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, 2006		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)
PXRE House		P.O. Box HM 1282
110 Pitts Bay Road		Hamilton HM FX
Pembroke HM08		Bermuda
Bermuda		(Mailing address)
(Address, including zip code, of
principal executive offices)

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o				No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o				No þ

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 þ				No o

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. o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o     Accelerated Filer þ     Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o				No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2005, computed by reference to the closing price of such common equity on the New York Stock Exchange as of the close of business on June 30, 2006 was $271,447,615. As of March 12, 2007, 72,342,119 of the registrant’s common shares were issued and outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of PXRE Group Ltd.’s definitive Proxy Statement for the 2007 Annual General Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K to the extent stated herein. Additionally, certain documents are incorporated by reference into Part IV of this Form 10-K as stated therein.

PART I

     Unless the context otherwise requires, references in this Form 10-K to “PXRE,” “we,” “us” and “our” include PXRE Group Ltd., a Bermuda holding company (the “Company”) and its subsidiaries, which principally include PXRE Reinsurance Ltd. (“PXRE Bermuda”), PXRE Corporation (“PXRE Delaware”), PXRE Reinsurance Company (“PXRE Reinsurance”), PXRE Solutions, S.A. (“PXRE Europe”), PXRE Holding (Ireland) Limited (“PXRE Ireland”) and PXRE Reinsurance (Barbados) Ltd. (“PXRE Barbados”). References to GAAP refer to accounting principles generally accepted in the United States (“GAAP”). References to SAP refer to statutory accounting principles (“SAP”) in either Bermuda where PXRE Bermuda is domiciled or the State of Connecticut where PXRE Reinsurance is domiciled, as applicable.

Cautionary Statement Regarding Forward-Looking Statements

     This report contains various forward-looking statements and includes assumptions concerning our operations, future results and prospects. Statements included herein, as well as statements made by us or on our behalf in press releases, written statements or other documents filed with the Securities and Exchange Commission (the “SEC”), or in our communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, which are not historical in nature are intended to be, and are hereby identified as, “forward-looking statements” for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements, identified by words such as “intend,” “believe,” “anticipate,” or “expects” or variations of such words or similar expressions are based on current expectations, speak only as of the date hereof, and are subject to risk and uncertainties. In light of the risks and uncertainties inherent in all future projections, these forward-looking statements in this report should not be considered as a representation by us or any other person that our objectives or plans will be achieved. We caution you that actual results or events could differ materially from those set forth or implied by the forward-looking statements and related assumptions, depending on the outcome of certain important factors including, but not limited to, the following:

	(i)		we face risks related to our proposed merger with Argonaut Group, Inc.;
	(ii)		if the merger with Argonaut is not completed, unless the Board of Directors identifies and implements a different operating strategic solution, we will not write or earn any material premiums in the future and, as a result, we expect to incur material operating losses, since our remaining revenue is insufficient to cover our projected operating and other expenses;
	(iii)		if the merger is not consummated, we may not be able to identify or implement a strategic alternative for PXRE;
	(iv)		if the merger is not consummated and our Board of Directors concludes that no other feasible strategic alternative would be in the best interests of our shareholders, it may determine that the best course of action is to place the reinsurance operations of PXRE into runoff and eventually commence an orderly winding up and liquidation of PXRE operations over some period of time that is not currently determinable;

	(v)		if the merger is not consummated and the Board of Directors elects to pursue a strategic alternative that does not involve the continuation of meaningful property catastrophe reinsurance business, there is a risk that the Company could incur additional material charges or termination fees in connection with our collateralized catastrophe facility and certain multiyear ceded reinsurance agreements;
	(vi)		our ability to continue to operate our business, consummate the merger and to identify, evaluate and complete any other strategic alternative is dependent on our ability to retain our management and other key employees, and we may not be able to do so;
	(vii)		adverse events in 2006 negatively affected the market price of our common shares, which may lead to further securities litigation, administrative proceedings or both being brought against us;
	(viii)		reserving for losses includes significant estimates, which are also subject to inherent uncertainties;
	(ix)		because of potential exposure to catastrophes in the future, our financial results may vary significantly from period to period;
	(x)		we operate in a highly competitive environment and no assurance can be given that we will be able to compete effectively in this environment;
	(xi)		reinsurance prices may decline, which could affect our profitability;
	(xii)		we may require additional capital in the future;
	(xiii)		our investment portfolio is subject to significant market and credit risks which could result in an adverse impact on our financial position or results;
	(xiv)		we have exited the finite reinsurance business, but claims in respect of finite reinsurance could have an adverse effect on our results of operations;
	(xv)		our reliance on reinsurance brokers exposes us to their credit risk;
	(xvi)		we may be adversely affected by foreign currency fluctuations;
	(xvii)		retrocessional reinsurance subjects us to credit risk and may become unavailable on acceptable terms;
	(xviii)		we have exhausted our retrocessional coverage with respect to Hurricane Katrina, leaving us exposed to further losses;

	(xix)		recoveries under our collateralized facility are triggered by modeled loss to a notional portfolio, rather than our actual losses arising from a catastrophe event, which creates a potential mismatch between the risks assumed through our inwards reinsurance business and the protection afforded by this facility;
	(xx)		our inability to provide the necessary collateral could affect our ability to offer reinsurance in certain markets;
	(xxi)		the insurance and reinsurance business is historically cyclical, and we may experience periods with excess underwriting capacity and unfavorable premium rates; conversely, we may have a shortage of underwriting capacity when premium rates are strong;
	(xxii)		regulatory constraints may restrict our ability to operate our business;
	(xxiii)		any determination by the United States Internal Revenue Service (“IRS”) that we or our offshore subsidiaries are subject to U.S. taxation could result in a material adverse impact on our financial position or results; and
	(xxiv)		any changes in tax laws, tax treaties, tax rules and interpretations could result in a material adverse impact on our financial position or results.

     In addition to the factors outlined above that are directly related to our business, we are also subject to general business risks, including, but not limited to, adverse state, federal or foreign legislation and regulation, adverse publicity or news coverage, changes in general economic factors and the loss of key employees. The factors listed above should not be construed as exhaustive. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Risks and Uncertainties.

     We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Item 1. Business

Business: Overview

     PXRE Group Ltd. is an insurance holding company organized in Bermuda. We provide reinsurance products and services to a worldwide marketplace through our wholly owned subsidiary operations located in Bermuda, Europe and the United States. Our primary business has been catastrophe and risk excess reinsurance, which accounted for substantially all of our net premiums written for the year ended December 31, 2006.

     On February 16, 2006, we announced that we would be increasing our estimates of the net pre-tax impact of Hurricanes Katrina, Rita and Wilma on our results of operations for the year ended December 31, 2005. We also announced our intention to explore strategic alternatives due to concerns about the hurricane losses and the resulting potential negative impact on our credit ratings. Following these announcements, in February 2006 our counterparty

credit and financial strength ratings were downgraded by the major rating agencies to a level that was unacceptable to many of our reinsurance clients. These ratings downgrades have had a significant negative impact on our results of operations and profitability because they have impaired our ability to retain and renew our existing reinsurance business. In light of the negative consequences of rating downgrades, our Board of Directors determined that we should evaluate strategic alternatives to our operating approach at that time and decided to retain Lazard Frères & Co. LLC (“Lazard”) (which has since been succeeded by Keefe, Bruyette & Woods, Inc. (“KBW”)) as a financial advisor to assist in the strategic exploration process.

     Since the downgrade and withdrawal of our credit ratings in early 2006, we have not underwritten any material new reinsurance contracts or renewed any of our expiring reinsurance contracts. During 2006, most of our clients exercised their contractual rights to terminate their reinsurance contracts with us as a result of the decline in our ratings and capital. In order to manage our peak zone catastrophe exposures, the Company had also selectively allowed extra-contractual cancellations on certain contracts that do not contain cancellation provisions triggered by rating downgrades. As of January 1, 2007, virtually all of our in-force assumed reinsurance contracts had expired and we have no remaining material exposure to future catastrophe events at that date.

     We had net income before convertible preferred share dividends of $28.5 million in 2006 compared to a net loss before convertible preferred share dividends of $697.6 million in 2005. The primary cause of the 2005 net loss was the net impact of catastrophe losses arising from Hurricanes Katrina, Rita and Wilma of $806.9 million, after reinsurance recoveries on our outwards reinsurance program and the impact of inwards and outwards reinstatements and additional premiums. The Company had $84.5 million in net premiums earned during the year ended December 31, 2006, as compared to $388.3 million in the prior year.

     Subsequent Event

     Proposed Merger with Argonaut Group, Inc.

     On March 14, 2007, the Board of Directors concluded its strategic alternative evaluation process and announced that we had entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Argonaut Group, Inc. (“Argonaut”). Pursuant to the terms of the Merger Agreement, Argonaut will merge into a newly formed PXRE Group Ltd. subsidiary, PXMS, Inc. Upon completion of the merger, and subject to the terms and conditions of the Merger Agreement which has been unanimously approved by the Board of Directors of both companies, Argonaut stockholders will receive subject to certain adjustments 6.4672 PXRE common shares in exchange for each share of Argonaut common stock. Upon closing of the transaction, approximately 73% of PXRE’s outstanding common shares will be owned by former Argonaut stockholders, and approximately 27% by former holders of PXRE’s common shares and convertible voting preferred shares. Argonaut stock options and other equity awards will automatically convert upon completion of the merger into stock options and equity awards with respect to PXRE common stock, subject to adjustment to reflect the exchange ratio.

     Upon completion of the merger, PXRE will be renamed “Argo Group International Holdings, Ltd.” and its common shares will be delisted from the New York Stock Exchange and relisted on the NASDAQ Global Market (“NASDAQ”).

     Completion of the merger, which is expected to occur in the third quarter of 2007, is subject to various conditions, including (1) receipt of approvals of the holders of PXRE and Argonaut common stock, (2) receipt of regulatory approvals, and (3) effectiveness of the Form S-4 registration statement relating to the PXRE common stock to be issued in the merger and (4) listing of the PXRE common stock on the NASDAQ.

     The merger agreement contains certain termination rights for both us and Argonaut. Under certain circumstances, including those relating to competing business combination proposals, termination of the merger agreement could obligate PXRE to pay a termination fee of $20 million.

     Argonaut underwrites specialty commercial insurance in niche areas of the property and casualty insurance market. Argonaut offers property and casualty insurance products through eleven wholly-owned insurance companies. Collectively, the insurance subsidiaries are admitted to write insurance in all fifty states and in the District of Columbia, Guam and the U.S. Virgin Islands and are authorized to write insurance on a surplus lines basis in all fifty states.

     Argonaut targets niches in which it can develop a leadership position and which Argonaut believes will generate underwriting profits. Argonaut has stated that its growth has been achieved both organically through an operational strategy focused on underwriting discipline and as a result of acquisition activity.

     Concurrently with the announcement of the merger, we also announced the formation of a new Bermuda based reinsurance subsidiary, Peleus Reinsurance Ltd. (“Peleus Re”). Peleus Re has been rated “A-” by A.M. Best & Company (“A.M. Best”) and is expected to begin writing reinsurance business. Peleus Re will focus on underwriting medium to small commercial property reinsurance risks on a pro rata and risk excess basis, and property catastrophe reinsurance risk on a controlled basis. It is also expected to reinsure casualty risks; initially through a quota share of Argonaut’s existing casualty business. Peleus Re will initially be capitalized with $213 million contributed from the existing surplus of PXRE Bermuda. PXRE Bermuda and PXRE Reinsurance will be placed into an orderly runoff, but will provide intercompany reinsurance support to Peleus Re.

     The Board of Directors believes that the merger with Argonaut and resumption of reinsurance business through Peleus Re will provide shareholders with an expected return that is superior to both the potential value that shareholders would have realized if the Board of Directors had elected to pursue other non-runoff alternatives considered during the strategic evaluation process or the potential value that shareholders were likely to realize if the Company were to be liquidated after the conclusion of an orderly runoff and winding up process.

     Status of Credit and Financial Strength Ratings

     Immediately following our February 16, 2006 announcement, Standard & Poor’s Ratings Services (“S&P”), a division of the McGraw-Hill Companies, Inc., downgraded its counterparty credit and financial strength rating on PXRE Reinsurance and PXRE Bermuda from “A-” to “BBB+” and placed these ratings on CreditWatch with negative implications. A.M. Best, an independent insurance industry rating organization, also downgraded its financial strength rating from “A-” to “B++” with a negative outlook. On February 17, 2006, Moody’s Investor Services (“Moody’s”) downgraded its insurance financial strength rating of PXRE Reinsurance from “Baa1” to “Baa2” and placed this rating under review for possible further downgrade.

     On February 22, 2006, we announced our financial results for the quarter ended December 31, 2005. We also announced a further increase in our estimates of the net pre-tax impact of Hurricanes Katrina, Rita and Wilma. See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Comparison of 2005 with 2004 – Losses and Loss Expenses.

     Subsequently in February, 2006, S&P further downgraded its counterparty credit and financial strength rating on PXRE Reinsurance and PXRE Bermuda from “BBB+” to “BBB-”, and A.M. Best further downgraded its financial strength rating on these entities from “B++” to “B+” with a negative implication. Moody’s further downgraded its insurance financial strength rating of PXRE Reinsurance from “Baa2” to “Baa3” and placed this rating under review for possible further downgrade. See Item 1 – Business: Ratings.

     In April, 2006, after finding that operational ratings below the critical “A” category provided little value for a reinsurer, we announced that we had requested that the major credit rating agencies withdraw their financial strength and claims paying ratings of the Company and its operating subsidiaries. In the wake of this request, A.M. Best downgraded its financial strength ratings of PXRE Reinsurance and PXRE Bermuda from “B+” to “B” and withdrew these ratings; S&P downgraded its counterparty credit and financial strength rating on PXRE Reinsurance and PXRE Bermuda from “BBB-” to “BB+” and then withdrew these ratings; and Moody’s downgraded its insurance financial strength rating of PXRE Reinsurance from “Baa3” to “Ba2” and then withdrew this rating.

     Ratings have become an increasingly important factor in establishing the competitive position of reinsurance companies. Due to these ratings downgrades and withdrawal in 2006 of the operational ratings of our reinsurance subsidiaries by A.M. Best, S&P and Moody’s, our competitive position in the reinsurance industry has suffered, with ceding companies and brokers having moved business to other reinsurers with higher ratings. As of December 31, 2006, virtually all of the Company’s reinsurance contracts had either been cancelled, non-renewed or expired.

     On March 15, 2007, Peleus Re received a rating of “A-” from A.M. Best. Our existing reinsurance subsidiaries, PXRE Bermuda and PXRE Reinsurance were also re-rated “B+” by A.M. Best on March 15, 2007.

     Overview of our 2006 Business

     The following discussion of our Business in Item 1 of this Annual Report on Form 10-K concerns PXRE’s business operations during 2006 and prior. As discussed above, our Board of Directors has entered into a Merger Agreement with Argonaut. For a discussion of Argonaut’s business, see Argonaut’s Annual Report of Form 10-K for the period ended December 31, 2006, which was filed with the SEC on March 1, 2007.

     Our catastrophe and risk excess business included property catastrophe excess of loss, property pro-rata, property catastrophe retrocessional, property risk excess, and marine excess and aerospace excess reinsurance products. Catastrophe and risk excess business has been our primary focus since our predecessor company was formed in 1986. This means that we primarily focused, in the year 2006 and prior, on providing reinsurance in respect of events which do not tend to occur frequently, but when they do occur, have the potential to generate a large amount of losses per occurrence. This focus on high-severity, relatively low frequency lines of business exposed us to short term volatility.

     Reinsurance is a contractual arrangement in which an insurance company, usually referred to as the reinsurer, agrees to indemnify another insurance company, usually referred to as the 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 net liability on individual or classes of risks, catastrophe protection from large or multiple losses, assistance in maintaining acceptable financial ratios, and additional underwriting capacity.

     There are two basic types of reinsurance arrangements: treaty and facultative reinsurance. All of our business was written as treaty reinsurance. In treaty reinsurance, the ceding company is obligated to cede and the reinsurer is obligated to assume a specified portion of a type or category of risks insured by the ceding company. Under treaty reinsurance, reinsurers do not generally separately evaluate each of the individual risks assumed under their treaties and, consequently, after a review of the ceding company’s underwriting practices, are largely dependent on the original risk underwriting decisions made by the ceding company. In facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part of the risk under a single insurance contract. Facultative reinsurance is negotiated separately for each insurance contract that is reinsured. Facultative reinsurance normally is purchased by ceding companies for individual risks not covered by their reinsurance treaties, for amounts in excess of the dollar limits of their reinsurance treaties and for unusual risks.

     Both treaty and facultative reinsurance can be written on either an excess of loss basis or a pro rata basis. Under excess of loss reinsurance arrangements, the reinsurer indemnifies the ceding company against all or a specified portion of losses and expenses in excess of a specified dollar amount, known as the reinsurer’s attachment point, generally subject to a negotiated reinsurance contract limit. This means that the reinsurer does not begin to pay its client’s claims until its claims exceed a certain contractually specified amount and its obligation to pay those claims is limited to a contractually specified aggregate amount. Under pro rata reinsurance arrangements, the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion.

     In pro rata reinsurance, the reinsurer generally pays the ceding company a ceding commission. The ceding commission generally is based on the ceding company’s cost of acquiring the business being reinsured (commissions, premium taxes, assessments and miscellaneous administrative expense). Premiums paid by the ceding company to a reinsurer for excess of loss reinsurance are not directly proportional to the premiums that the ceding company receives because the reinsurer does not assume a proportionate risk.

     Reinsurance can be written through intermediaries, generally professional reinsurance brokers, or directly with ceding companies. From a ceding company’s perspective, both the broker and the direct distribution channels have advantages and disadvantages. A ceding company’s decision to select one distribution channel over the other will be influenced by its perception of such advantages and disadvantages relative to the reinsurance coverage being placed.

     Property catastrophe reinsurance generally covers claims arising from large catastrophes around the world such as hurricanes, windstorms, hailstorms, earthquakes, volcanic eruptions, fires, industrial explosions, freezes, riots, floods and other man-made or natural disasters. In underwriting our property catastrophe portfolio, we sought to diversify our exposures geographically and by peril in order to manage the risks assumed and maximize the return on our portfolio. In 2006, approximately 99% of our property catastrophe reinsurance and retrocessional products were written on an excess-of-loss basis based on net premiums written. All of our reinsurance contracts contained aggregate limits on our exposure to losses. For the year ended December 31, 2006, approximately 79% of our property catastrophe and risk excess net premiums written emanated from clients located outside of North America, including clients located in the United Kingdom, Continental Europe, Latin America, the Caribbean, Bermuda, Australia and Asia.

     We provided property catastrophe products to both insurers and reinsurers. As of December 31, 2006, insurance and reinsurance companies comprised approximately 67% and 33%, respectively, of our total number of clients, based on client count. The reinsurance of a reinsurer or retrocedent is referred to as retrocessional reinsurance. Retrocessional reinsurance allows a reinsurer to cover its own risk exposure and can act to reduce net liability on individual or classes of risks, protect against catastrophic losses and create additional underwriting capacity. Retrocessional business generally carries substantially higher risk premiums than property catastrophe reinsurance business. We believe this risk premium is required because retrocessional coverage is characterized by higher volatility, principally due to the fact that retrocessional contracts expose a reinsurer to an uncertain level of correlation with other existing reinsurance contracts. In addition, the information available to retrocessional underwriters concerning the original primary risk is often less precise than the information received from primary insurers directly. The lack of precision in the information received from retrocessional clients also increases the difficulty of estimating losses in the immediate aftermath of a catastrophe event. Moreover, exposures from retrocessional business can change within a contract term as the underwriters of a retrocedent alter their book of business after retrocessional coverage has been bound. There are substantially fewer competitors offering this type of coverage due to the risks entailed in underwriting retrocessional business.

     We also offered our clients property-per-risk, marine and aerospace reinsurance and retrocessional products. Unlike property catastrophe reinsurance, which protects against the accumulation of a large number of related losses arising out of one catastrophe, per-risk excess of loss reinsurance protects our clients against a large loss arising from a single risk or location. Substantially all of our property-per-risk was written on an excess-of-loss basis with contractual aggregate limits on our exposure to losses. Our aerospace reinsurance business included both excess of loss aviation business and excess of loss and pro rata satellite reinsurance business.

     The property reinsurance market has historically been a very cyclical market, with pricing improving significantly in the wake of major insured catastrophe losses. For example, the events of September 11, 2001, combined with industry-wide reserve deficiencies recognized subsequently and generally poor investment performance of recent years, resulted in increases in pricing in conjunction with improved terms and conditions for the insurance industry for the underwriting years 2002 through 2004. As a direct result, we experienced significant rate increases and strong profitability in our core property catastrophe and risk excess segment, which is reflected in our results of operations for the years ended December 31, 2002 and 2003. Operating in this favorable environment, we had net income before convertible preferred share dividends of $64.5 million in 2002 and $96.6 million in 2003.

     The underwriting environment remained favorable in 2004, but our underwriting results were negatively impacted by losses arising from Hurricanes Charley, Frances, Ivan and Jeanne that occurred during the third quarter of 2004. As a result, net income before convertible preferred share dividends for the year ended December 31, 2004 was $22.8 million.

     In 2005, the underwriting environment generally remained favorable, but reinsurance rates in certain international territories had begun to soften. The unprecedented severity of Hurricane Katrina, followed by Hurricanes Rita and Wilma, however, resulted in a net loss before convertible preferred share dividends of $697.6 million for the year ended December 31, 2005. As a result of the unprecedented size of the industry-wide losses from Hurricanes Katrina, Rita and Wilma, rates and limitations in coverage were favorable for each of the lines of business that we underwrote in 2006.

     We conduct our business primarily through our principal operating subsidiaries, PXRE Bermuda, PXRE Reinsurance, and PXRE Europe. PXRE Bermuda is a broker-market reinsurer with $564.2 million of statutory capital and surplus as of December 31, 2006, which, prior to the ratings downgrades referenced above, principally underwrote treaty reinsurance for property (including marine and aerospace) risks. PXRE Bermuda’s reinsurance business was supported by an unlimited parental guarantee from the Company and an excess of loss reinsurance treaty from PXRE Reinsurance that provided $100.0 million of reinsurance protection in excess of $110.0 million in the period January 1, through March 31, 2006 and $40.0 million of reinsurance protection in excess of $150.0 million at April 1, 2006. PXRE Bermuda is neither licensed nor admitted as an insurer in any jurisdiction other than Bermuda.

     PXRE Reinsurance is a broker-market reinsurer with $138.0 million of statutory capital and surplus as of December 31, 2006, which, prior to the ratings downgrades referenced above, principally underwrote treaty reinsurance for property (including marine and aerospace) risks. PXRE Reinsurance is licensed, accredited or permitted to do business in each of the 50 states and the District of Columbia, Puerto Rico, Bermuda, Colombia, Mexico. Until January 31, 2003 PXRE Reinsurance also operated a branch in Belgium, which we refer to as PXRE’s Brussels Branch.

     On March 14, 2007, we announced the formation of Peleus Reinsurance Ltd. Peleus is licensed as a Class 3 reinsurer in Bermuda. It has been capitalized with $213 million and will commence underwriting reinsurance through the broker market.

     PXRE Europe, a Belgian reinsurance intermediary, performs reinsurance intermediary activities on behalf of PXRE Bermuda and PXRE Reinsurance.

Business: History

     The Company was formed in 1999 as part of the reorganization of PXRE Delaware, a Delaware corporation. Prior to the reorganization, PXRE Delaware was the ultimate parent holding company of the various PXRE companies and its common shares were publicly-traded on the New York Stock Exchange. As a result of the reorganization, the Company became the ultimate parent holding company of PXRE Delaware and the holders of PXRE Delaware common stock automatically became holders of the same number of the Company’s common shares. The reorganization was consummated at the close of business on October 5, 1999 and, on October 6, 1999 the Company’s common shares commenced trading on the New York Stock Exchange under the symbol “PXT.” The reorganization also involved the establishment of a Bermuda-based reinsurance subsidiary, PXRE Bermuda, and a Barbados based reinsurance subsidiary, PXRE Barbados.

     The Company’s predecessor, PXRE Delaware, was organized in July 1986 to succeed, through PXRE Reinsurance, to the property and casualty reinsurance business carried on since 1982 by Phoenix General Insurance Company.

     The Company effected an internal reorganization of our subsidiaries on March 15, 2005. The purpose of the reorganization was to consolidate all of our non-Bermudian subsidiaries under a newly formed holding company established in Ireland, PXRE Ireland. PXRE Ireland is a wholly owned subsidiary of PXRE Bermuda. In the reorganization, PXRE Barbados distributed all of the common shares of PXRE Delaware to PXRE Bermuda. PXRE Bermuda then contributed the common shares of PXRE Delaware and the common shares of PXRE Europe to PXRE Ireland. Following the reorganization, PXRE Barbados ceased writing any new reinsurance business and is expected to be wound up in an orderly fashion during 2007.

     Catastrophe and risk excess business has been our primary focus since our predecessor company was formed in 1986. Beginning in 1997, the pricing and terms in our core property reinsurance markets began to deteriorate, resulting in a soft reinsurance market that only began to recover in late 2000. During that time, we decided to pursue a variety of diversification efforts to enhance our competitiveness and growth opportunities in that soft reinsurance market environment that included: the establishment of a corporate member (“PXRE Limited”) at Lloyd’s of London (“Lloyd’s”), an underwriting syndicate (“PXRE Lloyds Syndicate 1224”) and managing agent; the establishment of an excess and surplus lines operation; the addition of a reinsurance platform offering primarily casualty products directly to insurance companies (rather than through reinsurance brokers); the enhancement of our international broker market reinsurance platform to include additional lines of business, including casualty and credit risks; an acceleration of business offerings to one of our managed business participants; and the formation of a finite reinsurance unit.

     In the wake of the events of September 11, 2001, we decided to return our focus to our core property catastrophe, property per-risk, marine and aerospace reinsurance and retrocessional products. Accordingly, we exited all of the non-property catastrophe and risk businesses other than our finite business. In the first half of 2004, market conditions for finite risk deteriorated sufficiently to cause us to exit this line of business as well. As a result of this strategic realignment, we became solely focused on our catastrophe and risk excess business. This, combined with the affects of our ratings downgrades, reduced the number of our employees from a high of 103 in December 1999 to 45 at December 31, 2006.

Business: Operating Segments

     During 2006, PXRE operated in two reportable property and casualty segments – (i) catastrophe and risk excess and (ii) exited lines – based on PXRE’s approach to managing the business. The exited lines segment includes business previously written and classified by the Company as direct casualty, Lloyd’s, international casualty and finite.

     In addition, PXRE operated in two geographic segments in 2006 – North American, representing North American based risks written by North American based clients, and International (principally worldwide risks including the United States, United Kingdom, Continental Europe, Latin America, the Caribbean, Bermuda, Australia and Asia), representing all other premiums written.

     As of January 1, 2007, virtually all of our in-force assumed reinsurance contracts had expired.

     During 2006, unpaid net loss and loss expense reserves in the exited lines segment decreased from $93.5 million at December 31, 2005 to $48.2 million at December 31, 2006 as a result of both the payment of loss and loss expenses and commutations in this segment.

     There are no differences among the accounting policies of the segments as compared to PXRE’s consolidated financial statements.

     PXRE does not maintain separate balance sheet data for its operating segments nor does it allocate net investment income, net realized investment gains or losses, other fee income, other reinsurance related expense, operating expenses, foreign exchange gains and losses, or interest expense to these segments. Accordingly, PXRE does not review and evaluate the financial results of its operating segments based upon balance sheet data and these other income statement items.

Operating Segments-Catastrophe and Risk Excess

     Our primary business during 2006 was our catastrophe and risk excess business. Our catastrophe and risk excess portfolio consisted principally of property catastrophe excess of loss, property pro-rata, property catastrophe retrocessional, property risk excess, and marine excess and aerospace excess reinsurance coverages. The catastrophe and risk excess segment accounted for substantially all of our net premiums earned for the years ended December 31, 2006, 2005 and 2004. This portfolio can be characterized as being comprised of coverages involving higher expected margins and volatility.

     Net premiums earned in this segment were $84.9 million, $389.6 million and $301.8 million for the years ended December 31, 2006, 2005 and 2004, respectively. The decrease in premium volume in 2006 was due to cancellation and non-renewal of many of our reinsurance contracts due to our ratings downgrades in February 2006.

     The increase in premium volume for the catastrophe and risk excess segment from 2001 through to 2005 was largely attributable to increases in the volume of business underwritten, and the rates charged, as a result of large losses from catastrophic events (including the events of September 11, 2001 and Hurricanes Charley, Frances, Ivan and Jeanne that occurred in 2004). The increase in 2005 can also be attributed to net reinstatement and additional premiums of $43.9 million associated with Hurricanes Katrina, Rita and Wilma.

     The catastrophe and risk excess segment produced underwriting income of $59.8 million for the year ended December 31, 2006. This underwriting income was primarily attributable to the absence of any significant loss events during 2006 as well as net favorable development on our prior year losses and loss expenses, offset by a decrease in net premiums earned due to the cancellation and non-renewal of the majority of our reinsurance portfolio following our ratings downgrades in February 2006.

     The catastrophe and risk excess segment produced an underwriting loss of $664.4 million for the year ended December 31, 2005. The primary cause of this underwriting loss was the impact of catastrophe losses arising from Hurricanes Katrina, Rita and Wilma of $806.9 million, after reinsurance recoveries on our outwards reinsurance program and the impact of inwards and outwards reinstatements and additional premiums. The underwriting loss from Hurricanes Katrina, Rita and Wilma affected both the North American and International segments due to treaties with worldwide coverage.

     Largely as a result of the occurrence of Hurricanes Charley, Frances, Ivan and Jeanne, the catastrophe and risk excess segment produced underwriting income of only $70.2 million for the year ended December 31, 2004. The hurricane losses impacted both North American and International geographic segments as reinsurance being assumed from non-U.S. based clients was exposed to North American and Caribbean perils.

     For 2006, 2005 and 2004, approximately 79%, 70% and 75%, respectively, of our property catastrophe and risk excess net premiums written were derived from clients located outside of North America, including clients located in the United Kingdom, Continental Europe, Latin America, the Caribbean, Bermuda, Australia and Asia.

     The following table presents the distribution of our net premiums written, net premiums earned, losses and loss expenses incurred, commission and brokerage, net of fee income and our underwriting income (loss) for the periods indicated under our catastrophe and risk excess segment.

Catastrophe and Risk Excess Segment:		Year Ended December 31,
($000’s)		2006				2005				2004
Net Premiums Written (1)
International		$	110,923			$	378,583			$	250,505
North American			30,148				159,101				85,661
Excess of Loss Cessions			(87,137	)			(129,413	)			(28,729	)
		$	53,934			$	408,271			$	307,437
Net Premiums Earned (1)
International		$	128,450			$	372,433			$	249,365
North American			44,809				148,506				87,109
Excess of Loss Cessions			(88,311	)			(131,357	)			(34,655	)
		$	84,948			$	389,582			$	301,819
Losses and Loss Expenses Incurred
International		$	(15,248	)		$	737,749			$	163,781
North American			25,489				428,185				39,766
Excess of Loss Cessions			(3,751	)			(161,163	)			(4,649	)
		$	6,490			$	1,004,771			$	198,898
Commission and Brokerage, Net of Fee Income
International		$	10,241			$	25,910			$	21,898
North American			7,612				16,306				10,550
Excess of Loss Cessions			844				7,040				281
		$	18,697			$	49,256			$	32,729
Underwriting Income (Loss) (2)
International		$	133,457			$	(391,226	)		$	63,686
North American			11,708				(295,985	)			36,793
Excess of Loss Cessions			(85,404	)			22,766				(30,287	)
		$	59,761			$	(664,445	)		$	70,192

     Property Catastrophe Excess of Loss Reinsurance. Our property catastrophe excess of loss reinsurance business reinsured catastrophic perils for insurance companies on a treaty basis and provided protection for most catastrophic losses that are covered in the underlying insurance policies written by our clients. The perils in our portfolio underlying the North American portion of this segment emanated principally from East Coast and Gulf Coast hurricanes and Midwest and West Coast earthquakes. The perils underlying the International portion of this segment emanated principally from European, Japanese and Caribbean windstorm, flood and earthquake risks. In addition, we were exposed to major oil rig explosions, cruise ship disasters, satellite failures, commercial airplane crashes and similar risks throughout the world. This business was generally comprised of reinsurance contracts that incur losses only when events occur that impact more than one risk or insured. Coverage for other perils can be negotiated on a case-by-case basis. Protection under property catastrophe treaties was generally provided on an occurrence basis, allowing our ceding company clients to combine losses that have been incurred in any single event from multiple underlying policies.

     The property catastrophe excess of loss reinsurance business operates on a subscription basis, with the reinsurance intermediaries seeking participation for specific treaties among a number of reinsurers. All subscribing reinsurers participate at substantially the same pricing, terms, and conditions.

     Property Catastrophe Retrocessional Reinsurance. We entered into retrocessional contracts that provide property catastrophe coverage to other reinsurers or retrocedents. In providing retrocessional coverage, we focused on reinsurance that covers the retrocedent on an excess of loss basis when aggregate claims and claim expenses from a single occurrence of a covered peril and from a multiple number of reinsureds exceed a contractually specified attachment point. The coverage provided under excess of loss retrocessional contracts may be on a worldwide basis or limited in scope to selected geographic areas. Coverage can also vary from “all property” perils to limited coverage on selected perils, such as “earthquake only” coverage.

     Retrocessional coverage is characterized by high volatility, principally because retrocessional contracts expose a reinsurer to an uncertain level of correlation with other existing reinsurance contracts. In addition, the information available to retrocessional underwriters concerning the original primary risk can be less precise than the information received from primary companies directly. The lack of precision in the information received from retrocessional clients also increases the difficulty of estimating losses in the immediate aftermath of a catastrophe event. Moreover, exposures from retrocessional business can change within a contract term if the underwriters of a retrocedent dramatically alter their book of business after retrocessional coverage has been bound.

     Property Risk Excess Reinsurance. Our property risk excess business reinsured individual property risks of ceding companies on a treaty basis. This business was comprised of a highly diversified portfolio of property risk excess reinsurance contracts covering claims from individual insurance policies issued by our ceding company clients. Loss exposures in this business included the perils of fire, explosion, collapse, riot, vandalism, wind, tornado, flood and earthquake. For the year ended December 31, 2006, 100% of the clients reinsured by us in this business were located internationally, based on net premiums written.

     Because the reinsurance contracts written in this business are exposed to losses on an individual policy basis, we underwrote and priced the agreements based on anticipated claims frequency. We used actuarial techniques to examine our ceding companies’ underwriting results as well as the underwriting results from the ceding companies with comparable books of business and pertinent industry results. These experience analyses were compared against actuarial exposure analyses to refine our pricing assumptions. Our pricing also took into account our variable and fixed expenses and our assessment of an appropriate return on the capital required to support each individual contract relative to our portfolio of risks.

     Reinsurance contracts that provide coverage of individual underlying insurance policies may contain significant risk of accumulation of exposures to natural and other perils. Our underwriting process recognizes these exposures. Natural perils, such as windstorm and earthquake, are analyzed through our modeling systems. Other perils, such as fire, terrorism events and flood, are considered on a contract-by-contract basis and monitored for cumulative aggregate exposure.

     This property per risk business operates as a subscription market. Those reinsurers that ultimately subscribe to any given treaty participate at substantially the same pricing, terms, and conditions.

     Aerospace Reinsurance. Our aerospace business included hull, aircraft liability, aircraft products and space coverages. We wrote all of these exposures as reinsurance and retrocessional coverages. In all cases, we track our exposures by original insured in order to monitor our maximum exposures by major airline and by major manufacturer. The space business includes satellite launch and in-orbit coverage. We had chosen to write space business predominately on a proportional reinsurance basis where we sought to provide retrocessional support to underwriters that have demonstrated a positive track record in this business.

     Marine Reinsurance. The marine portfolio was very limited and provided retrocessional coverage primarily against large insured market losses in the offshore energy, protection and indemnity, and pollution business segments. In 2006 and 2005, we did not underwrite any marine reinsurance contracts.

Operating Segments-Exited Lines

     Our exited lines segment consists principally of North American general liability, commercial and personal auto liability, risk excess and other liability coverages; International pro rata casualty coverages; all business written through PXRE Lloyd’s Syndicate 1224; and credit coverages and finite risk coverages. In the third quarter of 2000, we ceased accepting new and renewal risks at PXRE Lloyd’s Syndicate 1224. We ceased underwriting virtually all of the other non-finite business within the exited lines segment in 2001 and all premiums written and earned relate to reinsurance contracts that were entered into prior to September 2001, but for which coverage had not expired. We ceased underwriting finite risk business in 2004.

     The exited lines segment accounted for negative $0.4 million, negative $1.3 million and $2.4 million of net premiums written in 2006, 2005 and 2004, respectively. Virtually all of the premiums under these contracts have now been earned and we do not expect to report a material amount of premiums in this segment in 2007. In 2006, 2005 and 2004, the exited lines segment produced underwriting losses of $6.6 million, $7.7 million and $22.8 million, respectively. Underwriting losses for the exited lines segment in 2004 related primarily to adverse loss development on a finite contract with Lumbermens Mutual Casualty Company (“LMC”). During the fourth quarter of 2004, this contract was commuted.

     In the fourth quarter of 2005, we sold PXRE Limited, the sole corporate capital provider to PXRE Lloyd’s Syndicate 1224, to Chaucer Holdings PLC (“Chaucer”) and agreed terms for the reinsurance to close of the liabilities of PXRE Lloyd’s Syndicate 1224 into a Lloyd’s syndicate controlled by Chaucer. As part of the transaction, PXRE Bermuda entered into a stop loss reinsurance contract with the Chaucer Syndicate, pursuant to which PXRE Bermuda is obligated to indemnify the Chaucer Syndicate if reinsurance liabilities arising from the PXRE Lloyd’s Syndicate 1224 exceed £6.0 million (approximately $11.6 million), subject to an aggregate limit of liability of £12.0 million (approximately $23.2 million). Prior to the sale, net loss reserves for Lloyd’s Syndicate 1224 were $11.1 million. As of December 31, 2006 and 2005, PXRE Bermuda has $1.1 million of net loss reserves related to the stop loss reinsurance contract.

     The following table presents the distribution of our net premiums written, net premiums earned, losses and loss expenses incurred, commission and brokerage, net of fee income and our underwriting (loss) income for the periods indicated under our exited lines segment.

Exited Lines Segment:		Year Ended December 31,
($000’s)		2006				2005				2004
Net Premiums Written (1)
International		$	(499	)		$	(272	)		$	(119	)
North American			74				(994	)			2,469
		$	(425	)		$	(1,266	)		$	2,350
Net Premiums Earned (1)
International		$	(499	)		$	(268	)		$	(121	)
North American			80				(990	)			6,374
		$	(419	)		$	(1,258	)		$	6,253
Losses and Loss Expenses Incurred
International		$	(1,188	)		$	(4,012	)		$	(4,618	)
North American			7,141				10,764				32,067
		$	5,953			$	6,752			$	27,449
Commission and Brokerage, Net of Fee Income
International		$	59			$	17			$	417
North American			127				(314	)			1,180
		$	186			$	(297	)		$	1,597
Underwriting (Loss) Income (2)
International		$	630			$	3,727			$	4,080
North American			(7,188	)			(11,440	)			(26,873	)
		$	(6,558	)		$	(7,713	)		$	(22,793	)

Business: Underwriting

     In the past, we have pursued a core strategy of short-tail, high-severity, low frequency lines of business. Reinsurance treaties were reviewed for compliance with our general underwriting standards and nearly all treaties were evaluated in part based upon our internal quantitative analysis using our proprietary, internally developed models as well as third party models. We sought to manage our risk of loss through a combination of aggregate exposure limits, underwriting guidelines that take into account risks, prices and coverage and retrocessional agreements. As we underwrote risks from a large number of clients based on information generally supplied by reinsurance brokers, there was a risk of developing a concentration of exposure to loss in certain geographic areas prone to specific types of catastrophes. We developed systems and software tools to monitor and manage the accumulation of our exposure to such losses. We established guidelines for maximum tolerable losses from a single or multiple catastrophic events based on historical data and probabilistic risk limits. No assurance, however, can be given that these guidelines for probabilistic risk limits will not be exceeded in an actual event. In fact, these guidelines for probabilistic risk limits for a single event were exceeded by the unprecedented accumulation of exposures in the Hurricane Katrina loss.

     Risk Limits

     We sought to manage our risk of loss through a combination of aggregate exposure limits, underwriting guidelines that take into account risks, prices and coverage and retrocessional agreements. As we underwrote risks from a large number of clients based on information generally supplied by reinsurance brokers, there was a risk of developing a concentration of exposure to loss in certain geographic areas prone to specific types of catastrophes. We developed systems and software tools to monitor and manage the accumulation of our exposure to such losses. We established guidelines for maximum probabilistic 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.

     The purpose of the probabilistic risk limit is to seek to constrain the maximum amount of net loss the Company could incur from a catastrophe event with a given mathematical probability. For calendar year 2006 and prior periods, the Company had established internal risk parameters whereby the Company did not want to lose more than 25% of its beginning of calendar year total “capital” (“capital” being defined as the sum of shareholders’ equity and subordinated debt) from a single large catastrophic event after adjusting the income statement effect of the gross loss from such an event for (a) reinsurance recoveries and net reinstatement premiums received associated with the catastrophic event and (b) the expected profitability of the Company for the calendar year excluding the catastrophic event. Because it is probabilistic, the single event probabilistic risk limit did not seek to be the maximum that could be lost from a particular event. What it did seek to do, based on internal and third-party catastrophe models, was to estimate the amount of loss from an event in each zone with a remote annual probability.

     The largest assumption made in calculating the amount of exposure which could be accepted in compliance with the single event probabilistic risk limit is the perils that are simulated in the third party catastrophe models. The next largest assumption is the frequency assumptions for catastrophes with given physical characteristics. Finally, the exposure information provided by our clients is subject to change throughout the contract term. We assumed that the information we had was correct and made assumptions for any missing data and expected changes in the portfolio during the contract term. All of these assumptions could give rise to potential differences between any actual event and the single event probabilistic risk limit.

     The Company has never exceeded its single event probabilistic risk limit in any event other than Hurricane Katrina. Under the guidelines of the probabilistic risk limits in place during 2005, we sought to limit our gross loss and loss expenses from any single event to $683.0 million. Our gross losses and loss expenses arising from Hurricane Katrina were $771.0 million as of December 31, 2005, which was $88.0 million over our guidelines for the probabilistic risk limits. Several factors contributed to the Company’s exceeding its probabilistic risk limits in Hurricane Katrina. In setting probabilistic risk limits, we are heavily reliant on third party catastrophe models, which did not include flood damage assessments other than storm surge associated with wind events in the US. Although we attempt to account for the flood uncertainty in setting our risk limits, the losses arising from flood coverage provided by our cedents to their policyholders for Hurricane Katrina were more widespread than in past hurricanes. In certain cases, losses were larger than expected for those treaties which saw increases in cedents exposures in the US Gulf Coast from the time they purchased reinsurance from us to the time of Hurricane Katrina. Finally, the unprecedented characteristics of Hurricane Katrina resulted in significant losses under treaties which would not normally be expected to trigger such losses in a hurricane.

     We utilized a two-tier approach to risk management, including both overall risk limits and a portfolio optimization system. Our portfolio optimization system incorporates third-party catastrophe modeling software and internally developed models. Our software tools use exposure data provided by our ceding company clients to simulate catastrophic losses.

     Data output from the commercial modeling software is incorporated in our proprietary model for multiple purposes. First, the data is used to estimate the amount of reinsurance premium that is required to pay the long-term expected losses under the proposed contracts. Second, the data is used to estimate correlation among the contracts we have written. The degree of correlation is used to estimate the incremental capital required to support our participation on each proposed contract. Finally, the data is used to monitor our cumulative exposure to individual perils across all of our businesses. This system is used to price each reinsurance contract based on marginal capital requirements, and enables our underwriters to dynamically evaluate potential new business and exposures against the background of our existing business to optimize the overall portfolio. Any new business bound is incorporated in this analytical approach to enable a real-time assessment of the portfolio.

     Our pricing of property catastrophe reinsurance contracts is based on a combination of modeled loss estimates, actual ceding company loss history, surcharges for potential unmodeled exposures (such as flooding), fixed and variable expense estimates and profit requirements. The profit requirements are based on incremental capital usage estimates described above and our required return on consumed capital.

     Our portfolio was also subject to probabilistic risk limits for the business as a whole, by territory and by type of events.

     We maintain strict limits on our departmental underwriting authority. All risks of up to $1.5 million per treaty program must be approved by a minimum of two underwriters, one of whom must be the department head. All risks above $1.5 million must be referred to our underwriting committee. While the Company was underwriting in 2006, the committee was comprised of our Chief Executive Officer, Chief Operating Officer and two senior underwriters. The number of committee members required for approval of a program increases with the amount of risk involved. One underwriter and at least one member of the underwriting committee other than the underwriter’s department head must approve treaty program lines in excess of $1.5 million and up to $5.0 million. At least two members of the underwriting committee must approve any treaty program lines that are greater than $5.0 million or any programs that are deemed outside the predominant risk distribution of the overall portfolio.

Business: Marketing

     During 2006, we provided reinsurance for international insurance and reinsurance companies headquartered, principally, in the United Kingdom, Continental Europe, Latin America, the Caribbean, Bermuda, Australia and Asia. In the United States, we reinsured national and regional insurance and reinsurance companies and specialty insurance companies.

     Historically, we have obtained substantially all of our reinsurance business through reinsurance intermediaries, which represent our clients in negotiations for the purchase of reinsurance. None of the reinsurance intermediaries through whom we obtain this business are authorized to arrange any business in our name without our approval. We pay commissions to these intermediaries or brokers that vary in size based on the amount of premiums and type of business ceded. These commission payments constitute part of our total acquisition costs and are included in our underwriting expenses. We generally pay reinsurance brokerage commissions believed to be comparable to industry norms.

     In both 2006 and 2005, substantially all of gross premiums written were written in the broker market. Approximately 100% of gross premiums written for the year ended December 31, 2006 were arranged through brokers individually representing 10% or more of gross premiums written including Benfield Greig Ltd. (approximately 41%), the worldwide branch offices of Guy Carpenter & Company, Inc., a subsidiary of Marsh & McLennan Companies, Inc. (approximately 22%), Willis Re Inc. (approximately 14%), and Aon Group Ltd. (approximately 12%). The commissions we paid to these intermediaries are generally at the same rates as those paid to other intermediaries. The Company’s policy is not to pay different commission rates based on volume.

Business: Competition

     Our counterparty credit and financial strength ratings were downgraded by the major rating agencies in February 2006 to a level that is generally unacceptable to most of our reinsurance clients. These ratings downgrades had a significant negative impact on our competitive position within all of our lines of reinsurance business.

     Ratings have become an increasingly important factor in establishing the competitive position of reinsurance companies. Due to the ratings downgrades in February 2006 of our reinsurance subsidiaries by A.M. Best, S&P and Moody’s, our competitive position in the reinsurance industry suffered, and we were unable to retain our reinsurance portfolio or renew existing reinsurance agreements. The downgrades resulted in the loss of virtually all of our reinsurance business as ceding companies and brokers that place such business moved to other reinsurers with higher ratings.

     Competitive forces in the property and casualty reinsurance industry are substantial. We operate in an industry that is highly competitive and is undergoing a variety of challenging developments. The industry has in recent years placed increased importance on credit ratings, size and financial strength in the selection of reinsurers. This trend became more pronounced in the wake of September 11, 2001, with the formation at that time and subsequently, particularly following the losses resulting from Hurricanes Katrina, Rita and Wilma, of many new large, well-capitalized reinsurance companies in Bermuda.

     Many of these start-ups are focusing on the short tail property reinsurance markets in which PXRE has historically competed. Other existing competitors have also formed “side car” reinsurers to supplement their existing capacity to underwrite short tail property reinsurance business. Additionally, reinsurers are tapping new markets and complementing their range of traditional reinsurance products with innovative new products that bring together capital markets and reinsurance experience.

     We compete with numerous major reinsurance and insurance companies. These competitors, many of whom have higher credit ratings, substantially greater financial, marketing and management resources than us, include independent reinsurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain commercial insurance companies and underwriting syndicates. We also may face competition from new market entrants or from market participants that decide to devote greater amounts of capital to the types of business written by us.

     In particular, we compete with reinsurers that provide property-based lines of reinsurance, such as ACE Tempest Reinsurance Ltd., Arch Reinsurance Ltd., Aspen Insurance Holdings Limited, AXIS Reinsurance Company, Endurance Specialty Insurance Ltd., Everest Reinsurance Company, IPC Re Limited, Lloyd’s of London syndicates, Montpelier Reinsurance Ltd., Munich Reinsurance Company, Partner Reinsurance Company Ltd., Platinum Underwriters Reinsurance, Inc., Renaissance Reinsurance Ltd., Swiss Reinsurance Company and XL Re Ltd. Competition varies depending on the type of business being insured or reinsured.

     It is difficult to accurately measure the annual industry premium related to catastrophe and risk excess reinsurance; and therefore, it is difficult to measure PXRE’s share of this market. Several factors contribute to this lack of market information, including the fact that catastrophe reinsurance is often written by non-public reinsurance companies and public multi-line reinsurance companies often do not disclose the amount of catastrophe and risk excess reinsurance that they write. While we have access to the transactions presented to us, we do not have access to all of the transactions in the market. Furthermore, we may not know the final outcomes of all business submitted to PXRE due to (i) not receiving allocations on all business authorized and (ii) not authorizing all business submitted. As a result of our 2006 ratings downgrades, it is not possible to predict our market share in 2007, but we expect it will be significantly less than 2005.

Business: Ceded Reinsurance Agreements

     We selectively managed our catastrophe exposures and increased our underwriting commitments by retroceding some of our underwritten risks to other reinsurers through various retrocessional arrangements. Our ceded reinsurance underwriting committee consisted of our Chief Executive Officer, Chief Financial Officer and one senior underwriter responsible for the selection of reinsurers as quota share reinsurers or as participating reinsurers in the catastrophe coverage protecting us. 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 our approval. Although management carefully selects our retrocessionaires, we are subject to credit risk with respect to our retrocessionaires because the ceding of risk to retrocessionaires does not relieve us of our liability to clients.

     The following table sets forth certain information regarding the volume of premiums we ceded to other reinsurers pursuant to retrocessional agreements for the periods indicated:

		Year Ended December 31,
($000’s)		2006				2005				2004
Gross premiums written		$	138,776			$	542,325			$	346,035
Reinsurance ceded premiums written:
Quota share reinsurers			191				814				(5,704	)
Catastrophe coverage and other			(85,458	)			(136,134	)			(30,544	)
Total reinsurance ceded premiums written			(85,267	)			(135,320	)			(36,248	)
Net premiums written		$	53,509			$	407,005			$	309,787

     The decrease in reinsurance ceded premiums written during 2006 as compared to 2005 was largely due to ceded reinstatement and additional premiums related to Hurricanes Katrina, Rita and Wilma recognized during 2005 compared to virtually none in 2006, offset, in part, by an increase of $57.7 million in ceded premiums written associated with excess of loss retrocessional catastrophe coverage during 2006, including one of the collateralized catastrophe facilities entered into during the fourth quarter of 2005 to protect the Company against a severe catastrophe event and the related early termination charge of approximately $17.6 million.

     In addition, in the fourth quarter of 2005, PXRE sponsored a catastrophe bond transaction which was determined to be a derivative and recorded at fair value. During 2006, the increase of $16.9 million in other reinsurance related expense was due to the change in fair value of this derivative, principally due to the passage of one year of the transaction’s risk coverage for calendar year 2006. The derivative will also provide $125.0 million of coverage for the period from January 1, 2007 to December 31, 2008 for second event losses in the same calendar year arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California. The recovery is based on modeled losses and is not limited to PXRE’s ultimate net loss from the loss event.

     We had reinsurance recoverables of $38.7 million as of December 31, 2006, which represents a 65% decrease from the reinsurance recoverables of $111.9 million at December 31, 2005. Approximately 92% of our reinsurance recoverables at December 31, 2006 are either fully collateralized or reside with entities rated “A-” or its equivalent or higher by A.M. Best or S&P (as of January 2007).

     Our ten largest reinsurance recoverables as of December 31, 2006, ranked by the amount of the reinsurance recoverable, are listed below:

						Amount of
						Reinsurance
		Amount of				Recoverable,
Reinsurer		Reinsurance				Net of
($000’s)		Recoverable				Collateral				Rating(1)
GE ERC Strategic Reinsurance Limited		$	16,060			$	—				A
Swiss Reinsurance America Corporation			8,030				6,163				A+
Auto Owners Group			2,670				2,290				A+
Tower Insurance Company			2,475				2,475				A -
Everest Reinsurance Limited — UK			1,651				1,651				A+
American Healthcare Indemnity			1,495				1,243				B+
Merrimack Mutual Fire			1,437				1,267				A+
Lloyds 2020 – Wellington			922				824				A
Farm Bureau Group of Iowa			775				—				A
Continental Casualty Company			695				695				A
		$	36,210			$	16,608

     All of our outstanding reinsurance recoverables for Hurricanes Katrina, Rita and Wilma were collected as of December 31, 2006.

Business: Loss Liabilities and Claims

     We establish loss and loss expense liabilities (to cover expenses related to settling claims, including legal and other fees) to provide for the ultimate cost of settlement and administration of claims for losses, including claims that have been reported to us by our reinsureds and claims for losses that have occurred but have not yet been reported to us. Under GAAP, we are not permitted to establish loss reserves until an event that may give rise to a claim occurs.

     For reported losses, we establish liabilities when we receive notice of the claim. It is our general policy to establish liabilities for reported losses in an amount equal to the liability set by the reinsured. In certain instances, we 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 our provision for such liabilities. In general, these methods involve the extrapolation of reported loss data to estimate ultimate losses. Our loss calculation methods generally rely upon a projection of ultimate losses based upon the historical patterns of reported loss development. Additionally, we establish provisions through our liabilities for incurred but not reported losses for any identified deficiencies in the liabilities for reported losses set by our reinsureds.

     In reserving for catastrophe losses, our estimates are influenced by underwriting information provided by our clients, industry catastrophe models and our internal analyses of this information. This reserving approach can cause significant development for an accident year. As an event matures, we rely more on our own development patterns by type of event as well as contract information to project ultimate losses for the event. Our loss estimation methods are described in more detail under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policy Disclosures – Estimation of Losses and Loss Expenses.” Reserving for catastrophe losses is an inherently uncertain process and there is a risk that our ultimate liability for a catastrophe event will exceed our best estimate of such liability.

     In reserving for non-catastrophe losses from recent years, we are usually required to make assumptions concerning the expected loss ratio usually for broad lines of business, but sometimes on an individual contract basis. We consider historical loss ratios for each line of business and utilize information provided by our clients and estimates provided by underwriters and actuaries concerning the impact of pricing and coverage changes. As experience emerges, we revise our prior estimates concerning pricing adequacy and non-catastrophe loss potential for our coverages and we will eventually rely solely on our estimated development pattern in projecting ultimate losses.

     Management believes that our overall liability for losses and loss expenses recorded as of December 31, 2006 is adequate. There is a risk that our liability for losses and loss expenses could prove to be greater than expected in any year, because of the inherent uncertainty in the reserving process 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.

     Our liability for losses and loss expenses has an average expected duration of 2 years for the catastrophe and risk excess segment and an average duration of 5 years for the exited lines segment.

     Historically, we have 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 that have an established historical pattern of losses. In addition, we are required to make estimates of losses based on limited information from ceding companies as well as our own underwriting data due to the significant reporting delays that normally occur under our retrocessional book of business and with respect to insured losses that occur near the end of a reporting period. Additionally, our estimates are subject to a high level of uncertainty due to the short period of time that has passed since Hurricanes Katrina, Rita and Wilma occurred, and the extremely complex and unique causation and coverage issues associated with Hurricane Katrina, including the appropriate attribution of losses to wind or flood damage as opposed to other perils such as fire, business interruption or civil commotion. The underlying personal lines policies generally contain exclusions for flood damage; however, water damage caused by wind may be covered. We expect that causation and coverage issues may not be resolved for a considerable period of time and may be influenced by evolving legal and regulatory developments. Our loss estimation methods for these hurricanes are described in more detail under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policy Disclosures – Estimation of Losses and Loss Expenses.”

     Historically, we have underwritten a small amount of casualty reinsurance. In 1998, we began underwriting new casualty lines of business and, in 1999 and 2000 we substantially expanded our casualty and finite businesses. In September 2001, we ceased underwriting non-finite casualty business. In the first half of 2004, we ceased underwriting finite risk business. With respect to our casualty business, significant delays, ranging up to several years or more, can be expected between the reporting of a loss to us and settlement of our 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 our claims handling procedures. In addition, most of the risks reinsured in our finite business are also casualty risks and are subject to some of the same risks as our casualty business. 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, the necessary reliance on the ceding companies for information regarding reported claims and differing reserving practices among ceding companies.

     Our difficulty in accurately predicting casualty losses may also be exacerbated by the limited amount of statistically significant historical data regarding losses on our casualty lines of business. We must therefore rely on the inherently less reliable historical loss patterns reported by ceding companies and industry loss standards in calculating our casualty reserves. Thus, the actual casualty losses and loss expenses may deviate, perhaps substantially, from estimates of liabilities reflected in our 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, 2006, 2005 and 2004. Except with respect to certain workers’ compensation liabilities, discounted by $0.7 million and $0.6 million at December 31, 2006 and 2005, respectively, we do not discount our loss and loss expense liabilities; that is, we do not calculate them on a present value basis.

		Year Ended December 31,
($000’s)		2006				2005				2004
Gross GAAP liability for losses and loss expenses, beginning of year		$	1,320,126			$	460,084			$	450,635
Gross provision for losses and loss expenses:
Occurring in current year			22,856				1,158,583				219,939
Occurring in prior years			(1,604	)			22,474				17,570
Total gross provision			21,252				1,181,057				237,509
Gross payments for losses and loss expenses:
Occurring in current year			(4,530	)			(111,179	)			(18,234	)
Occurring in prior years			(739,016	)			(202,385	)			(213,228	)
Total gross payments			(743,546	)			(313,564	)			(231,462	)
Retroactive reinsurance assumed			—				—				(1,037	)
Foreign exchange and other adjustments			5,409				(7,451	)			4,439
Gross GAAP liability for losses and loss expenses, end of year		$	603,241			$	1,320,126			$	460,084
Ceded GAAP liability for losses and loss expenses, end of year			(35,327	)			(107,655	)			(61,215	)
Net GAAP liability for losses and loss expenses, end of year		$	567,914			$	1,212,471			$	398,869

     In 2005, Hurricanes Katrina, Rita and Wilma accounted for $1,014.5 million of gross incurred losses. During 2006, there was less than $0.5 million of adverse development to our estimate of net losses and loss expenses for Hurricanes Katrina, Rita and Wilma.

     Approximately ninety-five percent of our projected net ultimate incurred loss for Hurricanes Katrina, Rita and Wilma has been formally reported to us as paid or case reserves. However, as of December 31, 2006, we have paid less than 60% of our net incurred loss amounts with respect to these hurricanes. Accordingly, the liability for loss and loss expenses incurred with respect to Hurricanes Katrina, Rita and Wilma represents management’s best estimate of our ultimate liability for claims arising from these catastrophes. Our estimation of loss and loss expense liability involves significant uncertainties and is based on complex and subjective judgments. Because of the uncertainty in the process of estimating our losses from catastrophe events, there is a risk that our liability for losses and loss expenses could prove to be inadequate, with a consequent adverse impact on our future earnings and shareholders’ equity. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Update on Critical Accounting Policy Disclosures – Estimation of Losses and Loss Expenses.”

     Our incurred loss for these events represents our best estimate, which is primarily based on reported claims, modeling, a review of affected contracts and discussions with our clients; however, some of our cedents who have incurred losses from multiple events, may have the ability to choose which losses to cede, and as such, in future periods they may reallocate losses amongst the 2005 events.

     The following table presents the development of our GAAP balance sheet liability for losses and loss expenses for the period 1996 through 2006. 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 us. The upper portion of the table shows the cumulative amounts subsequently paid as of successive years with respect to such liabilities. The lower portion of the table shows the re-estimated amount of previously recorded liabilities based on experience as of the end of each succeeding year. These estimates change as more information becomes known about the frequency and severity of claims for individual years. A redundancy (deficiency) exists when the re-estimated 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 1998 to be $150,000 was first reserved in 1996 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 1996-1997 shown below. This table does not present accident or policy year development data.

     

		Year Ended December 31,
($000’s, except percentages)		2006				2005				2004				2003				2002				2001				2000				1999				1998				1997				1996
Gross liabilities for losses and loss expenses		$	603,241			$	1,320,126			$	460,084			$	450,635			$	447,829			$	453,705			$	251,620			$	261,551			$	102,592			$	57,189			$	61,389
Cumulative amount of liability paid through:
One year later							739,016				202,385				213,228				142,803				151,264				85,904				210,519				75,814				29,108				23,708
Two years later											310,784				284,020				320,231				262,860				140,051				265,904				102,526				39,853				40,673
Three years later															338,955				372,655				419,824				172,147				294,211				112,966				47,373				46,545
Four years later																			407,776				468,925				287,101				308,432				118,441				50,085				52,220
Five years later																							490,462				319,277				332,514				124,796				52,181				54,144
Six years later																											329,804				350,467				129,476				54,615				55,863
Seven years later																															354,511				139,477				56,330				57,324
Eight years later																																			141,717				61,699				58,680
Nine years later																																							62,466				60,681
Ten years later																																											61,438
Liabilities re-estimated as of:
One year later							1,323,847				478,714				471,368				500,643				499,773				285,959				338,881				135,227				57,280				66,257
Two years later											495,086				464,117				530,053				552,169				307,042				344,773				141,087				52,271				63,292
Three years later															476,620				523,378				588,899				330,963				351,349				139,220				63,151				61,178
Four years later																			537,330				581,066				354,300				359,604				140,178				62,664				66,137
Five years later																							598,975				345,107				369,589				143,745				63,973				65,819
Six years later																											357,163				363,201				145,071				63,706				66,724
Seven years later																															367,156				146,559				64,184				65,717
Eight years later																																			147,152				66,695				65,935
Nine years later																																							66,409				65,211
Ten years later																																											64,973
Gross reserves of TREX at date of merger							—				—				—				—				—				—				—				—				—				9,589
Gross reserve for elimination of one quarter lag for UK subsidiary							—				—				—				—				—				—				—				(1,191	)			—				—
Gross retroactive accounting							—				—				(1,037	)			(8,074	)			2,817				2,055				—				—				—				—
Foreign exchange and other adjustments							5,325				2,141				1,128				922				683				592				55				42				38				34
Gross cumulative (deficiency) redundancy through December 31, 2006:
Amount							1,604				(32,861	)			(25,893	)			(96,654	)			(141,770	)			(102,895	)			(105,550	)			(45,709	)			(9,182	)			6,039
Percentage							0	%			(7	%)			(6	%)			(22	%)			(31	%)			(41	%)			(40	%)			(45	%)			(16	%)			9	%
Retrocessional recoveries							8,809				1,647				6,583				18,483				25,762				20,794				30,211				12,199				5,803				(688	)
Net cumulative (deficiency) redundancy through December 31, 2006:
Amount							10,413				(31,214	)			(19,310	)			(78,171	)			(116,008	)			(82,101	)			(75,338	)			(33,510	)			(3,380	)			5,350
Percentage							1	%			(8	%)			(6	%)			(33	%)			(56	%)			(53	%)			(47	%)			(48	%)			(8	%)			10	%

     In calendar year 2006, we experienced net favorable development of $10.4 million. In calendar years 2005, 2004, 2003 and 2002 we experienced net adverse development of $23.9 million, $12.0 million, $44.7 million and $23.9 million, respectively.

     During 2006, we experienced net favorable development of $10.4 million for prior-year losses and loss expenses, comprised of $16.3 million of favorable development on our catastrophe and risk excess segment and $5.9 million of adverse development on our exited lines segment. The $16.3 million of prior year favorable development in the catastrophe and risk excess segment was primarily related to favorable reported loss activity on our prior-year non-significant catastrophe losses. During 2006, there was no material change to our estimate of net losses and loss expenses for Hurricanes Katrina, Rita and Wilma. Prior year losses in the exited lines segment increased because of higher than expected reported claims.

     During 2005, we experienced net adverse development of $23.9 million for prior-year losses and loss expenses, comprised of $17.3 million of adverse development on our catastrophe and risk excess segment and $6.6 million of adverse development on our exited lines segment. The $17.3 million of prior-year catastrophe and risk excess losses were primarily related to re-estimation of the 2004 storm losses following additional claim reports from cedents. Prior year losses in the exited lines segment increased because of higher than expected reported claims.

     During 2004, we experienced net adverse development of $12.0 million for prior-year losses and loss expenses, comprised of $11.4 million catastrophe and risk excess net favorable development and $23.4 million exited lines net adverse development. The favorable development in the catastrophe and risk excess business was primarily related to case reserve takedowns from past significant catastrophes, such as the 2002 European floods. The $23.4 million net adverse development related to exited lines was due primarily to $13.7 million of adverse loss development related to an adverse litigation outcome concerning one aggregate excess of loss reinsurance contract (the “LMC XOL Contract”) that was commuted during the fourth quarter of 2004 following an adverse ruling in litigation. We also experienced $19.7 million of adverse development on our exited direct casualty reinsurance operations. The primary cause of the adverse development was higher than expected reported losses in 2004. Favorable development in other exited lines partially offset the adverse development experienced on the LMC XOL Contract and our exited direct reinsurance operations.

     During 2003, we experienced net adverse development of $44.7 million for prior-year losses and loss expenses, $21.8 million of which was due to loss development on our exited direct casualty reinsurance operations, $8.8 million adverse development from aerospace claims arising to a significant degree from our first receipt of notice that the increase in industry losses related to a 1998 air crash had resulted in the exhaustion of deductibles under three aerospace contracts between PXRE and Reliance Insurance Company and $8.2 million of development from finite contracts, $7.3 million of which related to the LMC XOL Contract noted above.

     The $21.8 million of 2003 adverse development attributable to our exited direct casualty reinsurance operations was primarily caused by $16.4 million of general liability development, with $15.3 million of this development attributable to the 2001 and 2000 accident years. In addition to the explicit recognition of more than expected reported losses during the year, there was a shift in actuarial methods with the maturing of the underwriting years.

     During 2002, we experienced net adverse development of $23.9 million for prior-year losses and loss expenses, with $16.9 million from our exited lines segment, $16.2 million of which was due to adverse loss development on our exited direct casualty reinsurance operations.

     In each of the calendar years 2001 to 2006, our exited direct casualty business had sustained losses beyond what was originally estimated. We underwrote this business primarily from 1999 to 2001. Initially, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policy Disclosures – Estimation of Losses and Loss Expenses,” we utilized several loss reserving techniques, including those which were dependent on industry loss reporting patterns as provided by various industry sources, estimates of pricing adequacy as measured by the expected loss ratio, and earned premiums. As the data and the business have matured, we have placed more weight on loss development techniques that rely on the loss reporting pattern and reported losses. As a result of shifting to actuarial methodologies more appropriate to a seasoned portfolio as well as new information from both the industry and clients, we have re-estimated our incurred losses recorded related to our direct casualty business for several years.

     During 2000, we experienced net adverse development of $59.6 million for prior-year losses and loss expenses, $43.4 million of which was due to loss development from catastrophic events that occurred late in 1999. In the last week of December 1999, French storms Lothar and Martin resulted in significant losses to several of our reinsureds. Because of the lateness in the year of the storms’ occurrences and the unprecedented nature of the catastrophes, only limited relevant data could be obtained from both our clients and the industry by the time the loss reserving estimates were required to be determined. As a result, our reserves (which utilize industry data as a check on client-supplied data) were increased in subsequent years due to the events that occurred at year-end 1999. There was a similar result in the estimation of losses due to Hurricane George, which occurred in 1998, in that industry wide losses were significantly underestimated.

     A large portion of our adverse development of our exited direct casualty business during the previous years was due to significant industry-wide underpricing of underwriting years 1998 to 2001. The complete effect of the soft market during that period was not initially reflected in the historical industry loss ratios. We estimate that the underpricing of these underwriting years amounted to $21.2 million of the $44.7 million of 2003 adverse development, $17.0 million of the $23.9 million of 2002 adverse development, $9.0 million of the $19.3 million of adverse development in 2001 and $10.5 million of the $59.6 million of adverse development in 2000.

     The adverse development in each of the years discussed above is due to a variety of factors outlined in the section “Management Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policy Disclosures – Estimation of Losses and Loss Expenses”, including late reporting by clients (particularly retrocedents) and the imprecise nature of the actuarial science accentuated when the risk is catastrophe coverage rather than large numbers of homogeneous small dollar risks. Our reserving assumptions are updated on an ongoing basis as new information becomes available to minimize this residual adverse development, which arises from many causes.

     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 the future adequacy or inadequacy of our reserves based on the foregoing.

Business: Investments

     In 2006, our investment strategy focused on maintaining the majority of our investment portfolio in high quality fixed income investments and short-term securities. As of December 31, 2006, approximately 98.7% of our investment portfolio was comprised of fixed maturity and short-term securities with a weighted average credit rating of AAA and approximately 1.3% of our portfolio was comprised of investments in four different hedge funds and other limited partnerships. One of our goals with respect to the investment portfolio is to achieve a low correlation between risks in our underwriting operation and risks in our investment portfolio. We utilize outside portfolio managers to manage our investments, with strict oversight by management and our Board of Directors.

     We have established general procedures and guidelines for our investment portfolio. General Re-New England Asset Management, Inc. (“NEAM”) and Mariner Investment Group, Inc. (“Mariner”), a specialist in alternative investments, are our principal investment managers. Our investment policies stress conservation of principal, diversification of risk and liquidity. As of December 31, 2006, our invested assets consist primarily of bonds with fixed maturities and short-term investments, but also include limited amounts of hedge funds and other non-hedge fund limited partnership investments. Our investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities.

     At December 31, 2006, we had, at fair value, $517.8 million in fixed maturities, $671.2 million in short-term investments (which we define as investments which have an original maturity of one year or less), $12.8 million in hedge funds, and $2.4 million in other invested assets that are comprised of other limited partnerships. See Note 4 of Notes to Consolidated Financial Statements. See also, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policy Disclosures – Valuation of Investments” and Item 7A. “Investments” for further information regarding our investment portfolio, including our hedge fund portfolio.

     Subsequent to, and as a result of, the downgrades in our ratings that occurred in February 2006, we sold approximately $490.5 million of fixed income securities held by PXRE Bermuda, and additionally executed redemption orders for all of the Company’s hedge fund investments. The proceeds of the sales of the fixed income securities were all received by the first week of March 2006 and were reinvested in commercial paper and other short term investments. With respect to the proceeds of the sales of the hedge fund investments, approximately 92% of such proceeds were received by December 31, 2006. The remainder is expected to be received by June 30, 2007. As a result of these steps, we believe we have sufficient liquidity to meet the currently foreseen needs of our counterparties.

     The following table summarizes our investments at December 31, 2006 and 2005 at carrying value:

		Analysis of Investments
		December 31, 2006								December 31, 2005
($000’s, except percentages)		Amount				Percent				Amount				Percent
Fixed maturities:
United States government securities		$	54,200				4.5	%		$	57,415				3.5	%
Foreign denominated securities			15,497				1.3				25,796				1.5
United States government sponsored agency debentures			53,426				4.4				190,591				11.6
United States government sponsored agency mortgage-backed securities			131,069				10.9				171,199				10.4
Other mortgage and asset-backed securities			166,765				13.9				418,829				25.4
Obligations of states and political subdivisions			1,243				0.1				1,526				0.1
Corporate securities			95,551				7.9				368,688				22.4
Total fixed maturities			517,751				43.0				1,234,044				74.9
Short-term investments			671,197				55.7				261,076				15.9
Total fixed maturities and short-term investments			1,188,948				98.7				1,495,120				90.8
Hedge funds			12,766				1.1				148,230				9.0
Other invested assets			2,427				0.2				3,142				0.2
Total investment portfolio		$	1,204,141				100.0	%		$	1,646,492				100.0	%

     At December 31, 2006, the fair value of our investment portfolio exceeded its cost by $2.5 million, of which $1.9 million related to unrealized appreciation from hedge funds and other invested assets and $0.6 million related to unrealized appreciation on fixed maturities. At December 31, 2005, the fair value of our investment portfolio exceeded its cost by $9.4 million, of which $15.9 million related to unrealized appreciation from hedge funds and other invested assets, offset in part by $6.5 million of unrealized depreciation on fixed maturities.

     The following table indicates the composition of our fixed maturity and short-term investments at fair value, by time to maturity at December 31, 2006 and 2005:

		Composition of Investments by Maturity
		December 31, 2006								December 31, 2005
($000’s, except percentages)		Amount				Percent				Amount				Percent
Maturity (1)
One year or less		$	744,658				62.6	%		$	460,435				30.8	%
Over 1 year through 5 years			378,357				31.8				883,594				59.1
Over 5 years through 10 years			60,565				5.1				145,891				9.8
Over 20 years			5,368				0.5				5,200				0.3
Total fixed maturities and short-term investments		$	1,188,948				100.0	%		$	1,495,120				100.0	%

     The average yield to maturity of our fixed maturities portfolio, including short-term investments at December 31, 2006 and 2005 was approximately 5.3% and 4.7%, respectively.

     The following table indicates the composition of our fixed maturities portfolio, at fair value, excluding short-term investments, by rating at December 31, 2006 and 2005:

						Composition of
		Fixed Maturities Portfolio By Rating (1)
		December 31, 2006								December 31, 2005
($000’s, except percentages)		Amount				Percent				Amount				Percent
United States government securities		$	54,200				10.5	%		$	57,415				4.7	%
Foreign denominated securities
Aaa and/or AAA			15,497				3.0				23,998				1.9
Aa2 and/or AA			—				—				1,798				0.2
United States government sponsored agency debentures
Aaa and/or AAA			52,924				10.2				190,086				15.4
Aa2 and/or AA			502				0.1				505				—
United States government sponsored agency mortgage-backed securities			131,069				25.3				171,199				13.9
Other mortgage and asset-backed securities
Aaa and/or AAA			166,036				32.1				415,920				33.7
Aa2 and/or AA			729				0.1				2,866				0.2
Not rated or below BB			—				—				43				—
Obligations of states and political subdivisions
Aaa and/or AAA			753				0.1				1,040				0.1
Aa2 and/or AA			490				0.1				486				—
Corporate securities
Aaa and/or AAA			15,952				3.1				18,316				1.5
Aa2 and/or AA			18,459				3.6				54,115				4.4
A2 and/or A			35,502				6.9				256,283				20.8
Baa2 and/or BBB			20,470				3.9				34,774				2.8
Ba2 and/or BB			—				—				5,200				0.4
Not rated or below BB			5,168				1.0				—				—
Total fixed maturities		$	517,751				100.0	%		$	1,234,044				100.0	%
Aaa and/or AAA		$	436,431				84.3	%		$	877,974				71.2	%
Aa2 and/or AA			20,180				3.9				59,770				4.8
A2 and/or A			35,502				6.9				256,283				20.8
Baa2 and/or BBB			20,470				3.9				34,774				2.8
Ba2 and/or BB and/or below			5,168				1.0				5,243				0.4
Total fixed maturities		$	517,751				100.0	%		$	1,234,044				100.0	%

     The following table summarizes our fixed maturity investments with unrealized losses at fair value by length of continuous unrealized loss position as of December 31, 2006:

		One Year or Less								Over One Year
						Unrealized								Unrealized
($000’s)		Fair Value				Loss				Fair Value				Loss
United States government securities		$	1,051			$	(7	)		$	47,627			$	(1,180	)
United States government sponsored agency debentures			7,715				(59	)			22,021				(596	)
United States government sponsored agency mortgage-backed securities			—				—				15,813				(588	)
Other mortgage and asset-backed securities			359				(1	)			47,254				(1,429	)
Obligations of states and political subdivisions			—				—				1,044				(16	)
Corporate securities			3,013				(20	)			47,501				(1,464	)
Total temporarily impaired securities		$	12,138			$	(87	)		$	181,260			$	(5,273	)

     During the year ended December 31, 2006, PXRE recorded $7.3 million in other than temporary impairment charges, $0.4 million of which was recovered due to sales of securities during the third and fourth quarters of 2006. The other than temporary impairment charges recorded in the current year relate to investments that the Company may not have the ability to hold to maturity or recovery as a result of the ratings downgrades of PXRE that occurred in February 2006.

     Unrealized losses amounting to $1.1 million of the total unrealized loss on fixed maturity investments as of December 31, 2006 relate to investments that PXRE has deposited in a trust for the benefit of a cedent in connection with certain finite reinsurance transactions. The remaining unrealized losses are primarily due to increases in interest rates since the purchase dates for individual securities.

     The following table summarizes our fixed maturity investments with unrealized losses at fair value by length of continuous unrealized loss position as of December 31, 2005:

		One Year or Less								Over One Year
						Unrealized								Unrealized
($000’s)		Fair Value				Loss				Fair Value				Loss
United States government securities		$	41,260			$	(1,116	)		$	6,286			$	(200	)
United States government sponsored agency debentures			50,736				(499	)			19,832				(589	)
United States government sponsored agency mortgage-backed securities			15,950				(404	)			2,791				(153	)
Other mortgage and asset-backed securities			40,781				(532	)			32,862				(1,063	)
Obligations of states and political subdivisions			560				(8	)			966				(20	)
Corporate securities			32,385				(566	)			36,924				(1,282	)
Total temporarily impaired securities		$	181,672			$	(3,125	)		$	99,661			$	(3,307	)

     During the year ended December 31, 2005, PXRE recorded $11.8 million in other than temporary impairment charges. The other than temporary impairment charges recorded in 2005 relate to investments that the Company may not have had the ability to hold to maturity or recovery as a result of the ratings downgrades of PXRE that occurred in February 2006.

     Unrealized losses amounting to $1.2 million of the total unrealized loss on fixed maturity investments as of December 31, 2005 relate to investments that PXRE has deposited in a trust for the benefit of a cedent in connection with certain finite reinsurance transactions. The remaining unrealized losses are primarily due to increases in interest rates since the purchase dates for individual securities.

     Set out below are the actual total returns of the different elements of our investment portfolio, together with the indices against which we benchmark the portfolio’s performance. We use the Lehman Intermediate AA Credit Index for fixed maturities, 1-month LIBOR for short-term investments and the CISDM Fund of Funds Index for hedge funds and other investments. Since we do not have an equity portfolio, the Standard & Poor’s 500 Index is not used as a comparative measure of performance.

		Year Ended December 31,
		2006								2005
Actual vs. Benchmark Total Return		Actual				Benchmark				Actual				Benchmark
Fixed maturities			4.2	%			3.8	%			2.4	%			1.9	%
Short-term investments			5.0	%			5.2	%			3.3	%			3.5	%
Total fixed maturities and short-term investments			4.6	%			4.4	%			2.6	%			2.2	%
Hedge funds			9.1	%			9.3	%			8.5	%			6.5	%
Other invested assets			30.7	%			9.3	%			0.7	%			6.5	%
Total investment portfolio			4.8	%			4.7	%			3.2	%			2.7	%

     Our diversified managed hedge fund strategy has generated only two quarters of negative returns over the past ten years.

     The Investment Committee of our Board of Directors and management periodically evaluate the composition of the investment portfolio and reposition the portfolio in response to market conditions in order to improve total risk-adjusted returns, while maintaining liquidity and superior credit quality. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Investments – Market Risk.”

Business: Ratings

     A.M. Best maintains a letter scale rating system ranging from “A++” (superior) to “F” (in liquidation). S&P maintains a letter scale rating system ranging from “AAA” (extremely strong) to “R” (under regulatory supervision).

     The property catastrophe reinsurance market is highly sensitive to the ratings assigned by the rating agencies. In the aftermath of Hurricane Katrina, each of the major rating agencies placed the credit ratings of our reinsurance subsidiaries on CreditWatch negative or the equivalent. On February 16, 2006, A.M. Best downgraded its financial strength ratings on PXRE Reinsurance and PXRE Bermuda from “A-” to “B++” with a negative outlook. In February, 2006, A.M. Best further downgraded its financial strength ratings on these entities from “B++” to “B+” with a negative implication and S&P downgraded its counterparty credit and financial strength ratings on PXRE Reinsurance and PXRE Bermuda from “A-” to “BBB+” and placed these ratings on CreditWatch with negative implications. Thereafter S&P further downgraded its counterparty credit and financial strength ratings on PXRE Reinsurance and PXRE Bermuda from “BBB+” to “BBB-” and Moody’s downgraded its insurance financial strength rating of PXRE Reinsurance from “Baa1” to “Baa2” and placed this rating under review for possible further downgrade. Subsequently, Moody’s further downgraded its insurance financial strength rating of PXRE Reinsurance from “Baa2” to “Baa3” and placed this rating under review for possible further downgrade. In April, 2006, after finding that operational ratings below the critical “A” category provided little value for a reinsurer, we announced that we had requested that the major credit rating agencies withdraw their financial strength and claims paying ratings of the Company and its operating subsidiaries. In the wake of this request, A.M. Best downgraded its financial strength ratings of PXRE Reinsurance and PXRE Bermuda from “B+” to “B” and withdrew these ratings; S&P downgraded its counterparty credit and financial strength rating on PXRE Reinsurance and PXRE Bermuda from “BBB-” to “BB+” and then withdrew these ratings; and Moody’s downgraded its insurance financial strength rating of PXRE Reinsurance from “Baa3” to “Ba2” and then withdrew this rating.

     Ratings have become an increasingly important factor in establishing the competitive position of reinsurance companies. Due to the ratings downgrades and withdrawal of the operational ratings of our reinsurance subsidiaries by A.M. Best, S&P and Moody’s, our competitive position in the insurance industry has suffered and we have been unable to retain our reinsurance portfolio and renew many of our existing reinsurance agreements. These downgrades resulted in a substantial loss of business as ceding companies and brokers that place such business moved to other reinsurers with higher ratings. A change in any such rating is at the discretion of the respective rating agencies.

     It is increasingly common for our assumed reinsurance contracts to contain terms that would allow our clients to cancel the contract if we are downgraded below various rating levels by one or more rating agencies. Whether a client would exercise such rights would depend, among other things, on the reasons for such a downgrade, the extent of the downgrade, the prevailing market conditions, and the pricing and availability of replacement reinsurance coverage. As of January 1, 2006, more than 75% of our business (by premium volume) was subject to contractual provisions allowing clients additional rights upon a decline in PXRE’s ratings or capital. As of December 31, 2006, almost all of the Company’s reinsurance contracts had either been cancelled, non-renewed or expired.

     Subsequent Event

     On March 14, 2007, we announced a merger with Argonaut and the formation of Peleus Re. A.M. Best has granted a financial strength rating of “A-” to Peleus Re and has re-rated PXRE Bermuda and PXRE Reinsurance “B+.” No assurance can be given that these ratings will be retained if the merger with Argonaut is not consummated.

Business: Regulation

Bermuda

     PXRE Reinsurance Ltd.

     The Insurance Act 1978 of Bermuda and related regulations, as amended (collectively, the “Act”) impose on Bermuda insurance companies, including PXRE Bermuda, solvency and liquidity standards and auditing and reporting requirements, and grants to the Bermuda Monetary Authority (“BMA”) powers to supervise, investigate and intervene in the affairs of insurance companies.

     Since our ratings downgrades in February 2006, we have maintained active communications with the BMA. As a result of these communications and as a precondition to the licensing of Peleus Re, PXRE Bermuda has agreed to submit to additional regulatory oversight by the BMA. We agreed that effective March 12, 2007 PXRE Bermuda will not write any insurance business other than intra-group reinsurance in support of Peleus Re without the approval of the BMA.

     We have also agreed with the BMA that effective March 12, 2007, PXRE Bermuda, before reducing its total statutory capital by 10% or more, in the aggregate, as set out in its previous year’s financial statements, in any calendar year, shall apply to the BMA for its approval. Notwithstanding the foregoing, PXRE Bermuda may reduce its total statutory capital, as set out in its previous year’s financial statements, by less than 10%, in the aggregate in any calendar year, provided that at least fourteen days before payment of such distribution it files with the BMA a certificate signed by the insurer’s principal representative and two of its directors which states that, in the opinion of those signing the certificate; the return and reduction of statutory capital will not cause the insurer to fail to meet its relevant margins.

     Additionally, PXRE Bermuda, before declaring a dividend in respect of any financial year which would exceed 20% of its total statutory capital and surplus, as shown on its statutory balance sheet in relation to the previous financial year, must apply to the BMA for its approval. Notwithstanding the foregoing, PXRE Bermuda may declare and pay dividends in respect of any financial year which would not exceed 20% of its total statutory capital and surplus, as shown on its statutory balance sheet in relation to the previous financial year provided that at least fourteen days before payment of such dividend it files with the BMA a certificate signed by its principal representative and two of its directors which states that, in the opinion of those signing the certificate; the payment of such dividend will not cause PXRE Bermuda to fail to meet its relevant margins.

     The Act provides that the value of the general business assets of a Class 4 insurer must exceed the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margin. PXRE Bermuda, as a Class 4 insurer, is required to maintain a minimum solvency margin equal to the greatest of: (a) $100.0 million, (b) 50% of net premiums written (with a deduction for ceded reinsurance from gross premiums written not exceeding 25% of gross premiums written) or (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 BMA, from declaring or paying any dividends during the next financial year. If its total statutory capital and surplus falls to $75.0 million or less, it will have to comply with additional reporting requirements as mandated by the BMA.

     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 that, unless specifically permitted by the BMA, 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).

     At December 31, 2006, PXRE Bermuda’s solvency and liquidity margins and statutory capital and surplus were in excess of the minimum levels required by the Act.

     As a registered Class 4 insurer, PXRE Bermuda is required to submit an opinion of its approved loss reserve specialist with its statutory financial return in respect of its loss and loss expense reserves. The appointment of the loss reserve specialist, who will normally be a qualified casualty actuary, must be approved by the BMA. Malkie Mayer, ACAS, MAAA of PXRE Reinsurance has been approved to act as PXRE Bermuda’s loss reserve specialist.

     Any person who, directly or indirectly, becomes a holder of at least 10 percent, 20 percent, 33 percent or 50 percent of our common shares must notify the BMA in writing within 45 days of becoming such a holder or 30 days from the date they have knowledge of having such a holding, whichever is later. The BMA may, by written notice, object to such a person if it appears to it that the person is not fit and proper to be such a holder. The BMA may require the holder to reduce their holding of our Common Shares and direct, among other things, that voting rights attaching to the common shares shall not be exercisable. A person that does not comply with such a notice or direction from the Authority will be guilty of an offence.

     The BMA may at any time, bv written notice, object to a person holding 10 percent or more of our common shares if it appears to the BMA that the person is not or is no longer fit and proper to be such a holder. In such a case, the BMA may require the shareholder to reduce its holding of our common shares and direct, among other things, that such shareholder’s voting rights attaching to the common shares shall not be exercisable. A person who does not comply with such a notice or direction from the BMA will be guilty of an offence.

United States

     PXRE Reinsurance is subject to regulation under the insurance statutes of various U.S. states, including Connecticut, the domiciliary state of PXRE Reinsurance. The regulation and supervision to which PXRE Reinsurance is subject relate primarily to the standards of solvency that must be met and maintained, licensing requirements for reinsurers, the nature of and limitations on investments, deposits of securities for the benefit of a reinsured, methods of accounting, periodic examinations of the financial condition and affairs of reinsurers, the form and content of reports of financial condition required to be filed, reserves for losses and other matters. In general, such regulation is for the protection of the reinsureds and policyholders, rather than investors.

     In addition, the Company and PXRE Delaware are subject to regulation under the insurance holding company statutes of various U.S. states, including Connecticut. These laws and regulations vary from state to state, but generally require an insurance holding company 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 may not enter into certain transactions, including certain reinsurance agreements, management agreements, and service contracts, with members of its insurance holding company system, unless it has first notified the Connecticut Insurance Commissioner of its intention to enter into any such transaction and the Connecticut Insurance Commissioner does not disapprove of such transaction within the period specified by the Connecticut insurance statute. Among other things, such related company 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.

     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 inter-corporate transfers of assets within the holding company structure. An investor who acquires or attempts to acquire shares representing or convertible into more than 10% of the voting power of the securities of the Company would become subject to at least some of such regulations, would require approval by the Connecticut Insurance Commissioner prior to acquiring such shares and would be required to file certain notices and reports with the Connecticut Insurance Commissioner prior to such acquisition. See “Market for Registrant’s Common Equity and Related Shareholder Matters” for a discussion of other limitations on voting and ownership of the Company’s securities contained in the Company’s Bye-Laws.

     The principal sources of cash for the payment of operating expenses, debt service obligations, and dividends by the Company are the receipt of dividends from PXRE Reinsurance, PXRE Bermuda and PXRE Ireland. Under the Connecticut insurance laws, the maximum amount of dividends or other distributions that PXRE Reinsurance may declare or pay within any twelve-month period from unassigned surplus, 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 ended December 31 of the preceding year, all determined in accordance with SAP. Accordingly, the Connecticut insurance laws could limit the amount of dividends available for distribution by PXRE Reinsurance without prior regulatory approval, depending upon a variety of factors outside our control, 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.

     In the wake of losses incurred as a result of Hurricanes Katrina, Rita and Wilma during 2005, PXRE Reinsurance has an accumulated deficit and, therefore, may not declare and pay any dividends without regulatory approval during 2007. During 2006, PXRE Reinsurance did not pay any dividends. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – 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 NAIC assists state insurance supervisory officials in achieving insurance regulatory objectives, including the maintenance and improvement of state regulation. The risk-based capital regulations adopted 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 of December 31, 2006, PXRE Reinsurance’s statutory capital and surplus was $138.0 million and substantially exceeded its calculated risk-based capital authorized control level, which was $15.4 million.

     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 thirteen 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, 2006, 2005 and 2004, PXRE Reinsurance’s results were within the usual values for each of the thirteen ratios, except for one ratio in 2006, five ratios in 2005 and three ratios in 2004. The one ratio that fell outside the range in 2006, a two year average operating ratio, was due to increased losses primarily due to losses incurred from Hurricanes Katrina, Rita and Wilma, including an $80.0 million full limit loss on an excess of loss agreement where PXRE Reinsurance reinsured PXRE Bermuda. The five ratios that fell outside the range in 2005 were due to (a) decreases in net writings in 2005 due to an increase in net premiums written by PXRE Bermuda previously written by PXRE Reinsurance, (b) decreased investment yield associated with general market conditions and (c) increased losses and decreased surplus primarily due to losses incurred from Hurricanes Katrina, Rita and Wilma, including an $80.0 million full limit loss on an excess of loss agreement where PXRE Reinsurance reinsured PXRE Bermuda. The three ratios that fell outside the range in 2004 were due to (a) decreases in net writings in 2004 due to a decrease in finite premiums in 2004 compared to 2003 and net premiums written by PXRE Bermuda previously written by PXRE Reinsurance, (b) decreased investment yield associated with general market conditions and (c) decreased surplus primarily due to dividends paid and distributions.

     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, an initiative to create a federally guaranteed disaster reinsurance pool pre-funded by insurers and proposals in various state legislatures (some of which have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. We are unable to predict what effect, if any, the foregoing developments may have on our operations and financial condition in the future.

Business: Taxation of PXRE and its Subsidiaries

     The following summary of the taxation of the Company, PXRE Bermuda, PXRE Ireland, PXRE Europe and our U.S. subsidiaries, including PXRE Reinsurance (collectively, the “PXRE U.S. Companies”) is based upon current law. Legislative, judicial or administrative changes may be forthcoming that could affect this summary. Certain subsidiaries and branch offices of PXRE are subject to taxation related to our operations in Belgium.

Bermuda

     Under current Bermuda law, no income, withholding or capital gains taxes are imposed on the Company or PXRE Bermuda. The Company and PXRE Bermuda have each received an assurance from the Minister of Finance 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 the Company or PXRE Bermuda or to any of their operations or their shares, debentures or other obligations until March 28, 2016. These assurances are subject to the proviso that they are not to be construed so as to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda (the Company 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 the Company or PXRE Bermuda. The Company and PXRE Bermuda each pay annual Bermuda government fees and PXRE Bermuda pays annual insurance license fees. In addition, all entities employing individuals in Bermuda are required to pay a payroll tax and other sundry fees and levies, directly or indirectly, to the Bermuda government.

Ireland

     PXRE Ireland is an Irish incorporated company established as a holding company and will coordinate the administration, finances and activities of any future non-Bermudian subsidiary companies. PXRE Ireland is governed by the Companies Acts 1963 to 2003. Under Irish law, PXRE Ireland is subject to tax on its worldwide income. The tax rate is a function of the nature of the income of PXRE Ireland. Income in respect of trading (active income) is subject to tax at the rate of 12.5%. Income arising in respect of investments (passive income) is subject to tax in Ireland at a rate of 25%. In relation to a company which acts as a holding company in Ireland, certain exemptions and reliefs are available in respect of gains produced by the disposal of qualifying subsidiaries and the receipt of dividend income from such subsidiaries.

     We believe that PXRE Ireland and PXRE Delaware will be entitled to the benefits provided by the income tax treaty between Ireland and the United States, which reduce the rate of withholding tax applicable to dividends paid by a U.S. corporation to an Irish shareholder from the generally applicable rate of 30% to 5%. If PXRE Delaware and/or PXRE Ireland were determined not to be eligible for these benefits and should PXRE Delaware pay dividends to PXRE Ireland, the consequent increase in withholding tax to the generally applicable 30% rate could have a material adverse effect on our financial condition and results of operations.

United States

     The PXRE U.S. Companies carry on business, and are subject to taxation, in the United States. The Company 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 may provide relief to PXRE Bermuda if it 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, which meets certain ownership requirements, 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, the Company is not entitled to the benefits of the Bermuda Treaty. Similar benefits are provided under the tax convention between the United Stated and Ireland (the “Irish Treaty”) although that treaty is not limited to insurance companies. Each of the Company, PXRE Bermuda and PXRE Ireland operates under guidelines that are intended to minimize the risk that they will be treated as engaged in a U.S. trade or business; and PXRE Bermuda and PXRE Ireland each operates under guidelines that are intended to minimize the risk that it will be found to have a U.S. permanent establishment.

     On this basis, we do not expect that the Company or our 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, because there is uncertainty as to the activities that constitute being engaged in a trade or business in the United States even if the guidelines are complied with in all aspects, there can be no assurance that (i) the IRS will not contend successfully that the Company or a non-U.S. subsidiary is engaged in a trade or business in the United States, that (ii) PXRE Bermuda will qualify for the Bermuda Treaty or PXRE Ireland will qualify for the Irish Treaty now or in the future, or that (iii) the Bermuda Treaty and/or Irish Treaty will not be terminated or revised in a manner that could adversely affect any protection from U.S. corporate tax that they currently provide.

     In such case, the income considered to be “effectively connected” with such U.S. trade or business (both underwriting income and a portion of investment income), or income attributable to a U.S. permanent establishment if treaty benefits are claimed, would be subject to U.S. federal income tax at regular corporate rates. The maximum federal income tax rate for corporations is currently 35%. Such U.S. federal income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a U.S. corporation. The IRS takes the position that a non-U.S. corporation can generally claim deductions and credits only if it timely files a U.S. income tax return and that penalties may be assessed for the failure to timely file tax returns. The U.S. Tax Court recently held, however, that foreign corporations determined to be doing business in the United States may claim deductions and credits even if they have not timely filed a return. In addition, the U.S. imposes a branch profits tax of 30% each year on a non-U.S. corporation’s earnings and profits (reduced by the regular corporate tax and with certain other adjustments) effectively connected with its U.S. trade or business that are deemed repatriated out of the United States.

     A report issued in 2005 by the Joint Committee on Taxation contains a legislative proposal that, if enacted, would treat a foreign corporation as a U.S. corporation for U.S. federal income tax purposes, and therefore subject to U.S. federal income tax on all of its income, if its primary place of management and control is located within the United States. A corporation’s primary place of management and control would be where the executive officers and senior management of the corporation exercise their day-to-day responsibility for the strategic, financial and operational policy decision making for the corporation. The proposal is proposed to be effective two years after its enactment. We are unable to predict whether this or any similar legislative proposal will be enacted, the exact form any such legislation may ultimately take and what impact any such legislation would have on us.

     Section 845 of the Code allows the IRS to reallocate the amount of income between related persons who are parties to a reinsurance transaction. Accordingly, it is possible that the IRS could alter the terms of the reinsurance agreements between the PXRE U.S. Companies and PXRE Ireland, with the result of increasing the taxable income of the PXRE U.S. Companies.

Business: Employees

     We employed 45 full-time employees at December 31, 2006. No employees are represented by a labor union, and management considers its relationship with employees to be satisfactory.

     In the wake of the ratings downgrade and withdrawal in early 2006, we lost approximately 22% of our employees, including our Chief Operating Officer and the majority of our underwriters. Our ability to continue to operate our business and to implement the business plan contemplated under the Merger Agreement entered into by the Company and Argonaut is dependent on our ability to retain our management and other key employees.

     A significant number of the PXRE’s Bermuda based employees, including the Chief Executive Officer of the Company and PXRE Bermuda, are employed pursuant to work permits granted by Bermuda authorities. The Bermuda government will issue a work permit for a specific period of time, which may be extended upon showing that, after proper public advertisements, no Bermudian (or spouse of a Bermudian or holder of a permanent resident certificate) is available who meets the minimum standards for the advertised position. The Bermuda government has a policy that limits the duration of work permits to six years, subject to certain exemptions for key employees. A significant number of our key officers, including our Chief Executive Officer, an executive vice president and key reinsurance underwriters are working in Bermuda under work permits that will expire over the next year. The Bermuda government could refuse to extend these work permits. If any of our senior executive officers were not permitted to remain in Bermuda, our operations could be disrupted and our financial performance could be adversely affected.

Business: Available Information

     We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any documents we file at the SEC’s public reference room at room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains a website that contains annual, quarterly and current reports, proxy statements and other information that we file electronically with the SEC. The SEC’s website is http://www.sec.gov.

     We maintain an Internet website at http://www.pxre.com. We make available free of charge on our website our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after we electronically file such material with, or furnish it to, the SEC.

     We also post the following PXRE corporate governance documents on our website:

	•		Corporate Governance Guidelines
	•		Audit Committee Charter
	•		Nominating/Corporate Governance Committee Charter
	•		Human Resources Charter
	•		Code of Business Conduct and Ethics for Directors, Officers and Employees

     We will deliver any of these corporate governance documents free of charge upon request by any investor. Investors should contact Sard Verbinnen, our regularly retained investor relations consultant by calling James Tully at 1-212-687-8080 to request any of those documents.

     The information on our website is not incorporated by reference into this report.

Item 1A. Risk Factors

     Certain risks and uncertainties related to our business, including with respect to the cyclical nature of our business and our financial position, to the industry we operate in, to an investment in our common shares and other securities and to other matters affecting us are set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Certain Risks and Uncertainties.” If one or more of these events was to occur, there could be a material adverse affect on our business and our actual results could differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make.

Item 1B. Unresolved Staff Comments

     We do not have any unresolved comments from the SEC staff regarding our periodic or current reports under the Securities Exchange Act of 1934, as amended.

Item 2. Properties

     PXRE leases office space in Bermuda where our principal executive offices are located, and in Edison, New Jersey, where PXRE Reinsurance’s principal offices are located. We also lease office space in Brussels, Belgium. Our properties are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. PXRE believes the facilities it occupies are adequate for the purposes for which they are currently used and are well maintained.

Item 3. Legal Proceedings

     Between May 3, 2006 and June 16, 2006, several class action lawsuits were filed against PXRE, Jeffrey Radke, the Company’s Chief Executive Officer, and John Modin, the Company’s former Chief Financial Officer, in the U.S. District Court for the Southern District of New York on behalf of a putative class consisting of investors who purchased the publicly traded securities of PXRE between July 28, 2005 and February 16, 2006. Each of the class action complaints asserts nearly identical claims and alleges that during the purported class period certain PXRE executives made a series of materially false and misleading statements or omissions about PXRE’s business, prospects and operations, thereby causing investors to purchase PXRE’s securities at artificially inflated prices, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and Rule 10b-5 promulgated under the 1934 Act. The class action complaints allege, among other things, that the Company failed to disclose and misrepresented the following material adverse facts: (1) the full impact on PXRE’s business of Hurricanes Katrina, Rita and Wilma (the “2005 Hurricanes”); (2) the doubling of PXRE’s cost of the 2005 Hurricanes to an estimated $758 million to $788 million; and (3) the magnitude of the loss to PXRE and PXRE’s potential loss of its financial-strength and credit ratings from A.M. Best . Further, the complaints allege, based on the foregoing asserted facts, that PXRE’s statements with respect to its loss estimates for the 2005 hurricane season lacked any reasonable basis. The class actions seek an unspecified amount of damages, as well as other forms of relief. A motion to appoint a lead plaintiff and consolidate all of the class actions into a single proceeding is currently pending before the court.

     On February 21, 2007, PXRE entered into a Tolling and Standstill Agreement with certain institutional investors in connection with potential claims arising out of the Private Placement of Series D Perpetual Non-voting Preferred Shares of PXRE that were sold pursuant to the Private Placement Memorandum dated on or about September 28, 2005.

     We are subject to litigation and arbitration in the ordinary course of business. Management does not believe that the eventual outcome of any such pending ordinary course of business litigation or arbitration is likely to have a material effect on our financial condition or business. Pursuant to our insurance and reinsurance arrangements, disputes are generally required to be finally settled by binding arbitration.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of the Company’s shareholders during the fourth quarter of 2006.

PART II

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters

Common Shares

     The Company’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 closing sale prices for the Company’s common shares as reported by the New York Stock Exchange and cash dividends per common share declared and subsequently paid:

		Closing Price
		High				Low				Dividends
2006:
First Quarter		$	13.26			$	3.01			$	—
Second Quarter			4.07				3.17				—
Third Quarter			4.20				3.49				—
Fourth Quarter			4.94				4.15				—
2005:
First Quarter		$	27.11			$	24.62			$	0.06
Second Quarter			25.22				22.99				0.12
Third Quarter			25.59				13.46				0.12
Fourth Quarter			13.71				10.22				0.12

     As of March 12, 2007, the closing sale price of the Company’s common shares on the New York Stock Exchange was $4.54

     Upon and as a closing condition to the proposed merger with Argonaut, PXRE’s common shares will be delisted from the New York Stock Exchange and will be quoted on the NASDAQ.

     As of March 12, 2007, there were 72,342,119 common shares issued and outstanding, which shares were held by approximately 175 shareholders of record and, based on the Company’s best information, by approximately 11,400 beneficial owners of the common shares. See Notes 11 and 12 of Notes to Consolidated Financial Statements for information with respect to shares reserved for issuance under employee benefit and stock option plans.

     In April 2002, the Company issued 15,000 Convertible Voting Preferred Shares (the “Preferred Shares”). As of March 12, 2007, there were 5,813 Preferred Shares outstanding that are ultimately convertible into 5.2 million common shares, representing approximately 6.7% of the Company’s outstanding common shares on a fully diluted basis as of March 12, 2007. See “Market for Registrant’s Common Equity and Related Shareholder Matters—Preferred Shares” below.

     The payment of dividends on the common shares is subject to Bermuda law and the discretion of the Company’s Board of Directors, which will consider, among other factors, our operating results, overall financial condition, capital requirements and general business conditions. There can be no assurance that dividends will be paid in the future.

     Under the terms of the Preferred Shares, the payment of dividends on the Company’s common shares is subject to the following limitations: (i) no dividend may be paid upon the common shares if the dividends payable upon the Preferred Shares are overdue, (ii) the amount of dividends paid with respect to the common shares may not be increased by a cumulative annualized rate of more than 10% at any time prior to April 4, 2005 (the “Permitted Dividend Amount”) without the consent of the majority of holders of the Preferred Shares; and (iii) at any time on or after April 4, 2005, no dividend may be paid that would result in payment of any dividend or other distribution with respect to common shares or result in a redemption, offer to purchase, tender offer or other acquisition of capital shares of the Company involving consideration having an aggregate fair value in excess of the greater of the Permitted Tender Offer Amount and the Permitted Dividend Amount. For this purpose, the term “Permitted Tender Offer Amount” means an amount equal to 20% of the cumulative amount by which our consolidated net income in any calendar year commencing with the year ending December 31, 2002 exceeds $50.0 million minus the sum of all cash and the fair value of all non-cash consideration paid in respect of redemptions, offers to purchase, tender offers or other acquisitions of our capital shares on or after December 10, 2001.

     As a holding company, the Company is dependent upon dividend payments from its subsidiaries, including PXRE Bermuda and PXRE Reinsurance, to pay dividends to the Company’s shareholders. PXRE Bermuda is subject to Bermuda law, which may restrict its ability to distribute dividends. PXRE Reinsurance is subject to the insurance laws of the State of Connecticut, which currently prohibit the payment of any dividends without the prior approval of the Insurance Commissioner of the State of Connecticut. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources” and “Business – Regulation” for further information concerning restrictions under Bermuda and U.S. law.

     Under the Company’s Bye-Laws, subject to certain exceptions and to waiver by the Company’s Board of Directors on a case by case basis, no transfer of the Company’s 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 the Company or more than 9.9% of the outstanding shares of any class of the Company’s shares. Ownership is broadly defined in the Company’s Bye-Laws.

     The Company may refuse to register any such transfer on the Company’s share transfer records. A transferee will be permitted to promptly dispose of any of the Company’s shares purchased that violate the restriction and as to the transfer of which registration is refused. The transferor of such shares of the Company 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 the Company becomes aware of a shareholder owning more than 9.9% of the voting power of the Company’s outstanding shares after a transfer of shares has been registered, the Company’s Bye-Laws provide that, subject to the same exceptions and waiver procedures, the voting rights with respect to the shares of the Company owned by any such shareholder will be limited to a voting power of 9.9%. The Board of Directors has determined to waive this requirement with respect to Capital Z Financial Services Fund II, L.P. (including, for such purpose, certain of its affiliates).

Preferred Shares

     As of December 31, 2006 there were 5,813.20 shares of Preferred Stock outstanding. These shares are allocated to three series as follows: 3,168.532 Series A Preferred Shares, 1,588.492 Series B Preferred Shares and 1,056.176 Series C Preferred Shares. The material terms and provisions of the rights, preferences and privileges of the Preferred Shares and Convertible Common Shares are contained in the Description of Stock for Series A Convertible Voting Preferred Shares, Series B Convertible Voting Preferred Shares, Series C Convertible Voting Preferred Shares, Class A Convertible Voting Common Shares, Class B Convertible Voting Common Shares and Class C Convertible Voting Common Shares.

     For each series, each Preferred Share, in whole or in part, is convertible at any time at the option of the holder into Convertible Common Shares for such series. The number of Convertible Common Shares per Preferred Share issuable upon any conversion will be determined by dividing a liquidation preference for the series equal to the aggregate original purchase price of the Preferred Shares plus accrued but unpaid dividends thereon, by the conversion price then in effect. As of December 31, 2006 the adjusted conversion price was $11.28.

     The conversion price is subject to adjustment to avoid dilution in the event of recapitalization, reclassification, stock split, consolidation, merger, amalgamation or other similar event or an issuance of additional Common Shares in a private placement below the fair market value or in a registered public offering below 95% of fair market value (in each case, fair market value being the value immediately prior to the date of announcement of such issuance) or without consideration. As a result of the issuance of 8,843,500 Common Shares in October 2005 at the price of $13.25 per share pursuant to a public offering of Common Shares and the issuance of 34,090,906 Common Shares upon the exchange of the Series D Preferred Shares at the exchange price of $11.00 per share, the conversion price on the Preferred Shares was adjusted downwards by $1.75 in accordance with the terms of the underlying Share Purchase Agreement.

     In addition, the conversion price is subject to adjustment, for certain loss and loss expense development on reserves for losses incurred on or before September 30, 2001 (and loss adjustment expenses related thereto) and for any liability or loss arising out of pending material litigation (other than legal fees and expenses), on an after-tax basis, equal to an amount computed in accordance with a formula as set forth in the Description of Stock. Adjustments occur if the development exceeds a deductible after-tax threshold of $7.0 million and, with respect to all reserves other than reserves for certain discontinued operations and the events of September 11, 2001 and liability arising out of pending litigation, the adjustment is limited to $12.0 million of further development. At December 31, 2006, PXRE has incurred $40.5 million of net adverse development above this $7.0 million threshold. As a result of this, and the anti-dilution adjustment discussed above, as of December 31, 2006, the adjusted conversion price was $11.28.

     Each Series of Preferred Shares were sub-divided into two sub-series. On March 31, 2005, 5,840.6 Series A1 convertible voting preferred shares, 3,143.6 Series B1 convertible voting preferred shares and 1,393.6 Series C1 convertible voting preferred shares were mandatorily converted into 4.4 million class A convertible voting common shares, 2.4 million class B convertible voting common shares and 1.0 million class C convertible voting common shares, respectively. The conversion was effected based upon a conversion price of $13.27, which conversion price was agreed between the Company and holders of the Company’s convertible voting preferred shares pursuant to a letter agreement dated as of March 31, 2005. These shares were originally scheduled to convert on April 4, 2005, but in the interest of presenting a balance sheet reflecting the conversion on March 31, 2005, PXRE reached an agreement with the preferred shareholders to convert four days early.

     All the remaining Preferred Shares will be mandatorily convertible into Convertible Common Shares on April 4, 2008.

     The aggregate purchase price paid for the shares of Preferred Stock issued totaled $150.0 million. The Company’s shareholders approved the issuance on February 12, 2002.

     Subsequent Event

     In connection with the proposed merger with Argonaut, the Preferred Shareholders have agreed to consent to the merger, forego future dividends and convert their preferred shares into common shares upon the closing of the merger. As consideration for such consent foregone dividends and conversion, the conversion price was reduced from $11.28 to $6.24 provided that such reduction shall be null and void if the merger is not consummated.

Convertible Common Shares

     As of December 31, 2006, there were 8.9 million Convertible Common Shares outstanding, including 1.8 million Class B Convertible Common Shares issued on exchange of the Company’s Series D Preferred Shares upon affirmative vote of the shareholders’ on November 18, 2005. Except as otherwise provided, each class of Convertible Common Shares shall have the same rights, preferences and restrictions as common shares. The Convertible Common Shares shall automatically convert into common shares on a one-for-one basis upon a transfer of record ownership thereof to any person other than the original purchasers, or any of their respective affiliates or limited partners (including, without limitation, in connection with a public offering of such shares), or a person approved by our Board of Directors in its sole discretion. Convertible Common Shares may be converted at the option of the holder thereof into common shares on a one-for-one basis at any time that such holder would be entitled to vote Preferred Shares generally in the election of directors in accordance with the Description of Stock. Our Class IV directors are designated solely by holders of our convertible common shares and preferred shares. The holders of convertible common shares do not vote for any other class of directors.

     Subsequent Event

     Upon the closing of the merger, all Convertible Common Shares will be converted into Common Shares.

Item 6. Selected Financial Data.

		Year Ended December 31,
		2006				2005				2004				2003				2002
($000’s except per share data and ratios)		(1)(2)(3)(4)				(1)(2)				(1)(2)
Income Statement Data:
Gross premiums written		$	138,776			$	542,325			$	346,035			$	339,140			$	366,768
Premiums ceded			(85,267	)			(135,320	)			(36,248	)			(60,729	)			(72,285	)
Net premiums written			53,509				407,005				309,787				278,411				294,483
Change in unearned premiums			31,020				(18,681	)			(1,715	)			42,522				(25,123	)
Net premiums earned			84,529				388,324				308,072				320,933				269,360
Net investment income			60,654				45,292				26,178				26,931				24,893
Net realized investment (losses) gains			(7,809	)			(14,736	)			(150	)			2,447				8,981
Fee income			428				941				1,785				5,014				3,432
Total revenues			137,802				419,821				335,885				355,325				306,666
Losses and loss expenses incurred			12,443				1,011,523				226,347				157,598				125,361
Commission and brokerage			19,126				49,900				36,111				47,360				53,391
Other reinsurance related expense			17,862				936				—				—				—
Operating expenses			43,373				36,208				41,293				39,701				34,228
Foreign exchange losses (gains)			1,444				(1,547	)			80				143				(273	)
Interest expense			14,455				14,452				14,389				2,506				2,939
Minority interest in consolidated subsidiaries (1)(2)			—				—				—				10,528				8,646
Total losses and expenses			108,703				1,111,472				318,220				257,836				224,292
Income (loss) before income taxes, cumulative effect of accounting change and convertible preferred share dividends			29,099				(691,651	)			17,665				97,489				82,374
Income tax provision (benefit)			597				5,907				(6,234	)			841				17,829
Income (loss) before cumulative effect of accounting change and convertible preferred share dividends			28,502				(697,558	)			23,899				96,648				64,545
Cumulative effect of accounting change, net of tax			—				—				(1,053	)			—				—
Net income (loss) before convertible preferred share dividends		$	28,502			$	(697,558	)		$	22,846			$	96,648			$	64,545
Convertible preferred share dividends			4,864				7,040				14,018				13,113				9,077
Net income (loss) to common shareholders		$	23,638			$	(704,598	)		$	8,828			$	83,535			$	55,468