<PAGE>
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 0-22376
TRANSNATIONAL RE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3731572
(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 May 13, 1996, 5,365,400 shares of Class A Common Stock, $.01 par
value per share, and 1,535,948 shares of Class B Common Stock, $.01 par value
per share, of the Registrant were outstanding.
================================================================================
<PAGE>
<PAGE>
TRANSNATIONAL RE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets
at March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income and Stockholders' Equity
for the three months ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flow
for the three months ended March 31, 1996 and 1995 5
Notes to Consolidated Interim Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION 17
2
<PAGE>
<PAGE>
TRANSNATIONAL RE CORPORATION
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C> <C>
ASSETS Investments
Fixed maturities, available for sale, at fair value (amortized cost
$159,736,000 and $151,158,000, respectively) $160,450,383 $154,073,267
Short-term investments 29,135,021 26,357,481
------------ ------------
Total investments 189,585,404 180,430,748
Cash 2,509,611 1,924,121
Accrued investment income 2,409,918 1,873,205
Receivables:
Unreported premiums: PXRE 5,393,585 4,631,112
Non-affiliates 2,406,480 4,924,574
Balances due from intermediaries and brokers: PXRE 3,565,479 1,016,420
Non-affiliates 1,565,493 2,584,877
Deferred acquisition costs 2,143,378 1,009,994
Income tax recoverable 0 904,997
Deferred income tax benefit 1,766,324 960,069
Investment in equity of Cat Fund, L.P. 2,051,306 2,024,195
Other assets 944,269 156,986
------------ ------------
Total assets $214,341,247 $202,441,298
============ ============
LIABILITIES Losses and loss expenses: PXRE $ 10,242,281 $ 8,966,592
Non-affiliates 8,898,378 15,833,499
Unearned premiums 12,393,934 5,499,201
Contingent commissions payable 4,115,993 3,396,809
Payable for securities 5,548,999 0
Deferred incentive liability 3,381,330 2,998,847
Income tax payable 2,390,024 0
Payable to PXRE 403,589 443,469
Other liabilities 489,548 431,920
------------ ------------
Total liabilities 47,864,076 37,570,337
------------ ------------
STOCKHOLDERS' EQUITY Serial preferred stock, $.01 par value -- 5,000,000 shares authorized; no
shares issued and outstanding 0 0
Class A common stock, $.01 par value -- 20,000,000 shares authorized;
5,750,000 shares issued 57,500 57,500
Class B common stock, $.01 par value -- 5,000,000 shares authorized;
1,535,948 shares issued and outstanding 15,359 15,359
Additional paid-in capital 120,708,243 120,708,243
Net unrealized appreciation on investments, net of deferred income tax
expense of $250,000 and $1,020,000 464,342 1,894,945
Retained earnings 53,005,994 47,449,119
Treasury stock at cost (384,600 and 270,100 shares, respectively) (7,774,267) (5,254,205)
------------ ------------
Total stockholders' equity 166,477,171 164,870,961
------------ ------------
Total liabilities and stockholders' equity $214,341,247 $202,441,298
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
<PAGE>
TRANSNATIONAL RE CORPORATION
Consolidated Statements of Income and Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
------------ ------------
<S> <C> <C> <C>
REVENUES Net premiums earned: PXRE $ 5,622,221 $ 5,616,308
Non-affiliates 8,300,512 10,842,589
Net investment income 2,569,836 2,034,770
Net realized investment losses (49,553) (22,045)
------------ ------------
16,443,016 18,471,622
------------ ------------
LOSSES AND Losses and loss expenses incurred: PXRE 2,737,390 3,759,448
EXPENSES Non-affiliates 932,292 1,714,161
Commissions and brokerage: PXRE 656,549 582,370
Non-affiliates 1,600,528 1,364,302
Management fee expense -- PXRE 706,828 822,944
Other operating expenses 933,762 1,242,022
------------ ------------
7,567,349 9,485,247
------------ ------------
Income before income taxes 8,875,667 8,986,375
Income tax provision 2,968,000 3,055,000
------------ ------------
Net income $ 5,907,667 $ 5,931,375
============ ============
PER SHARE Net income per share $ 0.84 $ 0.82
============ ============
Weighted average shares outstanding 7,015,598 7,220,837
============ ============
STOCKHOLDERS'EQUITY Stockholders' equity at beginning of period $164,870,961 $136,304,764
Change in unrealized appreciation (depreciation) on investments net of
deferred income tax (1,430,603) 2,207,078
Repurchase of common stock (2,520,062) (1,543,143)
Net income 5,907,667 5,931,375
Dividends to stockholders (350,792) 0
------------ ------------
Stockholders' equity at end of period $166,477,171 $142,900,074
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
<PAGE>
TRANSNATIONAL RE CORPORATION
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
----------- -----------
<S> <C> <C> <C>
CASH FLOW Net income $ 5,907,667 $ 5,931,375
FROM OPERATING Adjustments to reconcile net income to net cash provided by operating
ACTIVITIES activities:
Losses and loss expenses (5,659,432) (425,756)
Unearned premiums 6,894,733 11,582 734
Deferred acquisition costs (1,133,384) (2,141,023)
Receivables 945,130 (4,378,313)
Payable to PXRE (25,912) 48,754
Income tax recoverable 3,295,021 3,310,813
Other (829,491) 50,421
----------- -----------
Net cash provided by operating activities 9,394,332 13,979,005
----------- -----------
CASH FLOW Cost of fixed maturity investments (13,460,732) (4,599,299)
FROM INVESTING Fixed maturity investments matured/disposed 4,751,285 6,607,017
ACTIVITIES Investment in joint venture 0 (2,000,000)
Payable for securities 5,548,999 0
Net change in short-term investments (2,777,540) (11,616,039)
----------- -----------
Net cash used by investing activities (5,937,988) (11,608,321)
----------- -----------
CASH FLOW FROM Cost of treasury stock (2,520,062) (1,543,143)
FINANCING ACTIVITIES Dividends (350,792) 0
----------- -----------
Net cash used by financing activities (2,870,854) (1,543,143)
----------- -----------
Net change in cash 585,490 827,541
Cash, beginning of period 1,924,121 941,123
----------- -----------
Cash, end of period $ 2,509,611 $ 1,768,664
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
<PAGE>
Transnational Re NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Corporation
- --------------------------------------------------------------------------------
1. ORGANIZATION
Transnational Re Corporation ("Transnational Re") was incorporated on
August 30, 1993, in the State of Delaware as a wholly-owned subsidiary of PXRE
Corporation ("PXRE"). On November 1, 1993, a registration statement relating to
an initial public offering (the "Offering") was declared effective.
Transnational Insurance Company, renamed Transnational Reinsurance Company
("Transnational Reinsurance") was incorporated in the State of Connecticut on
July 17, 1989, and commenced writing business in June, 1990. Through the date of
the Offering, Transnational Reinsurance had written only a nominal amount of
business which principally consisted of primary insurance. Transnational
Reinsurance was a wholly-owned subsidiary of PXRE Reinsurance Company ( "PXRE
Reinsurance"), which is a wholly-owned subsidiary of PXRE. Transnational
Reinsurance became a wholly-owned subsidiary of Transnational Re effective
November 9, 1993. TREX Trading Corporation ("TREX Trading") was incorporated in
1995 as a wholly-owned subsidiary of Transnational Re to trade in catastrophe
futures and option contracts on the Chicago Board of Trade ("CBOT").
Transnational Re, Transnational Reinsurance and TREX Trading (collectively the
"Company") now specialize in providing brokered property retrocessional
reinsurance and marine and aviation retrocessional reinsurance in the United
States and international markets, principally involving brokered property
catastrophe retrocessional coverages. The Company also writes marine and
aviation reinsurance, as well as facultative reinsurance.
2. 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 the Company. 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.
6
<PAGE>
<PAGE>
Transnational Re NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Corporation
- --------------------------------------------------------------------------------
3. PREMIUMS ASSUMED
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.
4. LOSSES AND LOSS EXPENSES 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.
Because of the significant delay in losses being reported to insurance
carriers, reinsurers and finally retrocessionaires, such as Transnational Re,
the Company's loss estimate is necessarily based on broad assumptions and is
subject to possible revision.
5. INVESTMENTS
Fixed maturity investments 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.
7
<PAGE>
<PAGE>
Transnational Re NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Corporation
- --------------------------------------------------------------------------------
7. DEFERRED ACQUISITION COSTS
Acquisition costs consist of commissions, fees and brokerage expenses
incurred in connection with contract issuance. These costs are deferred and
amortized over the period in which the related premiums are earned. Deferred
acquisition costs are reviewed periodically to determine that they do not exceed
recoverable amounts after allowing for anticipated investment income.
8. TREASURY STOCK
In November 1994, Transnational Re was authorized to repurchase up to
500,000 shares of its stock. Transnational Re repurchased 114,500 shares of its
stock during the first quarter of 1996. Since inception of its stock repurchase
plan, Transnational Re has repurchased a total of 384,600 shares of its common
stock in the open market.
9. SUBSEQUENT EVENT
On May 10, 1996, Transnational Re received a proposal from PXRE
for a business combination of PXRE and Transnational Re designated to be on a
tax-free basis. Under the proposal, PXRE would enter into a merger agreement
with Transnational Re pursuant to which PXRE, or a newly organized subsidiary
of PXRE, would exchange 0.98 shares of PXRE common stock for each
share of Transnational Re Class A 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.
8
<PAGE>
<PAGE>
Transnational Re MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Corporation FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
Transnational Re was incorporated on August 30, 1993 in the State of
Delaware and commenced operations in November 1993 following the November 9,
1993 closing of the Offering. Transnational Re, through its subsidiary
Transnational Reinsurance, specializes in providing brokered property
retrocessional reinsurance in the United States and international markets,
currently focusing primarily on property catastrophe retrocessional coverages.
Transnational Re derives its business from its affiliation with PXRE
Reinsurance, a wholly-owned subsidiary of PXRE, a publicly traded reinsurance
group with a primary focus on brokered property reinsurance, including
catastrophe related coverages, in both the United States and international
markets. Pursuant to the Management Agreement by and among Transnational Re,
Transnational Reinsurance and PXRE Reinsurance that has been in effect since
November 8, 1993, PXRE Reinsurance has responsibility for the day-to-day
operations of Transnational Re and Transnational Reinsurance, including all the
reinsurance operations of Transnational Reinsurance. Transnational Re and
Transnational Reinsurance do not have any operating properties, systems or paid
employees. Pursuant to the Management Agreement, PXRE Reinsurance provides all
the operating facilities, systems, equipment and management and clerical
employees required to conduct the businesses of Transnational Re and
Transnational Reinsurance.
Under the terms of the Management Agreement, Transnational Reinsurance
shares in certain specified business of PXRE Reinsurance that is classified as
property retrocessional reinsurance business, marine and aviation retrocessional
reinsurance or marine and aviation reinsurance and facultative reinsurance.
Transnational Reinsurance is also entitled to share in other property
reinsurance business, if any, which PXRE Reinsurance may, from time-to-time,
propose that Transnational Reinsurance underwrite and which Transnational
Reinsurance's Board of Directors may approve.
CERTAIN RISKS AND UNCERTAINTIES
Pursuant to the Management Agreement, PXRE provides underwriting and
supervisory services relating to the reinsurance operations of Transnational Re,
and provides management and administrative services. Transnational Re does not
have any operating properties, systems or paid employees. There is no assurance
that Transnational Re can renew the Management Agreement with PXRE or with
comparable terms.
9
<PAGE>
<PAGE>
As a reinsurer principally of property catastrophe retrocessional coverages
in both the international and domestic markets, Transnational Re'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 retrocessional 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 the significant delay in losses being
reported to insurance carriers, reinsurers and finally, retrocessionaires such
as Transnational Re, require Transnational Re 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 Transnational Re'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 retrocessional reinsurance, Transnational Re may forgo
potential investment income because property losses are typically settled within
a short period of time.
Because Transnational Re's current focus is primarily on catastrophe
retrocessional coverages which can involve significantly increased exposures,
principally as a consequence of the retrocessionaire's exposure to an
aggregation of losses from the same catastrophic event, and underwriting
limitations associated with retrocessional business, the occurrence of one or
more major catastrophes in any given period (such as hurricane Andrew and Iniki
in 1992 and the Northridge earthquake in 1994) could have a material adverse
impact on Transnational Re's result of operations and financial condition and
result in substantial liquidation of investments and outflows of cash as losses
are paid.
As Transnational Re underwrites risks from a large number of insurers based
on information generally supplied by retrocessional brokers, there is a risk of
developing a concentration of exposure to loss in certain geographic areas prone
to specific types of catastrophes. Transnational Re has 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.
10
<PAGE>
<PAGE>
Although Transnational Re'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 Transnational Re's
investments do not necessarily represent the amount which could be realized upon
future sale, particularly if Transnational Re were required to liquidate a
substantial portion of its portfolio to fund losses from catastrophic events.
Premium receivables and loss reserves include business denominated in
currencies other than U.S. dollars. Transnational Re is exposed to the
possibility of significant claims in currencies other than U.S. dollars. While
Transnational Re holds positions denominated in foreign currencies to mitigate,
in part, 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.
Transnational Re (parent company) relies primarily on cash dividends and
net tax allocation payments from its subsidiary Transnational Reinsurance to pay
its operating expenses and to pay common stock dividends to Transnational Re's
stockholders. The payment of dividends by Transnational Reinsurance to
Transnational Re (parent company) is subject to limits imposed under the
insurance laws and regulations of Connecticut, the state of incorporation and
domicile of Transnational Reinsurance. In the event the amount of dividends
available, together with other sources of funds, are not sufficient to permit
Transnational Re to pay cash dividends, it would be necessary to obtain the
approval of the Connecticut Insurance Commissioner prior to Transnational
Reinsurance's payment of additional dividends. If such approval were not
obtained, Transnational Re would have to adopt one or more alternatives, such as
seeking additional equity. There can be no assurance that 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. Transnational Re competes
with numerous major international and domestic reinsurance companies, many of
which have substantially greater financial, marketing and management resources
than Transnational Re.
11
<PAGE>
<PAGE>
COMPARISON OF FIRST QUARTER RESULTS FOR
1996 WITH 1995
Net premiums written for the three months ended March 31, 1996 decreased
25.6% to $20,817,000 from $27,963,000 for the corresponding period of 1995.
Gross premiums written for the first quarter of 1996 decreased 25.1% to
$20,943,000 from $27,963,000 for the comparable period of 1995. Net premiums
earned for the first quarter of 1996 decreased 15.4% to $13,923,000 from
$16,459,000 in the corresponding period of 1995. Gross written, net written and
net earned premiums for the first quarter of 1996 declined from prior year
levels as Transnational Re continued its planned response to the increased
competitive trends that have characterized the retrocessional reinsurance market
since 1995. Premiums written and earned were also adversely affected by a
$891,000 reduction in reinstatement premiums due to favorable loss experience.
Transnational Reinsurance has not maintained any retrocessional coverage
for its exposures on business written since the closing of the Offering, and
until 1996 had established its underwriting guidelines based upon the assumption
that it would not purchase retrocessional coverage. However, as the cost of
catastrophe retrocessional facilities has declined, Transnational Reinsurance
has begun selectively to purchase such coverages in 1996.
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 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 26.4% for the three months ended March 31, 1996 compared
with 33.2% for the corresponding period of 1995. There were no significant
catastrophic losses during the first quarter of 1996. The first quarter 1995
loss ratio reflects $4,000,000 of losses caused by the January, 1995 Kobe, Japan
earthquake.
During the first quarter of 1996, Transnational Re experienced a deficiency
of $634,000 net for prior year losses and loss expenses. The loss ratio for the
comparable quarter in 1995 was unfavorably affected by increases to reserves of
$593,000 net for prior year losses and loss expenses.
12
<PAGE>
<PAGE>
The underwriting expense ratio was 28.0% for the three months ended March
31, 1996 compared with 24.4% for the corresponding period of 1995. The increase
was due to an increase in contingent commissions payable to clients related to
profitable business, as well as the decline in premiums earned. As a result of
the above, the combined ratio was 54.4% for the first quarter 1996 compared with
57.6% for the corresponding period of 1995.
Under the terms of the Management Agreement with PXRE Reinsurance, the
Company incurred management fees of $1,047,000 (5% of gross written premiums)
for the first quarter of 1996 compared to $1,398,000 in the first quarter of
1995. These fees are expensed as the related premiums are earned, and
accordingly management fee expense for the first quarter of 1996 was $707,000
compared to $823,000 in the first quarter of 1995.
Other operating expenses decreased to $934,000 for the three months ended
March 31, 1996 from $1,242,000 for the corresponding period of 1995. Other
operating expenses reflect foreign currency exchange losses of $140,000 for the
first quarter of 1996 compared to losses of $157,000 for the corresponding
period of 1995.
Net investment income for the three months ended March 31, 1996 increased
26.3% to $2,570,000 from $2,035,000 for the corresponding period of 1995. The
increase in net investment income was caused by an increase in average
investments for 1996 compared with the previous year and an increase in
Transnational Re's pre-tax investment yield to 5.8% for the first quarter of
1996 from 5.4% in the corresponding period of 1995, both calculated using
amortized cost and gross of investment expenses. Net realized investment losses
for the first quarter of 1996 were $50,000 compared with $22,000 for the
corresponding period of 1995.
For the reasons discussed above, net income was $5,908,000 for the three
months ended March 31, 1996 compared to $5,931,000 for the corresponding period
of 1995. Net income per common share available to Transnational Re's Class A and
Class B common stockholders for the first quarter 1996 was $0.84 based on
average shares outstanding of approximately 7,015,600 compared to $0.82 in the
first quarter of 1995 based on average shares outstanding of approximately
7,220,800.
LIQUIDITY AND CAPITAL RESOURCES
Transnational Reinsurance's results may be influenced by a variety of
factors, including changes in the property and casualty reinsurance market,
insurance regulatory changes and changes in general economic conditions.
Transnational Reinsurance's ability to pay dividends to Transnational Re is
subject to provisions of the Connecticut insurance law restricting the ability
of Connecticut insurance companies to make certain dividends and distributions
without prior regulatory notification and approval. Connecticut insurance law
provides that the maximum amount of dividends or other
13
<PAGE>
<PAGE>
distributions that Transnational Reinsurance may declare or pay to Transnational
Re within any twelve month period, without regulatory approval, is limited to
the lesser of (a) earned surplus or (b) the greater of 10% of policyholder
surplus at December 31, of the preceding year or 100% of net income for the
twelve month period ended December 31 of the preceding year, all determined in
accordance with SAP. As of December 31, 1995, Transnational Reinsurance had
earned surplus of approximately $35,004,000, policyholder surplus of
$151,924,000 and its net income for 1995 was $26,674,000. The maximum amount of
dividends or distributions that Transnational Reinsurance may declare and pay in
1996, without regulatory approval, is therefore $26,674,000. Transnational
Reinsurance did not pay any dividends to Transnational Re during the first
quarter of 1996.
Transnational Re 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"). Transnational Re 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 Transnational Re 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. Transnational Re 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
(from) Transnational Re.
Management expects that Transnational Reinsurance's capitalization will
provide it with sufficient resources to meet its liquidity requirements on both
a short-term and long-term basis, although no assurances can be given that such
expectation will prove to be correct.
For the three months ended March 31, 1996 and 1995, Transnational Re's net
cash flow provided by operations was $9,394,000 and $13,979,000, respectively.
The three months ended March 31, 1996 reflected lower premiums written and
higher loss payments, offset by the timing of other underwriting and operating
payments.
Transnational Re'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, under an investment
advisory agreement. 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 risk inherent in particular
securities. As at March 31, 1996, Transnational Re's investment portfolio
consisted solely of fixed maturities and short-term investments. Although
Transnational Re's investment portfolio does not currently include any equity
14
<PAGE>
<PAGE>
securities, Transnational Re may in the future determine to invest a portion of
its investment portfolio in equity securities. The investment policies and all
investments of Transnational Re are approved by its Board of Directors.
Of Transnational Re's fixed maturities portfolio as at March 31, 1996,
98.8% of the fair value was in obligations rated "Aa" or "AA" or better by
Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively,
or in government or government-backed securities . United States government
agency mortgage-backed securities (principally GNMAs) accounted for 18.9% of
fixed maturities based on fair value at March 31, 1996. In addition,
Transnational Re has no investments in real estate or commercial mortgage loans.
The average market yield to maturity of Transnational Re's fixed maturities
portfolio at March 31, 1996 and 1995 was 5.0% and 5.1%, 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. Transnational Re recorded directly to equity a $1,431,000
after-tax unrealized decline in the value of its portfolio during the first
quarter reflecting the effect of increasing interest rates during the period.
Short-term investments are carried at amortized cost which approximates fair
value. Transnational Re's short-term investments (principally high grade
commercial paper) were $29,135,000 at March 31, 1996 compared to $26,357,000 at
December 31, 1995.
Transnational Re 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. Transnational Re expects to hold currency 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 Transnational Re's investment portfolio and, in
the opinion of Transnational Re's management, are sufficiently liquid for its
needs.
During the first quarter of 1996, Transnational Re declared a quarterly
dividend on its common stock of $0.05 per share. The expected annual dividend,
based on shares outstanding at March 31, 1996, is approximately $1,380,000.
In November 1994, Transnational Re's Board of Directors authorized the
repurchase of up to 500,000 shares of its Class A Common Stock from time-to-time
in open market or private block purchase transactions. Through March 31, 1996,
Transnational Re has expended approximately $7,774,000 to repurchase a total of
384,600 shares of which 114,500 shares were repurchased during the first quarter
of 1996.
15
<PAGE>
<PAGE>
In March 1995, Transnational Re and PXRE entered into a joint venture
arrangement to trade in catastrophe futures and options contracts on the CBOT.
Transnational Re and PXRE have each contributed $2.5 million to capitalize 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 March 31, 1996.
As of March 31, 1996, Transnational Re had no material commitments for
capital expenditures.
INCOME TAXES
Transnational Re's effective tax rate for the three months ended March 31,
1996 and 1995 was 33.4% and 34.0% respectively. The effective tax rates differ
from the applicable federal statutory tax rates due to tax exempt interest
income and state and local taxes.
16
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
On May 10, 1996, Transnational Re received a proposal from PXRE
Corporation ("PXRE") for a business combination of PXRE and Transnational Re
designated to be 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 0.98 shares of PXRE
common stock for each share of Transnational Re Class A 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.
Transnational Re intends to form a special committee of its board of
directors, consisting of all of its independent directors, to consider PXRE's
proposal with the assistance of independent legal and financial advisors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2. The proposal letter dated May 10, 1996 from PXRE
Corporation relating to the proposal referred to in Item 5
hereof is attached hereto as Exhibit 2.
(b) Reports on Form 8-K:
None
17
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
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.
TRANSNATIONAL RE CORPORATION
May 14, 1996 By: /s/ Sanford M. Kimmel
-------------------------
Sanford M. Kimmel
Senior Vice President, Treasurer
and Chief Financial Officer
18
<PAGE>
<PAGE>
<PAGE>
399 Thornall Street
Fourteenth Floor
Edison, NJ 08837
908 906 8100
908 906 9157 FAX
PXRE CORPORATION [LOGO]
May 10, 1996
Board of Directors
Transnational Re Corporation
399 Thornall Street
Edison, NJ 08837
Dear Sirs:
I am pleased to inform you of our proposal for a strategic business
combination of PXRE Corporation ('PXRE') and Transnational Re Corporation
('Transnational Re'). After careful study and consideration, we have concluded
that the proposed combination is a sound business step for us and, at the same
time, is in the best interests of Transnational Re and its shareholders.
We believe that this combination will benefit our respective shareholders
by allowing them to participate in a larger, financially stronger company with
increased market presence, improved creditworthiness, reduced operating costs,
increased capital management opportunities and increased market capitalization
and float. Additionally, the proposed combination would enable Transnational
Re's shareholders to retain a very substantial continuing equity interest in the
combined businesses and to participate in future opportunities in reinsurance
markets.
Under this proposal, based on our current analysis PXRE and Transnational
Re would enter into a merger agreement pursuant to which PXRE, either through
PXRE itself or a newly organized subsidiary of PXRE, would exchange 0.98 shares
of PXRE common stock for each share of Transnational Re Class A common stock,
which represents a price of $23.50 based on yesterday's closing price for PXRE
of $24.00. It is contemplated that the merger agreement would be in a form
customary for transactions of this type. The transaction would be designed to be
tax-free to Transnational Re shareholders.
Naturally, our 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
<PAGE>
<PAGE>
[LOGO]
directors of PXRE and Transnational Re (including the approval of a committee of
Transnational Re's independent directors) and by the shareholders of both
companies.
We understand that, in transactions of this nature, it is typical for a
special committee of independent directors to be established to review the
combination proposal. PXRE and its advisors are, of course, prepared to meet
with Transnational Re's committee and its advisors to answer any questions they
may have.
As we stated, we believe the transaction provides an attractive opportunity
for both companies. We hope that you give this proposal your prompt attention.
Sincerely,
PXRE Corporation
GERALD L. RADKE
Gerald L. Radke
Chairman, President and
Chief Executive Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 159,736,008
<DEBT-CARRYING-VALUE> 160,450,383
<DEBT-MARKET-VALUE> 160,450,383
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 189,585,404
<CASH> 2,509,611
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,143,378
<TOTAL-ASSETS> 214,341,247
<POLICY-LOSSES> 19,140,659
<UNEARNED-PREMIUMS> 12,393,934
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 72,859
0
0
<OTHER-SE> 166,404,312
<TOTAL-LIABILITY-AND-EQUITY> 214,341,247
13,922,733
<INVESTMENT-INCOME> 2,569,836
<INVESTMENT-GAINS> (49,553)
<OTHER-INCOME> 0
<BENEFITS> 3,669,682
<UNDERWRITING-AMORTIZATION> 2,257,077
<UNDERWRITING-OTHER> 1,640,590
<INCOME-PRETAX> 8,875,667
<INCOME-TAX> 2,968,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,907,667
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
<RESERVE-OPEN> 24,800,091
<PROVISION-CURRENT> 3,036,126
<PROVISION-PRIOR> 633,554
<PAYMENTS-CURRENT> 576,886
<PAYMENTS-PRIOR> 8,752,226
<RESERVE-CLOSE> 19,140,659
<CUMULATIVE-DEFICIENCY> (633,554)
</TABLE>
