998 or who subsequently become members after having been nominated, or
otherwise approved in writing, by at least a majority of individuals who
constituted the Board as of December 30, 1998 (or their approved replacements).
On January 29, 1997, PXRE Capital Trust I, a Delaware statutory business
trust and a wholly-owned subsidiary of PXRE ("PXRE Capital Trust") issued
$100,000,000 principal amount of its 8.85% TRUPS 'sm' due February 1, 2027 in an
institutional private placement. Proceeds from the sale of these securities were
used to purchase PXRE's 8.85% Junior Subordinated Deferrable Interest Debentures
due February 1, 2027 (the "Subordinated Debt Securities"). On April 23, 1997,
PXRE and PXRE Capital Trust completed the registration with the Securities and
Exchange Commission of an exchange offer for these securities and the securities
were exchanged for substantially similar securities (the "Capital Securities").
Distributions on the Capital Securities (and interest on the related
Subordinated Debt Securities) are payable semi-annually, in arrears, on February
1 and August 1 of each year, commencing August 1, 1997. Minority interest
expense, including amortization of debt offering costs, for the three months
ended March 31, 1999 in respect of the Capital Securities (and related
Subordinated Debt Securities) amounted to approximately $2,108,000. On or after
February 1, 2007, PXRE has the right to redeem the Subordinated Debt Securities,
in whole at any time or in part from time to time, subject to certain
conditions, at call prices of 104.180% at February 1, 2007, declining to
100.418% at February 1, 2016, and 100% thereafter. PXRE has the right, at any
time, subject to certain conditions, to defer payments of interest on the
Subordinated Debt Securities for Extension Periods (as defined in the applicable
indenture), each not exceeding 10 consecutive semi-annual periods; provided that
no Extension Period may extend beyond the maturity date of the Subordinated Debt
Securities. As a consequence of PXRE's extension of the interest payment period
on the Subordinated Debt Securities, distributions on the Capital Securities
would be deferred (though such distributions would continue to accrue interest
at a rate of 8.85% per annum compounded semi-annually).
20
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PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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In the event that PXRE exercises its right to extend an interest payment period,
then during any Extension Period, subject to certain exceptions, (i) PXRE shall
not declare or pay any dividend on, make any distributions with respect to, or
redeem, purchase, acquire or make a liquidation payment with respect to, any of
its capital stock or rights to acquire such capital stock or make any guarantee
payments (subject to specified exceptions) with respect to the foregoing, and
(ii) PXRE shall not make any payment of interest on, or principal of (or
premium, if any, on), or repay, repurchase or redeem, any debt securities issued
by PXRE which rank pari passu with or junior to the Subordinated Debt
Securities. Upon the termination of any Extension Period and the payment of all
amounts then due, PXRE may commence a new Extension Period, subject to certain
requirements.
PXRE has used the net proceeds from the sale of the Capital Securities
for general corporate purposes, including the redemption and the purchase of
outstanding indebtedness and common stock of PXRE.
PXRE files federal income tax returns for itself and all of its direct
or indirect subsidiaries that satisfy the stock ownership requirements for
consolidation for federal income tax purposes (collectively, the
"Subsidiaries"). PXRE is party to an Agreement Concerning Filing of Consolidated
Federal Income Tax Returns (the "Tax Allocation Agreement") pursuant to which
each domestic Subsidiary makes tax payments to PXRE in an amount equal to the
federal income tax payment that would have been payable by such Subsidiary for
such year if it had filed a separate income tax return for such year. PXRE is
required to provide for payment of the consolidated federal income tax liability
for the entire group. If the aggregate amount of tax payments made in any tax
year by a domestic Subsidiary is less than (or greater than) the annual tax
liability for such Subsidiary on a stand-alone basis for such year, such
Subsidiary will be required to make up such deficiency to PXRE (or will be
entitled to receive a credit if payments exceed the separate return tax
liability) of the Subsidiary.
The primary sources of liquidity for PXRE's principal operating
subsidiaries are net cash flow from operating activities (including interest
income from investments), the maturity or sale of investments, borrowings,
capital contributions and advances from PXRE or PXRE Reinsurance and in the case
of PXRE Reinsurance, dividends from Transnational Insurance. Funds are applied
primarily to the payment of claims, operating expenses and, income taxes and to
the purchase of investments. Premiums are typically received in advance of
related claim payments.
Net cash flow used by operations was $2,598,000 during the first quarter
of 1999 compared with net cash flow provided by operations of $3,908,000 during
the corresponding period of 1998, 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
21
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PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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investment portfolio and oversees investment management carried out by Phoenix
Investment Partners, Limited, a public majority-owned subsidiary of Phoenix Home
Life Mutual Insurance Company, and by selected other investment managers. PXRE's
invested assets consist primarily of fixed maturities and short-term
investments, but also include equities and investments in limited partnerships,
REITS, emerging market debt and other high yield bonds. PXRE's investments are
subject to market-wide risks and fluctuations, as well as to risk inherent in
particular securities. As at March 31, 1999, 82.0% of PXRE's investment
portfolio, at fair value, consisted of fixed maturities and short-term
investments, while the balance was in equity securities including various mutual
funds and other invested assets primarily in the form of limited partnerships.
PXRE's investment policies stress conservation of principal, diversification of
risk and liquidity and are approved by its Board of Directors.
Of PXRE's fixed maturities portfolio at March 31, 1999, 82.1% of the
fair value was in obligations rated "A2" or "A" or better by Moody's or S&P,
respectively. Mortgage and asset-backed securities accounted for 17.6% of
fixed maturities based on fair value at March 31, 1999. PXRE had no
investments in real estate or commercial mortgage loans; however, PXRE has
invested in common and preferred shares of publicly traded REITS. The average
market yield to maturity of PXRE's fixed maturities portfolio was 6.4% at both
March 31, 1999 and 1998.
Fixed maturity and equity investments are reported at fair value, with
the net unrealized gain or loss, net of tax, reported as a separate component of
stockholders' equity. PXRE recorded directly to stockholders' equity a
$3,436,000 after-tax unrealized loss in the value of its investment portfolio
($0.29 book value per share) at March 31, primarily due to the realization of
certain gains (which at December 31, 1998 were unrealized).
Short-term investments are carried at amortized cost, which approximates
fair value. PXRE's short-term investments, principally high-grade commercial
paper, U.S. Treasury bills and investment in a limited partnership which invests
primarily in U.S. Treasury bills, were $75,391,000 at March 31, 1999 compared to
$58,862,000 at December 31, 1998. Other invested assets amounting to $59,400,000
at March 31, 1999, which were comprised of limited partnerships, were accounted
for under the equity method. The amount of equity income included in short-term
investments and other invested assets for the quarter ended March 31, 1999
amounted to $2,126,000.
Dividends incurred in the first quarter of 1999 were approximately
$3,163,000 compared to $3,450,000 in the corresponding period of 1998, as a
result of the increase in the per share quarterly dividend from $0.25 to $0.26
commencing in the fourth quarter of 1998 more than offset by the decline in
outstanding shares resulting from stock repurchases. The expected annual
dividend based on shares outstanding at March 31, 1999 is approximately
$12,301,000.
Book value per common share was $26.35 at March 31, 1999.
22
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PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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During the first quarter of 1999, PXRE acquired 688,776 shares of common
stock under its currently authorized stock repurchase program and, subsequent to
March 31, 1999, and through to May 10, 1999 PXRE has purchased an additional
119,900 shares of common stock. PXRE continues to have authorization to
repurchase approximately 500,000 shares. PXRE had approximately 11,828,000
common shares outstanding as of March 31, 1999.
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.
In connection with the capitalization of PXRE Lloyd's Syndicate, PXRE
has placed on deposit $46,287,000 par value of U.S. government securities and
municipal bonds as collateral for Lloyd's. In addition, PXRE issued a letter of
credit for the benefit of Lloyd's in the amount of $15,355,000, which is
collateralized by municipal bonds for approximately $17,835,000. In addition,
PXRE has provided a 'L'5,000,000 ($8,050,000 at March 31, 1999 exchange
rates) line of credit to PXRE Managing Agency for liquidity purposes. There has
been no drawdown of these amounts through March 31, 1999.
In September 1997, PXRE and Phoenix Home Life completed the formation of
a joint venture, Cat Bond Investors L.L.C., with initial committed capital of
$20 million. The joint venture specializes in investing in instruments, the
returns on which are determined, in whole or in part, by the nature, magnitude
and/or effects of certain catastrophic events or meteorological conditions.
All amounts classified as reinsurance recoverable at March 31, 1999 are
considered by management of PXRE to be collectible in all material respects.
MARKET RISK
PXRE reviewed the change in its exposure to market risks since December
31, 1998. The components of PXRE's holdings in derivatives and other financial
instruments have not materially changed. PXRE's risk management strategy and
objectives have not materially changed. PXRE believes that the potential for
loss in each market risk sector described at year-end has not materially
changed.
23
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PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
INCOME TAXES
PXRE recognized a tax benefit of $2,368,000 in the first quarter of 1999
compared to tax expense of $4,650,000 in the corresponding period of 1998. The
tax benefit reported by PXRE in 1999 is attributable primarily to a net loss,
tax-exempt income and amortization of negative goodwill. The effective tax rate
for the first quarter of 1998 was 31.8% which differed from the statutory rate
principally due to tax exempt income, negative goodwill and state and local
taxes.
YEAR 2000 UPDATE
PXRE's Year 2000 Project is proceeding on schedule. The Project is
addressing the issue of computer programs and embedded computer chips being
unable to distinguish between the year 1900 and the year 2000. PXRE believes
that the impact of Year 2000 issues on its internal computer systems will not be
material. PXRE wrote and upgraded most of its software over the last four years
in an Oracle based software environment that has been certified as Year 2000
compliant. It has been PXRE's internal standard to develop or, where necessary,
redevelop internally based systems using 4 digit date fields for all
calculations.
Two older legacy systems were identified as not being year 2000
compliant. One was a vendor provided general ledger system, which was replaced
with a new, Year 2000 certified general ledger system in December 1998. This
system has been converted, implemented, tested and is working properly effective
with year-end 1998. Another system, which was internally developed, was upgraded
and rewritten by December 31, 1998.
PXRE has replaced or upgraded, as part of its normal upgrade of hardware
and software, most of its mission critical servers, personal computers and
related desktop or network software to Year 2000 compliant versions. The cost of
replacing or upgrading any remaining non-compliant equipment is not expected to
be material. PXRE budgeted and expended $300,000 in 1998 for the upgrade and
replacement of software systems and hardware for this purpose. Management of
PXRE anticipates spending an additional $100,000 in 1999 to obtain backup
equipment that will increase its Y2K security.
PXRE has been in contact with its other material business partners to
determine their state of readiness with regard to the Year 2000 issue and the
potential impact on PXRE. PXRE has identified the following categories of
business partners as material to PXRE's ability to conduct its operations: banks
and investment advisors, reinsurance intermediaries, major reinsurance clients,
reinsurance providers, telecommunications providers and utilities.
In connection with reinsurance intermediaries and reinsurance clients,
PXRE has the ability to verify their calculations of reinsurance transactions so
that material errors brought on by a failure of their systems are capable of
being detected.
24
<PAGE>
<PAGE>
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Where PXRE has determined that the relationship with a business partner
is material to its ability to conduct normal operations, PXRE has sent letters
to that partner requesting an update on the status of its Year 2000 initiative.
Where deemed necessary, PXRE is following up with the business partner to obtain
additional information. Based on these assurances and PXRE's internal reviews of
the information provided, PXRE has not currently identified a material business
partner that will not be compliant. However, there can be no assurance that all
business partners will supply accurate or up-to-date information regarding their
preparedness for the Year 2000, and there can be no assurance that all material
business partners will be compliant. Such non-compliance could have a material
effect on PXRE's financial position and results of operations. PXRE expects to
complete its review of material business partners by June 30, 1999.
PXRE has made the decision to evaluate the potential Year 2000 exposures
emanating from its reinsurance business by conducting an analysis of each
individual customer's risk exposures. Where appropriate, PXRE requires that an
exclusion be added to the reinsurance contract or letter of intent be received.
PXRE began adding exclusions to reinsurance contracts in early 1998.
Additionally, it is PXRE's position, in common with others in the industry that
Year 2000 exposures in and or themselves are not fortuitous losses and thus are
not covered under reinsurance contracts even without specific exclusions. For
these reasons, PXRE believes that its exposures to Year 2000 claims will not be
material. However, as was the case with environmental exposures, changing social
and legal trends may create unintended coverage for exposures by reinterpreting
reinsurance contracts and related exclusions. It is impossible to predict what,
if any, exposure reinsurance companies may ultimately have for Year 2000 claims
whether coverage for the issue is specifically excluded or included.
PXRE is reviewing its disaster recovery procedures and testing its
ability to redeploy its computer and staff operations to a remote hot site
location in the event of failure on the part of public utilities to provide
electrical power or communication links following a Year 2000 problem.
Additional formal contingency plans will not be formulated until PXRE has
identified specific areas where there is a substantial risk of Year 2000
problems occurring, and no such other areas have been identified as of this
date.
Readers are cautioned that forward-looking statements contained in this
Year 2000 Update should be read in conjunction with the Company's disclosures
under the heading: "CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains various forward-looking statements and includes
assumptions concerning PXRE's operations, future results and prospects.
Statements included herein, as
25
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<PAGE>
PXRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
well as statements made by or on behalf of PXRE in press releases, written
statements or other documents filed with the Securities and Exchange Commission,
or in its communications and discussions with investors and analysts in the
normal course of business through meetings, phone calls and conference calls,
which are not historical in nature are intended to be, and are hereby identified
as, "forward-looking statements" for purposes of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934 as amended. These
forward-looking statements are based on current expectations and are subject to
risk and uncertainties. PXRE cautions investors and analysts that actual results
or events could differ materially from those set forth or implied by the
forward-looking statements and related assumptions, depending on the outcome of
certain important factors including, but not limited to, the following: (i) the
frequency and severity of catastrophic events; (ii) changes in the level of
competition in the reinsurance or primary insurance markets that impact the
volume or profitability of the property-casualty reinsurance business (these
changes include, but are not limited to, the intensity of price competition, the
entry of new competitors, existing competitors exiting the market and the
development of new products by new and existing competitors); (iii) changes in
the demand for reinsurance, including changes in the amount of ceding companies'
retentions and changes in the demand for excess and surplus lines insurance
coverages; (iv) the ability of PXRE to execute its diversification initiatives
in markets in which PXRE has not had a significant presence; (v) adverse
development on loss reserves related to business written in prior years; (vi)
lower than estimated retrocessional recoveries on unpaid losses, including the
effects of losses due to a decline in the creditworthiness of PXRE's
retrocessionaires; (vii) increases in interest rates, which cause a reduction in
the market value of PXRE's interest rate sensitive investments, including its
fixed income investment portfolio; (viii) decreases in interest rates causing a
reduction of income earned on new cash flow from operations and the reinvestment
of the proceeds from sales, calls or maturities of existing investments; (ix)
market fluctuations in equity securities and securities underlying limited
partnership investments; (x) changes in the composition of PXRE's investment
portfolio; and (xi) changes in management's evaluation of the impact of the Year
2000 problem on its operations.
In addition to the factors outlined above that are directly related to
PXRE's business, PXRE is also subject to general business risks, including, but
not limited to, adverse state, federal or foreign legislation and regulation,
adverse publicity or news coverage, changes in general economic factors and the
loss of key employees.
26
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
27
<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
May 14, 1999 By:/s/ Sanford M. Kimmel
_____________________
Sanford M. Kimmel
Senior Vice President, Treasurer
and Chief Financial Officer
STATEMENT OF DIFFERENCES
------------------------
The service mark symbol shall be expressed as............................ 'sm'
The British pound sterling sign shall be expressed as.................... 'L'
28
<PAGE>
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