PXRE reports net loss of $446.5 million

PXRE Group Ltd. (NYSE:PXT) recently reported a net loss before convertible preferred share dividends of $446.5 million for the quarter ended Dec. 31, 2005 compared to net income before convertible preferred share dividends of $32.8 million in the fourth quarter of 2004.
The net loss in the fourth quarter of 2005 principally reflects losses from Hurricane Wilma and increased estimates of losses from Hurricanes Katrina and Rita. On a fully diluted basis, book value per share decreased to $6.01 at Dec. 31, 2005 from $13.01 per share at Sept. 30, 2005. Fully diluted shares outstanding as of Dec. 31, 2005 are approximately 77.4 million. The Company’s shareholders’ equity was $465.3 million as of Dec. 31, 2005.
Jeffrey L. Radke, president & CEO of PXRE Group, says, the Company’s fourth quarter results reflect the severe losses associated with Hurricane Wilma and significant development on Hurricanes Katrina and Rita.
“Although the fourth quarter loss and recent rating actions are extremely disappointing, PXRE remains financially sound and able to meet all of our obligations to clients,” Radke says. “We also have sufficient liquidity to meet all currently foreseen needs and have taken a number of steps to even further improve our liquidity in order to meet contingencies that may arise.”
Radke adds that PXRE more than 75% of its current reinsurance clients, as measured by the premium volume, have been given the right to cancel their reinsurance contracts as a result of either the recent ratings downgrade or reduction of PXRE’s capital, which, if such rights were exercised, could cause a substantial loss in premium volume.
As of Sept. 30, 2005, the Company had income tax recoverables of $47.8 million. The recent downgrade of the Company’s credit ratings below the “A-” level creates uncertainty with regard to the ultimate realization of the Company’s income tax recoverables.
As a result, the Company has recorded a valuation allowance against certain of these assets, which reduced the income tax recoverable to $6.3 million as of December 31, 2005. This amount represents expected tax refunds related to prior periods that are expected to be received in 2006.
A result of the recording of this valuation allowance is the reversal of approximately $30.9 million of tax benefits that had previously reduced the net impact of Hurricanes Katrina and Rita on the Company’s results at Sept. 30, 2005.
The $330.3 million increase in the estimated pre-tax net impact for Hurricanes Katrina, Rita and Wilma brings the estimated losses for these hurricanes above the high end of the range announced by the Company on Feb. 16, 2006. The new loss estimate results from the Company’s assessment of recent loss reports, as well as notifications received by the Company subsequent to the recent downgrades from two counterparties exercising their rights under certain of the Company’s reinsurance contracts to cancel and commute retrocessional coverage based on ratings downgrades and material changes to the Company.
As a result of the losses arising from Hurricanes Katrina, Rita and Wilma during the second half of 2005, PXRE has an accumulated deficit of $527.3 million at Dec. 31, 2005.
Under Bermuda company law, even if a company is solvent and able to pay its liabilities as they become due, it cannot declare or pay dividends or make distributions if, after such payment, the realizable value of its assets would thereby be less than the sum of its liabilities, its issued share capital (par value) and its share premium account, a defined term in Bermuda company law.
Due to the size of the Company’s share premium account ($550.0 million as of Dec. 31, 2005), it is currently prohibited under Bermuda company law from paying dividends or making distributions from its contributed surplus to its shareholders.
In order for PXRE to continue to have the flexibility to pay dividends, the board of directors has determined that it is in the best interests of PXRE to reduce the share premium account to zero and allocate $550 million to the Company’s contributed surplus as permitted under Bermuda company law.
This reduction of the share premium account and reallocation to the Company’s contributed surplus requires the approval of PXRE’s shareholders at a General Meeting.
If shareholders approve the foregoing proposal, the board of directors will evaluate whether to resume paying dividends and the appropriate level of such dividends as part of its evaluation of strategic alternatives.