-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JNf6MiYr6LHtg+N7PGQ489U13p7tX71xcUH7amW3lHr9LOPr2E2UgZbf98IzLYII DBMd7C8aap+L/wMnBtKwVQ== 0000950117-00-000741.txt : 20000411 0000950117-00-000741.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950117-00-000741 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PXRE GROUP LTD CENTRAL INDEX KEY: 0001091748 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-15259 FILM NUMBER: 583753 BUSINESS ADDRESS: STREET 1: CLARENDON HOUSE STREET 2: 2 CHURCH STREET MAILTON HM CX CITY: BERMUDA MAIL ADDRESS: STREET 1: CLARENDON HOUSE STREET 2: 2 CHURCH STREET HAMILTON HM CX CITY: BERMUDA 10-K 1 PXRE GROUP LTD. 10-K - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------- For the fiscal year ended December 31, 1999 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 (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 99 FRONT STREET SUITE 231 HAMILTON HM 12 12 CHURCH STREET BERMUDA HAMILTON HM 11 (ADDRESS, INCLUDING ZIP CODE, BERMUDA OF PRINCIPAL EXECUTIVE OFFICES) (MAILING ADDRESS) (441) 296-5858 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: COMMON SHARES, PAR VALUE $1.00 PER SHARE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X * No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 24, 2000 computed by reference to the closing price of such common equity as of the close of business on March 24, 2000 was $151,427,255. As of March 24, 2000, 11,758,174 of the registrant's common shares were issued and outstanding. *PXRE Group Ltd. ("PXRE") is the parent corporation of PXRE Corporation ("PXRE Delaware") (Commission File No. 001-12595; I.R.S. Employer Identification No. 06-1183996) which became an indirect wholly owned subsidiary of PXRE at the close of business on October 5, 1999 in connection with the reorganization of PXRE Delaware. Simultaneously therewith, holders of PXRE Delaware common stock, $.01 par value per share, automatically became holders of the same number of PXRE common shares, $1.00 par value per share, which shares continue to trade under the same New York Stock Exchange ticker symbol PXT. In connection with the reorganization, PXRE has become subject to the reporting requirements of the Securities Exchange Act of 1934 and has filed all reports required to be filed thereafter. - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE Part III Portions of PXRE's definitive Proxy Statement for the Annual General Meeting of Shareholders to be held on May 16, 2000. Part IV Portions of PXRE Corporation's Proxy Statement dated April 12, 1991. PART I ITEM 1. BUSINESS OVERVIEW PXRE Group Ltd. ("PXRE" or the "Company") -- with operations principally in Bermuda, Barbados, the United States, the United Kingdom and Europe -- provides reinsurance products and services to a worldwide market place. The Company primarily emphasizes commercial and personal property and casualty reinsurance risks, and it offers both broker-based and direct-writing distribution capabilities. PXRE also provides marine and aerospace reinsurance products and services. The Company's shares trade on the New York Stock Exchange under the symbol PXT. On October 5, 1999 PXRE Corporation, a Delaware holding company ("PXRE Delaware") completed a reorganization that resulted in the Company becoming the ultimate parent holding company of PXRE Delaware. Holders of PXRE Delaware common stock automatically became holders of the same number of PXRE common shares. The reorganization also involved the establishment of a Bermuda based reinsurance company, PXRE Reinsurance Ltd. ("PXRE Bermuda"), and operations in Barbados through PXRE (Barbados) Ltd. ("PXRE Barbados"). The Company conducts its business primarily through its principal operating subsidiaries, PXRE Delaware, PXRE Reinsurance Company ("PXRE Reinsurance"), PXRE Solutions Inc. ("PXRE Solutions"), PXRE Bermuda, PXRE Barbados, PXRE Managing Agency Limited ("PXRE Managing Agency"), PXRE Limited, the sole member of PG Butler Syndicate 1224 ("PXRE Lloyd's Syndicate") and Transnational Insurance Company ("Transnational Insurance"). The term "PXRE," as used herein, refers to one or more of PXRE Delaware, PXRE Reinsurance, PXRE Solutions, PXRE Bermuda, PXRE Barbados, PXRE Managing Agency, PXRE Lloyd's Syndicate and Transnational Insurance in discussions of these entities' business and refers to PXRE Group Ltd. in all other circumstances. PXRE Reinsurance is both a brokerage market reinsurer and a direct writing reinsurer, with approximately $399 million of statutory capital and surplus, which principally underwrites treaty and facultative reinsurance for property (including marine and aerospace) and casualty risks. PXRE Reinsurance is licensed or authorized to transact business in 46 states and the District of Columbia, Puerto Rico, Columbia and Mexico and operates a branch in Belgium ("PXRE's Brussels Branch"). PXRE Bermuda is a quota share reinsurer of PXRE Reinsurance (30% in the fourth quarter of 1999) and PXRE Reinsurance provides aggregate excess of loss reinsurance protection for PXRE Bermuda. PXRE Bermuda, with approximately $25.2 million of statutory capital and surplus, also provides structured/finite coverages. PXRE Bermuda is not licensed or admitted as an insurer in any jurisdiction other than Bermuda. PXRE Solutions performs certain limited reinsurance intermediary activities on behalf of a number of Bermuda reinsurers, including PXRE Bermuda. PXRE Managing Agency manages PXRE Lloyd's Syndicate, which has an underwriting capacity of approximately 'L'35 million ($57 million at December 31, 1999 exchange rates), and manages, on a fee basis, other syndicates at Lloyd's of London ("Lloyds") with an aggregate underwriting capacity of approximately 'L'250 million ($402 million at December 31, 1999 exchange rates). PXRE Limited, which carries on business as a corporate member of Lloyd's, is the sole member of PXRE Lloyd's Syndicate. PXRE Lloyd's Syndicate underwrites specialty types of property and casualty insurance and reinsurance (including certain accident and health coverages as well as catastrophe-type coverages, aerospace reinsurance and facultative reinsurance) on a worldwide basis. Underwriting premium volume and loss experience related to the business of PXRE Lloyd's Syndicate is included in PXRE's consolidated results on a one quarter lag basis, from 1997 through the third quarter of 1999. Beginning with the fourth quarter of 1999, PXRE Lloyd's Syndicate reports its results currently. -4- Transnational Insurance is an excess and surplus lines carrier which has specialized in non-standard and excess property insurance risks. Transnational Insurance, which is a wholly-owned subsidiary of PXRE Reinsurance, has approximately $99 million of capital and is eligible to write business on a surplus lines basis in 45 states and the District of Columbia, Guam and the U.S. Virgin Islands. The property and casualty reinsurance industry has been experiencing an extended period of soft market conditions characterized by inadequate pricing. The industry is also consolidating through mergers and other acquisitions. PXRE competes with numerous companies, many of which have substantially greater financial, marketing and management resources. PXRE has specialized in property reinsurance, including a strong focus on catastrophe-type products. Coverage terms for these products have deteriorated in recent years, and PXRE has reduced commitments on marginally priced business. Meanwhile, PXRE has adopted an ambitious diversification strategy involving: the establishment of a direct presence in the Lloyd's market; the addition of a reinsurance platform offering primarily casualty products directly to customers; the enhancement of its international broker market reinsurance platform to include additional lines of business including casualty risks; the start-up of an excess and surplus lines insurance company; an acceleration of business offerings to one of its managed business participants; the formation of a finite reinsurance unit; and the establishment of a direct presence in the Bermuda market. At December 31, 1999, PXRE was a party to retrocessional arrangements with a number of insurers and reinsurers. Under these arrangements, PXRE cedes some of its underwritten risks to the participants, subject to maximum aggregate liabilities per reinsurance program. PXRE receives a management fee or commission, initially based on premium volume, adjusted in some cases through contingent profit commissions related to underwriting results measured over a period of years. Future management fee income is dependent upon the amount of business ceded to the participants and the profitability of that business. Another arrangement with Select Reinsurance Ltd. ("Select Re"), a Bermuda reinsurer, formerly Investors Reinsurance Ltd., involves a multi-year fee based undertaking by PXRE through the year ending December 31, 2003 to produce and underwrite business with Select Re. Gerald Radke (Chairman, President and Chief Executive Officer of PXRE) and Jeffrey Radke (Executive Vice President of PXRE and President of PXRE Bermuda) are on the Board of Directors of Select Re and are shareholders of Select Re. Gerald Radke is Co-Vice Chairman of Select Re and Jeffrey Radke was formerly the President of Select Re. PXRE also purchases catastrophe retrocessional coverage for its own protection, depending on market conditions. PXRE significantly increased its purchases of such coverage in 1998 and 1999 in light of the continued general deterioration in catastrophe reinsurance pricing and the opportunity to buy protection at more favorable terms than in previous years. HISTORY PXRE Delaware was organized in July 1986 by Phoenix Home Life Mutual Insurance Company ("Phoenix Home Life") to succeed, through PXRE Reinsurance, to the property and casualty reinsurance business carried on since 1982 by Phoenix General Insurance Company, formerly a wholly-owned subsidiary of Phoenix Home Life. As of February 29, 2000, Phoenix Home Life owned 1,131,700 PXRE common shares. -5- In November 1993, PXRE Delaware sponsored the initial public offering of Transnational Re Corporation ("TREX") to raise capital and take advantage of favorable conditions in the worldwide retrocessional reinsurance market. PXRE Delaware, through PXRE Reinsurance, retained a 21% ownership position in TREX and had responsibility for the day-to-day operations of TREX, including all the reinsurance operations of its subsidiary, Transnational Reinsurance Company ("Transnational Reinsurance"). On December 11, 1996, TREX merged into PXRE Delaware (the "Merger"), and each share of common stock of TREX was converted into the right to receive 1.0575 shares of PXRE Delaware common stock. Following the Merger, Transnational Reinsurance became a wholly-owned subsidiary of PXRE Reinsurance and was re-named Transnational Insurance Company. The Merger has been accounted for using the purchase method of accounting; therefore net income of TREX (including Transnational Reinsurance/Transnational Insurance) has been included in PXRE Delaware's consolidated results of operations from the date of the Merger. In December 1996, PXRE Delaware completed the organization of PXRE Managing Agency and PXRE Lloyd's Syndicate, thereby establishing a direct presence in the Lloyd's market. In 1999, PXRE Managing Agency expanded its operations to managing for a fee other syndicates at Lloyd's. In June 1998, PXRE Delaware added direct writing and international teams, composed of eight direct writing reinsurance professionals and three international reinsurance executives, respectively. The direct writing team operates as the Direct Treaty Division of PXRE Reinsurance which provides reinsurance on a direct basis (directly with the primary company) primarily on casualty and, to a lesser extent, non-catastrophe type property business. -6- The international team's focus is property and casualty reinsurance in the brokerage market. Subsequently in 1998, PXRE Delaware further strengthened its Direct Treaty Division, and has also strengthened PXRE Managing Agency with the recruitment of additional reinsurance professionals. In mid 1999, PXRE Reinsurance formed a finite reinsurance unit to provide structured/finite coverages combining elements of risk transfer and managing the impact of such risks on a cedent's financial statements and cash flow. On October 5, 1999, PXRE Delaware completed a reorganization that resulted in the Company becoming the ultimate parent holding company of PXRE Delaware. The reorganization also involved the establishment of PXRE Bermuda, a Bermuda based reinsurance company, operations in Barbados through PXRE (Barbados) Ltd., and PXRE Solutions, a reinsurance intermediary. RATINGS PXRE Reinsurance is rated "A" (Excellent) by A.M. Best Company ("A.M. Best"), an independent insurance industry rating organization. Transnational Insurance also is rated "A" (Excellent) by A.M. Best. PXRE Bermuda is not rated by A.M. Best, although it and PXRE Reinsurance and Transnational Insurance have been assigned an A+ financial strength rating by Standard & Poor's Corporation ("S&P"). PXRE Lloyd's Syndicate enjoys the benefit of ratings of Lloyd's, which has been rated "A" (Excellent) by A.M. Best and has been assigned an A+ financial strength rating by S&P. These ratings are based upon factors that may be of concern to policyholders, agents and intermediaries, but may not reflect the considerations applicable to an investment in a reinsurance or insurance company. A change in any such rating is at the discretion of the respective rating agencies. -7- GENERAL Reinsurance is an arrangement in which a reinsurer agrees to indemnify a primary insurer or another reinsurer (also known as a ceding company) against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance contracts. Reinsurance can provide a ceding company with several benefits, including a reduction in exposure on individual risks, protection against catastrophic losses and assistance in maintaining acceptable financial ratios. Reinsurance, however, does not legally discharge the ceding company from its liability to policyholders. There are two basic types of reinsurance arrangements: treaty and facultative reinsurance. In treaty reinsurance, the reinsurer and the ceding company negotiate a contractual arrangement which reinsures a specified portion of a type or category of risk. Treaty reinsurers, including PXRE, do not separately evaluate each individual risk assumed, and, consequently, after a review of the ceding company's underwriting practices, are largely dependent on the original underwriting decisions made by the ceding company. Such dependence subjects reinsurers in general, including PXRE, to the risk that the primary insurer has not adequately determined the risks to be reinsured and, accordingly, that the premium ceded to the reinsurer in connection therewith may not adequately compensate the reinsurer for the risk assumed. Treaty reinsurance contributed approximately 97.4% of PXRE's gross premiums written in 1999. Treaty reinsurance can be written on either a pro rata basis or an excess of loss basis. In pro rata reinsurance, the reinsurer agrees, in return for a percentage of the premiums, to share in a proportional amount of the losses up to the limit, if any, of the reinsurance agreement. Premiums that the ceding company pays to the reinsurer are proportional to the premiums that the ceding company receives, and the reinsurer generally pays the ceding company a ceding commission to reimburse the ceding company for the expenses incurred in obtaining the business. In excess of loss treaty reinsurance, the reinsurer indemnifies the ceding company for a portion of the losses and expenses on underlying policies which exceed a specified dollar amount (known as the ceding company's retention or the reinsurer's attachment point) generally subject to a negotiated reinsurance contract limit. Premiums paid by the ceding company for excess of loss coverage may not be directly proportional to the premiums on the underlying policies because the reinsurer does not assume a proportional share of the underlying risk. Excess of loss treaty reinsurance can, in turn, be written on a per risk or catastrophe basis. Per risk excess of loss reinsurance protects the ceding company against a loss resulting from a single risk or location. Catastrophe excess of loss reinsurance protects a ceding company from an accumulation of a large number of related losses resulting from a variety of risks which may occur in a given catastrophe, and hence is a highly volatile business. Catastrophe-type coverages include catastrophe coverage provided to ceding insurance companies and retrocessional catastrophe coverage provided to other reinsurers. Catastrophe-type coverages have represented the majority of PXRE's net premiums written during the past three fiscal years, although they have declined in percentage terms from 84% in 1997 to 52% in 1999. See "Underwriting Operations." Facultative reinsurance is the reinsurance of individual risks; rather than an agreement to reinsure a specified portion of a type or category of risk, the reinsurer separately rates and underwrites each risk. In some cases, risks covered by facultative reinsurance are those excluded from coverage by treaty reinsurance. Facultative reinsurance contributed only approximately 2.6% of PXRE's net premiums written in 1999. Reinsurers typically purchase reinsurance to cover their own risk exposure. Reinsurance of a reinsurer's business is called a retrocession. Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons similar to those that cause ceding companies to purchase reinsurance. -8- Reinsurance can be written through professional reinsurance brokers or directly for ceding companies. From a ceding company's perspective, both the broker market and the direct market have advantages and disadvantages. A ceding company's decision to select one market over the other will be influenced by its perceptions of such advantages and disadvantages relative to the reinsurance coverage being placed. PXRE writes property and casualty treaty and property facultative business both through professional reinsurance brokers and on a direct basis. UNDERWRITING OPERATIONS PXRE, through its subsidiaries, is principally engaged in providing treaty and facultative reinsurance to primary insurers and other reinsurers of commercial and personal property and casualty risks. PXRE also provides marine and aerospace reinsurance products and services. PXRE has specialized in property reinsurance, including a strong focus on catastrophe-type products. In mid-1998, PXRE added new reinsurance lines and expanded its capabilities in existing areas, including establishing a direct-writing reinsurance unit to complement its existing brokerage-based reinsurance operations and offering excess of loss casualty products (including general liability, commercial auto and personal auto) for casualty markets in which PXRE had not previously had a significant presence. In late 1999, PXRE established Bermuda underwriting operations. PXRE operates in four reportable property and casualty segments -- catastrophe and risk excess, casualty, structured/finite business and all other lines -- based on the Company's method of internal management reporting. In addition, the Company 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, Australia and Asia) representing all other premiums written. The reportable segments were redefined during 1999 once the platform for the diversification strategy was largely in place. The prior year segment information has been restated to be consistent with the 1999 segments. The following tables present the distribution of PXRE's net premiums written, net premiums earned and underwriting operations for the years ended December 31, 1999, 1998 and 1997: -9- Net Premiums Written (1)
Year Ended December 31, 1999 1998 1997 ------ ------ ----- Amount Percent Amount Percent Amount Percent --------------------------------------------------------- (in thousands, except percentages) Catastrophe and Risk Excess North American $ 26,704 $ 12,795 $ 21,724 International 63,957 58,595 63,154 Excess of loss cessions (18,883) (3,938) (409) --------- --------- --------- Subtotal 71,778 52% 67,452 76% 84,469 84% --------- --------- --------- Casualty North American 13,148 650 -- International 12,851 4,433 -- --------- --------- --------- 25,999 19% 5,083 6% -- --------- --------- --------- Structured/Finite Business North American -- -- -- International -- -- -- --------- --------- --------- -- -- -- --------- --------- --------- Other Lines North American 12,073 2,054 4,848 International 28,995 14,105 10,738 --------- --------- --------- 41,068 29% 16,159 18% 15,586 16% --------- --- --------- --- --------- --- Total $ 138,845 100% $ 88,694 100% $ 100,055 100% ========= === ========= === ========= ===
-10- Net Premiums Earned (1)
Year Ended December 31, 1999 1998 1997 ------ ------ ------- Amount Percent Amount Percent Amount Percent ---------------------------------------------------------------------------- (in thousands, except percentages) Catastrophe and Risk Excess North American $ 26,155 $ 13,561 $ 21,877 International 61,241 63,830 60,148 Excess of loss cessions (14,958) (2,869) (353) --------- -------- -------- Subtotal 72,438 56% 74,522 81% 81,672 89% --------- -------- -------- Casualty North American 11,593 (152) -- International 9,794 2,207 -- --------- -------- -------- 21,387 17% 2,055 2% -- --------- -------- -------- Structured/Finite Business North American -- -- -- International -- -- -- --------- -------- -------- -- -- -- --------- -------- -------- Other Lines North American 11,296 3,234 5,650 International 23,383 12,575 4,093 --------- -------- -------- 34,679 27% 15,809 17% 9,743 11% --------- --- -------- --- -------- --- Total $ 128,504 100% $ 92,386 100% $ 91,415 100% ========= === ======== === ======== ===
-11- Underwriting Operations (2)
Year Ended December 31, 1999 1998 1997 ------ ------ ------- Amount Percent Amount Percent Amount Percent ---------------------------------------------------------------------------- (in thousands, except percentages) Catastrophe and Risk Excess North American $ (31,591) $ 6,970 $ 13,655 International (32,039) 7,081 48,197 Excess of loss cessions 15,476 8,372 2,407 --------- -------- -------- Subtotal (48,154) 87% 22,423 141% 64,259 102% --------- -------- -------- Casualty North American (279) (409) -- International (242) 87 -- --------- -------- -------- (521) 1% (322) (2)% -- --------- -------- -------- Structured/Finite Business North American -- -- -- International 411 -- -- --------- -------- -------- 411 (1)% -- -- -- --------- -------- -------- Other Lines North American (715) (1,442) (2,075) International (6,166) (4,794) 573 --------- -------- -------- (6,881) 13% (6,236) (39)% (1,502) (2)% --------- --- -------- --- -------- --- Total $ (55,145) 100% $ 15,865 100% $ 62,757 100% ========= === ======== === ======== ===
- ------------------ (1) Premiums written and earned are expressed on a net basis (after deduction for ceded reinsurance premiums) to reflect more accurately business written for PXRE's own account. (2) Underwriting operations include premiums earned, losses incurred and commission and brokerage net of management fees, but do not include investment income, realized gains or losses, interest expense, operating expenses, unrealized foreign exchange gains or losses on losses incurred or management fees on weather contracts. -12- The catastrophe and risk excess portfolio consists principally of property catastrophe excess of loss, property retrocessional, property risk excess, property London Market Excess ("LMX") and marine and aerospace excess reinsurance coverages. This portfolio can be characterized on a longer term basis as being comprised of coverages involving higher margins and greater volatility than other coverages written by the Company. In 1999, $90,661,000 of net premiums written were attributable to the catastrophe and risk excess portfolio, or $71,778,000 net of excess of loss retrocessional reinsurance ceded to other reinsurers. Over the periods indicated pricing and other coverage terms deteriorated and in response PXRE moved to layers of risk less affected by competitive pressures, or reduced commitments. Notwithstanding these moves, in 1999 this portfolio produced an underwriting loss of $48,154,000 as a consequence of major events. In contrast, this portfolio produced underwriting profits of $22,423,000 and $64,259,000 in 1998 and 1997, respectively. The increase in premium volume for catastrophe and risk excess coverages in 1999 was attributable to reinstatement premiums on 1999 catastrophe activity, offset, in part, by the purchase of increased amounts of retrocessional protection. The exposures underlying the North American portion of this portfolio emanate from East Coast and Gulf hurricanes, Midwest and West Coast earthquakes, major oil rig explosions, cruise ship disasters, satellite failures, commercial airplane crashes and similar risks. The exposures underlying the International portion of this portfolio emanate from European, Japanese and Carribbean windstorm, flood and earthquake. The casualty portfolio consists principally of North American general liability, commercial and personal auto liability risk excess and other liability coverages and International pro rata casualty coverages. This portfolio can be characterized on a longer term basis as being comprised of coverages involving lower margins and less volatility than the Company's catastrophe and risk excess portfolio. Casualty accounted for $25,999,000 of net premiums written in 1999, split approximately equally between the Company's North American and International geographical segments. Premiums written in 1999 represented a substantial increase over 1998, when PXRE entered the market in the latter half of the year. In 1999, the casualty portfolio produced an underwriting loss of $521,000 before investment income, realized gains and losses and overhead expenses. PXRE entered the structured/finite business in the latter part of 1999 with products combining elements of risk transfer and managing the impact of such risk on a cedent's financial statements and cash flow. Premiums in this segment are expected to vary widely from period to period. PXRE's other lines portfolio consists of many different coverages, principally accident and health coverages, of which North American and International accounted for $6,980,000 and $13,324,000, respectively, of net premiums written in 1999, property pro rata business and binding and lineslip authorities written through PXRE Lloyd's Syndicate. The Company's other lines portfolio produced a North American underwriting loss of $715,000 and International underwriting loss of $6,166,000, up modestly in the aggregate from 1998. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding PXRE's reportable segments and geographic areas. PXRE's treaty underwriting process emphasizes a team approach among the Company's underwriters, actuaries and claims staff. Treaties are reviewed for compliance with PXRE's general underwriting standards and certain treaties are evaluated in part based upon actuarial analyses conducted by the Company. PXRE's facultative underwriters operate within guidelines specifying acceptable types of risks, limits and maximum risk exposure. The Company manages its risk of loss through a combination of aggregate exposure limits, underwriting guidelines that take into account risks, prices and coverage and retrocessional agreements. As PXRE underwrites risks from a large number of insurers based on information generally supplied by reinsurance brokers, there is a risk of developing a concentration of exposure to loss in certain geographic areas prone to specific types of catastrophes. The Company has developed systems and software tools to monitor and manage the accumulation of its exposure to such losses. Management has established guidelines for maximum tolerable losses from a single or multiple catastrophic event based on historical data. However, no assurance can be given that these maximums will not be exceeded in some future catastrophe. -13- MARKETING PXRE provides reinsurance for international insurance and reinsurance companies principally headquartered in the United Kingdom, Continental Europe, Australia and Asia. In the United States, PXRE currently reinsures both national and regional insurance and reinsurance companies and specialty insurance companies. Historically, PXRE has obtained most of its facultative and substantially all of its treaty reinsurance business through reinsurance intermediaries which represent reinsureds in negotiations for the purchase of reinsurance. None of the reinsurance intermediaries through which PXRE obtains this business are authorized to arrange any business in the name of PXRE without PXRE's approval. PXRE pays such intermediaries or brokers commissions based on the amount of premiums and type of business ceded. These payments constitute part of PXRE's total acquisition costs and are included in its underwriting expenses. PXRE generally pays reinsurance brokerage fees believed to be comparable to industry norms. Approximately 19.1%, 10.7% and 13.2% of gross premiums written in fiscal year 1999 were arranged through the worldwide branch offices of Aon Group Ltd., Guy Carpenter & Company, Inc. (subsidiary of Marsh & McLennan Companies, Inc.) and Benfield Greig Ltd., respectively. The commissions paid by PXRE to these intermediaries are generally at the same rates as those paid to other intermediaries. In mid-1998 PXRE established a U.S. based direct writing reinsurance unit to complement its existing brokerage-based reinsurance operations. Approximately 88.1% and 11.9% of PXRE's 1999 net premiums written were written in the broker and direct markets, respectively. PXRE's U.S. based direct writings are comprised principally of casualty business. PXRE's ability to write reinsurance both through brokers and directly with ceding companies gives it the flexibility to pursue business regardless of the ceding company's preferred reinsurance purchasing method. COMPETITION Competitive forces in the property and casualty reinsurance and insurance business are substantial. PXRE operates in a reinsurance industry which is highly competitive and is undergoing a variety of challenging developments. The industry has in recent years moved toward greater consolidation as ceding companies have placed increased importance on size and financial strength in the selection of reinsurers. Additionally, reinsurers are tapping new markets and complementing their range of traditional reinsurance products with innovative new products which bring together capital markets and reinsurance experience. PXRE competes with numerous major reinsurance and insurance companies. These competitors, many of which have substantially greater financial, marketing and management resources than PXRE, include independent reinsurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain commercial insurance companies, and underwriting syndicates. PXRE also may face competition from new market entrants or from market participants that determine to devote greater amounts of capital to the types of business written by PXRE. Although PXRE historically has obtained most of its facultative and substantially all of its treaty reinsurance business through reinsurance intermediaries or brokers, it competes indirectly with reinsurers who obtain business directly from primary insurers because PXRE's brokers must compete with direct reinsurers for business to be forwarded to PXRE. PXRE's recently established direct writing reinsurance unit competes directly with other direct reinsurers. PXRE therefore competes both with reinsurers that obtain business directly from reinsureds and with reinsurers that obtain their business through intermediaries and brokers. Competition in the types of reinsurance business which PXRE underwrites is based on many factors, including the perceived overall financial strength of the reinsurers, premiums charged, other terms and conditions, -14- ratings of A.M. Best, S&P and Moody's Investors Service, Inc. ("Moody's"), service offered, speed of service (including claims payment), and perceived technical ability and experience of staff. The number of jurisdictions in which a reinsurer is licensed or authorized to do business is also a factor. PXRE Reinsurance is licensed, accredited, or otherwise authorized or permitted to conduct reinsurance business in all states (except Arkansas, Minnesota, Oklahoma and Washington) and the District of Columbia, Puerto Rico, Columbia and Mexico, and PXRE's Brussels Branch operates from Belgium. PXRE Bermuda is licensed to do business only in Bermuda. RETROCESSIONAL AGREEMENTS The following table sets forth certain information regarding the volume of premiums PXRE has ceded to other reinsurers pursuant to retrocessional agreements for the periods indicated:
Year Ended December 31, ----------------------------------------- 1999 1998 1997 (in thousands) Gross premiums written $221,349 $136,215 $126,232 Reinsurance premiums ceded: Managed business participants 42,549 21,542 16,534 Catastrophe coverage and other reinsurance 39,955 25,979 9,643 Total reinsurance premiums ceded 82,504 47,521 26,177 -------- -------- -------- Net premiums written $138,845 $ 88,694 $100,055 ======== ======== ========
PXRE has been able to increase its underwriting commitments and to generate management fee income by retroceding some of its underwritten risks to other reinsurers through various retrocessional arrangements whereby it manages business for such participants. In 1999, PXRE was a party to three such arrangements. The first such arrangement, which is subject to renewal each January 1 and which has been renewed effective January 1, 2000, is referred to as the AMA. The AMA is a pool consisting of a number of insurance companies (the "Pool"), for which PXRE acts as reinsurance manager. In 1999, the Pool was comprised of Merrimack Mutual Fire Insurance Company, Pennsylvania Lumbermens Mutual Insurance Company, NRMA Insurance Limited, Auto-Owners Insurance Company and the Kyoei Mutual Fire & Marine Insurance Company. It is PXRE's policy that in order to join the Pool, companies must have a rating by A.M. Best of "A-" or better, other than foreign companies, most of which (including the foreign participants in the AMA) are not rated by A.M. Best. Under the terms of the agreements governing the Pool, if a participating company's rating falls below "A-", it generally will be required to withdraw from the Pool in the following year. PXRE receives, as reinsurance manager, a commission based on premiums ceded, as well as a contingent profit commission equal to a percentage of any ultimate underwriting profits in connection with the reinsurance ceded. The contingent profit commission is paid after a three-year period and is subject to adjustment based on cumulative experience. The second such retrocessional arrangement, which was not renewed upon its expiration December 31, 1999, was with Trenwick America Reinsurance Corporation ("Trenwick Group"). Under this arrangement PXRE receives, as reinsurance manager, a management fee based on premiums ceded, as well as a contingent profit commission equal to a percentage of any ultimate underwriting profits in connection with the reinsurance ceded. The contingent profit commission is paid after a three-year period and is subject to adjustment based on cumulative experience. Trenwick Group is currently rated "A" (Excellent) by A.M. Best. -15- The third such retrocessional arrangement is with Select Re. This arrangement involves a multi-year fee based undertaking by PXRE through the year ending December 31, 2003 to produce and underwrite business with Select Re. The undertaking, which is subject to adjustment based on Select Re's shareholders' equity, was approximately $29.5 million in aggregate premium for 1999. PXRE receives an override commission on premiums ceded to Select Re. Because Select Re is not licensed in any jurisdiction in the United States, the retrocessional arrangement provides that a trust fund and/or letter of credit be established by Select Re for the benefit of PXRE to secure Select Re's obligations. Net assets due from Select Re at December 31, 1999 of $14,932,000 is secured by a trust agreement and letter of credit. As previously discussed, the Chief Executive Officer and an Executive Officer of PXRE are on the Board of Directors and are shareholders of Select Re. The Chief Executive Officer of PXRE is Co-Vice Chairman of Select Re and the Executive Officer of PXRE was formerly the President of Select Re. The following table sets forth PXRE's earned commissions from retrocessionaires pursuant to its three managed business arrangements for the periods indicated:
Year Ended December 31, ------------------------------------------ 1999 1998 1997 --------- ---------- --------- (in thousands) Commission $3,851 $2,247 $ 879 Contingent profit commission(1) (761) (75) 2,127 ------ ------ ------ Total $3,090 $2,172 $3,006 ====== ====== ======
- ------------------- (1) Contingent profit commission is paid after a three-year period and is subject to adjustment based on cumulative experience under the AMA and Trenwick Group arrangements and prior to 1998 under the arrangement with Select Re. PXRE also purchases catastrophe retrocessional coverage for its own protection, depending on market conditions. PXRE significantly increased its purchases of such coverage in 1998 and 1999. In 1999 and 1998, catastrophe and other reinsurance ceded premiums written increased due to additional coverage associated with new operations and to opportunistic purchases of catastrophe retrocessional protection. Certain business fronted on behalf of other reinsurers also contributed to the 1999 increase in catastrophe and other reinsurance ceded premiums written. PXRE's property business is protected by a series of retrocessional agreements which currently provide protection principally against unusual severity of loss and are not designed to protect PXRE's exposure to smaller, more frequent loss occurrences. PXRE has a committee consisting of its chief executive officer and senior underwriting executives responsible for the selection of reinsurers as managed business participants or as participating reinsurers in the catastrophe coverage protecting PXRE. Proposed reinsurers are evaluated at least annually based on consideration of a number of factors including the management, financial statements and the historical experience of the reinsurer. This procedure is followed whether or not a rating has been assigned to a proposed reinsurer by any rating organization. All reinsurers, whether obtained through direct contact or the use of reinsurance intermediaries, are subject to approval by PXRE. At December 31, 1999, estimated losses recoverable (including incurred but not reported losses ("IBNR")) from retrocessionaires were $106,702,000 including $5,667,000 of paid loss recoverables. Although management carefully selects its retrocessionaires, PXRE is subject to credit risk with respect to its retrocessions because the ceding of risk to retrocessionaires does not relieve the Company of its liability to ceding companies. LOSS LIABILITIES AND CLAIMS PXRE establishes loss and loss expense liabilities (to cover expenses related to settling claims, including legal and other fees) to provide for the ultimate cost of settlement and administration of claims for losses, including claims that have been reported to it by its reinsureds and claims for losses that have occurred but have not yet been -16- reported to PXRE. Under United States generally accepted accounting principles ("GAAP"), PXRE is not permitted to establish loss reserves until an event which may give rise to a claim occurs. For reported losses, PXRE establishes liabilities when it receives notice of the claim. It is PXRE's general policy to establish liabilities for reported losses in an amount equal to the liability set by the reinsured. In certain instances, PXRE will conduct an investigation to determine if the amount established by the reinsured is appropriate or if it should be adjusted. For incurred but not reported losses, a variety of methods have been developed in the insurance industry for use in determining such liabilities. In general, these methods involve the extrapolation of reported loss data to estimate ultimate losses. PXRE's loss calculation methods generally rely upon a projection of ultimate losses based upon the historical patterns of reported loss development. Additionally, PXRE makes provision through its liabilities for incurred but not reported losses for any identified deficiencies in the liabilities for reported losses set by its reinsureds. PXRE's management believes that its overall liability for losses and loss expenses maintained as of December 31, 1999 is adequate. Because of the inherent uncertainty in the reserving process, however, there is a risk that PXRE's liability for losses and loss expenses could prove to be greater than expected in any year, with a consequent adverse impact on future earnings and shareholders' equity. Estimating the ultimate liability for losses and loss expenses is an imprecise science subject to variables that are influenced by both internal and external factors. Historically, PXRE has focused on property related coverages. In contrast to casualty losses, which frequently are slow to be reported and may be determined only through the lengthy, unpredictable process of litigation, property losses tend to be reported more promptly and usually are settled within a shorter time period. However, the estimation of losses for catastrophe reinsurers is inherently less reliable than for reinsurers of risks which have an established historical pattern of losses. In addition, insured events which occur near the end of a reporting period, as well as, with respect to PXRE's retrocessional book of business, the significant delay in losses being reported to insurance carriers, reinsurers and finally retrocessionaires, require PXRE to make estimates of losses based on limited information from ceding companies and based on its own underwriting data. Although historically PXRE has written a small amount of casualty reinsurance, in 1998 PXRE began underwriting new casualty lines of business and PXRE substantially expanded its casualty business in 1999. With respect to casualty business, significant delay, ranging up to several years or more, can be expected between the reporting of a loss to PXRE and the settlement of PXRE's liability for that loss. As a result, such future claim settlements could be influenced by changing rates of inflation and other economic conditions, changing legislative, judicial and social environments and changes in PXRE's claims handling procedures. While the reserving process is difficult and subjective for ceding companies, the inherent uncertainties of estimating such reserves are even greater for a reinsurer, due primarily to the longer time between the date of the occurrence and the reporting of any attendant claims to the reinsurer, the diversity of development patterns among different types of reinsurance treaties or facultative contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing reserving practices among ceding companies. -17- PXRE's difficulty in accurately predicting casualty losses may also be exacerbated by the limited amount of statistically significant historical data regarding losses on PXRE's new casualty lines of business. PXRE must therefore rely on the inherently less reliable historical loss patterns reported by ceding companies and industry loss standards in calculating its casualty reserves. Thus, the actual casualty losses and loss expenses may deviate, perhaps substantially, from estimates of liabilities reflected in PXRE's consolidated financial statements. The following table provides a reconciliation of beginning and ending loss and loss expense liabilities under GAAP for the fiscal years ended December 31, 1999, 1998 and 1997. PXRE does not discount such liabilities; that is, it does not calculate them on a present value basis.
Year Ended December 31, 1999 1998 1997 -------- -------- -------- (in thousands) Gross GAAP liability for losses and loss expenses at beginning of year................................. $ 102,592 $ 57,189 $ 70,978 Add: Gross provision for losses and loss expenses-- Occurring in current year.......................................... 200,132 94,003 19,344 Occurring in prior years........................................... 57,129 90 (4,721) -------- -------- -------- Total gross provision(1)......................................... 257,261 94,093 14,623 -------- -------- -------- Less: Gross payments for losses and loss expenses-- Occurring in current year.......................................... 17,508 19,582 4,705 Occurring in prior years........................................... 80,794 29,108 23,707 -------- -------- -------- Total gross payments............................................. 98,302 48,690 28,412 -------- -------- -------- Gross GAAP liability for losses and loss expenses at end of year................................... $ 261,551 $102,592 $ 57,189 ========= ======== ======== Ceded GAAP liability for losses and loss expenses at end of year................................... (101,035) (33,350) (12,734) -------- -------- -------- Net GAAP liability for losses and loss expenses at end of year................................... $ 160,516 $ 69,242 $ 44,455 ========= ======== ======== Foreign currency adjustment.......................................... 249 (193) 482 ========= ======== ======== Gross SAP liability for losses and loss expenses at end of year(2).................................... $ 261,800 $102,399 $ 57,671 ========= ======== ========
- ---------------- (1) The GAAP provision for losses and loss expenses includes net foreign currency exchange (losses) gains of $442,000, ($675,000) and $627,000 for 1999, 1998 and 1997, respectively. (2) SAP is U.S. statutory accounting principles. The following table presents the development of PXRE's GAAP balance sheet liability for losses and loss expenses for the period 1989 through 1999. The top line of the table shows the liabilities at the balance sheet date for each of the indicated years. This reflects the estimated amount of losses and loss expenses for claims arising in that year and all prior years that are unpaid at the balance sheet date, including losses incurred but not yet reported to PXRE. The upper portion of the table shows the cumulative amounts subsequently paid as of successive years with respect to the liability. The lower portion of the table shows the reestimated amount of previously recorded liability based on experience as of the end of each succeeding year. The estimates change as more information becomes known about the frequency and severity of claims for individual years. A redundancy (deficiency) exists when the reestimated liability at each December 31 is less (greater) than the prior liability estimate. The "cumulative redundancy (deficiency)" depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years. Each amount in the table below includes the effects of all changes in amounts for prior periods. For example, if a loss determined in 1992 to be $150,000 was first reserved in 1989 at $100,000, the $50,000 deficiency (actual loss minus original estimate) would be included in the cumulative redundancy (deficiency) in each of the years 1989-1991 shown below. This table does not present accident or policy year development data. -18- Loss and loss expense liabilities for fiscal years 1991 through 1999 are presented on a gross basis (excluding the effects of losses recoverable from retrocessionaires). Loss and loss expense liabilities for December 31, 1990 and prior periods are stated on a net basis (after deduction for losses recoverable from retrocessionaires) because gross incurred but not reported liability data were not developed by PXRE at any date prior to December 31, 1991 as it was not required for reporting purposes. Furthermore, it is not practicable for PXRE currently to reconstruct this information. -19-
Year Ended December 31, ------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 ------- ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ (in thousands, except percentages) Liabilities for losses and loss expenses................. $261,551 $102,592 $57,189 $61,389 $72,719 $81,836 $71,442 $88,668 $62,664 $31,632 $37,963 Cumulative amount of liability paid through: One year later................ 75,814 29,108 23,708 42,698 41,601 37,820 59,773 35,575 15,688 18,421 Two years later............... 39,853 40,673 55,620 58,968 54,400 79,926 48,393 25,466 28,178 Three years later............. 46,545 67,296 67,630 60,850 89,519 52,301 29,066 31,852 Four years later.............. 70,676 76,762 64,566 94,261 55,022 30,117 33,980 Five years later.............. 79,433 69,414 96,895 56,976 31,528 34,434 Six years later............... 70,392 99,864 58,822 32,137 35,408 Seven years later............. 100,724 61,235 33,202 36,003 Eight years later............. 62,130 33,624 36,980 Nine years later.............. 33,956 37,301 Ten years later............... 37,485 Liabilities reestimated as of: One year later................ 135,227 57,280 66,257 83,228 87,818 78,188 101,423 67,165 33,874 37,211 Two years later............... 55,271 63,292 85,162 87,750 76,902 103,632 62,262 33,726 37,800 Three years later............. 61,178 83,178 90,409 74,683 105,165 62,827 33,488 36,588 Four years later.............. 82,129 89,284 75,392 103,801 63,032 33,682 36,881 Five years later.............. 88,326 74,880 104,330 62,593 34,310 37,023 Six years later............... 74,173 104,222 63,632 33,777 37,667 Seven years later............. 103,854 63,792 34,714 37,166 Eight years later............. 63,633 34,815 37,998 Nine years later.............. 34,777 38,124 Ten years later............... 38,084 Gross reserves of TREX at date of merger..................... 9,589 5,242 2,067 26 Gross reserves for elimination of one quarter lag for U.K. subsidiary............... (1,191) Gross cumulative redundancy (deficiency) through December 31, 1999: Amount........................ (33,826) 1,918 9,800 (4,168) (4,423) (2,705) (15,186) (969) NA NA Percentage.................... (33%) 3% 14% (5%) (5%) (4%) (17%) (2%) NA NA Retrocessional recoveries....... 14,045 (749) (1,517) 6,796 2,500 726 2,689 1,936 NA NA Net cumulative redundancy (deficiency) through December 31, 1999: ------- ----- ------ ------ ------ ------ ------ ----- ------ ----- Amount....................... (19,781) 1,169 8,283 2,628 (1,923) (1,979) (12,497) (2,905) (3,145) (111) Percentage................... (29%) 3% 15% 5% (4%) (5%) (35%) (8%) (10%) 0%
-20- During 1999, PXRE incurred development from prior year losses amounting to $19,781,000 net as a result of changes in estimates of insured events in prior years, primarily Hurricanes Georges and Mitch and accident and health and facultative reserve strengthening in PXRE Lloyd's Syndicate. During 1998, PXRE experienced savings of $532,000 net, for prior year losses and loss expenses primarily related to the triggering of a retrocessional recovery on a 1994 aviation loss offset in part by adverse development due to the 1997 German, Polish and Czech floods. During 1997, PXRE experienced savings of $3,917,000 net, for prior-year losses and loss expenses primarily related to the Eurotunnel fire and Hurricane Fran where redundant reserves were recognized in 1997 of approximately $1,644,000 and $1,440,000, respectively. In addition, included in the savings of $3,917,000 were prior-year losses originally thought to have triggered market loss coverage thresholds which proved to be redundant by approximately $1,800,000 offset, in part, by development on prior-year facultative losses. During 1996, PXRE incurred development from prior year losses amounting to $3,249,000 primarily due to Hurricanes Marilyn and Luis. During 1995, PXRE incurred development from prior year losses amounting to $4,311,000 primarily as a result of losses from the Northridge earthquake. During 1994, PXRE incurred development from prior year losses amounting to $3,261,000 primarily as a result of marine pro rata losses and 1993 Midwest flood activity. During 1993, PXRE's management strengthened the liability for incurred but not reported losses occurring in prior years by $10,499,000, of which approximately $5,394,000 was the result of additional information received with respect to Hurricanes Andrew and Iniki and approximately $3,330,000 was the result of losses under a number of pro rata reinsurance treaties. During 1992, PXRE's management strengthened the liability for incurred but not reported losses occurring in prior years by $2,355,000 of which $2,036,000 was the result of additional information received with respect to losses under a number of pro rata reinsurance treaties. In 1991, PXRE's management strengthened the liability for losses and loss expenses occurring in prior years by $2,242,000, of which $1,196,000 was due to unfavorable development experienced on PXRE's marine and aerospace reinsurance business. PXRE commenced writing marine and aerospace reinsurance in 1988 and estimated the amounts of losses and loss expenses for claims on such business during 1988 and subsequent periods based on cumulative experience as of such time. As more information became available, prior estimates were revised. Approximately $740,000 of the balance of the liability strengthening in 1991 was attributable to changes in 1991 in the loss amounts applicable to catastrophes which occurred in 1989 and 1990, years impacted by high levels of catastrophe loss activity. Management of PXRE believes that the cumulative reserve redundancies in 1995, 1996 and 1997 demonstrated by the above table, and that the strengthening of reserves in 1989-1994 and 1998, is attributable to the factors described above and not to any material changes in reserving methods or assumptions. -21- Conditions and trends that have affected reserve development in the past may not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on the foregoing. INVESTMENTS PXRE's management has established general procedures and guidelines for its investment portfolio and oversees investment management carried out by Phoenix Investment Partners, Limited (formerly Phoenix Duff & Phelps Corporation), a public majority-owned subsidiary of Phoenix Home Life, and by Mariner Investment Group, Inc. ("Mariner") the sole shareholder of which is the Chairman of the Board and a founding shareholder of Select Re. PXRE's invested assets consist primarily of fixed maturities and limited partnerships, but also include equities, real estate investment trusts ("REITS") and short-term investments. PXRE's investments are subject to market-wide risks and fluctuations, as well as to risk inherent in particular securities. As at December 31, 1999, PXRE had $26,214,000 in equity securities (at cost) and $93,147,000 in various limited partnerships (at cost). The limited partnerships primarily include a fund of funds investing in a multiple number of hedge strategies. Short-term investments includes one limited partnership which invests primarily in marketable fixed income securities and provides for fund withdrawals upon 30 days' notice. Limited partnership investments are accounted for under the equity method, whereby both the investment income and any change in the market value are recorded through the investment income line of the income statement. Included in investments in limited partnerships are investments (at cost) aggregating $55,517,000 in various limited partnerships affiliated with Mariner, including an investment of $17,517,000 in Mariner Select, L.P., which provided approximately $10,618,000 of investment income for PXRE in 1999. See Note 3 of Notes to Consolidated Financial Statements. The investment policies of PXRE stress conservation of principal, diversification of risk and liquidity. -22- The following table summarizes the investments of PXRE at December 31, 1999 and 1998: ANALYSIS OF INVESTMENTS
December 31, 1999 December 31, 1998 ----------------------------- --------------------------- Amount Percent Amount Percent ------ ------- ------ ------- (in thousands, except percentages) Fixed maturities (at amortized cost): United States government securities $104,034 21.1 $113,030 23.9 Foreign government securities 10,116 2.0 43,815 9.3 United States government agency mortgage and asset-backed securities 25,417 5.1 1,087 0.2 Other mortgage and asset-backed securities 69,105 14.0 43,175 9.1 Obligations of states and political subdivisions 94,692 19.2 97,470 20.6 Public utilities, industrial and miscellaneous securities 26,598 5.4 10,081 2.1 -------- ----- -------- ---- Total fixed maturities 329,962 66.8 308,658 65.2 Equity securities (at cost) 26,214 5.3 41,146 8.7 Short-term investments (at cost) 44,384 9.0 57,244 12.1 Limited Partnership assets (at cost) 93,147 18.9 66,588 14.0 -------- ---- -------- ---- Total investments $493,707 100 $473,636 100 ======== ==== ======== ====
At December 31, 1999, the fair value of PXRE's investment portfolio exceeded its amortized cost by $15,861,000 due to equity accounting on the limited partnerships amounting to $25,949,000, offset in part by unrealized depreciation on fixed maturities and equity securities amounting to $10,088,000. At December 31, 1998, the fair value of PXRE's investment portfolio exceeded its amortized cost by $841,000. -23- The following table indicates the composition of PXRE's fixed maturity investments (at amortized cost), including short-term investments (at cost), by time to maturity at December 31, 1999 and 1998: COMPOSITION OF INVESTMENTS BY MATURITY
December 31, 1999 December 31, 1998 ------------------ -------------------- Amount Percent Amount Percent ------ ------- ------ ------- (in thousands, except percentages) Maturity(1) One year or less $ 50,963 13.6 $73,955 20.2 Over 1 year through 5 years 118,566 31.7 121,627 33.2 Over 5 years through 10 years 79,630 21.3 65,077 17.8 Over 10 years through 20 years 10,659 2.8 27,777 7.6 Over 20 years 18,929 5.1 33,204 9.1 -------- ---- -------- ----- 278,747 74.5 321,640 87.9 United States government agency and other mortgage and asset-backed securities 95,599 25.5 44,262 12.1 -------- ---- -------- ---- Total $374,346 100 $365,902 100 ======== ==== ======== ====
- ------------------------ (1) Based on stated maturity dates with no prepayment assumptions. The average market yield to maturity of PXRE's fixed maturities portfolio at December 31, 1999 and December 31, 1998 was 6.6% and 5.9%, respectively. At December 31, 1999, the fair value of PXRE's fixed maturities portfolio was less than its amortized cost by $8,714,000. At December 31, 1998, the fair value of PXRE's fixed maturities portfolio exceeded its amortized cost by $819,000. -24- The following table indicates the composition of PXRE's fixed maturities portfolio (at amortized cost), excluding short-term investments, by rating at December 31, 1999 and 1998: COMPOSITION OF FIXED MATURITIES PORTFOLIO BY RATING
December 31, 1999 December 31, 1998 ------------------- ------------------- Amount Percent Amount Percent ------ ------- ------ ------- (in thousands, except percentages) Ratings(1) - ----------- United States government securities $104,034 31.5 $113,030 36.6 United States government agency mortgage and asset-backed securities 25,416 7.7 1,087 0.4 Other mortgage and asset-backed securities Aaa and/or AAA 57,321 17.4 34,558 11.2 Aa2 and/or AA 3,168 1.0 -- -- A2 and/or A 8,000 2.4 8,000 2.6 Baa2 and/or BBB 615 0.1 616 0.2 Obligations of states and political subdivisions Aaa and/or AAA 70,053 21.2 64,883 21.0 Aa2 and/or AA 24,639 7.5 32,587 10.6 Public utilities and industrial and miscellaneous securities Aaa and/or AAA 2,499 0.8 -- -- Aa2 and/or AA 5,871 1.8 -- -- A2 and/or A 3,379 1.0 749 0.2 Baa2 and/or BBB 4,549 1.4 4,226 1.4 Ba2 and/or BB 7,444 2.3 3,117 1.0 B2 and/or B 2,856 0.9 1,989 0.6 Foreign government securities Baa2 and/or BBB 2,908 0.9 3,820 1.2 Ba2 and/or BB 4,873 1.5 30,196 9.8 B2 and/or B 2,337 0.6 8,618 2.8 Ca and/or CC -- -- 1,182 0.4 -------- --- -------- --- Total $329,962 100 $308,658 100 ======== === ======== ===
- ---------------------------- (1) Ratings as assigned by Moody's and S&P, respectively. Such ratings are generally assigned upon the issuance of the securities, subject to revision on the basis of ongoing evaluations. PXRE's management continually evaluates the composition of the investment portfolio and repositions the portfolio in response to market conditions in order to improve total returns while maintaining liquidity and superior credit quality. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources -- Market Risk." -25- REGULATION PXRE, PXRE Reinsurance and Transnational Insurance are subject to regulation under the insurance statutes of various U.S. states, including Connecticut, the domiciliary state of PXRE Reinsurance and Transnational Insurance. The regulation and supervision to which PXRE Reinsurance and Transnational Insurance are subject relate primarily to the standards of solvency that must be met and maintained, licensing requirements for reinsurers and insurers, the nature of and limitations on investments, restrictions on the size of risks which may be insured, deposits of securities for the benefit of a reinsured or insured, methods of accounting, periodic examinations of the financial condition and affairs of reinsurers and insurers, the form and content of reports of financial condition required to be filed, reserves for losses, and other purposes. In general, such regulation is for the protection of the reinsureds and policyholders, rather than investors. In addition, PXRE, PXRE Reinsurance and Transnational Insurance are subject to regulation by U.S. state insurance authorities under the insurance holding company statutes of various states, including Connecticut. These laws and regulations vary from state to state, but generally require an insurance holding company and insurers and reinsurers that are subsidiaries of an insurance holding company to register with the state regulatory authorities and to file with those authorities certain reports including information concerning their capital structure, ownership, financial condition, and general business operations. Moreover, PXRE Reinsurance and Transnational Insurance may not enter into certain transactions, including certain reinsurance agreements, management agreements, and service contracts, with members of their insurance holding company system, unless they have first notified the Connecticut Insurance Commissioner of their intention to enter into any such transaction and the Connecticut Insurance Commissioner has not disapproved of such transaction within the period specified by the Connecticut insurance statute. Among other things, such transactions are subject to the requirements that their terms be fair and reasonable, charges or fees for services performed be reasonable and the interests of policyholders not be adversely affected. U.S. state laws also require prior notice or regulatory agency approval of direct or indirect changes in control of an insurer, reinsurer, or its holding company, and of certain significant intercorporate transfers of assets within the holding company structure. An investor who acquires shares representing or convertible into more than 10% of the voting power of the securities of PXRE would become subject to at least some of such regulations, would be subject to approval by the Connecticut Insurance Commissioner prior to acquiring such shares, and would be required to file certain notices and reports with the Commissioner prior to such acquisition. See "Market for Registrant's Common Equity and Related Stockholder Matters" for a discussion of other limitations on voting and ownership of PXRE securities contained in PXRE's Bye-Laws. The principal sources of cash for the payment of operating expenses and income taxes, debt service obligations, and dividends by PXRE are the receipt of dividends and net tax allocation payments from PXRE Reinsurance, Transnational Insurance and PXRE Bermuda. Under the Connecticut insurance laws, the maximum amount of dividends or other distributions that PXRE Reinsurance may declare or pay, and that Transnational Insurance may declare or pay to PXRE Reinsurance, within any twelve-month period, without regulatory approval, is limited to the lesser of (a) earned surplus or (b) the greater of 10% of policyholder surplus at December 31 of the preceding year, or 100% of net income for the twelve-month period ended December 31 of the preceding year, all determined in accordance with U.S. statutory accounting principles ("SAP"). Accordingly, the Connecticut insurance laws could limit the amount of dividends available for distribution by PXRE Reinsurance or Transnational Insurance without prior regulatory approval, depending upon a variety of factors outside the control of PXRE, including the frequency and severity of catastrophe and other loss events and changes in the reinsurance market, in the insurance regulatory environment and in general economic conditions. The maximum amount of dividends or distributions that PXRE Reinsurance may declare and pay during 2000, without regulatory approval, is limited to approximately $39,901,000. Transnational Insurance may not declare or pay any dividend to PXRE Reinsurance in 2000, without regulatory approval. During 1999, $35,525,695 in dividends were paid by PXRE Reinsurance, including extraordinary dividends and $10,000,000 was paid by Transnational Insurance to PXRE Reinsurance, including extraordinary dividends. In both cases authorization was obtained from the Insurance Department of the State of Connecticut. See below for a discussion of Bermuda dividend restrictions applicable to PXRE Bermuda. -26- See also "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Additionally, Connecticut has adopted regulations respecting certain minimum capital requirements for property and casualty companies, based upon a model adopted by the National Association of Insurance Commissioners (the "NAIC"). The risk-based capital regulations provide for the use of a formula to measure statutory capital and surplus needs based on the risk characteristics of a company's products and investment portfolio to identify weakly capitalized companies. As at December 31, 1999, PXRE Reinsurance's surplus and Transnational Insurance's surplus substantially exceeded their respective calculated risk-based capital. In addition, from time to time various regulatory and legislative changes have been proposed in the U.S. insurance industry, some of which could have an effect on reinsurers and insurers. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers, the initiative to create a federally guaranteed disaster reinsurance pool prefunded by insurers, and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. Furthermore, the NAIC has commenced a project to codify statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. Accordingly, that project, which is expected to take affect in 2001, will likely change the definitions of what constitutes prescribed versus permitted statutory accounting practices and will likely result in changes to the accounting policies that insurance enterprises use to prepare their statutory financial statements. The NAIC is an organization which assists state insurance supervisory officials in achieving insurance regulatory objectives, including the maintenance and improvement of state regulation. See also, "Taxation of PXRE and its Subsidiaries -- Legislation" PXRE is unable to predict what effect, if any, the foregoing developments may have on its operations and financial condition in the future. The NAIC's Insurance Regulatory Information System ("IRIS") was developed by a committee of state insurance regulators and is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies eleven industry ratios and specifies "usual values" for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer's business. For the years ended December 31, 1999, 1998 and 1997, PXRE Reinsurance's results were within the usual values for each of the eleven ratios, except for one ratio in each of 1999 and 1998. PXRE's management believes that the ratio fell outside the usual range in 1999 due to the unusual level of catastrophe losses in 1999 and in 1998 due to the substantial turmoil in global securities markets and the resulting decline in the value of certain limited partnership investments. In 1999, Transnational Insurance's results were within the usual values for each of the eleven ratios except for one due to the increase in net writings arising from an intercompany pooling agreement in 1999 with its parent PXRE Reinsurance. In 1998 one ratio was outside the usual range due primarily to the change in net writings associated with business written in 1994 to 1996. In 1997, two ratios were outside the usual range, when Transnational Insurance did not write any business and paid a dividend, including an extraordinary dividend, of $58,877,000 to PXRE Reinsurance, affecting the change in net writings ratio and change in surplus ratio. PXRE Limited, PXRE Managing Agency and PXRE Lloyd's Syndicate are subject to regulation by Lloyd's. The form of that regulation is prescribed by the Lloyd's Act of 1982 and Lloyd's internal regulatory by-laws and directions. The regulation and supervision to which PXRE Limited is subject relates primarily to the maintenance of a risk based capital requirement (by way of a deposit of securities and a letter of credit with Lloyd's to support its underwriting) and methods of accounting. PXRE Managing Agency must satisfy a solvency requirement, methods of accounting and periodic examinations of compliance with Lloyd's by-laws and other purposes. PXRE Lloyd's Syndicate has to comply with accounting regulation, internal reporting and periodic examinations of compliance. The Lloyd's market is regulated externally by the Financial Services Authority, although the day to day regulation of the market remains the responsibility of the Council of Lloyd's. All invested -27- assets of PXRE Lloyd's Syndicate amounting to approximately $11,253,000 at December 31, 1999, are restricted from being paid as a dividend for at least three years. The Insurance Act 1978 of Bermuda and related regulations (collectively, the "Act") imposes on Bermuda insurance companies, including PXRE Bermuda, solvency and liquidity standards and auditing and reporting requirements and grants to the Minister of Finance powers to supervise, investigate and intervene in the affairs of insurance companies. The Act provides that the value of the general business assets of a Class 3 insurer must exceed the amount of its general business liabilities by at least the prescribed minimum solvency margin. PXRE Bermuda, as a Class 3 insurer, is required to maintain a minimum solvency margin equal to the greatest of: (A) $1,000,000, (B) 20% of net premiums written up to $6,000,000 plus 15% of net premiums written over $6,000,000, and (C) 15% of loss reserves. In addition, PXRE Bermuda is prohibited from declaring or paying any dividends during any financial year it is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio (if it fails to meet its minimum solvency margin or minimum liquidity ratio on the last day of any financial year, the insurer will be prohibited, without the approval of the Minister, from declaring or paying any dividends during the next financial year). As a Class 3 insurer, PXRE Reinsurance also is prohibited, without the approval of the Minister, from reducing by 15% or more its total statutory capital, as set out in its previous year's financial statements, and if it appears to the Minister that there is a risk of the insurer becoming insolvent or that it is in breach of the Insurance Act or any conditions imposed upon its registration, the Minister may, in addition to the restrictions specified above, direct the insurer not to declare or pay any dividends or any other distributions or may restrict it from making such payments to such extent as the Minister may think fit. The Act provides a minimum liquidity ratio for general business. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment income due and accrued, accounts and premiums receivable and reinsurance balances receivable. There are certain categories of assets which, unless specifically permitted by the Minister, do not automatically qualify as relevant assets such as unquoted equity securities, investments in and advances to affiliates, real estate and collateral loans. The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax and sundry liabilities (by interpretation, those not specifically defined). Under Bermuda law, PXRE Bermuda may not lawfully declare or pay a dividend unless there are reasonable grounds for believing that it is, or will after payment of the dividend be, able to pay its liabilities as they become due, and that the realizable value of its assets will, after payment of the dividend, be greater than the aggregate value of its liabilities, issued share capital and share premium accounts. PXRE Bermuda is also required to maintain statutory assets in an amount that permits it to meet the prescribed minimum solvency margin for the net premium income level of its business from time to time. In addition, the directors of PXRE Bermuda are, as a matter of prudence, required to ensure that any dividend declared or paid is not of an amount that will reduce the reserves of PXRE Bermuda to a level that is not sufficient to meet the reserve requirements of its business. At December 31, 1999 PXRE Bermuda's solvency and liquidity margins and statutory capital and surplus were in excess of the minimum levels required by Bermuda regulations. TAXATION OF PXRE AND ITS SUBSIDIARIES The following summary of the taxation of PXRE, PXRE Bermuda, PXRE Barbados and PXRE's U.S. subsidiaries, including PXRE Reinsurance, Transnational Insurance, PXRE Trading Corporation, TREX Trading Corporation, PXRE Solutions Inc., PXRE Direct Underwriting Managers, Inc. and PXRE Underwriting Managers, -28- Inc. (collectively, the "PXRE U.S. Companies") is based upon current law. Legislative, judicial or administrative changes may be forthcoming that could affect this summary. See, for example, "Legislation" below. Certain subsidiaries and branch offices of PXRE are subject to taxation related to operations in the United Kingdom and Belgium. Bermuda PXRE and PXRE Bermuda have each received from the Minister of Finance an assurance under The Exempted Undertakings Tax Protection Act, 1966 of Bermuda, to the effect that in the event of there being enacted in Bermuda any legislation imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax shall not be applicable to PXRE or PXRE Bermuda or to any of their operations or the shares, debentures or other obligations of PXRE or PXRE Bermuda until March 28, 2016. These assurances are subject to the proviso that they are not construed so as to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda (PXRE and PXRE Bermuda are not currently so designated) or to prevent the application of any tax payable in accordance with the provisions of The Land Tax Act of 1967 of Bermuda or otherwise payable in relation to the land leased to PXRE or PXRE Bermuda. Barbados PXRE Barbados is subject to a Barbados corporation tax, assessed at a rate of 2.5% on profits and gains of up to 10 million Barbados Dollars (approximately U.S. $5 million), and at declining rates on profits and gains exceeding 10 million Barbados Dollars. PXRE Barbados may elect to take a credit in respect of taxes paid to a country other than Barbados provided that such an election does not reduce the tax payable in Barbados to a rate less than 1% of the profits and gains of PXRE Barbados in any income year. United States The PXRE U.S. Companies carry on business in, and are subject to taxation in, the United States. PXRE believes that it and its subsidiaries, other than the PXRE U.S. Companies, have operated and will continue to operate their business in a manner that will not cause them to be treated as engaged in a trade or business within the United States. Tax conventions between the United States and Bermuda or Barbados may provide relief to PXRE Bermuda and PXRE Barbados, respectively, if either such company is deemed to be engaged in the conduct of a U.S. trade or business. Under the tax convention between Bermuda and the United States (the "Bermuda Treaty"), a Bermuda company predominantly engaged in the insurance business, such as PXRE Bermuda, is subject to U.S. income tax on its insurance income found to be effectively connected with a U.S. trade or business only if that trade or business is conducted through a permanent establishment in the United States. (As a holding company that is not predominantly engaged directly in an insurance business, PXRE Group Ltd. is not entitled to the benefits of the Bermuda Treaty.) Similarly, under the tax convention between Barbados and the United States (the "Barbados Treaty"), a corporation that is a Barbados resident will not be subject to U.S. income tax on income that is effectively connected with a U.S. business, unless such business is conducted through a permanent establishment in the United States. Each of PXRE Group Ltd., PXRE Bermuda and PXRE Barbados will operate under guidelines that are intended to minimize the risk that it will be treated as engaged in a U.S. trade or business, and each of PXRE Bermuda and PXRE Barbados will operate under guidelines that are intended to minimize the risk that it will be found to have a U.S. permanent establishment. On this basis, PXRE does not expect that it and its subsidiaries, other than the PXRE U.S. Companies, will be required to pay U.S. federal corporate income taxes (other than withholding taxes on certain U.S. source investment income and excise taxes on reinsurance premiums as described below). However, irrespective of such guidelines, there can be no assurance that PXRE Bermuda and PXRE Barbados will qualify for the Bermuda Treaty and the Barbados Treaty, respectively, now or in the future, or that the Bermuda Treaty or the Barbados Treaty will not be -29- terminated or revised in a manner that could adversely affect any protection from U.S. corporate tax that it currently provides. In addition, because there is uncertainty as to the activities which constitute being engaged in a trade or business in the United States, there can be no assurances that the U.S. Internal Revenue Service will not contend successfully that PXRE or a non-U.S. subsidiary is engaged in a trade or business in the United States. The maximum federal tax rates currently are 35% for a corporation's income which is effectively connected with being engaged in a trade or business in the United States. In addition, the U.S. branch profits tax of 30% is imposed each year on a corporation's earnings and profits (with certain adjustments) effectively connected with its U.S. trade or business deemed repatriated out of the United States, for a potential maximum effective tax rate of approximately 54% on the net business connected with a U.S. trade or business. Foreign corporations not engaged in a trade or business in the United States are subject to U.S. income tax, effected through withholding by the payor, on certain "fixed or determinable annual or periodic gains, profits and income" derived from sources within the United States as enumerated in Section 881(a) of the U.S. Internal Revenue Code (the "Code"). The United States also imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the United States. The rate of tax applicable to reinsurance premiums paid to PXRE Bermuda is 1% of gross premiums. Legislation PXRE understands that certain U.S.-based insurance companies are advocating an amendment to the Code which would impose federal income tax on a domestic insurer which is controlled by a foreign reinsurer on the deemed investment income on its reserves on U.S. risks ceded to one or more foreign reinsurers. At this point, the Company is unable to predict whether this legislative effort will be successful, what form any such legislation may ultimately take and what impact any such legislation would have on the Company. EMPLOYEES PXRE employed 103 full-time employees as at December 31, 1999. None of PXRE's employees is represented by a labor union, and management considers its relationship with its employees to be excellent. Bermuda based employees of PXRE, including senior management of PXRE Group Ltd. and PXRE Bermuda, are employed pursuant to work permits granted by Bermuda authorities. These permits expire at various times over the next few years. The Company has no reason to believe that these permits would not be extended at expiration upon request, although no assurance can be given in this regard. ITEM 2. PROPERTIES PXRE leases a total of approximately 69,500 square feet of office space in Hamilton, Bermuda (PXRE's corporate headquarters), Edison, New Jersey, Norwalk, Connecticut, New York, New York, Richmond, Virginia, San Francisco, California, London, England and Brussels, Belgium. The Hamilton, Bermuda lease, which covers approximately 2,618 square feet of office space, was signed in 1999 and is for a term of two (2) years at a fixed annual rent of approximately $102,000 and additional rents on account of PXRE's proportionate share of services. The Edison, New Jersey space is comprised of (i) a 1994 lease of approximately 24,000 square feet of office space, for a term of 15 years at a fixed annual rent of approximately $370,000 (inclusive of basic electricity) and additional rents on account of PXRE Corporation's proportionate share of increases in building operating expenses and property taxes over calendar year 1994, and (ii) a November 1999 lease of approximately 24,000 square feet of additional office space for a term of 10 years expiring on October 31, 2009 at fixed rentals of approximately $582,000 for years 1-5 of the term and $676,000 for years 6-10 of the term, in each case plus additional rents on account of PXRE Corporation's proportionate share of taxes and operating expenses attributable to the building. Relatedly, in February 2000 PXRE Corporation subleased approximately 11,000 square feet of the additional space for a three year term ending on the -30- 36th month next following the date that the premises are delivered to the subtenant. The sublease provides for the subtenant to pay fixed rent to PXRE Corporation at the rate of approximately $274,000 per annum, together with electricity at the rate of approximately $16,500 per annum. The subtenant is additionally required to pay its proportionate share of taxes and operating expenses payable by PXRE Corporation under the lease. ITEM 3. PENDING LEGAL PROCEEDINGS PXRE is subject to litigation and arbitration in the ordinary course of its business. Management does not believe that the eventual outcome of any such pending litigation or arbitration is likely to have a material adverse effect on the Company's financial condition or business. Pursuant to PXRE's insurance and reinsurance arrangements, disputes are generally required to be finally settled by arbitration. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At a special meeting of the stockholders of PXRE Corporation on October 5, 1999, the holders of PXRE Corporation common stock approved the following: (1) The approval and adoption of the Agreement and Plan of Merger, dated July 7, 1999 (the "Merger Agreement") among PXRE Corporation, PXRE Group Ltd. and PXRE Merger Corp.
Broker Votes For Votes Against Abstentions Non-Votes --------- ------------- ------------ ---------- Approval of the Merger Agreement 6,989,981 2,065,714 18,941 2,549,966
-31- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PXRE's common shares are listed on the New York Stock Exchange under the symbol "PXT". The following table sets forth for the periods indicated the high and low bid quotations for PXRE's common shares as reported by the New York Stock Exchange and cash dividends per common share declared and subsequently paid:
Bid Price --------------- High Low Dividends ---- --- --------- 1998: First Quarter $ 35.25 $ 29.375 $ 0.25 Second Quarter 32.875 29.00 0.25 Third Quarter 30.50 25.625 0.25 Fourth Quarter 26.688 20.625 0.26 1999: First Quarter $ 26.25 $ 18.00 $ 0.26 Second Quarter 21.25 16.00 0.26 Third Quarter 19.0625 14.3125 0.06 Fourth Quarter 14.50 10.00 0.06
These prices represent quotations by dealers and do not include markups, markdowns, or commissions, and do not necessarily represent actual transactions. As of March 24, 2000, there were 11,758,174 common shares issued and outstanding, which shares were held by approximately 90 shareholders of record and, based on PXRE's best information, by approximately 2200 beneficial owners of the common shares. See Notes 8 and 9 of Notes to Consolidated Financial Statements for information with respect to shares reserved for issuance under employee benefit and stock option plans. The payment of dividends on the common shares is subject to the discretion of the Board of Directors which will consider, among other factors, PXRE's operating results, overall financial condition, capital requirements and general business conditions. There can be no assurance that dividends will be paid in the future. As a holding company, PXRE is largely dependent upon dividends and net tax allocation payments from its subsidiaries including PXRE Reinsurance, Transnational Insurance and PXRE Bermuda, to pay dividends to PXRE's shareholders. PXRE Reinsurance and Transnational Insurance are subject to U.S. state laws, and PXRE Bermuda is subject to Bermuda law, that may restrict their ability to distribute dividends. In addition, certain covenants in PXRE's bank credit agreement may restrict PXRE's ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Business--Regulation" for further information concerning restrictions contained in PXRE's bank credit agreement and under U.S. and Bermuda law. Under PXRE's Bye-Laws, subject to certain exceptions and to waiver by PXRE's board of directors on a case by case basis, no transfer of PXRE shares is permitted if such transfer would result in a shareholder owning, directly or indirectly, more than 9.9% of the voting power of the outstanding shares, including common shares, of -32- PXRE or more than 9.9% of the outstanding shares of any class of PXRE's stock. Ownership is broadly defined in PXRE's Bye-Laws. PXRE may refuse to register any such transfer on PXRE's share transfer records. A transferee will be permitted to promptly dispose of any PXRE shares purchased which violate the restriction and as to the transfer of which registration is refused. The transferor of such PXRE shares will be deemed to own such shares for dividend, voting and reporting purposes until a transfer of such shares has been so registered. In addition, in the event that PXRE becomes aware of a shareholder owning more than 9.9% of the voting power of PXRE's outstanding shares after a transfer of shares has been registered, PXRE's Bye-Laws provide that, subject to the same exceptions and waiver procedures, the voting rights with respect to PXRE shares owned by any such shareholder will be limited to a voting power of 9.9%. The voting rights with respect to all shares held by such person in excess of the 9.9% limitation will be allocated to the other holders of PXRE common shares. Such allocation will be pro rata based on the number of PXRE common shares held by all such other holders of PXRE common shares, subject only to the further limitation that no shareholder allocated any such voting rights may exceed the 9.9% limitation as a result of such allocation. Recent Sales of Unregistered Securities (Information required by Item 701 of Regulation S-K): (a) On June 4, 1999, 12,000 PXRE common shares were issued. (b) The securities were issued to the PXRE Purpose Trust in connection with the Bermuda redomestication. (c) The securities were issued for $12,000 and the PXRE Purpose Trust made subsequent capital contributions, of $865,000 in respect of such shares. (d) Exemption from registration was claimed pursuant to Section 4(2) of the Securities Act of 1933. There was no public offering and the participants in the transaction were the Company and the PXRE Purpose Trust, a trust established and funded by PXRE Corporation in connection with that corporation's Bermuda redomestication. (e) Not applicable. -33- ITEM 6. SELECTED FINANCIAL DATA.
Year Ended December 31, ----------------------- 1999 1998 1997 1996 1995 (1)(2) (1)(2) (1)(2) (3) ------ ------- ------ ------- ------ (in thousands, except per share data and ratios) INCOME STATEMENT DATA: Gross premiums written $221,349 $136,215 $126,232 $114,348 $155,380 Premiums ceded (82,504) (47,521) (26,177) (46,630) (57,744) --------- --------- --------- --------- --------- Net premiums written 138,845 88,694 100,055 67,718 97,636 Change in unearned premiums (10,341) 3,692 (8,640) 5,078 (494) --------- --------- ---------- ---------- ---------- Net premiums earned 128,503 92,386 91,415 72,796 97,142 Net investment income 47,173 19,612 31,191 16,782 14,730 Net realized investment (losses) gains (3,766) (3,862) 2,467 94 85
Management fees(3) 3,590 2,172 3,006 6,032 6,417 --------- --------- ---------- ---------- ---------- Total revenues 175,500 110,308 128,079 95,704 118,374 ------- ------- -------- --------- -------- Losses and loss expenses incurred 159,259 57,793 12,491 18,564 34,716 Commissions and brokerage 27,703 20,563 19,138 12,874 13,251 Other operating expenses 30,052 19,313 15,716 12,262 11,237 Interest expense 3,915 1,395 3,325 6,957 7,143 Minority interest in consolidated subsidiary 8,790 8,928 8,184 -- -- -------- --------- --------- ----------- ------------- Total losses and expenses 229,719 107,992 58,854 50,657 66,347 ------- ------- -------- -------- --------- (Loss) income before income taxes, cumulative effect of accounting change, extraordinary (54,219) 2,316 69,225 45,047 52,027 item and equity in net earnings of TREX Equity in net earnings of TREX(3) 0 0 0 3,898 5,948 Income tax (benefit) provision (12,775) (1,206) 22,198 15,644 18,189 -------- ------- ---------- -------- -------- (Loss) income before cumulative effect of (41,444) 3,522 47,027 33,301 39,786 accounting change and extraordinary loss Cumulative effect of accounting change, net of tax 695 -- -- -- -- Extraordinary loss on debt redemption, net of tax 0 843 2,774 -- -- --------- ------ -------- -------- -------- Net (loss) income $(42,139) $2,679 $ 44,253 $ 33,301 $ 39,786 ========= ====== ======== ======== ======== Preferred stock dividend(4) 0 0 0 0 599 ========= ====== ======== ======== ======== Net (loss) income available to common stockholders $(42,139) $2,679 $ 44,253 $ 33,301 $ 39,187 ========= ====== ======== ======== ========
-34-
1999 1998 1997 1996 1995 (1)(2) (1)(2) (1)(2) (3) ------ ------- ------- ------ ------ (in thousands, except per share data and ratios) Ratio of earnings to fixed charges(5) -- 1.09 6.59 7.15 7.90 Ratio of earnings to combined fixed charges -- and preferred dividends(5) 1.09 6.59 7.15 7.04 Basic earnings per common share: (Loss) income before cumulative effect of accounting change and extraordinary item $ (3.58) $ 0.26 $ 3.41 $ 3.73 $ 4.81 Cumulative effect of accounting change (0.06) -- -- -- -- Extraordinary loss -- 0.06 0.20 -- -- -------- -------- ------- ------- ------- Net (loss) income $ (3.64) $ 0.20 $ 3.21 $ 3.73 $ 4.81 ======== ======= ======= ======= ======= Average common shares outstanding(3)(4) 11,568 13,339 13,776 8,922 8,150 ====== ====== ======== ======= ======= Diluted earnings per common share: (Loss) income before cumulative effect of accounting change and extraordinary item $ (3.58) $ 0.26 $ 3.39 $ 3.69 $ 4.52 Cumulative effect of accounting change (0.06) -- -- -- -- Extraordinary loss -- 0.06 0.20 -- -- -------- -------- ------- ------- ------- Net (loss) income $ (3.64) $ 0.20 $ 3.19 $ 3.69 $ 4.52 ======== ======= ======= ======= ======= Average common shares outstanding(3) 11,568 13,452 13,893 9,020 8,812 ====== ====== ====== ======= ======== Cash dividends per common share $ 0.64 $ 1.01 $ 0.88 $ 0.75 $ 0.63 OTHER OPERATING DATA: GAAP loss ratio(6) 123.9% 62.6% 13.7% 25.5% 35.7% GAAP underwriting expense ratio(6) 43.0% 40.9% 34.8% 26.2% 18.6% ------- ------- ------- ----- ----- GAAP combined ratio(6) 166.9% 103.5% 48.5% 51.7% 54.3% ====== ====== ======= ===== =====
As of December 31, ----------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- ------ BALANCE SHEET DATA: (in thousands, except per share data and ratios) Cash and investments $524,303 $490,594 $527,738 $467,078 $269,089 Total assets 780,180 632,691 608,172 543,324 396,084 Losses and loss expenses 261,551 102,592 57,189 70,977 72,719 Minority interest in consolidated subsidiary 99,521 99,517 99,513 -- -- Debt payable 75,000 50,000 21,414 64,725 67,775 Total stockholders' equity 263,279 334,376 386,688 357,678 211,162 Book value per common share $ 22.54 $ 27.13 $ 28.10 $ 25.63 $ 24.15 Statutory capital and surplus of PXRE Reinsurance $399,007 $447,229 $451,321 $400,133 $250,231 Statutory capital and surplus of PXRE Bermuda(1) $25,200 -- -- -- --
- ------------------- (1) PXRE Group Ltd. was incorporated on June 1, 1999 as a Bermuda holding company and a wholly owned subsidiary of PXRE Purpose Trust, a purpose trust established under the laws of Bermuda. On October 5, 1999, PXRE Corporation, -35- a publicly held Delaware holding company ("PXRE Delaware") completed a reorganization pursuant to which the Company became the ultimate parent holding company of PXRE Delaware. PXRE Delaware and its subsidiaries provide property and casualty reinsurance and insurance products to a national and international market place. In connection with the reorganization, the Company repurchased for $1.00 per share 100% of the common shares owned by PXRE Purpose Trust and each outstanding share of PXRE Delaware common stock (other than shares held by PXRE Delaware and its subsidiaries) was converted into one common share of the Company. After the consummation of the reorganization the Company commenced carrying on the holding company functions previously conducted by PXRE Delaware. (2) In the fourth quarter of 1999, PXRE changed the reporting period for its U.K. operations from a fiscal year ending September 30 to a calendar year ending December 31. The results of operations for the period from October 1, 1998 to December 31, 1998 amounted to a loss of approximately $140,000. This loss was charged to retained earnings during the year in order to report only twelve months operating results. The U.K. operations of PXRE Limited and PXRE Managing Agency are included in the consolidated results on a one quarter lag basis from 1997 through the third quarter of 1999. (3) On December 11, 1996, PXRE merged with TREX. The Merger has been accounted for as a purchase. Accordingly, TREX has been included in PXRE's consolidated results of operations from the date of acquisition, which resulted in incremental earnings of $1,253,000 in 1996. For 1994 and 1995 and for the period from January 1, 1996 until December 11, 1996, PXRE recorded equity in net earnings of TREX. Diluted average shares outstanding reflects the 5,680,256 weighted shares issued to holders of TREX common shares in connection with the Merger. Included in management fee was $2,512,000, $3,526,000 and $3,364,000 in 1996, 1995 and 1994, respectively, earned from TREX prior to the Merger. If the Merger had taken place at the beginning of 1996 and 1995, consolidated revenues would have been $153,410,000 and $193,972,000 for 1996 and 1995, respectively. Consolidated pro forma net income and diluted net income per share would have been $49,161,000 and $3.42 in 1996 and $60,755,000 and $4.19 in 1995. Such pro forma amounts are not necessarily indicative of what the actual consolidated results might have been if the Merger had been effected prior to December 11, 1996. (4) During 1995, all of PXRE's outstanding shares of Series A Cumulative Convertible Preferred Stock were converted into shares of PXRE's common stock. (5) The ratios of earnings to fixed charges were determined by dividing consolidated earnings by total fixed charges. For purposes of these computations (i) earnings consist of consolidated income before considering income taxes, fixed charges and minority interest and (ii) fixed charges consist of interest on indebtedness and that portion of rentals which is deemed by PXRE's management to be an appropriate interest factor. Earnings were inadequate to cover fixed charges by $55,288,000 for the year ended December 31, 1999. The ratios of earnings to combined fixed charges and preferred dividends were determined by dividing consolidated earnings by total fixed charges and preferred dividends. Earnings were inadequate to cover fixed charges and preferred dividends by $55,288,000 for the year ended December 31, 1999. (6) The loss, underwriting expense and combined ratios included under "Other Operating Data" have been derived from the audited consolidated statements of income of PXRE prepared in accordance with U.S. GAAP. -36- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL PXRE Group Ltd. ("PXRE" or the "Company") - with operations principally in Bermuda, Barbados, the United States, the United Kingdom and Europe - provides reinsurance products and services to a worldwide market place. The Company primarily emphasizes commercial and personal property and casualty reinsurance risks and it offers both brokerbased and direct-writing distribution capabilities. PXRE also provides marine and aerospace reinsurance products and services. The Company's shares trade on the New York Stock Exchange under the symbol PXT. On October 5, 1999 PXRE Corporation, a Delaware holding company ("PXRE Delaware") completed a reorganization that resulted in the formation of the Company which became the ultimate parent holding company of PXRE Delaware. Holders of PXRE Delaware common stock automatically became holders of the same number of PXRE common shares. The reorganization also involved the establishment of a Bermuda based reinsurance company, PXRE Reinsurance Ltd. ("PXRE Bermuda"), and operations in Barbados through PXRE (Barbados) Ltd ("PXRE Barbados"). The Company conducts its business primarily through its principal operating subsidiaries, PXRE Delaware, PXRE Reinsurance Company ("PXRE Reinsurance"), PXRE Solutions Inc. ("PXRE Solutions"), PXRE Bermuda, PXRE Barbados, PXRE Managing Agency Limited ("PXRE Managing Agency"), PXRE Limited, the sole member of PG Butler Syndicate 1224 ("PXRE Lloyd's Syndicate"), and Transnational Insurance Company ("Transnational Insurance"). The term "PXRE" as used herein, refers to one or more of PXRE Delaware, PXRE Reinsurance, PXRE Solutions, PXRE Bermuda, PXRE Barbados, PXRE Managing Agency, PXRE Lloyd's Syndicate and Transnational Insurance in discussions of these entities' businesses and refers to PXRE Group Ltd. in all other circumstances. The property and casualty reinsurance industry has been experiencing an extended period of soft market conditions characterized by inadequate pricing. The industry is also consolidating through mergers and other acquisitions. PXRE competes with numerous companies, many of which have substantially greater financial, marketing and management resources. Since its formation more than a decade ago, PXRE has specialized in property reinsurance, including a strong focus on catastrophe-type products. Coverage terms for these products have deteriorated in recent years, and PXRE has reduced commitments on marginally priced business. 37 Meanwhile, PXRE has adopted an ambitious diversification strategy involving: - the establishment of a direct presence in the Lloyd's market; - the addition of a reinsurance platform offering primarily casualty products directly to customers; - the enhancement of its international broker market reinsurance platform to include additional lines of business including casualty risks; - the start-up of an excess and surplus lines insurance company; - an acceleration of business offerings to one of its managed business participants; - the formation of a finite reinsurance unit; and - the establishment of a direct presence in the Bermuda market. At December 31, 1999, PXRE was a party to retrocessional arrangements with a number of insurers and reinsurers. Under these arrangements, PXRE cedes some of its underwritten risks to the participants, subject to maximum aggregate liabilities per reinsurance program. PXRE receives a management fee or commission, initially based on premium volume, adjusted in some cases through contingent profit commissions related to underwriting results measured over a period of years. Future management fee income is dependent upon the amount of business ceded to the participants and the profitability of that business. Another arrangement with Select Reinsurance Ltd. ("Select Re"), a Bermuda reinsurer, formerly Investors Reinsurance Ltd., involves a multi-year fee based undertaking by PXRE through the year ending December 31, 2003 to produce and underwrite business with Select Re. Gerald Radke (Chairman, President and Chief Executive Officer of PXRE) and Jeffrey Radke (Executive Vice President of PXRE and President of PXRE Bermuda) are on the Board of Directors of Select Re and are shareholders of Select Re. Gerald Radke is Co-Vice Chairman of Select Re and Jeffrey Radke was formerly the President of Select Re. PXRE also purchases catastrophe retrocessional coverage for its own protection, depending on market conditions. PXRE significantly increased its purchases of such coverage in 1998 and 1999 in light of the continued general deterioration in catastrophe reinsurance pricing and the opportunity to buy protection at more favorable terms than in previous years. CERTAIN RISKS AND UNCERTAINTIES As a reinsurer of property catastrophe-type coverages in the worldwide market place, PXRE's operating results in any given period depend to a large extent on the number and magnitude of natural and man-made catastrophes such as hurricanes, windstorms, floods, earthquakes, spells of severely cold weather, fires and explosions. While PXRE may, depending on market conditions, purchase catastrophe retrocessional coverage for its own protection, the occurrence of one or more major catastrophes in any given period could nevertheless have a material adverse impact on PXRE's results of operations and financial condition and result in substantial liquidation of investments and outflows of cash as losses are paid. 38 The estimation of losses for catastrophe reinsurers is inherently less reliable than for reinsurers of risks which have an established historical pattern of losses. In addition, insured events which occur near the end of a reporting period, as well as with respect to PXRE's retrocessional book of business, the significant delay in losses being reported to insurance carriers, reinsurers and finally retrocessionaires require PXRE to make estimates of losses based on limited information from ceding companies and based on its own underwriting data. Because of the uncertainty in the process of estimating its losses from insured events, there is a risk that PXRE's liabilities for losses and loss expenses could prove to be inadequate, with a consequent adverse impact on future earnings and stockholders' equity. Additionally, as a consequence of its emphasis on property reinsurance, PXRE may forgo potential investment income because property losses are typically settled within a shorter period of time than casualty losses. In addition, the potential for uncertainty for recent underwriting years is greater than in past years because of the increased casualty exposures assumed by PXRE. Unlike property losses that tend to be reported more promptly and usually are settled within a shorter time period, casualty losses are frequently slower to be reported and may be determined only through the lengthy, unpredictable process of litigation. Moreover, given its recent expansion of casualty business, PXRE does not have an established historical loss pattern that can be used to establish casualty loss liabilities. PXRE must therefore rely on the inherently less reliable historical loss patterns reported by ceding companies and industry loss standards in calculating its liabilities. As PXRE underwrites risks from a large number of insurers based on information generally supplied by reinsurance brokers, there is a risk of developing a concentration of exposure to loss in certain geographic areas prone to specific types of catastrophes. PXRE has developed systems and software tools to monitor and manage the accumulation of its exposure to such losses. Management has established guidelines for maximum tolerable losses from a single or multiple catastrophic events based on historical data; however, no assurance can be given that these maximums will not be exceeded in some future catastrophe. Premiums on reinsurance business assumed are recorded as earned on a pro rata basis over the contract period based upon estimated subject premiums. Management must estimate the subject premiums associated with the treaties in order to determine the level of earned premiums for a reporting period. Such estimates are based on information from brokers, which can be subject to change as new information becomes available. Because of the inherent uncertainty in this process, there is the risk that premiums and related receivable balances may turn out to be higher or lower than reported. PXRE's invested assets consist primarily of fixed maturities and limited partnerships, but also include equities, real estate investment trusts ("REITS") and short-term investments. PXRE's investments are subject to market- wide risks and fluctuations, as well as to risk inherent in particular securities. Additionally, the estimated fair value of PXRE's investments does not necessarily represent the amount which could be realized upon future sale particularly if PXRE were required to liquidate a substantial portion of its portfolio to fund catastrophic losses. PXRE's investment guidelines stress conservation of principal, diversification of risk and liquidity. 39 Premium receivables and loss reserves include business denominated in currencies other than U.S. dollars. PXRE is exposed to the possibility of significant claims in currencies other than U.S. dollars. While PXRE holds positions denominated in foreign currencies to mitigate, in part, the effects of currency fluctuations on its results of operations, it currently does not hedge its currency exposures before a catastrophic event which may produce a claim. PXRE and its non-U.S. subsidiaries intend to operate their business in a manner that will not cause them to be treated as engaged in a trade or business in the United States and, thus, will not require them to pay U.S. federal corporate income taxes (other than withholding taxes on certain U.S. source investment income and excise taxes on reinsurance premiums). However, because there is uncertainty as to the activities which constitute being engaged in a trade or business within the United States, there can be no assurances that the U.S. Internal Revenue Service will not contend successfully that PXRE Group or a non-U.S. subsidiary is engaged in a trade or business in the United States. The company understands that certain U.S.-based insurance companies are advocating an amendment to the U.S. Internal Revenue Code which would impose federal income tax on a domestic insurer which is controlled by a foreign reinsurer on the deemed investment income on its reserves on U.S. risks ceded to one or more foreign reinsurers. At this point, the Company is unable to predict whether this legislative effort will be successful, what form any such legislation may ultimately take and what impact any such legislation would have on the Company. If PXRE Group or any of its non-U.S. subsidiaries were subject to U.S. income tax, PXRE Group's shareholders' equity and earnings could be materially adversely affected. COMPARISON OF 1999 WITH 1998
Year Ended December 31, Increase 1999 1998 (Decrease) ---- ---- ---------- (000's) % Gross premiums written $221,349 $136,215 62.5 Ceded premiums: Managed business participants 42,549 21,542 97.5 Catastrophe coverage and other reinsurance 39,955 25,979 53.8 -------- -------- Total reinsurance premiums ceded 82,504 47,521 73.6 -------- -------- Net premiums written $138,845 $ 88,694 56.5 ======== ========
Gross premiums written for 1999 increased 62.5% to $221,349,000 from $136,215,000 for 1998. Net premiums written for the year ended December 31, 1999 increased 56.5% to $138,845,000 from $88,694,000 for 1998. Net premiums earned for the year ended December 31, 1999 increased 39.1% to $128,503,000 40 from $92,386,000 in 1998. Gross written, net written and net earned premiums for 1999 increased from prior year levels reflecting new business written through PXRE's diversification program and approximately $7,548,000 of additional reinstatement premiums generated by 1999 loss activity. Premiums ceded by PXRE to its managed business participants increased 97.5% to $42,549,000 for 1999 compared with $21,542,000 for 1998. The increase in premiums ceded to these programs was due primarily to the increase in gross premiums written, including reinstatement premiums on 1999 catastrophe losses, and to fronting certain businesses on behalf of other reinsurers. In 1999, catastrophe coverage and other reinsurance ceded premiums written increased due to PXRE fronting certain business on behalf of other reinsurers, to additional coverage associated with new operations and to opportunistic purchases of catastrophe retrocessional protection. PXRE's property business is protected by a series of retrocessional agreements which currently provide protection principally against unusual severity of loss and are not designed to protect PXRE's exposure to smaller, more frequent loss occurrences. The following tables summarize the 1999 and 1998 net written and earned premium by PXRE's business segments:
Net Premiums Written (000's except %'s) 1999 1999 1998 1998 ---- ---- ---- ---- Amount % Amount % ------ --- ------ --- Catastrophe and Risk Excess North American $ 26,704 $ 12,795 International 63,957 58,595 Excess of loss cessions (18,883) (3,938) -------- --------- Subtotal 71,778 52% 67,452 76% -------- --------- Casualty North American 13,148 650 International 12,851 4,433 -------- --------- 25,999 19% 5,083 6% -------- --------- Structured/Finite Business North American 0 0 International 0 0 -------- --------- 0 0% 0 0% -------- --------- Other Lines North American 12,073 2,054 International 28,995 14,105 -------- --------- 41,068 29% 16,159 18% -------- --------- Total $138,845 100% $ 88,694 100% ======== ==== ========= ====
41
Net Premiums Earned (000's except %'s) 1999 1999 1998 1998 ---- ---- ---- ---- Amount % Amount % ------ --- ------ --- Catastrophe- and Risk Excess North American $ 26,155 $ 13,561 International 61,241 63,830 Excess of loss cessions (14,958) (2,869) ---------- ----------- Subtotal 72,438 56% 74,522 81% ---------- ----------- Casualty North American 11,593 (152) International 9,794 2,207 ---------- ---------- 21,387 17% 2,055 2% ---------- ---------- Structured /Finite Business North American 0 0 International 0 0 ---------- ---------- 0 0% 0 0% ---------- ---------- Other Lines North American 11,296 3,234 International 23,383 12,575 ---------- ---------- 34,679 27% 15,809 17% ---------- --- ---------- ---- Total $ 128,504 100% $ 92,386 100% ========== ==== ========== ====
Management fee income from all sources for the year ended December 31, 1999 increased 65.3% to $3,590,000 from $2,172,000 for 1998, reflecting higher ceded premiums written, including higher management fee income earned from Select Re, offset in part by reduced profit commission from 1999 catastrophe losses. The underwriting results of a property and casualty insurer are discussed frequently by reference to its loss ratio, underwriting expense ratio and combined ratio. The loss ratio is the result of dividing losses and loss expenses incurred by net premiums earned. The underwriting expense ratio is the result of dividing underwriting expenses (reduced by management fees, if any) by net premiums written for purposes of U.S. SAP and net premiums earned for purposes of U.S. GAAP. The combined ratio is the sum of the loss ratio and the underwriting expense ratio. A combined ratio under 100% indicates underwriting profits and a combined ratio exceeding 100% indicates underwriting losses. The combined ratio does not reflect the effect of investment income on operating results. The ratios discussed below have been calculated on a U.S. GAAP basis. The loss ratio was 123.9% for 1999 compared with 62.6% for 1998 largely due to fifteen catastrophe events in 1999, primarily in the fourth quarter when $59,635,000 of the $79,465,000 in net catastrophe losses for 1999 occurred. The loss ratio for 1999 reflected incurred catastrophe losses of $170,477,000 gross and $92,687,000 net. In comparison, the loss ratio for 1998 reflected incurred catastrophe losses of $55,564,000 gross and $29,437,000 net largely due to Hurricane Georges and two aerospace catastrophes. 42 Significant catastrophe and risk losses affecting the year ended December 31, 1999 loss ratio are as follows:
Amount of Losses ---------------- Loss Event Gross Net - ---------- ----- --- (in thousands) French Storm Martin $31,300 $24,000 French Storm Lothar 51,900 20,600 Hurricane Floyd 20,900 13,700 Danish Storms 14,800 11,400 Hurricane Lenny 4,300 3,300 Hurricane Bart 5,800 2,500 Three Risk Losses 11,300 3,500
Significant catastrophe and satellite losses affecting the year ended December 31, 1998 loss ratio are as follows:
Amount of Losses ---------------- Loss Event Gross Net - ---------- ----- --- (in thousands) Hurricane Georges $49,106 $ 25,753 Hailstorms 4,521 3,597 Swissair and Delta 3 Satellites 4,087 3,399
The provision for losses and loss expenses and the loss ratio includes the effect of foreign exchange movements on PXRE's liability for losses and loss expenses, resulting in a foreign currency exchange gain of $442,000 for 1999 compared to a loss of $675,000 for 1998. During 1999, PXRE experienced adverse development of $19,781,000 net for prior-year loss and loss expenses primarily related to $8,400,000 of Hurricane Georges, $1,400,000 of Hurricane Mitch and other 1998 events, including $3,381,000 in PXRE Lloyd's Syndicate, primarily due to accident and health and facultative reserve strengthening. During 1998, PXRE experienced savings of $532,000 net for prior-year loss and loss expenses primarily related to the triggering of a retrocessional recovery on a 1994 aviation loss offset in part by adverse development due to the 1997 German, Polish and Czech floods. The underwriting expense ratio was 43.0% for 1999 compared with 40.9% for 1998. The increase in underwriting expense ratio was substantially due to an increase in salary and benefits incurred in building the diversified business. As a result of the above, the combined ratio was 166.9% for 1999 compared with 103.5% for 1998. The increase in PXRE's GAAP combined ratio was primarily caused by the catastrophe activity previously discussed. 43 The following table summarizes the 1999 and 1998 underwriting profit and loss by segment:
Underwriting (000's except %'s) 1999 1999 1998 1998 ---- ---- ---- ---- Amount % Amount % ------ ---- ------ ---- Catastrophe and Risk Excess North American $(31,591) $ 6,970 International (32,039) 7,081 Excess of loss cessions 15,476 8,372 --------- ------- Subtotal (48,154) 87% 22,423 141% --------- ------- Casualty North American (279) (409) International (242) 1% 87 --------- ------- (521) (322) (2%) --------- ------- Structured/Finite Business North American 0 0 International 411 0 --------- ------- 411 (1%) 0 (0%) --------- ------- Other Lines North American (715) (1,442) International (6,166) (4,794) --------- ------- (6,881) 13% (6,236) (39%) --------- --- ------- ---- Total $(55,145) 100% $ 15,865 100% ========= ==== ========== ====
Underwriting operations include premiums earned, losses incurred and commission and brokerage net of management fees, but do not include investment income, realized gains or losses, interest expense, operating expenses, unrealized foreign exchange gains or losses incurred or management fees on weather contracts. The catastrophe and risk excess underwriting portfolio can be characterized on a longer term basis as being comprised of coverages involving higher margins and greater volatility than other coverages written by PXRE. Over the periods indicated pricing and other coverage terms deteriorated and in response PXRE moved to layers of risk less affected by competitive pressure; or reduced commitments. Notwithstanding these moves, in 1999 this portfolio produced an underwriting loss as a result of major events. Other operating expenses increased to $30,052,000 for the year ended December 31, 1999 from $19,313,000 in 1998, as a result of the costs incurred to implement PXRE's planned diversification including an increase in salary and related benefit costs of $6,329,000 and data processing costs of $1,462,000. Included in other operating expenses were foreign currency exchange losses of $836,000 for 1999 compared to gains of $204,000 for the corresponding period of 1998. In addition, PXRE incurred charges of approximately $1,087,000 after-tax in connection with the redomestication as well as tax charges discussed below. Also in 1999, PXRE incurred $695,000 in after-tax expenses associated with a change in accounting in accordance with the American Institute of Certified Public Accountants Statement of Position 98-5, for organizational and start-up costs capitalized in prior years. During 1999, interest expense increased to $3,915,000 as compared to $1,395,000 in 1998. The increase in interest expense relates to a drawdown of $50,000,000 under a credit facility at a fixed rate of 6.34% on December 30, 1998, and a drawdown of the remaining $25,000,000 of this facility in the fourth quarter of 1999, at a variable annual rate of 7.12%. See "Liquidity and Capital Resources". Interest in 1998 reflected $21,400,000 of PXRE's 9.75% Senior Debt which was retired in August 1998. In addition, during 1999 PXRE incurred minority interest expense amounting to $8,790,000 related to PXRE's $100 million of 8.85% Capital Trust Pass-through Securities'sm' (TRUPS'sm') 44 (as described below under "Liquidity and Capital Resources") compared to $8,928,000 in 1998. Net investment income for the year ended December 31, 1999 increased, 140.5% to $47,173,000 from $19,612,000 for 1998. The increase in net investment income was caused primarily by strong limited partnership investment returns amounting to $25,700,000 (which are carried on the equity method). PXRE's pre-tax investment yield was 10.4% for 1999 compared with 4.3% for 1998, both calculated using amortized cost and investment income before investment expenses. Net realized investment losses for 1999 were $3,766,000, reflecting losses from trading of weather contracts compared to losses of $3,862,000 for 1998 from volatile emerging market bonds offset, in part, by net gains from sale of other securities. The net effects of foreign currency exchange fluctuations were losses of $394,000 in 1999, as compared to losses of $471,000 for 1998. In 1999, PXRE changed the reporting period for its UK operations from a fiscal year ending September 30, to a calendar year ending December 31. The results of operations for the period from October 1, 1998 to December 31, 1998, amounted to a loss of approximately $140,000. This loss was charged to retained earnings during the year in order to report only 12 months of operating results. The increase in losses in the fourth quarter of 1999 amounted to $3,517,000, primarily related to the European storms. The tax benefit includes a one-time income tax charge in connection with the Bermuda redomestication of approximately $1.8 million related to the cancellation of shares of PXRE Delaware held by its subsidiary. In addition, PXRE incurred a tax charge of $2,314,000 upon payment of a dividend by PXRE Delaware in connection with the redomestication. For the reasons discussed above, the net loss was $42,139,000 for 1999 compared to net income of $2,679,000 for 1998. The diluted loss per common share before cumulative effect of accounting change and extraordinary loss was $3.58 for 1999 compared to net income of $0.26 for the prior year. The diluted net loss per common share was $3.64 for 1999 compared to net income of $0.20 for 1998 based on diluted average shares outstanding of approximately 11,568,000 in 1999 and 13,452,000 in 1998. 45 COMPARISON OF 1998 AND 1997
Year Ended December 31, Increase 1998 1997 (Decrease) ---- ---- ---------- (000's) % ------ --- Gross premiums written $136,215 $126,232 7.9 Ceded premiums: Managed business participants 21,542 16,534 30.3 Catastrophe coverage 25,979 9,643 169.4 --------- --------- ------ Total reinsurance premiums ceded 47,521 26,177 81.5 --------- --------- ------- Net premiums written $ 88,694 $100,055 (11.4) ======== ======== ======
Gross premiums written for 1998 increased 7.9% to $136,215,000 from $126,232,000 for 1997. Net premiums written for the year ended December 31, 1998 decreased 11.4% to $88,694,000 from $100,055,000 as PXRE increased the purchase of reinsurance and retrocessional coverage in 1998. Net premiums earned for the year ended December 31, 1998, increased 1.1% to $92,386,000 from $91,415,000 in 1997. The contribution of PXRE Lloyd's Syndicate operation, which commenced in the first quarter of 1997, together with PXRE's new business initiatives commenced in 1998, more than offset the continued impact of an intensely competitive market on PXRE's other business lines and helped PXRE increase its premium volume during the fourth quarter of 1998. New business expansion in 1998 included an international treaty underwriting team, excess and surplus lines written by Transnational Insurance, new international facultative business, and PXRE's new direct writing team. Premiums ceded by PXRE to its managed business participants increased 30.3% to $21,542,000 for 1998 compared with $16,534,000 for 1997. The increase in premiums ceded to these programs was due primarily to an increased cession rate to Select Re and cessions from new operations offset in part by the effect of declines in gross premiums written in PXRE's traditional operations. In 1998, opportunistic purchases of catastrophe retrocessional protection and additional coverage associated with new operations increased catastrophe written premiums ceded. Management fee income from all sources for the year ended December 31, 1998 decreased 27.7% to $2,172,000 from $3,006,000 for 1997, reflecting a reduced profit commission primarily associated with Hurricane Georges and the two aerospace catastrophes discussed below and a higher combined ratio on the change in business mix reflected in the higher ceded premiums written, offset, in part, by an increase in management fee income earned from Select Re. The loss ratio was 62.6% for 1998 compared with 13.7% for 1997 largely due to Hurricane Georges, two aerospace catastrophes and the higher average loss ratio from the PXRE Lloyd's Syndicate operation, the new excess and surplus 46 lines business and new international operations. The loss ratio for 1998 reflected incurred catastrophe losses of $55,564,000 gross and $29,437,000 net for 1998 and prior accident years. In comparison, the loss ratio for 1997 reflected a re-estimation, which reduced catastrophe losses by $1,457,000 gross and $964,000 net for 1997 and prior accident years, after taking into account, among other things, the German, Polish and Czech flood losses referred to below. Significant catastrophe and satellite losses affecting the year ended December 31, 1998 loss ratio are as follows:
Amount of Losses ---------------- Loss Event Gross Net ----- --- (in thousands) Hurricane Georges $49,106 $25,753 Hailstorms 4,521 3,597 Swissair and Delta 3 Satellites 4,087 3,399
Significant catastrophe and risk losses affecting the year ended December 31, 1997 loss ratio are as follows:
Amount of Losses ----------------- Loss Event Gross Net ----- ---- (in thousands) German, Polish and Czech Floods $1,739 $1,457
The provision for losses and loss expenses and the loss ratio includes the effect of foreign exchange movements on PXRE's liability for losses and loss expenses, resulting in a foreign currency exchange loss of $675,000 for 1998 compared to a gain of $627,000 for 1997. During 1998, PXRE experienced savings of $532,000 net for prior-year loss and loss expenses primarily related to the triggering of a retrocessional recovery on a 1994 aviation loss offset in part by adverse development due to the 1997 German, Polish and Czech floods. The loss ratio for 1997 was favorably affected by decreases to reserves of $3,917,000 net for prior-year loss and loss expenses primarily related to the Eurotunnel fire and Hurricane Fran where redundant reserves were recognized in 1997 of approximately $1,644,000 and $1,440,000 respectively. In addition, included in the savings of $3,917,000 were prior-year losses originally thought to have triggered market loss coverage thresholds which proved to be redundant by approximately $1,800,000, offset in part by development on prior year facultative losses. The underwriting expense ratio was 40.9% for 1998 compared with 34.8% for 1997. The increase in underwriting expense ratio was substantially due to higher acquisition expenses and contingent commissions on certain business. In addition, PXRE's diversification strategy announced in the second quarter of 1998, involving the addition of direct writing and international teams, and PXRE's strengthening of its Lloyd's and Brussels' units contributed a significant portion of the $3,597,000 of additional overhead expenses in 1998 in addition to expenses associated with the first year of underwriting operations for Transnational Insurance. 47 As a result of the above, the combined ratio was 103.5% for 1998 compared with 48.5% for 1997. Other operating expenses increased to $19,313,000 for the year ended December 31, 1998 from $15,716,000 in 1997. The increase was mainly due to salary and benefits expenses associated with new operations. Included in other operating expenses were foreign currency exchange gains of $204,000 for 1998 compared to losses of $1,221,000 for the corresponding period of 1997. During 1998, interest expense decreased to $1,395,000 as compared to $3,325,000 in 1997 due to the effect of repurchases of PXRE's 9.75% Senior Notes in open market purchases and the redemption of the remaining Senior Notes on August 15, 1998 (see "Liquidity and Capital Resources"). In addition, during 1998 PXRE incurred minority interest expense amounting to $8,928,000 related to PXRE's $100 million of 8.85% Capital Trust Pass-through Securities'sm' (TRUPS'sm') (as described below under "Liquidity and Capital Resources") compared to $8,184,000 in 1997. The increase in 1998 reflects the fact that the obligation was only outstanding during a portion of 1997. In 1998, PXRE recorded an extraordinary loss of $843,000, net of tax, in connection with the redemption of $20.4 million of PXRE's 9.75% Senior Notes and the associated write-off of the pro rata share of the unamortized debt issuance costs. Net investment income for the year ended December 31, 1998 decreased 37.1% to $19,612,000 from $31,191,000 for 1997. The decrease in net investment income was largely due to the substantial turmoil witnessed in global securities markets during the third and fourth quarters of 1998 and the resulting decline in value of certain of PXRE's limited partnership investments. PXRE's pre-tax investment yield was 4.3% for 1998 compared with 6.3% for 1997, both calculated using amortized cost and investment income before investment expenses. The decline in yield was primarily due to returns on the limited partnership investments. Net realized investment losses for 1998 were $3,862,000 compared to gains of $2,467,000 for 1997, which included trading in investment products having characteristics similar to the types of reinsurance PXRE traditionally assumes. In 1998, PXRE recorded the markdown of a Russian bond that was in technical default. This loss was recorded as realized which resulted in a pre-tax loss of $6,600,000. The net effects of foreign currency exchange fluctuations were losses of $471,000 in 1998, as compared to losses of $594,000 for 1997. For the reasons discussed above, net income was $2,679,000 for 1998 compared to net income of $44,253,000 for 1997. Diluted income per common share before extraordinary loss was $0.26 for 1998 compared to $3.39 for the prior year. Diluted net income per common share was $0.20 for 1998 compared to $3.19 for 1997 based on diluted average shares outstanding of approximately 13,452,000 in 1998 and 13,893,000 in 1997. 48 LIQUIDITY AND CAPITAL RESOURCES PXRE relies primarily on cash dividends and net tax allocation payments from its subsidiaries, including PXRE Reinsurance, Transnational Insurance 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 and by Transnational Insurance to PXRE Reinsurance is subject to limits imposed under the insurance laws and regulations of Connecticut, the state of incorporation and domicile of PXRE Reinsurance and Transnational Insurance, as well as certain restrictions arising in connection with PXRE indebtedness discussed below. Under the Connecticut insurance law, the maximum amount of dividends or other distributions that PXRE Reinsurance may declare or pay, and that Transnational Insurance may declare or pay to PXRE Reinsurance, within any twelve-month period, without regulatory approval, is limited to the lesser of (a) earned surplus or (b) the greater of 10% of policyholders' surplus at December 31 of the preceding year or 100% of net income for the twelve-month period ending December 31 of the preceding year, all determined in accordance with U.S. SAP. Accordingly, the Connecticut insurance laws could limit the amount of dividends available for distribution by PXRE Reinsurance or Transnational Insurance without prior regulatory approval, depending upon a variety of factors outside the control of PXRE, including the frequency and severity of catastrophe and other loss events and changes in the reinsurance market, in the insurance regulatory environment and in general economic conditions. The maximum amount of dividends or distributions that PXRE Reinsurance may declare and pay during 2000, without regulatory approval, is $39,901,000. Transnational Insurance may not declare or pay any dividend to PXRE Reinsurance in 2000 without regulatory approval. During 1999, $35,525,695 in dividends was paid by PXRE Reinsurance, including extraordinary dividends and $10,000,000 was paid by Transnational Insurance to PXRE Reinsurance, including extraordinary dividends. In both cases authorization was obtained from the Insurance Department of the State of Connecticut. Under Bermuda law, PXRE Bermuda may not pay a dividend unless after payment of the dividend it is able to pay its liabilities as they become due, and the realizable value of its assets are greater than the aggregate value of its liabilities, issued share capital and share premium accounts. PXRE Bermuda is also required to maintain statutory assets in an amount that permits it to meet the prescribed minimum solvency margin for the net premium income level of its business from time to time. In addition, any dividend paid cannot be in an amount that will reduce the reserves of PXRE Bermuda to a level that is not sufficient to meet the reserve requirements of its business. Dividends and other permitted payments from PXRE Delaware to PXRE Barbados are expected to be subject to U.S. withholding taxes at the rate of 5% (reduced from 30% under the tax convention between the United States and Barbados) and a 2 1/2 % Barbados corporate income tax. In the event the amount of dividends available, together with other sources of funds, are not sufficient to permit PXRE to meet its debt service and other obligations and to pay cash dividends, it would be necessary to obtain the approval of the Connecticut Insurance Commissioner prior to the payment of additional dividends by PXRE Reinsurance (or Transnational Insurance) or the approval of the Bermuda Minister of Finance prior to the payment of additional dividends by PXRE Bermuda. If such approval were not obtained, PXRE would have to adopt one or more alternatives, such as refinancing or restructuring its indebtedness or seeking additional equity. There can be no assurance that any of 49 these strategies could be effected on satisfactory terms, if at all. In the event that PXRE were unable to generate sufficient cash flow and were otherwise unable to obtain funds necessary to meet required payments of principal and interest on its indebtedness, PXRE could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all of the funds borrowed thereunder to be due and payable together with accrued and unpaid interest. PXRE Delaware entered into a Credit Agreement dated as of December 30, 1998 (the "Credit Agreement") with First Union National Bank ("First Union") as Agent and as a Lender, pursuant to which First Union agreed to make available to PXRE Delaware a $75,000,000 revolving credit facility. On May 18, 1999, pursuant to various Joinder Agreements and Assignment and Acceptance Agreements, First Union 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 First Union, the "Lenders"). As at December 31, 1998, PXRE Delaware had outstanding borrowings under the Credit Agreement of $50,000,000, and in October 1999, the remaining $25,000,000 was borrowed. The terms of the Credit Agreement have been amended three times pursuant to a First Amendment and Waiver to Credit Agreement, dated May 18, 1999, and a second Amendment and Waiver to Credit Agreement, dated June 25, 1999 and the First Amended and Restated Credit Agreement dated August 31, 1999. The First Amendment increased the applicable margin percentage for LIBOR loans under the Credit Agreement by 1/8% and changed the governing law from North Carolina to New York law. The Second Amendment modified various covenants related to the investments that PXRE and its subsidiaries are permitted to make under the Credit Agreement. The First Amended and Restated Credit Agreement was undertaken to address the Bermuda redomestication and to provide for PXRE Group Ltd. and PXRE (Barbados) Ltd. as guarantors of the loan obligation. As amended, loans under the Credit Agreement bear interest at an annual rate equal to First Union's base rate, as in effect from time to time, for base rate loans or at a margin (1.00% as of December 31, 1999) over First Union's Eurodollar rate for periods of 30, 60, 90 or 180 days for LIBOR loans. In connection with the Credit Agreement, PXRE Delaware and First Union entered into an interest rate swap which, effective December 31, 1998, has the intended effect of converting the initial $50,000,000 borrowings by PXRE Delaware into a fixed rate borrowing at an annual interest of 6.34%. The remaining $25,000,000, was borrowed at a variable annual rate of 7.12%. Commitments under the Credit Agreement terminate on March 31, 2005 and are subject to annual reductions of $10,000,000 commencing March 31, 2000 and $25,000,000 on March 31, 2005, and, unless due or paid sooner, the aggregate principal of the loans are due and payable in full on March 31, 2005. The Credit Agreement contains covenants which, among other things, limit the ability of PXRE and its subsidiaries and affiliates: (a) to incur additional Indebtedness (other than certain permitted Indebtedness); (b) to create Liens upon their properties or assets (other than Permitted Liens); (c) to sell, transfer or otherwise dispose of their assets, business or properties (other than certain permitted dispositions); (d) to make additional Investments 50 (other than certain permitted Investments, including Permitted Acquisitions and other Investments in compliance with, among other things, applicable law and the limitations set forth in the companies' investment policies and not exceeding specified limits); (e) to pay dividends or repurchase stock if after giving effect thereto a Default or Event of Default exists or the Fixed Charge Coverage Ratio would be less than 1.5 to 1.0 as defined in the Credit Agreement; (f) to enter into certain transactions with Affiliates; (g) to engage in any unrelated business (h) to enter into or remain a party to certain ceded reinsurance agreements or (i) to consolidate, merge or otherwise combine (or agree to do any of the foregoing) unless, among other things, (1) PXRE Group Ltd. is the surviving entity in such merger or consolidation, (2) such merger or consolidation constitutes a Permitted Acquisition and the conditions and requirements of the Credit Agreement are complied with and (3) immediately thereafter no Default or Event of Default exists. The Credit Agreement also requires compliance with Leverage Ratio, Fixed Charge Coverage Ratio, Risk-Based Capital Ratio and Combined Statutory Surplus requirements. As at December 31, 1999, there was no default under the Credit Agreement. The Credit Agreement enumerates various Events of Default, including but not limited to, if: (1) any Person or group becomes the "beneficial owner" of securities of PXRE Group Ltd. representing 20% or more of the combined voting power of the then outstanding securities of PXRE Group Ltd. ordinarily having the right to vote in the election of directors; or (2) the Board of Directors of PXRE Group Ltd. ceases to consist of a majority of the individuals who constituted the Board as of the date of the Credit Agreement or who subsequently become members after having been nominated, or otherwise approved in writing, by at least a majority of individuals who constituted the Board as of the date of the Credit Agreement (or their approved replacements). A copy of the First Amended and Restated Credit Agreement dated August 31, 1999 is filed as Exhibit 4.5 and is incorporated herein by reference. 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 $100,000,000 principal amount of its 8.85% TRUPS'sm' due February 1, 2027 in an institutional private placement. Proceeds from the sale of these securities were used to purchase PXRE 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 twelve months ended December 31, 1999 in respect of the Capital Securities (and related Subordinated Debt Securities) amounted to $8,790,000. On or after February 1, 2007, PXRE Delaware has the right to redeem the Subordinated Debt Securities, in whole at any time or in part from time to time, subject to certain conditions, at call prices of 104.180% at February 1, 2007, declining to 100.418% at February 1, 2016, and 100% thereafter. PXRE Delaware has the right, at any time, subject to certain conditions, to defer payments of interest on the Subordinated Debt Securities for Extension Periods (as defined in the applicable indenture), each not exceeding 10 consecutive 51 semi-annual periods; provided that no Extension Period may extend beyond the maturity date of the Subordinated Debt Securities. As a consequence of PXRE Delaware's extension of any interest payment period on the Subordinated Debt Securities, distributions on the Capital Securities would be deferred (though such distributions would continue to accrue interest at a rate of 8.85% per annum compounded semi-annually). In the event that PXRE Delaware exercises its right to extend an interest payment period, then during any Extension Period, subject to certain exceptions, (i) PXRE Delaware may not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock or rights to acquire such capital stock or make any guarantee payments (subject to specified exceptions) with respect to the foregoing, and (ii) PXRE Delaware may not make any payment of interest on, or principal of (or premium, if any, on), or repay, repurchase or redeem, any debt securities issued by PXRE Delaware which rank pari passu with or junior to the Subordinated Debt Securities. Upon the termination of any Extension Period and the payment of all amounts then due, PXRE Delaware may commence a new Extension Period, subject to certain requirements. PXRE Delaware has used the net proceeds from the sale of the Capital Securities for general corporate purposes, including the redemption and the purchase of outstanding indebtedness and common stock of PXRE Delaware. 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. The primary sources of liquidity for PXRE's principal operating subsidiaries are net cash flow from operating activities (including interest income from investments), the maturity or sale of investments, borrowings, capital contributions and advances and in the case of PXRE Reinsurance, dividends from Transnational Insurance. 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 $17,512,000 in 1999 compared with $4,955,000 during 1998, due to the effects of timing of collection of receivables and reinsurance recoverables and payments of losses. 52 PXRE's management has established general procedures and guidelines for its investment portfolio and oversees investment management carried out by Phoenix Investment Partners, Limited, a public majority-owned subsidiary of Phoenix Home Life Mutual Insurance Company, and by Mariner Investment Group, Inc. ("Mariner") the sole shareholder of which is the Chairman of the Board and a founding shareholder of Select Re. PXRE's invested assets consist primarily of fixed maturities and limited partnerships, but also include equities, REITS and short term investments. PXRE investments are subject to market-wide risks and fluctuations, as well as to risk inherent in particular securities. As at December 31, 1999, 72.9% of PXRE's investment portfolio, at fair value, consisted of fixed maturities and short-term investments, while the balance was in various mutual funds, limited partnerships and equity securities. The limited partnerships primarily include a fund of funds investing in a multiple number of hedge strategies. The investment policies of PXRE are approved by its Board of Directors. Of PXRE's fixed maturities portfolio at December 31, 1999, 89.0% of the fair value was in obligations rated "A2" or "A" or better by Moody's or S&P, respectively. Mortgage and asset-backed securities accounted for 28.9% of fixed maturities based on fair value at December 31, 1999. At December 31, 1999, PXRE had no investments in real estate or commercial mortgage loans; however, PXRE has invested in common and preferred shares of publicly traded REITS. The average market yield to maturity of PXRE's fixed maturities portfolio at December 31, 1999 and 1998, was 6.6% and 5.9%, respectively. Fixed maturity and equity investments are reported at fair value, with the net unrealized gain or loss, net of tax, reported as a separate component of stockholders' equity. PXRE recorded directly to stockholders' equity a $6,752,000 after-tax unrealized loss in the value of its investment portfolio at December 31,1999 primarily due to an increase in interest rates. Short-term investments are carried at amortized cost, which approximates fair value. PXRE's short-term investments, principally high-grade commercial paper, marketable fixed income securities and investments in limited partnerships which invest primarily in marketable fixed income securities, were $50,004,000 at December 31, 1999 compared to $58,862,000 at December 31, 1998. Limited partnership assets amounting to $113,476,000 at December 31, 1999, were accounted for under the equity method. The amount of equity income included in short-term investments and limited partnership assets as of December 31, 1999 amounted to $25,740,000. Dividends declared in 1999 were $7,629,925 compared to $13,585,333 in 1998, as a result of the decrease in the per share quarterly dividend from $.26 to $.06 in the third quarter of 1999 in anticipation of the Bermuda redomestication as well as share repurchases in 1999. The expected annual dividend based on shares outstanding at December 31, 1999 is approximately $2,803,000. Book value per common share was $22.54 at December 31, 1999. During 1999, PXRE acquired 884,700 shares of common stock under its stock repurchase program. In December 1999, PXRE announced a new stock 53 repurchase program of up to 1,000,000 shares. PXRE had approximately 11,680,000 common shares outstanding as of December 31, 1999. PXRE may be subject to gains and losses resulting from currency fluctuations because substantially all of its investments are denominated in U.S. dollars, while some of its net liability exposure is in currencies other than U.S. dollars. PXRE holds, and expects to continue to hold, currency positions and has made, and expects to continue to make, investments denominated in foreign currencies to mitigate, in part, the effects of currency fluctuations on its results of operations. Currency holdings and investments denominated in foreign currencies do not constitute a material portion of PXRE's investment portfolio and, in the opinion of PXRE's management, are sufficiently liquid for its needs. In connection with the capitalization of PXRE Lloyd's Syndicate, PXRE has placed on deposit $46,587,000 par value of U.S. government securities and municipal bonds as collateral for Lloyd's. In addition, PXRE issued a letter of credit for the benefit of Lloyd's in the amount of $15,355,000, which is collateralized by municipal bonds of approximately $17,835,000. All invested assets of PXRE Lloyd's Syndicate amounting to $11,253,000 at December 31, 1999 are restricted from being paid as a dividend for at least three years. In addition, PXRE Reinsurance has provided a 'L'5,000,000 ($8,091,000 at December 31, 1999 exchange rates) line of credit to PXRE Managing Agency for liquidity purposes of which $7,111,000 had been drawn. In September 1997, PXRE and Phoenix Home Life completed the formation of a joint venture, Cat Bond Investors L.L.C., with initial committed capital of $20 million. The joint venture specializes in investing in instruments, the returns on which are determined, in whole or in part, by the nature, magnitude and/or effects of certain catastrophe events or meteorological conditions. All amounts classified as reinsurance recoverable at December 31, 1999 are considered by management of PXRE to be collectible in all material respects. MARKET RISK PXRE is exposed to market risks that are principally interest rate and equity price risks. The potential for losses from changes in interest rates with respect to its investments, borrowings, and a related interest rate swap exists. PXRE is exposed to potential losses from changes in equity prices with respect to its investments. However, PXRE believes its exposure to foreign exchange risk and exposures to other market risks represented by weather contracts, are not currently material. PXRE has no open weather contracts as of December 31, 1999. PXRE risk management strategy is to accept certain levels of market risks, principally through its investment activities, in order to offset its insurance exposures that may be considered actuarial rather than financial. The objectives of PXRE's investment activities are to generate the required return from selected market sectors and limit its exposures to market risks that may prevent PXRE from servicing its insurance obligations. PXRE's Board of Directors approves investment guidelines and the selection of external investment 54 advisers who manage PXRE's portfolios. The investment managers make tactical investment decisions within the established guidelines. Management monitors the external advisers through written reports that are reviewed and approved by the Board of Directors. Management also manages diversification strategies across the portfolios in order to limit PXRE's potential loss from any single market risk. The performance and risk profiles of the portfolio are reported in various forms throughout the fiscal year to management, the Board of Directors, rating agencies, regulators, and to shareholders. The investment portfolio of PXRE is summarized in the Notes to the Financial Statements, Item 7, Management's Discussion and Analysis and Item 1, Business. INTEREST RATE RISK PXRE's principal fixed maturity market risk exposure is to changes in U.S. interest rates. Changes in interest rates may affect the fair value of PXRE's fixed-income portfolio, borrowings (Bank Debt and Trust Preferred) and a related interest rate swap. PXRE's holdings subject it to exposures in the treasury, municipal, and various asset-backed sectors. These sectors consist primarily of investment grade securities whose fair value is subject to interest rate, credit and prepayment risk. All investment positions are long with no 'short' or derivative positions. PXRE's investments in emerging market debt securities are subject to interest rate risk which is included in the analysis below. During 1999, PXRE substantially reduced its investment in emerging market debt securities to less than 4% of the fixed maturity portfolio. Therefore, the level of credit exposure associated with these securities has been substantially reduced. PXRE believes that reinsurance receivables and payables do not expose it to significant interest rate risk and are excluded from the analysis below. In order to measure PXRE's exposure to changes in interest rates a sensitivity analysis was performed. Potential loss is measured as a change in fair value. The fair value of the fixed income portfolio, borrowings and related interest rate swap at year-end was re-measured from the fair values reported in the financial statements assuming a 10% increase in interest rates. The potential loss in fair value due to interest rate exposure was estimated at $3 million at December 31, 1999 and $1 million at December 31, 1998. The estimated potential loss is net of prepayment risk associated with the mortgage-related securities. The mortgage sector is a minor portion of the portfolio at year-end. The estimate assumes a similar change in fair value across security sectors with no adjustment for change in value due to credit risk. The interest rate risk related to the investments of PXRE Lloyd's Syndicate is diminimus. The average maturity of these investments is under one year. CREDIT RISK PXRE's exposure to potential loss due to changes in credit spreads was simulated through a sensitivity analysis assuming an increase in credit spreads of 200 basis points with respect to the emerging market securities holdings. 55 The estimated potential loss in fair value due to changes in credit spreads was estimated at $5 million at December 31, 1998. This analysis excluded the impact of changes in credit spreads on other portfolio sectors and borrowings that may be offsetting. PXRE has significantly reduced its investments in emerging market securities in 1999. Therefore the credit risk related to the investment is diminimus at December 31, 1999. FOREIGN EXCHANGE RISK PXRE's exposure to foreign exchange risk from its foreign denominated securities is not material. Only a small portion of PXRE's investment portfolio is denominated in currencies other than U.S. dollars. Additionally the carrying value of certain receivables and payables denominated in foreign currencies are carried at fair value. For these reasons, these items have been excluded from the market risk disclosure. EQUITY PRICE RISK PXRE is exposed to equity price risk in the form of a limited number of equity investments, including holdings in the common stock of U.S. REIT's. Based on a 10% decrease in equity prices the potential loss in fair value is estimated to be $2.4 million and $4 million at December 31, 1999 and 1998, respectively. The decrease reflects the reduction in the size of the equity portfolio at December 31, 1999. DIVERSIFICATION BENEFIT PXRE's risk management strategy includes investments that are expected to reflect offsetting changes in fair value in response to various changes in market risks. PXRE's exposure to interest risk in its fixed income portfolio is expected to be offset in part by the change in value of its REIT's. PXRE also invests in REIT's to limit the potential loss due to exposures to changes in interest rates; this loss limit is based on the expected minimum value of the real estate holdings of the trusts. PXRE also holds other investments that are excluded from this disclosure that are expected to provide positive returns under most market conditions representing adverse changes in interest rates and other market factors (See Note 3 of Notes to Consolidated Financial Statements). To compare the magnitude of changes in fair value due to interest rate changes with those of other risk factors in the investment portfolio, reference is made to Note 3 of Notes to Consolidated Financial Statements related to realized and unrealized gains and losses on investments. INCOME TAXES PXRE recognized a tax benefit in 1999 and 1998 of $13,149,000, and $1,660,000, respectively, compared to tax expense in 1997 of $20,705,000. The tax benefit reported by PXRE for 1999 and 1998 is primarily attributable to underwriting losses, tax-exempt income and amortization of negative goodwill. 56 The tax benefit in 1999 was offset, in part, by non recurring charges including approximately $1.8 million in connection with the Bermuda redomestication related to the cancellation of shares of PXRE Delaware held by its subsidiary and by $2.3 million in connection with the redomestication related to dividends paid by PXRE Delaware. Tax expense in 1997 differed from the statutory rate principally due to the relative proportion of underwriting and taxable income versus tax exempt income and negative goodwill amortization. See Note 5 of Notes to Consolidated Financial Statements. 57 YEAR 2000 UPDATE PXRE's Year 2000 Readiness Project was successfully concluded prior to December 31, 1999. The Company did not experience any Y2K-related problems at year-end or thereafter. PXRE contacted and where appropriate re-contacted its material business partners to determine their Year 2000 date processing capabilities. To date none of these partners has reported or evidenced any date-related difficulty. PXRE continues to maintain disaster recovery procedures and the ability to re-deploy computer and staff to a remote hot site. PXRE continues to evaluate potential Year 2000 exposures emanating from its reinsurance business by conducting an analysis of each individual customer's risk exposures. Where appropriate, PXRE requires that an exclusion be added to the reinsurance contract or that a letter of intent be received. PXRE began adding exclusions to reinsurance contracts in early 1998. Additionally, it is PXRE's position, in common with others in the industry, that Year 2000 exposures in and of themselves are not fortuitous losses and thus are not covered under reinsurance contracts even without specific exclusions. For these reasons, PXRE believes that its exposures to Year 2000 claims will not be material. However, as was the case with environmental exposures, changing social and legal trends may create unintended coverage for exposures by causing courts to reinterpret reinsurance contracts and related exclusions. It is impossible to predict what, if any, exposure reinsurance companies may ultimately have for Year 2000 claims whether coverage for the issue is specifically excluded or included. Readers are cautioned that forward-looking statements contained in this Year 2000 Update should be read in conjunction with the Company's disclosures under the heading: "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS." CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report contains various forward-looking statements and includes assumptions concerning PXRE's operations, future results and prospects. Statements included herein, as well as statements made by or on behalf of PXRE in press releases, written statements or other documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, which are not historical in nature are intended to be, and are hereby identified as, "forward-looking statements" for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements, identified by words such as "intend", "believe", or "expects" or variations of such words or similar expressions are based on current expectations and are subject to risk and uncertainties. PXRE cautions investors and analysts that actual results or events could differ materially from those set forth or implied by the forward-looking statements and related assumptions, depending on the outcome of certain important factors including, but not limited to, the following: (i) the 58 frequency and severity of catastrophic events; (ii) changes in the level of competition in the reinsurance or primary insurance markets that impact the volume or profitability of business (these changes include, but are not limited to, the intensity of price competition, the entry of new competitors, existing competitors exiting the market and competitors'development of new products); (iii) changes in the demand for reinsurance, including changes in the amount of ceding companies' retentions and changes in the demand for excess and surplus lines insurance coverages; (iv) the ability of PXRE to execute its diversification initiatives in markets in which PXRE has not had a significant presence; (v) adverse development on loss reserves related to business written in prior years; (vi) lower than estimated retrocessional recoveries on unpaid losses, including the effects of losses due to a decline in the creditworthiness of PXRE's retrocessionaires; (vii) increases in interest rates, which cause a reduction in the market value of PXRE's interest rate sensitive investments, including its fixed income investment portfolio; (viii) decreases in interest rates causing a reduction of income earned on new cash flow from operations and the reinvestment of the proceeds from sales, calls or maturities of existing investments; (ix) market fluctuations in equity securities and securities underlying limited partnership investments; (x) foreign currency fluctuations resulting in exchange gains or losses; (xi) changes in the composition of PXRE's investment portfolio; (xii) changes in tax laws, tax treaties, tax rules and interpretations; and (xiii) changes in management's evaluation of the impact of the Year 2000 problem on its operations. In addition to the factors outlined above that are directly related to PXRE's business, PXRE is also subject to general business risks, including, but not limited to, adverse U.S. state and federal or non-U.S. legislation and regulation, adverse publicity or news coverage, changes in general economic factors and the loss of key employees. 59 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements are filed as part of this Form 10-K:
Page PXRE Group Ltd.: Report of Independent Accountants F-1 Consolidated Balance Sheets at December 31, 1999 and 1998 F-2 Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 1999, 1998 and 1997 F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 F-4 Consolidated Statements of Cash Flow for the years ended December 31, 1999, 1998 and 1997 F-5 Notes to Consolidated Financial Statements F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disclosure hereunder is required as PXRE has not changed its accountants since December 31, 1997. -60- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 is contained in PXRE's Proxy Statement, which information is incorporated herein by reference and which Proxy Statement will be filed within 120 days of the end of PXRE's 1999 fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is contained in PXRE's Proxy Statement, which information is incorporated herein by reference and which Proxy Statement will be filed within 120 days of the end of PXRE's 1999 fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is contained in PXRE's Proxy Statement, which information is incorporated herein by reference and which Proxy Statement will be filed within 120 days of the end of PXRE's 1999 fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is contained in PXRE's Proxy Statement, which information is incorporated herein by reference and which Proxy Statement will be filed within 120 days of the end of PXRE's 1999 fiscal year. -61- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: (1) Financial Statements
Page PXRE Group Ltd.: Report of Independent Accountants F-1 Consolidated Balance Sheets at December 31, 1999 and 1998 F-2 Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 1999, 1998 and 1997 F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 F-4 Consolidated Statements of Cash Flow for the years ended December 31, 1999, 1998 and 1997 F-5 Notes to Consolidated Financial Statements F-6 (2) Financial Statements Schedules Schedule I - Summary of Investments (The information required by this Schedule is presented in the financial statements and the notes thereto included in this Form 10-K.) -- Schedule II - Condensed Financial Information of Registrant F-31 Schedule III - Supplementary Insurance Information F-32 Schedule IV - Reinsurance (The information required by this Schedule is presented in the financial statements and the notes thereto included in this Form 10-K.) --- Schedule VI -- Supplemental Information Concerning Property/Casualty Insurance Operations F-32 Report of Independent Accountants on the Financial Statement Schedules and Consent of Independent Accountants F-33 All other financial statement schedules have been omitted as
-62- inapplicable. (3) Exhibits 3.1 Memorandum of Association and Bye-laws of PXRE Group Ltd. (Exhibits 3.1 and 3.2, respectively, to PXRE's Form S-4 Registration Statement dated August 18, 1999 (File No. 333-85451), and incorporated herein by reference). (4) Instruments Defining the Rights of Security Holders. 4.1 Form of Specimen Common Share certificate, par value $1.00 per share, of PXRE (Exhibit 4.1 to PXRE's Form S-4 Registration Statement dated August 18, 1999 (File No. 333-85451), and incorporated herein by reference). 4.2 Credit Agreement dated as of December 30, 1998 among PXRE Corporation, the banks and financial institutions listed on the signature pages thereto or that subsequently become parties thereto (collectively, the "Lenders") and First Union National Bank ("First Union") as agent for the Lenders (Exhibit 4.8 to PXRE Corporation's Form 8-K dated January 8, 1999 (File No. 0-15428), and incorporated herein by reference). 4.3 First Amendment and Waiver to Credit Agreement dated as of May 18, 1999 among PXRE Corporation, the Lenders and First Union, Joinder Agreements dated May 18, 1999 by Fleet National Bank and Credit Lyonnais New York Branch, Assignments and Acceptances dated May 18, 1999 between First Union and Fleet National Bank and between First Union and The First National Bank of Chicago, respectively (Exhibit 4.9 to PXRE Corporation's Form 10-Q for the quarterly period ended June 30, 1999 (File No. 0-15428), and incorporated herein by reference). 4.4 Second Amendment and Waiver to Credit Agreement dated as of June 25, 1999 among PXRE Corporation, the Lenders and First Union, (Exhibit 4.9 to PXRE Corporation's Form 10-Q for the quarterly period ended June 30, 1999 (File No. 0-15428), and incorporated herein by reference). 4.5 First Amended and Restated Credit Agreement among PXRE Corporation, as borrower, PXRE Group Ltd. and PXRE (Barbados) Ltd., as guarantors, the Lenders named therein and First Union as agent (Exhibit 4.5 to PXRE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 1-15259) and incorporated herein by reference). 4.6 Indenture, dated as of January 29, 1997, between PXRE Corporation and First Union National Bank, as Trustee (Exhibit 4.3 to PXRE Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 4.7 First Supplemental Indenture, dated as of January 29, 1997, between PXRE Corporation and First Union National Bank, as Trustee, in respect of PXRE Corporation's 8.85% Junior Subordinated Deferrable Interest Debentures due 2027 (Exhibit 4.4 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 4.8 Amended and Restated Declaration of Trust of PXRE Capital Trust I, dated as of January 29, 1997, among PXRE Corporation, as sponsor, the Administrators thereof, First Union Bank of Delaware, as Delaware Trustee, First Union National Bank, as Institutional Trustee, and the holders from time to time of undivided interests in the assets of PXRE Capital Trust I (Exhibit 4.5 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). -63- 4.9 Capital Securities Guarantee Agreement, dated as of January 29, 1997, between PXRE Corporation and First Union National Bank, as Guarantee Trustee (Exhibit 4.6 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No.0-15428), and incorporated herein by reference). 4.10 Common Securities Guarantee Agreement, dated as of January 29, 1997, executed by PXRE Corporation (Exhibit 4.7 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 4.11 Registration Rights Agreement, dated January 29, 1997, among PXRE Corporation, PXRE Capital Trust I and Salomon Brothers Inc, as Representative of the Initial Purchasers (Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 4.12 Purchase Agreement among PXRE Corporation, PXRE Capital Trust I and Salomon Brothers Inc, as Representative of the Initial Purchasers, dated January 24, 1997 (Exhibit 10.2 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). (10) Material Contracts. The material contracts of PXRE are as follows: 10.1 PXRE Reinsurance Company Management Agreement among PXRE Reinsurance Company and, among others, Merrimack Mutual Fire Insurance Company ("Merrimack"), Pennsylvania Lumbermens Mutual Insurance Company ("Pennsylvania Lumbermens"), and NRMA Insurance Limited ("NRMA") (Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein by reference); letter dated November 28, 1990 from Pennsylvania Lumbermens confirming reduced participation (Exhibit 10.7 to PXRE Corporation's Form S-2 Registration Statement dated February 21, 1992, as amended by Amendment No. 1 thereto dated April 1, 1992 and by Amendment No. 2 thereto dated April 13, 1992 and by Amendment No. 3 thereto dated April 23, 1992 (File No. 33-45893), and incorporated herein by reference); cover notes respecting January 1997 renewals by Merrimack, Pennsylvania Lumbermens and NRMA and cover note respecting participation commencing January 1, 1997 by Auto-Owners Insurance Company ("Auto-Owners") (Exhibit 10.3 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference); cover notes respecting January 1999 renewals by NRMA, Pennsylvania Lumbermens, Auto-Owners and The Andover Companies (a Merrimack company) (Exhibit 10.3 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428), and incorporated herein by reference); and cover note respecting participation commencing January 1, 1999 by the Kyoei Mutual Fire & Marine Insurance Company. 10.2 Quota Share Retrocessional Agreement between PXRE Reinsurance Company and Trenwick America Reinsurance Corporation ("Trenwick Group") (Exhibit 10.21 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1993 (File No. 0-15428), and incorporated herein by reference); cover note respecting January 1999 renewal by Trenwick Group (Exhibit 10.17 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428), and incorporated herein by reference). 10.3 Undertaking dated September 1, 1998 between PXRE Reinsurance Company and Select Reinsurance Ltd., Amended and Restated Facultative Obligatory Quota Share Retrocessional Agreement between PXRE Reinsurance Company and Select Reinsurance Ltd. and Variable Quota Share Retrocessional Agreement between PXRE Reinsurance Company and Select Reinsurance Ltd. (Exhibit 10.36 to the Annual Report on Form -64- 10-K of PXRE Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428), and incorporated herein by reference); letter dated November 1, 1999 regarding Undertaking extension; and endorsement regarding Select Reinsurance Ltd. participation for 2000. 10.4 Tax Settlement Agreement dated June 21, 1991 between PXRE Corporation, PXRE Reinsurance Company and PM Holdings, Inc. (Exhibit 10.2 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein by reference). 10.5 Investment Advisory Agreement between PXRE Reinsurance Company and Phoenix Investment Counsel, Inc., dated February 25, 1987 and effective as of January 1, 1987 (Exhibit 10.10 to Amendment No. 1 dated February 19, 1987 to PXRE Corporation's Form S-1 Registration Statement dated August 29, 1986, as subsequently amended by Amendment No. 2 thereto dated March 25, 1987 (File No. 33-8406), and incorporated herein by reference); Amendment to Investment Advisory Agreement between PXRE Reinsurance Company and Phoenix Investment Counsel, Inc., effective retroactively as of January 1, 1987 (Exhibit 10.3 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein by reference); Amendment No. 2 to Investment Advisory Agreement between PXRE Reinsurance Company and Phoenix Investment Counsel, Inc., effective as of November 1, 1989 (Exhibit 10.4 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein by reference); Amendment No. 3 to Investment Advisory Agreement between PXRE Reinsurance Company and Phoenix Investment Counsel, Inc. effective June 1, 1995 (Exhibit 10.26 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1995 (File No. 0-15428), and incorporated herein by reference). 10.6 Investment Management Agreement, effective January 29, 1997 between PXRE Corporation and Phoenix Investment Counsel, Inc. (Exhibit 10.29 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 10.7 Amended and Restated Investment Advisory Agreement between Transnational Reinsurance Company and Phoenix Investment Counsel, Inc., dated November 8, 1993 (Exhibit 10.4 to Transnational Re Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-22376) and incorporated herein by reference), as amended by the Amendment thereto, effective June 1, 1995 (Exhibit 10.11 to Transnational Re Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-22376) and incorporated herein by reference). 10.8 Investment Management Agreement effective October 15, 1999 between PXRE Group Ltd. and Phoenix Investment Counsel, Inc. 10.9 Investment Management Agreement effective October 15, 1999 between PXRE Reinsurance Ltd. and Phoenix Investment Counsel, Inc. 10.10 Investment Advisory Services Agreement between PXRE Reinsurance Ltd. and Mariner Investment Group, Inc. dated October 1, 1999. 10.11 Amended and Restated Agreement Concerning Filing of Consolidated Federal Income Tax Returns dated as of August 23, 1993 between PXRE Corporation and PXRE Reinsurance Company (Exhibit 10.8 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1993 (File No. 0-15428), and incorporated herein by reference); Addendum No. 2 dated November 10, 1994 to the PXRE Corporation Amended and Restated Agreement Concerning Filing of Consolidated Federal Income Tax Returns (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1994 (File No. 0-15428), and incorporated herein by reference); and Addendum No. 3 dated as of December 11, 1996 to the PXRE Corporation Amended and Restated Agreement Concerning Filing of Consolidated Federal -65- Income Tax Returns (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 10.12 Employee Stock Purchase Plan, as amended (Appendix C to PXRE's Proxy Statement for the 2000 annual general meeting of shareholders, and incorporated herein by reference). (M) 10.13 Executive Severance Plan (Exhibit 10.10 to PXRE's Form S-4 Registration Statement dated August 18, 1999 (File No. 333-85451) and incorporated herein by reference). (M) 10.14 1988 Stock Option Plan, as amended (Exhibit A to the first Prospectus forming part of PXRE's Form S-8 and S-3 Registration Statement dated June 21, 1990 (File No. 33-35521), and incorporated herein by reference). (M) 10.15 Restated Employee Annual Incentive Bonus Plan, as amended (Appendix A to PXRE's Proxy Statement for the 2000 annual general meeting of shareholders, and incorporated herein by reference).(M) 10.16 1992 Officer Incentive Plan, as amended (Appendix B to PXRE's Proxy Statement for the 2000 annual general meeting of shareholders and incorporated herein by reference).(M) 10.17 Director Stock Plan (Appendix D to PXRE's Proxy Statement for the 2000 annual general meeting of shareholders and incorporated herein by reference).(M) 10.18 Director Equity and Deferred Compensation Plan (Appendix E to PXRE's Proxy Statement for the 2000 annual general meeting of shareholders, and incorporated herein by reference).(M) 10.19 Non-Employee Director Deferred Stock Plan (Appendix A to PXRE Corporation's Proxy Statement dated April 12, 1991, and incorporated herein by reference).(M) 10.20 Management Agreement dated as of November 8, 1993 among PXRE Reinsurance Company, Transnational Re Corporation and Transnational Reinsurance Company (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1993 (File No. 0-15428), and incorporated herein by reference), as amended by Amendment No. 1 thereto, dated December 1, 1994 (Exhibit 10.21 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1994 (File No. 0-15428), and incorporated herein by reference). 10.21 Agreement and Plan of Merger dated as of August 22, 1996 between PXRE Corporation and Transnational Re Corporation, as amended by Amendment No. 1 dated as of September 27, 1996 and Amendment No. 2 dated as of October 24, 1996 (Annex A to PXRE Corporation's Form S-4 Registration Statement dated October 30, 1996 (File No. 333-15087), and incorporated herein by reference). 10.22 Excess of Loss Reinsurance Agreement, effective as of January 1, 1998, between PXRE Reinsurance Company and Transnational Insurance Company. - -------- (M) INDICATES A MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT IN WHICH THE DIRECTORS AND/OR EXECUTIVE OFFICERS OF PXRE PARTICIPATE. -66- 10.23 Reinsurance Pooling Agreement, effective as of January 1, 1999, between PXRE Reinsurance Company and Transnational Insurance Company. (Exhibit 10.21 to PXRE's Form S-4 Registration Statement dated August 18, 1999 (File No. 333-85451), and incorporated herein by reference). 10.24 Agreement and Plan of Merger dated as of July 7, 1999 among PXRE Corporation, PXRE Group Ltd. and PXRE Merger Corp. (Annex A to PXRE's Form S-4 Registration Statement dated August 18, 1999 (File No. 333-85451), and incorporated herein by reference). 10.25 Facultative Obligatory Quota Share Retrocessional Agreement effective October 1, 1999 between PXRE Reinsurance Company and PXRE Reinsurance Ltd. and Aggregate Excess of Loss Agreement effective October 1, 1999 between PXRE Reinsurance Ltd. and PXRE Reinsurance Company. 10.26 Lease dated May 9, 1994 between Thornall Associates, L.P. and PXRE Corporation (Exhibit 10.24 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1994 (File No. 0-15428), and incorporated herein by reference) and Lease dated November 1, 1999 between Thornall Associates, L.P. and PXRE Corporation. 10.27 Lloyd's Deposit Trust Deed (Third Party Deposit) dated November 29, 1996 between PXRE Limited and PXRE Reinsurance Company (Exhibit 10.32 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1997 (File No. 0-15428), and incorporated herein by reference). 10.28 Letter of Credit dated November 22, 1996 issued by The Chase Manhattan Bank by order of PXRE Reinsurance Company for the benefit of Lloyd's (Exhibit 10.33 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1997 (File No. 0-15428), and incorporated herein by reference). 10.29 Lloyd's Security Trust Deed (Letter of Credit and Bank Guarantee) dated November 29, 1997 between PXRE Limited and Lloyd's (Exhibit 10.34 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1997 (File No. 0-15428), and incorporated herein by reference). 10.30 Operating Agreement of Cat Bond Investors, effective as of June 9, 1997 among Cat Bond Investors, Phoenix Home Life and PXRE Corporation (Exhibit 10.35 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1997 (File No. 0-15428), and incorporated herein by reference). 10.31 Employment Agreement dated July 16, 1998 between PXRE Managing Agency Limited and Peter G. Butler (Exhibit 10.37 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428) and incorporated herein by reference). (M) 10.32 Employment Agreement dated June 8, 1998 between PXRE Corporation and Michael J. Toman (Exhibit 10.38 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428) and incorporated herein by reference). (M) 10.33 Employment Agreement dated April 14, 1999 between PXRE Reinsurance Company and Jeffrey Mayer (Exhibit 10.39 to PXRE Corporation's Form 10-Q for the quarterly period ended June 30, 1999 (File No. 0- 15428) and incorporated herein by reference). (M) 10.34 Investment Advisory Services Agreement between PXRE Corporation and Mariner Investment Group, Inc. dated March 14, 2000. - -------- (M) INDICATES A MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT IN WHICH THE DIRECTORS AND/OR EXECUTIVE OFFICERS OF PXRE PARTICIPATE. -67- (11) Statement re computation of earnings per share (The information required by this Exhibit is presented in the financial statements and the notes thereto included in this Form 10-K.) (12) Statement re computation of ratios (attached hereto as Exhibit 12). (21) List of Subsidiaries. At December 31, 1999, PXRE had the following subsidiaries: PXRE Reinsurance Ltd., a Bermuda insurance company; PXRE (Barbados) Ltd., a Barbados company; PXRE Corporation, a Delaware corporation; PXRE Reinsurance Company, a Connecticut insurance company; Transnational Insurance Company, a Connecticut insurance company; PXRE Capital Trust I, a Delaware statutory business trust; PXRE Limited., an English company (the sole member of PG Butler Syndicate 1224 at Lloyd's); PXRE Managing Agency Limited (the managing agency for PG Butler Syndicate 1224 at Lloyd's); PXRE Trading Corporation, a Delaware corporation; TREX Trading Corporation, a Delaware corporation; PX/TX Associates, a Delaware general partnership (of which PXRE Trading and TREX Trading are the only partners); CAT Fund, L.P., a Delaware limited partnership (of which PX/TX Associates is the sole general partner and PXRE Trading and TREX Trading are the only limited partners); Cat Bond Investors L.L.C. (of which PXRE Delaware and Phoenix Home Life are the only members); PXRE Solutions Inc., a Connecticut corporation; PXRE Direct Underwriting Managers, Inc., a Connecticut corporation; and PXRE Underwriting Managers, Inc., a Virginia corporation. (See the discussion in this Form 10-K under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations.") (23) Consents of Experts and Counsel. The consent of PricewaterhouseCoopers, independent accountants to PXRE, is included as part of Item 14(a)(2) of this Form 10-K. (24) Power of Attorney. Copies of the powers of attorney executed by each of F. Sedgwick Browne, Robert W. Fiondella, Franklin D. Haftl, Bernard Kelly, Wendy Luscombe, Philip R. McLoughlin, David W. Searfoss and Wilson Wilde are attached hereto as Exhibit 24. (27) Financial Data Schedule. Exhibit 27 included in electronic filing only. (28) Information from reports furnished to state insurance regulatory authorities. Filed in paper under cover of Form SE. (b) Current Reports. None. (c) See Item 14(a)(3) above. (d) See Item 14(a)(2) above. -68- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, PXRE Group Ltd. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PXRE GROUP LTD. By: /s/ Gerald L. Radke Gerald L. Radke Its Chairman of the Board, President and Chief Executive Officer Date: March 29, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of PXRE Group Ltd. and in the capacity and on the dates indicated: By:/s/ Gerald L. Radke By:/s/ James F. Dore Gerald L. Radke James F. Dore Its Chairman of the Board, Its Executive Vice President President and Chief and Chief Financial Executive Officer Officer (Principal Executive (Principal Financial Officer) and Director Officer and Principal Accounting Officer) Date: March 29, 2000 Date: March 29, 2000 By*_______________________ By*______________________ F. Sedgwick Browne Franklin D. Haftl Director Director Date: March 29, 2000 Date: March 29, 2000 By*_______________________ By*______________________ Robert W. Fiondella Wendy Luscombe Director Director Date: March 29, 2000 Date: March 29, 2000 -69- By*_______________________ By*______________________ Bernard Kelly Philip R. McLoughlin Director Director Date: March 29, 2000 Date: March 29, 2000 By*_______________________ By*_______________________ David W. Searfoss Wilson Wilde Director Director Date: March 29, 2000 Date: March 29, 2000 *By:/s/ Gerald L. Radke Gerald L. Radke Attorney-in-Fact Attorney-in-Fact -70- REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF PXRE GROUP LTD. (Successor Registrant of PXRE Corporation) In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of PXRE Group Ltd. (Successor Registrant of PXRE Corporation) and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers Hamilton, Bermuda February 7, 2000 F-1 PXRE Group Ltd. Consolidated Balance Sheets - --------------------------------------------------------------------------------
December 31, 1999 1998 ---- ---- Assets Investments: Fixed maturities, available-for-sale, at fair value (amortized cost $329,962,000 and $308,658,000, respectively) $ 321,247,527 $ 309,477,075 Equity securities, at fair value (cost $26,214,000 and $41,146,000) 24,840,360 40,974,283 Short-term investments 50,004,473 58,861,983 Limited partnerships, at equity (cost $93,147,000 and $66,588,000) 113,475,717 65,163,581 ------------- ------------- Total investments 509,568,077 474,476,922 Cash 14,735,040 16,117,473 Accrued investment income 4,186,849 5,330,419 Receivables: Unreported premiums 40,216,340 18,440,954 Balances due from intermediaries and brokers, net 21,549,113 14,631,140 Other receivables 22,971,088 21,293,256 Reinsurance recoverable 106,702,307 41,260,657 Ceded unearned premiums 19,582,260 8,231,130 Deferred acquisition costs 7,809,971 4,122,603 Current income tax recoverable 12,628,414 14,095,364 Deferred tax asset 11,531,000 5,474,000 Other assets 8,699,650 9,217,218 ------------- ------------- Total assets $ 780,180,109 $ 632,691,136 ============= ============= Liabilities Losses and loss expenses $ 261,551,353 $ 102,592,394 Unearned premiums 42,218,837 20,541,326 Debt payable 75,000,000 50,000,000 Other liabilities 38,609,857 25,664,972 ------------- ------------- Total liabilities 417,380,047 198,798,692 ------------- ------------- Minority interest in consolidated subsidiary: Company-obligated mandatorily redeemable capital trust pass-through securities of subsidiary trust holding solely a company-guaranteed related subordinated debt 99,521,079 99,516,938 Stockholders' Serial preferred stock, $1.00 par value -- 10,000,000 shares authorized Equity respectively; 0 shares issued and outstanding 0 0 Common stock, $1.00 par value and $.01 respectively -- 50,000,000 shares authorized 11,679,769 and 14,938,262 shares issued 11,679,769 149,382 Additional paid-in capital 173,682,802 259,147,554 Treasury stock at cost ( 0 and 2,614,498 shares) 0 (61,420,025) Accumulated other comprehensive income: Net unrealized (depreciation) appreciation on investments, net of deferred income tax (benefit) expense of $3,520,000 and $3,400 (6,752,002) 6,253 Retained earnings 89,932,620 139,842,939 Restricted stock at cost (369,483 and 167,832 shares) (5,264,206) (3,350,597) ------------- ------------- Total stockholders' equity 263,278,983 334,375,506 ------------- ------------- Total liabilities and stockholders' equity $ 780,180,109 $ 632,691,136 ============= =============
The accompanying notes are an integral part of these statements. F-2 PXRE Group Ltd. Consolidated Statements of Operations and Comprehensive Income - --------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 ---- ---- --- Revenues Net premiums earned $ 128,503,110 $ 92,386,326 $ 91,415,240 Net investment income 47,172,616 19,611,889 31,190,625 Net realized investment (losses) gains (3,765,816) (3,862,189) 2,467,338 Management fees 3,590,337 2,172,131 3,005,657 ---------------- ------------- ------------ 175,500,247 110,308,157 128,078,860 ---------------- ------------- ------------ Losses and Losses and loss expenses incurred 159,259,413 57,793,626 12,491,324 Expenses Commissions and brokerage 27,701,644 20,562,688 19,137,822 Other operating expenses 30,052,310 19,313,425 15,716,150 Interest expense 3,915,098 1,394,811 3,324,900 Minority interest in consolidated subsidiary 8,790,106 8,927,863 8,183,514 --------------- ------------- ------------ 229,718,571 107,992,413 58,853,710 ---------------- ------------- ------------ (Loss) income before income taxes, cumulative effect of accounting change, and extraordinary item (54,218,324) 2,315,744 69,225,150 Income tax benefit (provision) 12,774,971 1,206,077 (22,198,000) ---------------- ------------- ------------ (Loss) income before cumulative effect of accounting change and extraordinary loss (41,443,353) 3,521,821 47,027,150 Cumulative effect of accounting change, net of $374,381 tax benefit 695,278 0 0 Extraordinary loss on debt redemption, net of $454,000 income tax benefit 0 843,000 2,773,690 ================ ============= ============ Net (loss) income $ (42,138,631) $ 2,678,821 $ 44,253,460 ================ ============= ============ Comprehensive Other comprehensive (loss) income, net of tax: Income Net unrealized (depreciation) appreciation on investments (6,758,255) (3,166,753) 2,604,601 ================ ============= ============ Comprehensive (loss) income $ (48,896,886) $ (487,932) $ 46,858,061 ================ ============= ============ Per Share Basic: (Loss) income before cumulative effect of accounting change and extraordinary item $ (3.58) $ 0.26 $ 3.41 Cumulative effect of accounting change (0.06) 0.00 0.00 Extraordinary loss 0.00 (0.06) (0.20) ---------------- ------------- ------------ Net (loss) income $ (3.64) $ 0.20 $ 3.21 ================ ============= ============ Average shares outstanding 11,568,494 13,339,479 13,775,844 ================ ============= ============ Diluted: (Loss) income before cumulative effect of accounting change and extraordinary item $ (3.58) $ 0.26 $ 3.39 Cumulative effect of accounting change (0.06) 0.00 0.00 Extraordinary loss 0.00 (0.06) (0.20) ---------------- ------------- ------------ Net (loss) income $ (3.64) $ 0.20 $ 3.19 ================ ============= ============ Average shares outstanding 11,568,494 13,451,731 13,892,760 =============== ============= ============
The accompanying notes are an integral part of these statements. F-3 PXRE Group Ltd. Consolidated Statements of Stockholders' Equity - ------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997 Accumulated Additional Other Preferred Common Paid-in Treasury Comprehensive Retained Stock Stock Capital Stock Income Earnings ----- ----- ------- ----- ------ -------- Balance at December 31, 1996 $0 $ 147,058 $ 252,978,182 $ (14,090,289) $ 568,405 $118,705,257 Net income 44,253,460 Unrealized appreciation on investments, net 2,604,601 Issuance of common stock 1,005 1,748,520 Repurchase of treasury stock (7,464,583) Issuance of restricted stock Amortization of restricted stock Dividends paid to common stockholders (12,209,266) Other 334,090 (105,236) ------------------------------------------------------------------------------------- Balance at December 31, 1997 0 148,063 255,060,792 (21,660,108) 3,173,006 150,749,451 Net income 2,678,821 Unrealized depreciation on investments, net (3,166,753) Issuance of common stock 1,319 4,069,940 Repurchase of treasury stock (39,728,564) Issuance of restricted stock Amortization of restricted stock Dividends paid to common stockholders (13,585,333) Other 16,822 (31,353) ------------------------------------------------------------------------------------- Balance at December 31, 1998 0 149,382 259,147,554 (61,420,025) 6,253 139,842,939 Net loss (42,138,631) Unrealized depreciation on investments, net (6,758,255) Increase in par value upon redomestication 11,501,792 (11,501,792) Issuance of common stock 28,595 4,928,345 Repurchase of common stock (17,169,725) Cancellation of treasury stock (78,697,992) 78,697,992 Issuance of restricted stock Amortization of restricted stock Dividends paid to common stockholders (7,629,924) Elimination of quarter lag in results of UK subsidiary (141,764) Other (193,313) (108,242) ------------------------------------------------------------------------------------- Balance at December 31, 1999 $0 $11,679,769 $ 173,682,802 $ 0 $(6,752,002) $ 89,932,620 =====================================================================================
Total Restricted Stockholders' Stock Equity ----- ------ Balance at December 31, 1996 $ (630,835) $ 357,677,778 Net income 44,253,460 Unrealized appreciation on investments, net 2,604,601 Issuance of common stock 1,749,525 Repurchase of treasury stock (7,464,583) Issuance of restricted stock (741,988) (741,988) Amortization of restricted stock 585,263 585,263 Dividends paid to common stockholders (12,209,266) Other 4,752 233,606 --------------------------- Balance at December 31, 1997 (782,808) 386,688,396 Net income 2,678,821 Unrealized depreciation on investments, net (3,166,753) Issuance of common stock 4,071,259 Repurchase of treasury stock (39,728,564) Issuance of restricted stock (3,838,227) (3,838,227) Amortization of restricted stock 1,239,085 1,239,085 Dividends paid to common stockholders (13,585,333) Other 31,353 16,822 --------------------------- Balance at December 31, 1998 (3,350,597) 334,375,506 Net loss (42,138,631) Unrealized depreciation on investments, net (6,758,255) Increase in par value upon redomestication 0 Issuance of common stock 4,956,940 Repurchase of common stock (17,169,725) Cancellation of treasury stock 0 Issuance of restricted stock (4,385,780) (4,385,780) Amortization of restricted stock 2,409,665 2,409,665 Dividends paid to common stockholders (7,629,924) Elimination of quarter lag in results of UK subsidiary (141,764) Other 62,506 (239,049) ----------------------------- Balance at December 31, 1999 $ (5,264,206) $ 263,278,983 =============================
The accompanying notes are an integral part of these statements. - -------------------------------------------------------------------------------- F-4 PXRE Group Ltd. Consolidated Statements of Cash Flows - --------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 ---- ---- ---- Cash Flows Net (loss) income $ (42,138,631) $ 2,678,821 $ 44,253,460 from Operating Adjustments to reconcile net income to net cash Activities provided by operating activities: Losses and loss expenses 158,958,959 45,402,940 (13,787,994) Unearned premiums 15,512,597 (3,643,393) 8,639,753 Deferred acquisition costs (3,687,368) (1,156,862) (1,516,691) Receivables (29,151,184) (16,603,791) (12,764,637) Reinsurance balances payable 10,385,580 10,021,725 (5,082,885) Reinsurance recoverable (70,627,866) (27,018,379) 3,822,847 Income tax recoverable 3,132,135 (7,591,759) (3,139,559) Equity in earnings of limited partnerships (23,608,098) 5,059,230 (2,298,232) Other (1,263,685) (2,193,466) 1,500,427 --------------- ---------------- ------------------ Net cash provided by operating activities 17,512,439 4,955,067 19,626,489 --------------- ---------------- ------------------ Cash Flows Cost of fixed maturity investments (129,792,417) (178,648,802) (294,637,213) from Investing Fixed maturity investments matured/disposed 103,388,412 262,534,237 290,013,188 Activities Payable for securities 2,076,557 0 0 Cost of equity securities (9,835,512) (22,871,893) (17,372,574) Equity securities disposed 28,382,068 2,817,183 3,172,678 Net change in short-term investments 12,717,651 (6,053,033) 8,742,789 Limited partnerships disposed 30,391,215 7,040,660 0 Limited partnerships purchased (56,883,257) (34,325,097) (42,375,000) --------------- ---------------- ------------------ Net cash (used) provided by investing activities (19,555,283) 30,493,255 (52,456,132) --------------- ---------------- ------------------ Cash Flows Proceeds from issuance of common stock 505,795 233,032 855,570 from Financing Cash dividends paid to common stockholders (7,629,924) (13,585,333) (12,209,266) Activities Issuance of minority interest in consolidated subsidiary 0 0 99,509,000 Repurchase of debt 0 (22,527,860) (46,521,683) Proceeds of debt 25,000,000 50,000,000 0 Cost of stock repurchased (17,215,460) (39,728,564) (7,464,583) --------------- ---------------- ------------------ Net cash provided(used) by financing activities 660,411 (25,608,725) 34,169,038 --------------- ---------------- ------------------ Net change in cash (1,382,433) 9,839,597 1,339,395 Cash, beginning of period 16,117,473 6,277,876 4,938,481 --------------- ---------------- ------------------ Cash, end of period $ 14,735,040 $ 16,117,473 $ 6,277,876 ================== ================ ===============
The accompanying notes are an integral part of these statements. F-5 PXRE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GROUP LTD. YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND CONSOLIDATION On October 5, 1999, PXRE completed a reorganization that involved the formation of PXRE Group Ltd., a Bermuda-based holding company which became the holding company for PXRE Corporation and its other operations. The reorganization also involved the establishment of a Bermuda-based reinsurance subsidiary, PXRE Reinsurance Ltd., and operations in Barbados through PXRE (Barbados) Ltd. The accompanying consolidated financial statements have been prepared in U.S. dollars in conformity with generally accepted accounting principles ("GAAP") in the United States. The 1999 financial statements reflect the consolidated operations of PXRE Group Ltd. (collectively referred to as "PXRE"), and its subsidiaries PXRE Corporation, PXRE Reinsurance Company ("PXRE Reinsurance"), PXRE Solutions Inc., PXRE Direct Underwriting Managers, Inc., Transnational Insurance Company ("Transnational"), PXRE Trading Corporation, TREX Trading Corporation, Cat Fund L.P., PXRE Capital Trust I, PXRE Limited, PXRE Managing Agency Limited, PXRE Reinsurance Ltd., and PXRE (Barbados) Ltd. The 1998 and 1997 financial statements reflect the financial position and results of operations of PXRE Corporation and subsidiaries. PXRE, through its wholly-owned subsidiaries, principally provides property and casualty reinsurance products and services through broker-based and direct-writing distribution capabilities. PXRE also provides marine and aerospace reinsurance products and services. All material transactions between the consolidated companies have been eliminated in preparing these consolidated financial statements. Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amount of assets and liabilities 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 estimates. Certain reclassifications have been made for 1998 and 1997 to conform to the 1999 presentation. PREMIUMS ASSUMED AND CEDED Premiums on reinsurance business assumed are recorded as earned on a pro rata basis over the contract period based on estimated subject premiums. Adjustments based on actual subject premium are recorded once ascertained. The portion of premiums written relating to unexpired coverages at the end of the period is recorded as unearned premiums. Reinsurance premiums ceded are recorded as incurred on a pro rata basis over the contract period. DEFERRED ACQUISITION COSTS Acquisition costs consist of commission and brokerage expenses incurred in connection with contract issuance, net of acquisition costs ceded. These costs are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are reviewed to determine that they do not exceed recoverable amounts, after considering investment income. F-6 MANAGEMENT FEES Management fees are recorded as earned under various arrangements whereby PXRE Reinsurance acts as underwriting manager for other insurers and reinsurers. These fees are initially based on premium volume, but are adjusted in some cases through contingent profit commissions related to underwriting results measured over a period of years. LOSSES AND LOSS EXPENSE LIABILITIES Liabilities for losses and loss expenses are established in amounts estimated to settle incurred losses. Losses and loss expense liabilities are based on individual case estimates provided for reported losses for known events and estimates of incurred but not reported losses. Losses and loss expense liabilities are necessarily based on estimates and the ultimate liabilities may vary from such estimates. Any adjustments to these estimates are reflected in income when known. Reinsurance recoverable on paid losses and reinsurance recoverable on unpaid losses are reported as assets. Reinsurance recoverable on paid losses represent amounts recoverable from retrocessionaires at the end of the period for gross losses previously paid. Provisions are established for all reinsurance recoveries which are considered doubtful. INVESTMENTS Fixed maturity investments and equity securities are considered available-for-sale and are reported at fair value. Unrealized gains and losses, as a result of temporary changes in fair value during the period such investments are held, are reflected net of income taxes in stockholders' equity. Unrealized losses which are deemed other than temporary are charged to operations. Short-term investments, which have an original maturity of one year or less, are carried at amortized cost which approximates fair value. Short-term investments also includes a limited partnership that invests primarily in marketable fixed income securities and provides for fund withdrawals upon 30 days notice; this partnership is reported under the equity method. Investments in limited partnerships are reported under the equity method, which includes the cost of the investment and subsequent proportional share of the partnership earnings. Realized gains or losses on disposition of investments are determined on the basis of specific identification. The amortization of premiums and accretion of discount for fixed maturity investments is computed utilizing the interest method. The effective yield under the interest method is adjusted for anticipated prepayments. Investments in weather indexed contracts are carried at estimated fair value and such adjustments to estimated fair value are included in realized gains and losses. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of certain assets and liabilities are based on published market values, if available, or estimates based upon fair values of similar issues. Fair values are reported in Notes 3 and 4. F-7 DEBT ISSUANCE COSTS Debt issuance costs associated with the issuance of $100 million 8.85% Capital Trust Pass-through Securities'sm' (TRUPS'sm') and the issuance of a note under a $75 million Credit Agreement are being amortized over the term of the related outstanding debt on the interest method. EXCESS OF FAIR MARKET VALUE OF NET ASSETS OF BUSINESS ACQUIRED OVER COST The excess of fair market value of net assets of business acquired over cost is included in other liabilities and is amortized on a straight-line basis over three years. FOREIGN EXCHANGE Foreign currency assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Resulting gains and losses are reflected in income for the period. FEDERAL INCOME TAXES Deferred tax assets and liabilities reflect the expected future tax consequences of temporary differences between carrying amounts and the tax bases of PXRE's assets and liabilities. COMPREHENSIVE INCOME Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income consists of the change in the net unrealized appreciation or depreciation of investments, net of tax. EARNINGS PER SHARE Basic earnings per share are determined by dividing net earnings (after deducting cumulative preferred stock dividends) by the weighted average number of common shares outstanding. On a diluted basis both net earnings and shares outstanding are adjusted to reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity, unless the effect of the assumed conversion is anti-dilutive. STOCK-BASED COMPENSATION PXRE accounts for its stock options in accordance with the provisions of Accounting Principles Board Opinion No. 25 ("APB"). SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION Effective December 31, 1998, PXRE adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. This statement requires that companies report certain information about their operating segments, including information about the products and services from which the revenues are derived, the geographic areas of operation, and information about major customers. The statement defines operating segments based on internal management reporting and management's method of allocating resources and assessing performance. F-8 REPORTING YEAR FOR U.K. OPERATIONS In 1999, PXRE changed the reporting period for its U.K. operations from a fiscal year ending September 30 to a calendar year ending December 31. The results of operations for the period from October 1, 1998 to December 31, 1998 amounted to a loss of approximately $140,000. This loss was charged to retained earnings during the year in order to report only 12 months' operating results. ORGANIZATIONAL AND START-UP COSTS Effective for 1999, PXRE adopted Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" issued by the American Institute of Certified Public Accountants. This statement requires that companies expense organizational and start-up costs as incurred, and that initial application be reported as the cumulative effect of a change in accounting principle. As a result, PXRE expensed $695,000 in such expenses, net after tax, 1999. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain instruments embedded in other contracts. It requires that all derivatives be recognized as either assets or liabilities in the balance sheet and measured at fair value. Gains or losses from changes in the derivative values are to be accounted for based on how the derivative was used and whether it qualifies for hedge accounting. The statement has been deferred and is now effective for all fiscal periods beginning after June 15, 2000. PXRE is currently assessing the effect of adopting this statement. It is not expected, however, that the adoption of this statement will have a material effect on PXRE's financial position or results of operations. 2. UNDERWRITING PROGRAMS Premiums written and earned for the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ---- ---- ---- Premiums written Assumed $218,507,032 $133,143,629 $126,231,727 Direct 2,842,139 3,071,559 0 ------------- -------------- ------------- Gross premiums written 221,349,171 136,215,188 126,231,727 Ceded premiums written (82,504,050) (47,521,377) (26,176,733) -------------- ------------- ------------- Net premiums written $138,845,121 $ 88,693,811 $100,054,994 ============= ============= ============= 1999 1998 1997 ---- ---- ---- Premiums earned Assumed $198,342,728 $133,010,858 $119,609,970 Direct 2,113,403 424,822 0 Ceded (71,953,021) (41,049,354) (28,194,730) -------------- ------------- ------------- Net premiums earned $128,503,110 $ 92,386,326 $ 91,415,240 ============== ============= =============
F-9 Premiums written were assumed principally through reinsurance brokers or intermediaries. In 1999, 1998 and 1997 three reinsurance intermediaries individually accounted for more than 10% of gross premiums written, and collectively accounted for approximately 43%, 47% and 55% of gross premiums written, respectively. Included in ceded premiums written to managed business participants is $29,466,000, $10,565,000 and $3,023,000 of premiums ceded to a reinsurer, Select Reinsurance Ltd., whose Board of Directors includes PXRE's Chief Executive Officer and an Executive Officer, both of whom are shareholders of the reinsurer. Net assets due from the reinsurer at December 31, 1999, are $14,932,000 which is secured by a trust agreement and letter of credit. PXRE also 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. Activity in the net losses and loss expense liability for the years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997 ---- ---- ---- Net balance January 1 $ 69,242,355 $44,455,998 $55,309,304 Adjustment to eliminate quarter lag on U.K. subsidiary (1,677,529) 0 0 Incurred related to: Current year 139,478,230 58,325,429 16,443,586 Prior years 19,781,183 (531,903) (3,917,410) ------------ ---------- ---------- Total incurred 159,259,413 57,793,526 12,526,176 ------------ ---------- ---------- Paid related to: Current year 17,855,659 11,112,999 4,295,293 Prior years 48,452,350 21,894,173 19,084,189 ------------ ---------- ---------- Total paid 66,308,009 33,007,172 23,379,482 ------------ ---------- ---------- Net balance at December 31 160,516,230 69,242,352 44,455,998 Reinsurance recoverable on unpaid losses and loss expenses 101,035,123 33,350,042 12,733,456 ------------ ------------- ---------- Gross balance at December 31 $261,551,353 $102,592,394 $57,189,454 ============ ============ ==========
As a result of changes in estimates of insured events in prior years, the provision for losses and loss expenses experienced deficiencies of $19,781,000 on a net basis in 1999, primarily due to Hurricanes Georges and Mitch and accidents and health and facultative reserve strengthening in PXRE Lloyd's Syndicate. The net loss ratio was favorably affected by a savings to reserves of $532,000 in 1998 and $3,917,000 in 1997. F-10 3. INVESTMENTS The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investments in fixed maturities and equity securities as of December 31, 1999 and 1998 are shown below:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- 1999 United States government securities $ 104,034,363 $ 54,370 $ 2,568,969 $ 101,519,764 Foreign government securities 10,115,674 0 1,373,084 8,742,590 United States government agency mortgage-backed securities 25,416,497 0 817,661 24,598,836 Other mortgage and asset-backed securities 69,105,382 8,288 1,900,332 67,213,338 Obligations of states and political subdivisions 94,691,998 422,315 1,163,694 93,950,619 Public utilities and industrial and miscellaneous securities 26,598,316 9,120 1,385,056 25,222,380 --------------- --------------- ------------ --------------- Total fixed maturities $ 329,962,230 $ 494,093 $ 9,208,796 $ 321,247,527 =============== =============== ============ =============== Equity securities $ 26,214,265 $ 0 $ 1,373,905 $ 24,840,360 =============== ================ ============ ===============
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- -------- -------- 1998 United States government securities $ 113,029,756 $ 1,771,592 $ 159,367 $ 114,641,981 Foreign government securities 43,815,569 242,591 5,286,056 38,772,104 United States government agency mortgage-backed securities 1,087,492 17,031 0 1,104,523 Other mortgage-backed securities 43,174,814 1,271,787 181,569 44,265,032 Obligations of states and political subdivisions 97,469,857 4,467,662 27,311 101,910,208 Public utilities and industrial and miscellaneous securities 10,080,619 0 1,297,392 8,783,227 --------------- --------------- ------------ --------------- Total fixed maturities $ 308,658,107 $ 7,770,663 $ 6,951,695 $ 309,477,075 =============== ================ ============ =============== Equity securities $ 41,146,001 $ 3,661,597 $ 3,833,315 $ 40,974,283 =============== ================ ============ ===============
F-11 Included in other comprehensive income in 1999 is $6,758,000 of net unrealized depreciation on investments which includes $10,524,000 of unrealized net losses arising during the year less $3,766,000 of reclassification adjustments for net losses, included in net income. Proceeds, gross realized gains, and gross realized losses from sales of fixed maturity investments before maturity date or securities that prepay and from sales of equity securities were as follows:
1999 1998 1997 ---- ---- ---- Proceeds from Sale Fixed maturities $ 86,040,075 $ 234,195,041 $281,200,500 ============ ============= ============ Equity securities $ 28,382,068 $ 3,871,056 $ 3,883,703 ============ ============= ============ Gross Gains Fixed maturities $ 1,936,898 $ 4,298,138 $ 3,443,425 Equity securities 4,307,178 1,046,699 807,238 Other 3,661,831 2,346,612 0 ------------ ------------- ------------ 9,905,907 7,691,449 4,250,663 ------------ ------------- ------------ Gross Losses Fixed maturities (6,316,161) (10,615,978) (1,621,134) Equity Securities (687,055) (23,056) 0 Other (6,668,507) (914,604) (162,191) ------------ ------------- ------------ (13,671,723) (11,553,638) (1,783,325) ------------ ------------- ------------ Net realized (losses) gains $ (3,765,816) $ (3,862,189) $ 2,467,338 ============ ============= ============
Included in gross losses on fixed maturities for 1998 is a realized loss on the permanent write down of a bond in technical default in the amount of $6,600,000, which was sold in 1999 at a gain of $596,000. The components of net investment income were as follows:
1999 1998 1997 ---- ---- ---- Fixed maturity investments $ 19,096,242 $ 22,654,993 $25,835,051 Equity securities 1,282,199 579,718 180,956 Short-term investments 1,984,366 2,044,876 5,646,704 Limited partnerships 25,703,702 (4,933,361) 442,504 ------------- ------------- ----------- 48,066,509 20,346,226 32,105,215 Less investment expenses 893,893 734,337 914,590 ------------- ------------- ----------- Net investment income $ 47,172,616 $ 19,611,889 $31,190,625 ============= ============= ===========
Investment expenses primarily represent fees paid to Phoenix Investment Partners, Limited (formerly Phoenix Duff & Phelps Corporation), a public majority-owned subsidiary of Phoenix Home Life Mutual Insurance Company which owned 7.8%, 5.17% and 4.6% of the outstanding common stock of PXRE at December 31, 1999, 1998 and 1997, respectively. F-12 INVESTMENT MATURITY DISTRIBUTIONS The amortized cost and estimated fair value of fixed maturity investments at December 31, 1999 by contractual maturity date is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Fair Cost Value ---- ----- Maturity One year or less $ 6,578,422 $ 6,659,434 Over 1 through 5 years 118,566,069 116,668,834 Over 5 through 10 years 79,630,444 76,727,334 Over 10 through 20 years 10,659,376 11,300,517 Over 20 years 18,928,560 17,204,092 United States government agency and other mortgage and asset-backed securities 95,599,359 92,687,316 ------------ ------------- Total $329,962,230 $ 321,247,527 ============ =============
In addition to fixed maturities, PXRE held $50,004,000 and $58,862,000 of short-term investments at December 31, 1999 and 1998, respectively, comprised principally of high-grade commercial paper, U.S. Treasury bills and other investments with original maturities of one year or less. PXRE also held $113,476,000 and $65,164,000 of limited partnership assets at December 31, 1999 and 1998, respectively, accounted for under the equity method, as follows:
1999 1998 ---- ---- $ Ownership % $ Ownership % - ------------ - ----------- Mariner Select L.P. 27,229,000 47.35 26,652,967 51.62 Other 86,246,717 38,510,614 ---------- ---------- Total 113,475,717 65,163,581 =========== ==========
Total net assets and net income of the Mariner Select L.P. Fund amounted to $57,511,000 and $16,795,000 in 1999, and $51,621,000 and $2,456,000 in 1998. Mariner Partners L.P., which is included in short-term investments, has total net assets and net income of $41,493,000 and $7,250,000 in 1999, and $51,440,000 and net loss of $408,000 in 1998. The sole shareholder of Mariner Investment Group is the Chairman of the Board and a founding shareholder of Select Reinsurance Ltd. which owns approximately 9.5% of PXRE. F-13 RESTRICTED ASSETS Under the terms of certain reinsurance agreements, irrevocable letters of credit in the amount of $480,000 were issued at December 31, 1999, in respect of reported loss reserves and unearned premiums. Investments with a par value of $4,000,000 have been pledged as collateral with issuing banks. In addition, securities with a par value of $15,376,000 at December 31, 1999 were on deposit with various state insurance departments in order to comply with insurance laws. PXRE, in connection with the startup of PXRE Ltd.'s Syndicate No. 1224, has placed on deposit $46,587,000 par value of United States government securities and municipal securities as collateral for Lloyd's of London. In addition, PXRE issued a letter of credit for the benefit of Lloyd's of London in the amount of $15,355,000. The letter of credit is collateralized by municipal bonds of approximately $17,835,000. All invested assets of Syndicate 1224 amounting to $11,253,000 at December 31, 1999 are restricted from being paid as a dividend for at least three years. PXRE has $25 million in commitments for funding certain investments in certain limited partnerships of which $18.5 million has been funded at December 31, 1999. 4. NOTES PAYABLE AND CREDIT ARRANGEMENTS In January 1997, PXRE Corporation issued $100,000,000 of 8.85% TRUPS. The fair value of the TRUPS is $87,677,919 and $99,086,425 at December 31, 1999 and 1998, respectively. Interest is payable on the TRUPS semi-annually. The notes are redeemable on or after February 1, 2007 at the option of PXRE Corporation, initially at 104.180% declining to 100.418% at February 1, 2016, and 100% thereafter. On August 15, 1998, PXRE Corporation redeemed the remaining balance of $20,414,000 of its 9.75% Senior Notes due August 15, 2003 at a premium of 103.656%. In connection with the redemption of the Senior Notes, PXRE Corporation recorded an extraordinary charge of $843,000, net of tax reflecting the write-off of the remaining unamortized debt issuance costs and related redemption premium. Interest paid, including the minority interest in consolidated subsidiary, was $12,705,000, $11,687,000, and $8,707,000 for 1999, 1998 and 1997, respectively. On December 30, 1998 PXRE Corporation entered into a Credit Agreement with First Union National Bank ("First Union") to arrange and syndicate for it a revolving credit facility of up to $75 million. At December 31, 1998, $50 million of the total $75 million was underwritten and committed to by First Union. The additional $25 million of the revolving credit facility was drawn down October 6, 1999 and PXRE Group Ltd. and PXRE (Barbados) Ltd. were added as guarantors under the Credit Agreement. First Union syndicated the $75 million 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 First Union, the "Lenders"). The $75 million borrowings under the Credit Agreement bear interest at First Union's base rate or at the financial institution's LIBOR rate for periods of 30, 60, 90 or 180 days plus a 1% credit margin. The interest rate as of December 31, 1999, was 7.12% on the $25 F-14 million loan. The interest rate charged on the $50 million portion of the loan at December 31, 1999 and 1998 was 6.936% and 7.75%, respectively. In addition, the Credit Agreement requires PXRE and certain subsidiaries, where applicable, to maintain certain financial ratios including minimum fixed charge coverage, maximum consolidated debt to total capitalization, minimum statutory capital and surplus, and minimum risk based capital ratios. Commitments under this Credit Agreement terminate on March 31, 2005 and are subject to annual reductions of $10 million commencing March 31, 2000 and $25 million on March 31, 2005. At December 31, 1999 and 1998, $75 million and $50 million was outstanding under this Credit Agreement. The Credit Agreement requires that PXRE Corporation pay a commitment fee of 25 basis points on any unused portion of the loan. PXRE Corporation entered into an interest rate swap agreement with First Union that locks in the interest rate on the $50 million portion of the loan to 5.34% plus a 1.00% credit margin or 6.34%. The swap agreement coincides with the maturity of the Credit Agreement. The fair value of the loan and the interest rate swap agreement at December 31, 1999 and 1998 was approximately $72,908,000 and $50,084,000, respectively. 5. INCOME TAXES PXRE is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. 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. PXRE does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to direct United States income taxation. The United States subsidiaries of PXRE file a consolidated U.S. federal income tax return. Pretax (loss) income from operations before cumulative effect of accounting change for the years ended December 31, was taxed under the following jurisdictions;
1999 1998 1997 ---- ---- ---- U.S. $(43,808,000) $2,316,000 $69,225,000 Bermuda (11,437,000) 0 0 Barbados 1,027,000 0 0 ------------ ---------- ----------- Total $(54,218,000) $2,316,000 $69,225,000 ============ ========== ===========
F-15 The components of the (benefit) provision for income taxes for the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ---- ---- ---- Current U.S. $(12,819,000) $ 3,321,000 $ 18,014,000 State and local 0 21,000 515,000 Foreign 2,314,000 0 706,000 ------------ ------------ ---------- Subtotal (10,505,000) 3,342,000 19,235,000 Deferred U.S. (2,270,000) (2,396,000) 2,963,000 Deferred foreign 0 (2,152,000) 0 ------------ ------------ ---------- Income tax (benefit) provision before extraordinary loss and change in accounting (12,775,000) (1,206,000) 22,198,000 Income tax benefit from extraordinary loss 0 454,000 1,493,000 Income tax benefit from change in accounting (374,000) 0 0 ------------ ------------ ---------- Income tax (benefit) provision $(13,149,000) $ (1,660,000) $ 20,705,000 ============ ============ ============ Income taxes paid $ 1,930,000 $ 10,900,000 $ 23,460,000 ============ ============ ============
The entire 1999 net operating loss will be carried back to 1997. The significant components of the net deferred income tax asset (liability) are as follows:
Deferred tax asset: 1999 1998 ---- ---- Discounted reserves and unearned premiums $ 7,177,000 $ 3,116,000 U.K. losses not currently deductible 6,478,000 1,027,000 Unrealized depreciation on investments 3,550,000 0 Deferred compensation and benefits 1,020,000 500,000 Credit carryforwards 1,433,000 3,434,000 Other, net 265,000 0 ------------ ------------ Total deferred income tax asset 19,923,000 8,077,000 ------------ ------------ Deferred income tax liability: Deferred acquisition costs (1,969,000) (678,000) Unrealized appreciation on investments (4,690,000) (236,000) Investments and unrealized foreign exchange (1,587,000) (621,000) Other, net (146,000) (1,068,000) ------------ ------------ Total deferred income tax liability (8,392,000) (2,603,000) ------------ ------------ Net deferred income tax asset $ 11,531,000 $ 5,474,000 ============ ============
F-16 Management has reviewed PXRE's deferred tax asset, and has concluded that it is realizable and no valuation allowance is necessary. The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate of 35% to pretax income from operations as a result of the following differences.
1999 1998 1997 ---- ---- ---- Statutory U.S. rate $(18,976,000) $ 357,000 $ 22,735,000 Tax exempt interest (1,781,000) (1,231,000) (1,284,000) Amortization of intangibles (753,000) (753,000) (753,000) Reciprocal shares 1,815,000 0 0 Foreign tax credit expiration 920,000 0 0 Bermuda loss 4,003,000 0 0 Foreign Income - Barbados (359,000) 0 0 Barbados tax 2,314,000 0 0 Other net (332,000) (33,000) 7,000 ------------ ------------ ------------ Total provision $(13,149,000) $ (1,660,000) $ 20,705,000 ============ ============ ============
6. STOCKHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS STOCKHOLDERS' EQUITY PXRE was incorporated on June 1, 1999 as a Bermuda holding company and a wholly owned subsidiary of PXRE Purpose Trust, a purpose trust established under the laws of Bermuda. In connection with the reorganization, PXRE repurchased for $1.00 per share, 100% of the common shares owned by PXRE Purpose Trust and each outstanding share of PXRE Corporation common stock (other than shares held by PXRE Corporation and its subsidiaries) was converted into one common share of PXRE. In addition, PXRE retired all of its treasury shares. On August 9, 1999 PXRE's Board of Directors unanimously approved a resolution to increase the number of authorized shares from 12,000 to 60,000,000 consisting of 50,000,000 common shares and 10,000,000 preferred shares. In addition, PXRE's Board of Directors authorized an increase in par value of its common shares from $0.01 per share to $1.00 per share. The Company's bye-laws restrict the ownership and voting rights of any shareholder who directly or indirectly would own more that 9.9% of the outstanding common shares of the Company. The restriction requires the prompt disposition of any shares held in violation of the provision and limits the voting power of a shareholder with more than 9.9% of the outstanding shares to the voting power of a shareholder with 9.9% or less of the outstanding common shares. F-17 DIVIDEND RESTRICTIONS The Insurance Department of the State of Connecticut, in which PXRE Reinsurance is domiciled, recognizes as net income and surplus (stockholders' equity) those amounts determined in conformity with statutory accounting practices ("SAP") prescribed or permitted by the department, which differ in certain respects from U.S. GAAP. The amount of statutory capital and surplus at December 31, and statutory net income of PXRE Reinsurance for the years then ended, as filed with insurance regulatory authorities are as follows:
1999 1998 1997 ---- ---- ---- (Unaudited) PXRE Reinsurance Statutory capital and surplus $ 399,007,000 $ 447,229,000 $ 451,321,000 Statutory net (loss) income $ (1,327,000) $ 4,835,000 $ 57,388,000
PXRE Reinsurance is subject to state regulatory restrictions, which limit the maximum amount of annual dividends or other distributions, including loans or cash advances, available to stockholders without prior approval of the Insurance Commissioner of the State of Connecticut. As of December 31, 1999, the maximum amount of dividends and other distributions which may be made by PXRE Reinsurance during 2000 without prior approval is limited to approximately $39,901,000. Accordingly, the remaining amount of its capital and surplus is considered restricted. Under the terms of the Credit Agreement, dividends to PXRE shareholders in any year are limited as described in Note 4. F-18 7. EARNINGS PER SHARE A reconciliation of income before extraordinary item and change in accounting, and shares, which affect basic and diluted earnings per share, is as follows:
1999 1998 1997 ---- ---- ---- (Loss) income available to common stockholders: (Loss) income before extraordinary loss and change in accounting $(41,443,353) $ 3,521,821 $ 47,027,150 Extraordinary loss 695,278 843,000 2,773,690 Change in accounting 0 0 0 ------------ ------------ ------------ Net (loss) income available to stockholders $(42,138,631) $ 2,678,821 $ 44,253,460 ============ ============ ============ Weighted average shares of common stock outstanding: Weighted average common shares outstanding (basic) 11,568,494 13,339,479 13,775,844 Equivalent shares of stock options 0 62,218 70,770 Equivalent shares of restricted stock 0 50,034 46,146 ------------ ------------ ------------ Weighted average common equivalent shares (diluted) 11,568,494 13,451,731 13,892,760 ============ ============ ============ Per share amounts: Basic (Loss) income before extraordinary loss and change in accounting $ (3.58) $ .26 $ 3.41 Net (loss) income $ (3.64) $ .20 $ 3.21 Diluted (Loss) income before extraordinary loss and change in accounting $ (3.58) $ .26 $ 3.39 Net (loss) income $ (3.64) $ .20 $ 3.19
F-19 8. EMPLOYEE BENEFITS BENEFIT PLANS Effective January 1, 1993, PXRE adopted a non-contributory defined benefit pension plan covering all U.S. employees with one year or more of service and who had attained age 21. Benefits are generally based on years of service and compensation. PXRE funds the plan in amounts not less than the minimum statutory funding requirement nor more than the maximum amount that can be deducted for U.S. income tax purposes. PXRE also sponsors a supplemental executive retirement plan. This plan is non-qualified and provides certain key employees benefits in excess of normal pension benefits. The net pension expenses for the company-sponsored plans included the following components at December 31, based on a January 1 valuation date (the latest actuarial estimate):
1999 1998 1997 ---- ---- ---- Components of net periodic cost Service cost $ 455,892 $ 308,916 $ 265,216 Interest cost 352,348 247,025 220,404 Expected return on assets (44,166) (29,802) (9,680) Amortization of prior service costs 110,301 94,147 94,996 Recognized net actuarial costs 75,280 8,734 (401) --------- --------- --------- Net periodic benefit costs $ 949,655 $ 629,020 $ 570,535 ========= ========= =========
F-20 The following table sets forth the funded status of the plans and amounts recognized in the consolidated balance sheets:
1999 1998 ---- ---- Reconciliation of benefit obligation Benefit obligation January 1 $ 4,297,331 $ 3,784,732 Service cost 455,892 308,916 Interest cost 352,348 247,025 Amendments 199,305 0 Actuarial loss (137,982) (43,342) ----------- ----------- Benefit obligation December 31 $ 5,166,894 $ 4,297,331 =========== =========== Reconciliation of plan assets Fair value of plan assets as of January 1 $ 453,518 $ 315,222 Return on plan assets 40,327 33,459 Employer contributions 308,942 104,837 ----------- ----------- Fair value of plan assets December 31 $ 802,787 $ 453,518 =========== =========== Reconciliation of funded status Funded status $(4,364,107) $(3,843,813) Unrecognized prior service cost 1,256,350 1,167,346 Unrecognized net gain 277,257 486,680 ----------- ----------- Prepaid cost $(2,830,500) $(2,189,787) =========== =========== Weighted average assumptions as of December 31, Discount rate 7.75% 6.75% Expected return on plan assets 8.00% 8.00% Rate of compensation increase 5.00% 4.50%
The Brussels and London operations cover employees under a defined contribution type plan. The provision for such plans is $326,000, $246,000 and $131,000 for 1999, 1998 and 1997 respectively. EMPLOYEE STOCK PURCHASE PLAN PXRE maintains an Employee Stock Purchase Plan under which it has reserved 6,029 common shares for issuance to PXRE personnel. The price per share is the lesser of 85% of the fair market value at either the date granted or the date exercised. F-21 9. STOCK OPTIONS AND GRANTS In 1988, PXRE adopted a stock option plan (the "1988 Stock Option Plan") which provides for the grant of incentive stock options and non-qualified stock options to officers and key employees. Options granted under the 1988 Stock Option Plan have a term of 10 years and become exercisable in four equal annual installments. The exercise price for options granted pursuant to the plan must be equal to or exceed the fair market value of the common shares on the date the option is granted. In 1992, the Board of Directors resolved to freeze the 1988 Stock Option Plan as of December 31, 1992. At December 31, 1999 and 1998, 73,380 and 86,674 options are exercisable under this plan. In 1992, a Restated Employee Annual Incentive Bonus Plan was approved. Incentive compensation to employees is based in part on return on equity compared to a target return on equity and in part at the discretion of the Restated Bonus Plan Committee. In 1992, PXRE adopted a 1992 Officer Incentive Plan that provides for the grant of incentive stock options, non-qualified stock options and awards of shares subject to certain restrictions. Options granted under the plan have a term of 10 years and generally become exercisable in four equal annual installments commencing one year from the date of grant. The exercise price for the incentive shares options must be equal to or exceed the fair market value of the common shares on the date the option is granted. The exercise price for the non-qualified options may not be less than the fair market value of the common stock on the date of grant. At December 31, 1999 and 1998, options for 256,631 and 220,743 shares respectively, were exercisable under this plan. In 1999, 1998, and 1997, $3,170,000, $1,240,000, and $1,553,000, respectively was incurred under these plans, including 30% of any bonus granted to certain levels of employees paid in restricted shares which vest in 36 months. F-22 Information regarding the option plans described above is as follows:
Number Option Price of Shares Per Share Range ---------- --------------- Outstanding at December 31, 1996 373,023 $8.00 - $25.00 Options granted 82,166 $26.688 Options exercised 64,504 $8.00 - $25.00 ------- Outstanding at December 31, 1997 390,688 Options granted 91,586 $30.72 - $32.94 Options exercised 4,626 $10.875 - $24.88 Options canceled 4,624 $24.75 - $26.69 ------- Outstanding at December 31, 1998 473,024 $8.75 - $32.94 Options granted 0 $0 Options exercised 13,294 $10.625 - $11.50 Options canceled 7,256 $24.75 - $32.938 ------- Outstanding at December 31, 1999 452,474 $8.75 - $32.938 =======
In 1995, PXRE adopted a non-employee Director Stock Option Plan, which provided for an annual grant of 1,000 options per director from 1995 to 1996 and provides for 3,000 options per director from 1997 to 2005 inclusive as amended. Options granted under the plan have a term of 10 years from the date of grant and are vested and exercisable in three equal annual installments commencing one year from the date of grant. The exercise price of the options is the fair market value on the date of grant. As of December 31, 1999, options for 250,000 shares were authorized and 91,191 were exercisable. Beginning January 1, 1998, PXRE allowed its directors to elect to convert their Board of Directors retainer fee to options. At December 31, 1999, ten year options for 48,461 shares were granted at prices ranging from $17.704 to $33.455 which are 100% vested and immediately exercisable. Total authorized common shares reserved for grants of stock options and restricted stock under the above plans is 2,141,754 shares. Total shares of 415,452 relate to stock options which are vested and exercisable at December 31, 1999, at exercise prices between $8.75 and $33.455. All options become exercisable upon a change of control of PXRE as defined by the plans. As permitted by SFAS No. 123, PXRE has elected to continue to account for its stock option plans under the accounting rules prescribed by APB 25, under which no compensation costs are recognized as an expense. Had compensation costs for the stock options been determined using the fair value method of accounting as recommended by SFAS No. 123, net income and earnings per share for 1999, 1998 and 1997 would have been reduced to the following pro forma amounts: F-23
1999 1998 1997 ---- ---- ---- Net income As reported $(42,138,631) $ 2,678,821 $ 44,253,460 Pro forma (42,612,003) 1,987,264 43,789,779 Basic income per share As reported $ (3.64) $ 0.20 $ 3.21 Pro forma (3.68) 0.15 3.18 Diluted income per share As reported $ (3.64) $ 0.20 $ 3.19 Pro forma (3.68) 0.15 3.15
The fair value of each option granted in 1999, 1998 and 1997 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
1999 1998 1997 ---- ---- ---- Risk-free rate 6.72% 5.07% 5.89% Dividend yield 1.85% 4.01% 2.63% Volatility factor 26.71% 24.94% 30.70% Weighted average expected life 5 5 5
A summary of the status of the employee and director stock option plans at December 31, 1999 and 1998 and changes during the years then ended is presented below:
1999 1998 ---- ---- Weighted Weighted Average Average Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- Options outstanding at beginning of year 561,475 24.58 433,688 20.49 Options granted 58,146 25.87 137,037 32.42 Options exercised 13,294 11.11 4,626 20.25 Options canceled 7,259 28.62 4,624 25.46 --------- --------- Options outstanding at end of year 599,068 24.80 561,475 24.58 --------- --------- Options exercisable at end of year 421,202 21.33 307,417 21.19 --------- --------- Weighted average fair value per share of options granted 10.68 7.50
F-24 Options outstanding at December 31, 1999 included:
Weighted Weighted Weighted Range of Average Average Average Exercise Number Outstanding at Remaining Exercise Number Exercisable at Exercise Prices December 31, 1999 Life Price December 31, 1999 Price - ------ ----------------- ---- ----- ----------------- --------- $8.75 to $11.50 73,380 1.61 9.80 73,380 9.80 $23.25 to $33.455 525,688 6.69 26.89 347,822 25.79
In 1990, PXRE adopted a non-employee Director Deferred Stock Plan granting 2,000 shares to each non-employee Board member at the time specified in the plan. The 12,000 shares granted to Board members who are not employees of PXRE or Phoenix Home Life Mutual Insurance Company will be issued to Board members at or after their retirement according to the option selected from those defined in the plan. The 6,000 shares granted to Board members who are employees of Phoenix Home Life Mutual Insurance Company were issued on August 24, 1993. 10. SEGMENT INFORMATION PXRE operates in four reportable property and casualty segments - catastrophe and risk excess casualty structured / finite business and all other lines based on the Company's method of internal management reporting. In addition, the Company 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, Australia and Asia) representing all other premiums written. The reportable segments were redefined during 1999. Segment information for 1998 and 1997 was restated to be consistent with 1999 segments. There are no significant differences among the accounting policies of the segments as compared to the Company'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. F-25
Net Premiums Written (000's except %'s) 1999 1999 1998 1998 1997 1997 ---- ---- ---- ---- ---- ---- Amount % Amount % Amount % ------ - ------ - ------ - Catastrophe and Risk Excess North American $ 26,704 $ 12,795 $ 21,724 International 63,957 58,595 63,154 Excess of loss cessions (18,883) (3,938) (409) -------- ------- ----- Subtotal 71,778 52% 67,452 76% 84,469 84% -------- ------- ------ Casualty North American 13,148 650 0 International 12,851 4,433 0 ------- ------ ------- 25,999 19% 5,083 6% 0 0% ------- ------ ------- Structured/Finite Business North American 0 0 0 International 0 0 0 ------- ------ -------- 0 0% 0 0% 0 0% ------- ------ -------- Other Lines North American 12,073 2,054 4,848 International 28,995 14,105 10,738 ------ ------ ------ 41,068 29% 16,159 18% 15,586 16% ------ -- ------ -- ------ ---- Total $ 138,845 100% $ 88,694 100% $ 100,055 100% ========== ==== ======== ==== ========= ==== Net Premiums Earned (000's except %'s) 1999 1999 1998 1998 1997 1997 ---- ---- ---- ---- ---- ---- Amount % Amount % Amount % Catastrophe- and Risk Excess North American $ 26,155 $ 13,561 $ 21,877 International 61,241 63,830 60,148 Excess of loss cessions (14,958) (2,869) (353) -------- -------- ------ Subtotal 72,438 56% 74,522 81% 81,672 89% ------- -------- ------ Casualty North American 11,593 (152) 0 International 9,794 2,207 0 ------ ------- ------ 21,387 17% 2,055 2% 0 0% ------- ------- ------ Structured /Finite Business North American 0 0 0 International 0 0 0 ------- ------- ------ 0 0% 0 0% 0 0% ------- ------- ------ Other Lines North American 11,296 3,234 5,650 International 23,383 12,575 4,093 34,679 27% 15,809 17% 9,743 11% ------- --- ------- --- ------ --- Total $128,504 100% $ 92,386 100% $ 91,415 100% ======== ==== ========= ==== ========= ====
F-26
Underwriting Profit (Loss) (000's except %'s) 1999 1999 1998 1998 1997 1997 ---- ---- ---- ---- ---- ---- Amount % Amount % Amount % ------ - ------ - ------ - Catastrophe and Risk Excess North American $ (31,591) $ 6,970 $ 13,655 International (32,039) 7,081 48,197 Excess of loss cessions 15,476 8,372 2,407 ----------- ------------ --------- Subtotal (48,154) 87% 22,423 141% 64,259 102% ----------- ------------ --------- Casualty North American (279) (409) 0 International (242) 87 0 ----------- ------------ ------- (521) 1% (322) (2%) 0 0% ----------- ------------ ------- Structured/Finite Business North American 0 0 0 International 411 0 0 ----------- ------------ ------------- 411 (1%) 0 0% 0 0% ----------- ------------ ------------- Other Lines North American (715) (1,442) (2,075) International (6,166) (4,794) 573 ----------- ------------ ------------ (6,881) 13% (6,236) (39%) (1,502) (2%) ----------- --- ------------ ----- ------------ ---- Total $ (55,145) 100% $ 15,865 100% $ 62,757 100% =========== ==== ============ ==== =========== ====
The following table reconciles the underwriting operations for the operating segments to income before tax as reported in the consolidated statements of operations and comprehensive income:
(000's) 1999 1998 1997 ---- ---- ---- Underwriting (loss) profit $(55,145) $ 15,865 $ 62,757 Net investment income 47,173 19,612 31,191 Net realized investment (losses) gains (3,766) (3,862) 2,467 Interest expense (3,915) (1,395) (3,325) Minority interest in consolidated subsidiary (8,790) (8,928) (8,184) Operating expenses (30,052) (19,313) (15,716) Other income 277 336 35 ------- ------- ------- (Loss) income before income taxes, cumulative effect of accounting change, and extraordinary item $(54,218) $ 2,315 $ 69,225 ========= ========== ========
F-27 11. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED) The following are unaudited quarterly results of operations on a consolidated basis for the years ended December 31, 1999 and 1998. Quarterly results necessarily rely heavily on estimates. This and certain other factors, such as catastrophic losses, call for caution in drawing specific conclusions from quarterly results. Due to changes in the number of average shares outstanding, quarterly earnings per share may not add to the total for the year. The common share price ranges are bid quotations as reported by the New York Stock Exchange. Results for the quarter ended September 30, 1999, includes results of operations of PXRE prior to the redomestication of PXRE Corporation and subsidiaries. F-28
THREE MONTHS ENDED ------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 1999 - ---- Net premiums written $ 38,828,000 $ 28,774,000 $ 31,960,000 $ 39,283,000 ============== ============== ============ ============== Revenues: Net premiums earned $ 23,830,950 $ 28,694,483 $ 32,458,734 $ 43,518,943 Net investment income 7,200,592 10,922,120 9,466,325 19,583,579 Realized investment (losses) gains (2,576,011) 1,193,499 (2,194,302) (189,002) Management fees 896,616 403,699 528,151 1,761,871 -------------- -------------- ------------ -------------- Total revenues 29,352,147 41,213,801 40,258,908 64,675,391 -------------- -------------- ------------ -------------- Losses and expenses: Losses and loss expenses incurred 18,898,062 17,969,860 29,327,207 93,064,284 Commissions and brokerage 6,406,928 6,138,823 7,871,366 7,284,527 Other operating expenses 6,237,793 7,079,920 7,389,761 9,344,836 Interest expense 831,285 842,700 885,254 1,355,859 Minority interest in consolidated subsidiary 2,108,441 2,218,328 2,220,046 2,243,291 -------------- -------------- ------------ -------------- Total expenses 34,482,509 34,249,631 47,693,634 113,292,797 -------------- -------------- ------------ -------------- (Loss) income before income taxes and change in accounting (5,130,362) 6,964,170 (7,434,726) (48,617,406) Income tax benefit (provision) 2,368,000 (1,918,000) 1,196,130 11,128,841 -------------- -------------- ------------ -------------- (Loss) income before change in accounting (2,762,362) 5,046,170 (6,238,596) (37,488,565) Cumulative effect of accounting change, net of $374,381 tax benefit 0 0 0 695,278 -------------- -------------- ------------ -------------- Net (loss) income $ (2,762,362) $ 5,046,170 $ (6,238,596) $ (38,183,843) ============== ============== ============ ============== Basic (loss) earnings per common share: Net (loss) income $ (0.23) $ 0.44 $ (0.55) $ (3.28) ============== ============== ============ ============== Average shares outstanding 11,889,636 11,439,018 11,441,979 $ 11,449,872 ============== ============== ============ ============== Diluted (loss) earnings per common share: Net (loss) income $ (0.23) $ 0.44 $ (0.55) $ (3.34) ============== ============== ============ ============== Average shares outstanding 11,889,636 11,584,551 11,441,979 11,449,872 ============== ============== ============ ============== Dividends paid per common share $ 0.26 $ 0.26 $ 0.06 $ 0.06 Price Range of Common Share: High $ 26.25 $ 21.25 $ 19.0625 $ 14.50 Low $ 18.00 $ 16.00 $ 14.3125 $ 10.00
F-29
THREE MONTHS ENDED ------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 1998 - ---- Net premiums written $ 28,357,000 $ 15,368,000 $ 24,001,000 $ 20,968,000 ============== ============== ============== ============== Revenues: Net premiums earned $ 19,713,968 $ 21,378,386 $ 27,644,965 $ 23,649,007 Net investment income 7,561,058 4,436,722 (851,792) 8,465,901 Realized investment gains (losses) 1,224,643 427,454 1,328,034 (6,842,320) Management fees 825,681 678,947 (33,227) 700,730 -------------- -------------- ------------- --------------- Total revenues 29,325,350 26,921,509 28,087,980 25,973,318 -------------- -------------- ------------- --------------- Losses and expenses: Losses and loss expenses incurred 3,570,797 2,951,664 32,936,993 18,334,172 Commissions and brokerage 3,992,016 4,288,096 7,376,058 4,906,518 Other operating expenses 4,349,853 3,600,868 5,414,708 5,947,996 Interest expense 544,280 601,890 248,641 0 Minority interest in consolidated subsidiary 2,231,884 2,231,923 2,232,051 2,232,005 -------------- -------------- ------------- --------------- Total expenses 14,688,830 13,674,441 48,208,451 31,420,691 -------------- -------------- ------------- --------------- Income (loss) before income taxes and extraordinary item 14,636,520 13,247,068 (20,120,471) (5,447,374) Income tax provision (benefit) 4,650,000 4,058,000 (7,484,000) (2,430,077) -------------- -------------- ------------- --------------- Income (loss) before extraordinary loss 9,986,520 9,189,068 (12,636,471) (3,017,297) -------------- -------------- ------------- --------------- Extraordinary loss on debt redemption net of income tax benefit 0 0 843,000 0 ---------------- ---------------- --------------- ---------------- Net income (loss) $ 9,986,520 $ 9,189,068 $ (13,479,471) $ (3,017,297) ---------------- ---------------- --------------- ---------------- Basic earnings (loss) per common share: Income (loss) before extraordinary item $ 0.73 $ 0.67 $ (0.93) $ (0.24) Extraordinary loss 0.00 0.00 0.06 0.00 -------------- -------------- ------------- --------------- Net income (loss) $ 0.73 $ 0.67 $ (0.99) $ (0.24) ============== ============== ============= =============== Average shares outstanding 13,744,975 13,650,563 13,596,222 12,691,058 ============== ============== ============= =============== Diluted earnings (loss) per common share: Income (loss) before extraordinary item $ 0.72 $ 0.67 $ (0.93) $ (0.24) Extraordinary loss 0.00 0.00 0.06 0.00 -------------- -------------- ------------- --------------- Net income (loss) $ 0.72 $ 0.67 $ (0.99) $ (0.24) ============== ============== ============= =============== Average shares outstanding 13,862,678 13,722,006 13,596,222 12,691,058 ============== ============== ============= =============== Dividends paid per common share $ 0.25 $ 0.25 $ 0.25 $ 0.26 Price Range of Common Share: High $ 35.25 $ 32.875 $ 30.500 $ 26.6875 Low $ 29.375 $ 29.00 $ 25.625 $ 20.6250
F-30 Parent Company Information Schedule II PXRE Group Ltd.'s (successor registrant to PXRE Corporation) summarized financial information (parent company only) is as follows:
December 31, December 31, 1999 1998 -------------- --------------- BALANCE SHEET Assets Short-term investments $ - $ 1,012,031 Equity securities(market Value) - 3,069,554 Other invested assets - 5,490,561 Cash 391,934 232,157 Receivable from subsidiaries 1,066,356 3,384,100 Other receivables 0 1,621 Income tax recoverable 0 10,402,439 Deferred income tax benefits 0 6,741,946 Equity in subsidiaries 263,737,568 457,193,174 Other assets 0 7,106,953 -------------- --------------- Total assets $ 265,195,858 $ 494,634,536 ============== =============== Liabilities Debt payable $ 0 $ 50,000,000 Income tax payable 0 0 Loan from subsidiary 1,877,000 3,416,886 Deferred income tax liabilities 0 0 Excess of fair market value over cost 0 2,550,671 Other liabilities 39,875 4,774,535 -------------- --------------- Total Liabilities 1,916,875 60,742,092 -------------- --------------- Minority Interest in Consolidated Subsidiary 0 99,516,938 Stockholders' equity 263,278,983 334,375,506 -------------- --------------- Total liabilities and stockholders' equity $ 265,195,858 $ 494,634,536 ============== ===============
INCOME STATEMENT Years ended December 31, ------------------------------------------------ 1999 1998 1997 -------------- -------------- -------------- Investment income (loss) $ 6,361 $ (1,839,856) $ 2,799,937 Realized (loss)/gain on investment 0 1,458,142 433,966 Management fee 44,178 300,380 0 Interest expense 0 (11,046,269) (12,005,863) Other operating expenses (1,105,792) (36,349) 154,757 -------------- -------------- ------------- Loss before tax benefit, cumulative effect of accounting change and extraordinary item (1,055,253) (11,163,952) (8,617,203) Income tax benefit 0 5,505,896 4,713,952 -------------- -------------- ------------- (1,055,253) (5,658,056) (3,903,251) Equity in earnings of subsidiary (40,388,100) 9,179,877 50,930,401 -------------- -------------- ------------- Net (loss) income before cumulative effect (41,443,353) 3,521,821 47,027,150 of accounting change and extraordinary loss Cumulative effect of accounting change, net of tax 695,278 0 0 Extraordinary loss, net of tax 0 843,000 2,773,690 -------------- -------------- ------------- Net (loss) income $ (42,138,631) $ 2,678,821 $ 44,253,460 ============== ============== ============= CASH FLOW STATEMENT Cash from operating activities: Net (loss) income $ (42,138,631) $ 2,678,821 $ 44,253,460 Adjustments to reconcile net income to cash provided by operating activities: Equity in earnings of subsidiaries 41,083,378 (9,179,877) (50,930,401) Cash dividends from subsidiaries 36,235,000 57,388,000 0 Contribution of capital to subsidiaries (35,000,000) (49,745,731) 0 Investment income receivable 0 377,245 (377,245) Loan from subsidiary (1,539,886) 0 0 Intercompany accounts 2,317,744 2,053,111 (2,314,302) Deferred income taxes 6,741,946 (1,580,912) (4,165,649) Income tax recoverable 10,402,439 (1,907,459) (5,074,049) Other (3,174,770) (4,716,339) 4,025,593 -------------- -------------- ------------- Net cash provided (used) by operating activities 14,927,220 (4,633,141) (14,582,593) -------------- -------------- ------------- Cash flow from investing activities: Investment in equity of PXRE Trading Corporation 0 3,444,305 0 Net change in short-term investments 1,012,031 4,114,797 13,372,334 Cost of fixed maturity investments 0 0 (32,981,953) Equity securities redomesticated/disposed 3,069,554 Cost of equity securities acquired 0 (45,688) (3,023,866) Fixed maturity investments matured/disposed 0 18,482,376 16,428,816 Net change in other invested assets 5,490,561 9,193,726 (14,684,287) -------------- -------------- ------------- Net cash provided (used) by investing activities 9,572,146 35,189,516 (20,888,956) -------------- -------------- ------------- Cash flow from financing activities: Proceeds from issuance of common stock 505,796 233,032 855,570 Cash dividends paid to common stockholders (7,629,925) (13,585,333) (12,209,262) Repurchase of debt 0 (27,689,000) (45,221,683) Proceeds from issuance of debt 0 50,000,000 0 Cost of treasury stock (17,215,460) (39,728,564) (7,464,583) Issuance of minority interest in consolidated subsidiary 0 0 99,509,000 -------------- -------------- ------------- Net cash (used) provided by financing activities (24,339,589) (30,769,865) 35,469,042 -------------- -------------- ------------- Net change in cash 159,777 (213,490) (2,507) Cash, beginning of period 232,157 445,647 448,154 -------------- -------------- ------------- Cash, end of period $ 391,934 $ 232,157 $ 445,647 ============== ============== =============
F-31
Schedule III PXRE CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION Column A Column B Column C Column D Column E Column F Column G Column H -------- -------- -------- -------- -------- -------- -------- -------- Future policy benefits, Other losses, policy Benefits, Segment- Deferred claims and claims and claims, property policy loss Unearned benefits Net losses and and acquisition expenses premiums payable Premium investment settlement casualty cost (caption (caption (caption revenue income expenses insurance (caption 7) 13-a-1) 13-a-2) 13-a-3) (caption 1) (caption 2) (caption 4) --------- ----------- ------- ------- ------- ----------- ----------- ----------- 1999 North American $ 49,044,000 $ 91,589,000 International 94,418,000 99,237,000 Corporate Wide (14,958,000) (31,567,000) ----------------------------------------------------------------------------------------------------- Total $ 7,810,000 $261,551,000 $42,219,000 $ 0 $128,504,000 $45,185,000 $159,259,000 1998 North American $ 16,643,000 $ 36,531,000 International 78,612,000 32,903,000 Corporate Wide (2,869,000) (11,640,000) ----------------------------------------------------------------------------------------------------- Total $ 4,123,000 $102,592,000 $20,541,000 $ 0 $ 92,386,000 $19,612,000 $ 57,794,000 1997 North American $ 27,527,000 $ 8,450,000 International 64,241,000 4,684,000 Corporate Wide (353,000) (643,000) ----------------------------------------------------------------------------------------------------- Total $ 2,966,000 $ 57,189,000 $18,485,000 $ 0 $ 91,415,000 $31,191,000 $ 12,491,000
Column I Column J Column K -------- -------- -------- Amortiza- tion of deferred policy Other acquisition operating Premiums costs expense written ----- ------- ------- 1999 North American $ 7,629,000 $ 51,925,000 International 15,899,000 105,803,000 Corporate Wide 4,174,000 (18,883,000) -------------------------------------------------- Total $ 27,702,000 $28,525,000 $138,845,000 1998 North American $ 6,697,000 $ 15,499,000 International 12,213,000 77,133,000 Corporate Wide 1,653,000 (3,938,000) -------------------------------------------------- Total $ 20,563,000 $19,313,000 $ 88,694,000 1997 North American $ 10,968,000 $ 26,572,000 International 7,279,000 73,892,000 Corporate Wide 891,000 (409,000) --------------------------------------------------- Total $ 19,138,000 $15,716,000 $100,055,000
Schedule VI PXRE CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS Column A Column B Column C Column D Column E Column F Column G -------- -------- -------- -------- -------- -------- -------- Reserves for unpaid Deferred claims Discount, Affiliation policy and claim if any Net with acquisition adjustment deducted in Unearned Earned investment registrant costs expenses Column C premiums premiums income ---------- ----- -------- -------- -------- -------- ------ 1999 Consolidated $ 7,810,000 $ 261,551,000 $ 0 $42,219,000 $ 128,503,000 $ 45,185,000 1998 Consolidated 4,123,000 102,592,000 0 20,541,000 92,386,000 19,612,000 1997 Property 2,966,000 57,189,000 0 18,485,000 91,415,000 31,191,000
Column H Column I Column J Column K -------- -------- -------- -------- Claims and Claim Amortiza- adjustment expenses tion of Paid incurred related to deferred claims (1) (2) policy and claim Current Prior acquisi- adjustment Premiums year years tion costs expenses written ---- ----- ---------- -------- ------- 1999 $ 139,478,000 $ 19,781,000 $27,702,000 $ 66,308,000 $ 138,845,000 1998 58,326,000 (532,000) 20,563,000 33,007,000 88,694,000 1997 16,408,000 (3,917,000) 19,138,000 23,379,000 100,055,000
F-32 REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULES To the Board of Directors of PXRE Group Ltd. (Successor Registrant of PXRE Corporation): Our audits of the consolidated financial statements referred to in our report dated February 7, 2000 appearing on page F-1 of PXRE Group Ltd.'s (Successor Registrant of PXRE Corporation) Annual Report on Form 10-K for the year ended December 31, 1999, also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICEWATERHOUSECOOPERS Hamilton, Bermuda February 7, 2000 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-4 (No. 333-85451) of PXRE Group Ltd. (Successor Registrant of PXRE Corporation) of our report dated February 7, 2000 appearing on page F-1 of this Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears above. PRICEWATERHOUSECOOPERS Hamilton, Bermuda March 29, 2000 F-33 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE -------- --------- ------ 3.1 Memorandum of Association and Bye-laws of PXRE Group Ltd. (Exhibits 3.1 and 3.2, respectively, to PXRE's Form S-4 Registration Statement dated August 18, 1999 (File No. 333-85451), and incorporated herein by reference). 4.1 Form of Specimen Common Share certificate, par value $1.00 per share, of PXRE (Exhibit 4.1 to PXRE's Form S-4 Registration Statement dated August 18, 1999 (File No. 333-85451), and incorporated herein by reference). 4.2 Credit Agreement dated as of December 30, 1998 among PXRE Corporation, the banks and financial institutions listed on the signature pages thereto or that subsequently become parties thereto (collectively, the "Lenders") and First Union National Bank ("First Union") as agent for the Lenders (Exhibit 4.8 to PXRE Corporation's Form 8-K dated January 8, 1999 (File No. 0-15428), and incorporated herein by reference). 4.3 First Amendment and Waiver to Credit Agreement dated as of May 18, 1999 among PXRE Corporation, the Lenders and First Union, Joinder Agreements dated May 18, 1999 by Fleet National Bank and Credit Lyonnais New York Branch, Assignments and Acceptances dated May 18, 1999 between First Union and Fleet National Bank and between First Union and The First National Bank of Chicago, respectively (Exhibit 4.9 to PXRE Corporation's Form 10-Q for the quarterly period ended June 30, 1999 (File No. 0-15428), and incorporated herein by reference). 4.4 Second Amendment and Waiver to Credit Agreement dated as of June 25, 1999 among PXRE Corporation, the Lenders and First Union, (Exhibit 4.9 to PXRE Corporation's Form 10-Q for the quarterly period ended June 30, 1999 (File No. 0-15428), and incorporated herein by reference). 4.5 First Amended and Restated Credit Agreement among PXRE Corporation, as borrower, PXRE Group Ltd. and PXRE (Barbados) Ltd., as guarantors, the Lenders named therein and First Union as agent (Exhibit 4.5 to PXRE's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 1-15259) and incorporated herein by reference). 4.6 Indenture, dated as of January 29, 1997, between PXRE Corporation and First Union National Bank, as Trustee (Exhibit 4.3 to PXRE Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 4.7 First Supplemental Indenture, dated as of January 29, 1997, between PXRE Corporation and First Union National Bank, as Trustee, in respect of PXRE Corporation's 8.85% Junior Subordinated Deferrable Interest Debentures due 2027 (Exhibit 4.4 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference).
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE -------- --------- ------ 4.8 Amended and Restated Declaration of Trust of PXRE Capital Trust I, dated as of January 29, 1997, among PXRE Corporation, as sponsor, the Administrators thereof, First Union Bank of Delaware, as Delaware Trustee, First Union National Bank, as Institutional Trustee, and the holders from time to time of undivided interests in the assets of PXRE Capital Trust I (Exhibit 4.5 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 4.9 Capital Securities Guarantee Agreement, dated as of January 29, 1997, between PXRE Corporation and First Union National Bank, as Guarantee Trustee (Exhibit 4.6 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No.0-15428), and incorporated herein by reference). 4.10 Common Securities Guarantee Agreement, dated as of January 29, 1997, executed by PXRE Corporation (Exhibit 4.7 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 4.11 Registration Rights Agreement, dated January 29, 1997, among PXRE Corporation, PXRE Capital Trust I and Salomon Brothers Inc, as Representative of the Initial Purchasers (Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 4.12 Purchase Agreement among PXRE Corporation, PXRE Capital Trust I and Salomon Brothers Inc, as Representative of the Initial Purchasers, dated January 24, 1997 (Exhibit 10.2 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 2
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE -------- --------- ------ 10.1 PXRE Reinsurance Company Management Agreement among PXRE Reinsurance Company and, among others, Merrimack Mutual Fire Insurance Company ("Merrimack"), Pennsylvania Lumbermens Mutual Insurance Company ("Pennsylvania Lumbermens"), and NRMA Insurance Limited ("NRMA") (Exhibit 10.1 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein by reference); letter dated November 28, 1990 from Pennsylvania Lumbermens confirming reduced participation (Exhibit 10.7 to PXRE Corporation's Form S-2 Registration Statement dated February 21, 1992, as amended by Amendment No. 1 thereto dated April 1, 1992 and by Amendment No. 2 thereto dated April 13, 1992 and by Amendment No. 3 thereto dated April 23, 1992 (File No. 33-45893), and incorporated herein by reference); cover notes respecting January 1997 renewals by Merrimack, Pennsylvania Lumbermens and NRMA and cover note respecting participation commencing January 1, 1997 by Auto-Owners Insurance Company ("Auto-Owners") (Exhibit 10.3 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference); cover notes respecting January 1999 renewals by NRMA, Pennsylvania Lumbermens, Auto-Owners and The Andover Companies (a Merrimack company) (Exhibit 10.3 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428), and incorporated herein by reference); and cover note respecting participation commencing January 1, 1999 by the Kyoei Mutual Fire & Marine Insurance Company.* 10.2 Quota Share Retrocessional Agreement between PXRE Reinsurance Company and Trenwick America Reinsurance Corporation ("Trenwick Group") (Exhibit 10.21 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1993 (File No. 0-15428), and incorporated herein by reference); cover note respecting January 1999 renewal by Trenwick Group (Exhibit 10.17 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428), and incorporated herein by reference). 10.3 Undertaking dated September 1, 1998 between PXRE Reinsurance Company and Select Reinsurance Ltd., Amended and Restated Facultative Obligatory Quota Share Retrocessional Agreement between PXRE Reinsurance Company and Select Reinsurance Ltd. and Variable Quota Share Retrocessional Agreement between PXRE Reinsurance Company and Select Reinsurance Ltd. (Exhibit 10.36 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428), and incorporated herein by reference); letter dated November 1, 1999 regarding Undertaking extension; and endorsement regarding Select Reinsurance Ltd. participation for 2000.* 3
- ------------------------- * Filed herewith
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE -------- --------- ------ 10.4 Tax Settlement Agreement dated June 21, 1991 between PXRE Corporation, PXRE Reinsurance Company and PM Holdings, Inc. (Exhibit 10.2 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein by reference). 10.5 Investment Advisory Agreement between PXRE Reinsurance Company and Phoenix Investment Counsel, Inc., dated February 25, 1987 and effective as of January 1, 1987 (Exhibit 10.10 to Amendment No. 1 dated February 19, 1987 to PXRE Corporation's Form S-1 Registration Statement dated August 29, 1986, as subsequently amended by Amendment No. 2 thereto dated March 25, 1987 (File No. 33-8406), and incorporated herein by reference); Amendment to Investment Advisory Agreement between PXRE Reinsurance Company and Phoenix Investment Counsel, Inc., effective retroactively as of January 1, 1987 (Exhibit 10.3 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein by reference); Amendment No. 2 to Investment Advisory Agreement between PXRE Reinsurance Company and Phoenix Investment Counsel, Inc., effective as of November 1, 1989 (Exhibit 10.4 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1991 (File No. 0-15428), and incorporated herein by reference); Amendment No. 3 to Investment Advisory Agreement between PXRE Reinsurance Company and Phoenix Investment Counsel, Inc. effective June 1, 1995 (Exhibit 10.26 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1995 (File No. 0-15428), and incorporated herein by reference). 10.6 Investment Management Agreement, effective January 29, 1997 between PXRE Corporation and Phoenix Investment Counsel, Inc. (Exhibit 10.29 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 10.7 Amended and Restated Investment Advisory Agreement between Transnational Reinsurance Company and Phoenix Investment Counsel, Inc., dated November 8, 1993 (Exhibit 10.4 to Transnational Re Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-22376) and incorporated herein by reference), as amended by the Amendment thereto, effective June 1, 1995 (Exhibit 10.11 to Transnational Re Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-22376) and incorporated herein by reference).
4
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE -------- --------- ------ 10.8 Investment Management Agreement effective October 15, 1999 between PXRE Group Ltd. and Phoenix Investment Counsel, Inc.* 10.9 Investment Management Agreement effective October 15, 1999 between PXRE Reinsurance Ltd. and Phoenix Investment Counsel, Inc.* 10.10 Investment Advisory Services Agreement between PXRE Reinsurance Ltd. and Mariner Investment Group, Inc. dated October 1, 1999.* 10.11 Amended and Restated Agreement Concerning Filing of Consolidated Federal Income Tax Returns dated as of August 23, 1993 between PXRE Corporation and PXRE Reinsurance Company (Exhibit 10.8 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1993 (File No. 0-15428), and incorporated herein by reference); Addendum No. 2 dated November 10, 1994 to the PXRE Corporation Amended and Restated Agreement Concerning Filing of Consolidated Federal Income Tax Returns (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1994 (File No. 0-15428), and incorporated herein by reference); and Addendum No. 3 dated as of December 11, 1996 to the PXRE Corporation Amended and Restated Agreement Concerning Filing of Consolidated Federal Income Tax Returns (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1996 (File No. 0-15428), and incorporated herein by reference). 10.12 Employee Stock Purchase Plan, as amended (Appendix C to PXRE's Proxy Statement for the 2000 annual general meeting of shareholders, and incorporated herein by reference).(M) 10.13 Executive Severance Plan (Exhibit 10.10 to PXRE's Form S-4 Registration Statement dated August 18, 1999 (File No. 333-85451) and incorporated herein by reference).(M) 10.14 1988 Stock Option Plan, as amended (Exhibit A to the first Prospectus forming part of PXRE's Form S-8 and S-3 Registration Statement dated June 21, 1990 (File No. 33-35521), and incorporated herein by reference).(M) 10.15 Restated Employee Annual Incentive Bonus Plan, as amended (Appendix A to PXRE's Proxy Statement for the 2000 annual general meeting of shareholders, and incorporated herein by reference).(M)
- ------------------------- * Filed herewith. (M) Indicates a management contract or compensatory plan or arrangement in which the directors and/or executive officers of PXRE participate. 5
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE -------- --------- ------ 10.16 1992 Officer Incentive Plan, as amended (Appendix B to PXRE's Proxy Statement for the 2000 annual general meeting of shareholders, and incorporated herein by reference).(M) 10.17 Director Stock Plan (Appendix D to PXRE's Proxy Statement for the 2000 annual general meeting of shareholders, and incorporated herein by reference).(M) 10.18 Director Equity and Deferred Compensation Plan (Appendix E to PXRE's Proxy Statement for the 2000 annual general meeting of shareholders, and incorporated herein by reference).(M) 10.19 Non-Employee Director Deferred Stock Plan (Appendix A to PXRE Corporation's Proxy Statement dated April 12, 1991, and incorporated herein by reference).(M) 10.20 Management Agreement dated as of November 8, 1993 among PXRE Reinsurance Company, Transnational Re Corporation and Transnational Reinsurance Company (Exhibit 10.22 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1993 (File No. 0-15428), and incorporated herein by reference), as amended by Amendment No. 1 thereto, dated December 1, 1994 (Exhibit 10.21 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1994 (File No. 0-15428), and incorporated herein by reference). 10.21 Agreement and Plan of Merger dated as of August 22, 1996 between PXRE Corporation and Transnational Re Corporation, as amended by Amendment No. 1 dated as of September 27, 1996 and Amendment No. 2 dated as of October 24, 1996 (Annex A to PXRE Corporation's Form S-4 Registration Statement dated October 30, 1996 (File No. 333-15087), and incorporated herein by reference). 10.22 Excess of Loss Reinsurance Agreement, effective as of January 1, 1998, between PXRE Reinsurance Company and Transnational Insurance Company.* 10.23 Reinsurance Pooling Agreement, effective as of January 1, 1999, between PXRE Reinsurance Company and Transnational Insurance Company. (Exhibit 10.21 to PXRE's Form S-4 Registration Statement dated August 18, 1999 (File No. 333-85451), and incorporated herein by reference).
- ------------------------- * Filed herewith. (M) Indicates a management contract or compensatory plan or arrangement in which the directors and/or executive officers of PXRE participate. 6
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE -------- --------- ------ 10.24 Agreement and Plan of Merger dated as of July 7, 1999 among PXRE Corporation, PXRE Group Ltd. and PXRE Merger Corp. (Annex A to PXRE's Form S-4 Registration Statement dated August 18, 1999 (File No. 333-85451), and incorporated herein by reference). 10.25 Facultative Obligatory Quota Share Retrocessional Agreement effective October 1, 1999 between PXRE Reinsurance Company and PXRE Reinsurance Ltd. and Aggregate Excess of Loss Agreement effective October 1, 1999 between PXRE Reinsurance Ltd. and PXRE Reinsurance Company.* 10.26 Lease dated May 9, 1994 between Thornall Associates, L.P. and PXRE Corporation (Exhibit 10.24 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1994 (File No. 0-15428), and incorporated herein by reference) and Lease dated November 1, 1999 between Thornall Associates, L.P. and PXRE Corporation.* 10.27 Lloyd's Deposit Trust Deed (Third Party Deposit) dated November 29, 1996 between PXRE Limited and PXRE Reinsurance Company (Exhibit 10.32 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1997 (File No. 0-15428), and incorporated herein by reference). 10.28 Letter of Credit dated November 22, 1996 issued by The Chase Manhattan Bank by order of PXRE Reinsurance Company for the benefit of Lloyd's (Exhibit 10.33 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1997 (File No. 0-15428), and incorporated herein by reference). 10.29 Lloyd's Security Trust Deed (Letter of Credit and Bank Guarantee) dated November 29, 1997 between PXRE Limited and Lloyd's (Exhibit 10.34 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1997 (File No. 0-15428), and incorporated herein by reference). 10.30 Operating Agreement of Cat Bond Investors, effective as of June 9, 1997 among Cat Bond Investors, Phoenix Home Life and PXRE Corporation (Exhibit 10.35 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1997 (File No. 0-15428), and incorporated herein by reference). 10.31 Employment Agreement dated July 16, 1998 between PXRE Managing Agency Limited and Peter G. Butler (Exhibit 10.37 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428) and incorporated herein by reference). (M)
- ------------------------- * Filed herewith. (M) Indicates a management contract or compensatory plan or arrangement in which the directors and/or executive officers of PXRE participate. 7
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE -------- --------- ------ 10.32 Employment Agreement dated June 8, 1998 between PXRE Corporation and Michael J. Toman (Exhibit 10.38 to the Annual Report on Form 10-K of PXRE Corporation for the fiscal year ended December 31, 1998 (File No. 0-15428) and incorporated herein by reference). (M) 10.33 Employment Agreement dated April 14, 1999 between PXRE Reinsurance Company and Jeffrey Mayer (Exhibit 10.39 to PXRE Corporation's Form 10-Q for the quarterly period ended June 30, 1999 (File No. 0-15428) and incorporated herein by reference). (M) 10.34 Investment Advisory Services Agreement between PXRE Corporation and Mariner Investment Group, Inc. dated March 14, 2000.* 11 Statement re computation of earnings per share. 12 Statement re computation of ratios.* 21 List of Subsidiaries. At December 31, 1999, PXRE had the following subsidiaries: PXRE Reinsurance Ltd., a Bermuda insurance company; PXRE (Barbados) Ltd., a Barbados company; PXRE Corporation, a Delaware corporation; PXRE Reinsurance Company, a Connecticut insurance company; Transnational Insurance Company, a Connecticut insurance company; PXRE Capital Trust I, a Delaware statutory business trust; PXRE Limited., an English company (the sole member of PG Butler Syndicate 1224 at Lloyd's); PXRE Managing Agency Limited (the managing agency for PG Butler Syndicate 1224 at Lloyd's); PXRE Trading Corporation, a Delaware corporation; TREX Trading Corporation, a Delaware corporation; PX/TX Associates, a Delaware general partnership (of which PXRE Trading and TREX Trading are the only partners); CAT Fund, L.P., a Delaware limited partnership (of which PX/TX Associates is the sole general partner and PXRE Trading and TREX Trading are the only limited partners); Cat Bond Investors L.L.C. (of which PXRE Delaware and Phoenix Home Life are the only members); PXRE Solutions Inc., a Connecticut corporation; PXRE Direct Underwriting Managers, Inc., a Connecticut corporation; and PXRE Underwriting Managers, Inc., a Virginia corporation. (See the discussion in this Form 10-K under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations.") 23 Consent of PricewaterhouseCoopers, independent accountants to PXRE. (Included as part of Item 14(a)(2) of this Form 10-K.) 24 Powers of Attorney.* 27 Financial Data Schedule (electronic filing only).*
- ------------------------- * Filed herewith. (M) Indicates a management contract or compensatory plan or arrangement in which the directors and/or executive officers of PXRE participate. 8
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE -------- --------- ------ 28 Information from reports furnished to state insurance regulatory authorities.**
- ------------------------- * Filed in paper under cover of Form SE. 9 STATEMENT OF DIFFERENCES The registered trademark symbol shall be expressed as...................... 'r' The service mark symbol shall be expressed as.............................. 'sm' The British pound sterling sign shall be expressed as...................... 'L' EX-10.1 2 EXHIBIT 10.1 Cover Note No TG0000617 [LOGO] Aon Re Worldwide Aon Re Japan 8 Devonshire Square London EC2M 4PL tel: 0171 623 5500 fax: 0171 621 1511 PXRE REINSURANCE COMPANY 399 THORNALL STREET 14TH FLOOR EDISON NEW JERSEY 08837 U.S.A. Date: 7th January 2000 COVER NOTE REASSURED: PXRE REINSURANCE COMPANY PERIOD: Continuous contract from 1st January, 2000, subject to 90 days written notice of cancellation prior to 31st December any year. Covering new and renewal business. TYPE: QUOTA SHARE TREATY. CLASS: All business written by the Reassured. TERRITORIAL SCOPE: As per original business written by Reassured. TREATY DETAIL: Reassured to cede up to a maximum of $20,000,000 any one programme for 100% on all business written and retained for net account. Hereon 0.7% Quota Share. COMMISSION: As original plus 5% overrider on Gross Written Premium as reimbursement for expenses. PROFIT COMMISSION: 100% of underwriting profits after commissions, including overrider. Reinsurers Management Expenses $100,000. LOSS CORRIDOR: Reassured to retain all losses in excess of 90% Combined Ratio. ACCOUNTS: Quarterly. Page 1 of 3 Please examine the terms, conditions and security shown on this Cover Note and advise us immediately if any of these are not in accordance with your requirements. - -------------------------------------------------------------------------------- Aon Group Limited Registered Office: 8 Devonshire Square London EC2M 4PL Registered in London No. 210725 o VAT Registration No. 480 8401 48 LLOYD's BROKER Aon Re Worldwide [LOGO] Continuation of Cover Note No. TG0000617 FUNDS WITHHELD: All cash balances in excess of $100,000 (in the aggregate any one year). CASH LOSS: Special Cash request for individual losses and/or catastrophe losses above $250,000 for 100%. (Waived for Kyoei's participation). GENERAL CONDITIONS: Special Termination Clause as per wording. Access to Records Clause. Errors and Omissions Clause. Insolvency Clause. Arbitration Clause. Offset Clause. WORDING: To be agreed. INFORMATION: 1999 Revised Estimated Premium Income - $128,756,000 (for 100%). 2000 Estimated Premium Income - $152,267,000 (for 100%). ORDER HEREON: 100% of 0.7% Quota Share. Reinsured With: 100.0000% THE KYOEI MUTUAL FIRE AND MARINE INSURANCE COMPANY TOKYO, JAPAN --------- 100,0000% --------- Page 2 of 3 Aon Re Worldwide [LOGO] Continuation of Cover Note No. TG0000617 Statement Of Connected Interests Aon Corporation is the ultimate parent company of Aon Group Limited. Aon Corporation has, through its subsidiaries, made minority investments in certain Lloyd's syndicates which may be participants in this placement. These investments are subject to strict Lloyd's regulations prohibiting any influence upon the business conduct of such syndicates. For and on behalf of AON GROUP LIMITED /s/ David Ambrose /s/ Philip Rees Director Director CLARKSON BAIN JAPAN CLARKSON BAIN JAPAN Page 3 of 3 EX-10.3 3 EXHIBIT 10.3 [LOGO] The Corner House, 20 Parliament Street, 4th Floor, Hamilton HM 12, Bermuda Tel: (441) 296-8453 Fax: (441) 296-8459 Mailing Address: Suite #794 48 Par-La-Ville Road, SELECT REINSURANCE LTD. Hamilton HM 11, Bermuda November 1, 1999 Mr. Gerald Radke PXRE Corporation 399 Thornall Street - 14 Floor Edison, New Jersey 8837 U.S.A. Tel. 1-732-906-6700 Dear Jerry: This will confirm our agreement with respect to the following matters: 1. In reference to PXRE's letter dated September 1, 1998 concerning the "20% undertaking", this agreement has been extended by one year to now end in 2003. PXRE Reinsurance and its affiliates will use reasonable efforts to offer to Select Re business with aggregate premiums of not less than 20% of Select Re's shareholders' equity derived from Class B, C, D, E and F common shares (at December 31, 1998 - $106.2 million). 2. Effective June 30, 1999 PXRE will cancel the Security Agreement between PXRE and Select Re. PXRE Agreement November 1, 1999 Page 2 If the foregoing correctly reflects our agreement, please sign and return to the undersigned the enclosed copy of this letter. Sincerely, Select Reinsurance Ltd. By /s/ Jeffrey L. Radke --------------------------- Jeffrey L. Radke President Accepted and Agreed: PXRE Reinsurance Company By /s/ Gerald L. Radke --------------------------- Gerald L. Radke President ENDORSEMENT TO FACULTATIVE OBLIGATORY RETROCESSIONAL AGREEMENT (hereinafter referred to as "Agreement") between PXRE REINSURANCE COMPANY (hereinafter referred to as the "Company") and SELECT REINSURANCE COMPANY (hereinafter referred to as the "Reinsurer") It is understood and agreed that effective January 1, 2000, the participation of the Reinsurer is amended to 15.00%. Under terms of the Agreement, the Reinsurer agrees to assume severally and not jointly with other participants a 15.00% share (being $3,000,000 per program) of the liability described in the attached Agreement, and as consideration of the above, the Reinsurer shall receive 15.00% of the premium named therein for cession made on or after 12:01 a.m., January 1, 2000, local time, for business incepting or renewing after that date. Signed in Hamilton Branch this 31st day of January, 2000. SELECT REINSURANCE LTD. BY: /s/ Robert P. Myron -------------------------- TITLE: Vice President And in Edison, New Jersey this 1st day of February, 2000. PXRE REINSURANCE COMPANY PXRE REINSURANCE COMPANY BY: /s/ Gordon Forsyth III -------------------------- TITLE: Gordon Forsyth III Executive Vice President EX-10 4 EXHIBIT 10.8 INVESTMENT MANAGEMENT AGREEMENT Witnesseth this AGREEMENT, effective October 15, 1999 by and between the PXRE GROUP LTD. (the "Client") and PHOENIX INVESTMENT COUNSEL, INC (the "Manager") a corporation organized pursuant to the laws of The Commonwealth of Massachusetts, with its home office at 56 Prospect Street, Hartford, Connecticut. In consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. APPOINTMENT OF MANAGER Client hereby engages the Manager and delegates to the Manager the power to manage (including the power to acquire or dispose of), in accordance with the terms and conditions of this Agreement, the assets of the Account. The "Account" shall mean the assets of the Client which are acceptable to the Manager and which by notice given to the Manager are placed in the Account, and the investments and reinvestments of, and all income earned by, or distributions received with respect to, any assets in the Account, subject to the provisions of paragraph 3 of this Agreement. Client agrees to provide Manager with written notice of additions to, and withdrawals from, the Account. 2. ACCEPTANCE BY MANAGER The Manager hereby acknowledges and agrees to the engagement provided in paragraph 1 hereof, and acknowledges and warrants that it is duly registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. 3. INVESTMENT DIRECTION The Client's fundamental investment policies and any applicable investment guidelines are set forth in Part I of Schedule A attached hereto and made a part hereof. The Client hereby directs the Manager to select investments for the Account in compliance with such policies and in accordance with such guidelines. All interest payments and other distributions with respect to any security or other property in the Account shall be reinvested, unless Client provides written notice to the contrary to Manager. Upon receiving written notice from the Client that a specified cash amount is required from the Account, the Manager shall liquidate such portion of the Account as may be necessary to provide the specified cash amount. The Manager shall in its sole discretion select the assets of the Account to be liquidated in such event, provided that the investment guidelines set forth in Schedule A shall be complied with to the extent possible after giving effect to such liquidation. The directions contained herein may be modified at any time by the Client by notice in writing to the Manager. 4. CUSTODY OF SECURITIES The Client will establish and maintain a custody account with a custodian ("Custodian") acceptable to the Manager for all assets in the Account. The Client agrees to give the Manager at least thirty (30) days' written notice of any change of Custodian. 5. MANAGER'S AUTHORITY Subject to the provisions of paragraph 3 and Schedule A of this Agreement, the Manager is authorized by the Client to invest, sell and reinvest the assets of the Account as it deems appropriate. The Manager is not authorized to take physical possession of the assets of the Account; and the Custodian shall have sole responsibility for holding and safekeeping the assets. The Custodian shall make settlement of purchases and sales of such assets upon orders placed by the Manager pursuant to the Custodian's established operating procedures. The Manager shall promptly notify the Custodian in writing of any purchase or sale made for the Account. The Manager shall select brokers and dealers for any purchase or sale of assets of the Account. The Manager may, in the allocation of portfolio brokerage business and the payment of brokerage commissions, consider the brokerage and research services furnished the Manager by brokers and dealers, in accordance with the provisions of Section 28(e) of the Securities Exchange Act of 1934, as amended. The Manager will not be required to take any action, or render any advice, with respect to the voting of any of the securities in the Account and Client agrees to be solely responsible for the voting of any such securities and for any required recordkeeping with respect thereto. 6. DOCUMENTATION TO BE FURNISHED The Manager shall keep accurate and detailed accounts of any investments, receipts and disbursements, and other transactions hereunder, and all such accounts and the books and records relating thereto shall be open to inspection at all reasonable times by the Client and by any other person entitled by law to inspect such records. Upon written request, the Manager will make available to the Client any information in the Manager's possession which may be required by the Client in fulfilling any reporting, disclosure, or recordkeeping obligation imposed on the Client by applicable law. 7. APPRAISAL; DETERMINATIONS OF VALUE The Manager will provide the Client with an appraisal of the Account as of the last day of each calendar quarter on which the New York Stock Exchange is open (the "Appraisal Date") during the term of this Agreement. Such appraisal shall include a written statement of each individual asset held in the Account on the Appraisal Date. 8. COMPENSATION TO MANAGER In consideration of the services to be performed by Manager pursuant to the terms of this Contract, the Client will pay to Manager compensation in accordance with the attached Schedule A, Part II based upon the value of the funds, securities and other assets subject to this Contract, as of the calendar quarter end, which compensation will be charged quarterly in arrears directly to the Client. Securities and other assets will, for purpose of determining compensation to Manager, be valued at market value or, in absence of market value, at fair value as determined in good faith by Manager. 9. ASSIGNMENT No assignment (as the term is defined in the Investment Adviser's Act of 1940) of this Agreement shall be made by the Manager without the consent of the Client. 10. RENEWAL AND TERMINATION This contract may be terminated by either the Client or the Manager upon written notice of such termination delivered to the other party at least 30 days prior to the end of any quarterly period. 11. LIABILITY OF MANAGER Client specifically acknowledges and agrees that except for loss resulting from negligence, misfeasance, bad faith or reckless disregard on the part of the Manager in performance of its duties hereunder, neither Manager or any of the Manager's officers, directors, shareholders, agents or employees shall be liable hereunder for any action taken or not taken in providing services hereunder. 12. OTHER AGREEMENTS AND OBLIGATIONS It is understood that the Manager may have advisory or other contracts with other persons, firms, or organizations (some of which may have investment policies similar to those of the Account) and may have other interests and businesses. In these connections the Manager may acquire information of a confidential nature. The Client agrees that the Manager shall not be required to provide investment advice or take any other action on behalf of the Account with respect to any particular investment if such action by the Manager would involve a violation of law. All information and advice furnished by either party to this Agreement shall be treated as confidential and shall not be disclosed to third parties except as required by law. The Manager may act as investment adviser to other clients and may give advice, and take action, with respect to any of those clients that may differ from the advice given, or the timing or nature of action taken, with respect to the Account. The Manager shall have no obligation to purchase or sell for Client, or to recommend for purchase or sale by Client, any security that the Manager, its principals, affiliates or employees may purchase for themselves or for any other clients. 13. NOTICES All notices and instructions with respect to any matters contemplated by this Agreement shall be deemed duly given when delivered in writing to the addresses below or when deposited by first-class mail addressed as follows: (a) To Client: James F. Dore PXRE Group Ltd. Clarendon House 2 Church Street Hamilton HM 11 Bermuda b) To Manager: Nancy Engberg, VP General Counsel Phoenix Investment Counsel, Inc. 56 Prospect Street P.O. Box 150480 Hartford, CT 06115 14. AUTHORITY TO PERFORM Each of the parties to this Agreement hereby represents that it is duly authorized and empowered to execute, deliver, and perform this Agreement and the transactions contemplated hereby, that such actions do not conflict with or violate any provision of law or contract. 15. GOVERNING LAW The laws of the State of Connecticut shall control all matters relating to this Agreement and shall apply to the extent not preempted by Federal law. 16. MISCELLANEOUS Client hereby acknowledges receipt of Adviser's brochure as required by Rule 204-3 under the Investment Advisers Act of 1940 prior to or on the date of the execution of this Contract. If the Client has received said brochure less than forty-eight hours prior to the execution of this Contract, the Client shall have the option to terminate this Contract without penalty within five business days after the date of execution; provided, however, that any investment action taken by Adviser with respect to the Account prior to the effective date of such termination shall be at the Client's risk. This Agreement is the entire agreement of the parties with respect to management of the assets in the Account and subject to the terms of paragraph 9, may not be amended except by a writing signed by the parties. This Agreement shall be effective as of the day and year first above written. PXRE GROUP LTD. Date: October 14, 1999 __________________________________ By: /s/ James F. Dore ________________________________ Title: Executive VP and CFO _____________________________ WITNESS: /s/ F. Sedgwick Browne _____________________________ PHOENIX INVESTMENT COUNSEL, INC. Title: Vice President ________________________________ By: James K. Salonia Date: November 1, 1999 ________________________________ ________________________________ Attachment: Schedule A, Parts I and II SCHEDULE A, PART I INVESTMENT OBJECTIVES AND GUIDELINES ATTACHMENT PXRE GROUP LTD. STATEMENT OF INVESTMENT OBJECTIVES AND GUIDELINES DATED 10-14-99 ____________________ Investment Policy Scope: This policy would cover the investment portfolio of PXRE Reinsurance, Ltd., PXRE Group Ltd. and PXRE (Barbados) Ltd. Investment Limitations: 1. No more than 5% of opening admitted assets (or Bermuda equivalent) in any single issuer. a. except, where a fund or limited partnership consisting of a diversified portfolio of stocks, bonds, equities or other instruments; a maximum of up to 10% in such fund or limited partnership. b. except, there shall be no limit on U.S. Treasury Securities or such investments guaranteed by the U.S. government (i.e., FNMA, GNMA, etc). c. No more than 30% can be invested in securities of any country (other than the United States) except where such investments are used to match with liabilities denominated in the same currency. 2. No more than 80% of the portfolio shall be in equity or limited partnership investments. 3. No more than 20% of the portfolio can be invested in below investment grade bonds as defined as below Baa S&P or equivalent for other rating agencies. 4. Exceptions can be made so long as the sum of all exceptions to the above policy statements does not exceed 15% of opening assets. 5. No more than 25% of the investments should be in mortgage or asset backed securities. Other Limitations: Short Term Investments -- All short term investments should be in instruments which are A2/P2 or better. SCHEDULE A, PART II INVESTMENT MANAGER COMPENSATION The Manager shall be paid a fee as specified below by the Client as full compensation for services rendered under the Investment Manager Agreement effective October 15, 1999. Upon presentation of an invoice by the Manager, after the close of each quarter, the Client shall pay the Manager a management fee which shall be calculated on the value of the assets of the Account and paid at one-fourth of the following annual fee rate: All Assets..................................................0.125% subject to a minimum quarterly fee of $6,250. For purposes of the calculation of the fee, the value of the securities (including all cash and cash equivalents) in the Account shall be determined as of the Appraisal Date at the end of each calendar quarter. If the Manager shall serve for less than the whole of any calendar quarter, its compensation shall be determined as provided above on the basis of the value of assets in the Account on the date of termination and shall be payable on a pro rata basis for the period of the calendar quarter for which it has served as Manager hereunder. In the event funds are contributed to or withdrawn from the Account during the calendar quarter, the amount of the management fee then due shall be prorated proportionately. EX-10 5 EXHIBIT 10.9 INVESTMENT MANAGEMENT AGREEMENT Witnesseth this AGREEMENT, effective October 15, 1999 by and between the PXRE REINSURANCE LTD. (the "Client") and PHOENIX INVESTMENT COUNSEL, INC (the "Manager") a corporation organized pursuant to the laws of The Commonwealth of Massachusetts, with its home office at 56 Prospect Street, Hartford, Connecticut. In consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. APPOINTMENT OF MANAGER Client hereby engages the Manager and delegates to the Manager the power to manage (including the power to acquire or dispose of), in accordance with the terms and conditions of this Agreement, the assets of the Account. The "Account" shall mean the assets of the Client which are acceptable to the Manager and which by notice given to the Manager are placed in the Account, and the investments and reinvestments of, and all income earned by, or distributions received with respect to, any assets in the Account, subject to the provisions of paragraph 3 of this Agreement. Client agrees to provide Manager with written notice of additions to, and withdrawals from, the Account. 2. ACCEPTANCE BY MANAGER The Manager hereby acknowledges and agrees to the engagement provided in paragraph 1 hereof, and acknowledges and warrants that it is duly registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. 3. INVESTMENT DIRECTION The Client's fundamental investment policies and any applicable investment guidelines are set forth in Part I of Schedule A attached hereto and made a part hereof. The Client hereby directs the Manager to select investments for the Account in compliance with such policies and in accordance with such guidelines. All interest payments and other distributions with respect to any security or other property in the Account shall be reinvested, unless Client provides written notice to the contrary to Manager. Upon receiving written notice from the Client that a specified cash amount is required from the Account, the Manager shall liquidate such portion of the Account as may be necessary to provide the specified cash amount. The Manager shall in its sole discretion select the assets of the Account to be liquidated in such event, provided that the investment guidelines set forth in Schedule A shall be complied with to the extent possible after giving effect to such liquidation. The directions contained herein may be modified at any time by the Client by notice in writing to the Manager. 4. CUSTODY OF SECURITIES The Client will establish and maintain a custody account with a custodian ("Custodian") acceptable to the Manager for all assets in the Account. The Client agrees to give the Manager at least thirty (30) days' written notice of any change of Custodian. 5. MANAGER'S AUTHORITY Subject to the provisions of paragraph 3 and Schedule A of this Agreement, the Manager is authorized by the Client to invest, sell and reinvest the assets of the Account as it deems appropriate. The Manager is not authorized to take physical possession of the assets of the Account; and the Custodian shall have sole responsibility for holding and safekeeping the assets. The Custodian shall make settlement of purchases and sales of such assets upon orders placed by the Manager pursuant to the Custodian's established operating procedures. The Manager shall promptly notify the Custodian in writing of any purchase or sale made for the Account. The Manager shall select brokers and dealers for any purchase or sale of assets of the Account. The Manager may, in the allocation of portfolio brokerage business and the payment of brokerage commissions, consider the brokerage and research services furnished the Manager by brokers and dealers, in accordance with the provisions of Section 28(e) of the Securities Exchange Act of 1934, as amended. The Manager will not be required to take any action, or render any advice, with respect to the voting of any of the securities in the Account and Client agrees to be solely responsible for the voting of any such securities and for any required recordkeeping with respect thereto. 6. DOCUMENTATION TO BE FURNISHED The Manager shall keep accurate and detailed accounts of any investments, receipts and disbursements, and other transactions hereunder, and all such accounts and the books and records relating thereto shall be open to inspection at all reasonable times by the Client and by any other person entitled by law to inspect such records. Upon written request, the Manager will make available to the Client any information in the Manager's possession which may be required by the Client in fulfilling any reporting, disclosure, or recordkeeping obligation imposed on the Client by applicable law. 7. APPRAISAL; DETERMINATIONS OF VALUE The Manager will provide the Client with an appraisal of the Account as of the last day of each calendar quarter on which the New York Stock Exchange is open (the "Appraisal Date") during the term of this Agreement. Such appraisal shall include a written statement of each individual asset held in the Account on the Appraisal Date. 8. COMPENSATION TO MANAGER In consideration of the services to be performed by Manager pursuant to the terms of this Contract, the Client will pay to Manager compensation in accordance with the attached Schedule A, Part II based upon the value of the funds, securities and other assets subject to this Contract, as of the calendar quarter end, which compensation will be charged quarterly in arrears directly to the Client. Securities and other assets will, for purpose of determining compensation to Manager, be valued at market value or, in absence of market value, at fair value as determined in good faith by Manager. 9. ASSIGNMENT No assignment (as the term is defined in the Investment Adviser's Act of 1940) of this Agreement shall be made by the Manager without the consent of the Client. 10. RENEWAL AND TERMINATION This contract may be terminated by either the Client or the Manager upon written notice of such termination delivered to the other party at least 30 days prior to the end of any quarterly period. 11. LIABILITY OF MANAGER Client specifically acknowledges and agrees that except for loss resulting from negligence, misfeasance, bad faith or reckless disregard on the part of the Manager in performance of its duties hereunder, neither Manager or any of the Manager's officers, directors, shareholders, agents or employees shall be liable hereunder for any action taken or not taken in providing services hereunder. 12. OTHER AGREEMENTS AND OBLIGATIONS It is understood that the Manager may have advisory or other contracts with other persons, firms, or organizations (some of which may have investment policies similar to those of the Account) and may have other interests and businesses. In these connections the Manager may acquire information of a confidential nature. The Client agrees that the Manager shall not be required to provide investment advice or take any other action on behalf of the Account with respect to any particular investment if such action by the Manager would involve a violation of law. All information and advice furnished by either party to this Agreement shall be treated as confidential and shall not be disclosed to third parties except as required by law. The Manager may act as investment adviser to other clients and may give advice, and take action, with respect to any of those clients that may differ from the advice given, or the timing or nature of action taken, with respect to the Account. The Manager shall have no obligation to purchase or sell for Client, or to recommend for purchase or sale by Client, any security that the Manager, its principals, affiliates or employees may purchase for themselves or for any other clients. 13. NOTICES All notices and instructions with respect to any matters contemplated by this Agreement shall be deemed duly given when delivered in writing to the addresses below or when deposited by first-class mail addressed as follows: (a) To Client: James F. Dore PXRE Reinsurance Ltd. Clarendon House 2 Church Street Hamilton HM 11 Bermuda b) To Manager: Nancy Engberg, VP General Counsel Phoenix Investment Counsel, Inc. 56 Prospect Street P.O. Box 150480 Hartford, CT 06115 14. AUTHORITY TO PERFORM Each of the parties to this Agreement hereby represents that it is duly authorized and empowered to execute, deliver, and perform this Agreement and the transactions contemplated hereby, that such actions do not conflict with or violate any provision of law or contract. 15. GOVERNING LAW The laws of the State of Connecticut shall control all matters relating to this Agreement and shall apply to the extent not preempted by Federal law. 16. MISCELLANEOUS Client hereby acknowledges receipt of Adviser's brochure as required by Rule 204-3 under the Investment Advisers Act of 1940 prior to or on the date of the execution of this Contract. If the Client has received said brochure less than forty-eight hours prior to the execution of this Contract, the Client shall have the option to terminate this Contract without penalty within five business days after the date of execution; provided, however, that any investment action taken by Adviser with respect to the Account prior to the effective date of such termination shall be at the Client's risk. This Agreement is the entire agreement of the parties with respect to management of the assets in the Account and subject to the terms of paragraph 9, may not be amended except by a writing signed by the parties. This Agreement shall be effective as of the day and year first above written. PXRE REINSURANCE LTD. PHOENIX INVESTMENT COUNSEL, INC. By: /s/ Gerald L. Radke By: James K. Salonia _______________________________ _______________________________ Title: President Title: Vice President ___________________________ ____________________________ Date: October 14, 1999 Date: November 1, 1999 _____________________________ ____________________________ WITNESS /s/ F. Sedgwick Browne Attachment: Schedule A, Parts I and II SCHEDULE A, PART I INVESTMENT OBJECTIVES AND GUIDELINES ATTACHMENT PXRE REINSURANCE LTD. STATEMENT OF INVESTMENT OBJECTIVES AND GUIDELINES DATED 10-14-99 ____________________ Investment Policy Scope: This policy would cover the investment portfolio of PXRE Reinsurance, Ltd., PXRE Group Ltd. and PXRE (Barbados) Ltd. Investment Limitations: 1. No more than 5% of opening admitted assets (or Bermuda equivalent) in any single issuer. a. except, where a fund or limited partnership consisting of a diversified portfolio of stocks, bonds, equities or other instruments; a maximum of up to 10% in such fund or limited partnership. b. except, there shall be no limit on U.S. Treasury Securities or such investments guaranteed by the U.S. government (i.e., FNMA, GNMA, etc). c. No more than 30% can be invested in securities of any country (other than the United States) except where such investments are used to match with liabilities denominated in the same currency. 2. No more than 80% of the portfolio shall be in equity or limited partnership investments. 3. No more than 20% of the portfolio can be invested in below investment grade bonds as defined as below Baa S&P or equivalent for other rating agencies. 4. Exceptions can be made so long as the sum of all exceptions to the above policy statements does not exceed 15% of opening assets. 5. No more than 25% of the investments should be in mortgage or asset backed securities. Other Limitations: Short Term Investments -- All short term investments should be in instruments which are A2/P2 or better. SCHEDULE A, PART II INVESTMENT MANAGER COMPENSATION The Manager shall be paid a fee as specified below by the Client as full compensation for services rendered under the Investment Manager Agreement effective October 15, 1999. Upon presentation of an invoice by the Manager, after the close of each quarter, the Client shall pay the Manager a management fee which shall be calculated on the value of the assets of the Account and paid at one-fourth of the following annual fee rate: All Assets..................................................0.125% subject to a minimum quarterly fee of $6,250. For purposes of the calculation of the fee, the value of the securities (including all cash and cash equivalents) in the Account shall be determined as of the Appraisal Date at the end of each calendar quarter. If the Manager shall serve for less than the whole of any calendar quarter, its compensation shall be determined as provided above on the basis of the value of assets in the Account on the date of termination and shall be payable on a pro rata basis for the period of the calendar quarter for which it has served as Manager hereunder. In the event funds are contributed to or withdrawn from the Account during the calendar quarter, the amount of the management fee then due shall be prorated proportionately. EX-10 6 EXHIBIT 10.10 October 1, 1999 PXRE Reinsurance Ltd. 99 Front Street Hamilton, Bermuda Re: Investment Advisory Services Dear Mr. Radke: This letter will serve to confirm our agreement that Mariner Investment Group, Inc. ("Mariner") will provide investment advisory, trade execution and related services to PXRE Reinsurance Ltd. (the "Client") on the terms, and subject to the conditions, set forth herein. SCOPE OF RESPONSIBILITIES Mariner will perform the services and have the authority set forth herein with respect to the cash, securities and other investment assets of the Client specified in writing by the Client and all proceeds thereof and additions thereto (the "Account"). Mariner will supervise and direct the investment of the Account in accordance with, and subject to, the investment guidelines provided by the Client in writing (a copy of the initial guidelines being annexed as Exhibit A), as the same may be amended, revised or replaced from time to time by the Client (the "Investment Guidelines"); provided, however, that Mariner shall not invest, or permit the investment of, the Account directly or indirectly in any partnership or other "flow-through" entity without first having received a written description of the policies and practices of such entity to prevent investors in the entity from being treated as engaged in a trade or business in the United States by virtue of the activities of the entity itself or partnerships or other "flow-through" entities in which it invests, which policies and practices have been accepted in writing by Client. Subject to the foregoing, Mariner, as agent and attorney-in-fact with respect to the Account may, when it deems appropriate, buy, sell, exchange, retain, reinvest or otherwise trade in securities of the types specified in the Investment Guidelines and place orders for the execution of such investment transactions with or through such brokers, dealers or other persons as Mariner may select. Mariner shall deliver, or shall cause to be delivered, to Client or to such custodian as Client may direct in writing to Mariner, all assets in the Account, as Client may direct from time to time, and Mariner shall not retain any assets in 1 the Account. Client may make any addition to or withdrawal from the Account at any time and in any amount that Client determines, so long as Client promptly notifies the Manager in writing of any addition to the Account and the amount of the addition, and so long as Client makes no withdrawal (and such withdrawal does not cause the Account or Mariner to be in violation of applicable law, regulation or order of a competent authority, of Bermuda) from the Account without first delivering to the Manager within a reasonable time prior to the withdrawal, written notice of intended withdrawal and the amount of the withdrawal. Mariner will comply with all legal requirements and rules of securities exchanges applicable to its duties in connection with the execution of transactions. Mariner will provide or cause to be provided to the Client such periodic reports concerning the status of the Account (including a valuation thereof based upon such valuation method(s) agreed with Client) as the Client may reasonably request. Mariner will provide to the Client on request, and not less frequently than quarterly, a report of Account transactions effected by Mariner since the date of the most recent such report. Mariner will preserve its records relating to the Account for no less than six years and shall make such records available for inspection at reasonable times during normal business hours, upon the request of the Client, to the Client, its auditors or any pertinent regulatory authority. Prior to discarding or destroying any such records, Mariner will give the Client reasonable opportunity, at the Client's expense, to review them and to take all or such portion of them as the Client wishes to retain. All information and advice furnished by either party to the other hereunder will be treated as confidential and will not be disclosed to third parties except as provided in this paragraph or as required by law. FEES Client agrees to pay Mariner a fee, or defer such fee pursuant to an arrangement agreed to in writing by both parties, payable or deferred quarterly in advance, calculated, based on the valuation of the Account as at the end of the previous quarter, using the fee schedule below for the assets under management.
Asset Class Annual fee % Traditional Equities .25% Non-Mariner Hedge Funds 1.25% Mariner Hedge Funds 0% High Yield Public Debt .25% Private Securities .50%
The methodology for valuing the Account for fee calculation purposes shall be as agreed in writing by Mariner and Client. If Mariner shall serve for less than the whole of any calendar quarter, its compensation shall be payable on a pro rata basis for the period of the calendar quarter for which it has served as manager hereunder, and Mariner shall promptly reimburse Client accordingly in respect of any advance payment. 2 EXPENSES Client shall reimburse Mariner for any reasonable investment-related out-of-pocket costs and expenses incurred in monitoring the Account of a type previously agreed in writing by the Client upon presentation of appropriate supporting documentation. INDEMNITY Client shall indemnify and hold harmless Mariner, its directors, officers, employees and agents ("Indemnified Parties"), individually and collectively, against any losses (including financial results poorer than expected by Client), claims, damages, liabilities or expenses, including reasonable attorneys' fees (collectively, "Losses") to which Mariner may become subject in so far as such Losses arise out of or are based upon any activities undertaken by, or inaction of, Mariner as investment advisor, unless such Losses arise out of the gross negligence, willful misfeasance or bad faith of the Indemnified Parties. Mariner shall give Client written notice as soon as practicable after it becomes aware of any fact, condition or event which may give rise to Losses for which indemnification hereunder may be sought. If any lawsuit or enforcement action is filed against any Indemnified Parties which may give rise to any indemnification Losses, written notice thereof shall be given to Client as promptly as practicable (and in any event, within 10 days after the service of the citation or summons); provided, that the failure to give such notice shall not relieve Client from its indemnification obligations hereunder, except and only to the extent that such failure increases the indemnified Losses. Client shall be entitled, if it so elects, to take control of the defense and investigation of any such lawsuit or action and to employ and engage attorneys of its choice (and at its expense) to handle and defend the same. No settlement relating to any Losses shall be made unless Mariner gives its written consent to such settlement which consent shall not be unreasonably delayed or withheld. STATUS OF INVESTMENT MANAGER Mariner will for all purposes herein be deemed to be an independent contractor and will, except as otherwise expressly provided or authorized by or under this letter agreement, have no authority to act for or represent the Client in any way or otherwise be deemed an agent of the Client. ACTIVITIES OF INVESTMENT MANAGER Mariner and its affiliates, may engage, simultaneously with the investment management activities on behalf of the Account, in other businesses and make investments for their own accounts, and may render services similar to those described in this agreement for other individuals, companies, trusts or persons, and shall not by reason of such engaging in other businesses, making such investments or rendering of services for others be deemed to be acting in conflict with the interest of the Account. 3 TERM This Agreement is effective from November 1, 1999 and may be terminated upon ninety-(90) days written notice by Mariner, or upon thirty (30) days written notice by Client, to the other or upon shorter notice upon the mutual agreement of the parties; provided, however, Client may terminate this Agreement without such advance notice if Client pays a termination fee determined as if the Manager had continued to provide services under this Agreement for a period of thirty (30) days after the termination date. Termination of this Agreement for any reason shall not relieve the Manager of liability or responsibility under this Agreement with respect to the period prior to the effectiveness of the termination. This letter agreement will be governed by, and construed in accordance with, the laws of the State of New York, (other than any conflict of law rule which might result in the application of the law of any other jurisdiction). NOTIFICATION All notices and other communications hereunder shall be in writing and shall be deemed to have been given when delivered by hand against written receipt; when confirmation of a fax or email sent during business hours of the recipient is received by the sender; or upon the fifth day following mailing which shall be by certified or registered mail, postage paid: 1. If to Mariner at: Mariner Investment Group, Inc. 65 East 55th Street, 9th Floor, NY, NY 10022 Fax number: 212 758 6680 Email: wmichaelcheck@goldbox.com Attention: William J. Michaelcheck 2. If to Client at: PXRE Reinsurance Ltd. Suite 231, 12 Church Street, Hamilton HM 11, Bermuda Attention: Gerald L. Radke ASSIGNMENT Without the written consent of the other party, this Agreement may not be assigned by either of the parties hereto; any such attempted assignment being void. AUTHORITY TO PERFORM Each of the parties to this Agreement hereby represents that it is duly authorized and empowered to execute, deliver and perform this Agreement and the transactions contemplated hereby, that such actions do not conflict with or violate any provision of law, regulation, or contract, deed of trust, agreement or other instrument to which it is a party or by which it is bound or to which it is subject and that no consent of any person or government regulatory agency to such person's performing its obligations under this 4 Agreement is required which has not been obtained, and that this Agreement is a valid and binding obligation upon that party, enforceable in accordance with its terms. MISCELLANEOUS This Agreement is the entire agreement of the parties with respect to the management of the assets in the Account and may not be amended except in a writing signed by the parties. Please confirm your agreement with the terms set forth herein by signing the enclosed copy of this letter where indicated below and returning it to Mariner. Very truly yours, MARINER INVESTMENT GROUP, INC. By /s/ William Michaelcheck ___________________________________ Title: Chairman AGREED AND ACKNOWLEDGED, IN HAMILTON, BERMUDA PXRE Reinsurance Ltd. By /s/ Gerald L. Radke ____________________________________ Title: President 5 EXHIBIT A Investment Policy Scope: This policy would cover the investment portfolio of PXRE Reinsurance, Ltd., PXRE Group Ltd. and PXRE (Barbados) Ltd. Investment Limitations: 1. No more than 5% of opening admitted assets (or Bermuda equivalent) in any single issuer. a. except, where a fund or limited partnership consisting of a diversified portfolio of stocks, bonds, equities or other instruments; a maximum of up to 10% in such fund or limited partnership. b. except, there shall be no limit on U.S. Treasury Securities or such investments guaranteed by the U.S. government (i.e., FNMA, GNMA, etc). c. No more than 30% can be invested in securities of any country (other than the United States) except where such investments are used to match with liabilities denominated in the same currency. 2. No more than 80% of the portfolio shall be in equity or limited partnership investments. 3. No more than 20% of the portfolio can be invested in below investment grade bonds as defined as below Baa S&P or equivalent for other rating agencies. 4. Exceptions can be made so long as the sum of all exceptions to the above policy statements does not exceed 15% of opening assets. 5. No more than 25% of the investments should be in mortgage or asset backed securities. Other Limitations: Short Term Investments -- All short term investments should be in instruments which are A2/P2 or better. EX-10 7 EXHIBIT 10.22 EXCESS OF LOSS REINSURANCE AGREEMENT This Agreement is made and entered into by and between TRANSNATIONAL INSURANCE COMPANY (hereinafter referred to as the "Company"), and PXRE REINSURANCE COMPANY (hereinafter referred to as the "Reinsurer"). WITNESSETH: That in consideration of the mutual covenants hereinafter contained and upon the terms and conditions hereinafter set forth, the parties hereto agree as follows: ARTICLE I - COVERAGE AND EFFECTIVE DATE This Agreement shall be effective as of 12:01 a.m., EST, January 1, 1998. The Reinsurer shall indemnify the Company in respect to losses, loss expenses and underwriting expenses, as further defined in Article II, that may accrue to the Company under all policies, contracts, binders or agreements of insurance or reinsurance, whether written or oral (hereinafter referred to as "policies") written or renewed by the Company at any time prior to the cancellation of this Agreement, as provided in Article III. Such coverage shall include the positive or negative development of loss reserves, loss expense reserves and underwriting liabilities established by the Company as of the effective date of this Agreement. All reinsurance for which the Reinsurer will be obligated by virtue of this Agreement will be subject to the same terms, conditions, interpretations, waivers, modifications and alterations as the respective policies of the Company to which this reinsurance applies. ARTICLE II - RETENTION AND LIMIT No claim will be made by the Company to the Reinsurer unless the Company has first incurred a "Combined Ratio", as defined in this Article II, exceeding 105% during any calendar year covered by this Agreement. The Reinsurer will indemnify the Company for the amount of losses, loss expenses and underwriting expenses in excess of the Company's retention. The indemnification provided by this Agreement shall have no limit. While the coverage under this Agreement shall apply on a calendar year basis, the Company shall measure the applicability of the coverage provided under this Agreement at the conclusion of each calendar quarter, as further provided in Article V. The Combined Ratio as provided in the previous paragraph, shall consist of the sum of the "Loss and Loss Expense Ratio" and the "Underwriting Expense Ratio". The two individual ratios which comprise the Combined Ratio shall be computed using information from the quarterly or annual statements prepared by the Company and filed with the National Association of Insurance Commissioners and the Insurance Department of the State of Connecticut, as follows: Loss and Loss Expense Ratio: The sum of: Net losses incurred (page 4, line 2, or line 2D ) Net loss expenses incurred (page 4, line 3) Divided by: Net premiums earned (page 4, line 1 or page 4, line 1D, ) Underwriting Expense Ratio: The sum of: Other underwriting expenses (page 4, line 4) Aggregate write-ins for underwriting deductions (page 4, line 5) Divided by: Net premiums written (page 9, column 4, line 31 or page 4, line 1D, parenthetical amount ) ARTICLE III - TERM AND CANCELLATION This Agreement will apply to all losses, loss expenses and underwriting expenses incurred by the Company as defined in Article I, and will remain in full force and effect until canceled as hereinafter provided. This Agreement can be canceled as of any December 31 by either party giving 30 (thirty) days prior notice to the other party. In the event this Agreement is canceled in accordance with the above procedure, the Reinsurer will continue to be liable for all losses, loss adjustment expenses and underwriting expenses incurred under policies covered by this Agreement through the effective date of cancellation. However, amounts incurred for losses, loss expenses or underwriting expenses occurring subsequent to the cancellation date, including the positive or negative development of loss reserves, loss expense reserves and underwriting liabilities established by the Company as of the cancellation date of this Agreement will not be covered by this Agreement. ARTICLE IV - RATE AND PREMIUM The Company will cede to the Reinsurer a premium of one percent (1.0%) of its net earned premium on all policies covered by this Agreement. Net earned premium shall be defined as all direct premium written by the Company, whether voluntary or involuntary and net of premiums returned as the result of cancellations and endorsements, plus all reinsurance assumed by the Company, adjusted for the change in unearned premiums associated with such direct or assumed - 2 - premiums written for the period covered by this Agreement. Net earned premium shall also be reduced by certain reinsurance ceded on earned premium as provided in Article VI, below. ARTICLE V - REPORTS AND REMITTANCES Within twenty-five (25) days following the close of each calendar quarter, the Company will furnish the Reinsurer with a report of reinsurance premium due to the Reinsurer for that period. Such report shall be in a form and shall contain such data as required by the Reinsurer for completion of its NAIC annual statement. The report will also provide the Reinsurer with a computation of the Combined Ratio, as defined in Article II, above, for the calendar quarter and calendar year-to-date. Any balance shown to be due to the Reinsurer will be remitted within forty (40) days following the close of the calendar quarter. Any balance shown as due to the Company will be settled as follows: (i) For the first, second and third calendar quarters, any balance shown to be due to the Company will be accrued on the books of both the Reinsurer and the Company but the remittance of funds will be deferred until the fourth quarter, (ii) For the fourth calendar quarter, any balance shown to be due to the Company, after taking into account balances deferred from prior quarters, will be paid to the Company by the Reinsurer within fifteen (15) days following receipt of the fourth quarter report from the Company. ARTICLE VI - OTHER REINSURANCE The Company is permitted to purchase other treaty and/or facultative reinsurance. The premium for any such reinsurance that inures to the benefit of this Agreement shall be deducted from the net earned premium which constitutes the subject premium under this Agreement. Further, where the Company is required by statute to purchase reinsurance that inures to the benefit of this Agreement, the entire premium subject to such mandatory reinsurance shall be deducted from the net earned premium which constitutes the subject premium under this Agreement. ARTICLE VII - WAIVER OF EXCLUSIONS It is intended that the Reinsurer shall "follow the fortunes" of the Company with respect to the policies covered by this Agreement and, accordingly, there shall be no exclusions with respect to the indemnity provided by this Agreement including, but not limited to: judgments in excess of policy limits, punitive damages and pre and post judgment interest. - 3 - ARTICLE VIII - ERRORS AND OMISSIONS The Company will not be prejudiced in any way by any omission, through clerical error, accident or oversight, to cede to the Reinsurer any reinsurance under the terms of this Agreement. Errors and omissions inadvertently made will not invalidate the liability of the Reinsurer. Any such error or omission will be corrected immediately upon discovery. ARTICLE IX - INSOLVENCY A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company, or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer, of the pendency of a claim against the Company indicating the policy insured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the insolvent Company. ARTICLE X - AMENDMENTS This Agreement may be altered or amended in any of its terms and conditions by mutual consent of the Company and the Reinsurer either by an addendum hereto or by an exchange of letters; such addendum or letters will then constitute a part of this Agreement. - 4 - IN WITNESS WHEREOF, the parties hereto have caused this Reinsurance Agreement to be executed in duplicate by their duly authorized representatives. TRANSNATIONAL INSURANCE COMPANY By: ------------------------------- Name: Title: PXRE REINSURANCE COMPANY By: ------------------------------- Name: Title: - 5 - EX-10 8 EXHIBIT 10.25 FACULTATIVE OBLIGATORY QUOTA SHARE RETROCESSIONAL AGREEMENT BETWEEN PXRE REINSURANCE COMPANY AND PXRE REINSURANCE LTD. FACULTATIVE OBLIGATORY QUOTA SHARE RETROCESSIONAL AGREEMENT, dated as of October 14, 1999 and effective as of October 1, 1999 (hereinafter referred to as the "Agreement"), between PXRE REINSURANCE LTD., a Bermuda company (hereinafter referred to as "Reinsurer"), and PXRE REINSURANCE COMPANY, a Connecticut corporation (hereinafter referred to as "Company"). W I T N E S S E T H : WHEREAS, the Company and the Reinsurer wish to enter into a quota share retrocessional arrangement pursuant to which the Company will offer to cede to the Reinsurer, and the Reinsurer may assume from the Company, a quota share of the Company's liabilities arising from the Company's reinsurance business, upon the terms and subject to the conditions described below. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants contained herein and of the mutual benefits herein provided, the parties hereto agree as follows: ARTICLE I CLASSES OF BUSINESS REINSURED This Agreement shall cover liability ceded under all Contracts written by the Company in the manner set forth in ARTICLE II - REINSURANCE CLAUSE and subject to the exclusions set forth in ARTICLE V - EXCLUSIONS. The terms "Contracts", "Contracts written by the Company" and "Contracts of the Company" shall mean any and all binders, policies, certificates, agreements and contracts of reinsurance and insurance in force on the effective date hereof or issued, renewed, accepted or held, covered provisionally or otherwise in the name of the Company on or after the effective date. ARTICLE II REINSURANCE CLAUSE Commencing with the effective date of this Agreement, the Company shall offer to cede to the Reinsurer the quota share ("Quota Share") set forth on the Quota Share Endorsement attached hereto of the Company's Net Retained Line on all Contracts coming within the scope of this Agreement. The Reinsurer shall have the right to accept or reject such cession offer in respect of any Contract (or all such Contracts), in its sole discretion, but shall be deemed to have accepted each Contract cession not rejected by notice given in writing to the Company promptly following receipt of underwriting detail in respect of the proposed Contract cession. Each Contract cession accepted (or deemed accepted) by the Reinsurer shall be deemed a Contract ceded to, and in force under, this Agreement. If this Agreement is renewed pursuant to Article III and the Parties desire to vary the Quota Share, the Parties shall execute a Quota Share Endorsement (substantially in the form of the Quota Share Endorsement attached hereto). Limitations per reinsurance program, if any, on cessions to this Agreement shall also be as set forth on the Quota Share Endorsement. Subject to the conditions of the following paragraph, the term "Net Retained Line" shall mean the amount of liability which the Company maintains per reinsurance program after deduction of liability ceded, if any, to any general or specific retrocessions to protect the Company and its quota share reinsurers (including, without limitation, the Reinsurer). The term "reinsurance program" shall be defined as: 1. Treaty Underlying Reinsurance Program - The portion of a ceding company's program consisting of Pro Rata Treaties and/or Risk Excess of Loss Contracts involving one or more layers where appropriate, and subject to the same loss from an original insured. 2. Treaty Catastrophe Reinsurance Program - The portion of a ceding company's program consisting of Catastrophe Excess of Loss and/or Aggregate Excess of Loss Contracts involving one or more layers where appropriate. ARTICLE III TERM AND CANCELLATION This Agreement shall be effective from 12:01 a.m. Eastern Time, October 1, 1999 and shall be continuously in force until 11:59 p.m. Eastern Time, December 31, 2000 (the "Termination Date"). This Agreement shall automatically renew for a one year term at each subsequent December 31 unless either Party has given written notice to the other Party at least 90 days prior to December 31 of the subject year of its intention not to renew this Agreement. If this Agreement is so renewed, the "Termination Date" shall be the following December 31. This Agreement may be terminated: (a) by the Company prior to the Termination Date by notice to the Reinsurer in the event that the Reinsurer's shareholders' equity (calculated under United States generally accepted accounting principles) shall have declined by 50% or more from the amount of such - 2 - shareholders' equity as at the previous December 31; (b) by the Company prior to the Termination Date upon: (i) a material breach by the Reinsurer of its obligations under this Agreement (x) which breach has not been cured within ten (10) days following receipt by the Reinsurer of written notice of such breach or (y) if such breach is not susceptible to cure within such ten (10) day period steps reasonably designed to cure such breach are not commenced within such period, such steps are not diligently pursued or such breach is not cured within a reasonable period following such written notice of breach, or (ii) the conviction of, or plea of nolo contendere by, the Reinsurer or any of its directors or executive officers ("Reinsurer Persons") to a felony or a crime involving moral turpitude, or the entry of a judgment no longer subject to appeal against the Reinsurer or any of the Reinsurer Persons finding a common law fraud, or other unlawful conduct by the Reinsurer or any of the Reinsurer Persons that is injurious to the financial condition or reputation of, or is otherwise materially injurious to, the Company or any of its subsidiaries or affiliates; or (c) by the Reinsurer prior to the Termination Date upon: (i) a material breach by the Company of its obligations under this Agreement (x) which breach has not been cured within ten (10) days following receipt by the Company of written notice of such breach or (y) if such breach is not susceptible to cure within such ten (10) day period steps reasonably designed to cure such breach are not commenced within such period, such steps are not diligently pursued or such breach is not cured within a reasonable period following such written notice of breach, or (ii) the conviction of, or plea of nolo contendere by, the Company or any of its directors or executive officers (the "Company Persons") to a felony or a crime involving moral turpitude, or the entry of a judgment no longer subject to appeal against the Company or any of the Company Persons finding a common law fraud, or other unlawful conduct by the Company or any of the Company Persons that is injurious to the financial condition or reputation of, or is otherwise materially injurious to, the Reinsurer or any of its subsidiaries or affiliates. The party desiring to terminate this Agreement pursuant to clause (a) through (c) above shall give prompt written notice of such termination to the other party. No termination of this Agreement pursuant to clause (a) through (c) above by a party will relieve the other party from any liability for - 3 - any breach of this Agreement or from the performance of any obligation due with respect to any period preceding such termination. In the event of the termination of this Agreement, the Reinsurer shall remain liable for all cessions in force prior to the termination until the natural expiration date and final disposition of all losses and loss expenses occurring hereunder during the period of its participation, and any amounts due under this Agreement applicable to periods prior to termination (for whatever reason) shall remain due after such termination. Notwithstanding the foregoing, in the event of a termination of this Agreement prior to its Termination Date as provided in clauses (a) or (b) above the Company may, at its option, reassume all reinsurances in force at such termination in which case the Reinsurer shall return to the Company the unearned premium reserve calculated as of such date less the related Commissions. ARTICLE IV TERRITORY This Agreement shall follow the territorial scope of the Contracts written by the Company. ARTICLE V EXCLUSIONS This Agreement shall be subject to the exclusions contained in the original Contracts of the Company. ARTICLE VI ORIGINAL CONDITIONS The true intent of this Agreement being that the Reinsurer shall follow the fortunes of the Company, all reinsurances hereunder shall be subject to the same rates, terms, conditions, waivers and modifications as the respective Contracts of the Company, and the Reinsurer shall be credited with its exact proportion of the original premium written by the Company, subject to the provisions of the second sentence of ARTICLE II hereof. - 4 - ARTICLE VII PREMIUM AND COMMISSION The Company shall keep a record of each and every Contract ceded to this Agreement and shall promptly cede to the Reinsurer its applicable Quota Share part of unearned premiums on the Contracts in force at the inception of this Agreement and, thereafter, the Company shall cede to the Reinsurer its applicable Quota Share part of all gross premiums written by the Company in respect of each and every Contract issued, renewed, accepted or held, covered provisionally or otherwise in the name of the Company on or after the effective date of this Agreement after deducting from such premiums any Return Premiums (as defined herein). The Reinsurer shall allow the Company a commission on the Contracts ceded hereunder equal to the applicable Quota Share part of the actual acquisition cost paid by the Company in obtaining said Contracts ("Written Commission"). For purposes of this Agreement, actual acquisition cost shall mean original commission plus premium tax and any brokerage paid by the Company. In addition, the Reinsurer shall allow the Company the following override commissions as an allowance for the Company's overhead expense ("Override Commission"; together with the Written Commission, the "Commissions"): 1. Casualty business: 1% of the applicable Quota Share part of all unearned premiums and gross premiums written in respect of Contracts ceded to this Agreement (after deducting Return Premiums) primarily involving such business. 2. All other business: 5% of the applicable Quota Share part of all unearned premiums and gross premiums written in respect of Contracts ceded to this Agreement (after deducting Return Premiums) primarily involving such business. In addition to the Commissions paid the Company as set forth herein, the Reinsurer shall pay the Company in respect of each Period during which this Agreement is in effect a profit commission ("Profit Commission") allowance of 25% on the applicable Quota Share part of the net profits in respect of all Contracts ceded to this Agreement with respect to such Period. Notwithstanding that the term of this Agreement is for fifteen months, the Parties intend the Profit Commission to operate on a 3 Period block basis. If, with respect to the first or any subsequent 3 Period block, this Agreement is not renewed for a second annual term, the Profit Commission percentage shall be reduced from 25% to 10%. Similarly, if this Agreement is not renewed for a third annual term, the Profit Commission percentage shall be reduced from 25% to 15%. The Profit Commission shall be computed as follows: - 5 - INCOME 1. Premiums earned during the Period. OUTGO 2. Losses incurred during the Period. 3. Written Commission, brokerage and Override Commission plus deferred acquisition costs at the beginning of the Period less deferred acquisition costs at the end of the Period. 4. Federal excise taxes ("FET") paid during the Period. 5. Allowances for Reinsurer's management expense equal to five percent (5%) of the premiums earned in (1) above. The calculation of profit or loss shall be made by the Company within ninety (90) days after the close of the applicable Period and any monies due shall be remitted forty-five (45) days thereafter; provided, however, that if this Agreement is renewed on the same or different terms beyond December 31, 2000 or the Company and the Reinsurer enter into any other retrocessional arrangement pursuant to which the Company offers to cede to the Reinsurer a share of the Company's liabilities arising from the Company's reinsurance contracts, then Profit Commission shall be calculated on a 3 Period block basis. The calculations of profit or loss for the first two Periods shall be deemed provisional and a final calculation for the entire 3 Period block shall be made at the end of the third Period. If the aggregate of the items under Outgo exceed the total of premiums earned as shown under Income (the amount of such excess, if any, hereinafter the "Deficit") for the 3 Period block, the amount of the Deficit shall be carried forward as a debit item in the calculation of income and outgo for the ensuing 3 Period blocks until the Deficit has been made good; provided, however, in no event shall any portion of any such Deficit otherwise be recoverable from the Company, whether on termination of this Agreement or otherwise. The first 3 Period block, if applicable, shall commence on October 1, 1999 and end on December 31, 2002. For the purposes of this Agreement, the following definitions will apply: (a) "Period" shall mean the actual time covered by each calculation of income and outgo as set forth in this Agreement. The first Period shall be the period October 1, 1999 through December 31, 2000 and, thereafter, each Period shall be an annual period from January 1 to December 31 unless this Agreement is terminated prior to such December 31 pursuant to ARTICLE III. (b) "Premiums earned" shall mean the total of the net written premiums ceded to the Reinsurer during the Period less unearned premiums at the close of the Period, if any, plus unearned premiums - 6 - at the beginning of the Period, if any. (c) "Net written premiums" shall mean gross premiums written and ceded to the Reinsurer as recorded by the Company less any returns and/or cancellations also recorded. (d) "Losses incurred" shall mean losses paid, plus loss adjustment expense paid, by the Reinsurer, less salvages or subrogations recovered, during the Period, plus loss and loss adjustment expenses outstanding (included IBNR) at the end of the Period, less loss and loss adjustment expenses (including IBNR) outstanding at the beginning of the Period, if any. ARTICLE VIII REPORTS AND REMITTANCES Within forty five (45) days after the close of each quarter, the Company will furnish the Reinsurer with a report summarizing the reported and estimated written premiums ceded less the related reported and estimated Commissions and FET, and less reported losses paid and reported loss adjustment expense paid, and the net balance (disregarding estimated items) due either party. In addition, the Company will furnish the Reinsurer a quarterly statement showing the total reserves for outstanding losses, loss adjustment expense, unearned premiums, Profit Commissions (if any) and such other information as may be required by the Reinsurer for completion of any reports or statements required to be filed with Bermuda or other applicable insurance regulatory authorities. Reinsurer agrees (i) to provide to the Company such information as may be reasonably requested from time to time by the Company which information is required by the Company to comply with any requests or requirements of applicable insurance regulatory authorities (including, without limitation, the Connecticut Insurance Department) and (ii) to take such other commercially reasonable actions as the Company shall request, which actions are necessary or desirable in order for the Company to comply with any applicable insurance regulatory requirements respecting its ability to take credit, or reduce its liabilities, by reason of the reinsurance cessions which are the subject of this Agreement. The Reinsurer agrees that it will on its books and records maintain reserves for outstanding losses and loss adjustment expense (including IBNR) that are at least equal to the amounts set forth in the statements provided by the Company respecting the Contracts ceded to this Agreement. Amounts due the Reinsurer by the Company will be remitted with the quarterly report. Amounts due the Company by the Reinsurer will be remitted within forty five (45) days following receipt of the report. Should payment due from the Reinsurer exceed $250,000 as respects any one loss, the Company may give the Reinsurer notice of payment made, or its intention to make payment, on a - 7 - certain date. If the Company has paid the loss, payment will be made by the Reinsurer immediately. If the Company intends to pay the loss by a certain date and has submitted a satisfactory proof of loss or similar document, payment will be due from the Reinsurer twenty four (24) hours prior to that date, provided the Reinsurer has a period of five (5) business days after receipt of said notice to dispatch the payment. Cash loss amounts specifically remitted by the Reinsurer as set forth herein will be credited to its next quarterly report in which such cash loss amounts are reported. ARTICLE IX LOSSES AND LOSS ADJUSTMENT EXPENSES All loss settlements (other than ex-gratia payments), whether under strict policy conditions or by way of compromise, shall be unconditionally binding upon the Reinsurer in the amount of its applicable Quota Share part thereof. The Reinsurer shall bear its applicable Quota Share part of all loss adjustment expenses incurred under the ceded Contracts. In addition to indemnity amounts recoverable hereunder, the Reinsurer shall bear its proportionate share of all expenses incurred by the Company in the investigation, adjustment, appraisal or defense of all claims under policies reinsured hereunder (excluding office expenses and compensation of officers and regular employees of the Company, other than staff field adjusters and out of pocket expense of the Company's officers incurred in connection with the loss), and shall receive its proportionate share of any recoveries of such expenses. ARTICLE X EXTRA CONTRACTUAL OBLIGATIONS The Reinsurer shall be liable hereunder for its share of 100% of any loss to the Company in respect of Extra Contractual Obligations. "Extra Contractual Obligations" are defined as those liabilities (excluding office expenses and compensation of officers and regular employees of the Company, other than staff field adjusters and out of pocket expense of the Company's officers incurred in connection with the loss) not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation is incurred by the Company shall be - 8 - deemed, in all circumstances, to be the date of the original loss. The time any amount is due from the Reinsurer hereunder shall be based upon the time the Company has made a payment to which these provisions relate. For purposes of Extra Contractual Obligations coverage there shall be no recovery hereunder where the loss has been incurred due to or to the extent caused by fraud by a member of the board of directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or other organization or party involved in the presentation, defense or settlement of a claim on behalf of the Company. ARTICLE XI JUDGMENTS IN EXCESS OF POLICY LIMITS This Agreement shall protect the Company for the Reinsurer's share in connection with 100% of any loss in excess of the limit of its original policy, such loss in excess of the limit having been incurred because of failure by the Company to settle within the policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement, or in the preparation of the defense, or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. However, this Article shall not apply where the loss has been incurred due to or to the extent caused by fraud by a member of the board of directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim. For purposes of this Article the word "loss" shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original policy (excluding office expenses and compensation of officers and regular employees of the Company, other than staff field adjusters and out of pocket expense of the Company's officers incurred in connection with the loss). ARTICLE XII UNAUTHORIZED REINSURANCE The obligations of the Reinsurer hereunder shall be secured by one or more trust accounts and/or by one or more clean, irrevocable and unconditional letters of credit, all as more fully described below. As regards Contracts issued by the Company coming within the scope of this Agreement, the Company agrees that when it shall file with the insurance regulatory authority or set up on its books reserves for unearned premium and losses covered hereunder which it shall be required by - 9 - law to set up, it will forward to the Reinsurer a statement showing the proportion of such reserves which is applicable to the Reinsurer. The Reinsurer hereby agrees to fund such reserves in respect of unearned premium, known outstanding losses that have been reported to the Reinsurer and allocated loss adjustment expense relating thereto, losses and allocated loss adjustment expense paid by the Company but not recovered from the Reinsurer, plus reserves for losses incurred but not reported, as shown in the statement prepared by the Company (hereinafter referred to as "Obligations") by funds withheld, cash advances, a reinsurance trust account or a letter of credit. The Reinsurer shall have the option of determining the method of funding provided it is acceptable to the Connecticut Insurance Department and any other insurance regulatory authorities having jurisdiction over the Company's reserves. A. Reinsurance Trust If the Reinsurer elects to secure its Obligations through a reinsurance trust account, the Reinsurer shall promptly establish a trust account (the "Statutory Trust") with terms and bank acceptable to the regulatory authority(ies) having jurisdiction over the Company. The trust agreement shall establish a trust that names the Company as beneficiary of the trust and the Reinsurer as grantor of the trust and shall satisfy applicable insurance regulatory requirements (the "Statutory Trust Agreement"). At all times during the term of this Agreement, the Reinsurer shall have on deposit in the Statutory Trust assets equal to the amount of the Obligations as of the last day of the immediately preceding fiscal quarter (the "Statutory Trust Amount"); provided, that the amount of the assets so deposited in the Statutory Trust may be less than the Statutory Trust Amount if the Reinsurer provides the Company with one or more letters of credit complying with Section B of this ARTICLE XII. Adjustments to the Statutory Trust Amount shall be made within thirty (30) days of Reinsurer's receipt of the report provided for in Article VIII. Assets deposited in the Statutory Trust shall be valued according to their current fair market value and shall consist only of cash (United States legal tender), certificates of deposit (issued by a United States bank and payable in United States legal tender), and investments of the types permitted for a domestic property/casualty reinsurance company under the provisions of the applicable insurance laws and regulations of the State of Connecticut, or any combination of the above, provided that any such investments are not issued by an institution that is the parent, subsidiary, or affiliate of either the Company or the Reinsurer. Upon notification by the Company that the value of the assets on deposit in the Statutory Trust is less than the Statutory Trust Amount (unless a letter of credit has been provided for the amount of such deficiency), the Reinsurer shall, within ten (10) days of receipt of such notice, deposit sufficient additional assets in the Statutory Trust to increase the value of the assets or deposit therein to the Statutory Trust Amount. - 10 - The Reinsurer, prior to depositing assets in the Statutory Trust, shall execute assignments, endorsements in blank, or transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the Company, or the trustee upon the direction of the Company, may whenever necessary negotiate, withdraw or dispose of any such assets without consent or signature from the Reinsurer or any other entity. The Reinsurer and the Company agree that, notwithstanding any other provision of this Agreement, the assets in the Statutory Trust established pursuant to the provisions of this Agreement may be withdrawn by the Company at any time, without notice to the Reinsurer, upon the presentation of a letter signed by the President or any Vice President of the Company stating that amounts are due and owing with respect to this Agreement and stating the amounts due. Such withdrawn assets shall be utilized and applied by the Company or its successors in interest by operation of law, including without limitation any liquidator, rehabilitator, receiver, or conservator of the Company, without diminution because of the insolvency of the Company or the Reinsurer, only for the following purposes: 1. To reimburse the Company for the Reinsurer's share of premiums returned to the owners of Contracts ceded to this Agreement because of cancellations of such Contracts ("Return Premiums"). 2. To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any Obligations, as stipulated in the annual statement submitted by the Company to the Reinsurer, which share is due to the Company and not otherwise paid by the Reinsurer. 3. To withdraw the balance of the Statutory Trust Account and place such sums in an interest bearing trust account to secure the continuing liabilities of the Reinsurer under this Agreement, in the event the Company has received effective notice of termination of the Statutory Trust Account and the Reinsurer's liability remains unliquidated and undischarged ten (10) days prior to the termination date of the Statutory Trust Account. Such sums will remain in an interest bearing trust account until a renewal Trust Agreement acceptable to the regulatory authority(ies) having jurisdiction over the Company, or a substitute in lieu thereof acceptable to the regulatory authority(ies) having jurisdiction over the Company, has been received by the Company. The Company shall provide to the Reinsurer payment of any interest thereon accruing from such account. 4. To refund any sum which is in excess of 102% of the actual amount required to fund the Obligations under this Agreement. 5. To pay any Commissions, Profit Commissions or other amounts the Company claims are due under this Agreement. - 11 - The Company agrees to return to the Reinsurer any amounts withdrawn from the Statutory Trust which are in excess of the actual amounts required for items 1, 2, and 3 above or, in the case of item 5 above, any amounts that are subsequently determined not to be due. The Company further agrees to utilize all of the assets in the Statutory Trust Account prior to drawing on any letter of credit established pursuant to Section B of this ARTICLE XII. B. Letters of Credit By January 1 of each year during the term of this Agreement, the Reinsurer shall, in the event that assets equal to the Statutory Trust Amount are not on deposit in the Statutory Trust, establish and provide to the Company a clean, irrevocable and unconditional Letter of Credit issued by a bank and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Company's reserves in an amount equal to the shortfall in the Statutory Trust. Such Letter of Credit shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days (sixty (60) days where required by insurance regulatory authorities) prior to any expiration date the issuing bank shall notify the Company by certified or registered mail that the issuing bank elects not to consider the Letter of Credit extended for any additional period. The Reinsurer and Company agree that the Letter of Credit provided by the Reinsurer pursuant to the provisions of this Agreement may be drawn upon at any time, notwithstanding any other provision of this Agreement, and be utilized by the Company or any successor, by operation of law, of the Company including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Company for the following purposes: 1. to reimburse the Company for the Obligations, the payment of which is due under the terms of this Agreement and which has not been otherwise paid; 2. to make refund of any sum which is in excess of the actual amount required to pay the Obligations under this Agreement; 3. to fund an account with the Company for the Obligations. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon not in excess of the prime rate shall accrue to the benefit of the Reinsurer; 4. to pay the Reinsurer's share of any other amounts the Company claims are due under this Agreement. In the event the amount drawn by the Company on any Letter of Credit is in excess of the actual - 12 - amount required for 1, 2 or 3, or in the case of 4, the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. All of the foregoing shall be applied without diminution because of insolvency on the part of the Company or the Reinsurer. The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. From time to time, the Company shall reduce the amounts of any letters of credit established under this ARTICLE XII, or release assets from the Statutory Trust established pursuant to this ARTICLE XII by such amounts as the Company reasonably determines (in its sole discretion) are no longer required to secure the obligations of the Reinsurer to the Company hereunder; provided, however, that in no event shall the value of the assets held in the Statutory Trust plus the amount of such letters of credit be less than the Obligations. ARTICLE XIII TAXES In consideration of the terms under which this Agreement is issued, the Company undertakes not to claim any deduction of the premium hereon when making tax returns, other than on Income or Profits Tax returns, to any state or territory of the United States of America or to the District of Columbia. ARTICLE XIV FEDERAL EXCISE TAX The Reinsurer and the Company agree that the Company shall withhold and pay over to the United States Treasury Department, together with all necessary forms and reports, the Excise Tax imposed by Section 4371 of the Internal Revenue Code of 1986, as amended, in accordance with the provisions of Sections 4370 through 4374 thereof. The Company will provide the Reinsurer copies of all such returns and reports. In the event of any Return Premium becoming due hereunder, the Company will either (i) offset the Excise Tax applicable to the Return Premium against future Excise Taxes payable to the Treasury Department, or (ii) pay to the Reinsurer the amount which the Company recovers from the Treasury Department with respect to the Return Premium. In the event any amount offset pursuant to subsection (i) of the previous sentence is - 13 - disallowed by the Internal Revenue Service, the Reinsurer shall indemnify the Company for any such disallowed amount. The Company will use reasonable efforts to offset or recover any such tax previously withheld on the returned portion of the premium and the Reinsurer will cooperate with the Company to the extent reasonably necessary to assist the Company in offsetting or recovering the tax previously withheld on the returned portion of the premium from the Treasury Department. ARTICLE XV CURRENCY Wherever the word "Dollars" or sign "$" appear in this Agreement they shall be construed to mean United States Dollars. For purposes of this Agreement, where the Company receives premiums or pays losses and/or commissions in currencies other than United States currency, such premiums or losses and commissions shall be converted into United States Dollars at the same rates of exchange as entered in the Company's books. ARTICLE XVI ACCESS TO RECORDS The Reinsurer or its duly accredited representatives shall have full access to the books and records (other than any list or lists of brokers through which the Company has written the business ceded hereunder) of the Company at all reasonable times for the purpose of obtaining information concerning this Agreement or the subject matter hereof. Upon request, the Company shall supply the Reinsurer, at the Reinsurer's expense, with copies of the whole or any part of such books and records relating to this Agreement or the subject matter hereof. The Reinsurer agrees, on behalf of itself and its representatives, to hold and keep confidential, and not to disclose to any third party (unless requested or required by relevant insurance regulatory authorities or otherwise compelled to do so by applicable law), any confidential and proprietary information of the Company which it receives or has access to pursuant to the above paragraph. The Reinsurer further agrees, on behalf of itself and its representatives, that it shall not use any underwriting or related information received from the Company, except for the sole purpose of analyzing the risks to be ceded to the Reinsurer hereunder or in the application of the terms of this Agreement. The Reinsurer agrees to abide by any determination by the Company - 14 - that any information provided to the Reinsurer constitutes confidential and proprietary information. ARTICLE XVII ERRORS AND OMISSIONS Except as provided in the second sentence of ARTICLE II hereof, any inadvertent delay, omission, or error shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such delay, omission or error had not been made, provided such delay, omission or error is rectified promptly upon discovery. ARTICLE XVIII INSOLVENCY In the event of the insolvency of the Company, this reinsurance shall be payable by the Reinsurer directly to the Company, or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator, or statutory successor of the Company has failed to pay all or portion of any claim. It is agreed, however, that the liquidator, receiver, conservator, or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator, or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of their respective reinsurance agreements as though such expense had been incurred by the Company. - 15 - The reinsurance shall be payable by the Reinsurer to the Company or its liquidator, receiver, conservator, or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where the agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and (b) where the Reinsurer, with the consent of the direct insured or insureds, has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. ARTICLE XIX ARBITRATION As a condition precedent to any right of action hereunder, if any dispute, claim or controversy shall arise between the Company and the Reinsurer with respect to this Agreement, the interpretation or breach thereof or the rights of the parties with respect to any transaction contemplated hereunder (a "Dispute"), whether such Dispute arises before or after termination of this Agreement, such dispute, upon the written demand of either party, shall be arbitrated in accordance with this ARTICLE XIX. Any such demand for arbitration shall be made within a reasonable time after the Dispute has arisen, and in any event shall not be made after the date when institution of legal or equitable proceedings based on such Dispute would be barred by the applicable statute of limitations. Any Dispute to be arbitrated hereunder shall be submitted to three arbitrators, one to be appointed by each party, and an umpire to be chosen by the two so appointed. If either party refuses or neglects to appoint an arbitrator within thirty (30) days after the receipt of written notice from the other party requesting it to do so, the requesting party may appoint two arbitrators. If the two arbitrators fail to agree in the selection of the umpire within thirty (30) days of their appointment, each arbitrator shall nominate three candidates within ten (10) days thereafter, two of whom the other shall decline, and the choice between the remaining two shall be made by drawing lots. All arbitrators shall be active or retired executive officers of insurance or reinsurance companies or underwriters at Lloyd's, London not under the control of, or having had in the previous 3 years direct and material business relations with, or related by birth or marriage to any employee of, either party to this Agreement, and having no other personal or financial interest in the outcome of the arbitration. Any determination by a majority of the arbitrators shall be binding and conclusive upon the parties hereto. Each party shall submit its case to the arbitrators within thirty (30) days of the appointment of the umpire. All proceedings before the arbitration panel shall be informal and the arbitrators shall have the power to fix all procedural rules relating to the arbitration proceeding. - 16 - The arbitration panel shall render its decision within thirty (30) days after termination of the proceeding, which decision shall be in writing, stating the reasons therefor. Judgment upon the final decision of the arbitrators may be entered in any court having jurisdiction or application may be made to such court for a judicial confirmation of the award and an order of enforcement, as the case may be. Unless otherwise allocated by the arbitrators, each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire and of any other expenses of the arbitration. The arbitration shall take place in the city in which the Company's head office is located unless some other place is mutually agreed upon by the Company and the Reinsurer. Notwithstanding the foregoing provisions of this ARTICLE XIX, it is hereby agreed that no arbitration panel shall have any power to add to, alter or modify the terms and conditions of this Agreement or to decide any issue which does not arise from the interpretation or application of the provisions of this Agreement. ARTICLE XX SERVICE OF SUIT In the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder following an arbitration decision, or if court action is necessary to aid arbitration, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction in the State and City of New York and will comply with all requirements necessary to give such court jurisdiction. All matters arising hereunder shall be determined in accordance with the law and practice of such court. Nothing in this ARTICLE XX constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. Service of process in such suit may be made upon Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, NY 10178 (the "agent for service of process") and in any suit instituted upon this Agreement, the Reinsurer will abide by the final decision of such court or of any appellate court in the event of an appeal whose decision is no longer subject to appeal. The above-named agent for service of process is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and the Reinsurer hereby agrees that any such service shall be deemed good and sufficient service under the New York Civil Practice Laws and Rules. Further, pursuant to any statute of any state, territory or district of the United States of America - 17 - which requires that the Reinsurer appoint a person designated by such statute as its agent for service of process, Reinsurer hereby designates the Superintendent, Commissioner, Director of Insurance, or other officer specified for that purpose in such statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement, and hereby designates the agent for service of process as the firm to whom the said officer is authorized to mail such process or a true copy thereof if such agent must be in the United States, otherwise such process shall be mailed to the Reinsurer at its address for notice under Article XXII hereof. ARTICLE XXI LIMITATIONS ON LIABILITY The parties acknowledge that all business ceded under this Agreement shall be subject to acceptance or rejection by the Reinsurer in its sole judgment. Accordingly, in no event shall the Company be liable to the Reinsurer respecting (i) the volume of business ceded pursuant to this Agreement (provided the Quota Share, if any, is offered to be ceded) or (ii) any losses on any business ceded pursuant to this Agreement. Subject to the provisions of the preceding paragraph, the liability of the Company to the Reinsurer in respect of any failure to comply with the provisions of this Agreement shall be limited to amounts actually owed hereunder and damages directly caused by the willful misconduct or gross negligence of the Company. In no event shall the Company be liable for indirect, incidental, special or consequential damages. The parties shall each be entitled to specific performance of the terms of this Agreement. ARTICLE XXII NOTICES All notices, requests, demands and other communications hereunder must be in writing (including facsimile transmission) and shall be deemed to have been duly given (i) when received if delivered by hand against written receipt, (ii) when sent if sent by facsimile transmission between 9:00 a.m. and 5:00 p.m. on a day when the Federal Reserve Bank and the Bank of Bermuda are open for business, provided such transmission is confirmed by the transmitting machine, (iii) 5 days after being mailed if mailed by prepaid, first class certified mail, return receipt requested, or (iv) if sent by overnight courier, 2 days after delivery to a - 18 - recognized major overnight courier service, fees prepaid. In each case notices shall be addressed as follows: If to the Company: PXRE Reinsurance Company 399 Thornall Street 14th Floor Edison, NJ 08837 Attention: President Facsimile No.: 908-906-9157 If to the Reinsurer: PXRE Reinsurance Ltd. 99 Front Street Hamilton Bermuda Attention: President Facsimile No.: Any party by notice in writing sent to the other may change the name, address or facsimile number to which notices, requests, demands or other communications to it shall be given. ARTICLE XXIII MISCELLANEOUS Both the Reinsurer and the Company shall have, and may exercise at any time, the right to offset any balance or balances due from one party to the other or, to the extent permitted by applicable law, such other's successor, including a successor by operation of law. Such offset may only include balances due under this Agreement and any other reinsurance agreements heretofore or hereafter entered into between the Reinsurer and the Company, regardless of whether such balances are in respect of premiums, or losses or otherwise, and regardless of the capacity of any party, whether as reinsurer or reinsured, under the various agreements involved. This Agreement (including any Endorsements hereto) contains the entire agreement between the parties, and supersedes all prior or contemporaneous discussions, negotiations, representations, or agreements, relating to the subject matter hereof. - 19 - This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of New York (other than any conflict of law rule which might result in the application of the law of any other jurisdiction). This Agreement is intended for the exclusive benefit of the parties to this Agreement and their respective successors and permitted assigns, and nothing contained in this Agreement shall be construed as creating any rights or benefits in or to any third party. The captions of the various sections of this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning thereof. This Agreement may not be modified or amended or any term or provision hereof waived or discharged except in writing signed by the party against whom such amendment, modification, waiver or discharge is sought to be enforced. Except as otherwise provided in this Agreement, any failure or delay on the part of any party in exercising any power or right hereunder shall not operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude any other or further exercise thereof or the exercise of any other right or power hereunder or otherwise available at law or in equity. No party may assign any of its rights or obligations under this Agreement without the written consent of the other party to this Agreement, which consent may be arbitrarily withheld by such party, any such non-consented to assignments being void. Except as otherwise provided in this Agreement, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against the respective successors and assigns of each party to this Agreement. This Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their duly authorized officers in Hamilton, Bermuda as of the date first written above. PXRE REINSURANCE LTD. By /s/ Gerald L. Radke ____________________________________________ Name: Gerald L. Radke Title: President - 20 - PXRE REINSURANCE COMPANY By /s/ Gerald L. Radke ___________________________________________ Name: Gerald L. Radke Title: Chairman and Chief Executive Officer - 21 - ANNEX I QUOTA SHARE ENDORSEMENT TO FACULTATIVE OBLIGATORY RETROCESSIONAL AGREEMENT (hereinafter referred to as the "Reinsurance Agreement") between PXRE REINSURANCE COMPANY (hereinafter referred to as the "Company) and PXRE REINSURANCE LTD. (hereinafter referred to as the "Reinsurer") It is understood and agreed that for the Period commencing October 1, 1999: (i) the applicable quota share for purposes of the Reinsurance Agreement shall be thirty percent (30%); and (ii) Cessions to the Reinsurance Agreement shall not exceed $3,000,000 per reinsurance program. Signed in Hamilton, Bermuda, as of October 14, 1999 PXRE REINSURANCE LTD. By /s/ Gerald L. Radke ____________________________________________ Name: Gerald L. Radke Title: President PXRE REINSURANCE COMPANY By /s/ Gerald L. Radke ___________________________________________ Name: Gerald L. Radke Title: Chairman and Chief Executive Officer AGGREGATE EXCESS OF LOSS AGREEMENT BETWEEN PXRE REINSURANCE COMPANY AND PXRE REINSURANCE LTD. AGGREGATE EXCESS OF LOSS AGREEMENT, dated as of October 14, 1999 and effective as of October 1, 1999 (hereinafter referred to as the "Agreement"), between PXRE REINSURANCE LTD., a Bermuda company (hereinafter referred to as the "Company"), and PXRE REINSURANCE COMPANY, a Connecticut corporation (hereinafter referred to as "Reinsurer"). W I T N E S S E T H : WHEREAS, the Company and the Reinsurer wish to enter into an aggregate excess of loss arrangement pursuant to which the Company will cede to the Reinsurer, and the Reinsurer will assume from the Company, certain of the Company's excess liabilities arising from the Company's reinsurance business, upon the terms and subject to the conditions described below. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants contained herein and of the mutual benefits herein provided, the parties hereto agree as follows: ARTICLE I REINSURANCE CLAUSE Commencing with the effective date of this Agreement and subject to the Aggregate Limit of Liability, the Reinsurer hereby reinsures the aggregate liability of the Company resulting from losses in excess of the Aggregate Retention that occur during the term of this Agreement under the Company's Contracts, in force at the inception of this Agreement or written or renewed during the term of this Agreement, subject to the terms and conditions set forth herein. In no event shall the Reinsurer be required to pay any losses hereunder (a) unless and until the Company's Ultimate Net Loss has exceeded the Aggregate Retention set forth in Annex I attached hereto; or (b) after the exhaustion of the Aggregate Limit of Liability set forth in Annex I attached hereto. If this Agreement is renewed pursuant to Article II and the Parties desire to vary the Aggregate Retention or Aggregate Limit of Liability, the Parties shall execute an endorsement (substantially in the form of the Annex I attached hereto). The terms "Contracts", "Contracts written by the Company" and "Contracts of the Company" shall mean any and all binders, policies, certificates, agreements and contracts of reinsurance and insurance in force on the effective date hereof or issued, renewed, accepted or held, covered provisionally or otherwise in the name of the Company on or after the effective date. The term "Ultimate Net Loss" means the actual loss, including loss adjustment expense, 100% of loss in excess of policy limits and 100% of extra contractual obligations, paid or to be paid by the Company on its Net Retained Line after making deductions for all recoveries, salvages, subrogations and all claims on inuring reinsurance, whether collectible or not; provided, however, that in the event of the insolvency of the Company, payment by the Reinsurer shall be made in accordance with the provisions of the Insolvency Article. Nothing herein shall be construed to mean that losses under this Agreement are not recoverable until the Company's ultimate net loss has been ascertained. The term "Net Retained Line" shall mean the amount of liability which the Company maintains per reinsurance program after deduction of liability ceded, if any, to any general or specific retrocessions to protect the Company and its reinsurers (including, without limitation, the Reinsurer). ARTICLE II TERM AND CANCELLATION This Agreement shall be effective from 12:01 a.m. Eastern Time, October 1, 1999 and shall be continuously in force until 11:59 p.m. Eastern Time, December 31, 2000 (the "Termination Date"). This Agreement shall automatically renew for a one year term at each subsequent December 31 unless either Party has given written notice to the other Party at least 90 days prior to December 31 of the subject year of its intention not to renew this Agreement. If this Agreement is so renewed, the "Termination Date" shall be the following December 31. This Agreement may be terminated: (a) by the Company prior to the Termination Date by notice to the Reinsurer in the event that the Reinsurer's shareholders' equity (calculated under statutory accounting principles) shall have declined by 50% or more from the amount of such shareholders' equity as at the previous December 31; (b) by the Company prior to the Termination Date upon: (i) a material breach by the Reinsurer of its obligations under this Agreement (x) which breach has not been cured within ten (10) days following receipt by the Reinsurer of written notice of such breach or (y) if such breach is not susceptible to cure within such ten (10) day period steps reasonably designed to cure such breach are not commenced within such period, such steps are not diligently pursued or such breach is not cured within a reasonable period following such written notice of breach, or (ii) the conviction of, or plea of nolo contendere by, the Reinsurer or any of its directors or executive officers ("Reinsurer Persons") to a felony or a crime involving moral turpitude, or the entry of a judgment no longer subject to appeal against the - 2 - Reinsurer or any of the Reinsurer Persons finding a common law fraud, or other unlawful conduct by the Reinsurer or any of the Reinsurer Persons that is injurious to the financial condition or reputation of, or is otherwise materially injurious to, the Company or any of its subsidiaries or affiliates; or (c) by the Reinsurer prior to the Termination Date upon: (i) a material breach by the Company of its obligations under this Agreement (x) which breach has not been cured within ten (10) days following receipt by the Company of written notice of such breach or (y) if such breach is not susceptible to cure within such ten (10) day period steps reasonably designed to cure such breach are not commenced within such period, such steps are not diligently pursued or such breach is not cured within a reasonable period following such written notice of breach, or (ii) the conviction of, or plea of nolo contendere by, the Company or any of its directors or executive officers (the "Company Persons") to a felony or a crime involving moral turpitude, or the entry of a judgment no longer subject to appeal against the Company or any of the Company Persons finding a common law fraud, or other unlawful conduct by the Company or any of the Company Persons that is injurious to the financial condition or reputation of, or is otherwise materially injurious to, the Reinsurer or any of its subsidiaries or affiliates. The party desiring to terminate this Agreement pursuant to clause (a) through (c) above shall give prompt written notice of such termination to the other party. No termination of this Agreement pursuant to clause (a) through (c) above by a party will relieve the other party from any liability for any breach of this Agreement or from the performance of any obligation due with respect to any period preceding such termination. In the event of the termination of this Agreement, the Reinsurer shall remain liable for all cessions in force prior to the termination until the natural expiration date and final disposition of all losses and loss expenses occurring hereunder during the period of its participation, and any amounts due under this Agreement applicable to periods prior to termination (for whatever reason) shall remain due after such termination. Notwithstanding the foregoing, in the event of a termination of this Agreement prior to its Termination Date as provided in clauses (a) or (b) above the Company may, at its option, reassume all reinsurances in force at such termination in which case the Reinsurer shall return to the Company the unearned premium reserve calculated as of such date. - 3 - ARTICLE III TERRITORY This Agreement shall follow the territorial scope of the Contracts written by the Company. ARTICLE IV EXCLUSIONS This Agreement shall be subject to the exclusions contained in the original Contracts of the Company. ARTICLE V ORIGINAL CONDITIONS The true intent of this Agreement being that the Reinsurer shall follow the fortunes of the Company, all reinsurances hereunder shall be subject to the same terms, conditions, waivers and modifications as the respective Contracts of the Company. ARTICLE VI PREMIUM As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurer the premium set forth in Annex I hereto. ARTICLE VII REPORTS AND REMITTANCES Within forty five (45) days after the close of each quarter, the Company will furnish the Reinsurer a quarterly statement showing the total reserves for outstanding losses, loss adjustment expense, unearned premiums, and such other information as may be required by the Reinsurer for completion of any reports or statements required to be filed with the Connecticut Insurance Department or other applicable insurance regulatory authorities. Reinsurer agrees (i) to provide to the Company such information as may be reasonably requested from time to time by the Company which information is required by the Company to comply with any requests or requirements of applicable insurance - 4 - regulatory authorities and (ii) to take such other commercially reasonable actions as the Company shall request, which actions are necessary or desirable in order for the Company to comply with any applicable insurance regulatory requirements respecting its ability to take credit, or reduce its liabilities, by reason of the reinsurance cessions which are the subject of this Agreement. Amounts due the Reinsurer by the Company will be remitted with the quarterly report. Amounts due the Company by the Reinsurer will be remitted within forty five (45) days following receipt of the report. Should payment due from the Reinsurer exceed $250,000 as respects any one loss, the Company may give the Reinsurer notice of payment made, or its intention to make payment, on a certain date. If the Company has paid the loss, payment will be made by the Reinsurer immediately. If the Company intends to pay the loss by a certain date and has submitted a satisfactory proof of loss or similar document, payment will be due from the Reinsurer twenty four (24) hours prior to that date, provided the Reinsurer has a period of five (5) business days after receipt of said notice to dispatch the payment. Cash loss amounts specifically remitted by the Reinsurer as set forth herein will be credited to its next quarterly report in which such cash loss amounts are reported. ARTICLE VIII EXTRA CONTRACTUAL OBLIGATIONS Subject to the Aggregate Retention and Aggregate Limit of Liability, the Reinsurer shall be liable hereunder for 100% of any loss to the Company in respect of Extra Contractual Obligations. "Extra Contractual Obligations" are defined as those liabilities (excluding office expenses and compensation of officers and regular employees of the Company, other than staff field adjusters and out of pocket expense of the Company's officers incurred in connection with the loss) not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original loss. The time any amount is due from the Reinsurer hereunder shall be based upon the time the Company has made a payment to which these provisions relate. For purposes of Extra Contractual Obligations coverage there shall be no recovery hereunder where the loss has been incurred due to or to the extent caused by fraud by a member of the - 5 - board of directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or other organization or party involved in the presentation, defense or settlement of a claim on behalf of the Company. ARTICLE IX JUDGMENTS IN EXCESS OF POLICY LIMITS Subject to the Aggregate Retention and Aggregate Limit of Liability, this Agreement shall protect the Company for 100% of any loss in excess of the limit of its original policy, such loss in excess of the limit having been incurred because of failure by the Company to settle within the policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement, or in the preparation of the defense, or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. However, this Article shall not apply where the loss has been incurred due to or to the extent caused by fraud by a member of the board of directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim. For purposes of this Article the word "loss" shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original policy (excluding office expenses and compensation of officers and regular employees of the Company, other than staff field adjusters and out of pocket expense of the Company's officers incurred in connection with the loss). ARTICLE X TAXES In consideration of the terms under which this Agreement is issued, the Company undertakes not to claim any deduction of the premium hereon when making tax returns, other than on Income or Profits Tax returns, to any state or territory of the United States of America or to the District of Columbia. ARTICLE XI CURRENCY Wherever the word "Dollars" or sign "$" appear in this Agreement they shall be construed to mean United States Dollars. - 6 - For purposes of this Agreement, where the Company receives premiums or pays losses in currencies other than United States currency, such premiums or losses shall be converted into United States Dollars at the same rates of exchange as entered in the Company's books. ARTICLE XII ACCESS TO RECORDS The Reinsurer or its duly accredited representatives shall have full access to the books and records (other than any list or lists of brokers through which the Company has written the business ceded hereunder) of the Company at all reasonable times for the purpose of obtaining information concerning this Agreement or the subject matter hereof. Upon request, the Company shall supply the Reinsurer, at the Reinsurer's expense, with copies of the whole or any part of such books and records relating to this Agreement or the subject matter hereof. The Reinsurer agrees, on behalf of itself and its representatives, to hold and keep confidential, and not to disclose to any third party (unless requested or required by relevant insurance regulatory authorities or otherwise compelled to do so by applicable law), any confidential and proprietary information of the Company which it receives or has access to pursuant to the above paragraph. The Reinsurer further agrees, on behalf of itself and its representatives, that it shall not use any underwriting or related information received from the Company, except for the sole purpose of analyzing the risks to be ceded to the Reinsurer hereunder or in the application of the terms of this Agreement. The Reinsurer agrees to abide by any determination by the Company that any information provided to the Reinsurer constitutes confidential and proprietary information. ARTICLE XIII ERRORS AND OMISSIONS Any inadvertent delay, omission, or error shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such delay, omission or error had not been made, provided such delay, omission or error is rectified promptly upon discovery. ARTICLE XIV INSOLVENCY In the event of the insolvency of the Company, this reinsurance shall be payable by the Reinsurer - 7 - directly to the Company, or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator, or statutory successor of the Company has failed to pay all or portion of any claim. It is agreed, however, that the liquidator, receiver, conservator, or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator, or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of their respective reinsurance agreements as though such expense had been incurred by the Company. The reinsurance shall be payable by the Reinsurer to the Company or its liquidator, receiver, conservator, or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where the agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and (b) where the Reinsurer, with the consent of the direct insured or insureds, has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. ARTICLE XV ARBITRATION As a condition precedent to any right of action hereunder, if any dispute, claim or controversy shall arise between the Company and the Reinsurer with respect to this Agreement, the interpretation or breach thereof or the rights of the parties with respect to any transaction contemplated hereunder (a "Dispute"), whether such Dispute arises before or after termination of this Agreement, such dispute, upon the written demand of either party, shall be arbitrated in - 8 - accordance with this ARTICLE XV. Any such demand for arbitration shall be made within a reasonable time after the Dispute has arisen, and in any event shall not be made after the date when institution of legal or equitable proceedings based on such Dispute would be barred by the applicable statute of limitations. Any Dispute to be arbitrated hereunder shall be submitted to three arbitrators, one to be appointed by each party, and an umpire to be chosen by the two so appointed. If either party refuses or neglects to appoint an arbitrator within thirty (30) days after the receipt of written notice from the other party requesting it to do so, the requesting party may appoint two arbitrators. If the two arbitrators fail to agree in the selection of the umpire within thirty (30) days of their appointment, each arbitrator shall nominate three candidates within ten (10) days thereafter, two of whom the other shall decline, and the choice between the remaining two shall be made by drawing lots. All arbitrators shall be active or retired executive officers of insurance or reinsurance companies or underwriters at Lloyd's, London not under the control of, or having had in the previous 3 years direct and material business relations with, or related by birth or marriage to any employee of, either party to this Agreement, and having no other personal or financial interest in the outcome of the arbitration. Any determination by a majority of the arbitrators shall be binding and conclusive upon the parties hereto. Each party shall submit its case to the arbitrators within thirty (30) days of the appointment of the umpire. All proceedings before the arbitration panel shall be informal and the arbitrators shall have the power to fix all procedural rules relating to the arbitration proceeding. The arbitration panel shall render its decision within thirty (30) days after termination of the proceeding, which decision shall be in writing, stating the reasons therefor. Judgment upon the final decision of the arbitrators may be entered in any court having jurisdiction or application may be made to such court for a judicial confirmation of the award and an order of enforcement, as the case may be. Unless otherwise allocated by the arbitrators, each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire and of any other expenses of the arbitration. The arbitration shall take place in the city in which the Company's head office is located unless some other place is mutually agreed upon by the Company and the Reinsurer. Notwithstanding the foregoing provisions of this ARTICLE XV, it is hereby agreed that no arbitration panel shall have any power to add to, alter or modify the terms and conditions of this Agreement or to decide any issue which does not arise from the interpretation or application of the provisions of this Agreement. - 9 - ARTICLE XVI SERVICE OF SUIT In the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder following an arbitration decision, or if court action is necessary to aid arbitration, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction in the State and City of New York and will comply with all requirements necessary to give such court jurisdiction. All matters arising hereunder shall be determined in accordance with the law and practice of such court. Nothing in this ARTICLE XVI constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. Service of process in such suit may be made upon Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, NY 10178 (the "agent for service of process") and in any suit instituted upon this Agreement, the Reinsurer will abide by the final decision of such court or of any appellate court in the event of an appeal whose decision is no longer subject to appeal. The above-named agent for service of process is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and the Reinsurer hereby agrees that any such service shall be deemed good and sufficient service under the New York Civil Practice Laws and Rules. Further, pursuant to any statute of any state, territory or district of the United States of America which requires that the Reinsurer appoint a person designated by such statute as its agent for service of process, Reinsurer hereby designates the Superintendent, Commissioner, Director of Insurance, or other officer specified for that purpose in such statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement, and hereby designates the agent for service of process as the firm to whom the said officer is authorized to mail such process or a true copy thereof if such agent must be in the United States, otherwise such process shall be mailed to the Reinsurer at its address for notice under Article XVIII hereof. ARTICLE XVII LIMITATIONS ON LIABILITY The liability of the Company to the Reinsurer in respect of any failure to comply with the provisions of this Agreement shall be limited to amounts actually owed hereunder and damages - 10 - directly caused by the willful misconduct or gross negligence of the Company. In no event shall the Company be liable for indirect, incidental, special or consequential damages. The parties shall each be entitled to specific performance of the terms of this Agreement. ARTICLE XVIII NOTICES All notices, requests, demands and other communications hereunder must be in writing (including facsimile transmission) and shall be deemed to have been duly given (i) when received if delivered by hand against written receipt, (ii) when sent if sent by facsimile transmission between 9:00 a.m. and 5:00 p.m. on a day when the Federal Reserve Bank and the Bank of Bermuda are open for business, provided such transmission is confirmed by the transmitting machine, (iii) 5 days after being mailed if mailed by prepaid, first class certified mail, return receipt requested, or (iv) if sent by overnight courier, 2 days after delivery to a recognized major overnight courier service, fees prepaid. In each case notices shall be addressed as follows: If to the Reinsurer: PXRE Reinsurance Company 399 Thornall Street 14th Floor Edison, NJ 08837 Attention: President Facsimile No.: 908-906-9157 If to the Company: PXRE Reinsurance Ltd. 99 Front Street Hamilton Bermuda Attention: President Facsimile No.: Any party by notice in writing sent to the other may change the name, address or facsimile number to which notices, requests, demands or other communications to it shall be given. - 11 - ARTICLE XIX MISCELLANEOUS Both the Reinsurer and the Company shall have, and may exercise at any time, the right to offset any balance or balances due from one party to the other or, to the extent permitted by applicable law, such other's successor, including a successor by operation of law. Such offset may only include balances due under this Agreement and any other reinsurance agreements heretofore or hereafter entered into between the Reinsurer and the Company, regardless of whether such balances are in respect of premiums, or losses or otherwise, and regardless of the capacity of any party, whether as reinsurer or reinsured, under the various agreements involved. This Agreement (including any Annexes or Endorsements hereto) contains the entire agreement between the parties, and supersedes all prior or contemporaneous discussions, negotiations, representations, or agreements, relating to the subject matter hereof. This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of New York (other than any conflict of law rule which might result in the application of the law of any other jurisdiction). This Agreement is intended for the exclusive benefit of the parties to this Agreement and their respective successors and permitted assigns, and nothing contained in this Agreement shall be construed as creating any rights or benefits in or to any third party. The captions of the various sections of this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning thereof. This Agreement may not be modified or amended or any term or provision hereof waived or discharged except in writing signed by the party against whom such amendment, modification, waiver or discharge is sought to be enforced. Except as otherwise provided in this Agreement, any failure or delay on the part of any party in exercising any power or right hereunder shall not operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude any other or further exercise thereof or the exercise of any other right or power hereunder or otherwise available at law or in equity. No party may assign any of its rights or obligations under this Agreement without the written consent of the other party to this Agreement, which consent may be arbitrarily withheld by such party, any such non-consented to assignments being void. Except as otherwise provided in this Agreement, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by - 12 - and against the respective successors and assigns of each party to this Agreement. This Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their duly authorized officers in Hamilton, Bermuda as of the date first written above. PXRE REINSURANCE LTD. By /s/ Gerald L. Radke ___________________________________________ Name: Gerald L. Radke Title: President PXRE REINSURANCE COMPANY By /s/ Gerald L. Radke ___________________________________________ Name: Gerald L. Radke Title: Chairman and Chief Executive Officer - 13 - ANNEX I TO AGGREGATE EXCESS OF LOSS AGREEMENT (hereinafter referred to as the "Reinsurance Agreement") between PXRE REINSURANCE COMPANY (hereinafter referred to as the "Reinsurer") and PXRE REINSURANCE LTD. (hereinafter referred to as the "Company") It is understood and agreed that for the Period commencing October 1, 1999 and terminating on December 31, 2000: 1. Aggregate Retention. The "Aggregate Retention" shall be the lesser of: (A) $40,000,000, or (B) 80% of the Company's Bermuda statutory capital through January 1, 2000. 2. Aggregate Limit of Liability. In no event shall the Reinsurer be liable during the term of this Agreement for losses in excess of the Aggregate Limit of Liability of $30,000,000. 3. Premium. $450,000, payable quarterly in arrears in five equal installments of $90,000. Signed in Hamilton, Bermuda, as of October 14, 1999 PXRE REINSURANCE LTD. By /s/ Gerald L. Radke ___________________________________________ Name: Gerald L. Radke Title: President PXRE REINSURANCE COMPANY By /s/ Gerald L. Radke ___________________________________________ Name: Gerald L. Radke Title: Chairman and Chief Financial Officer EX-10.26 9 EXHIBIT 10.26 ================================================================================ LEASE AGREEMENT BETWEEN THORNALL ASSOCIATES, L.P., AS LANDLORD -AND- PXRE CORPORATION, AS TENANT PREMISES: 399 THORNALL STREET EDISON, NEW JERSEY PORTION OF 12TH FLOOR DATED: NOVEMBER 1,1999 ================================================================================ INDEX
ARTICLE CAPTION PAGE - ------- ------- ---- 1 Demised Premises, Term, Rent ............................... 1 2 Use ........................................................ 3 3 Preparation of the Demised Premises ........................ 4 4 When Demised Premises Ready for Occupancy .................. 5 5 Additional Rent ............................................ 6 6 Subordination, Notice to Mortgagees ........................ 12 7 Quiet Enjoyment ............................................ 13 8 Assignment, Mortgaging, Subletting ......................... 13 9 Compliance with Laws and Requirements of Public Authorities ................................................ 16 10 Insurance .................................................. 17 11 Rules and Regulations ...................................... 19 12 Tenant's Changes ........................................... 20 13 Tenant's Property .......................................... 22 14 Repairs and Maintenance .................................... 23 15 Electricity ................................................ 23 16 Heating, Ventilation and Air-Conditioning .................. 25 17 Landlord's Other Services .................................. 25 18 Access, Changes in Building Facilities, Name ............... 27 19 Notices of Accidents ....................................... 28 20 Non-Liability and Indemnification .......................... 29
(i)
ARTICLE CAPTION PAGE - ------- ------- ---- 21 Destruction or Damage ........................................ 30 22 Eminent Domain ............................................... 31 23 Surrender .................................................... 33 24 Conditions of Limitation ..................................... 33 25 Re-Entry by Landlord ......................................... 35 26 Damages ...................................................... 36 27 Waivers ...................................................... 38 28 No Other Waivers or Modifications ............................ 38 29 Curing Tenant's Defaults ..................................... 39 30 Broker ....................................................... 40 31 Notices ...................................................... 40 32 Estoppel Certificate ......................................... 40 33 Arbitration .................................................. 41 34 No Other Representations, Construction, Governing Law ........ 42 35 Security ..................................................... 42 36 Parties Bound ................................................ 43 37 Consents ..................................................... 43 38 Mortgage Financing - Tenant Cooperation ...................... 44 39 Environmental Compliance ..................................... 44 40 Holding Over ................................................. 45 41 Certain Definitions & Constructions .......................... 46
(ii)
ARTICLE CAPTION PAGE - ------- ------- ---- 42 Relocation of Tenant ........................... 46 43 Option to Renew ................................ 47 EXHIBIT A - Description of Land EXHIBIT B - Floor Plan EXHIBIT C - Separate Workletter EXHIBIT D - Cleaning and Maintenance Specifications EXHIBIT E - Rules and Regulations EXHIBIT F - Definitions EXHIBIT G - Non Disturbance Agreement
(iii) LEASE, dated November 1, 1999, between THORNALL ASSOCIATES, L.P., a New Jersey Limited Partnership, c/o Alfieri Property Management, having its principal office located at 399 Thornall Street, P.O. Box 2911, Edison, New Jersey 08818-2911, ("Landlord"), and PXRE CORPORATION, a Delaware Corporation, having its principal office located at 399 Thornall Street, Edison, New Jersey 08837, ("Tenant"). WITNESSETH: ARTICLE 1 DEMISED PREMISES, TERM, RENT 1.01. Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the premises hereinafter described, in the building located at 399 Thornall Street, Edison, New Jersey, ("Building") on the parcel of land more particularly described in Exhibit A ("Land"), for the term hereinafter stated, for the rents hereinafter reserved and upon and subject to the conditions (including limitations, restrictions and reservations) and covenants hereinafter provided. Each party hereby expressly covenants and agrees to observe and perform all of the conditions and covenants herein contained on its part to be observed and performed. 1.02. The premises hereby leased to Tenant is a portion of the 12th floor of the Building, as shown on the floor plans annexed hereto as Exhibit B. Landlord and Tenant have mutually agreed that the premises leased has a rentable area of 24,238 square feet which includes Tenant's share of the common area. Said premises, together with all fixtures and equipment which at the commencement, or during the term of this Lease are thereto attached (except items not deemed to be included therein and removable by Tenant as provided in Article 13) constitute the "Demised Premises". Included in the leasing hereby is Tenant's non-exclusive right, together with other tenants of the Building and of the building known as 379 Thornall Street, Edison, New Jersey, to use the lobbies, elevators, sidewalks, public areas, hallways, parking deck, the atrium area and other public and service areas affecting or serving the Building and 379 Thornall Street. 1.03. The term of this Lease, for which the Demised Premises are hereby leased, shall commence on a date ("Commencement Date") which shall be (i) the day on which the Demised Premises are ready for occupancy (as defined in Article 4) or (ii) the day Tenant, or anyone claiming under or through Tenant, first occupies the Demised Premises for business, whichever occurs earlier, and shall end at noon on October 31, 2009, which ending date is hereinafter called the "Expiration Date", or shall end on such earlier date upon which said term may expire or be canceled or terminated pursuant to any of the conditions or covenants of this Lease or pursuant to law. Promptly following the Commencement Date, the Landlord shall notify Tenant in writing of the Commencement Date and the Expiration Date as determined in accordance with this Section. 1 1.04. The rents reserved under this Lease, for the term thereof, shall be and consist of: (a)
PERIOD FIXED RENT MONTHLY RENT ANNUAL RENT - ------ ---------- ------------ ----------- YEARS 1-5 $24.00 $48,476.00 $581,712.00 YEARS 6 - 10/31/09 $27.90 $56,353.35 $676,240.20
Said rent shall be payable in advance on the first day of each and every calendar month during the term of this Lease, and (b) Additional rent consisting of all such other sums of money as shall become due from and payable by Tenant to Landlord hereunder (for default in payment of which Landlord shall have the same remedies as for a default in payment of fixed rent), all to be paid to Landlord at its office, or such other place, or to such agent at such place, as Landlord may designate by notice to Tenant, in lawful money of the United States of America. 1.05. Tenant shall pay the fixed rent and additional rent herein reserved promptly as and when the same shall become due and payable, without demand therefor and without any abatement, deduction or setoff whatsoever. 1.06. If the Commencement Date occurs on a day other than the first day of a calendar month, the fixed rent for such calendar month shall be prorated and the balance of the first month's fixed rent theretofore paid shall be credited against the next monthly installment of fixed rent. 1.07. Late payments of any payment of rent, including monthly rent or any portion thereof, which is not received within five (5) days after it is due, will be subject to a late charge equal to five percent (5%) of the unpaid payment, or $100.00, whichever is greater. This amount is in compensation of Landlord's additional cost of processing late payments. In addition, any rent which is not paid when due, including monthly rent, will accrue interest at a late rate charge of First Union Prime Rate plus 2.5% per annum, as said rate is reasonably determined by Landlord from published reports, (but in no event in an amount in excess of the maximum rate allowed by applicable law) from the fifth (5th) day after it was due until the date on which it is paid in full with accrued interest. If Tenant is in default of the Lease for failure to pay rent, in addition to the late charges and interest set forth above, Tenant shall be charged with all attorney fees in connection with the collection of all sums due Landlord. Notwithstanding the foregoing, provided Tenant is not in default of this Lease, Tenant shall have one (1) grace period for each year of the Lease term where Tenant will not be subject to late charge or interest for any late payment of rent as set forth above provided Tenant pays the sums due within five (5) days of written notice therefor. 2 1.08. Owner and Broker acknowledge that Owner and Tenant (formerly known as Phoenix Re Corporation) entered into a lease dated May 9, 1994 (the "Other Lease") for 24,238 rentable square feet on the 14th floor of the Building for a term of fifteen (15) years commencing October 27, 1994 and expiring on October 31, 2009. 1.09.Tenant's Expansion Option for 4,000-6,000 rentable square feet on November 1, 1999 as more fully set forth in Article 44(a) of the Other Lease is hereby null and void and of no further force or effect. 1.10. Tenant acknowledges that there is currently a tenant of the Building occupying the Demised Premises. Tenant acknowledges that Landlord's obligation hereunder to deliver the Demised Premises is conditioned upon Landlord entering into satisfactory arrangements such tenant to vacate the Demised Premises. Upon the execution hereof, Landlord agrees to diligently proceed towards entering into such an arrangement with the tenant occupying the Demised Premises. If Landlord is unable to enter into an arrangement satisfactory to Landlord, as Landlord solely determines, for such tenant to vacate the Demised Premises, this Lease shall be null and void and of no further force or effect. ARTICLE 2 USE 2.01. Tenant shall use and occupy the Demised Premises for executive and general offices for the transaction of Tenant's business including ancillary uses consistent with first class office building uses and permitted by law and for no other purpose. 2.02. The use of the Demised Premises for the purposes specified in Section 2.01 shall not include, and Tenant shall not use or permit the use of the Demised Premises or any part thereof, for: (a) A school of any kind other than for the training of Tenant's employees; (b) An employment agency; or (c) An office for any governmental or quasi governmental bureau, department, agency, foreign or domestic, including any autonomous governmental corporation or diplomatic or trade mission; (d) Any telemarketing activities or other direct selling activities; or (e) Any use, including executive and general office use, which results in a density of a population of more than one person for every 200 rentable square feet. 3 2.03. Tenant shall obtain and maintain any governmental license or permit, other than a Certificate of Occupancy and any other permits in connection with Landlord's Work, which shall be required for the proper and lawful conduct of Tenant's business in the Demised Premises, or any part thereof. Tenant shall at all times comply with the terms and conditions of each such license or permit. 2.04. Tenant shall not at any time use or occupy, or do or permit anything to be done in the Demised Premises, in violation of the Certificate of Occupancy (or other similar municipal ordinance) governing the use and occupation of the Demised Premises or for the Building. 2.05. Landlord represents that it shall continue to maintain the Building as presently used as a first class office building, including such other ancillary uses as are presently permitted under applicable zoning ordinances, as well as those uses which are presently lawfully utilized in the atrium or in the Building known as 379 Thornall Street, Edison, New Jersey. Landlord shall comply with all licenses and permits required of it to maintain and operate the Demised Premises and the Building and the atrium area. Landlord represents that there are existing Certificates of Occupancy to allow occupancy for the purposes presently used in the Building and the atrium area. Landlord further represents that Tenant's use, as described in this Article 2, is permitted under the zoning ordinances, but such occupancy is subject to compliance with applicable codes respecting the completion of the Demised Premises. ARTICLE 3 PREPARATION OF THE DEMISED PREMISES 3.01. The Demised Premises shall be completed and prepared for Tenant's occupancy in the manner, and subject to the terms, conditions and covenants, set forth in Exhibit C. The facilities, materials, and work so to be furnished, installed, and performed in the Demised Premises by Landlord at its expense are hereinafter and in Exhibit C referred to as "Landlord's Work". Such other installations, materials, and work which may be undertaken by or for the account of Tenant to equip, decorate, and furnish the Demised Premises for Tenant's occupancy, commonly called finishing trades work, are hereinafter and in Exhibit C called "Tenant's Finish Work." 3.02. Landlord and Tenant acknowledge that Tenant shall be obligated to restore the Demised Premises by the end of the term, including such renewals thereto, or at any earlier expiration date. For purposes of this Lease, and specifically without limitation, for purposes of Article 3, Article 13 and specifically without limitation, Section 13.02, and Article 23, references to "restoration" or to the obligation of Tenant "to restore", shall mean the demolition of all of Landlord's Work and Tenant's Finish Work and of all work thereafter performed by or on behalf of Tenant in connection with Tenant Changes such that the Demised Premises are delivered to Landlord in the same manner and in the same condition as existed prior to Landlord's Work or Tenant's Finish Work as set forth in Exhibit C. If there are any changes to the base Building systems as a result of Landlord's Work, Tenant's Finish Work or the installation of the stairway between the 12th and 14th floor, Tenant shall be required to restore 4 such base Building systems to their condition prior to the performance of Landlord's Work, Tenant's Finish Work or the installation of the stairway. Landlord agrees that Tenant shall have the right, but shall be under no obligation, to request Landlord to restore the Demised Premises upon written notice to such effect given not later than sixty (60) days prior to the expiration of the term. If Tenant requests Landlord to restore the Demised Premises as aforesaid, then Tenant's restoration obligation shall be limited to payment of such demolition costs as are specific to Tenant's then constructed Demised Premises based upon the then applicable labor costs, as may be escalated, and upon the then applicable garbage hauling costs, as may be escalated, and the quantities so involved so reduced at Landlord's discretion. 3.03. Landlord agrees at its sole cost to modify the common area lobby of the 12th floor to a first class condition consistent with Landlord's Building standard lobbies, such renovation to be performed along with Landlord's Work. ARTICLE 4 WHEN DEMISED PREMISES READY FOR OCCUPANCY 4.01. The Demised Premises shall be deemed ready for occupancy on the earliest date on which all of the following conditions have been met: (a) A Certificate of Occupancy (temporary or final) has been issued by the applicable governmental authorities, permitting Tenant's use of the Demised Premises for the purposes for which the same have been leased. (b) Landlord's Work, and so much of Tenant's Finish Work as Landlord shall have undertaken in accordance with Exhibit C or by separate letter agreement, in the Demised Premises have been substantially completed, and same shall be so deemed notwithstanding the fact that minor or insubstantial details of construction, mechanical adjustment, or decoration or special Finish Work requested by Tenant, such as cabinetry remain to be performed, the non-completion of which does not materially interfere with Tenant's use of the Demised Premises. (c) Reasonable means of access and facilities necessary to Tenant's use and occupancy of the Demised Premises, including corridors, elevators and stairways, and heating ventilating, air conditioning, sanitary, water, and electrical facilities, have been installed and are in good operating order and available to Tenant. 4.02. If making the Demised Premises ready for occupancy shall be delayed by any act or omission of Tenant or any of its employees, agents or contractors or any failure (not due to any act or omission of Landlord or any of its employees, agents or contractors) to plan or execute Tenant's Finish Work diligently or by reason of Tenant's failure to submit Tenant's plans and specifications in the manner set forth in this Lease, the Demised Premises shall be deemed ready for occupancy on the date when they would have been ready but for such delay. In order for there to be deemed a delay in Landlord's Work, Landlord shall within twenty-four (24) hours of the inception of such delay advise Tenant that a tenant delay has occurred. 5 4.03. It shall be conclusively presumed that Landlord's Work has been satisfactorily completed (except for latent defects) as of the Commencement Date, unless within ninety (90) days after such date Tenant shall give Landlord notice specifying the respects in which the Demised Premises were not in satisfactory condition. 4.04. Tenant shall have the right to present Landlord with a written list of incomplete or defective Landlord's Work or Tenant's Finish Work (the "Punch List") provided however that Tenant shall provide such Punch List within ninety (90) days from when Tenant shall have taken actual possession of the Demised Premises (or any portion thereof) based on inspection with representatives of Tenant and Landlord present. Landlord shall proceed diligently to complete all such Punch List items within thirty (30) days after receipt of Tenant's Punch List and such additional time as may be reasonably required because of the nature of the defect, unavailability of materials or supplies or other reasons not subject to Landlord's control. ARTICLE 5 ADDITIONAL RENT 5.01. For the purpose of Sections 5.01 through 5.03. (a) "Taxes" shall mean real estate taxes, special and extraordinary assessments and governmental levies against the Land and Building of which the Demised Premises (but excluding therefrom that portion of the real estate taxes directly attributable to improvements made by other tenants in the Building beyond Landlord's allowances) are a part provided, however, if at any time during the term of this Lease the method of taxation prevailing at the date of this Lease shall be altered so that in lieu of or as a substitute for any or all of the above there shall be assessed, levied or imposed (i) a tax, assessment, levy, imposition or charge based on the income or rents received from the Building whether or not wholly or partially as a capital levy or otherwise; or (ii) a tax, assessment, levy, imposition or charge measured by or based in whole or in part upon all or any part of the Land and/or Building and imposed upon Landlord; or (iii) a license fee measured by the rents; or (iv) any other tax, assessment, levy, imposition, charge or license fee however described or imposed except as may otherwise be provided herein, then all such taxes, assessments, levies, impositions, charges or license fees or the part thereof so measured or based shall be included in the definition of "Taxes." Such determination of Taxes shall be computed as if Landlord owns no assets other than the Building and had no income other than from the Building. All Taxes imposed as special assessments shall be paid in installments whenever permitted or whenever payment of such installments is financially beneficial to tenants. Excluded from the definition of Taxes shall be late interest or penalties payable as a result of Landlord's late payment of Taxes, Landlord's inheritance estate, gift and income and transfer taxes. (b) "Base Taxes" shall mean the assessed valuation of the Land and Building, assuming the Building was 100% occupied, multiplied by the tax rate for the Tax Year 2000. 6 (c) "Tax Year" shall mean each calendar year for which Taxes are levied by any governmental authority. (d) "Operational Year" shall mean each calendar year commencing with calendar year 2001. (e) "Tenant's Proportionate Share of Increase" shall mean 7.97% of the increase in Taxes in any Operational Year in excess of the Base Taxes. Tenant's Proportionate Share of Increase for the first Operational Year shall be prorated to reflect the actual occupancy by Tenant for said Operational Year. With respect to the calculation of Tenant's Proportionate Share, in the event the rentable square footage of the Building is physically increased or decreased, the Tenant's Proportionate Share shall equally be adjusted based upon the total rentable square footage of the Building as may be adjusted as compared to Tenant's rentable square footage. (f) "Tenant's Projected Share of Increase" shall mean Tenant's Proportionate Share of Increase in Taxes for the projected Operational Year divided by twelve (12) and payable monthly by Tenant to Landlord as additional rent. 5.02. Commencing with the first Operational Year and thereafter, Tenant shall pay to Landlord as additional rent for the then Operational Year, Tenant's Projected Share of Increase in Taxes in equal monthly installments, which payment shall be made along with the fixed rent. 5.03. After the expiration of each Operational Year, Landlord shall furnish to Tenant a written statement of the Taxes incurred for such Operational Year as well as Tenant's Proportionate Share of Increase, if any. If the statement furnished by Landlord to Tenant pursuant to this Section at the end of the then Operational Year shall indicate that Tenant's Projected Share of Increase exceeded Tenant's Proportionate Share of Increase, Landlord shall either forthwith pay the amount of excess directly to Tenant concurrently with the statement or, if the excess is less than $1,000.00, credit same against Tenant's next monthly installment of rent. If such statement furnished by Landlord to Tenant shall indicate that the Tenant's Proportionate Share of Increase exceeded Tenant's Projected Share of Increase for the then Operational Year, Tenant shall forthwith pay the amount of such excess to Landlord within thirty (30) days of Tenant's receipt of Landlord's statement. 5.04. As used in Sections 5.04 through 5.06: (a) "Operating Expenses" shall mean any or all expenses incurred by Landlord in connection with the operation of the Land and Building of which the Demised Premises are a part, as determined in accordance with sound management practices in accordance with accounting principals generally used in the commercial real estate industry consistently applied, including all expenses incurred as a result of Landlord's compliance with any of its obligations hereunder other than Landlord's Work and such expenses shall include: (i) salaries, wages, medical, surgical and general welfare benefits, (including group life insurance) and 7 pension payments of employees of Landlord, but only to the extent the services of such employees are rendered with respect to the operation and maintenance of the Building; (ii) social security, unemployment, and payroll taxes, workers' compensation, disability coverage, uniforms, and dry cleaning for the employees referred to in Subsection (i); (iii) the cost for the Building and common areas of all charges for oil, gas, common and public service area electricity (including, but not limited to, fuel cost adjustments), steam, heat, ventilation, air-conditioning, heating, and water including any taxes on any such utilities, but excluding from Operating Expenses the Landlord's cost, including taxes thereon, of electric energy, other than for heating and air-conditioning, furnished to the Demised Premises (which electric energy so furnished shall be paid for by Tenant pursuant to the provisions of Article 15 hereof); (iv) the cost of all premiums and charges for the following insurances: rent, casualty, liability, fidelity and war risk (if obtainable from the United States Government all of which premiums and charges shall be commercially reasonable); (v) the cost of all building and cleaning supplies for the common areas of the Building and charges for telephone for the Building; (vi) the cost of all charges for management, window cleaning, security services, if any, and janitorial services, and any independent contractor performing work included within the definition of operating expenses; (vii) reasonable legal and accounting services and other professional fees and disbursements incurred in connection with the operation and management of the Land and Building (other than as related to new leases, enforcing Landlord's rights under existing leases, or sales of the Building, fees and charges for financing, refinancing, syndications); (viii) general maintenance of the Building and the cost of maintaining and replacing the landscaping; (ix) maintenance of the common area; (x) capital expenditures, including the purchase of any item of capital equipment or the leasing of capital equipment which have the effect of reducing the expenses which would otherwise be included in Operating Expenses, the costs of which shall be included in Operating Expenses for the Operational Year in which the costs are incurred and subsequent Operational Years on a straight-line basis, to the extent that such items are amortized over the actual life (but not more than ten (10) years of the expenditure or equipment), with an interest factor equal to the interest rate at the time of Landlord's having made said expenditure; and (xi) that portion of the cost of any capital expenditures incurred in connection with the operation of the Land and Building amortized on a straight line basis, to the extent that such items are amortized over the actual life, but not more than ten years, with an interest factor equal to the interest rate, at the time of Landlord's having made said expenditure. If during all or part of the Base Year or any Operational Year, Landlord shall not furnish any particular item(s) of work or service (which would otherwise constitute an Operating Expense hereunder) to portions of the Land or Building due to the fact that (i) such portions are not occupied or leased; (ii) such items of work or service is not required or desired by the tenant of such portion; (iii) such tenant is itself obtaining and providing such item of work or service; or (iv) for other reasons, then, for the purposes of computing Operating Expenses, the amount for such item and for such period shall be deemed to be increased by an amount equal to the additional costs and expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such item of work or services to such portion of the Building or such tenant. Landlord agrees that the sum of all Proportionate Shares of all tenants of increases in Operating Expenses for any Operational Year shall not exceed the actual 8 increases in Operating Expanses for such Operational Year when the actual Operating Expenses are so finally determined. Notwithstanding the foregoing, the following costs and expenses shall not be included in Operating Expenses: (1) Executives' salaries (and all related compensation) above the grade of building manager; (2) Amounts received by Landlord through proceeds of insurance except to the extent they are compensation for sums previously included in Operating Expenses hereunder; (3) Cost of repairs or replacements incurred by reason of fire or other casualty or condemnation to the extent Landlord is compensated therefor; (4) Advertising and promotional expenditures (including "open houses" or broker's parties); (5) Costs incurred in performing work or furnishing services for any tenant (including Tenant), whether at such tenant's or at Landlord's expense, to the extent that such work or service is in excess of any work or service that Landlord is obligated to furnish to or for Tenant at Landlord's expense; (6) Depreciation, except as provided above for permitted capital expenditures; (7) Brokerage commissions; (8) Taxes (as hereinbefore defined); (9) The cost of electricity (for other than heating and air-conditioning) furnished to the Demised Premises or any other space leased to tenants as reasonably estimated by Landlord; (10) Refinancing costs and mortgage interest and amortization payments; (11) Leasing commissions; (12) Costs of preparing tenantable space for a tenant's initial occupancy or lease renewal or extension and costs of relocating tenants of the Building; (13) Any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord; 9 (14) Interest on and amortization of debts, payments of ground rent and other payments due under ground lease; (15) Costs for acquisition or leasing of sculpture, paintings or other objects of art; (16) The cost of any additions to the square foot area of the Building above the square foot area of the Building on the Commencement Date; (17) The cost of any work or services performed or other expenses incurred in connection with installing, operating and maintaining any specialty service or facility other than common Building facilities (e.g. a skydeck, broadcasting facility or any luncheon, athletic or recreational club); (18) Brokerage commission and legal costs (including attorneys fees and disbursements) incurred in procuring tenants or renewing leases or in connection with any mortgaging, financing, refinancing, sale or entering into or extending or modifying any ground or underlying lease; (19) Costs incurred in connection with a transfer or disposition of all or any part of the Building or Land or any interest therein or in Landlord or any entity comprising Landlord; (20) Attorney's fees and Court costs in connection with disputes with tenants of the Building unless such disputes relate to matters which affect Tenant's (or any other tenant's) use or occupancy, or enjoyment of, the Building, the Demised Premises or the space occupied by any such tenant; (21) The cost of capital expenditures except as expressly permitted herein; (22) Any cost represented in an amount paid or allocated to an affiliate of Landlord to the extent the same is materially in excess of the amount which would have been paid in the absence of such a relationship (except that any amount expressly stated in this Lease shall be deemed to be not in excess); (23) Costs incurred in the removal, containment, encapsulation, disposal of or repair or cleaning of areas effected by asbestos or other substances installed by persons other than Tenant in the Building which must be removed or treated as required by law; (24) Any other expenditure which would otherwise be an Operating Expense to the extent Landlord is reimbursed therefore by condemnation award or insurance proceeds, or by refund, credit, warranty, service, contract or otherwise; and (25) Costs incurred to correct structural defects in the initial construction of the Building. 10 (b) "Operational Year" shall mean each calendar year commencing with calendar year 2001. (c) "Base Year" shall mean calendar year 2000. (d) "Tenant's Proportionate Share of Increase" shall mean 7.97% (which percentage may be adjusted as described above in Section 5.01(e), multiplied by the increase in Operating Expenses for the Operational Year over Operating Expenses for the Base Year. For purposes hereof, the Tenant's Proportionate Share of Increase has been computed based upon a total square footage of the Building equal to 304,000 square feet, and a total square footage of the Demised Premises equal to 24,238 square feet. (e) "Tenant's Projected Share of Increase" shall mean Tenant's Proportionate Share of Increase for the projected Operational Year divided by twelve (12) and payable monthly by Tenant to Landlord as additional rent which payment shall be made along with the fixed rent. 5.05. Commencing with the first Operational Year after Landlord shall be entitled to receive Tenant's Proportionate Share of Increase, Tenant shall pay to Landlord as additional rent for the then Operational Year, Tenant's Projected Share of Increase. 5.06. After the expiration of the first Operational Year and for each Operational Year thereafter, Landlord shall furnish to Tenant a written detailed statement of the Operating Expenses (certified to be true and correct by the Chief Operating Officer of Landlord) incurred for such Operational Year which statement shall set forth Tenant's Proportionate Share of Increase, if any. If the statement furnished by Landlord to Tenant, pursuant to this Section, at the end of the then Operational Year shall indicate that Tenant's Projected Share of Increase exceeded Tenant's Proportionate Share of Increase, Landlord shall either forthwith pay the amount of excess directly to Tenant concurrently with the statement or (if such excess is less than $1,000.00) credit same against Tenant's next monthly installment of rent. If such statement furnished by Landlord to Tenant hereunder shall indicate that the Tenant's Proportionate Share of Increase exceeded Tenant's Projected Share of Increase for the then Operational Year, Tenant shall forthwith pay the amount of such excess to Landlord within thirty (30) days of Tenant's receipt of Landlord's statement. 5.07. Every statement given by Landlord pursuant to Sections 5.03 and 5.06 shall be conclusive and binding upon Tenant unless (i) within ninety (90) days after the receipt of such statement Tenant shall notify Landlord that it disputes the correctness of the statement, specifying the particular respects in which the statement is claimed to be incorrect; and (ii) if such dispute shall not have been settled by agreement, shall submit the dispute to judicial proceedings within ninety (90) days after receipt of the statement. Within such 90 day period Tenant shall have the right to review, examine and audit Landlord's books and records for the applicable calendar year which pertain to the Operating Expenses and which are reasonably required to verify the accuracy of any component of Landlord's Operating Statements. Landlord shall also provide such additional reasonable information as is available based upon Tenant's reasonable request. Landlord's documents shall be made available to Tenant at Landlord's 11 offices in the Building and shall also be available for photocopy. Tenant agrees that it and its representatives shall conduct a review with complete confidentiality and shall enter into a reasonable confidentiality agreement with Landlord respecting the review, examination and audit. Pending the determination of such dispute by agreement or judicial proceedings as aforesaid, Tenant shall, within thirty (30) days after receipt of such statement, pay additional rent in accordance with Landlord's statement and such payment shall be without prejudice to Tenant's position. If the dispute shall be determined in Tenant's favor, Landlord shall forthwith pay Tenant the amount of Tenant's overpayment of rents resulting from compliance with Landlord's statement. If, after judicial proceeding, it is determined that the Landlord's Operating Statements vary by more than five percent (5%), then Landlord shall reimburse Tenant for Tenant's reasonable costs for payment of an auditor or accountant. If Landlord's statement is confirmed, Tenant shall reimburse Landlord for Landlord's auditor or accountant. ARTICLE 6 SUBORDINATION, NOTICE TO MORTGAGEES 6.01. Subject to Section 6.02 hereof, this Lease, and all rights of Tenant hereunder are and shall be subject and subordinate in all respects to all mortgages which may now or hereafter affect the Land and/or the Building and/or any of such leases, whether or not such mortgages shall also cover other lands and/or buildings, to each and every advance made or hereafter to be made under such mortgages, and to all renewals, modifications, replacements, and extensions of such mortgages and spreaders and consolidations of such mortgages. This Section shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute and deliver an instrument that Landlord or the holder of any such mortgage or any of their respective successors in interest may reasonably request to evidence such subordination. The mortgages to which this Lease is, at the time referred to, subject and subordinate are hereinafter sometimes called "superior mortgages" and the holder of a superior mortgage or its successor in interest at the time referred to is sometimes hereinafter called a "superior mortgagee." 6.02. Landlord shall make a good faith effort to obtain from the Mortgagee a Subordination, Non-Disturbance and Attornment Agreement (the "Non-Disturbance Agreement") in favor of Tenant utilizing such Mortgagee's standard form. Such Mortgagee's Non-Disturbance Agreement form is attached as Exhibit G Landlord agrees, within 120 days of the execution of this Lease and Tenant's execution of Exhibit G to promptly obtain Mortgagee's approval to execute the Non-Disturbance Agreement. If Tenant fails to accept the Non-Disturbance Agreement as described in Exhibit G attached, it shall be considered that Landlord has satisfied any requirement respecting the existing Mortgagee. As to any future mortgagee, Landlord agrees that it shall use its best efforts to obtain a similar Non-Disturbance Agreement which Tenant shall accept as a condition to a future subordination by Tenant under Section 6.01. 6.03. Landlord represents that the Land and Building are not subject to any ground, underlying or overriding leases. 12 ARTICLE 7 QUIET ENJOYMENT 7.01. So long as Tenant pays all of the fixed rent and additional rent due hereunder and performs all of Tenant's other obligations hereunder, Tenant and any person entitled under this Lease to claim through or under Tenant shall peaceably and quietly have, hold, and enjoy the Demised Premises subject, nevertheless, to the obligations of this Lease and, as provided in Article 6, to the superior mortgages. ARTICLE 8 ASSIGNMENT, MORTGAGING, SUBLETTING 8.01. Neither this Lease, nor the term and estate hereby granted, nor any part hereof or thereof, nor the interest of Tenant in any sublease, or the rentals thereunder, shall be assigned, mortgaged, pledged, encumbered or otherwise transferred by Tenant, and neither the Demised Premises, nor any part thereof shall be encumbered in any manner by reason of any act or omission on the part of Tenant or anyone claiming under or through Tenant or shall be sublet, or offered or advertised for subletting, or be used or occupied or permitted to be used or occupied, or utilized for desk space or for mailing privileges, by anyone other than Tenant or any entity which would be a permitted subtenant or a permitted assignee under Section 8.06 for any purpose other than as permitted by this Lease, without the prior written consent of Landlord in every case, except as expressly otherwise provided in this Article. Landlord's consent to a sublease or an assignment of the Demised Premises shall not be unreasonably withheld. Landlord shall not be deemed unreasonable for the purposes of consent for a sublease or an assignment if Landlord withholds its consent for any of the following: (i) in Landlord's belief the sublessee or assignee is known as a non-performing or litigious tenant; (ii) the sublessee's or assignee's use will burden the parking facilities of the Building; (iii) the sublessee's or assignee's use will violate any provision of this Lease; (iv) if such sublessee or assignee is an environmental nuisance; (v) if in Landlord's reasonable discretion the Landlord does not find that the financial capacity of the sublessee or assignee is adequate; or (vi) for any other reason which shall not be unreasonable for Landlord to withhold it's consent. 8.02. If this Lease be assigned, whether or not in violation of the provisions of this Lease, Landlord may collect rent from the assignee. If the Demised Premises or any part thereof be sublet or be used or occupied by anybody other than Tenant or any permitted subtenant or assignee under Section 8.06, whether or not in violation of this Lease, Landlord may, after default by Tenant and expiration of Tenant's time to cure such default, collect rent from the undertenant or occupant. In either event, Landlord may apply the net amount collected to the rents herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of any of the provisions of Section 8.01, or the acceptance of the assignee, undertenant or occupants as Tenant, or a release of Tenant from the further performance by Tenant of Tenant's obligations under this Lease. The consent by Landlord to assignment, 13 mortgaging, underletting or use or occupancy by others shall not in any way be considered to relieve Tenant from obtaining the express written consent of Landlord to any other or further assignment, mortgaging or underletting or use or occupancy by others not expressly permitted by this Article. 8.03. The following provisions shall govern in connection with the subletting of all or a portion of the Demised Premises: (a) Tenant shall submit in writing to Landlord (i) the name of the proposed subtenant; (ii) the nature and character of the proposed subtenant's business, and the intended use to be made of the Demised Premises by the proposed subtenant; (iii) the terms and conditions of the proposed sublease; and (iv) such reasonable financial information as Landlord may request regarding the proposed subtenant. (b) Within fifteen (15) business days of Landlord's receipt of the information described in (a) above, Landlord, at Landlord's election may (i) elect to sublease the Demised Premises directly from Tenant either upon (x) the same terms and conditions offered to the proposed subtenant or, (y) upon the same terms and conditions as set forth in this Lease; or (ii) cancel this Lease as to that portion of the Demised Premises which Tenant desires to sublease, in which event Tenant agrees to surrender all of its right, title, and interest hereunder and Landlord may thereafter enter into a direct Lease with the proposed subtenant or with any other persons as Landlord may desire; or (iii) consent to the subletting on such terms and conditions as established by Landlord, including Landlord's participation in any rentals received by Tenant. Notwithstanding the foregoing, if during the first three (3) years of the Lease term, Tenant submits a request for a proposed subtenant(s) for less than 12,000 rentable square feet whose subtennancy shall commence during the first three (3) years of the Lease term, Landlord shall have no right to recapture as set forth in (i) above and Landlord shall have no right to participate in any rentals as set forth in (iii) above. (c) As a condition to Landlord's consent, if given under (b) above, Landlord shall have obtained consent to such proposed subletting by a superior mortgagee, provided such superior mortgagee requires consent to the subletting. (d) In connection with any subletting, Tenant shall not offer the Demised Premises, or any part thereof, to any other tenant in the Building or their subsidiaries or affiliates at a rental rate less than the current rental rate for office buildings in the surrounding area. 8.04. Tenant shall remain fully liable for the performance of all Tenant's obligations hereunder notwithstanding any subletting provided for herein (except to Landlord), and without limiting the generality of the foregoing, shall remain fully responsible and liable to Landlord for all acts and omissions of any subtenant or anyone claiming under or through any subtenant which shall be in violation of any of the obligations of this Lease and any such violation shall be deemed to be a violation by Tenant. 14 8.05. Tenant shall not, without the prior written consent of Landlord, assign this Lease, and the provisions of Section 8.03 with respect to subletting shall equally apply to any assignment of this Lease. Tenant herein named, or any immediate or remote successor in interest of Tenant herein named, shall remain liable jointly and severally (as a primary obligor) with its assignee and all subsequent assignees for the performance of Tenant's obligations hereunder. In the event that Tenant hereunder is a corporation (other than one whose shares, now or in the future, are regularly and publicly traded on a recognized stock exchange, including over the counter, or is a public company or merges with a public company), then any substantial change in the ownership of and/or power to vote the majority of the outstanding capital stock of Tenant, other than by inheritance or operation of law, shall be deemed an assignment of this Lease and the provisions with respect to assignment shall be applicable. 8.06. Notwithstanding anything to the contrary contained in this Article with respect to assignment or subletting, Landlord shall consent to any assignment and/or subletting (i) to any parent, affiliate or wholly-owned subsidiary of Tenant (as defined in Rule 240.12b-2 under the Securities Exchange Act of 1934) or (ii) to any corporation or other entity which succeeds to all or substantially all of the assets and business of Tenant provided the resulting entity has a financial condition equal to or greater than Tenant's as of the date hereof, landlord's consent shall also not be required with respect to (a) any transfer of corporate shares in or of Tenant which are publicly traded on a recognized stock exchange or over-the-counter market; (b) any transfer of corporate shares or other interests, or the creation of additional corporate shares or other interests, which are not so publicly traded, provided such transfer or creation is for a good business purpose and not for the sole purpose transferring this Lease; (c) any sale or transfer of all or substantially all of the Tenant's assets other than in connection with (ii) above provided the resulting entity or owner shall have a financial capacity and net worth equal to or greater than Tenant's as of the date of this Lease; (d) any transfer of corporate shares or other interests in the Tenant following the death of any shareholder or other principal. Tenant shall so notify Landlord of all of the foregoing and provide Landlord such additional reasonable available information as Landlord reasonably requests or with respect to which Landlord is entitled. 8.07. Tenant agrees that in connection with each separate request for a Landlord's consent to a subletting or assignment (including the review of a statutory or other name change), Tenant shall pay to Landlord the sum of $500.00 representing a reasonable compensation to Landlord for the administration costs of evaluating and responding to the request. 8.08. Tenant further agrees that it shall not place any signs on the Land or on the windows located in the Demised Premises indicating that all or any portion of the Demised Premises are available for subleasing or assignment. 15 ARTICLE 9 COMPLIANCE WITH LAWS AND REQUIREMENTS OF PUBLIC AUTHORITIES 9.01. Tenant shall give prompt notice to Landlord of any notice it receives of the violation of any law or requirement of public authority, and at its expense shall comply with all laws and requirements of public authorities which shall, with respect to the Demised Premises or the use and occupation thereof, or the abatement of any nuisance, impose any violation, order or duty on Landlord or Tenant, arising from (i) Tenant's specific use (other than general office use) of the Demised Premises; (ii) the manner of conduct of Tenant's business or operation of its installation, equipment or other property therein; (iii) any cause or condition created by or at the instance of Tenant, other than by Landlord's performance of any work for or on behalf of Tenant; or (iv) the breach of any of Tenant's obligations hereunder. Furthermore, Tenant need not comply with any such law or requirement of public authority so long as Tenant shall be contesting the validity thereof, or the applicability thereof to the Demised Premises, in accordance with Section 9.02. Nothing contained herein shall be construed to require Tenant to make structural alterations to the Building except to the extent that same are required by reason of Tenant's specific use (other than general office). Further, Tenant shall have no obligation under this Section 9.01 with respect to any non-compliance of the Demised Premises or the Building with any law or requirement of public authority existing on the Commencement Date of this Lease unless caused by Tenant, its agents, employees and/or invitees. Tenant shall have no obligation hereunder with respect to any law which requires the removal and capsulation or abatement of any hazardous materials or substances including asbestos that are located in the Building on the Commencement Date (unless placed there by Tenant or its agents) and which on the Commencement Date are considered hazardous materials or substances requiring removal by any such public authority. Landlord represents that the Building does not contain any asbestos or any other toxic materials or environmentally hazardous materials which are considered such under any applicable building code or BOCA Code at the time the Building received its initial Certificate of Occupancy. Without any liability to Tenant, Landlord shall be liable to remove any such toxic environmentally hazardous material if such representation proves untrue. 9.02. Tenant may, at its expense (and if necessary, in the name of but without expense to Landlord) contest, by appropriate proceedings prosecuted diligently and in good faith, the validity, or applicability to the Demised Premises, of any law or requirement of public authority, and Landlord shall cooperate with Tenant in such proceedings provided that: (a) Tenant shall defend, indemnify, and hold harmless Landlord against all liability, loss or damage which Landlord shall suffer by reason of such noncompliance or contest, including reasonable attorney's fees and other expenses reasonably incurred by Landlord; (b) Such non-compliance or contest shall not constitute or result in any violation of any superior mortgage, or, if such superior mortgage shall permit such non- 16 compliance or contest on condition of the taking of action or furnishing of security by Landlord, such action shall be taken and such security shall be furnished at the expense of Tenant; and (c) Tenant shall keep Landlord advised as to the status of such proceedings. 9.03 Landlord states that, to the best of its knowledge, the Building complies with Title III of the Americans with Disabilities Act, (the Act), as the Act applies to existing structures constituting commercial facilities. Landlord further states that Landlord's Work, as described in Exhibit C, shall comply with the Act under Title III for existing structures which are commercial facilities. If, after the Demised Premises are ready for occupancy in accordance with Article 4, the Act requires further changes to the Building when occasioned by any other tenant, then such changes shall not be Tenant's responsibility. If, after the Demised Premises are ready for occupancy, further changes to the Building, including the Demised Premises, are required by virtue of the Lease and/or Tenant's specific use and occupancy other than as general office uses, such changes shall be Tenant's responsibility. ARTICLE 10 INSURANCE 10.01. Tenant shall not violate, or permit the violation of, any condition imposed by the all-risk casualty policy issued for the Building and shall not do anything, or permit anything to be kept, in the Demised Premises which would increase the fire or other casualty insurance rate on the Building or the property therein over the rate which would otherwise then be in effect, (unless Tenant pays the resulting increased amount of premium as provided in Section 10.02) or which would result in insurance companies of good standing refusing to insure the Building or any of such property in amounts and at normal rates reasonably satisfactory to Landlord. Tenant shall not be in violation hereof unless Tenant first receives written notice thereof. However, Tenant shall not be subject to any liability or obligation under this Article by reason of the proper use of the Demised Premises for the purposes permitted by Article 2. 10.02. If, by reason of any act or omission on the part of Tenant, the rate of fire insurance with extended all-risk coverage on the Building or equipment or other property of Landlord or other tenants shall be higher than it otherwise would be, Tenant shall reimburse Landlord, on demand, for that part of the premiums for fire insurance and extended all-risk coverage paid by Landlord because of such act or omission on the part of Tenant, which sum shall be deemed to be additional rent and collectible as such. If such increase is attributable to the acts or omissions of other tenants as well, the additional premiums shall be allocated among all applicable tenants, including Tenant. 10.03. In the event that any dispute should arise between Landlord and Tenant concerning insurance rates, a schedule or "make up" of rates for the Building or the Demised Premises, as the case may be, issued by the Fire Insurance Rating Organization of New Jersey or 17 other similar body making rates for fire insurance and extended coverage for the premises concerned, shall be presumptive evidence of the facts therein stated and of the several items and charges in the fire insurance rates with extended coverage then applicable to such premises. 10.04. Tenant shall obtain and keep in full force and effect during the term of this Lease, at its own cost and expense, Comprehensive General Liability Insurance, such insurance to afford protection in an amount of not less than $1,000,000 for injury or death to any one person, $3,000,000 for injury or death arising out of any one occurrence, and $1,000,000 for damage to property, protecting and naming the Landlord, Alfieri Property Management as additional insured and the Tenant as insured against any and all claims for personal injury, death or property damage occurring in, upon, adjacent, or connected with the Demised Premises and any part thereof. Tenant shall name such other insureds associated with the Building as Landlord reasonably requests. Tenant shall pay all premiums and charges therefor and upon failure to do so Landlord may, but shall not be obligated to, make payments, and in such latter event the Tenant agrees to pay the amount thereof to Landlord on demand and said sum shall be deemed to be additional rent, and in each instance collectible on the first day of any month following the date of notice to Tenant in the same manner as though it were rent originally reserved hereunder, together with interest thereon at the rate of two points in excess of Prime Rate of the First Union. Tenant will use commercially reasonable efforts to include in such Comprehensive General Liability Insurance policy a provision to the effect that same will be non-cancelable, except upon reasonable advance written notice to Landlord. Original insurance certificates evidencing the foregoing requirement shall be deposited with Landlord together with any renewals, replacements or endorsements thereof to the end that said insurance shall be in full force and effect for the benefit of the Landlord during the term of this Lease. 10.05. Landlord and Tenant agree to use their best efforts to include in each of its insurance policies a waiver of the insurer's right of subrogation against the other party or if such waiver shall be unobtainable or unenforceable (a) an express agreement that such policy shall not be invalidated if the insured waives or has waived before the casualty, the right of recovery against any party responsible for a casualty covered by the policy or (b) any other form of permission for the release of the other party. If such waiver, agreement, or permission shall not be or shall cease to be obtainable without additional charge, or at all, the insured party shall so notify the other party after learning thereof. In such a case, if the other party shall agree in writing to pay the insurer's additional charge therefor, such waiver agreement or permission shall, if obtainable, be included in the policy. 10.06. Each party hereby releases the other party with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damage, or destruction with respect to its property (including rental value or business interruption) occurring during the term of this Lease. 10.07 The waiver of subrogation or permission for release referred to in Section 10.05 shall extend to the agents of each party and their employees and, in the case of Tenant, shall also extend to all other persons and entities occupying, using or visiting the Demised Premises in accordance with the terms of this Lease, but only if and to the extent that such waiver or permission can be obtained without additional charge (unless such party shall pay such 18 charge). The releases provided for in Section 10.06 shall likewise extend to such agents, employees and other persons and entities, if and to the extent that such waiver or permission is effective as to them. Nothing contained in Section 10.06 shall be deemed to relieve either party of any duty imposed elsewhere in this Lease to repair, restore or rebuild or to nullify any abatement of rents provided for elsewhere in this Lease. Except as otherwise provided in Section 10.04, nothing contained in Sections 10.05 and 10.06 shall be deemed to impose upon either party any duty to procure or maintain any of the kinds of insurance referred to therein or any particular amounts or limits of any such kinds of insurance. However, each party shall advise the other, upon request, from time to time (but not more often than once a year) of all of the policies of insurance it is carrying of any of the kinds referred to in Sections 10.01 and 10.04, and if it shall discontinue any such policy or allow it to lapse, shall notify the other party thereof with reasonable promptness. The insurance policies referred to in Sections 10.05 and 10.06 shall be deemed to include policies procured and maintained by a party for the benefit of its mortgagee or pledgee. 10.08. Landlord agrees that it shall maintain in full force and effect all risk insurance in an amount not less than sufficient to avoid co-insurance with respect to the Building, including the Demised Premises, the Land, and Parking Deck. Landlord also agrees to carry loss of rent insurance so long as such insurance may be carried on a commercially reasonable basis. Landlord agrees that in connection with any such rent insurance, the waiver of subrogation provision set forth above shall apply as well. Landlord shall also maintain general public liability insurance, including contractual liability insurance, in such amounts as are generally carried by owners of first class office buildings in the Edison, Metro Park, New Jersey area. None of the foregoing shall relieve Tenant of nor diminish Landlord's rights with respect to Operating Expenses described in Article 5. ARTICLE 11 RULES AND REGULATIONS 11.01. Tenant and its employees and agent shall faithfully observe and comply with the Rules and Regulations annexed hereto as Exhibit E, and such reasonable changes therein (whether by modification, elimination, or addition) as Landlord at any time or times hereafter may make and communicate in writing to Tenant, which do not unreasonably affect the conduct of Tenant's business in the Demised Premises; provided, however, that in case of any conflict or inconsistency between the provisions of this Lease and any of the Rules and Regulations as originally promulgated or as changed, the provisions of this Lease shall control. 11.02. Nothing contained in this Lease shall be construed to impose upon Landlord any duty or obligation to Tenant to enforce the Rules and Regulations or the terms, covenants, or conditions in any other lease, as against any other tenant and Landlord shall not be liable to Tenant for violation of the same by any other tenant or its employees, agents or visitors. However, Landlord shall not enforce any of the Rules and Regulations in such manner as to discriminate against Tenant or anyone claiming under or through Tenant. 19 ARTICLE 12 TENANT'S CHANGES 12.01. Tenant shall make no changes, alterations, additions, installations, substitutions, or improvements (hereinafter Collectively called "changes", and, as applied to changes Provided for in this Article, "Tenant's Changes") in and to the Demised Premises without the express prior written consent of Landlord, which consent shall not be unreasonably withheld. All proposed Tenant's Changes shall be submitted to Landlord for written consent at least forty five (45) days prior to the date Tenant intends to commence such changes, such submission to include all plans and specifications reasonably required for the work to be done, proposed scheduling, and the estimated cost of completion of Tenant's Changes. If Landlord consents to Tenant's Changes, Tenant may commence and diligently prosecute to completion Tenant's Changes, under the direct supervision of Landlord. Tenant shall pay to Landlord a commercially reasonable supervision fee (which shall include the cost of review of the proposed Tenant's Changes) equal to the lesser of the actual cost of the supervision or ten percent (10%) of the certified cost of completion of Tenant's Changes. Prior to the commencement of Tenant's Changes, Tenant shall pay to Landlord ten percent (10%) of the estimated cost of completion (the "Estimated Payment") as additional rent. Within fifteen (15) days after completion of Tenant's Changes, Tenant shall furnish Landlord with a statement, certified by an officer or a principal of Tenant to be accurate and true, of the total cost of completion of Tenant's Changes (the "Total Cost"). If such certified statement furnished by Tenant shall indicate that the Estimated Payment exceeded the lesser of the actual cost of the supervision or ten percent (10%) of the Total Cost, Landlord shall forthwith either (i) pay the amount of excess directly to Tenant concurrently with the delivery of the certified statement or (ii) permit Tenant to credit the amount of such excess against the subsequent payment of rent due hereunder. If such certified statement furnished by Tenant shall indicate that the lesser of the actual cost of the supervision or ten percent (10%) of the Total Cost exceeded Tenant's Estimated Payment, Tenant shall, simultaneously with the delivery to Landlord of the certified statement, pay the amount of such excess to Landlord as additional rent. 12.02. Notwithstanding the provisions of Section 12.01, all proposed Tenant's Changes which shall affect or alter: (a) The outside appearance or the strength of the Building or of any of its structural parts; or (b) Any part of the Building outside of the Demised Premises; or (c) The mechanical, electrical, sanitary and other service systems of the Building, or increase the usage of such systems; 20 shall be performed only by the Landlord, at a cost to be mutually agreed upon between Landlord and Tenant, which cost shall be commercially reasonable. 12.03. Tenant, at its expense, shall obtain all necessary governmental permits and certificates for the commencement and prosecution of Tenant's Changes and for final approval thereof upon completion, and shall cause Tenant's Changes to be performed in compliance therewith and with all applicable laws and requirements of public authorities, and with all applicable requirements of insurance bodies, and in good and workmanlike manner, using new materials and equipment at least equal in quality and class to the original installations in the Building. Tenant's Changes shall be performed in such manner as not to unreasonably interfere with or delay and (unless Tenant shall indemnify Landlord therefor to the latter's reasonable satisfaction) as not to impose any additional expense upon Landlord in the construction, maintenance or operation of the Building. Throughout the performance of Tenant's Changes, Tenant, at its expense, shall carry, or cause to be carried, workmen's compensation insurance in statutory limits and general liability insurance for any occurrence in or about the Building, in which Landlord and its agents shall be named as parties insured in such limits as Landlord may reasonably prescribe, with insurers reasonably satisfactory to Landlord. Tenant shall furbish Landlord with reasonably satisfactory evidence that such insurance is in effect at or before the commencement of Tenant's Changes and, on request, at reasonable intervals thereafter during the continuance of Tenant's Changes. If any of Tenant's Changes shall involve the removal of any fixtures, equipment or other property in the Demised Premises which are not Tenant's Property (as defined in Article 13), such fixtures, equipment or other property shall be promptly replaced, at Tenant's expense, with new fixtures, equipment or other property (as the case may be) of like utility and at least equal value. In addition, unless Landlord shall otherwise expressly consent in writing, the Tenant shall deliver such removed fixtures to Landlord unless Tenant is reusing such fixtures within the Demised Premises. 12.04. Tenant, at its expense, and with diligence and dispatch, shall procure the cancellation or discharge of all notices of violation arising from or otherwise connected with Tenant's Changes which shall be issued by any public authority having or asserting jurisdiction. Tenant shall defend, indemnify and save harmless Landlord against any and all mechanic's and other liens filed in connection with Tenant's Changes, including the liens of any security interest in, conditional sales of, or chattel mortgages upon, any material, fixtures or articles so installed in and constituting part of the Demised Premises and, against all costs, expenses and liabilities incurred in connection with any such lien, security interest, conditional sale or chattel mortgage or any action or proceeding brought thereon. Tenant, at its expense, shall bond over or procure the satisfaction or discharge of all such liens within fifteen (15) days after Landlord makes written demand therefor. However, nothing herein contained shall prevent Tenant from contesting, in good faith and at its own expense, any such notice of violation, provided that Tenant shall comply with the provisions of Section 9.02. 12.05. Tenant agrees that the exercise of its rights pursuant to the provisions of this Article 12 shall not be done in a manner which would create any work stoppage, picketing, labor disruption or dispute or violate Landlord's union contracts affecting the Land and Building, nor interference with the business of Landlord or any tenant or occupant of the Building. 21 12.06.All of Tenant's Changes shall be subject to restoration in the same manner and subject to the same terms and conditions as described in Section 3.02. 12.07.None of the provisions of this Article 12 shall apply to Landlord's Work or Tenant's Finish Work described in Exhibit C. ARTICLE 13 TENANT'S PROPERTY 13.01. All fixtures, equipment, improvements, and appurtenances attached to or built into the Demised Premises at the commencement of or during the term of this Lease, whether or not by or at the expense of Tenant, shall be and remain a part of the Demised Premises, shall be deemed the property of Landlord and shall not be removed by Tenant, except as required herein to be restored or hereinafter in this Article expressly provided. 13.02. All business and trade fixtures, machinery and equipment, communications equipment and office equipment, whether or not attached to or built into the Demised Premises, which are installed in the Demised Premises by or for the account of Tenant, without expense to Landlord, and can be removed without permanent structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Demised Premises (all of which are sometimes called "Tenant's Property"), shall be and shall remain the property of Tenant and shall be removed by it at any time during the term of this Lease; provided that if any of Tenant's Property is removed, Tenant shall repair or pay the cost of repairing any damage to the Demised Premises or to the Building resulting from such removal.. Tenant's trade fixtures shall include movable millwork, such as desks, workstations, and audio-visual equipment and telecommunications equipment, except any such removal shall be without permanent structural damage to the Building as described above. 13.03. At or before the Expiration Date, or the date of an earlier termination of this Lease, or as promptly as practicable after such an earlier termination date, Tenant at its expense, shall restore the Demised Premises subject to the provisions of Section 3.02 and shall remove all Tenant's Property as described in Section 13.02 above. If Tenant fails to remove its Property and/or otherwise fails to perform any restoration required of it under this Lease, then Tenant shall be deemed a hold-over Tenant as contemplated in Article 40. 13.04. Any other items of Tenant's Property (except money, securities, and other like valuables) which shall remain in the Demised Premises after the Expiration Date or after a period of fifteen (15) days following an earlier termination date, may, at the option of the Landlord, be deemed to have been abandoned, and in such case either may be retained by Landlord as its property or may be disposed of, without accountability, in such manner as Landlord may see fit, at Tenant's expense. The foregoing shall not limit Tenant's liability for failure to restore as required under this Lease. 22 ARTICLE 14 REPAIRS AND MAINTENANCE 14.01. Tenant shall take good care of the Demised Premises. Tenant, at its expense, shall promptly make all repairs, ordinary or extraordinary, interior or exterior, structural or otherwise in and about the Demised Premises and the Building as shall be required by reason of (i) the performance of Tenant's Finish Work or Tenant's Changes; (ii) the installation, use or operation of Tenant's Property in the Demised Premises by Tenant, its agents or employees; (iii) the moving of Tenant's Property in or out of the Building; or (iv) the misuse or neglect of Tenant or any of its employees, agents, contractors or invitees; but Tenant shall not be responsible, and Landlord shall be responsible, for any of such repairs as are required by reason of Landlord's neglect or other fault in the manner of performing any of Tenant's Finish Work or Tenant's Changes which may be undertaken by Landlord for Tenant's account or are otherwise required by reason of neglect or other fault of Landlord or its employees, agents, or contractors. Except if required by the neglect or other fault of Landlord or its employees, agents, or contractors, Tenant, at its expense, shall replace all scratched, damaged or broken doors or other glass in or about the Demised Premises and shall be responsible for all repairs, maintenance, and replacement of wall and floor coverings in the Demised Premises and, for the repair and maintenance of all lighting fixtures therein. 14.02. Landlord, subject to the provisions of Section 5.04, shall keep and maintain the Building and its fixtures, appurtenances, systems and facilities serving the Demised Premises, in good working order, condition, and repair and shall make with all due diligence all repairs, structural and otherwise, interior and exterior, as and when needed in or about the Demised Premises, except for those repairs for which Tenant is responsible pursuant to any other provisions of this Lease. Landlord states that on the inception of this Lease, the plumbing, mechanical, electrical, sewerage, fire protection and sprinkler systems and the HVAC system and the elevators will be in good working order and shall comply with applicable legal requirements. 14.03. Landlord shall have no liability to Tenant by reason of any inconvenience, annoyance, interruption, or injury to Tenant's business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease or required by law, to make in or to any portion of the Building or the Demised Premises, or in or to the fixtures, equipment of appurtenances of the Building or the Demised Premises, provided that Landlord shall use due diligence with respect thereto and shall perform such work, except in case of emergency, at a time reasonably convenient to Tenant and otherwise in such a manner as will not materially interfere with Tenant's use of the Demised Premises. ARTICLE 15 ELECTRICITY 15.01. Landlord shall furnish the electric energy that Tenant shall require in the Demised Premises. Tenant shall pay to Landlord, as additional rent, the costs and charges for all electric energy furnished to Tenant at the Demised Premises, other than the electric energy costs 23 and charges for the use and operation of the HVAC system (and all its component parts) which costs shall be included as Operating Expenses under Article 5. Additional rent for such electric energy shall be calculated and payable in the manner hereinafter set forth. 15.02. As part of Landlord's Work described in Exhibit C, Landlord, at Tenant's sole cost and expense, shall install an electrical meter or sub-meter which shall measure Tenant's electrical use (other than the electric energy costs and charges for the use and operation of the base Building HVAC system and all of its component parts). Tenant shall pay the cost of such use to Landlord as additional rent, based upon the actual electrical energy usage as measured by the sub-meter, as if Tenant was a direct independent customer of the utility company. 15.03. Landlord shall not be liable in any way to Tenant for any failure or defect in the supply or character of electric energy furnished to the Demised Premises by reason of any requirement, act, or omission of the public utility serving the Building with electricity or for any other reason. Landlord shall furnish and install all replacement lighting tubes, lamps, bulbs, and ballasts required in the Demised Premises at Tenant's expense at a commercially reasonable cost. 15.04. Tenant's use of electric energy in the Demised Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Demised Premises. Landlord represents that the electrical capacity of the Demised Premises is sufficient to satisfy the needs of Tenant for any commercially reasonable use based upon the improvements contemplated in Exhibit C. Landlord further states that the Landlord shall provide electricity service to the main distribution electric buss service in the closet located in the Demised Premises capable of providing seven (7) watts (electric demand load, exclusive of HVAC) per rentable square feet as a basic building service. Tenant's use of such electricity service (other than the electric energy costs and charges for the use and operation of the base Building HVAC system and all of its component parts) shall be separately metered, as provided in Section 15.02. All distribution of electricity from this point shall be the responsibility of Tenant, all at Tenant's sole cost. Any increase in HVAC equipment or service necessitated by the use of this electric demand load shall be at the sole coat and expense of Tenant. In order to insure that such capacity is not exceeded and to avert possible adverse effect upon the Building electric service, Tenant shall not, without Landlord's prior written consent in each instance (which shall not be unreasonably withheld), connect any additional fixtures, appliances, or equipment to the Building electrical distribution system in excess of plus or minus 7 watts per rentable square foot or make any alteration or addition to the electric system of the Demised Premises existing on the Commencement Date, which shall cause the Building's electrical capacity to be exceeded. Should Landlord grant such consent, all additional risers, HVAC equipment or other electrical equipment required therefor shall be provided by Landlord and the cost of installation and maintenance thereof shall be paid by Tenant upon Landlord's demand. As a condition to granting such consent, Landlord, at Tenant's sole expense, may cause a new survey to be made of the use of electric energy (other than for Building standard heating and air-conditioning as described in Exhibit C) in order to calculate the potential additional electric energy to be made available to Tenant based upon the estimated additional capacity of such additional risers or other 24 equipment. When the amount of such increase is so determined, and the estimated cost thereof is calculated, the amount of monthly additional rent payable pursuant to Section 15.02 hereof shall be adjusted to reflect the additional cost, and shall be payable as therein provided. ARTICLE 16 HEATING, VENTILATION AND AIR-CONDITIONING 16.01. Landlord, subject to the provisions of Section 5.04, shall maintain and operate the heating, ventilating, and air-conditioning systems (hereinafter called "the systems") and shall furnish heat, ventilating, and air conditioning (hereinafter collectively called "air conditioning service") in the Demised Premises through the systems, as may be required for comfortable occupancy of the Demised Premises in accordance with the HVAC specifications incorporated as Item "1" of Exhibit C from 8:00 A.M. to 6:00 P.M. Monday through Friday except days observed by the Federal or the state government as legal holidays ("Regular Hours") throughout the year. Air cooling shall occur from April 15th through October 15th of each calendar year. If Tenant shall require air-conditioning service at any other time (hereinafter called "after hours"), Landlord shall furnish such after hours air-conditioning service upon reasonable advance notice from Tenant, and Tenant shall pay Landlord's then established charges therefor on Landlord's demand. 16.02. Use of the Demised Premises, or any part thereof, in a manner exceeding the design conditions (including occupancy and connected electrical load) specified in Exhibit C for air-conditioning service in the Demised Premises, or rearrangement of partitioning which interferes with normal operation of the air-conditioning in the Demised Premises, may require changes in the air-conditioning system servicing the Demised Premises. Such changes, so occasioned, shall be made by Landlord, at Tenant's expense, as Tenant's Changes pursuant to Article 12. ARTICLE 17 LANDLORD'S OTHER SERVICES 17.01. Landlord, subject to the provisions of Section 5.04, shall provide public elevator service, passenger and service, by elevators serving the floor on which the Demised Premises are situated during Regular Hours, and shall have at least one passenger elevator subject to call at all other times. Landlord states that except for such instances of temporary use for move in, no elevator shall be dedicated to the exclusive use of one tenant. 17.02. Landlord, subject to the provisions of Section 5.04, shall cause the Demised Premises, including the exterior and the interior of the windows thereof, to be cleaned. Tenant shall pay to Landlord on demand the costs incurred by Landlord for (a) extra cleaning work in the Demised Premises required because of (i) misuse or neglect on the part of Tenant or its employees or visitors; (ii) use of portions of the Demised Premises for preparation, serving or consumption of food or beverages, data processing, or reproducing operations, private lavatories 25 or toilets or other special purpose areas requiring greater or more difficult cleaning work than office areas (only to the extent of such additional work performed); (iii) unusual quantity of interior glass surfaces; (iv) non-building standard materials or finishes installed by Tenant or at its request after the Commencement Date; and (b) removal from the Demised Premises and the Building of so much of any refuse and rubbish of Tenant as shall exceed that ordinarily accumulated daily in the routine of business office occupancy. Landlord, its cleaning contractor, and their employees shall have after-hours access to the Demised Premises and the free use of light, power, and water in the Demised Premises as reasonably required for the purpose of cleaning the Demised Premises in accordance with Landlord's obligations hereunder. Landlord agrees that it shall reasonably permit Tenant to designate a locked "or security zone" for the storage of confidential proprietary information, which will have restricted access available to Landlord and its agents. To the extent such security zone is not available to Landlord, Tenant shall be liable for all legal requirements relating to safety, access, ventilation and maintenance and shall indemnify Landlord with respect thereto. Access shall be made available to Landlord upon reasonable notice and during emergencies. Tenant shall maintain the security zone so as to comply with reasonable requirements of Landlord's insurer. 17.03. Landlord, subject to the provisions of Section 5.04, shall furnish adequate hot and cold water to each floor of the Building for drinking, lavatory, and cleaning purposes, together with soap, towels, and toilet tissue for each lavatory. If Tenant uses water for any other purpose, Landlord, at Tenant's expense, shall install meters to measure Tenant's consumption of cold water and/or hot water for such other purposes and/or steam, as the case may be. Tenant shall pay for the quantities of cold water and hot water shown on such meters, at Landlord's cost thereof, on the rendition of Landlord's bills therefor. 17.04. Landlord, at its expense, and at Tenant's request, shall insert initial listings on the Building directory of the names of Tenant, and the names of any of their officers and employees, provided that the names so listed shall not take up more than Tenant's proportionate share of the space on the Building directory. All reasonable Building directory changes made at Tenant's reasonable request after the Tenant's initial listings have been placed on the Building directory shall be made by Landlord at the expense of Tenant, and Tenant agrees to promptly pay to Landlord as additional rent the cost of such changes within ten (10) days after Landlord has submitted an invoice therefor. 17.05. Landlord reserves the right, without any liability to Tenant, to stop service of any of the heating, ventilating, air conditioning, electric, sanitary, elevator, or other Building systems serving the Demised Premises, or the rendition of any of the other services required of Landlord under this Lease, whenever and for so long as may be necessary, by reason of accidents, emergencies, strikes, or the making of repairs or changes which Landlord is required by this Lease or by law to make or in good faith deems necessary, by reason of difficulty in securing proper supplies of fuel, steam, water, electricity, labor or supplies, or by reason of any other cause beyond Landlord's reasonable control. Notwithstanding the foregoing, if, as a result of circumstances beyond Landlord's control, any service, utility or capacity which Landlord is required to furnish or make available to Tenant under this Lease is interrupted such that Tenant is unable to utilize the Demised Premises, and such condition exists for three (3) consecutive business days after written notice thereof, then commencing from the fourth (4th) 26 business day, Tenant shall be entitled to an abatement of fixed rent and additional rent for each day thereafter that Tenant is unable to utilize the Demised Premises for the conduct of its business. If the condition exists for sixty (60) or more consecutive days, then on five (5) business days written notice, Tenant shall be entitled to terminate this Lease in which event, neither party shall have any further liability to the other. 17.06. Landlord shall make available for Tenant's use Tenant's Proportionate Share of parking spaces in common with other tenants of the Building in the parking area adjacent to the Building. Landlord agrees that except for payment of common expense charges covered by Article 5, there shall be no separate fee or cost to Tenant for use of the parking areas. Landlord states that the parking for the Building and the Building known as 379 Thornall Street, including the atrium, is contained in a parking structure attached to both buildings and surface parking area surrounding same and that the parking spaces are calculated on the basis of four (4) parking spaces per rentable 1,000 square feet of office space. 17.07. The Building and the Demised Premises shall be cleaned in accordance with the Cleaning and Maintenance Schedule set forth on Exhibit D annexed hereto and made a part hereof. 17.08. Tenant acknowledges that as part of the consideration for this Lease, and in order not to interfere with the rights of other tenants or other tenants' quiet enjoyment of the common areas of the Building and otherwise prevent Landlord from performing its services without causing increases to the cost of such services, Tenant agrees that it shall not permit its employees to congregate in hallways or elevators, shall not permit its employees to create an unsightly condition in or about any passageway from the Building or the common areas or to the parking lot/deck, with regard to smoking, including the disposal of cigarettes, in the courtyard and/or outer areas adjacent to the Building and will otherwise require its employees to act and conduct themselves in the common areas in such a manner as will not disturb other tenants or the use and enjoyment by other tenants of the Building. ARTICLE 18 ACCESS, CHANGES IN BUILDING FACILITIES, NAME 18.01. All walls, windows, and doors bounding the Demised Premises (including exterior Building walls, core corridor walls and doors, and any core corridor entrance), except the inside surfaces thereof, any terraces or roofs adjacent to the Demised Premises, and any space in or adjacent to the Demised Premises used for shafts, stacks, pipes, conduits, fan room, ducts, electric or other utilities, sinks or other Building facilities, and the use thereof, as well as access thereto through the Demised Premises for the purposes of operation, maintenance, decoration, and repair are reserved to Landlord. The exercise of Landlord's rights hereunder shall not result in a reduction in the rentable square footage of the Demised Premises or materially adversely affect Tenant's use and enjoyment of the Demised Premises. 27 18.02. Tenant shall permit Landlord to install, use, and maintain pipes, ducts, and conduits within the demising walls, bearing columns, and ceilings of the Demised Premises. 18.03. Landlord or Landlord's agent shall have the right upon reasonable advanced request to Tenant at the Demised Premises (except in emergency under clause (ii) hereof) to enter and/or pass through the Demised Premises or any part thereof, at reasonable times during reasonable hours, (i) to examine the Demised Premises and to show them to the holders of superior mortgages, prospective purchasers or mortgagees of the Building as an entirety; and (ii) for the purpose of making such repairs or changes or doing such repainting in or to the Demised Premises or its facilities, as may be provided for by this Lease or as may be mutually agreed upon by the parties or as Landlord may be required to make by law or in order to repair and maintain said structure or its fixtures or facilities. Landlord shall be allowed to take all materials into and upon the Demised Premises that may be required for such repairs, changes, repainting, or maintenance, without liability to Tenant but Landlord shall not unreasonably interfere with Tenant's use of the Demised Premises. Landlord shall also have the right to enter on and/or pass through the Demised Premises, or any part thereof, at such times as such entry shall be required by circumstances of emergency affecting the Demised Premises or the Building. 18.04. During the period of six (6) months prior to the Expiration Date, Landlord may exhibit the Demised Premises to prospective tenants. 18.05. Landlord reserves the right, at any time after completion of the Building, without incurring any liability to Tenant therefor, to make such changes in or to the Building and the fixtures and equipment thereof, as well as in or to the street entrances, halls, passages, elevators, escalators, and stairways thereof, as it may deem necessary or desirable, provided, however, that such changes shall not reduce the size of the Demised Premises nor materially adversely alter the character of the Building as a "first-class commercial office building." 18.06. Landlord may adopt any name for the Building. Landlord reserves the right to change the name or address of the Building at any time. ARTICLE 19 NOTICE OF ACCIDENTS 19.01. Landlord and Tenant mutually agree to give notice to the other, promptly after learning of (i) any accident in or about the Demised Premises for which Landlord might be liable; (ii) all fires in the Demised Premises; (iii) all damage to or defects in the Demised Premises, including the fixtures, equipment, and appurtenances thereof, for the repair of which Landlord might be responsible; and (iv) all damage to or defects in any parts or appurtenances of the Building's sanitary, electrical, heating, ventilating, air-conditioning, elevator, and other systems located in or passing through the Demised Premises or any part thereof. 28 ARTICLE 20 NON-LIABILITY AND INDEMNIFICATION 20.01. Neither Landlord nor any agent or employee of Landlord shall be liable to Tenant for any injury or damage to Tenant or to any other person or for any damage to, or loss (by theft or otherwise) of, any property of Tenant or of any other person, irrespective of the cause of such injury, damage, or loss, unless caused by or due to the negligence of Landlord, its agents, or employees without contributory negligence on the part of Tenant. Neither Tenant nor any agent or employee of Tenant shall be liable to Landlord for any injury or damage to Landlord or to any property of Landlord or of any other person or damage to any other person or their property, irrespective of the cause of such injury, damage, or loss, unless caused by or due to the negligence of Tenant, its agents, or employees without contributory negligence on the part of Landlord. 20.02. Tenant shall indemnify and save harmless Landlord and its agents against and from (a) any and all claims (i) arising from (x) the conduct or management of the Demised Premises or of any business therein, or (y) any work or thing whatsoever done, or any condition created (other than by Landlord for Landlord's or Tenant's account) in or about the Demised Premises during the term of this Lease or during the period of time, if any, prior to the Commencement Date that Tenant may have been given access to the Demised Premises, or (ii) arising from any negligent or otherwise wrongful act or omission of Tenant or any of its subtenants, invitees or licensees or its or their employees, agents, or contractors, and (b) all costs, expenses, and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon. In case any action or proceeding be brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord, shall resist and defend such action or proceeding. 20.03. Except as otherwise expressly provided in this Lease, this Lease and the obligations of Tenant hereunder shall be in no way affected, impaired or excused because Landlord is unable to fulfill, or is delayed in fulfilling, any of its obligations under this Lease by reason of strike, other labor trouble, governmental pre-emption or priorities or other controls in connection with a national or other public emergency or shortages of fuel supplies or labor resulting therefrom, or other like cause beyond Landlord's reasonable control. 20.04. Landlord shall indemnify and save Tenant harmless and its agents, employees and invitees arising from any negligent or other wrongful act or omission of Landlord or any of its subcontractors, or agents, or employees with respect to the Building and common areas and all costs, expenses, and liabilities incurred in connection with each such claim or action or proceeding brought thereon. In case any action or proceeding be brought against Tenant by reason of any such claim, Landlord, upon notice from Tenant, shall resist and defend such action or proceeding. 29 ARTICLE 21 DESTRUCTION OR DAMAGE 21.01. If the Building or the Demised Premises shall be partially or totally damaged or destroyed by fire or other cause, then whether or not the damage or destruction shall have resulted from the fault or neglect of Tenant, or its employees, agents or visitors (and if this Lease shall not have been terminated as in this Article hereinafter provided), Landlord shall repair the damage and restore and rebuild the Building and/or the Demised Premises, at its expense, with reasonable dispatch after notice to it of the damage or destruction; provided, however, that Landlord shall not be required to repair or replace any of the Tenant's Property. 21.02. If the Building or the Demised Premises shall be partially damaged or partially destroyed by fire or other cause not attributable to the fault or negligence of Tenant, its agents, or employees, the rents payable hereunder shall be abated to the extent that the Demised Premises shall have been rendered untenantable and for the period from the date of such damage or destruction to the date the damage shall be repaired or restored. If the Demised Premises or a major part thereof shall be totally (which shall be deemed to include substantially totally) damaged or destroyed or rendered completely (which shall be deemed to include substantially completely) untenantable on account of fire or other cause, the rents shall abate as of the date of the damage or destruction and until Landlord shall repair, restore, and rebuild the Building and the Demised Premises, provided, however, that should Tenant reoccupy a portion of the Demised Premises for the ordinary conduct of its work during the period of restoration work is taking place and prior to the date that the same are made completely tenantable, rents allocable to such portion shall be payable by Tenant from the date of such occupancy. 21.03. If the Building shall be totally damaged or destroyed by fire or other cause, or if the Building shall be so damaged or destroyed by fire or other cause (whether or not the Demised Premises are damaged or destroyed) as to require a reasonably estimated expenditure of more than twenty-five percent (25%) of the full insurable value of the Building immediately prior to the casualty, and Landlord elects to terminate all other leases, then in either such case Landlord may terminate this Lease by giving Tenant notice to such effect within sixty (60) days after the date of the casualty. In case of any damage or destruction mentioned in this Article, Tenant may terminate the Lease by notice to Landlord, if Landlord has not completed the making of the required repairs and restored and rebuilt the Building and the Demised Premises within twelve (12) months from the date of such damage or destruction, or within such period after such date (not exceeding six (6) months) as shall equal the aggregate period Landlord may have been delayed in doing so by adjustment of insurance, labor trouble, governmental controls, act of God, or any other cause beyond Landlord's reasonable control. In connection with any damage pursuant to this Section 21.03, if the Building is damaged during the last two (2) years of the term, then Tenant may cancel this Lease effective as of the date of the casualty by notifying Landlord within thirty (30) days of the casualty. 21.04. No damages, compensation, or claim shall be payable by Landlord for inconvenience, loss of business, or annoyance arising from any repair or restoration of any portion 2of the Demised Premises or of the Building pursuant to this Article. Landlord shall use 30 its best efforts to effect such repair or restoration promptly and in such manner as not unreasonably to interfere with Tenant's use and occupancy during such time that Tenant is able to use the Demised Premises during Landlord's restoration. 21.05. Landlord will not carry insurance of any kind on Tenant's Property, and, except as provided by law or by reason of its fault or its breach of any of its obligations hereunder, shall not be obligated to repair any damage thereto or replace the same; to the extent that Tenant shall maintain insurance on Tenant's Property, Landlord shall not be obligated to repair any damage thereto or replace the same. 21.07. The provisions of this Article shall be considered an express agreement governing any case of damage or destruction of the Demised Premises by fire or other casualty, and any law of the State of New Jersey providing for such a contingency in the absence of an express agreement, and any other law of like import, now of hereafter in force, shall have no application in such case. ARTICLE 22 EMINENT DOMAIN 22.01. If the whole of the Building shall be lawfully taken by condemnation or in any other manner for any public or quasi-public use of purpose, this Lease and the term and estate hereby granted shall forthwith terminate as of the date of vesting of title on such taking (which date is herein after also referred to as the "date of the taking"), and the rents shall be prorated and adjusted as of such date. 22.02. If any part of the Building shall be so taken, this Lease shall be unaffected by such taking, except that Tenant may elect to terminate this Lease in the event of a permanent partial taking, of or part of the Demised Premises if the Demised Premises are not be reasonably sufficient for Tenant to continue feasible operation of its business. Tenant shall give notice of such election to Landlord not later than thirty (30) days after the date of such taking. Upon the giving of such notice to Landlord, this Lease shall terminate on the date of service of notice and the rents apportioned to the part of the Demised Premises so taken shall be prorated and adjusted as of the date of the taking and the rents apportioned to the remainder of the Demised Premises shall be prorated and adjusted as of such termination date. Upon such partial taking and this Lease continuing in force as to any part of the Demised Premises, the rents apportioned to the part taken shall be prorated and adjusted as of the date of taking and from such date the fixed rent shall be reduced to the amount apportioned to the remainder of the Demised Premises and additional rent shall be payable pursuant to Article 5 according to the rentable area remaining. 22.03. Except as specifically set forth in Section 22.04. hereof, Landlord shall be entitled to receive the entire award in any proceeding with respect to any taking provided for in this Article without deduction therefrom for any estate vested in Tenant by this Lease, and 31 Tenant shall receive no part of such award. Tenant hereby expressly assigns to Landlord all of its right, title, and interest in or to every such award. Tenant may claim a condemnation award for the unamortized portion of the cost incurred by Tenant in connection with any of Tenant's Property installed pursuant to this Lease. In addition, Tenant may sue the appropriate agency for relocation expenses. 22.04. If the temporary use or occupancy of all or any part of the Demised Premises shall be lawfully taken by condemnation or in any other manner for any public or quasi-public use or purpose during the term of this Lease, Tenant shall be entitled, except as hereinafter set forth, to receive any award for such taking up to the aggregate of all fixed rent and additional rent provided any such reward does not serve to diminish Landlord's award in any respect whatsoever and, if so awarded, for the taking of Tenant's Property and for moving expenses, and Landlord shall be entitled to receive that portion which represents reimbursement for the cost of restoration of the Demised Premises. This Lease shall be and remain unaffected by such taking and Tenant shall remain responsible for all of its obligations hereunder insofar as such obligations are not affected by such taking and shall continue to pay in full the fixed rent and additional rent when due. If the period of temporary use or occupancy of the Demised Premises (or a part thereof) shall be divided between Landlord and Tenant so that Tenant shall receive so much thereof as represents the period prior to the Expiration Date and Landlord shall receive so much thereof as represents the period subsequent to the Expiration Date. All moneys received by Tenant as, or as part of, an award for temporary use and occupancy for a period beyond the date to which the rents hereunder have been paid by Tenant shall be received, held, and applied by Tenant as a trust fund for payment of the rents falling due hereunder. Any temporary taking which lasts longer than nine (9) months shall constitute a permanent taking. 22.05. In the event of any taking of less than the whole of the Building which does not result in a termination of this Lease, or in the event of a taking for a temporary use or occupancy of all or any part of the Demised Premises which does not extend beyond the Expiration Date, Landlord, at its expense, shall proceed with reasonable diligence to repair, alter, and restore the remaining parts of the Building and the Demised Premises to substantially their former condition to the extent that the same may be feasible and so as to constitute a complete and tenantable Building and Demised Premises provided that Landlord's liability under this Section 22.05 shall be limited to the net amount (after deducting all costs and expenses, including, but not limited to, legal expenses incurred in connection with the eminent domain proceeding) received by Landlord as an award arising out of such taking. If such taking occurs within the last three (3) years of the term of this Lease, Landlord shall have the right to terminate this Lease by giving the Tenant written notice to such effect within ninety (90) days after such taking, and this Lease shall then expire on that effective date stated in the notice as if that were the Expiration Date, but the fixed rent and the additional rent shall be prorated and adjusted as of the date of such taking. If such taking occurs during the last two (2) years of the term of this Lease, then Tenant shall have the right to terminate this lease by giving the Landlord written notice to such effect and the foregoing provisions of this Section 22.05 shall apply with respect to the Tenant's notification to terminate. 22.06. Should any part of the Demised Premises be taken to effect compliance with any law or requirement of public authority other than in the manner hereinabove provided in 32 this Article then, (i) if such compliance is the obligation of Tenant under this Lease, Tenant shall not be entitled to any diminution or abatement of rent or other compensation from Landlord therefor, but (ii) if such compliance is the obligation of Landlord under this Lease, the fixed rent hereunder shall be reduced and additional rents under Article 5 shall be adjusted in the same manner as is provided in Section 22.02 according to the reduction in rentable area of the Demised Premises resulting from such taking. 22.07. Any dispute which may arise between the parties with respect to the meaning or application of any of the provisions of this Article shall be determined by arbitration in the manner provided in Article 33. 22.08. Landlord and Tenant agree that any taking limited to the parking deck and surrounding areas, within the Land, which results in a permanent loss of twenty percent (20%) of the parking spaces, then such event shall be deemed a taking under this Article 22. ARTICLE 23 SURRENDER 23.01. Landlord and Tenant acknowledge that Tenant shall be obligated to restore the Demised Premises by the end of the term, including such renewals thereto, or at any earlier expiration date. For purposes of this Lease, and specifically without limitation, for purposes of Article 3, Article 13 and specifically without limitation, Section 13.02, and this Article 23, references to "restoration" or to the obligation of Tenant "to restore", shall mean the demolition of all of Landlord's Work and Tenant's Finish Work, excluding the base Building air-conditioning equipment and duct work and sprinkler systems, and of all work thereafter performed by or on behalf of Tenant in connection with Tenant Changes such that the Demised Premises are delivered to Landlord in the same manner and in the same condition as existed prior to Landlord's Work or Tenant's Finish Work as set forth in Exhibit C. Landlord agrees that Tenant shall have the right, but shall be under no obligation, to request Landlord to restore the Demised Premises upon written notice to such effect given not later than sixty (60) days prior to the expiration of the term. If Tenant requests Landlord to restore the Demised Premises as aforesaid, then Tenant's restoration obligation shall be limited to payment of such demolition costs as are specific to Tenant's then constructed Demised Premises based upon the then applicable labor costs, as may be escalated, and upon the then applicable garbage hauling costs, as may be escalated, and the quantities so involved so reduced at Landlord's discretion. If Tenant fails to perform any restoration required of it under this Lease on or before the last day of the term of this Lease or upon any earlier termination, Tenant shall be deemed a hold-over Tenant under Article 40 of this Lease until such time as Tenant has completed such restoration. ARTICLE 24 CONDITIONS OF LIMITATION 24.01. This Lease and the term and estate hereby granted are subject to the limitation that whenever Tenant shall make an assignment of the property of Tenant for the 33 benefit of creditors, or shall file a voluntary petition under any bankruptcy or insolvency law, or an involuntary petition alleging an act of bankruptcy or insolvency shall be filed against Tenant under any bankruptcy or insolvency law, or whenever a petition shall be filed by or against Tenant under the reorganization provisions of the United States Bankruptcy Act or under the provisions of any law of like imports or whenever a petition shall be filed by Tenant under the arrangement provisions of any law of like import, whenever a permanent receiver of Tenant or of or for the property of Tenant shall be appointed, then Landlord, (a) at any time of receipt of notice of the occurrence of any such event, or (b) if such event occurs without the acquiescence of Tenant, at any time after the event continues for sixty (60) days, Landlord may give Tenant a notice of intention to end the term of this Lease at the expiration of five (5) days from the date of service of such notice of intention, and upon the expiration of said five (5) day period this Lease and the term and estate hereby granted, whether or not the term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 26. 24.02. This Lease and the term and estate hereby granted are subject to the further limitation that: (a) Whenever Tenant shall default in the payment of installment of fixed rent, or in the payment of any additional rent or any other charge payable by Tenant to Landlord, or any day upon which the same ought to be paid, and such default shall continue for ten (10) days after written notice thereof in the case of fixed rent, Tenant's monthly Projected Share of Increases in Taxes and Operating Expenses, and Tenant's monthly electric charge and twenty (20) days in any other case; or, (b) Whenever Tenant shall do or permit anything to be done, whether by action or inaction, contrary to any of Tenant's obligations hereunder, and if such situation shall continue and shall not be remedied by Tenant within thirty (30) days after Landlord shall have given to Tenant a written notice specifying the same, or, in the case of a happening or default which cannot with due diligence be cured within a period of thirty (30) days and the continuance of which for the period required for cure will not subject Landlord to risk of criminal liability or foreclosure of any superior mortgage if Tenant shall not, (i) within said thirty (30) day period advise Landlord of Tenant's intention to duly institute all steps necessary to remedy such situation; (ii) duly institute within said thirty (30) day period, and thereafter diligently prosecute to completion all steps necessary to remedy the same; (iii) complete such remedy within such time after the date of giving of said notice to Landlord as shall reasonably be necessary; or (c) Whenever any event shall occur or any contingency shall arise whereby this Lease or the estate hereby granted or the unexpired balance of the term hereof would, by operation of law or otherwise, devolve upon or pass to any person, firm, or corporation other than Tenant, except as expressly permitted by Article 8; or (d) Whenever Tenant shall abandon the Demised Premises and not pay rent (unless as a result of a casualty); 34 (e) Whenever Tenant shall be deemed in default of the Other Lease; then, and in any of the foregoing cases, this Lease and the term and estate hereby granted, whether or not the term shall theretofore have commenced, shall, if the Landlord so elects, terminate upon ten (10) days written notice by Landlord to Tenant of Landlord's election to terminate the Lease and the term hereof shall expire and come end on the date fixed in such notice, with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for the rent and additional rent which subsequently accrues and for damages as provided in Article 26. 24.03. In addition to any other rights of Tenant set forth in this Lease, in the event Landlord is in default of its obligations hereof, Tenant shall give Landlord a written notice of such default and thirty (30) days within which to cure same, unless the nature of the default precludes cure within thirty (30) days in which case Landlord shall commence such cure within thirty (30) days and use its reasonable diligence to complete the cure of such default. If, Landlord fails to cure such default, Tenant shall have the right to pay such reasonable sums to cure such default and demand payment by Landlord thereof, or otherwise seek such relief as Tenant is entitled at law or in equity. Under no circumstances shall Tenant have the right to reduce its obligations to pay fixed or additional rent, or otherwise set off any sums against fixed or additional rent pending a judicial order permitting same or a judgment rendered against Landlord. ARTICLE 25 RE-ENTRY BY LANDLORD 25.01. If this Lease shall expire as provided in Article 24, Landlord or Landlord's agents and employees may immediately or at any time thereafter re-enter the Demised Premises, or any part thereof, in the name of the whole, either by summary dispossess proceedings or by any suitable action or proceeding at law, without being liable to indictment, prosecution or damages therefor, and may repossess the same, and may remove any persons therefrom, to the end that Landlord may have, hold, and enjoy the Demised Premises again as and of its first estate and interest therein. The word "re-enter", as herein used, is not restricted to its technical legal meaning. In the event of any termination of this Lease under the provisions of Article 24 or if Landlord shall re-enter the Demised Premises under the provisions of this Article or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall thereupon pay to Landlord the fixed rent and additional rent payable by Tenant to Landlord up to the time of such termination of this Lease, or of such recovery of possession or the Demised Premises by Landlord, as the case may be, and shall also pay to Landlord damages as provided in Article 26. 25.02. In the event of a breach or threatened breach by Landlord or Tenant of any of their respective obligations under this Lease, either Landlord or Tenant, as the case may be, shall also have the right of injunction. The special remedies hereunder are cumulative and 35 are not intended to be exclusive of any other remedies or means of redress to which the parties may lawfully be entitled at any time. 25.03. If this Lease shall terminate under the provisions of Article 24, or if Landlord shall re-enter the Demised Premises under the provisions of this Article, or in the event of any termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Landlord shall be entitled to retain all moneys, if any, paid by Tenant to Landlord, whether as advance rent, security, or otherwise, but such moneys shall be credited by Landlord against any fixed rent or additional rent due from Tenant at the time of such termination or re-entry or, at Landlord's option, against any damages payable by Tenant under Article 26 or pursuant to law. ARTICLE 26 DAMAGES 26.01. If this Lease is terminated under the provisions of Article 24, or if Landlord shall re-enter the Demised Premises under the provisions of Article 25, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action of any provision of law by reason of default hereunder on the part of Tenant, Tenant shall pay to Landlord as damages sums equal to the fixed rent and the additional rent (as above presumed) payable hereunder which would have been payable by Tenant had this Lease not so terminated, or had Landlord not so re-entered the Demised Premises, payable upon the due dates therefor specified herein following such termination or such re-entry and until the Expiration Date, provided, however, that if Landlord shall relet the Demised Premises during said period, Landlord shall credit Tenant with the net rents received by Landlord from such reletting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting, the expenses incurred or paid by Landlord in terminating this Lease or in re-entering the Demised Premises and in securing possession thereof, as well as the expenses of reletting, including altering and preparing the Demised Premises for new tenants, brokers' commissions, and all other expenses properly chargeable against the Demised Premises and the rental therefrom; it being understood that any such reletting may be for a period shorter or longer than the remaining term of this Lease; but in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder, nor shall Tenant be entitled in any suit for the collection of damages pursuant to this Subsection to a credit in respect of any net rents from a reletting, except to the extent that such net rents are actually received by Landlord. Damages shall also include the unamortized portion of the cost of Landlord's Work and any brokerage fees or commissions paid by Landlord. If the Demised Premises or any part thereof should be relet in combination with other space, then proper apportionment on a square foot basis shall be made of the rent received from such reletting and of the expenses of reletting. If the Demised Premises or any part thereof to be relet by Landlord for the unexpired portion of the term of this Lease, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of rent reserved upon such 36 reletting shall, prima facie, be the fair and reasonable rental value for the Demised Premises, or part thereof, so relet during the term of the reletting. Landlord agrees that it shall exert commercially reasonable efforts to mitigate damages by attempting to relet the Demised Premises. However, in the exercise of such efforts, Tenant acknowledges that Landlord shall have no obligation to Tenant to offer the Demised Premises, or any part thereof, in any manner, shape, form, or pursuant to any program different from any other space in any building owned by Landlord in the Metro Park Complex then sought to be leased by Landlord. 26.02. Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the term of this Lease would have expired if it had not been so terminated under the provisions of Article 24, or under any provision of law, or had Landlord not re-entered the Demised Premises. Nothing herein contained shall be construed to limit or preclude recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. Nothing herein contained shall be construed to limit or prejudice the right of Landlord to seek and obtain as liquidated damages by reason of the termination of this Lease or re-entry on the Demised Premises for the default of Tenant under this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved whether or not such amount be greater, equal to, or less than any of the sums referred to in Section 26.01. Except with respect to the amount of fixed rent or Tenant's finally determined Proportionate Share of Operating Expenses (which shall be governed by Article 5), any payment by Tenant may be accompanied by a letter from Tenant protesting such payment or reserving its rights under the Lease with respect to such payment. Any such protest or reservation must be made along with the payment and must be detailed and specific as to the nature of such protest or reservation. If Tenant fails to implement litigation proceedings within ninety (90) days of its reservation or protest, Tenant shall be deemed to have waived its protest and reservation. If Landlord accepts, or is otherwise as a result of litigation, required to reimburse or repay Tenant in connection with such reservation or protest, such reimbursement shall be accompanied by interest at First Union Prime Plus 2.5% per annum, which shall run from the date of protest through the date of payment by Landlord. 26.03. In addition to the foregoing and without regard to whether this Lease is terminated, Tenant shall pay to Landlord upon demand, all costs and expenses incurred by Landlord, including reasonable attorney's fees, with respect to any lawsuit instituted or defended or any action taken by Landlord to enforce all or any of the provisions of this Lease to the extent Landlord is successful. Landlord agrees that, if, after implementing proceedings or litigation, Tenant is successful therein, then Landlord shall pay Tenant's reasonable costs and expenses, including reasonable attorney fees. 37 ARTICLE 27 WAIVERS 27.01. Tenant, for Tenant, and on behalf of any and all persons claiming through or under Tenant, including creditors of all kinds, does hereby waive and surrender all right and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Demised Premises or to have a continuance of this Lease for the term hereby demised after being dispossessed or ejected therefrom by process of law or under the terms of this Lease or after the termination of this Lease as herein provided. 27.02. In the event that Tenant is in arrears in payment of fixed rent or additional rent hereunder, Tenant waives Tenant's right, if any, to designate the items against which any payments made by Tenant are to be credited, and Tenant agrees that Landlord may apply any payments made by Tenant to any items it sees fit, irrespective of and notwithstanding any designation or request by Tenant as to the items against which any such payments shall be credited. 27.03. Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Demised Premises, including any claim of injury or damage, or any emergency or other statutory remedy with respect thereto. 27.04. The provisions in Articles 16 and 17 shall be considered express agreements governing the services to be furnished by Landlord, and Tenant agrees that any laws and/or requirements of public authorities, now or hereafter in force, shall have no application in connection with any enlargement of Landlord's obligations with respect to such services. ARTICLE 28 NO OTHER WAIVERS OR MODIFICATIONS 28.01. The failure of either party to insist in any one or more instances upon the strict performance of any one or more of the obligations of this Lease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this Lease or of the right to exercise such election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act, or omission. No executory agreement hereafter made between Landlord and Tenant shall be effective to change, modify, waive, release, discharge, terminate or effect an abandonment of this Lease, in whole or in part, unless such executory agreement is in writing, refers expressly to this Lease and is signed by the party against whom enforcement of the change, modification, waiver, release, discharge, or termination of effectuation of the abandonment is sought. 38 28.02. Without limiting Section 28.01, the following provisions shall also apply: (a) No agreement to accept a surrender of all or any part of the Demised Premises shall be valid unless in writing and signed by Landlord. The delivery of keys to an employee of Landlord or of its agent shall not operate as a termination of this Lease or a surrender of the Demised Premises. If Tenant shall at any time request Landlord to sublet the Demised Premises for Tenant's account, Landlord or its agent is authorized to receive said keys for such purposes without releasing Tenant from any of its obligations under this Lease, and Tenant hereby releases Landlord from any liability for loss or damage to any of Tenant's property in connection with such subletting. (b) The receipt by Landlord or the payment by Tenant of rent with knowledge of breach of any obligation of this Lease shall not be deemed a waiver of such breach. (c) No payment by Tenant or receipt by Landlord of a lesser amount than the correct fixed rent or additional rent due hereunder shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy in this Lease or at law provided. ARTICLE 29 CURING TENANT'S DEFAULTS 29.01. If Tenant shall default in the performance of any of Tenant's obligations under this Lease, Landlord, without thereby waiving such default, may (but shall not be obligated to) perform the same for the account and at the expense of Tenant, without notice, in a case of emergency, and in any other case, only if such default continues after the expiration of (i) ten (10) days from the date Landlord gives Tenant notice of intention so to do, or (ii) the applicable grace period provided in Section 24.02 or elsewhere in this Lease for cure of such default, whichever occurs later. 29.02. Bills, invoices and purchase orders for any and all reasonable costs, charges, and expenses incurred by Landlord in connection with any such performance by it for the account of Tenant, including reasonable counsel fees, involved in collecting or endeavoring to collect the fixed rent or additional rent or any part thereof, or enforcing or endeavoring to enforce any rights against Tenant, under or in connection with this Lease, or pursuant to law, including any such cost, expense, and disbursement involved in instituting and prosecuting summary proceedings, may be sent by Landlord to Tenant monthly, or immediately, at Landlord's option, and, shall be due and payable in accordance with the terms of such bills. 39 ARTICLE 30 BROKER 30.01. Landlord and Tenant covenant, warrant, and represent that there was no broker except THE CORPORATE REAL ESTATE ALLIANCE, ("Broker") instrumental in consummating this Lease and that no conversations or negotiations were had with any broker except Broker concerning the renting of the Demised Premises. Landlord and Tenant agree to hold the other party harmless against any claims for a brokerage commission arising out of a breach by the other party of the foregoing representation. ARTICLE 31 NOTICES 31.01. Any notice, statement, demand, or other communications required or permitted to be given, rendered, or made by either party to the other, pursuant to this Lease or pursuant to any applicable law or requirement of public authority, shall be in writing (whether or not so stated elsewhere in this Lease) and shall be deemed to have been properly given, rendered or made, if sent by registered or certified mail, return receipt requested, addressed to the other party at the address hereinabove set forth (except that after the Commencement Date, Tenant's address, unless Tenant shall give notice to the contrary, shall be the Building) and shall be deemed to have been given, rendered, or made on the date following the date of mailing. Notice may also be given by facsimile transmittal or overnight mail. If such notice is given by facsimile transmittal, it shall be deemed received the day it was sent and overnight mail shall be deemed received the day after it was sent. Either party may, by notice as aforesaid, designate a different address or addresses for notices, statements, demands, or other communications intended for it. In the event of the cessation of any mail delivery for any reason, personal delivery shall be substituted for the aforedescribed method of serving notices. ARTICLE 32 ESTOPPEL CERTIFICATE 32.01. Tenant agrees, when requested by Landlord, to execute and deliver to Landlord a statement certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), certifying the dates to which the fixed rent and additional rent have been paid, whether any dispute exists with respect thereto and stating whether or not, to Tenant's best knowledge, Landlord is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default of which Tenant may have knowledge, it being intended that any such statement delivered pursuant hereto may be relied upon by others. Such statement shall be served upon Landlord by Tenant within ten (10) days of Landlord's request. Landlord agrees, when requested by Tenant, to execute and deliver to Tenant within ten (10) days of Tenant's written request therefor, a statement certifying that this Lease is unmodified and in full force and 40 effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), certifying the dates to which the fixed rent and additional rent have been paid, whether any dispute exists with respect thereto and stating whether or not, to Landlord's best knowledge, Tenant is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default of which Landlord may have knowledge, it being intended that any such statement delivered pursuant hereto may be relied upon by others. ARTICLE 33 ARBITRATION 33.01. The parties hereto shall not be deemed to have agreed to determination of any dispute arising out of this Lease by arbitration unless determination in such manner shall have been specifically provided for in this Lease. 33.02. The party desiring arbitration shall give notice to that effect to the other party and shall in such notice appoint a person as arbitrator on its behalf. Within ten (10) days, the other party by notice to the original party shall appoint a second person as arbitrator on its behalf. The arbitrators thus appointed shall appoint a third person, and such three arbitrators shall as promptly as possible determine such matter, provided, however that: (a) If the second arbitrator shall not have been appointed as aforesaid, the first arbitrator shall proceed to determine such matter; and (b) If the two arbitrators appointed by the parties shall be unable to agree, within ten (10) days after the appointment of the second arbitrator, upon the appointment of a third arbitrator, they shall give written notice to the parties of such failure to agree, and, if the parties fail to agree upon the selection of such third arbitrator within ten (10) days after the arbitrators appointed by the parties give notice as aforesaid, then within five (5) days thereafter either of the parties upon notice to the other party may request such appointment by the American Arbitration Association (or any organization successor thereto), or in it absence, refusal, failure, or inability to act, may apply for a court appointment of such arbitrator. 33.03. Each arbitrator shall be a fit and impartial person who shall have had at least five years' experience in a calling connected with the matter of dispute. 33.04. The arbitration shall be conducted, to the extent consistent with this Article, in accordance with the then prevailing rules of the American Arbitration Association (or any organization successor thereto). The arbitrators shall render their decision and award, upon the concurrence of at least two of their number, within thirty (30) days after the appointment of the third arbitrator. Such decision and award shall be in writing and shall be final and conclusive on the parties, and counterpart copies thereof shall be delivered to each of the parties. In rendering such decision and award, the arbitrators shall not add to, subtract from, or otherwise modify the provisions of this Lease. Judgment may be had on the decision and award of the arbitrator(s) so rendered in any court of competent jurisdiction. Notwithstanding the foregoing, the parties hereto agree that such judgment of the arbitrator shall not be binding and may be the 41 subject of litigation in the Superior Court of New Jersey if it is alleged that the arbitrator made a mistake of fact or law. 33.05. Each party shall pay the fees and expenses of the one of the two original arbitrators appointed by or for such party and the fees and expenses of the third arbitrator and all other expenses of the arbitration (other than the fees and disbursement of attorneys or witnesses for each party) shall be borne by the parties equally. 33.06. Notwithstanding the provisions of this Article, if any delay in complying with any requirements of this Lease by Tenant might subject Landlord to any fine or penalty, or to prosecution for a crime, or if it would constitute a default by Landlord under any mortgage, Landlord may exercise its right under Article 29, to remedy such default and in such event the sole question to be determined by the arbitrators under this Article, shall be whether Tenant is liable for Landlord's cost and expenses of curing such default. ARTICLE 34 NO OTHER REPRESENTATIONS, CONSTRUCTION, GOVERNING LAW 34.01. Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Lease. It is understood and agreed that all understandings and agreements heretofore had between the parties are merged in the Lease, which alone fully and completely express their agreements and that the same are entered into after full investigation, neither party relying upon any statement or representation not embodied in the Lease made by the other. 34.02. If any of the provisions of this Lease, or the application thereof to any person or circumstances, shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 34.03. This Lease shall be governed in all respects by the laws of the State of New Jersey. ARTICLE 35 SECURITY INTENTIONALLY DELETED 42 ARTICLE 36 PARTIES BOUND 36.01. The obligation of this Lease shall bind and benefit the successors and assigns of the parties with the same effect as if mentioned in each instance where a party is named or referred to, except that no violation of the provisions of Article 8 shall operate to vest any rights in any successor or assignee of Tenant and that the provisions of this Article shall not be construed as modifying the conditions of limitation contained in Article 24. However, the obligations of Landlord under this Lease shall not be binding upon Landlord herein named with respect to any period subsequent to the transfer of its interest in the Building as owner or lessee thereof and in event of such transfer said obligations shall thereafter be binding upon each transferee of the interest of Landlord herein named as such owner or lessee of the Building, but only with respect to the period ending with a subsequent transfer within the meaning of this Article. 36.02. If Landlord shall be an individual, joint venture, tenancy in common, partnership, unincorporated association, or other unincorporated aggregate of individuals and/or entities or a corporation, Tenant shall look only to such Landlord's estate and property in the Building (or the proceeds thereof), all consideration received by Landlord from the sale or the disposition of any part of Landlord's right, title and interest in the Building, all available condemnation awards and insurance proceeds not used for restoration, but subject to the rights of the mortgagee and, where expressly so provided in this Lease, to offset against the rents payable under this Lease for the collection of a judgment (or other judicial process) which requires the payment of money by Landlord in the event of any default by Landlord hereunder. No other property or assets of such Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder or Tenant's use or occupancy of the Demised Premises. Further, Tenant agrees that Landlord shall not be liable to Tenant for any special, indirect, or consequential damages arising out of Landlord's breach of this Lease. 36.03. Landlord agrees that Tenant shall not be liable to Landlord for any special, indirect or consequential damages arising out of Tenant's breach of this Lease, however, rents, restoration charges, interest, late charges, fees, reimbursements, damages incurred by Landlord as a result of Tenant holding over and other damages provided for in Article 26 shall not be considered special, indirect or consequential damages. ARTICLE 37 CONSENTS 37.01. Wherever it is specifically provided in this Lease that a party's consent is not to be unreasonably withheld, a response to a request for such consent shall also not be unreasonably delayed, If either Landlord or Tenant considers that the other had unreasonably withheld or delayed a consent, it shall so notify the other party within ten (10) days after receipt 43 of notice of denial of the requested consent or, in case notice of denial is not received, within twenty (20) days after making its request for the consent. ARTICLE 38 MORTGAGE FINANCING - TENANT COOPERATION 38.01. In the event that Landlord desires to seek mortgage financing secured by the Demised Premises, Tenant agrees to cooperate with Landlord in the making of any application(s) by Landlord for such financing including the delivery to Landlord's mortgage broker or mortgagee, of such information as they shall require with respect to Tenant's occupancy of the Demised Premises, including, but not limited to the current financial statement of Tenant, but Tenant shall not be required to deliver such information directly to Landlord, all of the above to be at no cost and expense of Tenant. In the event that Landlord's mortgagee shall request changes to the within Lease in order to make same acceptable to Landlord's mortgagee, Tenant agrees to consent to such changes, provided such changes shall not affect the term of this Lease nor the financial obligations of Tenant hereunder nor otherwise adversely affect Tenant's rights hereunder. The request by such mortgagee for notice of Landlord's defaults and reasonable opportunity to cure shall not be deemed adverse. ARTICLE 39 ENVIRONMENTAL COMPLIANCE 39.01. Tenant shall, at Tenant's sole cost and expense, comply with the New Jersey Industrial Site Recovery Act and the regulations promulgated thereunder (referred to as "ISRA") as same relate to Tenant's occupancy of the Demised Premises, as well as all other state, federal or local environmental law, ordinance, rule, or regulation either in existence as of the date hereof or enacted or promulgated after the date of this Lease, that concern the management, control, discharge, treatment and/or removal of hazardous discharges or otherwise affecting or affected by Tenant's use and occupancy of the Demised Premises. Tenant represents that Tenant's SIC number does not subject it to ISRA. Tenant shall, at Tenant's own expense, make all submissions to, provide all information to, and comply with all requirements of the Bureau of Industrial Site Evaluation (the "Bureau") of the New Jersey Department of Environmental Protection ("NJDEP"). Should the Bureau or any other division of NJDEP, pursuant to any other environmental law, rule, or regulation, determine that a cleanup plan be prepared and that a cleanup be undertaken because of any spills or discharge of hazardous substances or wastes at the Demised Premises which occur during the term of this Lease and were caused by Tenant or its agents or contractors, then Tenant shall, at Tenant's own expense prepare and submit the required plans and financial assurances, and carry out the approved plans. In the event that Landlord shall have to comply with ISRA by reason of Landlord's actions, Tenant shall promptly provide all information requested by Landlord for preparation of non-applicability affidavits or a Negative 44 Declaration and shall promptly sign such affidavits when requested by Landlord. Tenant shall indemnify, defend, and save harmless Landlord from all fines, suits, procedures, claims, and actions of any kind arising out of or in any way connected with any spills or discharges of hazardous substances or wastes at the Demised Premises which occur during the term of this Lease and were caused by Tenant or its agents or contractors, and from all fines, suits, procedures, claims, and actions of any kind arising out of Tenant's failure to provide all information, make all submissions and take all actions required by the Bureau or any other division of NJDEP. Tenant's obligations and liabilities under this Paragraph shall continue so long as Landlord remains responsible for any spills or discharges of hazardous substances or wastes at the Demised Premises which occur during the term of this Lease and were caused by Tenant or its agents or contractors. Tenant's failure to abide by the terms of this paragraph shall be restrainable by injunction. Tenant shall have no responsibility to obtain a "Negative Declaration" or "Letter of Non-Applicability" from the NJDEP if the sole reason for obtaining same is in connection with a sale or other disposition of the real estate by Landlord but Tenant agrees to cooperate with Landlord in Landlord's effort to obtain same and shall perform at Tenant's expense any clean up required by reason of Tenant's use and occupancy of the Demised Premises. ARTICLE 40 HOLDING OVER 40.01. Tenant will have no right to remain in possession of all or part of the Demised Premises after the expiration of the term. If Tenant remains in possession of all or any part of the Demised Premises after the expiration of the Lease, without the express consent of Landlord: (a) such tenancy will be deemed to be a periodic tenancy from month-to-month only; (b) such tenancy will not constitute a renewal or extension of this Lease for any further term; and (c) such tenancy may be terminated by Landlord upon the earlier of (i) thirty (30) days prior written notice, or (ii) the earliest date permitted by law. In such event, monthly rent will be increased to an amount equal to one hundred and twenty five percent (125%) for the first month of holdover, one hundred and fifty (150%) for the second month of holdover and two hundred percent (200%) thereafter of the monthly rent payable during the last month of the term, and any other sums due under this Lease will be payable in the amount and at the times specified in this Lease. Such month-to-month tenancy will be subject to every other term, condition, and covenant contained in this Lease. The provisions of this Section shall not be construed to relieve Tenant from liability to Landlord for damages resulting from any such holding over, or preclude Landlord from implementing summary dispossess proceedings. Tenant further acknowledges that its failure to perform any restoration required of it under this Lease shall be deemed the same as its remaining in possession of the Demised Premises after the expiration of the term, subjecting it to hold-over rent in accordance with this Article 40. 45 ARTICLE 41 CERTAIN DEFINITIONS AND CONSTRUCTIONS 41.01. For the purpose of this Lease and all agreements supplemental to this Lease, unless the context otherwise requires, the definitions set forth in Exhibit F annexed hereto shall be utilized. 41.02. The various terms which are italicized and defined in other Articles of this Lease or are defined in Exhibits annexed hereto, shall have the meanings specified in such other Articles and such Exhibits for all purposes of this Lease and all agreements supplemental thereto, unless the context shall otherwise require. 41.03. The submission of this Lease for examination does not constitute a reservation of, or option for, the Demised Premises, and this Lease becomes effective as a Lease only upon execution and delivery thereof by Landlord and Tenant. 41.04. The Article headings in this Lease and the Index prefixed to this Lease are inserted only as a matter of convenience in reference and are not to be given any effect whatsoever in construing this Lease. ARTICLE 42 RELOCATION OF TENANT 42.01. Landlord at its sole expense, on at least sixty (60) days prior written notice, may require Tenant to move from the Demised Premises to another location of comparable size and decor in the Building. By written notice to Landlord served within five (5) days of Tenant's receipt of the relocation notice, Tenant may elect to terminate this Lease in lieu of relocating to the other space and shall there upon vacate the Demised Premises within the sixty (60) day period. In the event of any such relocation, Landlord shall be responsible for the expenses of preparing and decorating the relocated premises so that they will be substantially similar to the Demised Premises being relocated at the time of such relocation. Landlord shall also bear the moving expenses of the relocation, but reserves the right to move Tenant through its own personnel. Landlord agrees that its right to relocate Tenant shall be limited to relocating Tenant to the 15th floor. Landlord shall be responsible for all costs associated with the closing of the stairwell on the 14th floor and its relocation between the 14th and 15th floor. Notwithstanding the foregoing, Landlord shall be entitled to rescind its notice of relocation within forty-five (45) days of its having forwarded to Tenant the notice of relocation or within forty-eight (48) hours of Tenant having properly elected to terminate this Lease. In the event Landlord rescinds the notice as aforesaid, this Lease shall continue in full force and effect. 46 ARTICLE 43 OPTION TO RENEW 43.01. Provided that Tenant is not then in default of the terms, covenants, and provisions of this Lease beyond any applicable notice and grace period and opportunity to cure, Landlord hereby grants to Tenant the right to renew the term of this Lease for one (1) additional period of five (5) years (the "First Renewal Period") commencing on the day after the initial Expiration Date upon the same terms and conditions as set forth in this Lease other than the fixed annual rental which shall be the Fair Market Rental of the Demised Premises at the time of the commencement of the First Renewal Period. Said fixed annual rental shall be payable in equal monthly installments in advance on the first day of each and every month of the First Renewal Period. The base year for calculation of additional rent for increase in taxes and operating expenses for the First Renewal Period shall be the assessed valuation of the Land and Building for the Tax Year in which the First Renewal Period shall commence, multiplied by the tax rate applicable to such period and the Base Year for Operating Expenses which shall be the first Operational Year in which the First Renewal Period shall commence. Tenant shall exercise the within Option by giving written notice to Landlord not later than nine (9) months prior to the initial Expiration Date, TIME BEING OF THE ESSENCE. If Tenant fails to give such notice, Tenant will be deemed to have waived such Renewal Option and the provisions of this Section shall be null and void. 43.02. Provided that Tenant is not then in default of the terms, covenants, and provisions of this Lease beyond any applicable notice and grace periods and has exercised its rights under Section 43.01 with respect to the First Renewal Period, Landlord hereby grants to Tenant the right to renew the term of this Lease for a second additional period of five (5) years (the "Second Renewal Period") commencing on the day after the expiration of the First Renewal Period upon the same terms and conditions as set forth in this Lease other than the fixed annual rental which shall be the Fair Market Rental of the Demised Premises at the time of the commencement of the Second Renewal Period. Said fixed annual rental shall be payable in equal monthly installments in advance on the first day of each and every month of the Second Renewal Period. The base year for calculation of additional rent for increase in taxes and operating expenses for the Second Renewal Period shall be the assessed valuation of the Land and Building for the Tax Year in which the Second Renewal Period shall commence, multiplied by the tax rate applicable to such period and the Base Year for Operating Expenses which shall be the first Operational Year in which the Second Renewal Period shall commence. Tenant shall exercise the within Option by giving written notice to Landlord not later than nine (9) months prior to the expiration of the First Renewal Period, TIME BEING OF THE ESSENCE. If Tenant fails to give such notice, Tenant will be deemed to have waived such Renewal Option and the provisions of this Section shall be null and void. 47 43.03. Fair Market Value shall mean the rents obtainable for comparable space in the Metro Park, Edison, New Jersey market area. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. WITNESS: LANDLORD: THORNALL ASSOCIATES, L.P., a New Jersey Limited Partnership /s/ Michael Alfieri - ---------------------------- ---------------------------------------- By: Michael Alfieri Title: Partner ATTEST: TENANT: PXRE CORPORATION, a Delaware Corporation /s/ Sanford M. Kimmel - ---------------------------- ---------------------------------------- By: Sanford M. Kimmel Title: Senior V.P. & Treasurer 48 EXHIBIT A DESCRIPTION OF LAND 399 THORNALL STREET ALL that certain tract, lot and parcel of land lying and being in the Township of Edison, County of Middlesex, and State of New Jersey being more particularly described as follows: BEGINNING at a point in the Southeasterly Right-of-Way line of Thornall Street, distant Southwestwardly 1,234.34 feet from the intersection formed by the Southeasterly Right-of-Way line of Thornall Street, with the Southwesterly Right-of-Way line of Wood Avenue South and from said beginning point running thence: 1. South 43 degrees 27 minutes 01 seconds East along the common line between lot 2-B-1 and Lot 2-B-4 in Block 676, as shown on the current Township of Edison Tax Map 919.28 feet to a point; running thence 2. South 55 degrees 02 minutes 33 seconds West, along the common line between Lot 2-B-4 and Lot 5 in Block 676, as shown on said Tax Map, 134.80 feet to an angle point; running thence 3. South 31 degrees 14 minutes 31 seconds West, 99.16 feet to a point; running thence 4. North 53 degrees 23 minutes 59 seconds West, 612.14 feet to a point; running thence 5. North 36 degrees 36 minutes 01 seconds East, 76.19 feet to a point; running thence 6. North 53 degrees 23 minutes 59 seconds West 264.80 feet to a point in the new southeasterly Right-of-Way line of Thornall Street; running thence 7. Northeastwardly along the new southeasterly Right-of-Way line of Thornall Street, along a curve to the left having a radius of 4,694.00 feet and an arc length of 42.71 feet to a point of tangency; thence running 8. North 31 degrees 44 minutes 10 seconds East, continuing along said Right-of-Way line of Thornall Street, 32.06 feet to a point of curvature; running thence 9. Northeastwardly still along the above mentioned new Right-of-Way line of Thornall Street, along a curve to the right, having a radius of 894.19 feet, an arch length of 235.66 feet to a point, said point being the point and place of BEGINNING. Being also known as Lot 2-B-4 in Block 676 on the current Tax Map of the Township of Edison, Middlesex County, New Jersey. Subject to easements, restrictions, and covenants of record and such state of facts as an accurate survey may reveal. 1A EXHIBIT B FLOOR PLAN SEE ATTACHED 1B [PXRE CORPORATION FLOOR PLAN DIAGRAM] EXHIBIT B EXHIBIT C SEPARATE WORKLETTER 1C THORNALL ASSOCIATES, AS LANDLORD PXRE CORPORATION, AS TENANT EXHIBIT C LANDLORD'S WORK 1. HVAC - Perimeter baseboard electric heat, central high velocity fan system which utilizes a minimum of 10% to a maximum of 100% fresh air to maintain no less than 68 degrees interior at zero degrees exterior, with a 15-mile per hour wind. Air-cooling shall maintain no more than 78 degrees F dry bulb with approximately 50% relative humidity when the outdoor conditions are 91 degrees F dry bulb. The above heating and cooling standard is for normal office use only which shall be deemed to be one person for every 200 square feet in any given or confined area which shall not include areas with special HVAC requirements such as computer rooms, conference rooms, cafeterias, high density or excessive heat producing equipment. Perimeter baseboard electric heat is used during winter operations and an air cooling system is utilized during summer operations. 2. Window covering - one (1) building-standard venetian blind per window. 3. Landlord shall complete the interior of the Demised Premises in accordance with space plans and specifications that shall be supplied by the Tenant. The location of the space is shown in Exhibit B, dated October 5, 1999. 4. Landlord shall permit Tenant and/or its agents or labor to enter the Premises prior to the Commencement Date of the Lease upon prior reasonable written request from Tenant, at a time designated by Landlord consistent with Landlord's construction schedule in order to install telephone outlets, data lines and computer equipment for the Computer Room. The foregoing right to enter prior to the Commencement Date, however, is conditioned upon Tenant's not interfering with Landlord's labor. If at any time such entry shall cause disharmony, interference, or union disputes of any nature whatsoever, or if Landlord shall, in Landlord's sole reasonable judgment, determine that such entry, such work and the continuance thereof shall interfere with, hamper or prevent Landlord from proceeding with the completion of the Demised Premises at the earliest possible date, then this right of entry may be withdrawn by Landlord immediately upon written notice to Tenant but shall be reinstated as soon as Landlord deems Tenant's re-entry practicable. Such entry shall be at Tenant's sole risk. In the event that Tenant's agents or labor incur any charges from Landlord, including but not limited to, charges for clean-up costs necessitated by Tenant's entry, such charges shall be deemed an obligation of Tenant and shall be collectible as additional rent pursuant to the Lease. Landlord shall have no liability for any furnishings, equipment or other items placed in the Demised Premises and Tenant shall indemnify, defend and hold Landlord harmless for any damage, loss or expense caused by it or its contractors or agents. Tenant shall also provide evidence of insurance in accordance with the Lease and evidence of Worker's Compensation Insurance to -2- protect Landlord and Tenant during the period of Tenant's entry prior to the Commencement Date. 5. At any time after substantial completion of Landlord's Work, Landlord, upon reasonable notice to Tenant, may enter the Demised Premises, at such times as shall be reasonably acceptable to Landlord and Tenant, to complete unfinished details of Landlord's Work and entry by Landlord, its agents, servants, employees or contractors for such purpose shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or its agents. 6. Tenant further agrees that if an elevator lobby or corridor is included in Tenant's Demised Premises or if by virtue of the size and configuration of Tenant's Demised Premises, other tenants of the Building when in the lobby, elevator or corridor can see into Tenant's Demised Premises through a demising wall by a glass window, the Landlord shall have the sole and final decision as to the color and design of all paint, wall coverings and floor coverings so visible from the lobby, elevator or corridor. 7. The Tenant shall provide the Landlord with a complete set of architectural and engineering documents to bid and for construction of the Tenant fit-out. These shall be submitted to the Landlord on or before November 30, 1999. Delivery after November 30, 1999 shall constitute a Tenant Delay, to the extent Landlord's Work is actually delayed. The Landlord shall have the right to review and approve these drawings. 8. The Landlord shall provide the Tenant with $23.00 per rentable square foot for the Tenant's improvements. This allowance shall be used in connection with the cost of Landlord's Work and for no other purpose of readying the Demised Premises for occupancy, such as telephone, furniture, or computer systems. 9. For any costs above the Landlord's Work, the Tenant shall pay the Landlord a 33% payment with the return of the work authorization to proceed, a 33% payment thirty (30) days after receipt of the building permit, a 29% payment upon Landlord's return of a Certificate of Occupancy and a final 5% payment upon Landlord's completion of the punchlist items. The punchlist shall be delivered by the Tenant to the Landlord within ten business days after the issuance of a Certificate of Occupancy. The punchlist items shall be limited to the scope and the extent of the initial construction fit-out work contained in the construction documents as provided by the Tenant to the Landlord per Paragraph 7 of Exhibit "C" above. After notice by the Landlord to the Tenant that the punchlist items are complete, then the Tenant shall pay the final 5% to the Landlord. -3- 10. The Landlord shall bid out all the trades to duly qualified subcontractors. The Tenant may make recommendations to the Landlord for qualified subcontractors, but the Landlord shall have the final choice as to which subcontractors are qualified. The Landlord shall pick the low bidder unless the Landlord and Tenant agree upon a higher bidder. The final cost for the entire job shall include: General conditions as defined in Division B10.00 of R. S. Means Construction Cost Data, as applicable to the Tenant's fit-out project All of the subcontractors' bids All demolition work shall be performed by the Landlord Overhead at 13% of the general conditions and the subcontractors' bids above Profit at 10% of all the items listed above Architectural fees, if any All charges associated with the review of mechanical, electrical, sprinkler, plumbing and structural engineering documents, if any 11. The Tenant shall be responsible for the telephone and computer installation. The Landlord shall coordinate the timing of these items with the Tenant. The Landlord shall not charge any overhead fees or profit for such coordination work. 12. All changes to Landlord's Work requested by Tenant shall be in writing. Landlord shall advise Tenant before accepting the change, of the cost thereof or, if applicable, the savings and the delay in the substantial completion, if any, caused by the change and, for any major changes to Landlord's Work, any additional restoration requirements, if any. Tenant shall have five (5) days from receipt of this information from Landlord to advise Landlord to proceed with the change or to withdraw the request. Tenant shall pay the cost of the change order within thirty (30) days after receipt of Landlord's invoice with respect to such change if there shall be an increased cost to Landlord as a result thereof. 13. The Landlord shall provide seven (7) watts per rentable square foot for the Tenant's electric in the suite, exclusive of HVAC. 14. The Tenant shall have the option to install a stairwell between the 12th and 14th Floors, subject to the review and approval by the Landlord of its location and for approval by the Landlord of the architectural and engineering drawings for the stairwell, which location has been approved by Landlord as set forth in the plan, titled PL-1A, dated July 15, 1999. 15. The Landlord will provide a location for the supplemental HVAC outside the building. EXHIBIT D CLEANING AND MAINTENANCE SPECIFICATIONS Landlord will provide building standard cleaning services to the tenant area and the ground floor lobby area in accordance with the following specifications: NIGHTLY 1. GENERAL CLEANING a. Empty all waste and recycling receptacles, removing waste and recycling material to designated central location for disposal. b. Empty and damp wipe clean all ashtrays. Screen and clean all sand urns, wipe exterior of sand urns. c. Wash and disinfect all water coolers and drinking fountains. d. Wipe clean fingermarks, smudges, etc. from all doors, security desks, wall surfaces, furniture system trim, fixtures, cabinets, files, conference tables, chairs, partition glass, flat ledges, heating units, baseboards, blinds and window ledges. e. Replace plastic liners in all waste-disposal cans. f. Hand brush and/or vacuum all upholstered furniture, including furniture system fabric panels. g. Doors: Wash and wipe clean all kick panels, push/pull areas. h. Wash and disinfect all public telephones. i. Wipe down mail chute and mail depository nightly. j. Clean all Tenant's interior stairways. 2. FLOORS Group A - Ceramic tile, marble, terrazzo. 1D Group B - Linotile, asphalt, koroseal, plastic vinyl, rubber, wood, cork, or other types of floors and base. a. All floors in Group A to be swept and wet-mopped. Move light furniture, planters and equipment other than desks and files. b. All floors in Group B to be dry mopped, using a "dustdown" preparation, and spots to be removed by wet process. c. Main lobby to be machine buffed nightly. 3. VACUUMING a. Vacuum all rugs and carpeted areas, moving light furniture and office equipment other than desks and file cabinets. Spot clean to remove soluble spots which safely respond to standard spotting procedures without risk of injury to color or fabric. 4. WASHROOMS AND TOILETS a. Sweep, mop, rinse, and dry floors. Polish mirrors, chrome plumbing and bright-work. Clean enameled surfaces. b. Wash and disinfect basins, urinals, and bowls using scouring powder to remove stains, making certain to clean undersides of rims of urinals and bowls. c. Wash and disinfect both sides of all toilet seats. d. Supply and service all toilet tissue, soap, towels, and sanitary napkins. Sanitary napkins will be supplied in coin operated dispensers. e. All wastepaper cans and all receptacles are to be emptied and new plastic liners installed. f. Hand dust and wash clean all partitions, tile walls, dispensers, and receptacles in lavatories and vanity area. g. Empty and clean sanitary disposal receptacles and install new plastic liners. 5. ELEVATORS 2D a. Clean the floor in accordance with specifications outlined above based upon the type of flooring installed. The doors, metal wall surfaces, wood wall surfaces, ceiling and fixtures shall be dusted. 6. GLASS a. Clean both sides of all lobby glass, building entrance doors, upper lobby glass, furniture system partition glass and interior wall glass. 7. STAIRWELLS a. Check all stairwells and landings nightly throughout entire demised area, and keep in clean condition. All stairways and landings will be dry mopped nightly. Railings, ledges, and equipment will be dusted nightly. WEEKLY 8. GENERAL CLEANING a. Hand dust all office equipment, furniture, fixtures, including paneling, shelving, window sills and mullions, telephones and all flat surfaces with a treated cloth or yarn duster. 9. FLOORS a. Floors in Group B will be wet mopped weekly. 10. WASHROOMS AND TOILETS a. Wash down walls in washrooms and stalls, from trim to floor. 11. ELEVATORS a. The doors, surfaces and fixtures shall be damp wiped. The floors shall be stripped, waxed and machine buffed weekly. 12. STAIRWAYS a. These areas shall be stripped, waxed and buffed weekly. This will be governed by the amount of wear due to weather and other conditions. 13. MAIN LOBBY 3D a. Clean walls with damp cloth and dust weekly. MONTHLY 14. FLOORS a. Waxing, buffing, stripping or machine scrubbing of the floors in Group A and B. 15. HIGH DUSTING a. Dust all closet shelving and wash all closet floors, when accessible. QUARTERLY 16. GLASS a. Clean inside of windows. 17. HIGH DUSTING a. Damp dust all pictures, charts, graphs, light fixtures, etc., not reached in nightly cleaning. b. Dust clean all vertical surfaces such as walls, partitions, doors, door bucks and other surfaces not reached in nightly cleaning. c. Damp dust air conditioning diffusers, wall grills, door louvers, registers and venetian blinds. SEMI ANNUALLY 18. GLASS a. Clean all doors and exterior side of exterior windows. ANNUALLY 19. HIGH DUSTING a. Dust interior and exterior of light fixtures. 4D MISCELLANEOUS a. On completion of work, all slop sinks are to be thoroughly cleaned, and cleaning equipment to be stored neatly in designated locations. b. All cleaning services except those performed by day porters, window cleaners, and matrons are to be performed nightly, five nights per week. No Saturday, Sunday or Building holiday service to be provided. In no event shall performance of any cleaning service interfere with Tenant's normal business operation. c. The Contractor or Landlord is to furnish all necessary approved cleaning materials, implements, and machinery for the satisfactory completion of the work. This includes scaffolding, vacuum machines, scrubbing machines, etc. d. Contractor shall furnish proof of liability and property damage insurance reasonably acceptable to Landlord, and Workman's Compensation Insurance in amounts required under the laws of New Jersey. e. Tenant will be charged for cleaning services in excess of the specifications outlined above. f. Tenant will be charged for the incremental cost to clean any areas of the Demised Premises used for special purposes requiring more difficult cleaning work than office areas including, but not limited to, private toilets and showers, dining areas, cafeteria, kitchen, etc. 5D EXHIBIT E RULES AND REGULATIONS 1. The rights of tenants in the entrances, corridors, elevators, and escalators of the Building are limited to ingress to and egress from the tenants' demised premises for the tenants and their employees, licensees, and invitees, and no tenant shall use or permit the use of the entrances, corridors, escalators, or elevators for any other purpose. No tenant shall invite to the tenant's demised premises, or permit the visit of, persons in such numbers or under such conditions as to interfere with the use and enjoyment of any of the plazas, entrances, corridors, escalators, elevators, and other facilities of the Building by other tenants. Fire exits and stairways are for emergency use only, and they shall not be used for any other purpose by the tenants, their employees, licensees, or invitees. No tenant shall encumber or obstruct, or permit the encumbrance or obstruction of any of the sidewalks, plazas, entrances, corridors, escalators, elevators, fire exits, or stairways of the Building. The Landlord reserves the right to control and operate the public portions of the Building and the public facilities , as well as facilities furnished for the common use of the tenants, in such manner as it deems best for the benefit of the tenants generally. 2. The Landlord may refuse admission to the Building outside of ordinary business hours to any person not having a pass issued by the Landlord or the tenant whose demised premises are to be entered or not otherwise properly identified, and may require all persons admitted to or leaving the Building outside of ordinary business hours to register. Any person whose presence in the Building at any time shall, in the judgment of the Landlord, be prejudicial to the safety, character, reputation, and interests of the Building or of its tenants may be denied access to the Building or may be ejected therefrom. In case of invasion, riot, public excitement, or other commotion, the Landlord may prevent all access to the Building during the continuance of the same, by closing the doors or otherwise, for the safety of the tenants and protection of property of the Building. The Landlord may require any person leaving the Building with any package or other object to exhibit a pass from the tenant from whose premises the packaging or object is being removed, but the establishment and enforcement of such requirement shall not impose any responsibilities on the Landlord for the protection of any tenant against the removal of property from the premises of the tenant. The Landlord shall in no way be liable to any tenant for damages or loss arising from the admission, exclusion, or ejection of any person to or from the tenant's premises or the Building under the provisions of this rule. Canvassing, soliciting, or peddling in the Building is prohibited, and every tenant shall cooperate to prevent the same. 3. No tenant shall obtain or accept for use in its demised premises ice, food for on premises preparation other than warming, beverage towel, barbering, boot blackening, floor polishing, lighting maintenance, cleaning, or other similar services from any persons not authorized by the Landlord in writing to furnish such services, provided that the charges for such services by persons authorized by the Landlord are not excessive and where appropriate and 1E consonant with the security and proper operation of the Building sufficient persons are so authorized for the same service to provide tenants with a reasonably competitive selection. Such services shall be furnished only at such hours, in such places within the Tenant's Demised Premises and under such reasonable regulations as may be fixed by the Landlord. Tenant may have a coffee service, subject to Landlord's approval, and a kitchen for the use of its employees commensurate with normal office use. 4. The cost of repairing any damage to the public portions of the Building or the public facilities or to any facilities used in common with other tenants, caused by a tenant or the employees, licensees, or invitees of the tenant shall be paid by such tenant. 5. No lettering, sign, advertisement, notice or object shall be displayed in or on the windows or doors, or on the outside of any tenant's demised premises, or at any point inside any tenant's premises where the same might be visible outside of such demised premises, except that the name of the tenant may be displayed on the entrance door of the tenant's demised premises, and in the elevator lobbies of the floors which are occupied entirely by any tenant, subject to the approval of the Landlord as to the size, color, and style of such display. The inscription of the name of the tenant on the door of the tenant's demised premises shall be done by the Landlord at the expense of the tenant. 6. No awnings or other projections over or around the windows shall be installed by any tenant, and only such window blinds as are supplied or permitted by the Landlord shall be used in a tenant's demised premises. Linoleum, tile, or other floor covering shall be laid in a tenant's demised premises only in a manner approved by the Landlord. 7. The Landlord shall have the right to prescribe the weight and position of safes and other objects of excessive weight, and no safe or other object whose weight exceeds the lawful load for the area upon which it would stand shall be brought into or kept upon a tenant's demised premises. If, in the judgment of the Landlord, it is necessary to distribute the concentrated weight of any heavy object, the work involved in such distribution shall be done at the expense of the tenant and in such manner as the Landlord shall determine. The moving of safes and other heavy objects shall take place only outside of ordinary business hours upon the same upon previous notice to the Landlord, and the persons employed to move the same in and out of the Building shall be reasonably acceptable to the Landlord and if so required by law, shall hold a Master Rigger's license. Freight, furniture, business equipment, merchandise, and bulky matter of any description shall be delivered to and removed from the demised premises only in the freight elevators and through the service entrances and corridors, and only during hours and in a manner approved by the Landlord. Arrangements will be made by the Landlord with any tenant for moving large quantities of furniture and equipment into or out of the Building. 8. No machines or mechanical equipment of any kind other than typewriters and other ordinary portable business machines, may be installed or operated in any tenant's demised premises without Landlord's prior written consent, and in no case (even where the same are of a type so accepted or as so consented to by Landlord) shall any machines or mechanical equipment be so placed or operated as to disturb other tenants; but machines and mechanical 2E equipment which may be permitted to be installed and used in a tenant's demised premises shall be so equipped, installed and maintained by such tenant as to prevent any disturbing noise, vibration, or electrical or other interference from being transmitted from such premises to any other area of the Building. 9. No noise, including the playing of any musical instruments, radio or television, which, in the judgment of the Landlord might disturb other tenants in the building, shall be made or permitted by any tenant, and no cooking shall be done in the tenant's demised premises, except as expressly approved by the Landlord. Nothing shall be done or permitted in any tenants' demised premises, and nothing shall be brought into or kept in any tenants' demised premises, which would impair or interfere with any of the Building services or the proper and economic heating, cleaning, or other servicing of the Building or the demised premises, or the use of enjoyment by any other tenant of any other demised premises, nor shall there be installed by any tenant any ventilating, air conditioning, electrical or other equipment of any kind which, in the judgment of the Landlord, might cause any such impairment or interference. No dangerous, inflammable, combustible, or explosive object or material shall be brought into the building by any tenant or with the permission of any tenant. Any cuspidors or similar containers or receptacles used in any tenants' demised premises shall be cared for and cleaned by and at the expense of the tenant. 10. No acids, vapors, or other materials shall be discharged or permitted to be discharged into the waste lines, vents or flues of the Building which may damage them. The water and wash closets and other plumbing fixtures in or serving any tenant's premises shall not be used for any purpose other than the purposes for which they were designed or constructed, and no sweepings, rubbish, rags, acids or other foreign substances shall be deposited therein. 11. No additional locks or bolts of any kind shall be placed upon any of the doors or windows in any tenants' demised premises and no lock on any door therein shall be changed or altered in any respect. Additional keys for a tenant's demised premises and toilet rooms shall be procured only from the Landlord, which may make a reasonable charge therefor. Upon the termination of a tenant's lease, all keys of the tenant's demised premises and toilet rooms shall be delivered to the Landlord. 12. All entrance doors in each tenants' demised premises shall be left locked, and all windows shall be left closed by the tenant when the tenant's demised premises are not in use. Entrance doors shall not be left open at any time. 13. Hand trucks not equipped with rubber tires and side guards shall not be used within the Building. 14. All windows in each tenant's demised premises shall be kept closed and all blinds therein above the ground floor shall be lowered when and as reasonably required because of the position of the sun, during the operation of the Building air conditioning system to cool or ventilate the tenant's demised premises. 3E EXHIBIT F DEFINITIONS (a) The term "mortgage" shall mean an indenture of mortgage and deed of trust to a trustee to secure an issue of bonds, and the term "mortgagee" shall mean such a trustee. (b) The terms "include," "including," and "such as" shall each be construed as if followed by the phrase "without being limited to." (c) References to Landlord as having no liability to Tenant or being without liability to Tenant, shall mean the Tenant is not entitled to terminate this Lease, or to claim actual or constructive eviction, partial or total, or to receive any abatement or diminution of rent, or to be relieved in any manner of any of its other obligations hereunder, or to be compensated (d) The term laws and/or requirements of public authorities and words of like import shall mean laws and ordinances of any or all of the Federal, state, city, county, and borough governments and rules, regulations, orders and/or directives of any or all departments, subdivisions, bureaus, agencies, or office thereof, or of any other governmental, public, or quasipublic authorities, having jurisdiction in the premises, and/or the direction of any public officer pursuant to law. (e) The term requirements of insurance bodies and words of like import shall mean rules, regulations, orders, and other requirements of the New Jersey Board of Fire Underwriters and/or similar body performing the same or similar functions and having jurisdiction or cognizance of the Building and/or the Demised Premises. (f) The term repair shall be deemed to include restoration and replacement as may be necessary to achieve and/or maintain good working order and condition. (g) Reference to termination of this Lease includes expiration or earlier termination of the term of this Lease or cancellation of this Lease pursuant to any of the provisions of this Lease or to law. Upon a termination of this Lease, the term and estate granted by this Lease shall end at noon of the date of termination as if such date were the date of expiration of the term of this Lease and neither party shall have any further obligation or liability to the other after such termination (i) except as shall be expressly provided for in this Lease, or (ii) except for such obligation as by its nature or under the circumstances can only be, or by the provisions of this Lease, may be performed after such termination and, in any event, unless expressly otherwise provided in this Lease, any liability for a payment which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this Lease. EXHIBIT G SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS AGREEMENT is made and entered into as of this _______ day of ________, 199___, by and among _______________________________________ (" Tenant ") and NEW YORK LIFE INSURANCE COMPANY, a New York mutual insurance company [NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION, a Delaware corporation] (" Lender"), whose principal address is 51 Madison Avenue, New York, New York, and THORNALL ASSOCIATES, L.P. ("Landlord"). RECITALS: A. Lender has made a mortgage loan (the " Loan ") to Landlord in the amount of $36,000,000 secured by a mortgage (the " Mortgage ") on the real property legally described in Exhibit "A" attached hereto (the "Premises"); B. Tenant is the present lessee under a lease dated _______________________ made by Landlord demising a portion of the Premises and other property (said lease and all amendments thereto being referred to as the "Lease"); C. The Loan terms require that Tenant subordinate the Lease and its interest in the Premises in all respects to the lien of the Mortgage and that Tenant attorn to Lender; and D. In return, Lender is agreeable to not disturbing Tenant's possession of the portion of the Premises covered by the Lease (the " Demised Premises "), so long as Tenant is not in default under the Lease. NOW THEREFORE, in consideration for the mutual covenants contained herein and other consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: AGREEMENTS: 1. Subordination. The Lease, and the rights of Tenant in, to and under the Lease and the Demised Premises, are hereby subjected and subordinated to the lien of the Mortgage and to any modification, reinstatement, extension, supplement, consolidation or replacement thereof as well as any advances or re-advances with interest thereon and to any mortgages or deeds trust on the Premises which may hereafter be held by Lender. -2- 2. Tenant Not to be Disturbed. In the event it should become necessary to foreclose the Mortgage or Lender should otherwise come into possession of title to the Premises, Lender will not join Tenant in summary or foreclosure proceedings unless required by law in order to obtain jurisdiction, but in such event no judgment foreclosing the Lease will be sought, and Lender will not disturb the use and occupancy of Tenant under the Lease so long as Tenant is not in default under any of the terms, covenants or conditions of the Lease and has not prepaid the rent except monthly in advance as provided by the terms of the Lease. 3. Tenant to Attorn to Lender. Tenant agrees that in the event any proceedings are brought for foreclosure of the Mortgage, it will attorn to the purchaser as the landlord under the Lease. The purchaser by virtue of such foreclosure shall be deemed to have assumed and agreed to be bound, as substitute landlord, by the terms and conditions of the Lease until the resale or other disposition of its interest by such purchaser, except that such assumption shall not be deemed of itself an acknowledgment by such purchaser of the validity of any then existing claims of Tenant against any prior landlord (including Landlord). All rights and obligations under the Lease shall continue as though such foreclosure proceedings had not been brought, except as aforesaid. Tenant agrees to execute and deliver to any such purchaser such further assurance and other documents, including a new lease upon the same terms and conditions of the Lease, confirming the foregoing as such purchaser may reasonably request. Tenant waives the provisions (i) contained in the Lease or any other agreement relating thereto and (ii) of any statute or rule of law now or hereafter in effect which may give or purport to give it any right or election to terminate or otherwise adversely affect the Lease and the obligations of Tenant thereunder by reason of any foreclosure proceeding. 4. Limitations. Notwithstanding the foregoing, neither Lender nor such other purchaser shall in any event be: (a) liable for any act or omission of any prior landlord (including Landlord); (b) obligated to cure any defaults of any prior landlord (including Landlord) which occurred prior to the time that Lender or such other purchaser succeeded to the interest of such prior landlord under the Lease; (c) subject to any offsets or defenses which Tenant may be entitled to assert against any prior landlord (including landlord); (d) bound by any payment of rent or additional rent by Tenant to any prior landlord (including Landlord) for more than one month in advance; (e) bound by any amendment or modification of the Lease made without the written consent of Lender or such other purchaser, or -3- (f) liable or responsible for, or with respect to, the retention, application and/or return to Tenant of any security deposit paid to any prior landlord (including Landlord), whether or not still held by such prior landlord, unless and until Lender or such other purchaser has actually received for its own account as landlord the full amount of such security deposit. 5. Acknowledgement of Assignment of Lease and Rent. Tenant acknowledges that it has notice that the Lease and the rent and all other sums due thereunder have been assigned or are to be assigned to Lender as security for the Loan secured by the Mortgage. In the event that Lender notifies Tenant of a default under the Mortgage and demands that Tenant pay its rent and all other sums due under the Lease to Lender, Tenant agrees that it will honor such demand and pay its rent and all other sums due under the Lease directly to Lender or as otherwise required pursuant to such notice. 6. Limited Liability. Tenant acknowledges that in all events, the liability of Lender and any purchaser shall be limited and restricted to their interest in the Premises and shall in no event exceed such interest. 7. Lender's Right to Notice of Default and Option to Cure: Tenant will give written notice to Lender of any default by Landlord under the Lease by mailing a copy of the same by certified mail, postage prepaid, addressed as follows (or to such other address as may be specified from time to time by Lender to Tenant): To Lender: New York Life Insurance Company [New York Life Insurance and Annuity Corporation] 51 Madison Avenue New York, NY 10010 Attn: Senior Vice President Mortgage Finance Department Upon such notice, Lender shall be permitted and shall have the option, in its sole and absolute discretion, to cure any such default during the period of time during which the Landlord would be permitted to cure such default, but in any event, Lender shall have a period of thirty (30) days after the receipt of such notification to cure such default, provided, however, that in the event Lender is unable to cure the default by exercise of reasonable diligence within such 30 day period, Lender shall have such additional period of time as may be reasonably required to remedy such default with reasonable dispatch. Tenant waives the provisions of any statute or rule of law now or hereafter in effect which may give or purport to give it any right or election to terminate or otherwise adversely affect the Lease and the obligations of Tenant thereunder in connection with any foreclosure proceedings. -4- 8. Successors and Assigns. The provisions of this Agreement are binding upon and shall inure to the benefit of the heirs, successors and assigns of the parties hereof. IN WITNESS WHEREOF, the parties hereto have executed these presents the day and year first above written; WITNESSED: TENANT: ___________________________________________ ______________________________ By:________________________________________ Name:______________________________________ ______________________________ Title:_____________________________________ LENDER: NEW YORK LIFE INSURANCE COMPANY [NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION] ______________________________ By:________________________________________ Name:______________________________________ ______________________________ Title:_____________________________________ The terms of the above Agreement are hereby consented, agreed to and acknowledged. LANDLORD: THORNALL ASSOCIATES, L.P. ______________________________ By:________________________________________ Name: Michael Alfieri ______________________________ Title: Partner EX-10 10 EXHIBIT 10.34 March 14, 2000 Gerald L. Radke President & Chief Executive Officer PXRE Corporation 399 Thornall Street Edison, NJ 08337 Re: Investment Advisory Services Dear Mr. Radke: This letter will serve to confirm our agreement that Mariner Investment Group, Inc. ("Mariner") will provide investment advisory, trade execution and related services to PXRE Corporation and its U.S. affiliates (the "Client") on the terms, and subject to the conditions, set forth herein. Scope of Responsibilities Mariner will perform the services and have the authority set forth herein with respect to certain cash, securities and other investment assets of the Client specified in writing by the Client and all proceeds thereof and additions thereto (the "Account"). Mariner will supervise and direct the investment of the Account in accordance with, and subject to, the investment guidelines provided by the Client in writing (a copy of the initial guidelines being annexed as Exhibit A), as the same may be amended, revised or replaced from time to time by the Client (the "Investment Guidelines"). Subject to the foregoing, Mariner, as agent and attorney-in-fact with respect to the Account may, when it deems appropriate, buy, sell, exchange, retain, reinvest or otherwise trade in securities of the types specified in the Investment Guidelines and place orders for the execution of such investment transactions with or through such brokers, dealers or other persons as Mariner may select; provided, however, that Mariner shall consult with Client prior to consummating any transaction, or series of related transactions, in excess of $5,000,000. Mariner shall deliver, or shall cause to be delivered, to Client or to such custodian as Client may direct in writing to Mariner, all assets in the Account, as Client may direct from time to time, and Mariner shall not retain any assets in the Account. Client may make any addition to or withdrawal from the Account at any time and in any amount that Client determines, so long as Client promptly notifies the Manager in writing of any addition to the Account and the amount of the addition, and so long as Client makes no withdrawal from the Account without first delivering to the Manager within a reasonable time prior to the withdrawal, written notice of intended withdrawal and the amount of the withdrawal. Mariner will comply with all legal requirements and rules of securities exchanges applicable to its duties in connection with the execution of transactions. Mariner will provide or cause to be provided to the Client such periodic reports concerning the status of the Account (including a valuation thereof based upon such valuation method(s) agreed with Client) as the Client may reasonably request. Mariner will provide to the Client on request, and not less frequently than quarterly, a report of Account transactions effected by Mariner since the date of the most recent such report. Mariner will preserve its records relating to the Account for no less than six years and shall make such records available for inspection at reasonable times during normal business hours, upon the request of the Client, to the Client, its auditors or any pertinent regulatory authority. Prior to discarding or destroying any such records, Mariner will give the Client reasonable opportunity, at the Client's expense, to review them and to take all or such portion of them as the Client wishes to retain. All information and advice furnished by either party to the other hereunder will be treated as confidential and will not be disclosed to third parties except as provided in this paragraph or as required by law. Fees Client agrees to pay Mariner a fee, or defer such fee pursuant to an arrangement agreed to in writing by both parties, payable or deferred quarterly in advance, calculated, based on the valuation of the Account as at the end of the previous quarter, using the fee schedule below for the assets under management.
Asset Class Annual fee % Traditional Equities .25% Non-Mariner Hedge Funds 1.25% Mariner Hedge Funds 0% High Yield Public Debt .25% Private Securities .50%
The methodology for valuing the Account for fee calculation purposes shall be as agreed in writing by Mariner and Client. If Mariner shall serve for less than the whole of any calendar quarter, its compensation shall be payable on a pro rata basis for the period of the calendar quarter for which it has served as manager hereunder, and Mariner shall promptly reimburse Client accordingly in respect of any advance payment. Expenses Client shall reimburse Mariner for any reasonable investment-related out-of-pocket costs and expenses incurred in monitoring the Account of a type previously agreed in writing by the Client upon presentation of appropriate supporting documentation. 2 Indemnity Client shall indemnify and hold harmless Mariner, its directors, officers, employees and agents ("Indemnified Parties"), individually and collectively, against any losses (including financial results poorer than expected by Client), claims, damages, liabilities or expenses, including reasonable attorneys' fees (collectively, "Losses") to which Mariner may become subject in so far as such Losses arise out of or are based upon any activities undertaken by, or inaction of, Mariner as investment advisor, unless such Losses arise out of the gross negligence, willful misfeasance or bad faith of the Indemnified Parties. Mariner shall give Client written notice as soon as practicable after it becomes aware of any fact, condition or event which may give rise to Losses for which indemnification hereunder may be sought. If any lawsuit or enforcement action is filed against any Indemnified Parties which may give rise to any indemnification Losses, written notice thereof shall be given to Client as promptly as practicable (and in any event, within 10 days after the service of the citation or summons); provided, that the failure to give such notice shall not relieve Client from its indemnification obligations hereunder, except and only to the extent that such failure increases the indemnified Losses. Client shall be entitled, if it so elects, to take control of the defense and investigation of any such lawsuit or action and to employ and engage attorneys of its choice (and at its expense) to handle and defend the same. No settlement relating to any Losses shall be made unless Mariner gives its written consent to such settlement which consent shall not be unreasonably delayed or withheld. Status of Investment Manager Mariner will for all purposes herein be deemed to be an independent contractor and will, except as otherwise expressly provided or authorized by or under this letter agreement, have no authority to act for or represent the Client in any way or otherwise be deemed an agent of the Client. Activities of Investment Manager Mariner and its affiliates, may engage, simultaneously with the investment management activities on behalf of the Account, in other businesses and make investments for their own accounts, and may render services similar to those described in this agreement for other individuals, companies, trusts or persons, and shall not by reason of such engaging in other businesses, making such investments or rendering of services for others be deemed to be acting in conflict with the interest of the Account. Term This Agreement is effective from May 1, 1999 and may be terminated upon ninety-(90) days written notice by Mariner, or upon thirty (30) days written notice by Client, to the other or 3 upon shorter notice upon the mutual agreement of the parties; provided, however, Client may terminate this Agreement without such advance notice if Client pays a termination fee determined as if the Manager had continued to provide services under this Agreement for a period of thirty (30) days after the termination date. Termination of this Agreement for any reason shall not relieve the Manager of liability or responsibility under this Agreement with respect to the period prior to the effectiveness of the termination. This letter agreement will be governed by, and construed in accordance with, the laws of the State of New York, (other than any conflict of law rule which might result in the application of the law of any other jurisdiction). Notification All notices and other communications hereunder shall be in writing and shall be deemed to have been given when delivered by hand against written receipt; when confirmation of a fax or email sent during business hours of the recipient is received by the sender; or upon the fifth day following mailing which shall be by certified or registered mail, postage paid: 1. If to Mariner at: Mariner Investment Group, Inc. 65 East 55th Street, 9th Floor, NY, NY 10022 Fax number: 212 758 6680 Email: wmichaelcheck@goldbox.com Attention: William J. Michaelcheck If to Client at: PXRE Corporation 399 Thornall Street Edison, NJ 08337 Fax number: 732-906-9157 Email: jim_dore@pxre.com Attention: James F. Dore Assignment Without the written consent of the other party, this Agreement may not be assigned by either of the parties hereto; any such attempted assignment being void. Authority to Perform Each of the parties to this Agreement hereby represents that it is duly authorized and empowered to execute, deliver and perform this Agreement and the transactions contemplated hereby, that such actions do not conflict with or violate any provision of law, regulation, or contract, deed of trust, agreement or other instrument to which it is a party or by which it is bound or to which it is subject and that no consent of any person or government regulatory agency to such person's performing its obligations under this Agreement is required which has not been obtained, and that this Agreement is a valid and binding obligation upon that party, enforceable in accordance with its terms. 4 Miscellaneous This Agreement is the entire agreement of the parties with respect to the management of the assets in the Account and may not be amended except in a writing signed by the parties. Please confirm your agreement with the terms set forth herein by signing the enclosed copy of this letter where indicated below and returning it to Mariner. Very truly yours, MARINER INVESTMENT GROUP, INC. By /s/ William Michaelcheck ------------------------------ Title: Chairman AGREED AND ACKNOWLEDGED, PXRE CORPORATION By /s/ James Dore ------------------------------- Title: Executive Vice President 5 EX-12 11 EXHIBIT 12 PXRE GROUP LTD. AND SUBSIDIARIES COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES AND RATIO OF CONSOLIDATED EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS (In thousands, except ratios)
Year ended December 31, ----------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- --- ---- Net income $ (42,139) $ 2,679 $ 44,253 $ 33,301 $ 39,786 Equity in earnings of TREX 0 0 0 (3,898) (5,948) --------- ------- -------- -------- --------- Income before equity in earnings of TREX (42,139) 2,679 44,253 29,403 33,838 Income taxes (13,149) (1,661) 22,198 15,644 18,189 --------- ------- -------- -------- --------- $ (55,288) $ 1,018 $ 66,451 $ 45,047 $ 52,027 Fixed charges: Interest expense 12,705 10,323 11,508 6,957 7,143 Appropriated portion (1/3) of rentals 718 490 378 365 397 --------- ------- -------- -------- --------- Total fixed charges 13,423 10,813 11,886 7,322 7,540 --------- ------- -------- -------- --------- Earnings before income taxes and fixed charges $ (41,865) $ 11,831 $ 78,337 $ 52,369 $ 59,567 --------- ------- -------- -------- --------- Preferred dividend requirements $ 0 $ 0 $ 0 $ 0 $ 599 --------- ------- -------- -------- --------- Ratio of pre-tax income to net income 1.31 0.38 1.50 1.53 1.54 --------- ------- -------- -------- --------- Preferred dividend factor $ 0 $ 0 $ 0 $ 0 $ 922 Total fixed charges 13,423 10,813 11,886 7,322 7,540 --------- ------- -------- -------- --------- Total fixed charges and preferred dividends $ 13,423 $ 10,813 $ 11,886 $ 7,322 $ 8,462 --------- ------- -------- -------- --------- Ratio of earnings to fixed charges (3.12) 1.09 6.59 7.15 7.90 --------- ------- -------- -------- --------- Ratio of earnings to combined fixed charges and preferred dividends (3.12) 1.09 6.59 7.15 7.04 --------- ------- -------- -------- --------- Deficiency in ratio 55,288 Deficiency in combined ratio 55,288 =========
EX-24 12 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of PXRE Group Ltd. (the "Company"), hereby constitutes and appoints Gerald L. Radke and James F. Dore, and each of them singly, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, acting in the name and on behalf of the undersigned, to sign the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1999, and all amendments or supplements (if any) thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. The undersigned does hereby grant unto such attorneys-in-fact and agents (and either of them) full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents (and either of them), or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 2000. /s/ F. Sedgwick Browne ----------------------------------- F. Sedgwick Browne EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of PXRE Group Ltd. (the "Company"), hereby constitutes and appoints Gerald L. Radke and James F. Dore, and each of them singly, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, acting in the name and on behalf of the undersigned, to sign the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1999, and all amendments or supplements (if any) thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. The undersigned does hereby grant unto such attorneys-in-fact and agents (and either of them) full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents (and either of them), or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 2000. /s/ Wendy Luscombe ----------------------------------- Wendy Luscombe EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of PXRE Group Ltd. (the "Company"), hereby constitutes and appoints Gerald L. Radke and James F. Dore, and each of them singly, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, acting in the name and on behalf of the undersigned, to sign the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1999, and all amendments or supplements (if any) thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. The undersigned does hereby grant unto such attorneys-in-fact and agents (and either of them) full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents (and either of them), or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 2000. /s/ David W. Searfoss ----------------------------------- David W. Searfoss EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of PXRE Group Ltd. (the "Company"), hereby constitutes and appoints Gerald L. Radke and James F. Dore, and each of them singly, as her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, acting in the name and on behalf of the undersigned, to sign the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1999, and all amendments or supplements (if any) thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. The undersigned does hereby grant unto such attorneys-in-fact and agents (and either of them) full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents (and either of them), or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 2000. /s/ Wilson Wilde ----------------------------------- Wilson Wilde EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of PXRE Group Ltd. (the "Company"), hereby constitutes and appoints Gerald L. Radke and James F. Dore, and each of them singly, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, acting in the name and on behalf of the undersigned, to sign the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1999, and all amendments or supplements (if any) thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. The undersigned does hereby grant unto such attorneys-in-fact and agents (and either of them) full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents (and either of them), or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 2000. /s/ Franklin D. Haftl ----------------------------------- Franklin D. Haftl EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of PXRE Group Ltd. (the "Company"), hereby constitutes and appoints Gerald L. Radke and James F. Dore, and each of them singly, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, acting in the name and on behalf of the undersigned, to sign the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1999, and all amendments or supplements (if any) thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. The undersigned does hereby grant unto such attorneys-in-fact and agents (and either of them) full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents (and either of them), or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 2000. /s/ Robert W. Fiondella ----------------------------------- Robert W. Fiondella EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of PXRE Group Ltd. (the "Company"), hereby constitutes and appoints Gerald L. Radke and James F. Dore, and each of them singly, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, acting in the name and on behalf of the undersigned, to sign the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1999, and all amendments or supplements (if any) thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. The undersigned does hereby grant unto such attorneys-in-fact and agents (and either of them) full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents (and either of them), or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 2000. /s/ Bernard Kelly ----------------------------------- Bernard Kelly EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of PXRE Group Ltd. (the "Company"), hereby constitutes and appoints Gerald L. Radke and James F. Dore, and each of them singly, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, acting in the name and on behalf of the undersigned, to sign the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1999, and all amendments or supplements (if any) thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. The undersigned does hereby grant unto such attorneys-in-fact and agents (and either of them) full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents (and either of them), or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of March, 2000. /s/ Philip R. McLoughlin ----------------------------------- Philip R. McLoughlin EX-27 13 EXHIBIT 27
7 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 329,962,000 321,247,527 321,247,527 24,840,360 0 0 509,568,077 14,735,040 106,702,307 7,809,971 780,180,109 261,551,353 42,218,837 0 0 75,000,000 11,679,769 0 0 251,599,214 780,180,109 128,503,110 47,172,616 (3,765,816) 3,590,337 159,259,413 27,701,644 30,052,310 (54,218,324) (12,774,971) (41,443,353) 0 0 (695,278) (42,138,631) (3.64) (3.64) 102,592,394 220,132,079 37,129,370 17,508,053 80,794,439 261,551,354 37,129,370 -----END PRIVACY-ENHANCED MESSAGE-----