10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-15259
PXRE GROUP LTD.
(Exact name of registrant as specified in its charter)
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Bermuda
(State or other jurisdiction of
Incorporation or Organization)
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98-0214719
(I.R.S. Employer
Identification No.) |
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PXRE House
110 Pitts Bay Road
Pembroke HM08
Bermuda
(Address, including Zip Code,
of Principal Executive Offices)
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P.O. Box HM 1282
Hamilton HM FX
Bermuda
(Mailing Address) |
(441) 296-5858
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer þ Non-accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of May 4, 2007, 72,598,604 common shares and convertible common shares, $1.00 par
value per share, of the Registrant were outstanding.
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PXRE
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Consolidated Balance Sheets |
Group Ltd.
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(Dollars in thousands, except par value per share) |
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March 31, |
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December 31, |
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2007 |
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|
2006 |
|
|
|
|
|
(Unaudited) |
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|
|
|
|
|
|
|
|
|
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Assets |
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Investments: |
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|
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|
|
|
|
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Fixed maturities, at fair value: |
|
|
|
|
|
|
|
|
|
|
Available-for-sale (amortized cost $484,908 and $502,307, respectively) |
|
$ |
486,601 |
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|
$ |
502,254 |
|
|
|
Trading (cost $14,794 and $14,794, respectively) |
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|
15,540 |
|
|
|
15,497 |
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|
Short-term investments, at fair value |
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570,230 |
|
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|
671,197 |
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Hedge funds, at fair value (cost $4,630 and $11,583, respectively) |
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5,579 |
|
|
|
12,766 |
|
|
|
Other invested assets, at fair value (cost $1,335 and $1,717, respectively) |
|
|
2,112 |
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|
2,427 |
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|
|
|
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|
|
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Total investments |
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1,080,062 |
|
|
|
1,204,141 |
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Cash |
|
|
9,490 |
|
|
|
12,251 |
|
|
|
Accrued investment income |
|
|
4,188 |
|
|
|
3,830 |
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|
Premiums receivable, net |
|
|
64,569 |
|
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|
93,325 |
|
|
|
Other receivables |
|
|
6,720 |
|
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|
7,321 |
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Reinsurance recoverable on paid losses |
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3,678 |
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|
3,324 |
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|
Reinsurance recoverable on unpaid losses |
|
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34,168 |
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|
35,327 |
|
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|
Ceded unearned premiums |
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11,251 |
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|
|
|
|
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Deferred acquisition costs |
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|
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8 |
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Other assets |
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39,196 |
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|
|
41,816 |
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|
|
|
|
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|
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Total assets |
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$ |
1,253,322 |
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$ |
1,401,343 |
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|
|
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Liabilities |
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Losses and loss expenses |
|
$ |
469,982 |
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|
$ |
603,241 |
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Unearned premiums |
|
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20 |
|
|
|
113 |
|
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Subordinated debt |
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|
167,091 |
|
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|
167,089 |
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Reinsurance balances payable |
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33,973 |
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34,649 |
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Deposit liabilities |
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|
53,463 |
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|
54,425 |
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Income tax payable |
|
|
507 |
|
|
|
597 |
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Other liabilities |
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|
37,989 |
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|
44,462 |
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|
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|
|
|
|
|
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Total liabilities |
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763,025 |
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|
|
904,576 |
|
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|
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|
|
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|
|
|
|
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Shareholders |
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Serial convertible preferred shares, $1.00 par value, $10,000 stated |
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|
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Equity |
|
value 30 million shares authorized, 0.01 million and 0.01 million shares
issued and outstanding, respectively |
|
|
58,132 |
|
|
|
58,132 |
|
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Common shares, $1.00 par value 350 million shares authorized,
72.6 million and 72.4 million shares issued and outstanding,
respectively |
|
|
72,588 |
|
|
|
72,351 |
|
|
|
Additional paid-in capital |
|
|
873,929 |
|
|
|
873,142 |
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Accumulated other comprehensive income (loss) |
|
|
1,413 |
|
|
|
(100 |
) |
|
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Accumulated deficit |
|
|
(512,071 |
) |
|
|
(503,711 |
) |
|
|
Restricted shares at cost (0.5 million and 0.4 million shares, respectively) |
|
|
(3,694 |
) |
|
|
(3,047 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
490,297 |
|
|
|
496,767 |
|
|
|
|
|
|
|
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Total liabilities and shareholders equity |
|
$ |
1,253,322 |
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$ |
1,401,343 |
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|
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|
|
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The
accompanying notes are an integral part of these statements.
3
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|
PXRE
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|
Consolidated Statements of Operations and Comprehensive Operations |
Group Ltd.
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|
(Dollars in thousands, except per share amounts) |
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|
|
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Three Months Ended |
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March 31, |
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|
|
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2007 |
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|
2006 |
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|
|
|
|
(Unaudited) |
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|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
Net premiums earned |
|
$ |
(5,194 |
) |
|
$ |
77,087 |
|
|
|
Net investment income |
|
|
13,680 |
|
|
|
17,912 |
|
|
|
Net realized investment losses |
|
|
(2,272 |
) |
|
|
(4,659 |
) |
|
|
Fee income |
|
|
63 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,277 |
|
|
|
90,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Losses and |
|
Losses and loss expenses incurred |
|
|
(3,182 |
) |
|
|
17,800 |
|
Expenses |
|
Commission and brokerage |
|
|
(393 |
) |
|
|
11,895 |
|
|
|
Other reinsurance related expense |
|
|
1,773 |
|
|
|
3,721 |
|
|
|
Operating expenses |
|
|
11,841 |
|
|
|
10,965 |
|
|
|
Foreign exchange (gains) losses |
|
|
(178 |
) |
|
|
927 |
|
|
|
Interest expense |
|
|
3,612 |
|
|
|
3,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,473 |
|
|
|
48,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(Loss) income before income taxes and convertible preferred share
dividends |
|
|
(7,196 |
) |
|
|
41,612 |
|
|
|
Income tax provision |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net (loss) income before convertible preferred share dividends |
|
$ |
(7,197 |
) |
|
$ |
41,612 |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred share dividends |
|
|
1,163 |
|
|
|
1,163 |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income to common shareholders |
|
$ |
(8,360 |
) |
|
$ |
40,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Comprehensive |
|
Net (loss) income before convertible preferred share dividends |
|
$ |
(7,197 |
) |
|
$ |
41,612 |
|
Operations, Net |
|
Net change in unrealized depreciation on investments |
|
|
(759 |
) |
|
|
(7,628 |
) |
of Tax |
|
Reclassification adjustments for losses included in net (loss) income |
|
|
2,272 |
|
|
|
4,659 |
|
|
|
Minimum additional pension liability |
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(5,684 |
) |
|
$ |
38,766 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Per Share |
|
Basic: |
|
|
|
|
|
|
|
|
|
|
(Loss) income before convertible preferred share dividends |
|
$ |
(0.10 |
) |
|
$ |
0.58 |
|
|
|
Net (loss) income to common shareholders |
|
$ |
(0.12 |
) |
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding (000s) |
|
|
72,049 |
|
|
|
71,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(0.12 |
) |
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding (000s) |
|
|
72,049 |
|
|
|
76,975 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
4
|
|
|
PXRE
|
|
Consolidated Statements of Shareholders Equity |
Group Ltd.
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
March 31, |
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Shares |
|
Balance at beginning and end of period
|
|
$ |
58,132 |
|
|
$ |
58,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
Balance at beginning of period |
|
$ |
72,351 |
|
|
$ |
72,281 |
|
Shares |
|
Issuance of common shares, net |
|
|
237 |
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
72,588 |
|
|
$ |
72,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
Balance at beginning of period |
|
$ |
873,142 |
|
|
$ |
875,224 |
|
Paid-in Capital |
|
Issuance of common shares, net |
|
|
787 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
873,929 |
|
|
$ |
875,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Balance at beginning of period |
|
$ |
(100 |
) |
|
$ |
(5,468 |
) |
Other |
|
Change in unrealized gains (losses) on investments |
|
|
1,513 |
|
|
|
(2,969 |
) |
Comprehensive |
|
Change in minimum additional pension liability |
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
Operations |
|
Balance at end of period |
|
$ |
1,413 |
|
|
$ |
(8,314 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated |
|
Balance at beginning of period |
|
$ |
(503,711 |
) |
|
$ |
(527,349 |
) |
Deficit) |
|
Net (loss) income before convertible preferred share dividends |
|
|
(7,197 |
) |
|
|
41,612 |
|
|
|
Dividends to convertible preferred shareholders |
|
|
(1,163 |
) |
|
|
(1,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(512,071 |
) |
|
$ |
(486,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
Balance at beginning of period |
|
$ |
(3,047 |
) |
|
$ |
(7,502 |
) |
Shares |
|
Issuance of restricted shares, net |
|
|
(1,029 |
) |
|
|
(140 |
) |
|
|
Amortization of restricted shares |
|
|
382 |
|
|
|
796 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(3,694 |
) |
|
$ |
(6,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Balance at beginning of period |
|
$ |
496,767 |
|
|
$ |
465,318 |
|
Shareholders |
|
Issuance of common shares, net |
|
|
1,024 |
|
|
|
133 |
|
Equity |
|
Restricted shares, net |
|
|
(647 |
) |
|
|
656 |
|
|
|
Unrealized appreciation (depreciation) on investments |
|
|
1,513 |
|
|
|
(2,969 |
) |
|
|
Minimum additional pension liability |
|
|
|
|
|
|
123 |
|
|
|
Net (loss) income before convertible preferred share dividends |
|
|
(7,197 |
) |
|
|
41,612 |
|
|
|
Dividends to convertible preferred shareholders |
|
|
(1,163 |
) |
|
|
(1,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
490,297 |
|
|
$ |
503,710 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
5
|
|
|
PXRE
|
|
Consolidated Statements of Cash Flows |
Group Ltd.
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
March 31, |
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows |
|
Premiums collected, net of reinsurance |
|
$ |
11,542 |
|
|
$ |
142,658 |
|
from Operating |
|
Losses and loss adjustment expenses paid, net of reinsurance |
|
|
(129,272 |
) |
|
|
(263,321 |
) |
Activities |
|
Commission and brokerage received (paid), net of fee income |
|
|
288 |
|
|
|
(8,995 |
) |
|
|
Operating expenses paid |
|
|
(12,260 |
) |
|
|
(13,141 |
) |
|
|
Net investment income received |
|
|
12,116 |
|
|
|
17,928 |
|
|
|
Interest paid |
|
|
(5,794 |
) |
|
|
(5,794 |
) |
|
|
Income taxes (paid) recovered |
|
|
(91 |
) |
|
|
214 |
|
|
|
Trading portfolio purchased |
|
|
|
|
|
|
(49,539 |
) |
|
|
Trading portfolio disposed |
|
|
|
|
|
|
40,121 |
|
|
|
Deposit
liabilities paid |
|
|
(962 |
) |
|
|
(3,537 |
) |
|
|
Other |
|
|
(3,009 |
) |
|
|
(2,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used by operating activities |
|
|
(127,442 |
) |
|
|
(146,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows |
|
Fixed maturities available for sale purchased |
|
|
(149 |
) |
|
|
(66,991 |
) |
from Investing |
|
Fixed maturities available for sale disposed or matured |
|
|
15,833 |
|
|
|
569,533 |
|
Activities |
|
Hedge funds purchased |
|
|
|
|
|
|
(4,000 |
) |
|
|
Hedge funds disposed |
|
|
7,280 |
|
|
|
13,116 |
|
|
|
Other invested assets disposed |
|
|
756 |
|
|
|
573 |
|
|
|
Net change in short-term investments |
|
|
100,967 |
|
|
|
(362,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
124,687 |
|
|
|
150,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows |
|
Proceeds from issuance of common shares |
|
|
93 |
|
|
|
257 |
|
from Financing |
|
Cash dividends paid to preferred shareholders |
|
|
|
|
|
|
(1,163 |
) |
Activities |
|
Cost of shares repurchased |
|
|
(99 |
) |
|
|
(263 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(6 |
) |
|
|
(1,169 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash |
|
|
(2,761 |
) |
|
|
2,737 |
|
|
|
Cash, beginning of period |
|
|
12,251 |
|
|
|
14,504 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
9,490 |
|
|
$ |
17,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net (loss) income to net cash used by operating activities: |
|
|
|
|
|
|
|
|
|
|
Net (loss) income before convertible preferred share dividends |
|
$ |
(7,197 |
) |
|
$ |
41,612 |
|
|
|
Adjustments to reconcile net (loss) income to net cash used by
operating activities: |
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
(133,259 |
) |
|
|
(310,086 |
) |
|
|
Unearned premiums |
|
|
(11,344 |
) |
|
|
1,807 |
|
|
|
Deferred acquisition costs |
|
|
8 |
|
|
|
(4,719 |
) |
|
|
Receivables |
|
|
29,357 |
|
|
|
77,259 |
|
|
|
Reinsurance balances payable |
|
|
(676 |
) |
|
|
(5,551 |
) |
|
|
Reinsurance recoverable |
|
|
805 |
|
|
|
29,414 |
|
|
|
Income taxes |
|
|
(90 |
) |
|
|
214 |
|
|
|
Equity in earnings of limited partnerships |
|
|
(534 |
) |
|
|
(5,872 |
) |
|
|
Trading portfolio purchased |
|
|
|
|
|
|
(49,539 |
) |
|
|
Trading portfolio disposed |
|
|
|
|
|
|
40,121 |
|
|
|
Deposit liability |
|
|
(962 |
) |
|
|
(3,537 |
) |
|
|
Receivable on commutation |
|
|
|
|
|
|
35,154 |
|
|
|
Other |
|
|
(3,550 |
) |
|
|
7,436 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by operating activities |
|
$ |
(127,442 |
) |
|
$ |
(146,287 |
) |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
6
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
PXRE Group Ltd. (the Company or collectively with its subsidiaries, PXRE) is an insurance
holding company organized in Bermuda. PXRE has historically provided reinsurance products and
services to a worldwide marketplace through its subsidiary operations located in Bermuda, Europe
and the United States. PXREs primary focus has historically been to provide property catastrophe
reinsurance and retrocessional coverage. PXRE also provided marine, aviation and aerospace
products and services. In February 2006, the Companys counterparty credit and financial strength
ratings were downgraded by three rating agencies, after which the Company withdrew such ratings.
Subsequent to the Companys ratings downgrades and through to March 31, 2007, PXRE did not renew
any of its reinsurance contracts that expired or were cancelled, nor did PXRE write any new
reinsurance contracts and therefore exposures decreased as compared to the prior period. As of
January 1, 2007, virtually all of PXREs in-force assumed reinsurance contracts had expired and
PXRE had no remaining material exposure to future catastrophe events.
On March 14, 2007, the Board of Directors concluded its strategic alternatives evaluation
process and announced that we had entered into an Agreement and Plan of Merger (the Merger
Agreement) with Argonaut Group, Inc. (Argonaut). Pursuant to the terms of the Merger Agreement,
Argonaut will merge into a newly formed PXRE Group Ltd. subsidiary, PXMS, Inc. Upon completion of
the merger, and subject to the terms and conditions of the Merger Agreement which has been
unanimously approved by the Board of Directors of both companies, Argonaut stockholders will
receive, subject to certain adjustments, 6.4672 shares of PXRE common stock in exchange for each
share of Argonaut common stock. Upon closing of the transaction, approximately 73% of PXREs
outstanding common stock will be owned by former Argonaut stockholders, and approximately 27% by
former holders of PXREs common stock and convertible voting preferred shares.
Completion of the merger, which is expected to occur in the third quarter of 2007, is subject
to various conditions, including (1) receipt of approvals of the holders of PXRE and Argonaut
common stock, (2) receipt of regulatory approvals, (3) effectiveness of the Form S-4 registration
statement relating to the PXRE common stock to be issued in the merger, and (4) listing of the PXRE
common stock on the NASDAQ Global Market (NASDAQ).
Concurrently with the announcement of the merger, we also announced the formation of a new
Bermuda based subsidiary, Peleus Reinsurance Ltd. (Peleus Re). Peleus Re has been rated A- by
A.M. Best & Company (A.M. Best) and has commenced operations. Peleus Re will focus on
underwriting medium to small commercial property reinsurance risks on a pro rata and risk excess
basis, and property catastrophe reinsurance risk on a controlled basis. It is also expected to
provide reinsurance of casualty risks. Following the merger, Peleus Re will provide quota share
reinsurance to Argonaut for its property and casualty risks. Peleus Re was initially capitalized
during the first quarter of 2007 with $213 million contributed from the existing surplus of PXRE
Bermuda. PXRE Bermuda and PXRE Reinsurance will be placed into an orderly runoff, but will provide
intercompany reinsurance support to Peleus Re.
All information included in the interim consolidated financial statements and related notes,
reflects only the results of PXRE and does not reflect any impact of the proposed merger.
7
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
2. |
|
Significant Accounting Policies |
Basis of Presentation and Consolidation
The interim consolidated financial statements have been prepared in U.S. dollars in conformity
with U.S. generally accepted accounting principles (GAAP). These statements reflect the
consolidated operations of the Company and its wholly-owned subsidiaries, including Peleus Re, PXRE
Reinsurance Ltd. (PXRE Bermuda), PXRE Corporation (PXRE Delaware), PXRE Reinsurance Company
(PXRE Reinsurance), PXRE Solutions, S.A. (PXRE Europe), PXRE Holding (Ireland) Limited (PXRE
Ireland), PXRE Reinsurance (Barbados) Ltd. (PXRE Barbados), and Mid-Atlantic Risk Systems
(MARS). All intercompany transactions have been eliminated in preparing these interim
consolidated financial statements.
GAAP requires management to make estimates and assumptions that affect (i) the reported
amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the
date of the financial statements; and (iii) the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Estimates which are
significant include estimation of losses and loss expenses, estimation and recognition of premiums,
valuation of investments and valuation of deferred tax assets.
The interim consolidated financial statements are unaudited. In the opinion of management,
such interim 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 consolidated financial statements should be read in conjunction with the 2006 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 the reinsurance business necessitate caution in drawing specific conclusions from interim
results.
New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN
48). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement for uncertain tax positions taken or expected to be taken in
income tax returns. The relevant company is to determine whether it is more likely than not that
the position would be sustained upon examination by tax authorities. Tax positions that meet the
more likely than not threshold are then measured using a probability weighted approach recognizing
the largest amount of tax benefit that is greater than a 50% likelihood of being realized upon
ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company adopted the provisions of FASB Interpretation No. 48 on January 1, 2007. Upon adoption and
during the first quarter of 2007, FIN 48 had no material effect on the Companys interim
consolidated financial statements and as of March 31, 2007, there
were no material reserves for uncertain tax positions recorded in the
Company's interim consolidated financial statements. The Companys accounting
policy for reserves for uncertain tax positions recorded and related
interest and penalties is to record these items as income tax expense
in the Consolidated Statements of Operations. The Internal Revenue
Service in their normal course of performing examinations, is
currently conducting an examination of the 2002 and later tax years.
The examination remains open as of March 31, 2007.
8
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
In September 2006, the FASB issued, Statement of Financial Accounting Standards No. 157 Fair
Value Measurements (SFAS 157). This Statement defines fair value, establishes a framework for
measuring fair value under U.S. generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement also provides guidance for using fair value to
measure assets and liabilities. The Statement applies whenever assets or liabilities are required
or permitted to be measured at fair value under U.S. generally accepted accounting principles. The
Statement does not expand the use of fair value in any new circumstances. The Statement is
effective for financial statements issued for fiscal years beginning after November 15, 2007. The
Company is currently evaluating what impact, if any, the adoption of SFAS 157 will have on its
consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). This Statement
permits entities to choose to measure many financial instruments and certain other items at fair
value. The Statement is effective as of the beginning of an entitys first fiscal year that begins
after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects to apply the provisions of
SFAS 157. The Company is currently evaluating what impact, if any, the adoption of SFAS 159 will
have on its consolidated financial statements.
Premiums written and earned for the three months ended March 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
% |
|
|
|
March 31, |
|
|
Increase |
|
($000s) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
written |
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
(2,079 |
) |
|
$ |
121,385 |
|
|
|
|
|
Ceded premiums written |
|
|
(14,459 |
) |
|
|
(42,492 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
(16,538 |
) |
|
$ |
78,893 |
|
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
earned |
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums earned |
|
$ |
(1,986 |
) |
|
$ |
95,644 |
|
|
|
|
|
Ceded premiums earned |
|
|
(3,208 |
) |
|
|
(18,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
(5,194 |
) |
|
$ |
77,087 |
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
PXRE did not underwrite any new reinsurance contracts during the first quarter of 2007
which decreased both gross premiums written and gross premiums earned during the three months ended
March 31, 2007 as compared to the prior year comparable period. The negative gross premiums written and gross premiums earned in the first quarter of 2007 are primarily
due to adjustments of prior-year reinstatement premiums.
9
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
PXRE purchases catastrophe retrocessional coverage for its own protection, depending on market
conditions. PXRE purchases reinsurance primarily to reduce its exposure to severe losses related
to any one event or catastrophe. In the three months ended March 31, 2007, PXRE did not purchase
any new retrocessional coverage. In 2007 and 2006, PXRE had reinsurance treaties in place with
several different coverages, territories, limits and retentions that serve to reduce a large gross
loss emanating from any one event. In 2007 and 2006, PXRE also had clash reinsurance protection
which allows PXRE to recover losses ceded by more than one reinsured related to any one particular
property, primarily related to PXREs exposure assumed on per-risk treaties. In 2005, PXRE also
sponsored two catastrophe bond transactions that supported two collateralized facilities which
provide the Company with protection against certain severe catastrophe events and the occurrence of
multiple significant catastrophe events during the same year. One of those two collateralized
facilities was determined to be a derivative and is therefore recorded at fair value on PXREs
Interim Consolidated Balance Sheets with the changes in fair value reported in Other reinsurance
related expense on PXREs Interim Consolidated Statements of Operations and Comprehensive
Operations for the three months ended March 31, 2007 and 2006. The other collateralized facility
was terminated during the first quarter of 2007 and as a result termination charges and all
remaining premiums due, which collectively totaled $24.2 million, were recognized as of December
31, 2006.
The decrease in both ceded premiums written and ceded premiums earned during the three months
ended March 31, 2007 as compared to the prior year comparable period was largely due to a decrease
of $26.5 million and $14.2 million in ceded premiums written and earned, respectively, associated
with excess of loss retrocessional catastrophe coverage, including one of the collateralized
catastrophe facilities entered into during 2005 to protect the Company against a severe catastrophe
event which was terminated as noted above, with termination charges recognized as of December 31,
2006.
In the event that retrocessionaires are unable to meet their contractual obligations, PXRE
would remain liable for the underlying covered claims and therefore the Company evaluates the
financial condition of its reinsurers and monitors concentration of credit risk. The Company
records a provision for uncollectible underlying reinsurance recoverable when collection becomes
unlikely.
10
The following table summarizes investments with unrealized losses at fair value by length of
continuous unrealized loss position as of March 31, 2007:
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less |
|
|
Over One Year |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
($000s) |
|
Fair Value |
|
|
Loss |
|
|
Fair Value |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government securities |
|
$ |
787 |
|
|
$ |
(1 |
) |
|
$ |
47,198 |
|
|
$ |
(927 |
) |
United States government sponsored agency debentures |
|
|
7,635 |
|
|
|
(24 |
) |
|
|
22,131 |
|
|
|
(481 |
) |
United States government sponsored agency mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
18,798 |
|
|
|
(537 |
) |
Other mortgage and asset-backed securities |
|
|
11,745 |
|
|
|
(29 |
) |
|
|
42,592 |
|
|
|
(1,089 |
) |
Obligations of states and political subdivisions |
|
|
|
|
|
|
|
|
|
|
1,045 |
|
|
|
(13 |
) |
Corporate securities |
|
|
701 |
|
|
|
(1 |
) |
|
|
50,638 |
|
|
|
(1,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
20,868 |
|
|
$ |
(55 |
) |
|
$ |
182,402 |
|
|
$ |
(4,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2007, PXRE recorded $2.3 million in other than
temporary impairment charges. The other than temporary impairment charges recorded during 2007
related to a single asset-backed security.
Unrealized losses amounting to $0.9 million of the total unrealized loss on fixed maturity
investments as of March 31, 2007 relate to investments that PXRE has deposited in a trust for the
benefit of a cedent in connection with certain finite reinsurance transactions. The remaining
unrealized losses are primarily due to increases in interest rates since the purchase dates for
individual securities.
The following table summarizes investments with unrealized losses at fair value by length of
continuous unrealized loss position as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less |
|
|
Over One Year |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
($000s) |
|
Fair Value |
|
|
Loss |
|
|
Fair Value |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government securities |
|
$ |
1,051 |
|
|
$ |
(7 |
) |
|
$ |
47,627 |
|
|
$ |
(1,180 |
) |
United States government sponsored agency debentures |
|
|
7,715 |
|
|
|
(59 |
) |
|
|
22,021 |
|
|
|
(596 |
) |
United States government sponsored agency mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
15,813 |
|
|
|
(588 |
) |
Other mortgage and asset-backed securities |
|
|
359 |
|
|
|
(1 |
) |
|
|
47,254 |
|
|
|
(1,429 |
) |
Obligations of states and political subdivisions |
|
|
|
|
|
|
|
|
|
|
1,044 |
|
|
|
(16 |
) |
Corporate securities |
|
|
3,013 |
|
|
|
(20 |
) |
|
|
47,501 |
|
|
|
(1,464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
12,138 |
|
|
$ |
(87 |
) |
|
$ |
181,260 |
|
|
$ |
(5,273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2006, PXRE recorded $7.3 million in other than
temporary impairment charges, $0.4 million of which was recovered due to sales of securities during
the third and fourth quarters of 2006. The other than temporary impairment charges recorded during
2006 related to investments that the Company may not have had the ability to hold to maturity or
recovery as a result of the ratings downgrades of PXRE that occurred in February 2006.
11
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
Unrealized losses amounting to $1.1 million of the total unrealized loss on fixed maturity
investments as of December 31, 2006 relate to investments that PXRE has deposited in a trust for
the benefit of a cedent in connection with certain finite reinsurance transactions. The
remaining unrealized losses are primarily due to increases in interest rates since the purchase
dates for individual securities.
Under the terms of certain reinsurance agreements, irrevocable letters of credit in the amount
of $208.3 million were issued at March 31, 2007 in respect of reported loss and loss expense
reserves. Cash and investments with a fair value of $271.2 million have been pledged as collateral
with issuing banks. In addition, securities with a par value of $9.7 million were on deposit with
various state insurance departments at March 31, 2007 in order to comply with insurance laws.
PXRE has outstanding commitments for funding an investment in a limited partnership of $0.2
million at March 31, 2007.
At March 31, 2007, PXRE has deposited cash and securities with a fair value of $52.9 million
in a trust for the benefit of a cedent in connection with certain finite reinsurance transactions.
5. |
|
Derivative Instruments |
As discussed in Note 3, PXRE entered into an agreement that provides $250.0 million of
collateralized catastrophe protection with Atlantic & Western Re Limited II (A&W II), a special
purpose Cayman Islands reinsurance company which was funded through a catastrophe bond transaction.
This coverage was effective January 1, 2006 and provides the Company with second event coverage
arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern
Europe and earthquakes in California. The coverage is based on a modeled loss trigger. Upon the
occurrence of a loss event, if the modeled loss exceeds the attachment point for the peril, the
coverage is activated. Upon the occurrence of a second loss event during the same calendar year,
if the modeled loss exceeds the attachment point, PXRE will make a recovery under the agreement.
The recovery is based on modeled losses and is not limited to PXREs ultimate net loss from the
loss event. The coverage provided $250.0 million of protection for the period from January 1, 2006
to December 31, 2006 and provides $125.0 million for the period from January 1, 2007 to December
31, 2008. The protections afforded by this collateralized catastrophe facility are expected to be
utilized by Peleus Re in future periods.
PXRE records this contract at fair value and such fair value is included in Other assets and
Other liabilities in the Companys Interim Consolidated Balance Sheets with any changes in the
value reflected in Other reinsurance related expense in the Interim Consolidated Statements of
Operations and Comprehensive Operations. As there is no quoted market value available for this
derivative, the fair value is estimated by management taking into account changes in the market for
catastrophe bond reinsurance contracts with similar economic characteristics and potential for
recoveries from events preceding the valuation date. The amount recognized could be materially
different from the actual recoveries received under this contract.
The reinsurance company that is the counterparty to this transaction is a variable interest
entity under the provisions of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46R). The Company is not the primary beneficiary of this entity and is
therefore not required to consolidate it in its interim consolidated financial statements.
12
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
A reconciliation of (loss) income before convertible preferred share dividends to (loss)
income, and shares, which affect basic and diluted earnings per share, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
($000s, except per share data) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders: |
|
|
|
|
|
|
|
|
Net (loss) income before convertible preferred
share
dividends |
|
$ |
(7,197 |
) |
|
$ |
41,612 |
|
Convertible preferred share dividends |
|
|
(1,163 |
) |
|
|
(1,163 |
) |
|
|
|
|
|
|
|
Net (loss) income to common shareholders |
|
$ |
(8,360 |
) |
|
$ |
40,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
(basic) |
|
|
72,049 |
|
|
|
71,889 |
|
Equivalent shares of underlying options |
|
|
6 |
|
|
|
|
|
Equivalent number of convertible preferred shares |
|
|
5,154 |
|
|
|
5,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common equivalent shares
(diluted) |
|
|
77,209 |
|
|
|
76,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common equivalent shares when
anti-dilutive |
|
|
72,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts: |
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
(Loss) income before convertible preferred share
dividends |
|
$ |
(0.10 |
) |
|
$ |
0.58 |
|
Net (loss) income to common shareholders |
|
$ |
(0.12 |
) |
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(0.12 |
) |
|
$ |
0.54 |
|
7. Income Taxes
PXRE is incorporated under the laws of Bermuda and, under current Bermuda law, is not
obligated to pay any taxes in Bermuda based upon income or capital gains. PXRE has received an
undertaking from the Supervisor of Insurance in Bermuda pursuant to the provisions of the Exempted
Undertakings Tax Protection Act, 1966, which exempts PXRE from any Bermuda taxes computed on
profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate duty
or inheritance tax, at least until the year 2016.
PXRE does not consider itself to be engaged in a trade or business in the United States and,
accordingly, does not expect to be subject to direct U.S. income taxation.
The United States subsidiaries of PXRE file a consolidated U.S. federal income tax return.
13
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
8. Shareholders Equity
As of March 31, 2007, the Company had the following equity securities outstanding: (i) 63.7
million common shares, (ii) 8.9 million convertible voting common shares, and (iii) 5,813
convertible voting preferred shares.
On March 31, 2005, 5,840.6 Series A1 convertible voting preferred shares, 3,143.6 Series B1
convertible voting preferred shares and 1,393.6 Series C1 convertible voting preferred shares were
mandatorily converted into 4.4 million class A convertible voting common shares, 2.4 million class
B convertible voting common shares and 1.0 million class C convertible voting common shares,
respectively. The conversion was effected based upon a conversion price of $13.27, which
conversion price was agreed between the Company and holders of the Companys convertible voting
preferred shares pursuant to a letter agreement dated as of March 31, 2005. All the remaining
convertible preferred shares mandatorily convert by April 4, 2008.
Each convertible voting common share converts into one common share upon sale to a third
party.
The convertible preferred shares accrue cumulative dividends per share at the rate per annum
of 8% of the sum of the stated value of each share plus any accrued and unpaid dividend thereon
payable on a quarterly basis. Commencing in the second quarter of 2005, the dividends paid on such
convertible voting preferred shares are paid in cash, rather than in additional convertible voting
preferred shares. No dividends were paid in the first quarter of 2006, and therefore overdue
dividends were accrued at 10% per annum from April 1, 2006 until paid on May 30, 2006.
As of March 31, 2007 and 2006, 5,813 convertible preferred shares were outstanding, which were
convertible into 5.2 million common shares. Convertible preferred shares are convertible into
convertible common shares at the option of the holder at any time at a conversion price equal to
the original conversion price, subject to certain dilution adjustments. The number of convertible
common shares issued upon the conversion of each convertible preferred share would be equal to the
sum of the original purchase price ($10,000) of such convertible preferred share plus accrued but
unpaid dividends divided by the adjusted conversion price. The conversion price is subject to
adjustment to avoid dilution in the event of recapitalization, reclassification, stock split,
consolidation, merger, amalgamation or other similar event or an issuance of additional common
shares in a private placement below the fair market value or in a registered public offering below
95% of fair market value (in each case, fair market value being the value immediately prior to the
date of announcement of such issuance) or without consideration. As a result of the issuance of
8.8 million common shares in October 2005 at the price of $13.25 per share pursuant to a public
offering of common shares and the issuance of 34.1 million common shares upon the exchange of the
Series D Perpetual Preferred Shares at the exchange price of $11.00 per share, the conversion price
on the Preferred Shares was adjusted downwards by $1.75 in accordance with the terms of the
underlying share purchase agreement.
14
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
In addition, the conversion price is subject to adjustment, for certain loss and loss expense
development on reserves for losses incurred on or before September 30, 2001 (and loss adjustment expenses related thereto) and for any liability or loss arising out of pending material litigation
(other than legal fees and expenses), on an after-tax basis, equal to an amount computed in
accordance with a formula as set forth in the Description of Stock. Adjustments occur if the
development exceeds a deductible after-tax threshold of $7.0 million and, with respect to all
reserves other than reserves for certain discontinued operations and the events of September 11,
2001 and liability arising out of pending litigation, the adjustment is limited to
$12.0 million of further development. At March 31, 2007, PXRE has incurred $42.5 million of
net adverse development above this $7.0 million threshold. As a result of this, and the
anti-dilution adjustment discussed above, as of March 31, 2007, the adjusted conversion price was
$11.18.
On March 14, 2007, in connection with the execution of the Merger Agreement with Argonaut, the
holders of the convertible preferred shares of PXRE (the Preferred Shareholders) and the holders
of the convertible common shares of PXRE (the Convertible Common Shareholders and, together with
the Preferred Shareholders, the Stockholders), entered into a Voting and Conversion Agreement
(the Voting Agreement). Pursuant to the Voting Agreement, the Stockholders agreed to vote in
favor of the Merger and the transactions contemplated thereby and PXRE has agreed to reduce the
conversion price of the convertible preferred shares from $11.28 to $6.24 per convertible preferred
share which will result in the issuance of an additional 4.2 million common shares upon the closing
of the Merger. The parties agreed that the convertible preferred shares and convertible common
shares would be converted into common shares of PXRE immediately prior to the Merger. In addition,
the Stockholders agreed to waive any dividends that would have otherwise accrued on the Preferred
Shares in accordance with the terms of the Description of Stock from and after December 31, 2006
(the Waived Dividends). Accordingly, as of March 31, 2007, dividends amounting to $1.2 million
were accrued but not paid. If the Plan of Merger is consummated by August 31, 2007, then this
accrual for dividends payable will be reversed. However, if the Merger Agreement is terminated,
the Voting Agreement will also terminate and the conversion terms in effect prior to entering into
the Voting Agreement shall apply and any Waived Dividends that become payable as a result thereof
shall not be deemed past due dividends under Section 4(c) of the Description of Stock if paid on
the next applicable Dividend Due Date.
9. Segment Information
PXRE operates in two reportable property and casualty segments (i) catastrophe and risk
excess and (ii) exited lines based on PXREs approach to managing the business. The exited
lines segment includes business previously written and classified by the Company as direct
casualty, Lloyds of London (Lloyds), international casualty and finite. In addition, PXRE
operates in two geographic segments North American, representing North American based risks
written by North American based clients, and International (principally worldwide risks including
the United States, United Kingdom, Continental Europe, Latin America, the Caribbean, Bermuda,
Australia and Asia), representing all other premiums written.
There are no differences among the accounting policies of the segments as compared to PXREs
interim consolidated financial statements.
15
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
PXRE does not maintain separate balance sheet data for each of its operating segments, nor
does it allocate net investment income, net realized investment gains or losses, other fee income,
other reinsurance related expense, operating expenses, foreign exchange gains or losses, or
interest expense to these segments. Accordingly, PXRE does not review and evaluate the financial
results of its operating segments based upon balance sheet data and these other income statement
items.
The following tables summarize the net premiums written, net premiums earned and underwriting
(loss) income by PXREs business segments. The amounts shown for the North American and
International geographic segments are presented net of proportional reinsurance and allocated
excess of loss reinsurance cessions, but gross of corporate catastrophe excess of loss reinsurance
cessions, which are separately itemized where applicable.
Net Premiums Written
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
($000s) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Catastrophe and Risk Excess |
International |
|
$ |
(2,100 |
) |
|
$ |
79,556 |
|
North American |
|
|
(1,358 |
) |
|
|
43,184 |
|
Excess of Loss Cessions |
|
|
(13,094 |
) |
|
|
(43,934 |
) |
|
|
|
|
|
|
|
|
|
|
(16,552 |
) |
|
|
78,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exited Lines |
International |
|
|
(7 |
) |
|
|
15 |
|
North American |
|
|
21 |
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(16,538 |
) |
|
$ |
78,893 |
|
|
|
|
|
|
|
|
Net Premiums Earned
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
($000's) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Catastrophe and Risk Excess |
International |
|
$ |
(2,006 |
) |
|
$ |
66,775 |
|
North American |
|
|
(1,358 |
) |
|
|
30,589 |
|
Excess of Loss Cessions |
|
|
(1,844 |
) |
|
|
(20,368 |
) |
|
|
|
|
|
|
|
|
|
|
(5,208 |
) |
|
|
76,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exited Lines |
International |
|
|
(7 |
) |
|
|
15 |
|
North American |
|
|
21 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(5,194 |
) |
|
$ |
77,087 |
|
|
|
|
|
|
|
|
16
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
Underwriting (loss) income includes net premiums earned, losses and loss expenses
incurred and commission and brokerage, net of fee income, but does not include net investment
income, net realized investment gains or losses, other fee income, other reinsurance related
expense, operating expenses, foreign exchange gains or losses, or interest expense.
Underwriting (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
($000s) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Catastrophe and Risk Excess |
|
|
|
|
|
|
|
|
International |
|
$ |
1,378 |
|
|
$ |
57,557 |
|
North American |
|
|
132 |
|
|
|
10,887 |
|
Excess of Loss Cessions |
|
|
(1,743 |
) |
|
|
(19,069 |
) |
|
|
|
|
|
|
|
|
|
|
(233 |
) |
|
|
49,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exited Lines |
|
|
|
|
|
|
|
|
International |
|
|
365 |
|
|
|
207 |
|
North American |
|
|
(1,733 |
) |
|
|
(1,999 |
) |
|
|
|
|
|
|
|
|
|
|
(1,368 |
) |
|
|
(1,792 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,601 |
) |
|
$ |
47,583 |
|
|
|
|
|
|
|
|
The following table reconciles underwriting (loss) income for the operating segments to
(loss) income before income taxes and convertible preferred share dividends as reported in the
Interim Consolidated Statements of Operations and Comprehensive Operations.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
($000s) |
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Underwriting (loss) income |
|
$ |
(1,601 |
) |
|
$ |
47,583 |
|
Net investment income |
|
|
13,680 |
|
|
|
17,912 |
|
Net realized investment losses |
|
|
(2,272 |
) |
|
|
(4,659 |
) |
Other fee income |
|
|
45 |
|
|
|
|
|
Other reinsurance related expense |
|
|
(1,773 |
) |
|
|
(3,721 |
) |
Operating expenses |
|
|
(11,841 |
) |
|
|
(10,965 |
) |
Foreign exchange gains (losses) |
|
|
178 |
|
|
|
(927 |
) |
Interest expense |
|
|
(3,612 |
) |
|
|
(3,611 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and
convertible preferred share dividends |
|
$ |
(7,196 |
) |
|
$ |
41,612 |
|
|
|
|
|
|
|
|
17
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
10. Employee Benefits
The qualified and non-qualified defined benefit pension plans were curtailed effective March
31, 2004 and employees no longer accrue additional benefits thereunder.
The components of net pension (income) expense for these company-sponsored plans are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
($000s) |
|
2007 |
|
|
2006 |
|
Components of net periodic benefit (income)
expense: |
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
72 |
|
|
$ |
89 |
|
Expected return on assets |
|
|
(89 |
) |
|
|
(83 |
) |
Recognized net actuarial costs |
|
|
4 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Net periodic benefit (income) expense |
|
$ |
(13 |
) |
|
$ |
31 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2007, the Company made no contributions to its
pension plans. In May 2007, the Company decided to terminate its U.S. defined benefit pension
plans and therefore expects to make contributions of approximately $2.5 million after March 31,
2007.
The assumptions used to determine the net periodic benefit (income) expense as outlined above
are described in Note 11 to the audited consolidated financial statements included in the Annual
Report on Form 10-K for the year ended December 31, 2006.
11. Commitments and Contingencies
The Merger Agreement contains certain termination rights for both PXRE and Argonaut. Under
certain circumstances, including those relating to competing business combination proposals,
termination of the Merger Agreement could obligate PXRE to pay a termination fee of $20 million.
If the Plan of Merger is consummated, then certain obligations will be triggered in
conjunction with the transaction, including accelerated vesting of certain share-based
compensation, obligations under a Separation Agreement with our Chief Executive Officer and
investment banking fees. With respect to share-based compensation, 0.3 million of the 0.5 million
restricted shares at March 31, 2007 and all of the unvested options at March 31, 2007 will vest on
the date of the closing of the Merger, resulting in up to $3.2 million of accelerated expense.
With respect to the Separation Agreement with our Chief Executive Officer, an obligation for $1.8
million of lump sum payments payable six months after the closing of the Merger, in addition to any
vesting of restricted shares or options expense included in the $3.2 million accelerated expense
noted earlier, will become due. Lastly, investment banking fees of approximately $4.2 million will
be payable upon the closing of the Merger. The Company
currently expects the Merger to close during the quarter ended September 30,
2007.
18
PXRE Group Ltd. Notes to Consolidated Financial Statements (Unaudited)
Between May 3, 2006 and June 16, 2006 several class action lawsuits have been filed against
PXRE, Jeffrey Radke, the Companys Chief Executive Officer, and John Modin, the Companys former
Chief Financial Officer, in the U.S. District Court for the Southern District of New York on behalf
of a putative class consisting of investors who purchased the publicly traded securities of PXRE
between July 28, 2005 and February 16, 2006. Each of the class action complaints asserts nearly
identical claims and alleges that during the purported class period certain PXRE executives made a
series of materially false and misleading statements or omissions about PXREs business, prospects
and operations, thereby causing investors to purchase PXREs securities at artificially inflated
prices, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended
(the 1934 Act), and Rule 10b-5 promulgated under the 1934 Act. The class action complaints
allege, among other things, that the Company failed to disclose and misrepresented the following
material adverse facts: (1) the full impact on PXREs business of hurricanes Katrina, Rita and
Wilma (the 2005 Hurricanes); (2) the doubling of PXREs cost of the 2005 Hurricanes to an
estimated $758 million to $788 million; and (3) the magnitude of the loss to PXRE and PXREs
potential loss of its financial-strength and credit ratings from A.M. Best. Further, the
complaints allege, based on the foregoing asserted facts, that PXREs statements with respect to
its loss estimates for the 2005 hurricane season lacked any reasonable basis. The class actions
seek an unspecified amount of damages, as well as other forms of relief. Pursuant to an opinion
and order of the United States District Court for the Southern District of New York dated March 30,
2007, these lawsuits have been consolidated into one proceeding.
On February 21, 2007, PXRE entered into a Tolling and Standstill Agreement with certain
institutional investors in connection with potential claims arising out of the Private Placement of
Series D Perpetual Non-voting Preferred Shares of PXRE that were sold pursuant to the Private
Placement Memorandum dated on or about September 28, 2005.
PXRE has not established any reserves for any potential liability relating to the class action
lawsuits other than $1.0 million for legal fees. The Company has insurance coverage with respect
to claims such as the class action lawsuits, but it is not currently possible to determine whether
such insurance coverage will be adequate to cover the Companys defense costs and any losses.
Unfavorable outcomes in the class action lawsuits, resulting in the payment of substantial damages
or fines or criminal penalties, could have a material adverse effect on the Companys business,
cash flows, results of operations, financial position and prospects.
19
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations |
General
Unless the context otherwise requires, references in this Form 10-Q to PXRE, we, us and
our include PXRE Group Ltd., a Bermuda holding company (the Company) and its subsidiaries,
which principally include Peleus Reinsurance Ltd. (Peleus Re), PXRE Reinsurance Ltd. (PXRE
Bermuda), PXRE Corporation (PXRE Delaware), PXRE Reinsurance Company (PXRE Reinsurance), PXRE
Solutions, S.A. (PXRE Europe), PXRE Holding (Ireland) Limited (PXRE Ireland), PXRE Reinsurance
(Barbados) Ltd. (PXRE Barbados), and Mid-Atlantic Risk Systems (MARS). References to GAAP
refer to U.S. generally accepted accounting principles (GAAP). References to SAP refer to
statutory accounting principles (SAP) in either, Bermuda, where Peleus Re and PXRE Bermuda are
domiciled, or the State of Connecticut, where PXRE Reinsurance is domiciled, as applicable.
The following is a discussion and analysis of PXREs results of operations for the three
months ended March 31, 2007 compared with the three months ended March 31, 2006, and also a
discussion of our financial condition as of March 31, 2007. This discussion and analysis should be
read in conjunction with the attached unaudited interim consolidated financial statements and notes
thereto and PXREs Annual Report on Form 10-K for the year ended December 31, 2006 (the 10-K),
including the audited consolidated financial statements and notes thereto, the discussion of
Certain Risks and Uncertainties and the discussion of Critical Accounting Policy Disclosures
contained in the 10-K.
Overview
PXRE Group Ltd. is an insurance holding company organized in Bermuda. We have historically
provided reinsurance products and services to a worldwide marketplace through our wholly owned
subsidiary operations located in Bermuda, Europe and the United States. Our primary business has
been catastrophe and risk excess reinsurance, which accounted for substantially all of our net
premiums earned during the three months ended March 31, 2007 and 2006.
On February 16, 2006, we announced that we would be increasing our estimates of the net
pre-tax impact of Hurricanes Katrina, Rita and Wilma on our results of operations for the year
ended December 31, 2005. We also announced our intention to explore strategic alternatives due to
concerns about the hurricane losses and the resulting potential negative impact on our credit
ratings. Following these announcements, in February 2006 our counterparty credit and financial
strength ratings were downgraded by the major rating agencies to a level that was unacceptable to
many of our reinsurance clients. These ratings downgrades have had a significant negative impact
on our results of operations and profitability because they have impaired our ability to retain and
renew our existing reinsurance business. In light of the negative consequences of rating
downgrades, our Board of Directors determined that we should evaluate strategic alternatives to our
operating approach at that time and decided to retain Lazard Frères & Co. LLC (Lazard) (which has
since been succeeded by Keefe, Bruyette &Woods, Inc. (KBW)) as a financial advisor to assist in
the strategic exploration process.
20
Since the downgrade and withdrawal of our credit ratings in early 2006, we have not
underwritten any material new reinsurance contracts or renewed any of our expiring reinsurance
contracts. During 2006, most of our clients exercised their contractual rights to terminate their
reinsurance contracts with us as a result of the decline in our ratings and capital. In order to
manage our peak zone catastrophe exposures, the Company had also selectively allowed
extra-contractual cancellations on certain contracts that did not contain cancellation provisions
triggered by rating downgrades. As of January 1, 2007, virtually all of our in-force assumed
reinsurance contracts had expired.
Due to our inability to underwrite any new reinsurance contracts during the first quarter of
2007, we had a net loss before convertible preferred share dividends of $7.2 million for the first
quarter ended March 31, 2007 compared to net income before convertible preferred share dividends of
$41.6 million in the comparable prior year period. The Company had negative $5.2 million in net
premiums earned during the quarter ended March 31, 2007, as compared to $77.1 million in the
comparable prior year period.
Proposed Merger with Argonaut Group, Inc.
On March 14, 2007, the Board of Directors concluded its strategic alternatives evaluation
process and announced that we had entered into the Merger Agreement with Argonaut. Pursuant to the
terms of the Merger Agreement, Argonaut will merge into a newly formed PXRE Group Ltd. subsidiary,
PXMS, Inc. Upon completion of the merger, and subject to the terms and conditions of the Merger
Agreement which has been unanimously approved by the Board of Directors of both companies, Argonaut
stockholders will receive, subject to certain adjustments, 6.4672 PXRE common shares in exchange
for each share of Argonaut common stock. Upon closing of the transaction, approximately 73% of
PXREs outstanding common shares will be owned by former Argonaut stockholders, and approximately
27% by former holders of PXREs common shares and convertible voting preferred shares. Argonaut
stock options and other equity awards will automatically convert upon completion of the merger into
stock options and equity awards with respect to PXRE common stock, subject to adjustment to reflect
the exchange ratio.
Upon completion of the merger, PXRE will be renamed Argo Group International Holdings, Ltd.
and its common shares will be delisted from the New York Stock Exchange and relisted on the NASDAQ.
Completion of the merger, which is expected to occur in the third quarter of 2007, is subject
to various conditions, including (1) receipt of approvals of the holders of PXRE and Argonaut
common stock, (2) receipt of regulatory approvals, and (3) effectiveness of the Form S-4
registration statement relating to the PXRE common stock to be issued in the merger and (4) listing
of the PXRE common stock on the NASDAQ.
The merger agreement contains certain termination rights for both us and Argonaut. Under
certain circumstances, including those relating to competing business combination proposals,
termination of the merger agreement could obligate PXRE to pay a termination fee of $20 million.
21
If the Plan of Merger is consummated, then certain obligations will be triggered in
conjunction with the transaction, including accelerated vesting of certain share-based
compensation, obligations under a Separation Agreement with our Chief Executive Officer and
investment banking fees. With respect to share-based compensation, 0.3 million of the 0.5 million
restricted shares at March 31, 2007 and all of the unvested options at March 31, 2007 will vest on
the date of the closing of the Merger, resulting in up to $3.2 million of accelerated expense.
With respect to the Separation Agreement with our Chief Executive Officer, an obligation for $1.8
million of lump sum payments payable six months after the closing of the Merger, in addition to any
vesting of restricted shares or options expense included in the $3.2 million accelerated expense
noted earlier, will become due. Lastly, investment banking fees of approximately $4.2 million will
be payable upon the closing of the Merger. The Company currently expects the Merger to close
during the quarter ended September 30, 2007.
On March 14, 2007, in connection with the execution of the Merger Agreement with Argonaut, the
holders of the convertible preferred shares of PXRE (the Preferred Shareholders) and the holders
of the convertible common shares of PXRE (the Convertible Common Shareholders and, together with
the Preferred Shareholders, the Stockholders), entered into a Voting and Conversion Agreement
(the Voting Agreement). Pursuant to the Voting Agreement, the Stockholders agreed to vote in
favor of the Merger and the transactions contemplated thereby and PXRE has agreed to reduce the
conversion price of the convertible preferred shares from $11.28 to $6.24 per convertible preferred
share which will result in the issuance of an additional 4.2 million common shares upon the closing
of the Merger. The parties agreed that the convertible preferred shares and convertible common
shares would be converted into common shares of PXRE immediately prior to the Merger. In addition,
the Stockholders agreed to waive any dividends that would have otherwise accrued on the Preferred
Shares in accordance with the terms of the Description of Stock from and after December 31, 2006.
Accordingly, as of March 31, 2007, dividends amounting to $1.2 million were accrued but not paid.
If the Plan of Merger is consummated by August 31, 2007, then this accrual for dividends payable
will be reversed. However, if the Merger Agreement is terminated, the Voting Agreement will also
terminate and the conversion terms in effect prior to entering into the Voting Agreement shall
apply and any Waived Dividends that become payable as a result thereof shall not be deemed past
due dividends under Section 4(c) of the Description of Stock if paid on the next applicable
Dividend Due Date.
Argonaut underwrites specialty commercial insurance in niche areas of the property and
casualty insurance market. Argonaut offers property and casualty insurance products through eleven
wholly-owned insurance companies. Collectively, the insurance subsidiaries are admitted to write
insurance in all fifty states and in the District of Columbia, Guam and the U.S. Virgin Islands and
are authorized to write insurance on a surplus lines basis in all fifty states.
Argonaut targets niches in which it can develop a leadership position and which Argonaut
believes will generate underwriting profits. Argonaut has stated that its growth has been achieved
both organically through an operational strategy focused on underwriting discipline and as a result
of acquisition activity.
22
Concurrently with the announcement of the merger, we also announced the formation of a new
Bermuda based subsidiary, Peleus Re, which has been rated A- by A.M. Best and has commenced
operations. Peleus Re will focus on underwriting medium to small commercial property reinsurance
risks on a pro rata and risk excess basis, and property catastrophe reinsurance risk on a
controlled basis. It is also expected to provide reinsurance of casualty risks. Following the
merger, Peleus Re will provide quota share reinsurance to Argonaut for its property and casualty
risks. Peleus Re was initially capitalized during the first quarter of 2007 with $213 million
contributed from the existing surplus of PXRE Bermuda. PXRE Bermuda and PXRE Reinsurance will be
placed into an orderly runoff, but will provide intercompany reinsurance support to Peleus Re.
The Board of Directors believes that the merger with Argonaut and resumption of reinsurance
business through Peleus Re will provide shareholders with an expected return that is superior to
both the potential value that shareholders would have realized if the Board of Directors had
elected to pursue other non-runoff alternatives considered during the strategic evaluation process
or the potential value that shareholders were likely to realize if the Company were to be
liquidated after the conclusion of an orderly runoff and winding up process.
Status of Credit and Financial Strength Ratings
Immediately following our February 16, 2006 announcement, Standard & Poors Ratings Services
(S&P), a division of the McGraw-Hill Companies, Inc., downgraded its counterparty credit and
financial strength rating on PXRE Reinsurance and PXRE Bermuda from A- to BBB+ and placed these
ratings on CreditWatch with negative implications. A.M. Best, an independent insurance industry
rating organization, also downgraded its financial strength rating from A- to B++ with a
negative outlook. On February 17, 2006, Moodys Investor Services (Moodys) downgraded its
insurance financial strength rating of PXRE Reinsurance from Baa1 to Baa2 and placed this
rating under review for possible further downgrade.
On February 22, 2006, we announced our financial results for the quarter ended December 31,
2005. We also announced a further increase in our estimates of the net pre-tax impact of
Hurricanes Katrina, Rita and Wilma.
Subsequently in February 2006, S&P further downgraded its counterparty credit and financial
strength rating on PXRE Reinsurance and PXRE Bermuda from BBB+ to BBB-, and A.M. Best further
downgraded its financial strength rating on these entities from B++ to B+ with a negative
implication. Moodys further downgraded its insurance financial strength rating of PXRE
Reinsurance from Baa2 to Baa3 and placed this rating under review for possible further
downgrade.
In April, 2006, after finding that operational ratings below the critical A category
provided little value for a reinsurer, we announced that we had requested that the major credit
rating agencies withdraw their financial strength and claims paying ratings of the Company and its
operating subsidiaries. In the wake of this request, A.M. Best downgraded its financial strength
ratings of PXRE Reinsurance and PXRE Bermuda from B+ to B and withdrew these ratings; S&P
downgraded its counterparty credit and financial strength rating on PXRE Reinsurance and PXRE
Bermuda from BBB- to BB+ and then
withdrew these ratings; and Moodys downgraded its insurance financial strength rating of PXRE Reinsurance from Baa3 to Ba2
and then withdrew this rating.
23
Ratings have become an increasingly important factor in establishing the competitive position
of reinsurance companies. Due to these ratings downgrades and withdrawal in 2006 of the
operational ratings of our reinsurance subsidiaries by A.M. Best, S&P and Moodys, our competitive
position in the reinsurance industry has suffered, with ceding companies and brokers having moved
business to other reinsurers with higher ratings. As of December 31, 2006, virtually all of the
Companys reinsurance contracts had either been cancelled, non-renewed or expired.
On March 15, 2007, Peleus Re received a rating of A- from A.M. Best. Also on March 15,
2007, our existing reinsurance subsidiaries, PXRE Bermuda and PXRE Reinsurance were re-rated B+
by A.M. Best.
Comparison of First Quarter Results for 2007 with 2006
For the quarter ended March 31, 2007, net loss before convertible preferred share
dividends was $7.2 million compared to net income before convertible preferred share dividends of
$41.6 million for the comparable period of 2006. The decrease in net income during the quarter
ended March 31, 2007 as compared to the prior year comparable period was largely due to an $82.3
million decrease in net premiums earned during the quarter ended March 31, 2007, PXRE did not
underwrite any new reinsurance contracts during the first quarter of 2007, which decreased net
premiums earned. Net premiums earned during the three months ended March 31, 2007 were negative
$5.2 million primarily as a result of ceded premiums and adjustments of prior-year reinstatement
premiums. The decrease in net premiums earned was offset, in part, by a $21.0 million decrease in
net losses and loss expenses incurred as the Company had no material exposure to catastrophe events
in the first quarter of 2007. In addition, the Company had net favorable development of $3.2
million on prior year losses and loss expenses during the quarter ended March 31, 2007.
Net loss per diluted common share was $0.12 for the first quarter of 2007 compared to net
income per diluted common share of $0.54 for the first quarter of 2006, based on diluted average
shares outstanding of approximately 72.0 million in the first quarter of 2007 and approximately
77.0 million in the first quarter of 2006. As the Company incurred a loss from continuing
operations in the quarter ended March 31, 2007, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, it did not include approximately 5.2
million of average shares in its calculation of net loss per diluted common shares that are
anti-dilutive, as shown in Note 6 to the Interim Consolidated Financial Statements.
24
Premiums
Gross and net premiums written for the first quarter of 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
$ Increase |
|
|
% Increase |
|
($000s) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
(Decrease) |
|
Gross premiums written |
|
$ |
(2,079 |
) |
|
$ |
121,385 |
|
|
$ |
(123,464 |
) |
|
|
(102 |
) |
Ceded premiums written |
|
|
(14,459 |
) |
|
|
(42,492 |
) |
|
|
(28,033 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
(16,538 |
) |
|
$ |
78,893 |
|
|
$ |
(95,431 |
) |
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross and net premiums earned for the first quarter of 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
$ Increase |
|
|
% Increase |
|
($000s) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
(Decrease) |
|
Gross premiums earned |
|
$ |
(1,986 |
) |
|
$ |
95,644 |
|
|
$ |
(97,630 |
) |
|
|
(102 |
) |
Ceded premiums earned |
|
|
(3,208 |
) |
|
|
(18,557 |
) |
|
|
(15,349 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
(5,194 |
) |
|
$ |
77,087 |
|
|
$ |
(82,281 |
) |
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PXRE did not underwrite any new reinsurance contracts during the first quarter of 2007,
which decreased both gross premiums written and gross premiums earned during the quarter ended
March 31, 2007 as compared to the prior year comparable period. Gross premiums written and gross
premiums earned during the first quarter of 2007 were negative $2.1 million and negative $2.0
million, respectively, primarily as a result of adjustments of prior-year reinstatement premiums.
The decrease in both ceded premiums written and ceded premiums earned during the quarter ended
March 31, 2007 was due to a decrease in ceded premiums associated with excess of loss
retrocessional catastrophe coverage during 2007, including one of the collateralized catastrophe
facilities entered into during the fourth quarter of 2005 to protect the Company against a severe
catastrophe event which was terminated during the first quarter of 2007 with termination charges
recognized as of December 31, 2006. PXRE has maintained some retrocessional coverage in 2007
despite not underwriting new reinsurance contracts during the first quarter of 2007, in
anticipation of Peleus Re assuming new reinsurance risks during the course of 2007 and future
periods.
The decrease in both net premiums written and net premiums earned during the three months
ended March 31, 2007 was a result of the decrease in gross premiums written and gross premiums
earned of $123.5 million and $97.6 million, respectively, offset, in part, by the decrease in ceded
premiums written and ceded premiums earned of $28.0 million and $15.3 million, respectively.
A summary of our net premiums written and earned by business segment for the three months
ended March 31, 2007 and 2006 is included in Note 9 to the Interim Consolidated Financial
Statements.
25
Ratios
The underwriting results of a property and casualty insurer are discussed frequently by
reference to its loss ratio, expense ratio and combined ratio. The loss ratio is the result of
dividing losses and loss expenses incurred by net premiums earned. The expense ratio is the result
of dividing underwriting expenses (including amortization of expenses previously deferred,
commission and brokerage, net of fee income, and operating expenses) by net premiums earned. The
combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio less than 100%
indicates underwriting profits and a combined ratio greater than 100% indicates underwriting
losses. The combined ratio does not reflect the effect of investment income, other reinsurance
related expense or other fee income on underwriting results. The ratios discussed below have been
calculated on a GAAP basis.
The following table summarizes the loss ratio, expense ratio and combined ratio for the
quarters ended March 31, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(%) |
|
2007 |
|
|
2006 |
|
Loss ratio |
|
NM |
|
|
23.1 |
% |
Expense ratio |
|
NM |
|
|
29.4 |
|
|
|
|
|
|
|
|
Combined ratio |
|
NM |
|
|
52.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe and risk excess loss ratio |
|
NM |
|
|
20.6 |
% |
|
|
|
|
|
|
|
As a result of the lack of new reinsurance business in the first quarter of 2007 and the
resulting lack of net premiums earned, the loss ratios, expense ratio and combined ratio are not
meaningful for the three months ended March 31, 2007.
Losses and Loss Expenses
Losses and loss expenses incurred amounted to negative $3.2 million in the first quarter of
2007 compared to $17.8 million in the first quarter of 2006. Our loss ratio was not meaningful, as
noted above, for the first quarter of 2007 as compared to 23.1% for the comparable prior year
period. There were no significant property catastrophe losses during either the first quarter of
2007 or 2006. The incurred loss amount of negative $3.2 million in the first quarter of 2007 was
due to net favorable development of $3.2 million on prior year losses and loss expenses. The
Company has no remaining material exposure to catastrophe events from policies written in prior
periods and additionally the Company has not underwritten any new business in the three months
ended March 31, 2007. Net favorable development of $3.2 million for prior-year losses and loss
expenses, was comprised of $4.6 million of net favorable development on our catastrophe and risk
excess segment and $1.4 million of net adverse development on our exited lines segment. The $4.6
million of favorable catastrophe and risk excess development was primarily related to $6.7 million
of favorable reported loss activity on our prior-year non-significant catastrophe losses, $2.9
million of favorable reported loss activity on the 2004 Hurricanes and other significant
catastrophes, offset by $5.0 million of adverse development on Hurricanes Katrina, Rita and Wilma,
primarily related to a late reported loss by a cedent in run-off.
26
During the first quarter of 2006, we experienced net favorable development of $2.6 million for
prior-year losses and loss expenses, consisting of $4.5 million of favorable development on our
catastrophe and risk excess segment, primarily from non-significant catastrophe losses and loss
expenses, offset by $1.9 million of adverse development on our exited lines segment. The $4.5
million of favorable catastrophe and risk excess development was related to favorable reported loss
activity. Prior year losses in the exited lines segment increased because of higher than expected
reported claims.
Underwriting Expenses
The expense ratio was not meaningful, as noted above, for the first quarter of 2007 compared
to 29.4% during the comparable year-earlier period. The commission and brokerage ratio, net of fee
income, was not meaningful for the first quarter of 2007 compared with 15.2% for the first quarter
of 2006. Commission and brokerage, net of fee income for the first quarter of 2007 decreased 104%,
or $12.1 million, to negative $0.4 million from $11.7 million in the first quarter of 2006 due to
the decrease in net premiums earned as no new business was underwritten in the three months ended
March 31, 2007. Commission and brokerage, net of fee income, during the first quarter of 2007 was
negative $0.4 million as a result of adjustments of net premiums earned on prior-year reinstatement
premiums.
The operating expense ratio was not meaningful, as noted above, for the three months ended
March 31, 2007 compared with 14.2% for the comparable period of 2006. Operating expenses in the
first quarter of 2007 include $3.9 million in legal and financial advisory costs which were
principally related to the proposed merger with Argonaut Group, Inc.
Other Reinsurance Related Expense
In the fourth quarter of 2005, PXRE sponsored a catastrophe bond transaction which was
determined to be a derivative and recorded at fair value. During the quarter ended March 31, 2007,
other reinsurance related expense decreased $1.9 million to $1.8 million for the three months ended
March 31, 2007 from $3.7 million in the comparable period of 2006 mainly due to the decrease in
protection provided by the derivative from $250.0 million in 2006 to $125.0 million in 2007.
27
Net Investment Income
Net investment income for the first quarter of 2007 decreased $4.2 million, or 24%, to $13.7
million from $17.9 million in the first quarter of 2006. This decrease is primarily as a result of
a $5.4 million decrease in income from our hedge funds and a $0.7 million decrease in income from
our fixed maturity and short-term investment portfolio, offset, in part, by a $1.6 million decrease
in investment expenses. The decrease in investment expenses resulted from the commutation of
several reinsurance contracts that required PXRE to credit interest to the counterparties to these
transactions, when these contracts were in place in 2006. The average invested balances in our
fixed maturity and short-term investment portfolio decreased due to cash flow used principally for
the payment of claims. The net return of the fixed maturity and short-term investment portfolios,
excluding realized and unrealized capital gains, increased to 5.2% during the first quarter of
2007, on an annualized basis, compared with 4.3% during the comparable prior-year period due to improved yields throughout the portfolio, but particularly
within our short-term portfolio. Investments in hedge funds produced a return of 1.5% for the
first quarter of 2007 compared with 3.7% in the comparable prior-year period. Subsequent to, and
as a result of the ratings downgrades, redemption orders were executed for all of the Companys
hedge fund investments and as a result income from hedge funds is expected to continue to decrease
in future quarters as we receive the proceeds from our various hedge fund investments, expected to
be received by the end of 2007.
Income Taxes
The tax expense recognized during the first quarter of 2007 was minimal. There was no tax
expense recognized during the first quarter of 2006.
Management has reviewed PXREs deferred tax asset as of March 31, 2007, and due to uncertainty
with respect to the amount of future taxable income that will be generated following the downgrades
of PXREs credit rating in February 2006, has concluded that a full valuation allowance continues
to be required for its entire deferred tax asset.
FINANCIAL CONDITION
Capital Resources
The Company and PXRE Delaware rely primarily on dividend payments or capital distributions
from PXRE Bermuda, Peleus Re and PXRE Reinsurance to pay their operating expenses, to meet their
debt service obligations and to pay dividends. In the wake of losses incurred as a result of
Hurricanes Katrina, Rita and Wilma during 2005, PXRE Reinsurance has an accumulated deficit and,
therefore, may not declare and pay any dividends without regulatory approval. Based on the
statutory surplus of PXRE Bermuda as of December 31, 2006, the aggregate dividends or capital
distributions that are available to be paid during 2007, without prior regulatory approval are
$104.6 million. Since our recent ratings downgrades we have been actively communicating with the
Bermuda Monetary Authority (BMA) and we do not intend to make any further dividends or capital
distributions from PXRE Bermuda without prior notification to the BMA. We also do not intend to
make any dividend or capital distributions from Peleus Re in 2007. Neither Peleus Re nor PXRE
Reinsurance paid any dividends in the first three months of 2007. PXRE Bermuda paid a capital
distribution of $174.0 million to the Company in 2007 with the consent of the BMA. In addition,
the Company made a capital contribution of $163.0 million to Peleus Re and PXRE Bermuda made a
capital contribution of $50.0 million to Peleus Re during the first three months of 2007 with the
consent of the BMA. These capital distributions and capital contributions did not impact or limit
the $104.6 million of aggregate dividends or capital distributions that PXRE Bermuda may pay during
2007. We anticipate that this remaining dividend and capital distribution capacity (with
notification to the BMA) will be sufficient to fund our liquidity needs during 2007.
28
PXRE also agreed with the BMA that effective March 12, 2007, PXRE Bermuda, before reducing its
total statutory capital by 10% or more, in the aggregate, as set out in its previous years
financial statements, in any calendar year, shall obtain the BMAs approval. PXRE Bermuda may
reduce its total statutory capital, as set out in its previous
years financial statements, by less than 10% in the aggregate in any calendar year, provided that at least fourteen
days before payment of such distribution it files with the BMA a certificate signed by the
insurers principal representative and two of its directors which states that, in the opinion of
those signing the certificate, the return and reduction of statutory capital will not cause the
insurer to fail to meet its relevant margins.
Additionally, PXRE Bermuda, before declaring a dividend in respect of any financial year which
would exceed 20% of its total statutory capital and surplus as shown on its statutory balance sheet
in relation to the previous financial year, must obtain the BMAs approval. PXRE Bermuda may
declare and pay dividends in respect of any financial year which would not exceed 20% of its total
statutory capital and surplus as shown on its statutory balance sheet in relation to the previous
financial year, provided that at least fourteen days before payment of such dividend it files with
the BMA a certificate signed by its principal representative and two of its directors which states
that, in the opinion of those signing the certificate, the payment of such dividend will not cause
PXRE Bermuda to fail to meet its relevant margins.
PXRE Bermuda is prohibited from declaring or paying any dividends during any financial year it
is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or
payment of such dividends would cause it to fail to meet such margin or ratio. If it fails to meet
its minimum solvency margin or minimum liquidity ratio on the last day of any financial year, the
insurer will be prohibited, without the approval of the BMA, from declaring or paying any dividends
during the next financial year. If its total statutory capital and surplus falls to $75.0 million
or less, it will have to comply with additional reporting requirements as mandated by the BMA.
Liquidity
The primary sources of liquidity for our principal operating subsidiaries have historically
been net cash flows from operating activities (including interest income from investments), the
maturity or sale of investments, borrowings, capital contributions and advances. Funds are applied
primarily to the payment of claims, operating expenses and to the purchase of investments.
Premiums are typically received in advance of related claim payments.
As
a result of our ratings downgrades in 2006, we have not underwritten any new
reinsurance business in the three months ended March 31, 2007, which has significantly decreased
cash flows associated with the receipt of reinsurance premiums. In addition, paid losses primarily
from the 2005 Hurricanes have resulted in net cash used by operating activities. Subsequent to,
and as a result of, the downgrades, we sold approximately $490.5 million of fixed income securities
held by PXRE Bermuda, and additionally executed redemption orders for all of the Companys hedge
fund investments. The proceeds of the sales of the fixed income securities were all received by
the first week of March 2006 and were reinvested in commercial paper and other short term
investments. With respect to the proceeds of the sales of the hedge fund investments,
approximately 96% of such proceeds were received by March 31, 2007 and the balance is expected to
be received by the end of 2007.
29
Financings
As of March 31, 2007, PXRE had $167.1 million in subordinated debt securities outstanding as
follows:
|
|
|
|
|
($000s) |
|
March 31, 2007 |
|
8.85% fixed rate due February 1, 2027 |
|
$ |
102,656 |
|
7.35% fixed/floating rate due May 15, 2033 |
|
|
18,042 |
|
9.75% fixed rate due May 23, 2033 |
|
|
15,464 |
|
7.70% fixed/floating rate due October 29, 2033 |
|
|
20,619 |
|
7.58% fixed/floating rate due September 30, 2033 |
|
|
10,310 |
|
|
|
|
|
|
|
$ |
167,091 |
|
|
|
|
|
Share Dividends and Book Value
There were no dividends to common shareholders declared in the first quarter of 2007 and 2006.
The Board of Directors does not intend to declare dividends on our common shares during the
pendency of the proposed merger with Argonaut.
Pursuant to the Voting Agreement, the Preferred Stockholders agreed to waive any dividends
that would have otherwise accrued on the Preferred Shares in accordance with the terms of the
Description of Stock from and after December 31, 2006 (the Waived Dividends). Accordingly, as of
March 31, 2007, dividends amounting to $1.2 million were accrued but not paid. If the Plan of
Merger is consummated by August 31, 2007, then this accrual for dividends payable will be reversed.
However, if the Merger Agreement is terminated, the Voting Agreement will also terminate and the
conversion terms in effect prior to entering into the Voting Agreement shall apply and any Waived
Dividends that become payable as a result thereof shall not be deemed past due dividends under
Section 4(c) of the Description of Stock if paid on the next applicable Dividend Due Date.
Book value per common share was $6.30 at March 31, 2007 after considering convertible
preferred shares at a conversion price of $11.18 and the accrual of the convertible preferred share
dividend as of March 31, 2007. Book value would be $5.99 at March 31, 2007 after considering
convertible preferred shares at a conversion price of $6.24, the conversion price agreed upon by
PXRE and the Preferred Stockholders pursuant to the Voting Agreement.
Cash Flows
Net cash flows used by operations were $127.4 million in the first quarter of 2007 compared to
$146.3 million in the first quarter of 2006 primarily due to a decrease in losses and loss expenses
paid, a decrease in premiums collected as the Company has not underwritten any new business in
2007, a decrease in commission and brokerage paid, a decrease in purchases of trading portfolio
securities denominated in foreign currencies to hedge foreign denominated loss reserves and a
decrease in investment income collected due to a reduced invested asset portfolio.
30
Because of the nature of the coverages we provide, which typically can produce infrequent
losses of high severity, it is not possible to predict accurately our future cash flows from
operating activities. As a consequence, cash flows from operating activities may fluctuate,
perhaps significantly, between individual quarters and years.
Net cash provided by investing activities were $124.7 million in the first quarter of 2007
compared to $150.2 million in the first quarter of 2006. This decrease reflects the decreased cash
flows used by operations.
If the merger with Argonaut is not consummated and our Board of Directors concludes that no
other feasible strategic alternative would be in the best interests of our shareholders, it may
determine that the best course of action is to place the reinsurance operations of PXRE into
runoff. If runoff is chosen, the only sources of liquidity for our principal operating
subsidiaries will be the maturity or sale of investments, as we will no longer expect to have net
positive cash flows from operating activities, borrowings, capital contributions or advances. As
of March 31, 2007, we have $570.2 million of short term investments and $509.8 million of other
invested assets. The overall duration of the Companys fixed income and short-term investment
strategy is 1.1 years. Based upon our current estimates of losses and loss expenses and other
liabilities on our March 31, 2007 interim consolidated balance sheet, we believe we have sufficient
liquidity to meet the currently foreseen needs of our counterparties should we elect to go into
runoff, however the nature and timing of cash flows could be highly uncertain in this scenario.
PXRE has three letter of credit (LOC) facilities that allow it to provide LOCs to its ceding
companies if such LOC is required under the terms of the contract. All of the facilities require
the Company to provide collateral in the form of fixed maturity securities or cash to the issuing
bank as security for outstanding LOCs. The first is a $110.0 million committed facility with
Barclays Bank plc under which the Company pays the issuing bank an annual standby commitment fee of
0.15% per annum. The second is a $200.0 million committed facility with Citibank Ireland Financial
Services plc under which the Company pays the issuing bank an annual standby commitment fee of
0.10% per annum. The third is an uncommitted facility with Merrill Lynch that allows for LOCs to
be issued subject to satisfactory collateral being provided to the issuing bank by the Company.
There is no commitment fee for the third facility. The Company must transfer eligible assets to
collateral accounts prior to each respective bank issuing an LOC. Since eligible assets include
fixed income investments, such securities need not be sold in order to qualify as eligible
collateral. As of March 31, 2007, the Company has pledged assets with a fair value of $271.2
million to support outstanding letters of credit.
31
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements. We do have the following
commitments, contingencies and contractual obligations. Payments due by period in the following
table reflect liabilities recorded at March 31, 2007 and future commitments.
Commitments, Contingencies and Contractual Obligations
PAYMENT DUE BY PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations |
|
|
|
|
|
Less Than |
|
|
1 3 |
|
|
3 5 |
|
|
More Than |
|
($000s) |
|
Total |
|
|
1 Year (1) |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations |
|
$ |
167,091 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
167,091 |
|
Interest on debt obligations |
|
|
320,042 |
|
|
|
8,464 |
|
|
|
28,654 |
|
|
|
28,653 |
|
|
|
254,271 |
|
Losses and loss expenses |
|
|
469,982 |
|
|
|
163,254 |
|
|
|
158,811 |
|
|
|
88,585 |
|
|
|
59,332 |
|
Capital (finance) lease
obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
3,939 |
|
|
|
836 |
|
|
|
1,718 |
|
|
|
1,385 |
|
|
|
|
|
Purchase obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on convertible
preferred shares |
|
|
4,702 |
|
|
|
3,488 |
|
|
|
1,214 |
|
|
|
|
|
|
|
|
|
Other long-term liabilities
reflected on the balance
sheet under GAAP |
|
|
4,533 |
|
|
|
4,230 |
|
|
|
303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
970,289 |
|
|
$ |
180,272 |
|
|
$ |
190,700 |
|
|
$ |
118,623 |
|
|
$ |
480,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents liabilities due through to December 31, 2007. |
Loss and loss expense reserves represent managements best estimate of the ultimate cost
of settling the underlying reinsurance claims. As more fully discussed in Critical Accounting
Policy Disclosures Estimation of Losses and Loss Expenses below, the estimation of loss and
loss expense reserves is based on various complex and subjective judgments. Actual losses and loss
expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our
interim consolidated financial statements. Similarly, the timing for payment of our estimated
losses is not fixed and is not determinable on an individual or aggregate basis. The assumptions
used in estimating the likely payments due by periods are based on the Companys historical claims
payment experience, but due to the inherent uncertainty in the process of estimating the timing of
such payments, there is a risk that the amounts paid in any such period can be significantly
different than the amounts disclosed above.
As noted under Capital Resources above, we expect to be able to meet the contractual
obligations over the remainder of 2007 with the dividend paying capacity of the Companys
subsidiary, PXRE Bermuda. PXRE Reinsurance, PXRE Bermuda and Peleus Re expect to be able to meet
their contractual obligations over the remainder of 2007 with operating and investing cash flows.
As of March 31, 2007, other commitments and pledged assets include (a) LOCs of $208.3 million
which are secured by cash and securities with a fair value of $271.2 million, (b) securities with a
par value of $9.7 million which were on deposit with various state insurance departments in order
to comply with insurance laws, (c) cash and securities with a fair value of $52.9 million deposited
in a trust for the benefit of a cedent in connection with certain deposit liabilities, (d) funding
commitments to a limited partnership of $0.2 million, (e) commitments under the subordinated debt
securities discussed above, and (f) commitment fees of $0.4 million per annum under the two
committed LOC facilities discussed above under Cash Flows.
32
In order to better protect PXRE against the risk of the occurrence of multiple significant
catastrophe events, we sponsored a catastrophe bond transaction that
closed during the fourth quarter of 2005. The transaction was a $250.0 million collateralized transaction with A&W II,
a Cayman Island reinsurance company, which is accounted for as a derivative. It is designed to
provide coverage to PXRE for second event losses in the same calendar year arising from hurricanes
in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes
in California. The agreement with A&W II provides two tranches of protection to PXRE for the risk
that a second significant catastrophe loss arising from a hurricane in the Eastern and Gulf coasts
of the United States, a windstorm in northern Europe or earthquake in California occurs following
the occurrence of a first significant hurricane, windstorm or earthquake loss. The coverage
provided $250.0 million of protection from January 1, 2006 to December 31, 2006 and provides $125.0
million of protection for the period from January 1, 2007 to December 31, 2008. The annual premium
payments with respect to the A&W II facility are approximately $8.0 million in both 2007 and 2008.
We expect that this catastrophe protection will be utilized by Peleus Re.
The A&W II coverage is based on a modeled loss trigger. PXRE created a series of notional
portfolios of reinsurance contracts designed to closely mimic the exposures in PXREs assumed
reinsurance portfolio at the time the transaction incepted. Upon the occurrence of a hurricane,
windstorm or earthquake in the covered territories, the parameters of the catastrophe event are
determined and modeled against the notional portfolios. If the modeled loss to the notional
portfolio exceeds the attachment point for the peril at issue, then the coverage is activated.
Upon the occurrence of a second catastrophe event in the covered territories during that calendar
year, the parameters of the catastrophe event are determined and modeled against the notional
portfolios. If the modeled loss to the notional portfolio for the second event exceeds the
attachment point for the peril at issue, then PXRE will make a recovery under the agreement. The
recovery is based on modeled losses and is not limited to PXREs ultimate net loss from the loss
event.
On December 21, 2005, A&W II financed the coverage through the issuance of $250.0 million in
catastrophe bonds pursuant to Rule 144A under the Securities Act of 1933.
The reinsurance companies that are counterparties to this transaction are variable interest
entities under the provisions of FIN 46R. The Company is not the primary beneficiary of this
entity and is therefore not required to consolidate this entity in its interim consolidated
financial statements.
If the merger with Argonaut is not consummated and the Board of Directors elects to pursue a
strategic alternative that materially changes PXREs catastrophe risk profile, we may seek to
assign or novate PXREs rights and obligations under the collateralized catastrophe facility to
another insurance or reinsurance company. There can be no assurance that any other insurance or
reinsurance company would be willing to accept such an assignment or novation, that the note
holders who funded the facility would consent to such an assignment or novation, or that the cost
of such an assignment or novation would not have a material adverse impact on PXRE. If PXRE was
not able to successfully assign or novate its rights and obligations under the collateralized
catastrophe facility, PXRE could incur material termination fees and liabilities. If the A&W II
facility is terminated prior to the end of the scheduled termination date of a tranche, PXRE could
be obligated to pay significant early termination fees that could be
as much as $5.8 million, and PXRE is obligated to make all premium payments up to the date of
termination.
33
If the merger with Argonaut is not consummated and the Board of Directors elects to pursue a
strategic alternative that materially changes PXREs catastrophe risk profile, the Company will
also need to evaluate its obligations under two multi-year ceded reinsurance contracts that provide
the Company with reinsurance protection against catastrophic events in 2007 and 2008. In this
regard, the Company will need to evaluate whether it is likely that catastrophe loss exposure
assumed by Peleus Re in 2007 and 2008 has the potential to result in losses that exceed the
retention level under these ceded reinsurance protections. The Company is currently obligated to
cede reinsurance premiums of $15.0 million per annum in each of 2007 and 2008 under these
multi-year contracts.
The Merger Agreement contains certain termination rights for both PXRE and Argonaut. Under
certain circumstances, including those relating to competing business combination proposals,
termination of the Merger Agreement could obligate PXRE to pay a termination fee of $20 million.
If the Plan of Merger is consummated, then certain obligations will be triggered in
conjunction with the transaction, including accelerated vesting of certain share-based
compensation, obligations under a Separation Agreement with our Chief Executive Officer and
investment banking fees. With respect to share-based compensation, 0.3 million of the 0.5 million
restricted shares at March 31, 2007 and all of the unvested options at March 31, 2007 will vest on
the date of the closing of the Merger, resulting in up to $3.2 million of accelerated expense.
With respect to the Separation Agreement with our Chief Executive Officer, an obligation for $1.8
million of lump sum payments payable six months after the closing of the Merger, in addition to any
vesting of restricted shares or options expense included in the $3.2 million accelerated expense
noted earlier, will become due. Lastly, investment banking fees of approximately $4.2 million will
be payable upon the closing of the Merger. The Company currently expects the Merger to close
during the quarter ended September 30, 2007.
On March 14, 2007, in connection with the execution of the Merger Agreement with Argonaut, the
holders of the convertible preferred shares of PXRE (the Preferred Shareholders) and the holders
of the convertible common shares of PXRE (the Convertible Common Shareholders and, together with
the Preferred Shareholders, the Stockholders), entered into a Voting and Conversion Agreement
(the Voting Agreement). Pursuant to the Voting Agreement, the Stockholders agreed to vote in
favor of the Merger and the transactions contemplated thereby and PXRE has agreed to reduce the
conversion price of the convertible preferred shares from $11.28 to $6.24 per convertible preferred
share which will result in the issuance of an additional 4.2 million common shares upon the closing
of the Merger. The parties agreed that the convertible preferred shares and convertible common
shares would be converted into common shares of PXRE immediately prior to the Merger. In addition,
the Stockholders agreed to waive any dividends that would have otherwise accrued on the Preferred
Shares in accordance with the terms of the Description of Stock from and after December 31, 2006.
Accordingly, as of March 31, 2007, dividends amounting to $1.2 million were accrued but not paid.
If the Plan of Merger is consummated by August 31, 2007, then
this accrual for dividends payable will be reversed. However, if the Merger Agreement is terminated, the Voting
Agreement will also terminate and the conversion terms in effect prior to entering into the Voting
Agreement shall apply and any Waived Dividends that become payable as a result thereof shall not be
deemed past due dividends under Section 4(c) of the Description of Stock if paid on the next
applicable Dividend Due Date.
34
Investments
As of March 31, 2007, our investment portfolio, at fair value, was allocated 46.5% in fixed
maturity debt instruments, 52.8% in short-term investments, 0.5% in hedge funds and 0.2% in other
invested assets.
The following table summarizes our investments at March 31, 2007 and December 31, 2006 at
carrying value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Investments |
|
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
($000s, except percentages) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government securities |
|
$ |
53,525 |
|
|
|
5.0 |
% |
|
$ |
54,200 |
|
|
|
4.5 |
% |
Foreign denominated securities |
|
|
15,541 |
|
|
|
1.4 |
|
|
|
15,497 |
|
|
|
1.3 |
|
United States government sponsored agency debentures |
|
|
53,692 |
|
|
|
5.0 |
|
|
|
53,426 |
|
|
|
4.4 |
|
United States government sponsored agency
mortgage-backed securities |
|
|
126,795 |
|
|
|
11.7 |
|
|
|
131,069 |
|
|
|
10.9 |
|
Other mortgage and asset-backed securities |
|
|
156,713 |
|
|
|
14.5 |
|
|
|
166,765 |
|
|
|
13.9 |
|
Obligations of states and political subdivisions |
|
|
1,245 |
|
|
|
0.1 |
|
|
|
1,243 |
|
|
|
0.1 |
|
Corporate securities |
|
|
94,630 |
|
|
|
8.8 |
|
|
|
95,551 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
502,141 |
|
|
|
46.5 |
|
|
|
517,751 |
|
|
|
43.0 |
|
Short-term investments |
|
|
570,230 |
|
|
|
52.8 |
|
|
|
671,197 |
|
|
|
55.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities and short-term investments |
|
|
1,072,371 |
|
|
|
99.3 |
|
|
|
1,188,948 |
|
|
|
98.7 |
|
Hedge funds |
|
|
5,579 |
|
|
|
0.5 |
|
|
|
12,766 |
|
|
|
1.1 |
|
Other invested assets |
|
|
2,112 |
|
|
|
0.2 |
|
|
|
2,427 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
1,080,062 |
|
|
|
100.0 |
% |
|
$ |
1,204,141 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2007, 97.5% of the fair value of our fixed maturities and short-term
investments portfolio was in obligations rated A- or better by Moodys or S&P. Mortgage and
asset-backed securities accounted for 26.4% of fixed maturities and short-term investments or 26.2%
of our total investment portfolio based on fair value at March 31, 2007. The average yield to
maturity on our fixed maturities portfolio, including short-term investments, at March 31, 2007 and
2006 was 5.4% and 5.0%, respectively.
Fixed maturity investments, other than trading securities, are reported at fair value, with
the net unrealized gain or loss, net of tax, reported in other comprehensive income as a separate
component of shareholders equity. Fixed maturity investments classified as trading securities are
reported at fair value, with the net unrealized gain or loss reported as investment income. At
March 31, 2007, an after-tax unrealized gain of $2.2 million (a gain of $0.03 per share, after
considering convertible preferred shares) was included in shareholders equity.
35
Short-term investments are carried at amortized cost, which approximates fair value. Our
short-term investments, principally U.S. treasury bills and agency securities, amounted to $570.2
million at March 31, 2007, compared to $671.2 million at December 31, 2006.
A significant component of our investment strategy had, in prior periods, been investing a
portion of our invested assets in a diversified portfolio of hedge funds. At March 31, 2007, total
hedge fund investments amounted to $5.6 million, representing 0.5% of the total investment
portfolio. At December 31, 2006, total hedge fund investments amounted to $12.8 million,
representing 1.1% of the total investment portfolio. For the three months ended March 31, 2007,
our hedge funds earned a return of 1.5% as compared to 3.7% in the three months ended March 31,
2006. As noted above, under the caption Cash Flows, the Company executed redemption orders for
all of its hedge funds during the first quarter of 2006.
As of March 31, 2007, our investment portfolio also included $2.1 million of other invested
assets which is in two mezzanine bond funds. The remaining aggregate cash call commitments in
respect of such investments are $0.2 million.
Hedge funds and other limited partnership investments are accounted for under the equity
method. Total investment income for the three months ended March 31, 2007, included $0.5 million
attributable to hedge funds and other investments.
Our hedge funds and other privately held securities program should be viewed as exposing us to
the risk of losses which we have historically sought to reduce through our multi-asset and
multi-management strategy. There can be no assurance, however, that this strategy will prove to be
successful.
Taxes
PXRE Delaware files U.S. income tax returns for itself and all of its direct or indirect U.S.
subsidiaries that satisfy the stock ownership requirements for consolidation. PXRE Delaware is
party to a tax allocation agreement concerning filing of consolidated federal income tax returns
pursuant to which each of these U.S. subsidiaries makes tax payments to PXRE Delaware in an amount
equal to the federal income tax payment that would have been payable by the relevant U.S.
subsidiary for the year if it had filed a separate income tax return for that year. PXRE Delaware
is required to provide 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 one of these U.S.
subsidiaries is less than (or greater than) the annual tax liability for that U.S. subsidiary on a
stand-alone basis for that year, the U.S. subsidiary will be required to make up the deficiency to
PXRE Delaware (or will be entitled to receive a credit if payments exceed the separate return tax
liability of that U.S. subsidiary).
36
Update on Critical Accounting Policy Disclosures
The Companys Annual Report on Form 10-K for the year ended December 31, 2006 contains a
discussion concerning critical accounting policy disclosures (See Item 7 Managements Discussion
and Analysis of Financial Condition and Results of OperationsCritical Accounting Policy
Disclosures contained in the Companys Annual Report on Form 10-K for the year ended December 31,
2006). We disclose our significant accounting policies in the notes to the Consolidated Financial Statements which should be read in conjunction with the
notes to the Interim Consolidated Financial Statements and the 2006 audited Consolidated Financial
Statements and notes. Certain of these policies are critical to the portrayal of our financial
condition and results since they require management to establish estimates based on complex and
subjective judgments, including those related to our estimation of losses and loss expenses,
estimation and recognition of premiums and valuation of deferred tax assets.
Estimation of Losses and Loss Expenses
As a property catastrophe reinsurer, incurred losses are inherently more volatile than those
of primary insurers and reinsurers of risks that have an established historical pattern of losses.
In addition, with respect to insured events that occur near the end of a reporting period, as well
as with respect to our retrocessional book of business, the significant delay in losses being
reported to insurance carriers, reinsurers and finally retrocessionaires require us to make
estimates of losses based on limited information from our clients, industry loss estimates and our
own underwriting data. Because of the uncertainty in the process of estimating our losses from
insured events, there is a risk that our liabilities for losses and loss expenses could prove to be
inadequate, with a consequent adverse impact on our earnings and shareholders equity in future
periods.
In establishing our loss and loss expense liabilities, PXRE records reserves as managements
best estimate of liabilities as of the balance sheet date. Management believes that the Companys
estimated liability for unpaid losses and loss expenses as of March 31, 2007 is adequate. Since
year-end 2004, all of our loss and loss expense estimates have been reviewed annually by an
independent internationally recognized actuarial firm, and their conclusions have not, in any
period, been materially different than those of the Company.
Significant Uncertainties
The most significant uncertainty in our reserves involves our estimates of catastrophe losses.
In reserving for catastrophe losses, our estimates are influenced by underwriting information
provided by our clients, industry catastrophe models, industry loss estimates and our internal
analyses of this information. This reserving approach can cause significant development from
initial loss estimates in the immediate wake of a catastrophe event due to the limited information
available to us as a reinsurer and retrocessionaire regarding the actual underlying losses. This
process can cause our ultimate estimates to differ significantly from initial projections.
37
Historically, there has been significant variability in the development of catastrophe losses
during the twelve month period immediately following the catastrophe event with such variability
reducing after the initial twelve month period. To further illustrate the variability of setting
catastrophe loss estimates, the following chart outlines the changes in the initial loss estimates
for recent costly catastrophes in the United States over a three-year period based on industry
insured loss:
Recent U.S. Catastrophes
Subsequent Development After Initial Estimates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change from Initial |
|
|
Percent Change from Initial |
|
|
|
|
|
|
|
PCS Industry Loss Estimates (2) |
|
|
PXRE Loss Estimates (2) |
|
|
|
|
|
|
|
@ 6 |
|
|
@ 12 |
|
|
@ 2 |
|
|
@ |
|
|
@ 6 |
|
|
@ 12 |
|
|
@ 2 |
|
|
@ 3 |
|
|
@ |
|
Date |
|
Event |
|
|
Mos. |
|
|
Mos. |
|
|
Yrs. |
|
|
Final |
|
|
Mos. |
|
|
Mos. |
|
|
Yrs. |
|
|
Yrs. |
|
|
Final |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aug-92 |
|
Hurricane Andrew (1) |
|
|
37 |
% |
|
|
99 |
% |
|
|
99 |
% |
|
|
99 |
% |
|
|
0 |
% |
|
|
46 |
% |
|
|
68 |
% |
|
|
59 |
% |
|
|
69 |
% |
Jan-94 |
|
Northridge Earthquake |
|
|
22 |
% |
|
|
131 |
% |
|
|
178 |
% |
|
|
178 |
% |
|
|
49 |
% |
|
|
100 |
% |
|
|
145 |
% |
|
|
151 |
% |
|
|
153 |
% |
Sep-98 |
|
Hurricane George |
|
|
16 |
% |
|
|
16 |
% |
|
|
16 |
% |
|
|
16 |
% |
|
|
8 |
% |
|
|
63 |
% |
|
|
41 |
% |
|
|
28 |
% |
|
|
39 |
% |
Sep-01 |
|
September 11 Events |
|
|
0 |
% |
|
|
23 |
% |
|
|
23 |
% |
|
|
13 |
% |
|
|
1 |
% |
|
|
2 |
% |
|
|
2 |
% |
|
|
4 |
% |
|
|
6 |
% |
Aug-04 |
|
Florida Hurricanes |
|
|
6 |
% |
|
|
11 |
% |
|
|
11 |
% |
|
|
11 |
% |
|
|
1 |
% |
|
|
28 |
% |
|
|
32 |
% |
|
NA |
|
|
NA |
|
|
|
|
(1) |
|
Hurricane Andrews initial PXRE loss estimate is at September 30, 1992. We have extrapolated this loss estimate based on the best available
information. |
|
(2) |
|
Initial estimates are as of quarter-end immediately following an event. Property Claims Services (PCS) is a division of the Insurance Services Office (ISO). |
Reserving Methodologies
We establish loss and loss expense liabilities (to cover expenses related to settling claims,
including legal and other fees) to provide for the ultimate cost of settlement and administration
of claims for losses, including claims that have been reported to us by our reinsureds and claims
for losses that have occurred but have not yet been reported to us.
For reported losses, we establish reserves (liabilities for formally reported claims) when we
receive notice of the claim, which we refer to as case reserves. It is our general policy to
establish liabilities for reported losses in an amount equal to the liability set by the reinsured.
In certain but infrequent instances, such as the receipt of inconsistent, incorrect or inadequate
supporting documentation, we will conduct an investigation to determine if the amount established
by the reinsured is appropriate or if it should be adjusted in the form of an additional case
reserve.
PXRE also records reserves for losses that have been incurred but not yet reported, which are
referred to as IBNR reserves. For IBNR reserves, a variety of methods have been developed in the
insurance industry and are generally accepted for use in determining the appropriate provision for
such liabilities. In general, these methods involve the extrapolation of reported loss data to
estimate ultimate losses. Our loss calculation methods generally rely upon a projection of
ultimate losses based upon the historical patterns of reported loss development.
38
Our methods for establishing loss and loss expense liabilities vary depending upon the nature
of the losses, which can generally be divided into three categories: (1) non-catastrophe losses in
our catastrophe and risk excess segment, (2) catastrophe losses in our catastrophe and risk excess
segment, and (3) losses in our exited lines segment. The Company generally considers reserves for
each of these categories to be mature as follows (1) for non-catastrophe losses in our
catastrophe and risk excess segment, generally anywhere between
eighteen and thirty-six months after the accident year, (2) for catastrophe losses in our catastrophe and
risk excess segment, generally anywhere between six to twelve months after the event occurs, and
(3) losses in our exited lines segment, depending upon the nature of the underlying business,
generally anywhere from five to seven years after the accident year.
(1) Non-Catastrophe Losses
In reserving for non-catastrophe losses in our catastrophe and risk excess segment, we use
three different methods to estimate IBNR reserves: the loss ratio method; the incurred
Bornhuetter-Ferguson method, which we refer to as the BF method; and the incurred loss development
method, the latter two of which are loss development approaches. Initially, at the inception of
an accident year, when there is little reported loss information, we use the loss ratio method.
This method computes IBNR, as the product of an expected loss ratio and assumed earned premium
minus reported loss to date. The expected loss ratio is primarily established for each line of
business based on the Companys historical loss ratios. In determining the expected loss ratio, we
also consider information provided by our clients and estimates provided by our underwriters and
actuary concerning the impact of pricing and coverage changes. As the accident year matures
further and reported loss activity begins to emerge (usually at the end of the second or third
quarter following the loss) we change to the BF method.
The BF method is a premium based method of computing IBNR which blends the loss ratio method
with the loss development method. The BF method computes IBNR for an accident year as the product
of expected loss (earned premium multiplied by an expected loss ratio) and an expected percentage
of unreported losses. This expected percentage of unreported loss is a function of the loss
development factors developed by our corporate actuary from our annual analysis of the Companys
historical loss development patterns by line of business. As experience emerges and accident years
mature further (generally eighteen to thirty-six months after the accident year given the
short-tailed nature of these property reinsurance lines) we transition to the incurred loss
development method, which relies solely on our clients reported loss information and indicated
historical loss development patterns to estimate ultimate losses.
Other alternate loss reserving methods developed in the insurance industry include the paid
loss development method and the paid Bornhuetter-Ferguson method. We do not use these methods to
establish our IBNR reserves. We believe that incurred loss methods are more reliable because they
rely on a much larger, more stable and credible source of information, which is not influenced by
the occurrence of one or more large payments. We do, however, use these alternate loss reserving
methods to evaluate the reasonableness of the IBNR reserves that we establish using the incurred
loss methods.
39
Our loss development factors and expected loss ratios are monitored regularly and updated as
appropriate but at least once a year. These are the key assumptions that materially affect our
estimates for reserves for losses and loss expenses. The expected loss ratio is primarily
established for each line of business based on the Companys historical loss ratios. In
determining the expected loss ratio, we also consider information provided by our clients and
estimates provided by our underwriters and actuary concerning the impact of pricing and coverage
changes. Loss development factors are developed from our annual
analysis of our Companys historical loss development patterns by line of business. These key assumptions did
not materially change from December 31, 2006 to March 31, 2007.
(2) Catastrophe Losses
In reserving for catastrophe losses in our catastrophe and risk excess segment, there is
initially little reported loss information in the immediate wake of a catastrophe event, as was the
case with the 2005 Hurricanes, Katrina, Rita and Wilma (KRW). The loss estimation process begins
with the identification of events with characteristics similar to the recent catastrophe
(geographic location, wind speed, damageability etc.), which then results in a list of the expected
losses by contract from our proprietary risk management system. Third party modeling software is
embedded in our proprietary risk management system.
Concurrently, our underwriting team performs a thorough contract by contract analysis to
identify potential changes to the expected loss estimates including IBNR by contract. With respect
to the 2005 Hurricanes, our underwriters estimates were subject to a high level of uncertainty.
Specifically for Hurricane Katrina, this high level of uncertainty arose out of extremely complex
and unique causation and coverage issues, including the appropriate attribution of losses to wind
or flood damage as opposed to other perils such as fire, business interruption or civil commotion.
In order to address these uncertainties, at that time, for contracts exposed to Hurricane Katrina
losses in our most volatile lines of business (retrocessional and direct and facultative
reinsurance) we recorded reserves for a significant percentage of occurrence limits as of December
31, 2005. These lines of business represented approximately 60% of our gross loss amount on
Hurricane Katrina. The underwriters knowledge of the clients underlying books of business is
considered in establishing loss estimates by contract. The combination of catastrophe modeling and
underwriting review of affected contracts then forms the basis of our initial loss estimates for
catastrophe losses.
In light of the limited loss data available from clients in the wake of catastrophes, our
actuary uses our most current internally generated catastrophe loss development factors to assess
the reasonableness and adequacy of our catastrophe loss reserves in the immediate wake of a
catastrophe. These significant catastrophe loss development factors reflect the historical
variability of prior catastrophe loss reserves in the industry and PXREs specific experience.
The results of this initial process are updated when additional information is available.
This information comes in the form of publicly available announcements, informal contact with
brokers and/or clients, submission data and formal claim notices. As catastrophic events mature
and reporting loss methods become more credible (usually six to twelve months after the event)
actuarial methods implementing historical patterns can be assigned more credibility. In evaluating
the loss estimates for catastrophic events, our actuary utilizes our internal database to establish
projected reporting patterns and payment patterns. This database includes data dating back to the
1980s consisting of well over one hundred catastrophic events, of which over twenty are
hurricanes. Our actuary also employs industry patterns from the Reinsurance Association of America
(RAA), an insurance industry organization. Using this information, we have developed loss
development factors for significant catastrophes. Our internal significant catastrophe loss
development factors are analyzed as appropriate and at least once per year to reflect updated
industry benchmarks and changes in PXREs specific loss history.
The volume of reported loss activity in interim quarterly periods is monitored by the Company to
determine consistency with expected loss activity based on PXRE and industry historical patterns.
For individual storms, PXRE specific loss development factors are applied to reported losses to
estimate IBNR reserves. However these may be weighted with industry factors or judgmental
adjustments for individual significant catastrophes based upon the nature of the particular
catastrophe and the underwriters knowledge.
40
This catastrophe reserving process can cause our ultimate estimates to differ significantly
from initial projections. For example, as part of our year-end closing process for the year ended
December 31, 2005, we reassessed our ultimate liability for losses and loss expenses arising from
Hurricanes Katrina, Rita and Wilma. During the course of our 2005 year-end assessment, we
increased our estimate of the ultimate incurred gross losses and loss expenses arising from
Hurricane Katrina by $214.6 million to $771.0 million and from Hurricane Rita by $48.1 million to
$68.9 million, in each case as compared to the gross incurred losses recorded as of September 30,
2005. Our initial loss estimates for each of the hurricanes were based, in part, on insured
industry loss estimates for each event, catastrophe modeling, preliminary discussions with clients
and a review of potentially exposed contracts by our underwriters. In our 2005 year-end assessment
of the liability for the 2005 hurricane losses, we determined that claims reported by clients
relating to Hurricanes Katrina and Rita were significantly higher than expected, especially
following a significant influx of reported claims from late November 2005 to February 2006. In
part, the additional claims arose from a reassessment by clients of their original loss estimates
for the hurricane events. For example, various clients, who advised our underwriters in the
immediate wake of the hurricanes that they did not expect to experience significant losses to the
reinsurance contracts in the upper layers of their reinsurance programs, reassessed their losses
and submitted notices of claim for the contracts that they had previously indicated would not be
impacted by the catastrophes.
In addition, in reviewing underwriting information provided by clients during December 2005 as
part of the January 1, 2006 renewal process, we found that certain clients were anticipating higher
losses from Hurricanes Katrina and Rita than had been reported through the formal claims channels.
As of March 31, 2007, our estimate of ultimate incurred net losses and loss expenses arising
from Hurricanes Katrina, Rita and Wilma is $856.2 million. Ninety-six percent of our projected net
ultimate incurred loss for these hurricanes has been formally reported to us as paid or case
reserves. However, as of March 31, 2007, we have paid 71% of our net incurred loss amounts with
respect to these hurricanes. Initially, our estimate of the ultimate liability arising from these
catastrophes was based on preliminary claims notices received from clients, catastrophe modeling, a
review of exposed reinsurance contracts, discussions with numerous clients and a review of the
underwriting information provided by clients with reinsurance contracts that renewed as of January
1, 2006. As of March 31, 2007, these events are reasonably mature to extrapolate projected
ultimate loss based on historical reporting patterns, both industry and company specific. Our
estimates fall within a reasonable actuarial range produced by these methods.
41
However, specifically for Hurricane Katrina, our estimates are subject to a high level of
uncertainty arising out of extremely complex and unique causation and
coverage issues, including the appropriate attribution of losses to wind or flood damage as opposed to other
perils such as fire, business interruption or civil commotion. The underlying personal lines
policies generally contain exclusions for flood damage; however, water damage caused by wind may be
covered. We expect that causation and coverage issues may not be resolved for a considerable
period of time and may be influenced by evolving legal and regulatory developments.
Our actual losses from Hurricanes Katrina, Rita and Wilma may exceed our best estimate as a
result of, among other things, the receipt of additional information from clients, the attribution
of losses to coverages that for the purpose of our estimates we assumed would not be exposed, and
inflation in repair costs due to the limited availability of labor and materials, in which case our
financial results could be further materially adversely affected.
In developing our best estimate for Hurricane Katrina, we have also assumed flood damage
exclusions contained in our cedents underlying insurance policies will be effective. We
understand that various lawsuits are pending seeking to invalidate such flood damage exclusions on
various grounds. If such lawsuits were to successfully invalidate the underlying flood damage
exclusions or if the court or a jury were to find that an insurer had not adequately established
that a loss was attributable to flood rather than wind, our liabilities for losses and loss
expenses relating to Hurricane Katrina could prove to be inadequate, with a consequent adverse
impact on our earnings and shareholders equity in future periods. Based on reports in the press,
we understand that State Farm, one of the nations largest insurers, has been engaging in various
settlement discussions concerning claims involving the controversies over the flood exclusion. We
do not reinsure State Farm and therefore are not directly exposed to future loss reports from State
Farm in the event these discussions result in additional claim liabilities for State Farm.
However, it is unclear at this time how any potential settlements by State Farm would impact or
influence our cedents, and consequently our loss and loss expense reserve estimates.
Most recently, reports in the press have disclosed that Nationwide Insurance (Nationwide)
has agreed to reevaluate its Hurricane Katrina claims related to Mississippi homes that were
completely destroyed by the 2005 storm. PXRE does reinsure Nationwide but, to date, has no
reported loss to its 2005 catastrophe reinsurance program with respect to Hurricane Katrina. We
believe that should a loss be reported by Nationwide, that such a report would not have a
significant impact on the Companys current overall estimate of ultimate incurred net losses and
loss expenses arising from Hurricanes Katrina. However, it is still too early to fully quantify
the impact of Nationwides recent actions.
42
A number of our clients have already exhausted all coverage available for losses arising from
Hurricane Katrina. If other clients were to incur widespread additional losses as a result of
settlements or adverse litigation results involving the flood versus wind controversy, it is
possible that our current best estimate for Hurricane Katrina will be exceeded. The remaining
limits table below displays the potential impact to PXRE as of March 31, 2007 should the aggregate
amount of losses reported by our clients from the ground up (FGU) from all cedents that still
have remaining limits increase uniformly by various percentages:
($000s, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane Katrina Remaining Limits |
|
|
Lines of Business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
X% FGU |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding |
Increase of: |
|
Catastrophe |
|
D&F |
|
Retro |
|
Risk Excess |
|
Total |
|
Risk Excess |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% |
|
$ |
4,781 |
|
|
$ |
7,056 |
|
|
$ |
3,019 |
|
|
$ |
1,639 |
|
|
$ |
16,495 |
|
|
$ |
14,856 |
|
10% |
|
|
9,975 |
|
|
|
13,368 |
|
|
|
5,563 |
|
|
|
3,247 |
|
|
|
32,153 |
|
|
|
28,906 |
|
15% |
|
|
14,177 |
|
|
|
19,218 |
|
|
|
8,013 |
|
|
|
4,857 |
|
|
|
46,265 |
|
|
|
41,408 |
|
20% |
|
|
17,697 |
|
|
|
24,150 |
|
|
|
10,218 |
|
|
|
6,079 |
|
|
|
58,144 |
|
|
|
52,065 |
|
50% |
|
|
41,725 |
|
|
|
38,121 |
|
|
|
20,470 |
|
|
|
9,520 |
|
|
|
109,836 |
|
|
|
100,316 |
|
If clients report increased losses this may not result in a linear increase in PXREs
assumed loss position as the Companys IBNR may cover such increases. In addition, the results are
showing limited amounts of development at the various FGU percentages presented for certain lines
of business due to the fact that as ground up losses are increased, an increasing number of
underlying contracts have reached their contractual limits. Additionally, total losses are shown
excluding risk excess business as this line primarily involves commercial exposures and is not
expected to experience material development due to adverse personal lines litigation results in
Louisiana, Mississippi and Alabama.
(3) Exited Lines Segment Losses
In reserving for losses on our exited lines segment, there is great uncertainty due to its
composition of casualty and finite businesses, which produce losses that are slower to be reported
and paid than the property losses of our catastrophe and risk excess segment. Moreover, given our
limited experience in the casualty and finite businesses, we do not have established historical
loss development patterns that can be used to estimate these loss liabilities. We must therefore
rely on the historical loss development patterns reported by our clients and industry loss
development data in estimating our liabilities including IBNR. Accident years for this segment
take a longer period of time to mature than for our catastrophe and risk excess segment,
therefore, we primarily utilize the loss ratio method and BF method to establish our initial exited
lines loss estimates including IBNR. When the amount of reported losses become a more reliable
means for setting reserve estimates, generally five to seven years after the relevant accident
year, PXRE places more weight on these reported losses to estimate its loss reserves including IBNR
and less weight on the BF method.
Interim reporting
With respect to the methods outlined above, estimation of IBNR in interim quarterly periods
follows the same process as that done at annual reporting periods. The incurred loss development
factors that are developed at year-end are interpolated to generate factors applicable for
quarterly evaluation periods. Generally, the expected loss ratios which were selected at year-end
are used in interim periods.
43
Additional Uncertainties
PXRE has historically been involved in very few disputes with ceding companies, especially
those that enter into contracts that the Company includes in its catastrophe and risk excess
segment; nevertheless contract disputes in the property casualty reinsurance industry have
increased in recent years.
There is an additional risk of uncertainty in PXREs estimation of losses due to the fact that
PXRE writes only reinsurance business and no insurance business. As a result, losses, unearned
premiums and premiums written are all recorded based on reports received from the ceding companies.
PXRE does not receive loss information from the underlying insureds; however, because the
Companys reinsurance business has focused on short-tail lines such as property catastrophe,
retrocessional property catastrophe, risk-excess and aerospace, the delay from the time of the
underlying loss to the report date to PXRE is not as significant a risk as it would be if the
Company underwrote a significant amount of casualty business. However, with respect to insured
events that occur near the end of a reporting period, as well as with respect to our retrocessional
book of business, a delay in losses being reported to insurance carriers, reinsurers and finally
retrocessionaires may require us to make estimates of losses based on limited information from our
clients, industry loss estimates and our own underwriting data.
We have a system of controls in place that assists us in evaluating the completeness of the
data received from cedents. PXRE derives almost all of its business from reinsurance
intermediaries. As a result, the ceding company reports claims to the intermediary and the
intermediary in turn reports the data to all the reinsurers included in the underlying program.
Controls in place require that certain claims must be approved by the underwriter or a member of
senior management to validate the reported loss data before recorded as a case reserve. The
underwriter, based on his knowledge and judgment, may question the broker or ceding company if he
did not expect a loss of a certain magnitude to impact a certain layer. Because many of PXREs
losses are from events that are well known, such as large hurricanes and earthquakes, the
underwriter may in fact expect losses to pierce certain layers and therefore would not question the
accuracy of such loss reports. If the underwriter does question the loss data, PXRE may perform
audits at the underlying ceding company in order to determine the accuracy of the amounts ceded.
PXREs risk management and underwriting systems provide a list of impacted or potentially impacted
contracts by peril and by geographic zone. This assists PXRE in determining the completeness of
losses, as we will contact intermediaries and the ceding companies for whom we believe underlying
contracts are impacted subsequent to an event to request information.
Currently, PXRE does not have any backlog related to the processing of assumed reinsurance
information. When a large loss occurs, the Company shifts personnel from various functions to
assist the claims personnel in the processing and evaluation of claims data.
44
Status of Loss Reserves as of March 31, 2007
The following chart sets forth the allocation of our net liabilities for unpaid losses and
loss expenses between case reserves and IBNR reserves as of March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 and Prior |
|
|
2007 Accident |
|
|
|
|
($000s) |
|
Accident Years |
|
|
Year |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe & Risk
Excess Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Case |
|
$ |
314,174 |
|
|
$ |
|
|
|
$ |
314,174 |
|
IBNR |
|
|
74,644 |
|
|
|
|
|
|
|
74,644 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
388,818 |
|
|
|
|
|
|
|
388,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exited Lines Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Case |
|
|
30,117 |
|
|
|
|
|
|
|
30,117 |
|
IBNR |
|
|
16,879 |
|
|
|
|
|
|
|
16,879 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
46,996 |
|
|
|
|
|
|
|
46,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Segments |
|
|
|
|
|
|
|
|
|
|
|
|
Case |
|
|
344,291 |
|
|
|
|
|
|
|
344,291 |
|
IBNR |
|
|
91,523 |
|
|
|
|
|
|
|
91,523 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
435,814 |
|
|
$ |
|
|
|
$ |
435,814 |
|
|
|
|
|
|
|
|
|
|
|
On an overall basis, the low and high ends of our selected range of reasonable net loss
and loss expense reserves are $26.3 million below and $32.3 million above the $435.8 million best
estimate. The range around the overall estimate is not the sum of the ranges about the component
segments due to the impact of diversification when the reserve levels are considered in total. The
impact of diversification reflects the fact that not all lines with very low correlations are
expected to develop well or poorly at the same time.
The low and high ends of a range of reasonable net loss and loss expense liabilities around
the best estimate displayed in the table below with respect to each segment are shown in the
following table as of March 31, 2007. This range was produced using two different methods, one for
KRW and one for the remainder of our carried loss and loss expense liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Expense Liabilities Range at March 31, 2007 |
|
($000s) |
|
Low End |
|
|
Best Estimate |
|
|
High End |
|
Catastrophe and Risk Excess, KRW only |
|
$ |
235,899 |
|
|
$ |
245,899 |
|
|
$ |
260,899 |
|
Catastrophe and Risk Excess, excluding KRW |
|
|
128,197 |
|
|
|
142,919 |
|
|
|
158,766 |
|
|
|
|
|
|
|
|
|
|
|
Catastrophe and Risk Excess, Total |
|
|
364,096 |
|
|
|
388,818 |
|
|
|
419,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exited Lines |
|
|
40,265 |
|
|
|
46,996 |
|
|
|
54,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Diversification |
|
|
5,116 |
|
|
|
|
|
|
|
(5,941 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
409,477 |
|
|
$ |
435,814 |
|
|
$ |
468,158 |
|
|
|
|
|
|
|
|
|
|
|
45
For the 2005 Hurricanes, the range was calculated by varying key assumptions regarding
PXRE and industry loss reporting patterns. These assumptions include assuming one quarter
acceleration/deceleration around expected historical reporting patterns, incorporating the most
recent RAA industry reporting patterns as well as observing the monthly patterns exhibited by the
2004 Florida Hurricanes with the assumption that this composite event may serve as a proxy for the
2005 Hurricanes. A selected range of $10.0 million below and $15.0 million above our net carried
reserves was determined in the aggregate for all three events combined, after considering the
sensitivity analysis outlined above, our best loss estimates, and actuarial judgment. This range
of reasonable estimates does not represent a range of all possible outcomes, but it is intended to
reflect the inherent variability in actuarial reserving methodologies. Assuming the flood
exclusion is effective, we believe that results outside this range are unlikely, and can not assign
probabilities with certainty to any points within this range.
For the remainder of our carried loss and loss expense liabilities, we used a statistical
model to simulate a range of results about our best estimates assuming probability distributions
believed to reasonably reflect potential for favorable and unfavorable loss development. The
simulation results indicate that a five percent probability exists that the net loss reserves will
be below the low estimate and a five percent probability exists that the net loss reserves will be
above the high estimate. However, no assurance can be given that our ultimate losses will not be
significantly different than the simulation.
The low end and high end of the range of reasonable net loss and loss expense reserves around
the best estimate have decreased from December 31, 2006 principally because of the reduction in the
Companys net loss reserve amount due to the payment of claims during the three months ended March
31, 2007, as well as the passage of time since the occurrences of Hurricanes Katrina, Rita and
Wilma and the resulting increase in formal loss reports and decrease in actuarial variability
surrounding the best estimate.
Estimation and Recognition of Premiums
Our premiums on reinsurance business assumed are recorded as earned evenly over the contract
period based upon estimated subject premiums. PXREs assumed premium is comprised of both minimum
and deposit premium and an estimate of premium. Minimum and deposit premium is billed and
collected in accordance with the provisions of the contracts and is usually billed quarterly or
semi-annually. A premium estimate is also recorded if the estimate of the ultimate premium is
greater than the minimum and deposit premium. The final or ultimate premium for most contracts is
the product of the provisional rate and the ceding companys subject net earned premium income
(SNEPI). Because this portion of the premium is reasonably estimable, the Company records and
recognizes it as revenue over the period of the contract in the same manner as the minimum and
deposit premium. The key assumption related to the premium estimate is the estimate of the amount
of the ceding companys SNEPI, which is a significant element of PXREs overall underwriting
process. 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.
46
The estimated premium receivable, net of commission and brokerage, included in Premiums
receivable, net on the Interim Consolidated Balance Sheets at March 31, 2007 of $64.6 million, is
$49.6 million, including assumed reinstatement premiums of $46.5 million.
We record an allowance for doubtful accounts that we believe approximates the exposure for all
potential uncollectible assets, after considering other balances that mitigate the exposure.
The premiums on reinsurance business ceded are recorded as incurred evenly over the contract
period. Certain ceded reinsurance contracts contain provisions requiring us to pay additional
premiums or reinstatement premiums in the event that losses of a significant magnitude are ceded
under such contracts. Under GAAP, we are not permitted to establish reserves for these potential
additional premiums until a loss occurs that would trigger the obligation to pay such additional or
reinstatement premiums. As a result, the net amount recoverable from our reinsurers in the event
of a loss may be reduced by the payment of additional premiums and reinstatement premiums.
Frequently, the impact of such premiums will be offset by additional premiums and reinstatement
premiums payable to us by our clients on our assumed reinsurance business. No assurance can be
given however, that assumed reinstatement and additional premiums will offset ceded reinstatement
and additional premiums. For example, in the case of the September 11, 2001 terrorist attacks, our
net premiums earned during 2001 were reduced by $26.3 million as a result of net additional
premiums and reinstatement premiums. In the case of Hurricanes Katrina, Rita and Wilma our net
premiums earned were increased by $43.9 million in 2005 as a result of net additional premiums and
reinstatement premiums.
Assumed reinstatement premiums that reinstate coverage are written and earned at the time the
associated loss event occurs. Under the contract terms of certain of our excess of loss contracts,
reinstatement premiums are mandatorily due PXRE following a ceding companys loss, based on
pre-defined contract terms. Terms principally include a pro-rata amount of the original contract
premium relative to the proportion of the contractual limit exhausted by the associated loss,
without respect to time remaining in the term of the original limit, that is, the amount due is
100% as to time and pro-rata as to amount. Less frequently, terms can vary to incorporate a
percentage of the original premium that is more or less than the original premium or can be
pro-rata as to time remaining in the term of the original limit.
Ceded additional premiums are less uniform in their terms than assumed reinstatement premiums.
The single largest additional premium in 2005, accounting for 80% of the additional premium
written and earned for the year ended December, 2005 events, was triggered by an event in excess of
$165.0 million of losses incurred.
47
Assumed reinstatement and additional premiums written and earned in the three months ended
March 31, 2007 and 2006, as reflected in the Interim Consolidated Statements of Operations and
Comprehensive Operations, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
($000s) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Assumed reinstatement premiums: |
|
|
|
|
|
|
|
|
Reported paid losses and case reserves |
|
$ |
127 |
|
|
$ |
39,872 |
|
IBNR |
|
|
(2,822 |
) |
|
|
(40,429 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(2,695 |
) |
|
$ |
(557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded reinstatement and additional premiums: |
|
|
|
|
|
|
|
|
Reported paid losses and case reserves |
|
$ |
(84 |
) |
|
$ |
(89 |
) |
IBNR |
|
|
(17 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(101 |
) |
|
$ |
(108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reinstatement and additional premiums |
|
$ |
(2,594 |
) |
|
$ |
(449 |
) |
|
|
|
|
|
|
|
Assumed reinstatement premiums receivable, net of commission and brokerage, associated
with our case reserves and incurred but not reported loss and loss expense liabilities, as
reflected in Premiums receivable, net in the Interim Consolidated Balance Sheets, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
($000s, except percentages) |
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed reinstatement
premiums receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Case reserves |
|
$ |
34,889 |
|
|
|
75 |
% |
|
$ |
92,132 |
|
|
|
72 |
% |
IBNR reserves |
|
|
11,612 |
|
|
|
25 |
|
|
|
36,347 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,501 |
|
|
|
100 |
% |
|
$ |
128,479 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
We accrue assumed reinstatement premiums based upon contract terms applied to the amount
estimated to settle ultimate incurred losses. The primary factor that could affect our estimate of
assumed reinstatement premiums is managements best estimate of ultimate incurred losses. See the
Update on Critical Accounting Policy Disclosures relating to the estimation of losses and loss
expenses with regards to the uncertainty, historical accuracy and sensitivity of this estimate.
While premiums stated relative to limit (rates on line) have an effect on the estimate of assumed
reinstatement premiums, those associated with case reserves are based on actual contract rate on
line terms, and those estimates associated with IBNR are based on weighted average rate on line
terms, of the book of business for a given underwriting year by line of business. Therefore the
primary factor that could change our estimate of assumed reinstatement premium is managements best
estimate of ultimate incurred losses and the mix of treaties along with their respective rate on
lines that ultimately incur losses. Assumed reinstatement premiums receivable are settled on a net
basis when loss payments are made to cedents. Accordingly, there is an insignificant amount of
credit risk associated with this asset as of any given period end date.
48
Additional ceded premiums occur less frequently, and were incurred by the Company in 2005 due
to the significance of the losses from Hurricanes Katrina and Wilma. In 2005, these ceded losses
were full limit losses, resulting in additional ceded premiums. These additional ceded premiums
are not expected to vary from the estimate in 2005.
Valuation of Deferred Tax Asset
Deferred tax assets and liabilities reflect the expected tax consequences of temporary
differences between carrying amounts and the tax bases of PXREs United States subsidiaries assets
and liabilities. At March 31, 2007, PXRE had a deferred tax asset net of deferred income tax
liability of $50.4 million, offset by a valuation allowance of $50.4 million. Management reviewed
the net deferred tax asset as of March 31, 2007, and as a result of the ratings downgrades of PXRE
that occurred subsequent to December 31, 2005, and the related uncertainty with respect to the
amount of future taxable income that will be generated by the Company, have concluded that the full
valuation allowance established at December 31, 2005 continues to be required for the entire
deferred tax asset as of March 31, 2007.
PXREs management will evaluate this valuation allowance on an ongoing basis and will make any
necessary adjustments to it based upon any changes in managements expectations of future taxable
income.
Cautionary Statement Regarding Forward-Looking Statements
This report contains various forward-looking statements and includes assumptions concerning
our operations, future results and prospects. Statements included herein, as well as statements
made by us or on our behalf in press releases, written statements or other documents filed with the
SEC, or in our communications and discussions with investors and analysts in the normal course of
business through meetings, phone calls and conference calls, which are not historical in nature are
intended to be, and are hereby identified as, forward-looking statements for purposes of the safe
harbor provided by Section 21E of the Securities Exchange Act of 1934 as amended. These
forward-looking statements, identified by words such as intend, believe, anticipate, or
expects or variations of such words or similar expressions are based on current expectations,
speak only as of the date thereof, and are subject to risk and uncertainties. In light of the
risks and uncertainties inherent in all future projections, the forward-looking statements in this
report should not be considered as a representation by us or any other person that our objectives
or plans will be achieved. We caution 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) |
|
we face risks related to our proposed merger with Argonaut Group, Inc.; |
|
|
(ii) |
|
if the merger with Argonaut is not completed, unless the Board of Directors identifies
and implements a different operating strategic solution, we will not write or earn any
material premiums in the future and, as a result, we expect to incur material operating
losses, since our remaining revenue is insufficient to cover our projected operating and
other expenses; |
49
|
(iii) |
|
if the merger is not consummated, we may not be able to identify or implement a
strategic alternative for PXRE; |
|
|
(iv) |
|
if the merger is not consummated and our Board of Directors concludes that no other
feasible strategic alternative would be in the best interests of our shareholders, it may
determine that the best course of action is to place the reinsurance operations of PXRE
into runoff and eventually commence an orderly winding up and liquidation of PXRE
operations over some period of time that is not currently determinable; |
|
|
(v) |
|
if the merger is not consummated and the Board of Directors elects to pursue a
strategic alternative that does not involve the continuation of meaningful property
catastrophe reinsurance business, there is a risk that the Company could incur additional
material charges or termination fees in connection with our collateralized catastrophe
facility and certain multiyear ceded reinsurance agreements; |
|
|
(vi) |
|
our ability to continue to operate our business, consummate the merger and to identify,
evaluate and complete any other strategic alternative is dependent on our ability to retain
our management and other key employees, and we may not be able to do so; |
|
|
(vii) |
|
adverse events in 2006 negatively affected the market price of our common shares,
which may lead to further securities litigation, administrative proceedings or both being
brought against us; |
|
|
(viii) |
|
reserving for losses includes significant estimates, which are also subject to inherent
uncertainties; |
|
|
(ix) |
|
because of potential exposure to catastrophes in the future, our financial results may
vary significantly from period to period; |
|
|
(x) |
|
we operate in a highly competitive environment and no assurance can be given that we
will be able to compete effectively in this environment; |
|
|
(xi) |
|
reinsurance prices may decline, which could affect our profitability; |
|
|
(xii) |
|
we may require additional capital in the future; |
|
|
(xiii) |
|
our investment portfolio is subject to significant market and credit risks which could
result in an adverse impact on our financial position or results; |
|
|
(xiv) |
|
we have exited the finite reinsurance business, but claims in respect of finite
reinsurance could have an adverse effect on our results of operations; |
|
|
(xv) |
|
our reliance on reinsurance brokers exposes us to their credit risk; |
|
|
(xvi) |
|
we may be adversely affected by foreign currency fluctuations; |
50
|
(xvii) |
|
retrocessional reinsurance subjects us to credit risk and may become unavailable on
acceptable terms; |
|
|
(xviii) |
|
we have exhausted our retrocessional coverage with respect to Hurricane Katrina, leaving
us exposed to further losses; |
|
|
(xix) |
|
recoveries under our collateralized facility are triggered by modeled loss to a
notional portfolio, rather than our actual losses arising from a catastrophe event, which
creates a potential mismatch between the risks assumed through our inwards reinsurance
business and the protection afforded by this facility; |
|
|
(xx) |
|
our inability to provide the necessary collateral could affect our ability to offer
reinsurance in certain markets; |
|
|
(xxi) |
|
the insurance and reinsurance business is historically cyclical, and we may experience
periods with excess underwriting capacity and unfavorable premium rates; conversely, we may
have a shortage of underwriting capacity when premium rates are strong; |
|
|
(xxii) |
|
regulatory constraints may restrict our ability to operate our business; |
|
|
(xxiii) |
|
any determination by the United States Internal Revenue Service (IRS) that we or our
offshore subsidiaries are subject to U.S. taxation could result in a material adverse
impact on our financial position or results; and |
|
|
(xxiv) |
|
any changes in tax laws, tax treaties, tax rules and interpretations could result in a
material adverse impact on our financial position or results. |
In addition to the factors outlined above that are directly related to our business, we are
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. The factors listed above should not be construed as
exhaustive.
We undertake no obligation to release publicly the results of any future revisions we may make
to forward-looking statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have reviewed our exposure to market risks at March 31, 2007 and the changes in exposure
since December 31, 2006. The principal market risks which we are exposed to continue to be
interest rate risk and credit risk.
The composition of our fixed maturity portfolio did not change materially during the first
quarter of 2007. There were no material changes in our exposure to market risks or our risk
management strategy during the first quarter of 2007.
51
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out by our
management, with the participation of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that these disclosure controls and procedures were effective as
of the end of the period covered by this report. In addition, no change in our internal control
over financial reporting (as defined in Rule 13a-15(f) under the Securities and Exchange Act of
1934) occurred during our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially effect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Several class action lawsuits have been filed against PXRE, Jeffrey Radke, the Companys Chief
Executive Officer, and John Modin, the Companys former Chief Financial Officer, in the U.S.
District Court for the Southern District of New York on behalf of a putative class consisting of
investors who purchased the publicly traded securities of PXRE between July 28, 2005 and February
16, 2006. Each of the class action complaints asserts nearly identical claims and alleges that
during the purported class period certain PXRE executives made a series of materially false and
misleading statements or omissions about PXREs business, prospects and operations, thereby causing
investors to purchase PXREs securities at artificially inflated prices, in violation of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the 1934 Act), and Rule 10b-5
promulgated under the 1934 Act. The class action complaints allege, among other things, that the
Company failed to disclose and misrepresented the following material adverse facts: (1) the full
impact on PXREs business of hurricanes Katrina, Rita and Wilma (the 2005 Hurricanes); (2) the
doubling of PXREs cost of the 2005 Hurricanes to an estimated $758 million to $788 million; and
(3) the magnitude of the loss to PXRE and PXREs potential loss of its financial-strength and
credit ratings from A.M. Best . Further, the complaints allege, based on the foregoing asserted
facts, that PXREs statements with respect to its loss estimates for the 2005 hurricane season
lacked any reasonable basis. The class actions seek an unspecified amount of damages, as well as
other forms of relief. Pursuant to an opinion and order of the United States District Court for
the Southern District of New York dated March 30, 2007, these lawsuits have been consolidated into
one proceeding.
On February 21, 2007, PXRE entered into a Tolling and Standstill Agreement with certain
institutional investors in connection with potential claims arising out of the Private Placement of
Series D Perpetual Non-voting Preferred Shares of PXRE that were sold pursuant to the Private
Placement Memorandum dated on or about September 28, 2005.
We are subject to litigation and arbitration in the ordinary course of business. Management
does not believe that the eventual outcome of any such pending ordinary course of business
litigation or arbitration is likely to have a material effect on our financial condition or
business. Pursuant to our insurance and reinsurance arrangements, disputes are generally required
to be finally settled by binding arbitration.
52
Item 1A. Risk Factors.
There has been no material change in the risk factors previously disclosed under Item 1A of
the Companys 2006 10K for the fiscal year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
a. Exhibits
A list of exhibits required to be filed as part of this report is set forth in the Exhibit
Index of this Form 10-Q, which immediately precedes such exhibits, and is incorporated herein by
reference.
EXHIBIT INDEX
|
|
|
Exhibit Number |
|
Description |
10.1
|
|
Certain documents incorporated by reference into Part IV of
Amendment No.1 on Form 10-K/A to PXRE Group Ltds Annual
Report on Form 10-K for the fiscal year ended December 31,
2006 as stated in part IV (Form 10-K/A dated April 23, 2007) |
|
|
|
31.1
|
|
Certification by the Chief Executive Officer Relating to a
Periodic Report Containing Financial Statements pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification by the Chief Financial Officer Relating to a
Periodic Report Containing Financial Statements Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Periodic Report Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report or amendment thereto to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
|
PXRE GROUP LTD.
|
|
May 9, 2007 |
By: |
/s/ Robert P. Myron
|
|
|
|
Robert P. Myron |
|
|
|
Executive Vice President
Chief Financial Officer and Treasurer |
|
54