SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-15259
PXRE GROUP LTD.
(Exact name of registrant as specified in its charter)
Bermuda 98-0214719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Swan Building P.O. Box HM 1282
26 Victoria Street Hamilton HM FX
Hamilton HM 12 Bermuda
Bermuda
(Address, including zip code,
of principal executive offices) (Mailing address)
(441) 296-5858
(Registrant's telephone number, including area code)
|
As of November 6, 2002 12,030,562 common shares, $1.00 par value per share, of the Registrant were outstanding.
PXRE GROUP LTD.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 3
Consolidated Statements of Income and Comprehensive Income
for the three and nine months ended September 30, 2002 and 2001 4
Consolidated Statements of Stockholders' Equity for the three
and nine months ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the three and
nine months ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 36
Item 4. Controls and Procedures 36
PART II. OTHER INFORMATION 37
Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
|
Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. |
PXRE Consolidated Balance Sheets Group Ltd. (Dollars in thousands, except par value per share) -------------------------------------------------------------------------------- |
September 30, December 31,
2002 2001
---- ----
(Unaudited)
Assets Investments:
Available for sale:
Fixed maturities, available-for-sale, at fair value (amortized
cost $458,701 and $218,635, respectively) $ 475,011 $ 219,482
Equity securities, at fair value (cost $252 and $650, respectively) 252 650
Short-term investments
Hedge funds 17,470 16,737
Non-hedge funds 118,788 153,503
Trading securities, at fair value
Hedge funds (cost $0 and $20,250, respectively) -- 25,764
Non-hedge funds (cost $19,499 and $0, respectively) 20,792 --
Limited partnerships, at equity
Hedge funds (cost $65,142 and $48,760, respectively) 91,214 73,068
Non-hedge funds (cost $8,993 and $16,430, respectively) 13,875 19,141
----------- -----------
Total investments 737,402 508,345
Cash 15,016 22,888
Accrued investment income 5,352 4,149
Receivables:
Unreported premiums 69,360 82,455
Balances due from intermediaries and brokers, net 16,232 11,148
Other receivables 43,428 20,176
Reinsurance recoverable 246,397 262,115
Ceded unearned premiums 52,145 18,163
Deferred acquisition costs 12,820 7,312
Current income tax asset 11,345 4,081
Deferred tax asset - 21,037
Other assets 46,077 44,069
----------- -----------
Total assets $ 1,255,574 $ 1,005,938
=========== ===========
Liabilities Losses and loss expenses $ 436,896 $ 453,705
Unearned premiums 90,814 46,335
Debt payable 30,000 55,000
Reinsurance balances payable 100,095 78,178
Deferred tax liability 1,433 --
Other liabilities 60,501 33,410
----------- -----------
Total liabilities 719,739 666,628
----------- -----------
Minority interest in consolidated subsidiary:
Company-obligated mandatorily redeemable capital trust
pass-through securities of subsidiary trust holding solely a
company-guaranteed related subordinated debt 95,334 99,530
----------- -----------
Stockholders' Serial convertible preferred stock, $1.00 par value, $10,000 stated
Equity value -- 10 million shares authorized, 0.02 million and 0 shares
issued and outstanding, respectively 155,958 --
Common stock, $1.00 par value -- 50 million shares
authorized, 12.0 million and 11.9 million shares
issued and outstanding, respectively 12,031 11,873
Additional paid-in capital 168,932 175,405
Accumulated other comprehensive income (loss) net of deferred income
tax (expense) benefit of $(4,554) and $37, respectively 10,188 (299)
Retained earnings 95,644 55,473
Restricted stock at cost (0.2 million and 0.2 million shares, respectively) (2,252) (2,672)
----------- -----------
Total stockholders' equity 440,501 239,780
----------- -----------
Total liabilities and stockholders' equity $ 1,255,574 $ 1,005,938
=========== ===========
|
The accompanying notes are an integral part of these statements.
PXRE Consolidated Statements of Income and Comprehensive Income Group Ltd. (Dollars in thousands, except per share amounts) -------------------------------------------------------------------------------- |
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
Revenues Net premiums earned $ 75,741 $ 17,543 $ 180,661 $ 108,809
Net investment income 5,011 5,767 17,543 23,888
Net realized investment gains 4,782 3,426 5,785 4,241
Management fees 928 2,335 2,766 5,069
--------- --------- --------- ---------
86,462 29,071 206,755 142,007
--------- --------- --------- ---------
Losses and Losses and loss expenses incurred 48,264 64,134 84,350 121,774
Expenses Commissions and brokerage 13,489 (3,958) 31,208 19,073
Other operating expenses 6,696 7,005 21,790 23,389
Interest expense 698 855 2,197 3,593
Minority interest in consolidated subsidiary 2,127 2,219 6,550 6,658
--------- --------- --------- ---------
71,274 70,255 146,095 174,487
--------- --------- --------- ---------
Income (loss) before income taxes, cumulative
effect of accounting change and preferred stock dividends 15,188 (41,184) 60,660 (32,480)
Income tax provision (benefit) 4,179 (7,338) 12,375 (5,852)
--------- --------- --------- ---------
Income (loss) before cumulative effect of
accounting change and preferred stock dividends 11,009 (33,846) 48,285 (26,628)
Cumulative effect of accounting change, net of
$172 tax expense -- -- -- 319
--------- --------- --------- ---------
Net income (loss) before preferred stock dividends $ 11,009 $ (33,846) $ 48,285 $ (26,309)
Preferred stock dividends 3,058 0 5,958 0
--------- --------- --------- ---------
Net income (loss) available to common stockholders $ 7,951 $ (33,846) $ 42,327 $ (26,309)
========= ========= ========= =========
Comprehensive Net unrealized appreciation on investments 6,262 2,192 10,771 2,206
Income, Net Net unrealized depreciation on cash flow hedge (346) (864) (284) (864)
of Tax --------- --------- --------- ---------
Comprehensive income (loss) $ 16,925 $ (32,518) $ 58,772 $ (24,967)
========= ========= ========= =========
Per Share Basic:
Net income (loss) before cumulative effect of
accounting change and preferred stock dividends $ 0.93 $ (2.94) $ 4.10 $ (2.31)
Cumulative effect of accounting change 0.00 0.00 0.00 0.03
Preferred stock dividends (0.26) 0.00 (0.51) 0.00
--------- --------- --------- ---------
Net income (loss) available to common stockholders $ 0.67 $ (2.94) $ 3.59 $ (2.28)
========= ========= ========= =========
Average shares outstanding (000's) 11,817 11,501 11,778 11,504
========= ========= ========= =========
Diluted:
Net income (loss) before cumulative effect of
accounting change $ 0.50 $ (2.94) $ 2.59 $ (2.31)
Cumulative effect of accounting change 0.00 0.00 0.00 0.03
--------- --------- --------- ---------
Net income (loss) $ 0.50 $ (2.94) $ 2.59 $ (2.28)
========= ========= ========= =========
Average shares outstanding (000's) 22,137 11,501 18,630 11,504
========= ========= ========= =========
|
The accompanying notes are an integral part of these statements.
PXRE Consolidated Statements of Stockholders' Equity Group Ltd. (Dollars in thousands) -------------------------------------------------------------------------------- |
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
Preferred Stock Balance at beginning of period $ 152,900 $ -- $ -- $ --
Issuance of shares, net -- -- 150,000 --
Dividends to preferred stockholders 3,058 -- 5,958 --
--------- --------- --------- ---------
Balance at end of period $ 155,958 $ -- $ 155,958 $ --
========= ========= ========= =========
Common Stock Balance at beginning of period $ 11,966 $ 11,903 $ 11,873 $ 11,820
Issuance of shares, net 65 25 158 108
--------- --------- --------- ---------
Balance at end of period $ 12,031 $ 11,928 $ 12,031 $ 11,928
========= ========= ========= =========
Additional Balance at beginning of period $ 168,034 $ 176,631 $ 175,405 $ 175,014
Paid-in Capital Issuance of shares 916 274 (6,420) 3,195
Other (18) (18) (53) (1,322)
--------- --------- --------- ---------
Balance at end of period $ 168,932 $ 176,887 $ 168,932 $ 176,887
========= ========= ========= =========
Accumulated Balance at beginning of period $ 4,272 $ (54) $ (299) $ (69)
Other Change in unrealized gains 6,262 2,191 10,771 2,206
Comprehensive Change in cash flow hedge (346) (864) (284) (864)
Income --------- --------- --------- ---------
Balance at end of period $ 10,188 $ 1,273 $ 10,188 $ 1,273
========= ========= ========= =========
Retained Balance at beginning of period $ 88,414 $ 82,409 $ 55,473 $ 76,301
Earnings Net income (loss) before
preferred stock dividends 11,009 (33,846) 48,285 (26,309)
Dividends to preferred stockholders (3,058) -- (5,958) --
Dividends to common stockholders (721) (715) (2,156) (2,144)
--------- --------- --------- ---------
Balance at end of period $ 95,644 $ 47,848 $ 95,644 $ 47,848
========= ========= ========= =========
Restricted Stock Balance at beginning of period $ (2,644) $ (4,526) $ (2,672) $ (3,680)
Issuance of restricted stock (9) -- (1,049) (2,449)
Amortization of restricted stock 401 523 1,469 1,880
Other -- -- -- 246
--------- --------- --------- ---------
Balance at end of period $ (2,252) $ (4,003) $ (2,252) $ (4,003)
========= ========= ========= =========
Total Balance at beginning of period $ 422,942 $ 266,363 $ 239,780 $ 259,386
Stockholders' Issuance of preferred shares -- -- 150,000 --
Equity Issuance of shares 981 299 (6,262) 3,303
Restricted stock, net 392 523 420 (569)
Unrealized appreciation on investments,
net of deferred income tax 6,262 2,191 10,771 2,206
Unrealized depreciation on cash flow hedge,
net of deferred income tax (346) (864) (284) (864)
Net income (loss) before preferred stock
dividends 11,009 (33,846) 48,285 (26,309)
Dividends to common stockholders (721) (715) (2,156) (2,144)
Other (18) (18) (53) (1,076)
--------- --------- --------- ---------
Balance at end of period $ 440,501 $ 233,933 $ 440,501 $ 233,933
========= ========= ========= =========
|
The accompanying notes are an integral part of these statements.
PXRE Consolidated Statements of Cash Flows Group Ltd. (Dollars in thousands) -------------------------------------------------------------------------------- |
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
Cash Flow Net income (loss) before preferred stock dividends $ 11,009 $ (33,846) $ 48,285 $ (26,309)
from Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities:
Losses and loss expenses 11,729 185,189 (16,809) 202,093
Unearned premiums (8,932) 1,533 10,498 3,411
Deferred acquisition costs 904 1,568 (5,508) 1,369
Receivables (9,331) (6,660) (16,150) (30,382)
Reinsurance balances payable 1,835 35,270 21,917 53,513
Reinsurance recoverable 16,128 (157,530) 15,717 (143,190)
Current income tax asset 2,135 (5,214) (6,949) (5,215)
Deferred tax asset 1,107 (532) 17,879 (2,584)
Equity in earnings of limited partnerships (671) (653) (6,077) (6,888)
Other (1,783) (28,762) 14,587 (14,838)
--------- --------- --------- ---------
Net cash provided (used) by operating activities 24,130 (9,637) 77,390 30,980
--------- --------- --------- ---------
Cash Flow Cost of fixed maturity investments (102,767) (37,670) (347,880) (160,301)
from Investing Fixed maturity investments matured or disposed 100,245 110,785 111,958 233,159
Activities Payable for securities (10,590) (10,011) 3,702 18
Cost of equity securities -- (455) -- (3,481)
Equity securities disposed -- 1,530 275 15,634
Net change in short-term investments (17,666) (76,635) 34,716 (101,948)
Other invested assets and trading portfolio disposed 16,655 14,539 57,249 30,271
Other invested assets and trading portfolio purchased (12,661) (4,000) (57,535) (24,968)
--------- --------- --------- ---------
Net cash used by investing activities (26,784) (1,917) (197,515) (11,616)
--------- --------- --------- ---------
Cash Flow Proceeds from issuance of preferred stock (46) -- 140,892 --
from Financing Proceeds from issuance of common stock 880 299 2,073 915
Activities Cash dividends paid to common stockholders (722) (715) (2,156) (2,144)
Repayment of debt (5,000) -- (25,000) (10,000)
Repurchase of minority interest in consolidated subsidiary -- -- (2,967) --
Cost of stock repurchased (31) -- (589) (1,173)
--------- --------- --------- ---------
Net cash (used) provided by financing activities (4,919) (416) 112,253 (12,402)
--------- --------- --------- ---------
Net change in cash (7,573) (11,970) (7,872) 6,962
Cash, beginning of period 22,589 37,941 22,888 19,009
--------- --------- --------- ---------
Cash, end of period $ 15,016 $ 25,971 $ 15,016 $ 25,971
========= ========= ========= =========
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The accompanying notes are an integral part of these statements.
1. Significant Accounting Policies
Basis of Presentation and Consolidation
The consolidated financial statements have been prepared in U.S. dollars in conformity with accounting principles generally accepted ("GAAP") in the United States of America. These statements reflect the consolidated operations of PXRE Group Ltd. (the "Company" or collectively with its various subsidiaries, "PXRE") and its wholly-owned subsidiaries, including PXRE Corporation ("PXRE Delaware"), PXRE Reinsurance Company ("PXRE Reinsurance"), PXRE Reinsurance Ltd. ("PXRE Bermuda"), PXRE Reinsurance (Barbados) Ltd. ("PXRE Barbados"), PXRE Solutions Inc. ("PXRE Solutions"), PXRE Direct Underwriting Managers, Inc., PXRE Trading Corporation, TREX Trading Corporation, Cat Fund L.P., PXRE Capital Trust I and PXRE Limited. All material intercompany transactions have been eliminated in preparing these consolidated financial statements.
The Company was formed in 1999 as part of the reorganization of PXRE Delaware, a Delaware corporation. Prior to the reorganization, PXRE Delaware was the ultimate parent holding company of the various PXRE companies and its common shares were publicly traded on the New York Stock Exchange. As a result of the reorganization, the Company became the ultimate parent holding company of PXRE Delaware and the holders of PXRE Delaware common stock automatically became holders of the same number of the Company's common shares. The reorganization was consummated at the close of business on October 5, 1999 and, on October 6, 1999, the Company's common shares began to trade on the New York Stock Exchange under the symbol PXT. The reorganization also involved the establishment of a Bermuda-based reinsurance subsidiary, PXRE Bermuda, operations in Barbados through PXRE Barbados and the formation of a reinsurance intermediary, PXRE Solutions.
GAAP requires management to make current estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those current estimates.
The interim consolidated financial statements are unaudited; however, in the opinion of management, such consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. These interim statements should be read in conjunction with the 2001 audited consolidated financial statements and related notes. The preparation of interim consolidated financial statements relies significantly upon estimates. Use of such estimates, and the seasonal nature of a portion of the reinsurance business, necessitates caution in drawing specific conclusions from interim results.
The Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 145, "Rescission of FASB Statements Nos. 4 and 64, Amendment of FASB Statement No. 13, and Technical Corrections", on April 30, 2002, which rescinds the requirement to present gains and losses from extinguishment of debt as an extraordinary item. The Company has adopted the new standard effective January 1, 2002. As a result, a gain of $1.2 million on the repurchase of $4.2 million of Minority Interest in Consolidated Subsidiary was classified with net realized investment gains during the first nine months of 2002.
Certain amounts in 2001 were reclassified to be consistent with the 2002 presentation.
2. Reinsurance
PXRE purchases catastrophe retrocessional coverage for its own protection, depending on market conditions. In the event that retrocessionaires are unable to meet their contractual obligations, PXRE would be liable for such defaulted amounts. The effects of such retrocessional coverage on premiums written and earned are as follows:
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
------------------------- -------------------------
2002 2001 % 2002 2001 %
($000's)
Premiums written
Gross premiums written $ 120,734 $ 97,092 $ 287,881 $ 223,622
Ceded premiums written (53,925) (78,016) (96,688) (111,402)
--------- --------- --------- ---------
Net premiums written $ 66,809 $ 19,076 250 $ 191,193 $ 112,220 70
========= ========= ========= =========
Premiums earned
Gross premiums earned $ 99,667 $ 92,794 $ 243,367 $ 219,582
Ceded premiums earned (23,926) (75,251) (62,706) (110,773)
--------- --------- --------- ---------
Net premiums earned $ 75,741 $ 17,543 332 $ 180,661 $ 108,809 66
========= ========= ========= =========
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3. Earnings Per Share
The table below presents the computation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2002 2001 2002 2001
------- -------- -------- --------
(000's, except per share data)
Net income available to common stockholders:
Income (loss) before cumulative effect of accounting
change and preferred dividends $11,009 $(33,846) $ 48,285 $(26,628)
Cumulative effect of accounting change 0 0 0 319
Preferred dividends (3,058) 0 (5,958) 0
------- -------- -------- --------
Net income (loss) available to common stockholders $ 7,951 $(33,846) $ 42,327 $(26,309)
======= ======== ======== ========
Weighted average shares of common stock outstanding:
Weighted average shares of common shares outstanding 11,817 11,501 11,778 11,504
Equivalent shares of stock options 337 138 325 163
Equivalent shares of restricted stock 141 253 132 280
Equivalent shares of convertible preferred stock 9,842 0 6,395 0
------- -------- -------- --------
Weighted average common equivalent shares (diluted) 22,137 11,892 18,630 11,947
======= ======== ======== ========
Per share amounts:
Basic
Income (loss) before cumulative effect of accounting
change and preferred dividends $0.93 $(2.94) $4.10 $(2.31)
Cumulative effect of accounting change 0.00 0.00 0.00 0.03
Preferred dividends (0.26) 0.00 (0.51) 0.00
------- -------- -------- --------
Net income (loss) $0.67 $(2.94) $3.59 $(2.28)
======= ======== ======== ========
Diluted
Income (loss) before cumulative effect of accounting
change $0.50 $(2.94) $2.59 $(2.31)
Cumulative effect of accounting change 0.00 0.00 0.00 0.03
------- -------- -------- --------
Net income (loss) $0.50 $(2.94) $2.59 $(2.28)
======= ======== ======== ========
|
4. Income Taxes
The Company 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. The Company has received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax Protection Act, 1966, which exempts the Company 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.
The Company 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 United States income taxation.
The United States subsidiaries of PXRE file a consolidated U.S. federal income tax return.
5. Losses and Loss Expense Liabilities
In 2000, PXRE Bermuda assumed a finite reinsurance contract that involved long tail casualty risks. This contract was recorded on a discounted basis, and was commuted during the second quarter of 2002 resulting in a net loss of $0.4 million. All reserves for PXRE Bermuda are now recorded on an undiscounted basis.
6. Stockholders' Equity
On April 4, 2002, the Company raised $150 million of additional capital through the issuance of 15,000 Convertible Voting Preferred Shares (the "Preferred Share Investment"). The Preferred Share Investment occurred pursuant to a Share Purchase Agreement, dated as of December 10, 2001, between the Company and Capital Z Financial Services Fund II, L.P., Capital Z Financial Services Private Fund II, L.P., Reservoir Capital Master Fund, L.P., Reservoir Capital Partners, L.P. and Richard E. Rainwater. The capital infusion from the Preferred Share Investment is enabling PXRE to increase underwriting capacity and therefore maximize participation in the hardening reinsurance market following the September 11th terrorist attacks. On February 12, 2002, the stockholders approved the sale and issuance of three series of convertible preferred shares pursuant to the Share Purchase Agreement, including 7,500 Series A Convertible Preferred Shares, 5,000 Series B Convertible Preferred Shares, and 2,500 Series C Convertible Preferred Shares. These shares will 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. The stockholders also voted to approve the division of 20 million of PXRE's 50 million authorized common shares into three new classes of convertible common shares including 10 million Class A Convertible Voting Common Shares ("Class A Common Shares"), 6,666.667 Class B Convertible Voting Common Shares ("Class B Common Shares"), and 3,333.333 Class C Convertible Voting Common Shares ("Class C Common Shares"). Preferred shares will be convertible into convertible common shares at the option of the holder at any time equal to the original purchase cost plus accrued but unpaid dividends at a conversion price equal to $15.69 provided that such conversion price is subject to adjustment if the Company experiences adverse loss development in excess of a $7 million after-tax threshold. As of September 30, 2002, the Company has incurred $5.1 of net adverse development that accrues towards this threshold. Preferred shares mandatorily convert at the third anniversary of the issuance for two thirds of the shares issued, and the balance at the sixth anniversary. Preferred shares will vote on a fully converted basis on all matters other than the election of directors.
On March 28, 2002, the Insurance Commissioner of the State of Connecticut approved the Preferred Share Investment, which closed on April 4, 2002. Proceeds, net of offering expenses of $9.1 million, amounted to $140.9 million.
7. Segment Information
PXRE operates in four reportable property and casualty segments - catastrophe and risk excess, finite business, other lines and exited lines - based on PXRE's approach to managing the business. Commencing with the 2002 underwriting renewal season, PXRE is returning its core focus to catastrophe and risk excess and finite business. Businesses that will not be renewed are reported as exited lines. The Company's segments for 2001 were reclassified to be comparable to the 2002 segments used for PXRE's method of managing the business. In addition, PXRE operates in two geographic segments - North American representing North American based risks written by North American based reinsureds and International (principally the United Kingdom, Continental Europe, Latin America, Caribbean, Australia and Asia) representing all other premiums written.
There are no significant differences among the accounting policies of the segments as compared to PXRE's consolidated financial statements.
PXRE does not maintain separate balance sheet data for each of its operating segments. Accordingly, PXRE does not review and evaluate the financial results of its operating segments based upon balance sheet data.
The following tables summarize the net written and earned premium by PXRE's business segments:
Net Premiums Written
($000's)
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
----------------------- ------------------------ ----------------------- ---------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
Catastrophe and Risk
Excess
North American $ 17,050 $ 11,806 $ 39,080 $ 22,378
International 51,110 37,069 126,714 77,271
Excess of loss
cessions (18,730) (52,868) (29,634) (62,513)
-------- -------- -------- --------
49,430 74% (3,993) (21)% 136,160 71% 37,136 33%
-------- -------- -------- --------
Finite Business
North American 12,754 3,090 42,446 26,086
International 0 0 0 0
-------- -------- -------- --------
12,754 19 3,090 16 42,446 22 26,086 23
-------- -------- -------- --------
Other Lines
North American 3,214 3,618 6,014 5,406
International 4 365 45 361
-------- -------- -------- --------
3,218 5 3,983 21 6,059 3 5,767 5
-------- -------- -------- --------
Exited Lines
North American (224) 9,252 8,090 23,875
International 1,631 6,744 (1,562) 19,356
-------- -------- -------- --------
1,407 2 15,996 84 6,528 4 43,231 39
-------- --- -------- --- -------- --- -------- ---
Total $ 66,809 100% $ 19,076 100% $191,193 100% $112,220 100%
======== === ======== === ======== === ======== ===
|
Net Premiums Earned
($000's)
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
----------------------- ------------------------ ------------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
Catastrophe and Risk
Excess
North American $ 14,639 $ 10,186 $ 35,951 $ 21,075
International 39,999 33,903 104,896 72,743
Excess of loss
cessions (6,774) (51,018) (17,677) (60,633)
-------- -------- -------- --------
47,864 63% (6,929) (40)% 123,170 68% 33,185 31%
-------- -------- -------- --------
Finite Business
North American 18,024 3,321 26,338 27,461
International 0 0 0 0
-------- -------- -------- --------
18,024 24 3,321 19 26,338 15 27,461 25
-------- -------- -------- --------
Other Lines
North American 2,031 1,132 5,756 2,669
International 4 383 106 427
-------- -------- -------- --------
2,035 3 1,515 9 5,862 3 3,096 3
-------- -------- -------- --------
Exited Lines
North American 5,419 9,256 17,471 21,113
International 2,399 10,380 7,820 23,954
-------- -------- -------- --------
7,818 10 19,636 112 25,291 14 45,067 41
-------- --- -------- --- -------- --- -------- ---
Total $ 75,741 100% $ 17,543 100% $180,661 100% $108,809 100%
======== === ======== === ======== === ======== ===
|
The following table summarizes the underwriting profit (loss) by segment:
Underwriting Operations
($000's)
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
------------------- ----------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
Catastrophe and Risk
Excess
North American $9,810 $(38,234) $31,944 $(37,197)
International 14,790 (48,627) 56,358 (28,490)
Excess of loss
cessions (4,652) 49,509 (9,055) 39,671
------- -------- ------- --------
19,948 139% (37,352) 97% 79,247 117% (26,016) 96%
------- -------- ------- --------
Finite Business
North American 469 5 2,635 1,791
International 0 0 0 0
------- -------- ------- --------
469 3 5 0 2,635 4 1,791 (7)
------- -------- ------- --------
Other Lines
North American 70 (751) 2,329 383
International (123) 288 119 (768)
------- -------- ------- --------
(53) 0 (463) 1 2,448 4 (385) 1
------- -------- ------- --------
Exited Lines
North American (5,247) 235 (14,043) 801
International (803) (949) (2,538) (3,385)
------- -------- ------- --------
(6,050) (42) (714) 2 (16,581) (25) (2,584) 10
------- --- -------- --- ------- --- -------- ---
Total $14,314 100% $(38,524) 100% $67,749 100% $(27,194) 100%
======= === ======== === ======= === ======== ===
|
The following table reconciles the underwriting operations for the operating segments to income before income taxes and cumulative effect of accounting change as reported in the consolidated statements of income and comprehensive income:
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
($000's)
Net underwriting profit (loss) $14,314 $(38,524) $67,749 $(27,194)
Net investment income 5,011 5,767 17,543 23,888
Net realized investment gains 4,782 3,426 5,785 4,241
Interest expense (698) (855) (2,197) (3,593)
Minority interest in
consolidated subsidiary (2,127) (2,219) (6,550) (6,658)
Other operating expenses (6,696) (7,005) (21,790) (23,389)
Unrealized foreign exchange
gains (losses)
on losses incurred 616 (1,673) 194 509
Other expense (14) (101) (74) (284)
------- -------- ------- --------
Income (loss) before income
taxes and cumulative effect of
accounting change $15,188 $(41,184) $60,660 $(32,480)
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8. Contingencies
In May 1999, PXRE Delaware entered into weather option agreements with two counterparties. In April 2000, these counterparties submitted invoices to PXRE Delaware in the aggregate sum of $8.25 million seeking payment under the weather option agreements, which invoices have been paid. PXRE Delaware insured its obligations under these weather option agreements through two Commercial Inland Marine Weather Insurance Policies issued by Terra Nova Insurance Company Limited ("Terra Nova"). PXRE Delaware submitted claims under these policies to Terra Nova in April 2000. Terra Nova had denied coverage, contending that its Managing General Agent had no authority to issue these policies.
PXRE Delaware disagreed with Terra Nova's denial and filed suit against Terra Nova in the United States District Court for the District of New Jersey. On June 10, 2002, PXRE Delaware was awarded a verdict of $8.25 million plus accumulated interest of $1.5 million by a jury at the conclusion of the trial of this dispute. The aggregate sum of $9.75 million is included in Other Assets. Terra Nova has appealed this verdict to the United States Court of Appeals for the Third Circuit, but management has concluded that it is realizable and that no valuation allowance is necessary.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Unless the context otherwise requires, references in this Form 10-Q to "PXRE" or "we" include PXRE Group Ltd. (the "Company") and its subsidiaries, which principally include PXRE Reinsurance Company ("PXRE Reinsurance"), PXRE Corporation ("PXRE Delaware"), PXRE Reinsurance Ltd. ("PXRE Bermuda"), PXRE Reinsurance (Barbados) Ltd. ("PXRE Barbados") and PXRE Solutions Inc. ("PXRE Solutions"). References to U.S. GAAP refer to accounting principles generally accepted in the United States ("U.S. GAAP"). References to SAP refer to statutory accounting principles ("SAP") in either the State of Connecticut where PXRE Reinsurance is domiciled or Bermuda where PXRE Bermuda is domiciled.
The following is a discussion of the Company's results of operations for the three and nine months ended September 30, 2002 and 2001 and financial condition as of September 30, 2002. This discussion and analysis should be read in conjunction with the attached unaudited consolidated financial statements and notes thereto and the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the "10-K"), including the audited consolidated financial statements and notes thereto and the discussion of Certain Risks and Uncertainties (including the discussion of Critical Accounting Policies) contained in the 10-K.
We provide reinsurance products and services to a worldwide marketplace through subsidiary operations in the United States, Europe, Bermuda and Barbados. Our primary focus is providing property catastrophe reinsurance and retrocessional coverage to a worldwide group of clients, where we have been among the leading franchises for two decades. Property catastrophe reinsurance generally covers claims arising from large catastrophes such as hurricanes, windstorms, hailstorms, earthquakes, volcanic eruptions, fires, industrial explosions, freezes, riots, floods and other man-made or natural disasters. Substantially all of our non-finite reinsurance products have been, and will continue to be, offered on an excess-of-loss basis with aggregate limits on our exposure to losses. This means that we do not begin to pay our client's claims until their claims exceed a certain specified amount and our obligation to pay those claims is limited to a specified aggregate amount.
We also offer our clients property-per-risk and marine and aviation reinsurance and retrocessional products. Unlike property catastrophe reinsurance, which protects against the accumulation of a large number of related losses arising out of one catastrophe, per-risk excess of loss reinsurance protects our clients against a large loss arising from a single risk or location. Substantially all of our property-per-risk and marine and aviation business is also written on an excess-of-loss basis with aggregate limits on our exposure to losses.
We also provide our clients with finite reinsurance products. Finite reinsurance contracts are highly customized for each transaction. If the loss experience with respect to the risks assumed by us is as expected or better than expected, our finite clients will share in the profitability of the underlying business through premium adjustments or profit commissions. If the loss experience is worse than expected, our finite clients generally participate in this negative outcome to a certain extent. In addition, we offer finite reinsurance products where investment returns on the funds transferred to us affect the profitability of the contract and the magnitude of any premium or commission adjustments.
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 or on our behalf in press releases, written statements or other documents filed with the Securities and Exchange Commission, 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 and are subject to risk and uncertainties. In light of the risks and uncertainties inherent in all future projections, the inclusion of 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) significant catastrophe losses or losses under other coverages, the timing and amount of which are difficult to predict;
(ii) changes in the level of competition in the reinsurance or primary insurance markets that impact the volume or profitability of business (these changes include, but are not limited to, the intensification of price competition, the entry of new competitors, existing competitors exiting the market and competitors' development of new products);
(iii) the lowering or loss of one of the financial or claims paying ratings of ours or one or more of our subsidiaries;
(iv) changes in the demand for reinsurance, including changes in the amount of risk that our clients elect to maintain for their own account;
(v) risks associated with the termination and run-off of our diversification initiatives;
(vi) adverse development on loss reserves related to business written in current and prior years;
(vii) lower than estimated retrocessional recoveries on unpaid losses, including the effects of losses due to a decline in the creditworthiness of our retrocessionaires;
(viii) increases in interest rates, which cause a reduction in the market value of our interest rate sensitive investments, including our fixed income investment portfolio and potential underperformance in our finite coverages;
(ix) decreases in interest rates causing a reduction of income earned on net cash flow from operations and the reinvestment of the proceeds from sales, calls or maturities of existing investments and shortfalls in cash flows necessary to pay fixed rate amounts due to finite contract counterparties;
(x) market fluctuations in equity securities and with respect to our portfolio of hedge funds and other privately held securities: leverage, concentration of investments, lack of liquidity, market fluctuations and direction (including as a result of interest rate fluctuations and direction, with respect to price levels and volatility thereof), currency fluctuations, credit risk, yield curve risk, spread risk between two or more similar securities, political risk, counterparty risk and risks relating to settlements on foreign exchanges;
(xi) foreign currency fluctuations resulting in exchange gains or losses;
(xii) changes in the composition of our investment portfolio;
(xiii) a contention by the United States Internal Revenue Service that the Company or our offshore subsidiaries are subject to U.S. taxation;
(xiv) changes in tax laws, tax treaties, tax rules and interpretations; and
(xv) changes in management's evaluation of potential Year 2000 exposures emanating from our reinsurance business.
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.
Comparison of Third Quarter Results for 2002 with 2001
For the quarter ended September 30, 2002, net income was $11.0 million versus a net loss of $33.8 million for the comparable period of 2001. The diluted net income per common share was $0.50 for the third quarter of 2002 compared to a diluted net loss per share of $2.94 for the third quarter of 2001, based on diluted average shares outstanding of approximately 22.1 million in the third quarter of 2002 and 11.5 million in the third quarter of 2001.
Premiums, losses and commission and brokerage in the third quarter of 2001 were significantly affected by losses related to the terrorist attack on September 11, 2001. The following table more fully details the impact of the September 11th event on our underwriting results in the third quarter of 2001:
Results Results
as WTC Excluding
($000's) Reported Event WTC Event
-------- -------- ----- ---------
Gross premiums written $97,092 $30,030 $67,062
Net premiums written 19,076 (29,020) 48,096
Net premiums earned 17,543 (29,020) 46,563
Management fees 2,335 613 1,722
Net losses incurred 64,134 27,190 36,944
Commission and brokerage (3,958) (11,432) 7,474
-------- -------- ---------
Underwriting results before taxes $(40,298) $(44,165) $ 3,867
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Gross and net written premiums for the third quarter of 2002 and 2001 were as follows:
Three Months Ended September 30,
------------- ------------- --------------
Increase
2002 2001 (Decrease)
---- ---- ----------
($000's) %
Gross premiums written $120,734 $97,092 24
Reinsurance premiums ceded 53,925 78,016 (31)
-------- -------
Net premiums written $ 66,809 $19,076 250
======== =======
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The increase in gross and net premiums written primarily reflected growth in the Catastrophe and Risk Excess and Finite segments. Improved pricing, increased participation with long-standing clients and substantial amounts of new business in our core Catastrophe and Risk Excess segment resulted in a 39% increase in net premiums written for the quarter, before the effects of excess of loss reinsurance ceded, in this key segment as compared to the prior year period. The Finite segment increased 313% during the third quarter of 2002 versus the prior comparable quarter on a net written basis primarily due to one large finite reinsurance contract. With respect to our Finite segment, we take an opportunistic approach to this business and do not believe this business is best measured by premiums written or earned from quarter to quarter. Compared to our other lines of business, our finite business involves a relatively small number of large reinsurance contracts. We therefore expect that the Finite segment premiums written and earned will vary widely from quarter to quarter reflecting this strategy. The Exited Lines segment decreased 91% on a net written basis compared to the prior year period. Given our decision to re-focus on our core Catastrophe and Risk Excess segment and to discontinue the businesses we have classified as Exited Lines, we expect to continue to see significant decreases in the premiums written and earned in the Exited Lines segment as this business is run off.
Net premiums earned for the third quarter of 2002 increased 332% to $75.7 million from $17.5 million for the corresponding period of 2001. The Catastrophe and Risk Excess segment increased 24%, before the effects of excess of loss reinsurance ceded, while the Finite segment increased 443% on an earned basis compared to the prior year period. The Exited Lines segment experienced a decline of 60% on an earned basis as compared to the third quarter of 2001.
Management fee income from all sources for the three months ended September 30, 2002 decreased 61% to $0.9 million from $2.3 million for the corresponding period of 2001, reflecting the reduction in the share of business ceded to quota share reinsurers.
The following table summarizes the loss and loss expense ratio, expense ratio and combined ratio (sum of loss and loss expense ratio, plus expense ratio) for the quarters ended September 30, 2002 and 2001, respectively:
(%) Three Months Ended September 30,
--- ------------------------------------
2002 2001
---- ----
Loss and loss expense ratio 63.7 365.6
Expense ratio 25.4 4.0
---- -----
Combined ratio 89.1 369.6
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The loss and loss expense ratio of 63.7% for the third quarter of 2002 reflected a $15.7 million loss incurred due to the 2002 European Floods, while the third quarter of 2001 was impacted by the terrorist attacks on September 11, 2001, which resulted in a net loss after tax of $35.3 million. As of September 30, 2002, our overall estimated net loss after tax arising from the September 11th terrorist attacks was $32.0 million.
During the third quarter of 2002, we experienced adverse development of $5.6 million net for prior-year loss and loss expenses primarily arising from loss development on our discontinued casualty reinsurance operations and the Toulouse Fertilizer Plant risk loss. This adverse development was caused by larger than expected reported claims under our casualty reinsurance contracts. The loss ratio for the comparable period of 2001 was affected by adverse development of $8.8 million net due to reserve strengthening in casualty, marine and aerospace lines of business, unrealized foreign exchange losses, and development on a number of significant catastrophes.
During the third quarter of 2002, we experienced a net loss of approximately $3.3 million on a financial guarantee insurance contract that guaranteed the performance of a minority portion of the debt of an unrelated company, Mariner Structured Products Sub-2, Ltd. ("MSP") for the benefit of a syndicate of lenders led by Bank of America, N.A. This contract was written in January, 2000, prior to our decision to re-focus on our core property catastrophe business. This insurance contract has been settled in full. The owner of MSP is a hedge fund managed by Mariner Investment Group, Inc. Select Reinsurance Ltd. guaranteed the portion of MSP's debt not guaranteed by us.
The expense ratio increased to 25.4% in the third quarter of 2002 compared to 4.0% during the comparable year earlier period. If the effects of the September 11th terrorist event on the third quarter of 2001 are excluded, the expense ratio decreased to 25.4% in the third quarter of 2002 compared to 27.4% in the third quarter of 2001. This decrease is due to an increase in premiums earned and a reduction in operating expenses to $6.7 million for the third quarter of 2002 from $7.0 million for the comparable period of 2001. This decrease primarily relates to the expense savings attributable to our decision to discontinue our exited lines of business, offset by the accrual of variable compensation expenses expected to be paid under the Company's Restated Employee Annual Incentive Bonus Plan if we achieve expected levels of profitability.
Interest expense was $0.7 million for the three months ended September 30, 2002 compared to $0.9 for the three months ended September 30, 2001. As of September 30, 2002, $30 million was outstanding under PXRE Delaware's Credit Agreement with a syndicate of lenders (as described under "Liquidity and Capital Resources"). The interest rate on such loan was 7.34% per annum after giving effect to a related interest rate swap. The Company incurred minority interest expense amounting to $2.1 million and $2.2 million related to PXRE's $100 million of 8.85% Capital Trust Pass-through Securities 'sm' ("TRUPS") (as described under "Liquidity and Capital Resources") during the three month periods ended September 30, 2002 and 2001, respectively.
Net investment income for the quarter declined 14% to $5.0 million from $5.8 million in the third quarter of 2001 primarily as a result of an increase in interest expense related to funds held in connection with certain finite reinsurance transactions as compared to the prior year period. Investment income related to the fixed maturity and non-hedge short term investment portfolios increased from $4.6 million during the third quarter of 2001 to $7.2 million this quarter primarily due to an increase in invested assets attributable to the proceeds of the Preferred Share Investment as well as cash flow from operations. The fixed maturity portfolio book yield on an annualized basis was approximately 5.0% during the third quarter of 2002 compared to 5.2% during the prior period. Investment income related to our hedge fund portfolio also increased slightly from $0.4 million in the third quarter of 2001 to $0.5 million in the current year period. Investment in hedge funds produced an annualized return of 1.8% for the quarter compared with 1.3% in the prior year period. Net realized investment gains for the third quarter of 2002 were $4.8 million compared to $3.4 million in the third quarter of 2001. The reinvestment of the proceeds of the investments sold contributed to the reduction of the overall fixed maturity and short-term investment portfolio's duration to 3.1 years at September 30, 2002 from 3.5 years at June 30, 2002.
As noted above, investment income for the quarter was affected by various finite and other reinsurance contracts where premiums payable under such contracts were retained on a funds withheld basis. In order to reduce credit risk or to comply with regulatory credit for reinsurance requirements, a portion of premiums paid under such reinsurance contracts are retained by the cedent pending payment of losses or commutation of the contract. Investment income on such withheld funds is typically for the benefit of the reinsurer and the cedent may provide an investment return on such funds. We have both ceded and assumed reinsurance contracts that involve the withholding of premiums by the cedent. On assumed reinsurance contracts, cedents held premiums and accrued investment income due to us of $25.6 million as of September 30, 2002, for which we have recognized $0.4 million of investment income for the third quarter of 2002. On ceded reinsurance contracts, we held premiums and accrued investment income of $135.1 million due to reinsurers as of September 30, 2002, for which we recognized a charge to investment income of $2.9 million for the third quarter of 2002. On a net basis, this charge to investment income was only $1.1 million, representing the difference between the stated investment return under such contracts and the overall yield achieved on our total investment portfolio for the quarter. The weighted average contractual investment return on the funds held by PXRE is 7.8% and we expect to be obligated for this contractual investment return for the life of the underlying liabilities, which is expected to be 7 years on a weighted average basis.
PXRE recognized a tax expense of $4.2 million in the third quarter of 2002 compared to a tax benefit of $7.3 million in the prior-year period. The tax expense in the third quarter of 2002 differed from the statutory rate primarily due to the mix of business in the U.S. and Bermuda, as well as tax-exempt income.
Comparison of Year-to-Date Results for 2002 and 2001
For the nine months ended September 30, 2002, net income was $48.3 million versus a net loss of $26.3 million for the comparable period of 2001. The diluted net income per common share was $2.59 for the first nine months of 2002 compared to a diluted net loss per share of $2.28 for the first nine months of 2001, based on diluted average shares outstanding of approximately 18.6 million in the first nine months of 2002 and 11.5 million in the first nine months of 2001.
Premiums, losses and commission and brokerage in the first nine months of 2001 were significantly affected by losses related to the terrorist attack on September 11, 2001. The following table more fully details the impact of the September 11th event on our underwriting results in the first nine months of 2001:
Results Results
as WTC Excluding
($000's) Reported Event WTC Event
-------- -------- ----- ---------
Gross premiums written $223,622 $30,030 $193,592
Net premiums written 112,220 (29,020) 141,240
Net premiums earned 108,809 (29,020) 137,829
Management fees 5,069 613 4,456
Net losses incurred 121,774 27,190 94,584
Commission and brokerage 19,072 (11,432) 30,504
-------- -------- --------
Underwriting results before taxes $(26,968) $(44,165) $ 17,197
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Gross and net written premiums for the first nine months of 2002 and 2001 were as follows:
Nine Months Ended September 30,
-------------- -------------- --------------
Increase
2002 2001 (Decrease)
---- ---- ----------
($000's) %
Gross premiums written $287,881 $223,622 29
Reinsurance premiums ceded 96,688 111,402 (13)
-------- --------
Net premiums written $191,193 $112,220 70
======== ========
|
The increase in gross and net premiums written primarily reflected growth in the Catastrophe and Risk Excess segment. Improved pricing, increased participation with long-standing clients and substantial amounts of new business in our core Catastrophe and Risk Excess segment resulted in a 66% increase in net premiums written for the period, before the effects of excess of loss reinsurance ceded, in this key segment as compared to the prior year period. The Finite segment increased 63% during the first nine months of 2002 versus the prior comparable period on a net written basis primarily due to one large finite reinsurance contract. With respect to our Finite segment, we take an opportunistic approach to this business and do not believe this business is best measured by premiums written or earned from period to period. Compared to our other lines of business, our finite business involves a relatively small number of large reinsurance contracts. We therefore expect that the Finite segment premiums written and earned will vary widely from period to period reflecting this strategy. The Exited Lines segment decreased 85% on a net written basis compared to the prior year period. Due to our decision to re-focus on our core Catastrophe and Risk Excess segment and to discontinue the businesses we have classified as Exited Lines, we expect to continue to see significant decreases in the premiums written and earned in the Exited Lines segment as this business is run off.
Net premiums earned for the first nine months of 2002 increased 66% to $180.7 million from $108.8 million for the corresponding period of 2001. The Catastrophe and Risk Excess segment increased 50% on an earned basis, before the effects of excess of loss reinsurance ceded, while the Finite segment decreased 4% on an earned basis versus the prior comparable nine month period. In the first nine months of 2002, we elected to partially terminate one finite transaction in order to remove the underwriting risk associated with that portion of the transaction, resulting in the return of premiums to the cedent. This caused a decrease in net premiums earned by our Finite segment during the first nine months of 2002 as compared to the prior year period. The Exited Lines segment experienced a decrease of 44% on an earned basis during the period as compared to the prior year period.
Management fee income from all sources for the nine months ended September 30, 2002 decreased 45% to $2.8 million from $5.1 million for the corresponding period of 2001, reflecting the reduction in the share of business ceded to quota share reinsurers.
The following table summarizes the loss and loss expense ratio, expense ratio and combined ratio (sum of loss and loss expense ratio, plus expense ratio) for the nine months ended September 30, 2002 and 2001, respectively:
(%) Nine Months Ended September 30,
--- ------------------------------------------------------------
2002 2001
---- ----
Loss and loss expense ratio 46.7 111.9
Expense ratio 27.8 34.4
---- -----
Combined ratio 74.5 146.3
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The loss and loss expense ratio of 46.7% for the first nine months of 2002 reflected reduced loss activity and no significant catastrophes other than the $15.7 million loss arising from the 2002 European floods. The first nine months of 2001 was impacted by the September 11th terrorist attack, sinking of the Petrobras Oil Rig and Tropical Storm Allison.
During the first nine months of 2002, we experienced adverse development of $20.4 million net for prior-year loss and loss expenses mainly due to loss development on our discontinued casualty reinsurance operations. The loss ratio for the comparable period of 2001 was affected by adverse development of $16.0 million net largely due to reserve strengthening in casualty, marine and aerospace lines of business.
During the third quarter of 2002, we experienced a net loss of approximately $3.3 million on a financial guarantee insurance contract that guaranteed the performance of a minority portion of the debt of MSP for the benefit of a syndicate of lenders led by Bank of America, N.A. This contract was written in January, 2000, prior to our decision to re-focus on our core property catastrophe business. This insurance contract has been settled in full.
The expense ratio declined to 27.8% in the first nine months of 2002 compared to 34.4% during the comparable year earlier period. This decrease is due to an increase in premiums earned and a reduction in operating expenses to $21.8 million for the nine months ended September 30, 2002 from $23.4 million for the comparable prior year period. The decrease in operating expenses primarily relates to the expense savings attributable to our decision to discontinue our exited lines of business, offset by the accrual of variable compensation expenses expected to be paid under the Company's Restated Employee Annual Incentive Bonus Plan if we achieve expected levels of profitability.
During the first nine months of 2002, interest expense decreased to $2.2 million compared to $3.6 million in the corresponding period of 2001. The decrease in interest expense primarily relates to repayment of $25.0 million under PXRE Delaware's Credit Agreement with a syndicate of lenders (as described under "Liquidity and Capital Resources") since December 31, 2001, reducing the outstanding amount from $55 million on December 31, 2001 to $30 million on September 30, 2002. The interest rate on such loan was 7.34% per annum after giving effect to a related interest rate swap. The Company incurred minority interest expense amounting to $6.6 million and $6.7 million related to PXRE's $100 million of 8.85% Capital Trust Pass-through Securities 'sm' ("TRUPS") (as described under "Liquidity and Capital Resources") during the nine month periods ended September 30, 2002 and 2001, respectively.
Net investment income for the nine months ended September 30, 2002 declined 27% to $17.5 million from $23.9 million for the comparable period of 2001, primarily as a result of an increase in interest expense related to funds held in connection with certain finite reinsurance transactions as compared to the prior year period. Investment income related to the fixed maturity and non-hedge short term investment portfolios increased from $14.9 million during the third quarter of 2001 to $17.3 million this quarter primarily due to an increase in invested assets attributable to the proceeds of the Preferred Share Investment as well as cash flow from operations. The fixed maturity portfolio book yield on an annualized basis was approximately 4.6% during the first nine months of 2002 compared to 6.2% during the prior year period. Investment income related to our hedge fund portfolio decreased from $7.0 million in the first nine months of 2001 to $3.5 million in the current year period. Investment in hedge funds produced an annualized return of 4.7% for the nine months ended September 30, 2002 compared with 8.3% in the prior year period. In addition, during the first nine months of 2002, we recognized $3.0 million related to a special distribution by one of our alternative investments and $1.5 million in interest related to the judgment entered in our favor in our lawsuit against Terra Nova.
Net realized investment gains for the first nine months of 2002 were $5.8 million compared to $4.2 million in the first nine months of 2001, including gains of $1.2 million on the repurchase of $4.2 million of TRUPS.
As noted above, investment income was also affected by various finite and other reinsurance contracts where premiums payable under such contracts were retained on a funds withheld basis. In order to reduce credit risk or to comply with regulatory credit for reinsurance requirements, a portion of premiums paid under such reinsurance contracts are retained by the cedent pending payment of losses or commutation of the contract. Investment income on such withheld funds is typically for the benefit of the reinsurer and the cedent may provide a minimum investment return on such funds. We have both ceded and assumed reinsurance contracts that involve the withholding of premiums by the cedent. On assumed reinsurance contracts, cedents held premiums and accrued investment income due to us of $25.6 million as of September 30, 2002, for which we have recognized $1.3 million of investment income for the first nine months of 2002. On ceded reinsurance contracts, we held premiums and accrued investment income of $135.1 million due to reinsurers as of September 30, 2002, for which we recognized a charge to investment income of $8.3 million during the first nine months of 2002. On a net basis, this charge to investment income was only $2.5 million, representing the difference between the stated investment return under the contracts and the overall yield achieved on our total investment portfolio for such nine-month period. The weighted average contractual investment return on the funds held by PXRE is 7.8% and we expect to be obligated for this contractual investment return for the life of the underlying liabilities, which is expected to be 7 years on a weighted average basis.
PXRE recognized a tax expense of $12.4 million in the first nine months of 2002 compared to a tax benefit of $5.9 million in the prior-year period. The tax expense for the first nine months of 2002 differed from the statutory rate primarily due to the mix of business in the U.S. and Bermuda, as well as tax-exempt income.
Update on Critical Accounting Policies
The Company's Annual Report on Form 10-K for the year ended December 31, 2001 discloses certain risks and uncertainties relating to critical accounting policies (See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Risks and Uncertainties Relating to Critical Accounting Policies contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001). This included disclosure concerning our estimation of losses and loss expense, the assumptions used in making such estimation and the various factors that contribute to uncertainty in those estimates.
In this regard, we noted as a catastrophe reinsurer, our estimations of losses are inherently less reliable than for reinsurers of risks that have an established historical pattern of losses such as Casualty Risks. In addition, with respect to insured events which 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 future earnings and stockholders' equity.
In reserving for non-catastrophe losses from recent years, we are required to make assumptions concerning the expected loss ratio usually for broad lines of business but sometimes by contract. We consider historical loss ratios for each line of business and estimates provided by underwriters and actuaries concerning the impact of pricing and coverage changes. We also utilize information provided by our clients when we reserve heterogeneous lines by selecting expected loss ratios based upon loss ratio projections from pricing analyses. As experience emerges, we revise our prior beliefs concerning pricing adequacy and non-catastrophe loss potential for our coverages and we will eventually rely solely on our estimated development pattern in projecting ultimate losses.
In addition, the potential for uncertainty for recent underwriting years is greater than in past years because of the increased casualty exposures assumed by us through our casualty and finite business. Unlike property losses that tend to be reported more promptly and usually are settled within a shorter time period, casualty losses are frequently slower to be reported and may be determined only through the lengthy, unpredictable process of litigation. Moreover, given our recent expansion of casualty and finite business, we do not have established historical loss development patterns that can be used to establish casualty loss liabilities. We must therefore rely on the inherently less reliable historical loss development patterns reported by our clients and industry loss development data in calculating our liabilities.
During the third quarter of 2002, we experienced adverse development of $5.6 million net for prior-year loss and loss expenses, $3.9 million of which was due to loss development in our Exited Lines segment. This adverse development was primarily caused by larger than expected reported claims under our direct casualty reinsurance contracts. Our current estimate of loss and loss expense liabilities for our Exited Lines segment as of September 30, 2002 is $95.9 million, which represents our best estimate from a range of estimates provided by alternative actuarial assumptions and methods. The low and high end of a range of reasonable loss reserves for our Exited Lines is $9.0 million below and $9.0 million above our current loss and loss expense estimate.
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company relies primarily on dividend payments and net tax allocation payments from its subsidiaries, including PXRE Reinsurance and PXRE Bermuda, to pay its operating expenses and income taxes, to meet its debt service obligations and to pay dividends. The payment of dividends by PXRE Reinsurance is subject to limits imposed under the insurance laws and regulations of Connecticut, the state of incorporation and domicile of PXRE Reinsurance, as well as certain restrictions arising in connection with our indebtedness discussed below. The maximum amount of dividends or distributions that PXRE Reinsurance may declare and pay during 2002, without regulatory approval, is $33.2 million. During the first nine months of 2002, $20.8 million in dividends were paid by PXRE Reinsurance.
The payment of dividends by PXRE Bermuda is limited under Bermuda insurance laws, which requires PXRE Bermuda to maintain certain measures of solvency and liquidity. As at September 30, 2002, the statutory capital and surplus of PXRE Bermuda was estimated to be $67.9 million and the amount required to be maintained was estimated to be $9.6 million.
Under Barbados law, PXRE Barbados may only pay a dividend out of the realized profits of the company. PXRE Barbados may not pay a dividend unless (a) it is able to pay its liabilities as they become due after payment of the dividend, and (b) the realizable value of its assets is greater than the aggregate value of its liabilities, and (c) the stated capital accounts are maintained in respect of all classes of shares.
On April 4, 2002, the Company raised $150 million of additional capital through the issuance of 15,000 Convertible Voting Preferred Shares (the "Preferred Share Investment"). The Preferred Share Investment occurred pursuant to a Share Purchase Agreement, dated as of December 10, 2001, between the Company and Capital Z Financial Services Fund II, L.P., Capital Z Financial Services Private Fund II, L.P. (together with Capital Z Financial Services Fund II, L.P., "Capital Z"), Reservoir Capital Master Fund, L.P., Reservoir Capital Partners, L.P. (together with Reservoir Capital Master Fund, L.P., "Reservoir") and Richard E. Rainwater ("Rainwater") (each of Capital Z, Reservoir and Rainwater, a "Purchaser", and together, the "Purchasers"). The Preferred Share Investment involved the issuance of 7,500 shares of Series A Preferred Shares, allocated to two sub-series of shares, 5,000 shares allocated to sub-series A1 (A1 Preferred Shares) and 2,500 shares allocated to sub-series A2 (A2 Preferred Shares); the purchase of 5,000 shares of Series B Preferred Shares, allocated to two sub-series of shares, 3,333.333 shares allocated to Series B1 (B1 Preferred Shares) and 1,666.667 shares allocated to Series B2 (B2 Preferred Shares); and 2,500 shares of Series C Preferred Shares, allocated to two sub-series of shares, 1,666.667 shares allocated to Series C1 (C1 Preferred Shares) and 833.333 shares allocated to Series C2 (C2 Preferred Shares). The Company's common shareholders approved the transaction on February 12, 2002.
The issuance of the Preferred Shares is not expected to have a material effect on our liquidity during the three-year period following their issuance. In this regard, the Preferred Shares will be entitled to receive, when, as and if declared by our Board of Directors and to the extent of funds legally available for the payment of dividends, cumulative dividends per share at the rate per annum of 8% of the sum of the stated value on each share plus any accrued and unpaid dividends thereon, payable on a quarterly basis. To the extent such dividends are not paid when due, dividends shall be payable and accrue at the rate of 10% per annum compounded quarterly until paid. Such dividends, if declared by our Board of Directors, shall be payable in additional Preferred Shares prior to the third anniversary of the closing and cash thereafter. We, at our sole election, may decide, in substitution in whole or in part for dividends payable in shares, to pay dividends in cash to the extent of any dividends that, if paid in additional shares of Preferred Shares, would otherwise cause the Purchasers and their affiliates to own more than 49.9% of the capital stock of the Company on a fully-diluted and fully-converted basis.
The A1 Preferred Shares, B1 Preferred Shares and C1 Preferred Shares will be mandatorily convertible into Class A Common Shares, Class B Common Shares and Class C Common Shares, respectively, on the third anniversary of the date of issuance, and all remaining Preferred Shares will be mandatorily convertible into Convertible Common Shares on the sixth anniversary of the date of issuance. Notwithstanding the foregoing, on any conversion date, to the extent necessary to prevent the initial Purchasers of Preferred Shares and their affiliates from owning more than 49.9% of the capital shares of the Company following conversion, we shall have the right (but not the obligation) to make a cash payment in lieu of Convertible Common Shares equal to the fair market value of the Convertible Common Shares that would have been received in excess of the 49.9% limitation in connection with any conversion, plus an additional tax gross up amount to take into account in appropriate circumstances the difference between the federal income tax rate on long-term capital gains and the federal ordinary income tax rate that might apply to the recipient on the receipt of a cash payment in lieu of Convertible Common Shares. If the A2 Preferred Shares, B2 Preferred Shares and C2 Preferred Shares are not voluntarily converted on or prior to the third anniversary of their issuance, an annual 8% dividend, payable in cash, will accrue until these Preferred Shares are converted.
PXRE Delaware entered into a Credit Agreement dated as of December 30, 1998 (as amended and restated in connection with the reorganization of PXRE Delaware, the "Credit Agreement") with Wachovia Bank, National Association (formerly know as First Union National Bank, "Wachovia") as Agent and as a Lender, pursuant to which Wachovia agreed to make available to PXRE Delaware a $75 million revolving credit facility. On May 18, 1999, pursuant to various Joinder Agreements and Assignment and Acceptance Agreements, Wachovia syndicated the revolving credit facility, joining Fleet National Bank, Credit Lyonnais New York Branch and Bank One (formerly, The First National Bank of Chicago) as additional lenders (collectively with Wachovia, the "Lenders"). As at March 31, 1998, PXRE Delaware had outstanding borrowings under the Credit Agreement of $50 million, and in October 1999, the remaining $25 million was borrowed. On each of March 31, 2000, 2001, 2002 and April 4, 2002 PXRE Delaware fulfilled its commitment and made principal payments of $10 million and an additional $5 million was paid on July 1, 2002, reducing the outstanding loan to $30 million, at September 30, 2002.
The Preferred Share Investment would have triggered an event of default under the Credit Agreement if the transaction were consummated without the consent of the Lenders. As a condition to the Lenders' consent to the Preferred Share Investment, the Credit Agreement was amended pursuant to the Restated Second Amendment to the First Amended and Restated Credit Agreement, dated April 4, 2002, between PXRE Delaware and the Lenders (the "Second Amendment" and together with the Credit Agreement, as amended by the Second Amendment, the "Amended Credit Agreement"). The Second Amendment was effective upon the closing of the Preferred Share Investment on April 4, 2002.
In connection with the Credit Agreement, PXRE Delaware and Wachovia entered into a cash flow hedge interest rate swap which has the intended effect of converting the $30.0 million borrowings by PXRE Delaware into a fixed rate borrowing at an annual interest rate of 7.34%. Commitments under the Credit Agreement terminate on March 31, 2004 and are subject to annual reductions and, unless due or paid sooner, the aggregate principal of the loans are due and payable in full on March 31, 2004. Under the Second Amendment to the First Amendment and Restated Credit Agreement, the reduction of the outstanding commitments under the Credit Agreement has been accelerated. As amended, the outstanding commitment was reduced by $10 million on April 4, 2002 and an additional reduction of $5 million was made on July 1, 2002. The remaining commitment will be reduced by $20 million on March 31, 2003 and by $10 million on March 31, 2004. In addition, commencing on September 30, 2003, 50% of Excess Cash Flow (as defined in the Second Amendment) shall be used to reduce the outstanding commitment. Effective April 4, 2002, the variable interest rate under the Amended Credit Agreement was increased by 100 basis points.
The Amended Credit Agreement contains covenants that, among other things, limit the ability of the Company and its subsidiaries and affiliates to undertake certain activities and require compliance with Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based Capital Ratio and Combined Statutory Surplus requirements. Under the Amended Credit Agreement, the definition of Fixed Charge Coverage Ratio has been amended to provide credit for the capital infusion resulting from the Preferred Share Investment. In addition, the Fixed Charge Coverage Ratio is reduced from 1.5 to 1, to 1.25 to 1 at March 31, 2002 and June 30, 2002 and 1.3 to 1 at September 30, 2002 and December 31, 2002.
In September, 2002, we discovered and reported to Wachovia that we had inadvertently failed to provide certain projections to the Lenders prior to increasing the quota share on a certain inter-company reinsurance agreement between PXRE Reinsurance and PXRE Bermuda as required pursuant to the terms of the Amended Credit Agreement. We also sought the Lenders' consent to the Company providing a parental guarantee to PXRE Bermuda for the benefit of PXRE Bermuda's reinsurance clients and the Lenders' agreement to relax certain covenants limiting the scope of inter-company transactions between the Company, our U.S. subsidiaries and PXRE Bermuda. Accordingly, we entered into the Third Amendment to the First Amended and Restated Credit Agreement, Consent and Waiver between PXRE Delaware and the Lenders, dated as of November 8, 2002, pursuant to which the Lenders waived our non-compliance and consented to the parental guarantee and certain amendments to the covenants concerning inter-company transactions (the "Third Amendment"). As a condition to the Third Amendment, PXRE Bermuda issued a credit enhancement insurance policy to the Lenders, as insureds, pursuant to which it agreed, subject to the terms of such policy, to pay any amounts due to Lenders under the Amended Credit Agreement if PXRE Delaware fails to pay such amounts when due.
On January 29, 1997, PXRE Capital Trust I ("PXRE Capital Trust"), a Delaware statutory business trust and a wholly-owned subsidiary of PXRE Delaware, issued $100 million principal amount of its 8.85% TRUPS 'sm' due February 1, 2027 in an institutional private placement. Proceeds from the sale of these securities were used to purchase PXRE Delaware's 8.85% Junior Subordinated Deferrable Interest Debentures due February 1, 2027 (the "Subordinated Debt Securities"). On April 23, 1997, PXRE Delaware and PXRE Capital Trust completed the registration with the Securities and Exchange Commission of an exchange offer for these securities and the securities were exchanged for substantially similar securities (the "Capital Securities"). Distributions on the Capital Securities (and interest on the related Subordinated Debt Securities) are payable semi-annually, in arrears, on February 1 and August 1 of each year, commencing August 1, 1997. Minority interest expense, including amortization of debt offering costs, for the nine months ended September 30, 2002 and 2001 in respect of the Capital Securities (and related Subordinated Debt Securities) amounted to $6.6 million and $6.7 million, respectively.
Our TRUPS have periodically traded at attractive prices. If such an opportunity arises in the future, we may cause one or more of our subsidiaries to purchase some of the outstanding TRUPS and hold them for investment purposes. If consummated, such a purchase is not expected to be treated as a redemption as our current intention is to hold the security in the operating company until maturity. During the first nine months of 2002, we purchased TRUPS in the principal amount of $4.2 million, which are being held in our investment portfolio. As a result of these purchases, we realized a $1.2 million gain during the nine months ended September 30, 2002. For GAAP purposes, the investment is eliminated against the outstanding TRUPS balance in consolidation.
PXRE Delaware files U.S. income tax returns for itself and all of its direct or indirect subsidiaries that satisfy the stock ownership requirements for consolidation (collectively, the "Subsidiaries"). PXRE Delaware is party to an Agreement Concerning Filing of Consolidated Federal Income Tax Returns (the "Tax Allocation Agreement") pursuant to which each U.S. Subsidiary makes tax payments to PXRE Delaware in an amount equal to the federal income tax payment that would have been payable by such Subsidiary for such year if it had filed a separate income tax return for such year. PXRE Delaware is required to provide for payment of the consolidated federal income tax liability for the entire group. If the aggregate amount of tax payments made in any tax year by a U.S. Subsidiary is less than (or greater than) the annual tax liability for such Subsidiary on a stand-alone basis for such year, such Subsidiary will be required to make up such deficiency to PXRE Delaware (or will be entitled to receive a credit if payments exceed the separate return tax liability of the Subsidiary).
Investments
As of September 30, 2002, our investment portfolio, at fair value, consisted of 83.3% in bonds and short-term investments with fixed maturities, 14.7% in hedge funds and 2% in other investments and equity securities.
The following table summarizes our investments at September 30, 2002 and 2001 at fair value:
Analysis of Investments
-----------------------
September 30, 2002 September 30, 2001
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
($000's, except percentages)
Fixed maturities:
U.S. treasury securities $59,723 8.1 $6,614 1.3
Foreign denominated securities 20,792 2.8 0 0.0
Foreign government securities 104 0.1 5,151 1.0
U.S. government sponsored agency and agency
mortgage-backed securities 80,655 10.9 76,641 15.0
Other mortgage and asset-backed securities 116,573 15.8 29,962 5.8
Municipal securities 70,853 9.6 38,377 7.5
Corporate securities 147,103 19.9 59,723 11.7
-------- ----- -------- -----
Total long-term fixed maturity securities 495,803 67.2 216,468 42.3
Short-term investments 118,788 16.1 159,051 31.1
-------- ----- -------- -----
Total fixed maturity securities 614,591 83.3 375,519 73.4
Hedge funds 108,684 14.7 112,202 22.0
Other investments 13,875 1.9 20,390 4.0
Equity securities 252 0.1 2,858 0.6
-------- ----- -------- -----
Total investment portfolio $737,402 100.0% $510,969 100.0%
======== ===== ======== =====
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At September 30, 2002, 96.8% of the fair value of our fixed maturity portfolio was in obligations rated "A1" or "A" or better by Moody's or S&P, respectively. Mortgage and asset-backed securities accounted for 26.4% of fixed maturities based on fair value at September 30, 2002. The average market yield on our fixed maturity portfolio at September 30, 2002 and 2001, was 3.7% and 4.8%, respectively.
In April 2002, the $140.9 million Preferred Share Investment net proceeds were received, with $10 million repaid under the Amended Credit Agreement, and the remainder was primarily invested in our fixed maturity portfolio.
Long-term fixed maturity, other than trading securities, and equity investments are reported at fair value, with the net unrealized gain or loss, net of tax, reported as a separate component of stockholders' equity. Fixed maturity investments classified as trading securities are reported at fair value, with the net unrealized gain or loss reported as investment income. At September 30, 2002, an after-tax unrealized gain of $11.2 million (gain of 51 cents per share, after considering convertible preferred shares), was included in stockholders' equity.
Short-term fixed maturities are carried at amortized cost, which approximates fair value. Our short-term fixed maturities, principally term deposits and short-term agencies were $118.8 million at September 30, 2002, compared to $159.1 million at September 30, 2001. The proportion of the investment portfolio invested in short-term fixed maturities has remained high in expectation of payment of claims related to the September 11th terrorist attacks and due to concerns over lengthening the duration of our fixed maturity portfolio.
A principal component of our investment strategy is investing a portion of our invested assets in a diversified portfolio of hedge funds. At September 30, 2002, total hedge fund investments amounted to $108.7 million, representing 14.7% of the total investment portfolio. At September 30, 2001, total hedge fund investments amounted to $112.2 million, representing 22.0% of the total investment portfolio. For the nine months ended September 30, 2002, our hedge funds yielded an annualized return of 4.7% as compared to 8.3% in the nine months ended September 30, 2001. As at September 30, 2002, hedge fund investments with fair values ranging from $1.9 million to $17.5 million were administered by eighteen managers.
Our hedge fund managers invest in a variety of markets utilizing a variety of strategies, generally through the medium of private investment companies or other entities. Criteria for the selection of hedge fund managers include, among other factors, the historical performance and/or recognizable prospects of the particular manager and a substantial personal investment by the manager in the investment program. However, managers without past trading histories or substantial personal investment may also be considered. Generally, our hedge fund managers may be compensated on terms that may include fixed and/or performance-based fees or profit participations.
Through our hedge fund managers, we may invest or trade in any securities or instruments including, but not limited to, U.S. and non-U.S. equities and equity-related instruments, currencies, commodities and fixed-income and other debt-related instruments and derivative instruments. Hedge fund managers may use both over-the-counter and exchange traded instruments (including derivative instruments such as swaps, futures and forward agreements), trade on margin and engage in short sales. Substantially all strategies hedge fund managers are expected to adopt employ leverage, to varying degrees, which magnifies both the potential for gain and the exposure to loss, which may be substantial. Leverage may be obtained through margin arrangements, as well as repurchase, reverse repurchase, securities lending and other techniques. Trades may be on or off exchanges and may be in thinly traded securities or instruments, which creates the risk that attempted purchases or sales may adversely affect the price of a particular investment or its liquidation and may increase the difficulty of valuing particular positions.
While we seek capital appreciation with respect to our hedge fund investments, we are also concerned with preservation of capital. For that reason, our hedge fund portfolio is designed to take advantage of broad market opportunities and diversify risk. Nevertheless, our investment policies with respect to our hedge fund investments generally do not restrict us from participating in particular markets, strategies or investments. In fact, our hedge fund investments may generally be deployed and redeployed in whatever investment strategies are deemed appropriate under prevailing economic and market conditions in an attempt to achieve capital appreciation, including, if appropriate, a concentration of investments in a relatively small group of strategies or hedge fund managers. Accordingly, the identity and number of hedge fund managers is likely to change over time.
As at September 30, 2002, our investment portfolio also included $13.9 million of mezzanine bond and equity limited partnership investments at fair values, with values ranging from $0.2 million to $7.7 million and remaining aggregate cash call commitments in respect of such investments of $1.1 million.
Hedge funds and other limited partnership investments are accounted for under the equity method. Total investment income for the nine months ended September 30, 2002, included $6.1 million attributable to hedge funds and other limited partnership investments.
Our hedge fund and other privately held securities program should be viewed as exposing us to the risk of substantial losses, which we seek to reduce through our multi-asset and multi-management strategy. There can be no assurance, however, that this strategy will prove to be successful.
Liquidity
The primary sources of liquidity for our principal operating subsidiaries are net cash flow from operating activities (including interest income from investments), the maturity or sale of investments, borrowings, capital contributions and advances. Funds are applied primarily to the payment of claims, operating expenses, income taxes and to the purchase of investments. Premiums are typically received in advance of related claim payments.
Net cash flow provided by operations was $24.1 million in the third quarter of 2002 compared to $9.6 million used by operations in the third quarter of 2001 due to the effects of timing of collection of receivables and reinsurance recoverables and payments of losses. Because of the nature of the coverages we provide, which typically can produce infrequent losses of high severity, it is not possible to accurately predict our future cash flows from operating activities. As a consequence, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years.
In connection with the capitalization of PXRE Lloyd's Syndicate 1224, PXRE Reinsurance had placed on deposit a $35.6 million par value U.S. Treasury security as collateral for Lloyd's. Cash and invested assets held by PXRE Lloyd's Syndicate 1224 amounting to $14.6 million at September 30, 2002, are restricted from being paid as a dividend through June 2003.
Other commitments and pledged assets include (a) letters of credit amounting to $14.9 million which are secured by cash and securities amounting to $15.1 million, (b) securities with a par value of $9.1 million on deposit with various state insurance departments in order to comply with insurance laws, (c) securities with a par value of $31.5 million deposited in a trust for the benefit of a cedent in connection with a finite reinsurance transaction, (d) funding commitments to certain limited partnerships of $1.1 million, (e) a commitment to lend up to $7 million to finance the construction of an office building that we intend to use as our headquarters in Bermuda, and (f) commitments under the credit agreement discussed above.
In addition, we may be subject to gains and losses resulting from currency fluctuations because substantially all of our investments are denominated in U.S. dollars, while some of our net liability exposure is in currencies other than U.S. dollars. We hold, and expect to continue to hold, currency positions and have made, and expect to continue to make, investments denominated in foreign currencies to mitigate, in part, the effects of currency fluctuations on our results of operations. Currency holdings and investments denominated in foreign currencies do not constitute a material portion of our investment portfolio and, in the opinion of our management, are sufficiently liquid for our needs.
Dividends declared to common shareholders in the third quarter of 2002 and 2001 were $0.7 million. The expected annual dividend based on common shares outstanding at September 30, 2002 is approximately $2.9 million.
Book value per common share, on a fully converted basis, was $20.05 at September 30, 2002.
All amounts classified as reinsurance recoverable at September 30, 2002 are considered by our management to be collectible in all material respects.
Certain Transactions
PXRE Reinsurance is a party to a retrocessional agreement (as amended from time to time, the "Select Re Quota Share Agreement") with Select Reinsurance Ltd. ("Select Re"), pursuant to which we offer to cede a proportional share of our non-casualty reinsurance business. In 2001, the proportional share of our non-casualty business ceded to Select Re under that agreement was 16.5%. This proportional share has been reduced to 8.0% for 2002. As a complement to the Select Re Quota Share Agreement, we cede an additional proportional share to Select Re on certain agreed risks under a variable quota share agreement. In connection with the Select Re Quota Share Agreement, we have entered into an undertaking to present Select Re with aggregate annual premiums equal to a minimum of 20% of Select Re's shareholders' equity (as defined in the undertaking). In return, Select Re is obligated to pay us a management fee based on the gross premiums ceded to them under these quota share agreements. During the first nine months of 2002, we ceded reinsurance premiums of $56.1 million to Select Re and earned management fees and ceding commissions of $6.2 million.
As of September 30, 2002, net assets of $100.4 million were due in the aggregate from Select Re, all of which is fully secured by way of reinsurance trusts, or funds withheld by us. In addition to the collateralization requirements, we have various additional protections to ensure Select Re's performance of its obligations to us. In this regard, pursuant to the Select Re Quota Share Agreement, among other rights, we have the right to designate one member of Select Re's board of directors and we have the right to limit the amount of non-PXRE reinsurance business assumed by Select Re.
Select Re is a Class 3 Bermuda reinsurance company that was formed in 1997. As of March 31, 2002, it had shareholders' equity of approximately $177 million and is privately owned by approximately 120 shareholders. In accordance with our contractual rights under the Select Re Quota Share Agreement, we had designated Gerald L. Radke, our Chairman and Chief Executive Officer, to serve on Select Re's board of directors. In addition, Jeffrey L. Radke, our President and Chief Operating Officer, also sits on Select Re's board. Prior to joining us in 1999, Jeffrey Radke had served as the President of Select Re and had been appointed to Select Re's board while he served in that capacity. Mr. Gerald Radke resigned from Select Re's board in March 2002 and Mr. Jeffrey Radke is now acting as our designee on their board of directors. Neither individual received any remuneration for serving on Select Re's board.
As of December 31, 2001, Select Re held 1,112,200 of the Company's Common Shares, but subsequently liquidated its position in the open market during February 2002. Gerald Radke, Jeffrey Radke and Halbert Lindquist, one of our directors, each individually holds Select Re shares, but each such person holds less than 1% of Select Re's outstanding shares. Gerald Radke and Jeffrey Radke have both given notice of redemption to Select Re to sell their shares and the sale is expected to be completed during the first quarter of 2003. Mr. William Michaelcheck is the Chairman of the Board of Select Re and also one of its founding shareholders. Mr. Michaelcheck is also the President and sole shareholder of Mariner Investment Group, Inc. ("Mariner"). Mariner acts as the investment manager for our hedge fund and alternative investment portfolio.
The Company's Board of Directors reviews the various transactions with Select Re at each of its meetings. In addition, the Board has required that the Company cannot enter into any transaction with Select Re without the prior approval of the Company's Chief Financial Officer.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have reviewed our exposure to market risks at September 30, 2002 and the changes in exposure since December 31, 2001. Interest rate and credit risk remain the principal market risks we are exposed to. The additional risks associated with our hedge fund investments are described earlier.
The composition of our fixed maturity portfolio did not materially change during the third quarter of 2002. There was no material change in our exposure to market risks or our risk management strategy during the third quarter. The fair value of our hedge fund investments decreased by $3.1 million due to net redemptions in the quarter.
Item 4. Controls and Procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of November 6, 2002 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Based on that evaluation, our management, including our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective as of November 6, 2002. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the last evaluation of such internal controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In May 1999, PXRE Delaware entered into weather option agreements with two counterparties. In April 2000, these counterparties submitted invoices to PXRE Delaware in the aggregate sum of $8.25 million seeking payment under the weather option agreements, which invoices have been paid. PXRE Delaware insured its obligations under these weather option agreements through two Commercial Inland Marine Weather Insurance Policies issued by Terra Nova Insurance Company Limited ("Terra Nova"). PXRE Delaware submitted claims under these policies to Terra Nova in April 2000. Terra Nova had denied coverage, contending that its Managing General Agent had no authority to issue these policies.
PXRE Delaware disagreed with Terra Nova's denial and filed suit against Terra Nova in the United States District Court for the District of New Jersey. On June 10, 2002, PXRE Delaware was awarded a verdict of $8.25 million plus accumulated interest of $1.5 million by a jury at the conclusion of the trial of this dispute. The aggregate sum of $9.75 million is included in Other Assets. Terra Nova has appealed this verdict to the United States Court of Appeals for the Third Circuit, but management has concluded that it is realizable and that no valuation allowance is necessary.
Item 2. Changes in Securities and Use of Proceeds.
During the quarter ended September 30, 2002, the Company issued the following securities in transactions that were not registered under the Securities Act of 1933, as amended (the "Act"):
(a) Securities sold. On September 30, 2002, the Company issued 305.8 Convertible Voting Preferred Shares to the existing holders of the Company's Convertible Preferred Shares in payment of its dividend obligation thereon. The 305.8 Convertible Voting Preferred Shares issued were allocated among Series as follows:
i. 152.9 shares of Series A Convertible Voting Preferred Shares, allocated to two sub-series of shares, 101.9 shares allocated to sub-series Al and 51 shares allocated to sub-series A2;
ii. 101.9 shares of Series B Convertible Voting Preferred Shares, allocated to two sub-series of shares, 67.9 shares allocated to Series B1 and 34 shares allocated to Series B2; and
iii. 51.0 shares of Series C Convertible Voting Preferred Shares, allocated to two sub-series of shares. 34.0 shares allocated to Series Cl and 17.0 shares allocated to Series C2.
(b) Underwriters and other purchasers. No underwriter participated. The additional Convertible Voting Preferred Shares were issued to the holders of record on September 13, 2002 of the outstanding Convertible Voting Preferred Shares.
(c) Consideration. The Convertible Voting Preferred Shares were issued in satisfaction of the Company's obligation to pay a quarterly dividend of $3.05 million to the holders of the outstanding Convertible Voting Preferred Shares.
(d) Exemption from registration claimed. Exemption from registration under the Act was claimed based upon Section 4(2) of the Act as a sale by an issuer not involving a public offering.
(e) Terms of conversion and exercise. The description of the terms of the Preferred Shares contained in Part II, Item 5 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001 is incorporated herein by reference.
(f) Use of proceeds. Not applicable.
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 and Reports on Form 8-K.
a. Exhibits
Employment Contract, dated as of August 6, 2002, between PXRE Group Ltd. and Guy D. Hengesbaugh;
Consulting and Separation Agreement, dated as of July 23, 2002, between PXRE Group Ltd. and James F. Dore;
Third Amendment to First Amended and Restated Credit Agreement, Consent
and Waiver dated as of the 8th day of November, 2002 between PXRE
Corporation, PXRE GROUP LTD., PXRE REINSURANCE (BARBADOS) LTD., and
WACHOVIA BANK, NATIONAL ASSOCATION( formerly known as First Union Bank)
99.1 Certification by the Chief Executive Officer and Chief Financial
Officer Relating to a Periodic Report Containing Financial Statements
38
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b. Current Reports on Form 8-K
None.
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Exhibit Number Description
-------------- -----------
10.1 Employment Contract, dated as of August 6, 2002, between
PXRE Group Ltd. and Guy D. Hengesbaugh
10.2 Consulting and Separation Agreement, dated as of July 23,
2002, between PXRE Group Ltd. and James F. Dore
10.3 Third Amendment to First Amended and Restated Credit
Agreement, Consent and Waiver dated as of the 8th day of
November, 2002 between PXRE Corporation, PXRE GROUP LTD.,
PXRE REINSURANCE (BARBADOS) LTD., and WACHOVIA BANK,
NATIONAL ASSOCIATION (formerly First Union Bank).
99.1 Certification by the Chief Executive Officer and Chief
Financial Officer Relating to a Periodic Report Containing
Financial Statements
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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.
November 12, 2002 By: /s/ John M. Modin
---------------------------
John M. Modin
Senior Vice President
and Chief Financial Officer
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Certifications
I, Gerald L. Radke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PXRE Group Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Gerald L. Radke
-----------------------
Gerald L. Radke
Chief Executive Officer
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I, John M. Modin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PXRE Group Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ John M. Modin
-----------------------
John M. Modin
Chief Financial Officer
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EXHIBIT 10.1
This EMPLOYMENT AGREEMENT (this "Agreement"), dated as of August 6, 2002 (the "Effective Date"), is hereby made by and between PXRE GROUP LTD., a Bermuda company (the "Company"), and GUY D. HENGESBAUGH, an individual (the "Executive").
WHEREAS, the Company desires to employ the Executive and to enter into this Agreement to set forth the terms of such employment; and
WHEREAS, the Executive desires to enter into such employment and enter into this Agreement.
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT AND DUTIES
1.1. General. The Company hereby employs the Executive, and the Executive hereby agrees to serve the Company, as Executive Vice President of the Company, upon the terms and subject to the conditions herein contained.
The Executive shall perform such other duties and services for the Company and its affiliates, commensurate with the Executive's position, as may be designated from time to time by the President, the Chief Executive Officer (the "CEO") or Board of Directors of the Company (the "Board"). The Executive agrees to serve the Company faithfully and to the best of his ability under the direction of the President, the CEO and the Board.
1.2. Extent of Services. Except as may otherwise be approved in advance by the Board, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Executive shall devote his full working time throughout his period of employment with the Company to the services required of him under this Agreement. The Executive shall use his best efforts, judgment and energy to improve and advance the business, reputation and interests of the Company in a manner consistent with the duties of his position.
1.3. Term of Employment. The Executive's employment under this Agreement shall commence as of the Effective Date and shall terminate on of the earlier of July 31, 2003 and the date of termination of the Executive's employment pursuant to Section 4 or 5. The period commencing on the Effective Date and ending on July 31, 2003 is hereinafter referred to as the "Employment Term".
2. COMPENSATION
2.1. Base Salary. From the Effective Date through the end of the Executive's employment hereunder, the Executive shall be entitled to receive a base salary ("Base Salary") at a rate of US$350,000 per annum, payable in arrears in equal installments in accordance with the Company's payroll practices, with such increases as may be granted to the Executive in accordance with Company policy. Once increased, such higher amount shall constitute the Executive's annual Base Salary.
2.2. Annual Review. The Executive's Base Salary shall be reviewed by the President, based upon the Executive's performance, not less often than annually, and may be increased but not decreased during the Employment Term.
2.3. Annual Incentive Bonus Plan. Subject to the provisions of Section 4.2, the Executive shall be entitled to participate annually during the Employment Term in the Company's Restated Employee Annual Incentive Bonus Plan (the "Bonus Plan"), or such substitute plan as shall be established from time to time by Company, which provides for the payment of annual bonuses to key employees of the Company, subject to the terms and conditions of the Bonus Plan or such substitute plan, as the case may be.
2.4. Equity Grants. Subject to the provisions of Section 4.2, the Executive shall be entitled to participate annually during the Employment Term in the Company's 2002 Officer Incentive Plan (the "Incentive Plan"), or such substitute plan as shall be established from time to time by Company, which provides for the grant of stock options and restricted shares of Company stock to key employees of the Company, subject to the terms and conditions of the Incentive Plan or such substitute plan, as the case may be.
2.5. Severance Plan. During the Employment Term, the Executive will not be eligible to participate in the Company's Amended and Restated Severance Plan for Certain Executives.
2.6. Housing Allowance. The Company shall provide the Executive with a housing allowance at an annual rate of US$120,000 for the Employment Term with such allowance payable to the Executive in monthly installments.
3. EMPLOYEE BENEFITS
3.1. In General. The Executive and his dependents shall, during his employment under this Agreement, be included to the extent eligible thereunder in all pension, 401(k), health, medical, life, disability or other similar plans or benefits which shall be established by the Company from time to time for, or made available to, its executives.
4. TERMINATION OF EMPLOYMENT
4.1. Termination Without Cause; Resignation for Good Reason.
4.1.1. General. Subject to the provisions of Sections 4.1.2
and 4.1.3, ifthe Executive's employment is terminated by the Company
without Cause (as defined in Section 4.3), or if the Executive
terminates his employment hereunder for Good Reason (as defined in
Section 4.4), the Company shall pay the Executive severance pay in an
amount equal to the sum of (i) the Base Salary (at a rate in effect on
the date of such termination or, if a reduction in Base Salary is the
basis for termination for Good Reason, then the Base Salary in effect
immediately prior to such reduction), plus (ii) the amount of the
annual housing allowance payable pursuant to Section 2.6. Such
severance pay shall be payable at such intervals as the same would have
been paid had the Executive remained in the active service of the
Company. In addition, the Executive and his dependents shall continue
to participate in the benefit plans described in Section 3.1 for a
period of one year from the date of termination or resignation pursuant
to this Section 4.1.1; provided, however, that the Company may, at its
option, pay to the Executive the present value of the aggregate dollar
value of such benefits, without the necessity to provide the respective
benefits to the Executive set forth in Section 3.1 hereof. The
Executive shall have no further right to receive any other compensation
or benefits after such termination or resignation of employment except
as determined in accordance with the terms of the employee benefit
plans or programs of the Company except that he shall receive payment
for earned but unused vacation. Salary continuation payments made and
benefits provided to the Executive pursuant to this Section 4.1.1 shall
be reduced by compensation earned and benefits received by the
Executive from a subsequent employer during 12-month period following
termination of employment (the "Severance Period").
4.1.2. Conditions Applicable to the Severance Period. If, during the Severance Period, the Executive breaches his obligations under Section 7 of this Agreement, the Company may terminate the Severance Period and cease to make any further payments or provide any benefits described in Section 4.1.1.
4.1.3. Death During Severance Period. In the event of the Executive's death during the Severance Period, all remaining severance pay due to the Executive unde Section 4.1.1 shall be payable immediately to the Executive's designated beneficiary.
4.1.4. Date of Termination. The date of termination of employment without Cause shall be the date specified in a written notice of termination to the Executive. The date of resignation for Good Reason shall be the date specified in the written notice of resignation from the Executive to the Company; provided, however, that no such written notice shall be effective unless the cure period specified in Section 4.4 has expired without the Company having corrected the event or events subject to cure. If no date of resignation is specified in the written notice from the Executive to the Company, the date of termination shall be the first day following the expiration of such cure period.
4.2. Termination for Cause; Resignation Without Good Reason.
4.2.1. General. If, prior to the expiration of the Employment Term, the Executive's employment is terminated by the Company for Cause, or the Executive resigns from his employment hereunder other than for Good Reason, the Executive shall be entitled only to payment of his Base Salary as then in effect through and including the date of termination or resignation together with payment for earned but unused vacation. The Executive shall have no further right to receive any other severance, compensation or benefits after such termination or resignation of employment, except as determined in accordance with the terms of the employee benefit plans or programs of the Company.
4.2.2. Date of Termination. Subject to the proviso to Section 4.3, the date of termination for Cause shall be the date specified in a written notice of termination to the Executive. The date of resignation without Good Reason shall be the date specified in the written notice of resignation from the Executive to the Company, or if no date is specified therein, 10 business days after receipt by the Company of written notice of resignation from the Executive.
4.3. Cause. Termination for "Cause" shall mean termination of the Executive's employment because of:
(a) any wilful act or omission that constitutes a material breach by the Executive of any of his obligations under this Agreement;
(b) the wilful and continued failure or refusal of the Executive to substantially perform the material duties required of him as an employee of the Company;
(c) any wilful material violation by the Executive of any law or regulation applicable to the business of the Company or any of its subsidiaries or affiliates, or the Executive's conviction of or plea of nolo contendere to a felony or a crime involving moral turpitude, or any wilful perpetration by the Executive of a common law fraud; or
(d) any other wilful misconduct by the Executive that is injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or any of its subsidiaries or affiliates;
provided, however, that if any such Cause relates to the Executive's obligations under this Agreement and is susceptible to cure, the Company shall not terminate the Executive's employment hereunder unless the Company first gives the Executive notice of its intention to terminate and of the grounds for such termination, and the Executive has not, within 10 business days following receipt of the notice, cured such Cause.
For purposes of this Section 4.3, an "affiliate" of a person or other entity shall mean a person or other entity that directly or indirectly controls, is controlled by, or is under common control with, the person or entity specified.
4.4. Good Reason. For purposes of this Agreement, "Good Reason" shall mean either of the following (occurring without the Executive's prior consent):
(a) a decrease in the Executive's base rate of compensation, or a failure by the Company to pay material compensation due and payable to the Executive in connection with his employment; or
(b) the failure by the Company to obtain an agreement from a successor to assume and agree to perform this Agreement in accordance with the second sentence of Section 8.3;
provided, however, that if any such Good Reason is susceptible of cure, the Executive may not resign for Good Reason unless the Executive first gives the Company notice of his intention to resign and of the grounds for such resignation, and the Company has not, within 10 business days following receipt of the notice, cured such Good Reason, or in the event that such Good Reason is not susceptible to cure within such 10 business day period, the Company has not taken all reasonable steps within such 10 business day period to cure such Good Reason as promptly as practicable thereafter.
5. DEATH OR DISABILITY
In the event of termination of the Executive's employment by reason of death or Permanent Disability (as hereinafter defined), the Executive (or his estate, as applicable) shall be entitled to Base Salary and benefits determined under Sections 2 and 3 through the date of termination. Other benefits shall be determined in accordance with the benefit plans maintained by the Company, and the Company shall have no further obligation hereunder. For purposes of this Agreement, "Permanent Disability" means a physical or mental disability or infirmity of the Executive that prevents the normal performance of substantially all his duties as an employee of the Company, which disability or infirmity shall exist, or in the option of an independent physician is reasonably likely to exist, for any continuous period of 180 days.
6. NO MITIGATION OF DAMAGES
The Executive shall not be required to mitigate the amount of any payment provided for in Section 4.1 by seeking other employment.
7. CONFIDENTIALITY
7.1. Confidentiality. The Executive agrees that during the Employment
Term and thereafter he will not, except in the performance of his obligations to
the Company hereunder or as may otherwise be approved in advance by the Board,
directly or indirectly, disclose or use (except for the direct benefit of the
Company) any confidential information that he may learn or has leaned by reason
of his association with the Company, any client or any of their respective
subsidiaries and affiliates. The term "confidential information" includes all
data, analyses, reports, interpretations, forecasts, documents and information
concerning or otherwise reflecting information and concerning the Company and
its affairs, including, without limitation, with respect to clients, products,
policies, procedures, methodologies, trade secrets and other intellectual
property, systems, personnel, confidential reports, technical information,
financial information, business transactions, business plans, prospects or
opportunities, but shall exclude any portion of such information that (a) was
acquired by the Executive prior to his employment by, or other association with,
the Company, (b) is or becomes generally available to the public or is generally
known in the industry or industries in which the Company operates, in each case
other than as a result of disclosure by the Executive in violation of this
Section 7.1 or (c) the Executive is required to disclose under any applicable
laws, regulations or directives of any government agency, tribunal or authority
having jurisdiction in the matter or under subpoena or other process of law.
7.2. Exclusive Property. The Executive confirms that all confidential information with respect to the Company is and shall remain the exclusive property of the Company. All business records, papers and documents kept or made by the Executive relating to the business of the Company shall be and remain the property of the Company, except for such papers customarily deemed to be the personal copies of the Executive.
7.3. Injunctive Relief. Without intending to limit the remedies available to the Company, the Executive acknowledges that a breach of any of the covenants contained in this Section 7 may result in material and irreparable injury to the Company and its affiliates and subsidiaries for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to seek a temporary restraining order or a preliminary or permanent injunction restraining the Executive from engaging in activities prohibited by this Section 7 or such other relief as may be required specifically to enforce any of the covenants in this Section 7. If for any reason it is held that the restrictions under this Section 7 are not reasonable or that consideration therefor is inadequate, such restrictions shall be interpreted or modified to include as much of the duration and scope identified in this Section 7 as will render such restrictions valid and enforceable.
8. MISCELLANEOUS
8.1. Notices. All notices or communications hereunder shall be in writing, addressed as follows:
To the Company:
PXRE Group Ltd.
99 Front Street
Hamilton HM 12
Bermuda
Fax: 441-296-6162
Attn: President
To the Executive:
Guy D. Hengesbaugh
99 Front Street
Hamilton HM 12
Bermuda
Fax: 441-296-6162
All such notices shall be conclusively deemed to be received and shall be effective, (a) if sent by hand delivery or courier service, upon receipt, (b) if sent by telecopy or facsimile transmission, upon confirmation of receipt by the sender of such transmission or (c) if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed.
8.2. Severability. Each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.
8.3. Assignment. The Company's rights and obligations under this Agreement shall not be assignable by the Company except as incident to a reorganization, merger or consolidation, or transfer of all or substantially all the Company's business and properties (or portion thereof in which the Executive is employed). The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Neither this Agreement nor any rights hereunder shall be assignable or otherwise subject to hypothecation by the Executive.
8.4. Entire Agreement. Except as expressly set forth herein, this Agreement represents the entire agreement of the parties and shall supersede any and all previous contracts, arrangements or understandings between the Company and the Executive. This Agreement may be amended at any time by mutual written agreement of the parties hereto.
8.5. Withholding. The payment of any amount pursuant to this Agreement shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans, if any.
8.6. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of Bermuda with regard to any conflict of law rules that might apply the laws of any other jurisdiction.
8.7. Waiver. No waiver by either party of any breach by the other party of any condition or provision contained in this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or an authorized officer of the Company, as the case may be.
8.8. Headings. The headings of the sections contained in this Agreement are for convenience of reference only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and the Executive has hereunto set his hand, as of the day and year first above written.
PXRE GROUP LTD.
By /s/ Jeffrey L. Radke --------------------------------- Name: Jeffrey L. Radke Title: President & Chief Operating Officer |
GUY D. HENGESBAUGH
/s/ Guy D. Hengesbaugh --------------------------------- |
EXHIBIT 10.2
July 23, 2002
James F. Dore
Re: Consulting and Separation Agreement
Dear Jim:
This consulting and separation agreement (this "Letter Agreement") confirms your retirement and the resulting termination of your status as an officer, director and employee of and with PXRE Group Ltd. (the "Company"), and each of the Company's direct and indirect subsidiaries (including, without limitation, PXRE Reinsurance Company), such retirement and termination to be effective upon September 30, 2002 (the "Retirement Date"). In order to be eligible to receive the benefits set forth in Section 4 of this Letter Agreement, you must execute it no later than August 14, 2002.
For good and valuable consideration, the receipt of which is hereby acknowledged, you and the Company mutually agree as follows:
1. Retirement and Resignation as Employee, Officer and Director. Your execution of this Letter Agreement hereby confirms in writing your desire to retire and terminate your status as an employee, director and officer of the Company and any and all of its subsidiaries, effective as of the Retirement Date.
2. Retirement Benefits. Pursuant to the various benefit plans of the Company and its subsidiaries, as a result of your retirement, this will confirm that you are entitled to the following benefits, subject, in each case, to applicable statutory deductions and withholdings:
(a) Incentive Plan. Pursuant to, and subject to the terms of, the 1992 Officer Incentive Plan:
i) All following Non-Qualified Options and Restricted
Shares (as such terms are defined in such plan) will
immediately vest upon the Retirement Date:
---------------------- -------------------- ------------------------
Type of Security No. of Securities Date of Grant
---------------------- -------------------- ------------------------
Non-Qualified Options 25,000 2/08/2000
---------------------- -------------------- ------------------------
Non-Qualified Options 26,250 2/12/2001
---------------------- -------------------- ------------------------
Non-Qualified Options 40,000 12/10/2001
---------------------- -------------------- ------------------------
Non-Qualified Options 35,000 2/12/2002
---------------------- -------------------- ------------------------
Restricted Shares 2,500 2/08/2000
---------------------- -------------------- ------------------------
Restricted Shares 7,500 2/12/2001
---------------------- -------------------- ------------------------
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ii) All of the foregoing Non-Qualified Options and any Non-Qualified Options that vested prior to the date of this Letter Agreement may be exercised by you at any time between the Retirement Date and the third anniversary date of the Retirement Date.
(b) Bonus Plan. Pursuant to, and subject to the terms of, the Restated Employee Annual Incentive Bonus Plan, you will be entitled to receive 9/12ths of the Cash and Restricted Share Bonuses (as defined and calculated under such plan) payable to Executive Vice Presidents under such plan with respect to the 2002 fiscal year, provided that, as a result of your retirement, the Restricted Share Bonus, if any, shall be payable in cash rather than Restricted Shares. In accordance with, and subject to terms of, the Restated Employee Annual Incentive Bonus Plan, any bonuses payable thereunder shall be paid to you no later than February 28, 2003.
(c) Employee Stock Purchase Plan. In accordance with the terms of the Employee Stock Purchase Plan, your account balance under such plan will be applied to purchase Shares at the Option Price on July 1, 2002, the last Exercise Date (as such terms are defined thereunder). Any remaining balance in your account under such plan will be refunded and all payroll deductions will cease as of July 1, 2002.
(d) Pension Plan. Given your length of service with the Company, you are not entitled to receive any benefits under the PXRE Reinsurance Company Retirement Plan.
(e) 401 K Plan. Pursuant to the terms of the PXRE Reinsurance Company 401(k) Plan, you are fully vested in all employer contributions made by the Company to your account maintained thereunder as a result of your length of service. Please consult with Linda Clauser to discuss the various options available to you for maintenance or distribution of your 401(k) account.
(f) SERP. Pursuant to, and subject to the terms of, the PXRE Reinsurance Company Supplemental Executive Retirement Plan ("SERP"), you are not entitled to any Supplemental Plan Benefits under Part B of the SERP due to insufficient Years of Credited Service. You are, however, entitled to receive an amount equal to the full amount of your Participant's Account under Part C of the SERP, including any Employer Contributions made pursuant to Section 6.2 of the SERP. Pursuant to Section 6.4(a) of the Plan, you have elected to receive such amount in a lump sum payable upon the Retirement Date.
3. Consulting Services. From the Retirement Date until September 30, 2003 (the "Consulting Period"), you agree to make yourself available for consultation with the Company and its subsidiaries to provide, as requested, advice and information with respect to the business of the Company and its subsidiaries, especially with respect to the Company's financial affairs. You shall be entitled to a cash payment in the amount of $15,000 per month, payable monthly during the Consulting Period.
4. Additional Payments and Benefits. In addition to the retirement related benefits under Section 2, you shall be entitled to the following payments and benefits, subject, in each case, to applicable statutory deductions and withholdings. Your right to receive and retain these payments and benefits shall be subject to your material compliance with the terms of this Letter Agreement (including, but not limited to, Sections 7 and 8 hereof).
(a) Upon the Retirement Date, you shall be paid the $90,000 retention bonus that would have been payable to you on January 31, 2003 pursuant to the Retention Bonus Letter Agreement dated as of December 12, 2001 if you had remained in the Company's employ until January 31, 2003.
(b) If any Cash and Restricted Share Bonuses are payable pursuant to the Restated Employee Annual Incentive Bonus Plan with respect to the 2002 fiscal year, you will be entitled to receive the remaining 3/12ths of the Cash and Restricted Share Bonuses (as defined and calculated under such plan) payable to Executive Vice Presidents under such plan that would not be otherwise be payable to you under such plan due to your retirement, provided that, as a result of your retirement, the Restricted Share Bonus, if any, shall be payable in cash rather than Restricted Shares. Such bonuses, if payable, shall be paid to you no later than February 28, 2003.
(c) The balance due from you to PXRE Reinsurance Company under the Promissory Note dated September 13, 2001 will be forgiven on the Retirement Date.
5. Cessation of all other Compensation and Benefits. From and after the Retirement Date, and except as otherwise expressly set forth in this Letter Agreement, you will not receive compensation, payments or benefits of any kind from the Company or its subsidiaries, and you expressly acknowledge and agree that, except with respect to the payments and benefits specifically set forth in this Letter Agreement, you are not entitled to any compensation, payment or benefit whatsoever, including, without limitation, any right to payment under Amended and Restated Severance Plan for Certain Executives of PXRE Group Ltd.
6. Payment is in Consideration of Release and Other Continuing
Obligations. You understand and agree that the payments provided for in
Section 4 of this Letter Agreement are being provided to you in
consideration for your acceptance and execution of, and in reliance
upon your agreements in, this Letter Agreement, including but not
limited to the release contained herein.
7. Non-Disparagement. You agree that you will not, directly or indirectly, disparage (whether in writing or orally) the Company or the Releasees (as defined below) in any manner whatsoever at any time.
8. Confidential Information. Except as may be required by the lawful order of a court or agency of competent jurisdiction, or except to the extent that you have express authorization from the Company, you hereby agree to keep secret and confidential indefinitely all non-public information (including, without limitation, information regarding any pending or threatened litigation, arbitrations or disputes) concerning the Company or its subsidiaries which was acquired by or disclosed to you during the course of your employment with the Company and its subsidiaries, or during the course of your consultation with the Company following your retirement, and to not to disclose same, either directly or indirectly, to any other person, firm or business entity, or use it in any way. To the extent that you obtained information on behalf of the Company or its Subsidiaries that may be subject to attorney-client privilege as to the Company's attorneys, you agree to take reasonable steps to maintain the confidentiality of such information and to preserve such privilege.
9. Release.
You hereby agree to accept the compensation, payments and
benefits provided for in Section 4 hereof in full resolution and
satisfaction of, and hereby IRREVOCABLY AND UNCONDITIONALLY RELEASE,
REMISE AND FOREVER DISCHARGE the Company, its past, present and future
direct and indirect parents, subsidiaries, affiliates, divisions,
predecessors, successors, and assigns, and their respective current and
former officers, directors, shareholders, representatives, agents and
employees, in their official and individual capacities, jointly and
individually (the "Releasees") from, any and all agreements, promises,
liabilities, claims and demands of any kind whatsoever, in law or
equity, whether known or unknown, suspected or unsuspected, fixed or
contingent, apparent or concealed, which you, your respective heirs,
executors, administrators, successors or assigns ever had, now have or
in the future may have, including, without limitation, any and all
claims arising out of or relating to your employment, your compensation
and benefits with the Company and/or the termination thereof, your
status as a stockholder of the Company and any and all contract, tort
or fraud claims, claims for defamation or other personal injury, claims
under any federal, state or municipal wage payment, discrimination or
fair employment practices law, statute or regulation and claims for
costs, expenses and attorneys' fees with respect thereto, arising from
the beginning of the world through the effective date of this Letter
Agreement, in each case, against the Company or any of the Releasees,
other than any claims with respect to the Company's breach of this
Letter Agreement. However, it is agreed that you do not waive your
rights for coverage or indemnification under any directors & officers
policy, or pursuant to the certificate of incorporation or the by-laws
of the Company for acts or omissions occurring during your employment.
THIS RELEASE AND WAIVER INCLUDES, WITHOUT LIMITATION, ANY AND ALL
CLAIMS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT, 29 U.S.C.
Section 621-634 (the "ADEA").
You represent and warrant as of the date hereof (i) that you have not filed any claim or demand for relief against the Company or Releasees, (ii) that there are no outstanding claims, or other claims or demands for relief within the meaning of this Section 9, and (iii) that there has been no assignment of any such claims.
10. Future Cooperation. You agree that upon the Company's reasonable request (whether during or after the Consulting Period), you will use reasonable efforts to assist and cooperate with the Company and the Releasees in connection with the defense or prosecution of any claim that may be made against or by the Company or the Releasees, or in connection with any ongoing or future investigation or dispute or claim of any kind involving the Company or the Releasees, including any proceeding before any arbitral, administrative, regulatory, self-regulatory, judicial, legislative, or other body or agency. You will not be paid any additional amounts for any assistance that you provide, although you will be entitled to reimbursement for reasonable out-of-pocket expenses.
11. Successors and Assigns. This Letter Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective successors and assigns, including but not limited to (i) with respect to the Company, any entity with which the Company may merge or consolidate or to which the Company may sell substantially all of its assets, and (ii) with respect to you, your executors, administrators, heirs and legal representatives. In the event of your death, all amounts due hereunder shall be accelerated and immediately payable to your estate.
12. Severability; Headings. In the event that any provision of this Letter Agreement shall be held by a court of proper jurisdiction to be invalid, void or voidable or otherwise unenforceable, the balance of this Letter Agreement shall continue in full force and effect unless such construction would clearly be contrary to the intentions of the parties or would result in an unconscionable injustice. The headings of the sections and paragraphs of this Letter Agreement are for convenience of reference only and shall not constitute a part hereof.
13. Miscellaneous: Choice of Law. This Letter Agreement may be executed in several counterparts, each or which shall be deemed to be an original but all of which together will constitute one and the same instrument. This Letter Agreement constitutes the entire agreement, and supersedes all prior agreements, of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than those contained herein and therein. This Letter Agreement cannot be modified, altered or amended except by a writing signed by all the parties. No waiver by either party of any provision or condition of this Letter Agreement at any time shall be deemed a waiver of such provision or condition at any prior or subsequent time or of any provision or condition at the same or any prior or subsequent time. This Letter Agreement shall be governed by and construed in accordance with the domestic laws of the State of New Jersey, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New Jersey or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New Jersey.
14. Facsimile Signatures Valid. Execution of this Letter Agreement with signatures transmitted via facsimile shall be considered valid.
* * * *
If this Letter Agreement conforms to your understanding and is acceptable to you, please indicate your agreement by signing and dating the enclosed copy of this Letter Agreement where indicated and returning it to the Company. You acknowledge and agree that you have been provided with the opportunity to have a period of at least 21 days in which to review and consider this Letter Agreement, and you have used such review period to the extent desired by you. After your execution of this Letter Agreement, you will then be permitted to revoke this Letter Agreement in writing at any time during the period of seven days following the execution thereof. In the event that you execute this Letter Agreement, this Letter Agreement will not be effective or enforceable, and no payments will be made hereunder, until the seven-day revocation period has expired; upon the expiration of such seven day period after your execution (and assuming no revocation), this Letter Agreement shall become effective. In the event that you fail to execute this letter by November 8, 2002, or if you execute this Letter Agreement and subsequently elect to revoke this Letter Agreement in writing pursuant to the terms hereof within such seven day revocation period, this Letter Agreement will be of no force or effect, and no party to this Letter Agreement will have any rights or obligations hereunder.
Sincerely,
By: /s/ Jeffrey L. Radke
----------------------------
Jeffrey L. Radke
President & Chief Operating Officer
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THIS LETTER AGREEMENT IS A LEGAL DOCUMENT. YOU SHOULD CONSULT WITH AN ATTORNEY PRIOR TO SIGNING THIS LETTER AGREEMENT.
BY SIGNING THIS LETTER AGREEMENT YOU ACKNOWLEDGE THAT YOU ARE COMPETENT, THAT YOU HAVE BEEN PROVIDED WITH THE OPPORTUNITY TO HAVE A PERIOD OF AT LEAST 21 DAYS IN WHICH TO REVIEW AND CONSIDER THIS LETTER AGREEMENT WITH AN ATTORNEY OF YOUR CHOICE AND YOU HAVE USED SUCH REVIEW PERIOD TO THE EXTENT YOU DESIRED, THAT YOU HAVE READ AND UNDERSTAND AND VOLUNTARILY ACCEPT THIS LETTER AGREEMENT AS FULLY AND FINALLY RESOLVING, WAIVING AND RELEASING ANY AND ALL CLAIMS WHICH YOU MAY HAVE AGAINST THE COMPANY AND RELEASEES (AS DEFINED HEREIN), INCLUDING ANY AND ALL CLAIMS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT, THAT NO PROMISES OR INDUCEMENTS HAVE BEEN MADE TO YOU EXCEPT AS SET FORTH IN THIS LETTER AGREEMENT, AND THAT YOU HAVE SIGNED THIS LETTER AGREEMENT FREELY AND VOLUNTARILY, INTENDING TO BE LEGALLY BOUND BY ITS TERMS. THE FOREGOING IS A SUMMARY DESCRIPTION OF THE GENERAL IMPORT OF THIS INSTRUMENT AND DOES NOT ALTER OR AMEND THE DETAILED PROVISIONS CONTAINED IN THE BODY HEREOF.
ACCEPTED AND AGREED:
EXHIBIT 10.3
THIRD AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT,
CONSENT AND WAIVER
THIS THIRD AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT,
CONSENT AND WAIVER, dated as of the 8th day of November, 2002 (this "Third
Amendment"), is made in respect of the First Amended and Restated Credit
Agreement dated August 31, 1999, as amended by a First Amendment dated March 29,
2000 and an Amended and Restated Second Amendment dated April 4, 2002 (together,
the "Existing Credit Agreement"), among PXRE CORPORATION, a Delaware corporation
with its principal offices in Edison, New Jersey (the "Borrower"), PXRE GROUP
LTD., a Bermuda corporation ("PXRE Group"), and PXRE REINSURANCE (BARBADOS)
LTD., a Barbados corporation ("PXRE Barbados"), the banks and financial
institutions listed on the signature pages thereof or that become parties
thereto after the date thereof (collectively the "Lenders"), and WACHOVIA BANK,
NATIONAL ASSOCIATION (formerly known as First Union National Bank), as agent for
the Lenders (in such capacity, the "Agent"). Capitalized terms used but not
defined herein shall have the meanings given to such terms in the Existing
Credit Agreement.
RECITALS
The parties agree to amend the Existing Credit Agreement, and the Lenders and Agent agree to grant the necessary consents, in connection with the proposal by PXRE Group to develop the reinsurance business of its Bermuda subsidiary, PXRE Reinsurance Ltd. ("PXRE Bermuda"), subject to the terms and conditions set forth herein.
In addition, Borrower requests certain amendments to the Existing Credit Agreement and a waiver with respect to its failure to comply with certain provisions set forth in Section 7.7(b) of the Existing Credit Agreement.
STATEMENT OF AGREEMENT
NOW, THEREFORE, the Borrower, the Agent and the Lenders, for themselves and their successors and assigns, agree as follows:
ARTICLE I
AMENDMENTS TO EXISTING CREDIT AGREEMENT
1.1 Amendments to Section 1.1. Section 1.1 of the Existing Credit Agreement is hereby amended as follows:
(a) The following definitions are added to the defined terms in Section 1.1 in the appropriate alphabetical order:
"PXRE Bermuda Credit Enhancement Policy" shall mean the Credit Enhancement Policy in the form of Exhibit A to the Third Amendment issued by PXRE Bermuda as of November 8, 2002 for the benefit of the Lenders in which PXRE Bermuda absolutely, unconditionally and irrevocably agreed to pay to the Lenders the full and complete amount of any Obligations when and as the same shall become due (whether at the stated maturity, by acceleration or otherwise) in each case subject to the terms and conditions therein.
"Third Amendment" shall mean the Third Amendment, Consent and Waiver to First Amended and Restated Credit Agreement and Consent, dated as of November 8, 2002, by and between the Borrower, the Guarantors, the Agent and the Lenders.
"Third Amendment Effective Date" shall mean the date upon which all of the conditions of Article III of the Third Amendment are satisfied or waived in writing by the Required Lenders.
(b) The definition of "Agreement" is amended by deleting and replacing it in its entirety with the following:
"Agreement" shall mean the First Amended and Restated Credit Agreement dated August 31, 1999, among the Borrower, PXRE Group, and PXRE Barbados, the Lenders and the Agent, as amended by a First Amendment among such parties dated March 29, 2000, by an Amended and Restated Second Amendment among such parties dated April 4, 2002, and by the Third Amendment among such parties dated November 8, 2002, and as further amended, modified or supplemented from time to time.
(c) The definition of "Credit Documents" is amended by deleting and replacing it in its entirety with the following:
"Credit Documents" shall mean this Agreement, the Notes, the Fee Letter, the Amendment Fee Letter, the PXRE Bermuda Credit Enhancement Policy, and all other agreements, instruments, documents and certificates now or hereafter executed and delivered to the Agent or any Lender by or on behalf of any Credit Party or any of their respective Subsidiaries with respect to this Agreement and the transactions contemplated hereby, in each case as amended, modified, supplemented or restated from time to time.
(d) The definition of "Investment Policy" is amended by deleting and replacing it in its entirety with the following:
"Investment Policy" shall mean the investment policy of PXRE Group and its Subsidiaries as of the Third Amendment Effective Date, as set forth in Schedule 7.5 to the Third Amendment, which shall not have been materially amended, modified and supplemented, other than as approved by the Agent and the Lenders.
1.2 Amendment to Section 7.7(b)(i)(C). Section 7.7(b)(i)(C) of the Existing Credit Agreement is hereby amended by deleting reference to "$30,000,000" appearing in such Section 7.7(b)(i)(C) and inserting the text "$80,000,000", in lieu thereof.
1.3 Amendment to Section 7.7(b)(iv)(B). Section 7.7(b)(iv)(B) of the Existing Credit Agreement is hereby amended by deleting reference to "$3,000,000" appearing in such Section 7.7(b)(iv)(B) and inserting the text "$7,500,000", in lieu thereof.
1.4 Amendment to Section 8.1(c). Section 8.1(c) of the Existing Credit Agreement is hereby amended by inserting the text "(other than the PXRE Bermuda Credit Enhancement Policy")" immediately following each reference to "Credit Documents" appearing therein.
1.5 Amendments to Section 8.1. Section 8.1 of the Existing Credit Agreement is hereby amended by: (a) inserting the word "or" at the end of subsection (l) thereof, and (b) inserting the following new subsection (m) immediately following subsection (l) of such Section 8.1:
"(m) At any time after the execution and delivery thereof, the PXRE Bermuda Credit Enhancement Policy or any provision thereof shall cease to be in full force or effect, or PXRE Bermuda or any Person acting by or on behalf of PXRE Bermuda shall deny or disaffirm its obligations under the PXRE Bermuda Credit Enhancement Policy or PXRE Bermuda shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the PXRE Bermuda Credit Enhancement Policy."
1.6 Amendments to Section 8.1. Section 8.1 of the Existing Credit
Agreement is hereby amended by inserting the text "PXRE Bermuda," immediately
following each reference to "Borrower" appearing in subsections (e), (f), (g),
(h), (j) and (k) of such Section 8.1 therein.
1.7 Schedules 7.5(b) and 7.5(c). Schedules 7.5(b) and 7.5(c) of the Existing Credit Agreement are amended by deleting and replacing them in their entirety with Schedule 7.5 attached hereto.
ARTICLE II
CONSENT AND WAIVER
2.1 Consent to Deed Poll Guarantee. Notwithstanding anything to the contrary contained in Sections 7.2 and 7.7 of the Existing Credit Agreement, but subject to satisfaction of the conditions set forth in Article III, the Agent and the Lenders do hereby consent to the issuance by PXRE Group of the Deed Poll Guarantee (the "Group Guarantee") in the form of Exhibit B hereto in support of the obligations of PXRE Bermuda in favor of the Cedents (as defined therein), provided that (w) the provisions of each reinsurance agreement, binder and slip entered into after the date hereof having the benefit of the Group Guarantee and the performance of the parties thereunder shall not conflict with any condition, covenant or agreement contained in the Existing Credit Agreement or any of the other Credit Documents, (x) each such reinsurance agreement, binder and slip having the benefit of the Group Guarantee shall be entered into in the ordinary course of business of PXRE Bermuda as set forth in Section 7.8 of the Existing Credit Agreement, (y) the obligations incurred by PXRE Group under the Group Guarantee shall not constitute Indebtedness under the Existing Credit Agreement and (z) PXRE Group shall not amend, modify or supplement the Group Guarantee, other than as approved by the Agent and the Required Lenders.
2.2 Waiver. The Borrower has informed the Agent that it has entered into reinsurance agreements with a basis of reinsurance exceeding the thirty percent (30%) quota share limitation set forth in Section 7.7(b)(i)(A) of the Existing Credit Agreement and has failed to provide to the Agent and the Lenders projections required under Section 7.7(b)(i)(B) of the Existing Credit Agreement. The Borrower has requested that the Required Lenders waive such noncompliance with Sections 7.7(b)(i)(A) and 7.7(b)(i)(B) and that the Agent forbear the exercise of its rights pursuant to Sections 8.2 and 8.3 of the Existing Credit Agreement, and the Required Lenders have agreed to provide such waiver on the terms and conditions set forth herein. Accordingly, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Required Lenders hereby agree to waive the Borrower's noncompliance with Sections 7.7(b)(i)(A) and 7.7(b)(i)(B) of the Existing Credit Agreement subject to the delivery of the projections required in Section 7.7(b)(i)(B) prior to the Third Amendment Effective Date. The Borrower understands that as of the Third Amendment Effective Date, all of the requirements of Sections 7.7(b)(i)(A) and 7.7(b)(i)(B) of the Existing Credit Agreement that have been waived as provided herein shall, without any further action by or notice to or from the Agent or any Lender, be in full force and effect, and unless such noncompliance shall have been cured, the Agent shall have all of the rights and remedies provided to it under the Existing Credit Agreement, the other Credit Documents, applicable law or otherwise with respect to such noncompliance as though no waiver had been granted hereunder. The waiver set forth herein is limited and specified, and shall not constitute or be deemed to constitute an amendment, modification or waiver of any provision of the Existing Credit Agreement or waiver of any Default or Event of Default except as expressly set forth herein.
ARTICLE III
CONDITIONS OF EFFECTIVENESS
3.1 Conditions of Effectiveness. This Third Amendment and the amendments and consent provided herein, are subject to the satisfaction of the following conditions precedent:
(a) The Agent shall have received the following, each dated as of the Third Amendment Effective Date and in sufficient executed originals for each Lender:
(1) this Third Amendment, duly completed and executed by the Borrower, each Guarantor, the Agent and each Required Lender;
(2) the PXRE Bermuda Credit Enhancement Policy in the form of Exhibit A attached hereto, duly completed and executed by PXRE Bermuda;
(3) the Group Guarantee in the form of Exhibit B attached hereto, duly completed and executed by PXRE Group;
(4) the favorable opinion of Conyers Dill & Pearman, counsel to PXRE Group and PXRE Bermuda, in form reasonably satisfactory to the Agent and substantially covering such opinion matters as the Agent may reasonably request.
(b) The Agent shall have received a certificate, signed by the president or chief financial officer of each Credit Party, in form and substance satisfactory to the Agent, certifying that (i) all representations and warranties of such Credit Party contained in this Third Amendment, the Existing Credit Agreement (subject to the updating of the representations and warranties therein pursuant to this Third Amendment) and the other Credit Documents are true and correct as of the Third Amendment Effective Date, both immediately before and after giving effect to the consummation of the transactions contemplated hereby, (ii) no Default or Event of Default has occurred and is continuing, both immediately before and after giving effect to the consummation of the transactions contemplated hereby, (iii) both immediately before and after giving effect to the consummation of the transactions contemplated hereby, no Material Adverse Change has occurred since December 31, 2001, and there exists no event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change, (iv) that the articles or certificate of incorporation of such Credit Party, as the case may be, have not been amended, revised or restated since the date of the Second Amendment, and (v) that the bylaws, operating agreement or memorandum and articles of association, as applicable, of such Credit Party, as the case may be, have not been amended, revised or restated since the date of the Second Amendment.
(c) The Agent shall have received certificates of the secretary, clerk or director, as applicable, or an assistant secretary, clerk or director, as applicable, of each Credit Party, in form and substance satisfactory to the Agent and dated as of the Third Amendment Effective Date, certifying (i) that attached thereto is a true and complete copy of resolutions adopted by the board of directors (or duly authorized committee thereof) of such Credit Party authorizing the execution, delivery and performance of this Third Amendment, and (ii) as to the incumbency and genuineness of the signature of each officer of such Credit Party executing this Third Amendment.
(d) The Agent shall have received a certificate of the
secretary, clerk or director, as applicable, or an assistant secretary,
clerk or director, as applicable, of PXRE Bermuda, in form and
substance satisfactory to the Agent and dated no earlier than thirty
(30) days prior to the Third Amendment Effective Date, certifying (i)
that attached thereto is a true and complete copy of the articles or
certificate of incorporation and all amendments thereto of PXRE
Bermuda, certified, to the extent applicable, as of a recent date by
the Secretary of State (or comparable Governmental Authority) of its
jurisdiction or organization, and that the same has not been amended
since the date of such certification, (ii) that attached thereto is a
true and complete copy of the bylaws, operating agreement or memorandum
and articles of association, as applicable, of PXRE Bermuda, as then in
effect and as in effect at all times from the date on which the
resolutions referred to in clause (iii) below were adopted to and
including the date of such certificate, (iii) that attached thereto is
a true and complete copy of resolutions adopted by the board of
directors (or duly authorized committee thereof) of PXRE Bermuda
authorizing the execution, delivery and performance of the PXRE Bermuda
Credit Enhancement Policy, and (iv) as to the incumbency and
genuineness of the signature of each officer of PXRE Bermuda executing
the PXRE Bermuda Credit Enhancement Policy.
(e) PXRE Bermuda shall have duly complied with and performed all of its agreements and conditions set forth in the PXRE Bermuda Credit Enhancement Policy required to be complied with or performed by it on or prior to the Third Amendment Effective Date and the Agent shall have received evidence satisfactory to it that premium due thereunder shall have been paid in full by PXRE Group.
(f) The Agent shall have received a Covenant Compliance Worksheet, duly completed and certified by the chief financial officer or treasurer of PXRE Group and the Borrower and in form and substance satisfactory to the Agent, demonstrating PXRE Group's and Borrower's compliance with the financial covenants set forth in Sections 6.1 through 6.4, determined on a pro forma basis as of September 30, 2002, after giving effect to the consummation of the transaction contemplated hereby.
(g) The Lenders shall have received a certificate as of a recent date of the good standing or existence of PXRE Bermuda under the law of its state or country of organization.
(h) All approvals, permits and consents of any Governmental Authorities or other Person required in connection with the execution and delivery of this Third Amendment, the PXRE Credit Enhancement Policy and the consummation of the transactions contemplated hereby shall have been obtained (without the imposition of conditions that are not reasonably acceptable to the Agent and the Required Lenders), and all related filings, if any, shall have been made, and all such approvals, permits, consents and filings shall be in full force and effect and the Agent shall have received such copies thereof as it shall have requested; all applicable waiting periods shall have expired without any adverse action being taken by any Governmental Authority having jurisdiction; and no action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before, and no order, injunction or decree shall have been entered by, any court or other Governmental Authority, in each case to enjoin, restrain or prohibit, to obtain substantial damages in respect of, or that is otherwise related to or arises out of, this Third Amendment, the PXRE Credit Enhancement Policy or the consummation of the transactions contemplated hereby, or that, in the opinion of the Agent and the Required Lenders, would otherwise be reasonably likely to have a Material Adverse Effect.
(i) The Borrower shall have paid the fee that is due and payable under that certain letter between the Agent and Borrower dated October 2, 2002 (the "Third Amendment Fee Letter"), together with all other fees and expenses of the Agent and the Lenders required hereunder or thereunder or under any other Credit Document to be paid on or prior to the Third Amendment Effective Date (including the reasonable fees and expenses of U.S. and Bermuda counsel to the Agent) in connection with this Third Amendment and the transactions contemplated hereby.
(j) Each of the representations and warranties contained in the Existing Credit Agreement, this Third Amendment and the other Credit Documents shall be true and correct on and as of the Third Amendment Effective Date with the same effect as if made on and as of such date, both immediately before and after giving effect to the consummation of the transactions contemplated hereby, except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty shall be true and correct as of such date.
(k) No Default or Event of Default shall have occurred and be continuing, both immediately before and after giving effect to the consummation of the transactions contemplated hereby.
(l) The Agent and each Lender shall have received such other documents, certificates, opinions and instruments in connection with the PXRE Bermuda Credit Enhancement Policy, the Group Guarantee and this Third Amendment as it shall have reasonably requested.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
To induce the Agent and Lenders to enter into this Third Amendment, the Credit Parties each represent and warrant to the Agent and each Lender, on the Third Amendment Effective Date, both before and after giving effect to the transactions contemplated hereby, as follows (PXRE Group making such representations and warranties as to itself and PXRE Bermuda, the Borrower as to itself only and PXRE Barbados as to itself only):
4.1 Corporate Power. Each of the Guarantors, the Borrower and PXRE Bermuda has the full corporate power and authority to execute, deliver and perform the Third Amendment, the Group Guarantee and the PXRE Bermuda Credit Enhancement Policy to which it is or will be a party.
4.2 Authorization; Enforceability. Each of the Borrower, the Guarantors and PXRE Bermuda has taken all necessary corporate action to execute, deliver and perform the Third Amendment, the Group Guarantee and the PXRE Bermuda Credit Enhancement Policy to which it is or will be a party, and has validly executed and delivered the Third Amendment, the Group Guarantee and the PXRE Bermuda Credit Enhancement Policy. The Third Amendment constitutes the legal, valid and binding obligation of the Borrower and the Guarantors enforceable against each of them in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally, by general equitable principles or by principles of good faith and fair dealing. The PXRE Bermuda Credit Enhancement Policy constitutes the legal, valid and binding obligation of PXRE Bermuda enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally, by general equitable principles or by principles of good faith and fair dealing
4.3 No Violation. The execution, delivery and performance by each of the Borrower the Guarantors, and PXRE Bermuda of this Third Amendment, the Group Guarantee and the PXRE Bermuda Credit Enhancement Policy, and compliance by it with the terms hereof and thereof, do not and will not (i) violate any provision of its certificate of incorporation or bylaws or contravene any other material Requirement of Law applicable to it, (ii) conflict with, result in a breach of or constitute (with notice, lapse of time or both) a default under any indenture, agreement or other instrument to which it is a party, by which it or any of its properties is bound or to which it is subject, or (iii) result in or require the creation or imposition of any Lien upon any of its properties or assets.
4.4 Governmental Authorization; Permits. No consent, approval, authorization or other action by, notice to, or registration or filing with, any Governmental Authority or other Person is or will be required as a condition to or otherwise in connection with the due execution, delivery and performance by the Borrower, the Guarantors and PXRE Bermuda of this Third Amendment, the Group Guarantee and the PXRE Bermuda Credit Enhancement Policy or the legality, validity or enforceability hereof or thereof.
ARTICLE V
GENERAL
5.1 Full Force and Effect. From and after the Third Amendment Effective Date, all references to the Existing Credit Agreement set forth in any other Credit Document or other agreement or instrument shall, unless otherwise specifically provided, be references to the Credit Agreement as amended by this Third Amendment and as may be further amended, modified, restated or supplemented from time to time. This Third Amendment is limited as specified and shall not constitute or be deemed to constitute an amendment, modification or waiver of, or consent to departure from, any provision of the Existing Credit Agreement except as expressly set forth herein. Except as expressly amended hereby, the Existing Credit Agreement shall remain in full force and effect in accordance with its terms.
5.2 Applicable Law. This Third Amendment shall be governed by and construed in accordance with the laws of the state of New York, without regard to principles of conflict of laws (excluding New York General Obligations Law ss.5-1401).
5.3 Counterparts. This Third Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument.
5.4 Headings. The headings of this Third Amendment are for the purposes of reference only and shall not affect the construction of this Third Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be executed by their duly authorized officers all as of the day and year first above written.
PXRE CORPORATION
By: /s/ John M. Modin
------------------------------------
Name: John M. Modin
------------------------------------
Title: Chief Financial Officer
------------------------------------
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PXRE GROUP LTD.
By: /s/ Jeffrey L. Radke
------------------------------------
Name: Jeffrey L. Radke
------------------------------------
Title: President
------------------------------------
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PXRE REINSURANCE (BARBADOS) LTD.
By: /s/ Jeffrey L. Radke
------------------------------------
Name: Jeffrey L. Radke
------------------------------------
Title: Vice President
------------------------------------
|
(signatures continued)
WACHOVIA BANK, NATIONAL ASSOCIATION, f/k/a
FIRST UNION NATIONAL BANK, as Agent
and as a Lender
By: /s/ Daniel J. Norton
------------------------------------
Name: Daniel J. Norton
------------------------------------
Title: Director
------------------------------------
|
BANK ONE, NA (f/k/a THE FIRST NATIONAL
BANK OF CHICAGO
By: /s/ Gretchen Roetzer
------------------------------------
Name: Gretchen Roetzer
------------------------------------
Title: Director
------------------------------------
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FLEET NATIONAL BANK
By: ____________________________________ Name: ____________________________________ Title: ____________________________________ |
CREDIT LYONNAIS NEW YORK BRANCH
By: ____________________________________ Name: ____________________________________ Title: ____________________________________ |
EXHIBIT 10.3a
GUARANTEE OF PXRE GROUP LTD.
THIS DEED POLL GUARANTEE is made and effective as of September 1, 2002 by PXRE GROUP LTD., a Bermuda corporation (the "Guarantor") in respect of PXRE REINSURANCE LTD., a Bermuda reinsurance company (the "Reinsurer").
WHEREAS, the Guarantor owns, beneficially and of record, all of the issued and outstanding capital stock of the Reinsurer;
WHEREAS, the Guarantor wishes to guarantee the Reinsurer's performance of obligations assumed during the course of the Reinsurer's reinsurance business;
NOW THEREFORE, the Guarantor hereby agrees as follows:
1. Guarantee. To induce cedents (the "Cedents") under any and all reinsurance agreements, binder and slips entered into after the date hereof between such Cedents and the Reinsurer to enter into such reinsurance agreements, the Guarantor as primary obligor hereby absolutely, unconditionally and irrevocably guarantees severally to each of the Cedents the prompt payment and performance, when due, of any and all obligations, amounts or other liabilities (the "Obligations") of Reinsurer now or hereafter existing under any reinsurance agreement, binder or slip entered into by Reinsurer after the date hereof and specifically designated therein as a "Reinsurance Agreement" having the benefit of this Guarantee, which shall be accomplished by inclusion of the following clause therein:
"This Agreement constitutes a "Reinsurance Agreement" as defined in, and for purposes of, the Guarantee dated as of September 1, 2002 by PXRE Group Ltd. in favor of PXRE Reinsurance Ltd."
2. Duration. This Deed shall in relation to any Reinsurance Agreement
(i) take effect on and be deemed to be delivered as a deed on the date on which
the Reinsurance Agreement is executed and (ii) shall continue and remain in
force and effect until and shall expire on the date on which the Reinsurer shall
have performed all its obligations and discharged its liabilities under the
Reinsurance Agreement.
3. Notice to Guarantor. The Guarantor waives notice of (i) acceptance of the Guarantee by any Cedent, and (ii) the entering into by the Reinsurer of any contract with any Cedent.
4. Consideration and Several Guarantee. The Guarantor assumes the obligations and liabilities under this Deed in consideration of such Cedent entering into the Reinsurance Agreement, whether such entry is effected on the date of this Deed or subsequently. This Guarantee is made for the benefit of the Cedents severally.
5. Nature of Guarantee. The Guarantor's obligations hereunder shall not be affected by the existence, validity, enforceability, or by any other circumstance relating to the Obligations that might otherwise constitute a legal or equitable discharge of or defense to the Guarantor not available to the Reinsurer. The Guarantor agrees that the Cedents may resort to the Guarantor for payment of any of the Obligations whether or not the Cedents shall have proceeded against the Reinsurer or any other obligor principally or secondarily obligated with respect to the Obligations. The Cedents shall not be obligated to file any claim relating to the Obligations in the event that the Reinsurer becomes subject to an insolvency, reorganization or similar proceeding, and the failure of the Cedents to so file shall not affect the Guarantor's obligations hereunder. In the event that any payment to the Cedents in respect of the Obligations is rescinded or must otherwise be returned for any reason whatsoever, the Guarantor shall remain liable hereunder with respect to such Obligations as if such payment had not been made. The Guarantor reserves the right to (a) set-off against any payment owing hereunder any amounts owing by the Cedents to the Reinsurer and (b) assert defenses which the Reinsurer may have to payment of the Obligations other than defenses arising from bankruptcy or insolvency of the Reinsurer and other defenses expressly waived hereby.
6. Changes in Obligations, and Agreements Relating thereto; Waiver of Certain Notices. The Guarantor agrees that the Cedents may at any time and from time to time, either before or after the maturity thereof, without notice to or further consent of the Guarantor, extend the time of payment of, or renew all or any part of the Obligations, and may also make any agreement with the Reinsurer for the extension, renewal, payment, compromise, discharge or release thereof, in whole or in part, or for any modification of the terms thereof or of any agreement between the Cedents and the Reinsurer, without in any way impairing or affecting this Guarantee. The Guarantor waives notice of the acceptance of this Guarantee and of the Obligations, presentment, demand for payment, notice of dishonor and protest.
7. Expenses. The Guarantor agrees to pay on demand all fees and out of pocket expenses (including the reasonable fees and expenses of one firm of counsel representing the Cedents) in any way relating to the enforcement or protection of the rights of the Cedents hereunder; provided, that the Guarantor shall not be liable for any expenses of the Cedents if no payment under this Guarantee is due
8. Subrogation. Upon payment of any of the Obligations, the Guarantor shall be subrogated to the rights of the Cedents against the Reinsurer with respect to such Obligations, and the Cedents agree by their acceptance of the Reinsurance Agreements to take at the Guarantor's expense such steps as the Guarantor may reasonably request to implement such subrogation.
9. No Waiver; Cumulative Rights. No failure on the part of the Cedents to exercise, and no delay in exercising, any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Cedents of any right, remedy or power hereunder preclude any other or future exercise of any right, remedy or power. Each and every right, remedy and power hereby granted to the Cedents or allowed it by law or other agreement shall be cumulative and not exclusive of any other, and may be exercised by the Cedents at any time or from time to time.
10. Assignment. No Cedent may assign its rights, interests or obligations hereunder to any other person (except by operation of law) without the prior written consent of the Guarantor.
11. Notices. All notices or demands on the Guarantor shall be deemed effective when received, shall be in writing and shall be delivered by hand or by registered mail, or by facsimile transmission promptly confirmed by registered mail, addressed to the Guarantor at:
PXRE GROUP LTD.
99 Front Street
Hamilton HM 12
Bermuda
Attn: President
Fax: (441) 296-6162
or to such other address or fax number as the Guarantor shall have notified the Cedents in a written notice delivered to the Cedents at the addresses or facsimile numbers specified in the Reinsurer's records.
12. Continuing Guarantee. This Guarantee shall remain in full force and effect and shall be binding on the Guarantor, its successors and assigns until all of the Obligations have been satisfied in full. Notwithstanding the foregoing, this Guarantee may be amended or terminated at any time by written amendment signed by the Guarantor, provided, that no such amendment or termination may adversely affect the rights, whether absolute or contingent, of any Cedent which shall have accrued or that may accrue hereunder, other than any rights with respect to any Reinsurance Agreement entered into after the Cedent shall have received notice of such amendment or termination; and provided further, that no such termination or amendment shall be effective with respect to any Reinsurance Agreement entered into prior to the subject Cedent's receipt of notice of termination or amendment until the Obligations incurred under such Reinsurance Agreements shall either be no longer outstanding or satisfied in full.
13. Governing Law. This Guarantee shall be governed by and construed in accordance with the laws of Bermuda without regard to principles of conflicts of laws.
IN WITNESS WHEREOF, this Deed Poll Guarantee has been duly executed as a deed and shall be delivered by the Guarantor in accordance with clause 2 hereof.
SEAL: PXRE GROUP LTD.
By: /s/ Jeffrey L. Radke
-------------------------------
Jeffrey L. Radke
President & Chief Operating Officer
By: /s/ Guy D. Hengesbaugh
-------------------------------
Guy D. Hengesbaugh
Executive Vice President
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EXHIBIT 10.3b
PXRE REINSURANCE LTD.
CREDIT ENHANCEMENT POLICY
November 8, 2002
Insureds: The LENDERS and WACHOVIA BANK, NATIONAL ASSOCIATION (formerly
known as First Union National Bank), as agent for the Lenders
(in such capacity, the "Agent"), ratably as their interest
appear under that certain First Amended and Restated Credit
Agreement dated August 31, 1999 (the "Original Agreement"),
among PXRE CORPORATION, a Delaware corporation (the
"Borrower"), PXRE GROUP LTD., a Bermuda corporation ("PXRE
Group"), and PXRE REINSURANCE (BARBADOS) LTD., a Barbados
corporation ("PXRE Barbados"), the Lenders and the Agent, as
amended by a First Amendment dated March 29, 2000 (the "First
Amendment") and the Amended And Restated Second Amendment To
First Amended And Restated Credit Agreement And Consent, dated
as of the 4th day of April, 2002 (the "Second Amendment",
together with the First Amendment and the Original Agreement,
the "Credit Agreement").
Insured
Obligation: 100% of the Obligations due and payable (whether at the
stated maturity, by acceleration or otherwise) under the
Credit Agreement or any of the other Credit Documents.
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PXRE Reinsurance Ltd. (the "Insurer"), for consideration of a premium in the amount of $500,000, the receipt of which by Insurer from PXRE Group for and on behalf of the Insureds is hereby acknowledged, hereby absolutely, unconditionally and irrevocably agrees to pay to the Insureds pursuant to this Credit Enhancement Policy (the "Policy"), the full and complete amount of any Obligations (the "Insured Obligations") when and as the same shall become due (whether at the stated maturity, by acceleration or otherwise) in each case subject to the terms and conditions of this Policy.
Capitalized terms used but not defined herein shall have the meanings given to such terms in the Credit Agreement.
The Insurer shall forthwith pay or cause to be paid to the Agent, for the benefit of the Insureds, an amount equal to the amount of the Insured Obligations then due and owing as aforesaid in US Dollars immediately after, and in any event within one (1) Business Day after its receipt of a written notice of nonpayment ("Notice of Nonpayment") executed by the Agent substantially in the form of Exhibit A hereto, or in such other form delivered to the Credit Parties under the Credit Agreement, it being specifically understood that any demand for payment made upon any Credit Party under the Credit Agreement shall be deemed a "Notice of Nonpayment" hereunder. Such payments shall be made, by wire transfer in immediately available funds, without set-off, counterclaim or other defense and, in accordance with Section 2.17 of the Credit Agreement, free and clear of and without deduction for any Taxes, the Insurer hereby agreeing to comply with and be bound by the provisions of Section 2.17 of the Credit Agreement in respect of all payments made by it hereunder and the provisions of which Section are hereby incorporated into and made a part of this Policy by this reference as if set forth herein at length, and such payments shall be made directly to the Agent on behalf of the Insureds to such account as the Agent shall notify the Insurer from time to time. All notices and other communications provided for hereunder shall be delivered in the manner prescribed in Section 11.5 of the Credit Agreement to any Credit Party.
This Policy is neither transferable nor assignable, in whole or in part, except to any successors and assigns of the Agent or Lenders permitted by the Credit Agreement (each, a "Permitted Assignee"). An assignment to a Permitted Assignee shall become effective upon receipt of a copy of the assignment by the Insurer. Upon assignment to a Permitted Assignee, the Permitted Assignee shall be deemed an "Insured" hereunder and shall succeed to all of the rights and benefits of the Insured-assignor herein contained.
The Insurer's obligation to make any payment required pursuant to this Policy shall be irrevocable and unconditional and the Insurer shall make such payment from its own funds without the prior assertion of any defenses to payment or rights of set off. The Insureds may resort to the Insurer for payment of all or any part of the Insured Obligation, whether or not the Insureds (a) shall have resorted to any collateral securing any of the Obligations under the Credit Agreement or (b) shall have proceeded against any other obligor primarily or secondarily obligated with respect to any of the Obligations under the Credit Agreement (all of the actions referred to in preceding clauses (a) and (b) being hereby expressly waived by the Insurer).
The Insureds shall be entitled to recover and the Insurer agrees to pay or reimburse upon demand all reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred or paid by (y) any Insured in connection with any suit, action or proceeding to enforce or protect any rights of the Insureds hereunder and (z) the Agent in connection with any amendment, modification or waiver hereof or consent pursuant hereto, and to indemnify and hold each Insured and its directors, officers, employees, agents and Affiliates harmless from and against any and all claims, losses, damages, obligations, liabilities, penalties, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) of any kind or nature whatsoever, whether direct, indirect or consequential, that may at any time be imposed on, incurred by or asserted against any such indemnified party as a result of, arising from or in any way relating to this Policy or the collection or enforcement of the Insured Obligations; provided, however, that no indemnified party shall have the right to be indemnified hereunder for any such claims, losses, costs and expenses to the extent determined by a final and nonappealable judgment of a court of competent jurisdiction or pursuant to arbitration as set forth herein to have resulted from the gross negligence or willful misconduct of such indemnified party.
This Policy and the obligations of the Insurer hereunder are
unconditional and irrevocable and shall only terminate on the date (the
"Termination Date") upon which the following has occurred: (i) the payment in
full of the Insured Obligations, (ii) the termination of the Commitments, and
(iii) the termination of, and settlement of all obligations of the Borrower
under, each Hedge Agreement to which the Borrower and any Lender or Affiliate of
any Lender are parties (the events in clauses (i), (ii) and (iii) above,
collectively, the "Termination Requirements"). This Policy sets forth in full
the undertaking of the Insurer, and shall not, except with the prior written
consent of the Agent or otherwise in accordance with the express terms hereof,
be modified, altered or affected by any other Policy or instrument, including
any modification or amendment thereto. This Policy may not be canceled by the
Insurer prior to the Termination Date. The Agent shall return this Policy to the
Insurer as soon as practicable immediately following the Termination Date.
This Policy shall be governed by and construed in accordance with the laws of Bermuda, without regard to principles of conflict of laws. The parties hereto hereby declare that it is their intention that this Policy shall be regarded as made under the laws of Bermuda and that the laws of Bermuda shall be applied in interpreting its provisions in all cases where legal interpretation shall be required. Notwithstanding the foregoing choice of law, the Insurer hereby consents to the nonexclusive jurisdiction of any state court within Mecklenburg County, North Carolina or any federal court located within the Western District of the State of North Carolina or the Southern District of the State of New York for any proceeding instituted hereunder, or arising out of or in connection with this, or any proceeding to which the Agent or any Lender or the Borrower or any Guarantor is a party, including any actions based upon, arising out of, or in connection with any course of conduct, course of dealing, statement (whether oral or written) or actions of the Agent or any Lender or the Borrower or any Guarantor. The Insurer irrevocably agrees to be bound (subject to any available right of appeal) by any judgment rendered or relief granted thereby and further waives any objection that it may have based on lack of jurisdiction or improper venue or forum non conveniens to the conduct of any such proceeding. The Insurer consents that all service of process be made by registered or certified mail directed to it at the address for PXRE Group set forth in Section 11.5 of the Credit Agreement, and service so made shall be deemed to be completed upon the earlier of actual receipt thereof or three (3) days after deposit in the United States mails, proper postage prepaid and properly addressed. Nothing in this paragraph shall affect the right to serve legal process in any other manner permitted by law or affect the right of the Agent or any Lender to bring any action or proceeding against the Insurer in the courts of any other jurisdiction.
To the fullest extent permitted under applicable law, the Insurer hereby irrevocably and unconditionally waives:
(i) all right to trial by jury in any action, proceeding or counterclaim arising out of or related to this Policy;
(ii) presentment, demand for payment, demand for performance, protest and notice of any other kind, including, without limitation, notice of nonpayment or other nonperformance (including notice of default under any Credit Document with respect to any Insured Obligation), protest, dishonor, acceptance hereof, extension of additional credit to any Credit Party and of any rights to consent thereto;
(iii) any right to require the Insureds or any of them, as a condition of payment or performance by the Insurer hereunder, to proceed against, or to exhaust or have resort to any collateral or other security from or any deposit balance or other credit in favor of, any Credit Party or any other Person directly or indirectly liable for any Insured Obligations, or to pursue any other remedy or enforce any other right; and any other defense based on an election of remedies with respect to any collateral or other security for any Insured Obligations or for any guaranty or other liability in respect thereof, notwithstanding that any such election (including any failure to pursue or enforce any rights or remedies) may impair or extinguish any right of indemnification, contribution, reimbursement or subrogation or other right or remedy of the Insurer against any Credit Party or any other Person directly or indirectly liable for any Insured Obligations or any such collateral or other security;
(iv) any right or defense based on or arising by reason of any right or defense of any Credit Party or any other Person, including, without limitation, any defense based on or arising from a lack of authority or other disability of any Credit Party or any other Person, the failure of PXRE Group to make any payment of premiums due under this Policy, the invalidity or unenforceability of any Insured Obligations, any collateral or other security therefore or any Credit Document or other agreement or instrument delivered pursuant thereto, or the cessation of the liability of any Credit Party for any reason other than the satisfaction of the Termination Requirements;
(v) any defense based on any Insured's acts or omissions in the administration of the Insured Obligations, any guaranty or other liability in respect thereof or any collateral or other security for any of the foregoing, and promptness, diligence or any requirement that any Insured Party create, protect, perfect, secure, insure, continue or maintain any liens in any such collateral or other security;
(vi) any right to assert against any Insured, as a defense, counterclaim, crossclaim or set-off, any defense, counterclaim, claim, right of recoupment or set-off that it may at any time have against any Insured (including, without limitation, failure of consideration, statute of limitations, payment, accord and satisfaction and usury), other than compulsory counterclaims; and
(vii) any defense based on or afforded by any applicable law that limits the liability of or exonerates insurers or that may in any other way conflict with the terms of this Policy.
The obligations of the Insurer under this Policy are irrevocable, primary, absolute and unconditional and neither the failure of the Insureds or any party to any Credit Document to perform any covenant or obligation in favour of the Insurer hereunder or under any other agreement, or the invalidity or unenforceability of any Credit Document (or any part thereof), nor the commencement of any insolvency proceeding by or against any of the Lenders will in any way affect or limit the Insurer's unconditional obligations under this Policy.
This Policy sets forth in full the undertaking of the Insurer, and (except as provided herein) may not be modified, altered, or affected by any other agreement or instrument (including without limitation any Credit Document), including any modification or amendment thereto, and may not be cancelled or revoked.
Upon any payment hereunder or any such advance, and upon the payment in full of all of the Obligations, in furtherance and not in limitation of the Insurer's equitable right of subrogation, the Insurer will be subrogated to the rights of the Agent and the Lender and any party indemnified under the Credit Documents to receive any amount with respect to which the Insurer has made a payment hereunder. Notwithstanding the foregoing, the Insurer hereby agrees that, until satisfaction of the Termination Requirements, it will not exercise or seek to exercise any claim or right that it may have against any Credit Party at any time as a result of any payment made under or in connection with this Policy or the performance or enforcement hereof, including any right of subrogation to the rights of any of the Insureds against any Credit Party, any right of indemnity, contribution or reimbursement against any Credit Party, any right to enforce any remedies of any Insured against any Credit Party, or any benefit of, or any right to participate in, any collateral or other security held by any Insured to secure payment of the Insured Obligations, in each case whether such claims or rights arise by contract, statute, common law or otherwise. The Insurer further agrees that all indebtedness and other obligations, whether now or hereafter existing, of any Credit Party or any Subsidiary of any Credit Party to the Insurer, including, without limitation, any such indebtedness in any proceeding under the Bankruptcy Code and any intercompany receivables, together with any interest thereon, shall be, and hereby are, subordinated and made junior in right of payment to the Insured Obligations. The Insurer further agrees that if any amount shall be paid to or any distribution received by the Insurer (i) on account of any such indebtedness at any time after the occurrence and during the continuance of an Event of Default, or (ii) on account of any such rights of subrogation, indemnity, contribution or reimbursement at any time prior to the satisfaction of the Termination Requirements, such amount or distribution shall be deemed to have been received and to be held in trust for the benefit of the Insureds, and shall forthwith be delivered to the Agent in the form received (with any necessary endorsements in the case of written instruments), to be applied against the Insured Obligations, whether or not matured, in accordance with the terms of the applicable Credit Documents and without in any way discharging, limiting or otherwise affecting the liability of the Insurer under any other provision of this Policy. Additionally, in the event any Credit Party or any Subsidiary of any Credit Party becomes a "debtor" within the meaning of the Bankruptcy Code, the Agent shall be entitled, at its option, on behalf of the Insureds and as attorney-in-fact for the Insurer, and is hereby authorized and appointed by Insurer, to file proofs of claim on behalf of the Insurer and vote the rights of Insurer in any plan of reorganization, and to demand, sue for, collect and receive every payment and distribution on any indebtedness of such Credit Party or such Subsidiary to Insurer in any such proceeding, Insurer hereby assigning to the Agent all of its rights in respect of any such claim, including the right to receive payments and distributions in respect thereof.
The Insurer covenants and agrees that, until the satisfaction of the
Termination Requirements, at all times the Insurer will comply with the
conditions attached to its registration as an insurer under the Insurance Act
1978 and the regulations promulgated thereunder. In addition, the Insurer will
not, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any direction which may be issued in respect of the Insurer by
the Bermuda Monetary Authority (the "Authority"), including, without limitation,
any direction that the Insurer cease or limit its underwriting or that there be
a prohibition or restriction on the payment of dividends or other distributions
by the Insurer, or any direction by the Authority directing the Insurer to
maintain in, or transfer to and keep in the custody of, a specified bank, assets
of the Insurer of such value and description as are specified in the direction.
Insurer will deliver to each of the Insureds promptly upon (and in any event
within five (5) Business Days after) any Responsible Officer of Insurer
obtaining knowledge thereof, written notice whether any direction under Section
32 has been issued to it or the occurrence of any of the events described in
Section 5.3(f) of the Credit Agreement.
IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed and delivered in Bermuda as a deed on the date first written above.
PXRE REINSURANCE LTD.
[SEAL]
By: /s/ Jeffrey L. Radke ------------------------- Name: Jeffrey L. Radke Title: Chief Operating Officer By: /s/ John M. Modin ------------------------- Name: John M. Modin Title: Chief Financial Officer |
Exhibit A to Credit Enhancement Policy
PXRE Reinsurance Ltd.
NOTICE OF NONPAYMENT
Pursuant to the Credit Enhancement Policy issued on October ___, 2002 (the "Policy"), the undersigned demands payment of $_____ by 1:00 p.m. Bermuda time on _________, 20,___.
This amount of:
(1) the sum under the Credit Agreement of $______ for principal due on ______, $____ for interest due on______, and $_____ for _____ due on_____.
An explanation of any amount due other than principal and interest is attached. The Agent represents and warrants that it is entitled to make this demand under the Credit Agreement and the Policy. Capitalized terms used herein and not otherwise defined have the meanings assigned to them in the Policy.
IN WITNESS WHEREOF, this notice has been executed this___ day of ________
Exhibit 99.1
Certification by the Chief Executive Officer and Chief Financial Officer Relating to a Periodic Report Containing Financial Statements
I, Gerald L. Radke, Chief Executive Officer, and John M. Modin, Chief Financial Officer, of PXRE Group Ltd., a Bermuda corporation (the "Company"), hereby certify that, based on our knowledge:
(1) The Company's periodic report containing financial statements on Form 10-Q for the period ended September 30, 2002 (the "Form 10-Q") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
* * *
Date: As of November 12, 2002 CHIEF EXECUTIVE OFFICER: CHIEF FINANCIAL OFFICER: /s/ Gerald L. Radke /s/ John M. Modin ----------------------- ----------------------- Gerald L. Radke John M. Modin |