S-4 1 y34230sv4.htm FORM S-4 S-4
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As filed with the Securities and Exchange Commission on May 2, 2007
Registration No. [•]
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
 
PXRE Group Ltd.
(Exact name of Registrant as specified in its Charter)
 
 
         
Bermuda   6361   98-0214719
(State or other jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (IRS Employer
Identification Number)
 
PXRE House
110 Pitts Bay Road
Pembroke HM 08
Bermuda
(441) 296-5858
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
CT Corporation
111 Eighth Avenue
13th Floor
New York, New York 10011
(212) 894-8600
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
         
Linda E. Ransom, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, NY 10019
(212) 259-8000
  Byron L. LeFlore, Jr., Esq.
Argonaut Group, Inc.
10101 Reunion Place, Suite 500
San Antonio, TX 78216
(210) 321-8400
  Michael Groll, Esq.
LeBoeuf, Lamb, Greene & MacRae LLP
125 West 55th Street
New York, NY 10019
(212) 424-8000
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement and the conditions to the completion of the merger described herein have been satisfied or waived.
 
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box:  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  o
 
CALCULATION OF REGISTRATION FEE
 
                                     
            Proposed maximum
      Proposed maximum
         
Title of each class of
    Amount to be
    offering price
      aggregate offering
      Amount of
 
securities to be registered     registered(1)     per share       price(2)       registration fee(3)  
Common Shares of PXRE Group Ltd., par value $1.00 per share
    240,099,293
common shares
      N/A       $ 1,206,155,277.69       $ 37,028.97  
                                     
(1) Represents a bona fide estimate of the maximum number of shares of common stock that may be issued in connection with the merger described herein, calculated as the product of (a) 35,257,389, the aggregate number of shares of Argonaut Group, Inc., which we refer to as Argonaut, common stock that were outstanding on April 26, 2007 (assuming the exercise of all options), and (b) 6.8099, the maximum number of common shares of PXRE Group Ltd., which we refer to as PXRE, that will be exchanged for each share of Argonaut common stock.
 
(2) Estimated solely for the purposes of calculating the registration fee required by Section 6(b) of the Securities Act and calculated pursuant to Rules 457(c) and 457(f)(1) under the Securities Act, the proposed maximum aggregate offering price of the registrant’s common shares was calculated based upon the market value of shares of Argonaut common stock (the securities to be cancelled in the merger) as follows: the product of (1) $34.21, the average of the high and low prices per share of Argonaut common stock on April 26, 2007, as quoted on the NASDAQ Global Select Market, multiplied by (2) 35,257,389, the aggregate number of shares of Argonaut common stock that were outstanding on April 26, 2007 (assuming the exercise of all options).
 
(3) Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $30.70 per $1,000,000 of the proposed maximum aggregate offering price.
 
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
 


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REFERENCES TO ADDITIONAL INFORMATION
 
This joint proxy statement/prospectus incorporates important business and financial information about PXRE and Argonaut from documents that are not included in or delivered with this joint proxy statement/prospectus. This information is available for you to review at the Securities and Exchange Commission’s public reference room located at 100 F Street, N.E., Room 1580, Washington, DC 20549, and through the SEC’s website, www.sec.gov. You can also obtain those documents incorporated by reference into this joint proxy statement/prospectus, without charge, by requesting them in writing or by telephone or email from the appropriate company at the following addresses, telephone numbers and email addresses or obtaining them from each company’s website listed below:
 
     
PXRE Group Ltd.
PXRE House
110 Pitts Bay Road
Pembroke HM 08
Bermuda
Attention: Shareholder Services
(441) 296-5858
bob.myron@pxre.com
www.pxre.com
  Argonaut Group, Inc.
10101 Reunion Place, Suite 500
San Antonio, Texas 78216
Attention: Shareholder Services
(210) 321-8400
investors@argonautgroup.com
www.argonautgroup.com
 
Information contained on the PXRE and Argonaut websites is expressly not incorporated by reference into this joint proxy statement/prospectus.
 
You can also obtain documents incorporated by reference into this joint proxy statement/prospectus by requesting them in writing or by telephone from Georgeson, Inc., the proxy solicitor for both PXRE and Argonaut, at the following address and telephone numbers:
 
 
 
17 State Street
New York, NY 10004
 
     
PXRE Shareholders
(866) 577-4838 (toll-free)
  Argonaut Shareholders
(866) 574-4071 (toll-free)
 
If you would like to request documents, you must do so by [•], 2007, so that you may receive them before the shareholder meetings.
 
See “Where You Can Find More Information” beginning on page 177.


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The information in this joint proxy statement/prospectus is not complete and may be changed. PXRE may not distribute and issue the common shares being registered pursuant to this registration statement until the registration statement filed with the Securities and Exchange Commission is declared effective. This joint proxy statement/prospectus is not an offer to sell these securities and PXRE is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED MAY 2, 2007
(PXRE LOGO) (ARGONAUT GROUP LOGO)
TO THE SHAREHOLDERS OF
PXRE GROUP LTD. AND ARGONAUT GROUP, INC.

MERGER PROPOSED — YOUR VOTE IS VERY IMPORTANT
 
The board of directors of PXRE Group Ltd., which we refer to as PXRE, and the board of directors of Argonaut Group, Inc., which we refer to as Argonaut, have each unanimously approved a business combination of the two companies pursuant to an Agreement and Plan of Merger, dated as of March 14, 2007. Upon completion of the merger of a direct, wholly owned subsidiary of PXRE with and into Argonaut, PXRE will acquire Argonaut and Argonaut will become a direct, wholly owned subsidiary of PXRE.
 
If the merger is completed, Argonaut shareholders will have the right to receive 6.4672 PXRE common shares in exchange for each share of Argonaut common stock they hold, subject to adjustment in the event that (i) Argonaut’s planned special dividend to its shareholders prior to the closing of the merger is less than $60 million, or (ii) Argonaut pays certain other dividends, incurs losses on sales of assets and/or engages in dilutive sales or purchases of Argonaut shares. The number of PXRE common shares that Argonaut shareholders will be entitled to receive will be adjusted, proportionately among all PXRE common shareholders, upon completion of a reverse split of PXRE shares immediately after the merger (subject to the approval of PXRE’s shareholders), as described in the accompanying joint proxy statement/prospectus. PXRE will not issue fractional shares in connection with the merger or in connection with the reverse share split. The value of any fractional shares will be paid in cash. The reverse share split would affect all of PXRE’s shareholders uniformly, including the former shareholders of Argonaut entitled to receive PXRE shares as merger consideration in the merger, and will not affect any shareholder’s percentage ownership interests in PXRE or proportionate voting power, except to the extent that the reverse share split would otherwise result in a shareholder owning a fractional share for which it will receive cash in lieu of such fractional share. The merger will be tax free to PXRE shareholders; however, PXRE shareholders will recognize gain or loss on any cash received in lieu of fractional shares they would be entitled to receive as a result of the reverse share split. Argonaut shareholders will recognize gain (but not loss) on the exchange of their shares of Argonaut common stock for common shares of PXRE and will recognize gain or loss on any cash received in lieu of fractional shares of PXRE.
 
Upon completion of the merger, PXRE’s name will be changed to “Argo Group International Holdings, Ltd.,” which we refer to as Argo Group.
 
PXRE common shares are listed and traded on the New York Stock Exchange, which we refer to as the NYSE, under the trading symbol “PXT.” We intend to apply to have the PXRE common shares delisted from the NYSE and listed on the NASDAQ Global Select Market, which we refer to as the NASDAQ, under the trading symbol “AGII” conditioned on and subject to the completion of the merger. Initially, a fifth character “D” will be appended to the “AGII” symbol for 20 trading days to reflect the reverse share split. Argonaut common stock, which is currently listed and traded on the NASDAQ under the trading symbol “AGII,” will be delisted upon completion of the merger.
 
Upon completion of the merger, we estimate that PXRE’s shareholders will own approximately 27% and Argonaut shareholders will own approximately 73% of the then-outstanding PXRE common shares.
 
Your vote is very important. We cannot complete the merger unless the PXRE shareholders approve the issuance of PXRE common shares and certain other proposals in connection with the merger and the Argonaut shareholders adopt the merger agreement. The completion of the merger is also subject to the satisfaction or waiver of several other conditions to the merger, including receiving approval from certain regulatory authorities. We are each holding a shareholder meeting for our shareholders to vote on these proposals. The places, dates and times of the shareholder meetings are as follows:
 
     
For PXRE shareholders:
  For Argonaut shareholders:
[•], 2007
  [•], 2007
[•] a.m., local time
  [•] a.m., local time
[•]   [•]
 
Whether or not you plan to attend your company’s shareholder meeting, please take the time to vote by following the instructions on your proxy/voting instruction card.
 
We urge you to read this joint proxy statement/prospectus, and the documents incorporated by reference into this joint proxy statement/prospectus, carefully and in their entirety. In particular, see “Risk Factors” beginning on page 20.
 
We are very excited about the opportunities the proposed merger brings to both PXRE and Argonaut shareholders, and we thank you for your consideration and continued support.
 
     

Jeffrey L. Radke
  Mark E. Watson III
President & Chief Executive Officer
  President & Chief Executive Officer
PXRE Group Ltd. 
  Argonaut Group, Inc.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the merger or the securities to be issued in the merger, or passed upon the adequacy or accuracy of this joint proxy statement/prospectus. Any representation to the contrary is a criminal offense.
 
The Bermuda Monetary Authority and the Registrar of Companies accept no responsibility for the financial soundness of any proposal or for the correctness of any of the statements made or opinions expressed in this joint proxy statement/prospectus.
 
This joint proxy statement/prospectus is dated [•], 2007, and is first being mailed to shareholders on or about [•], 2007.


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(PXRE LOGO)
 
PXRE House
110 Pitts Bay Road
Pembroke HM 08
Bermuda
 
[•], 2007
 
NOTICE OF
SPECIAL GENERAL MEETING OF SHAREHOLDERS
TO BE HELD ON [•], 2007
 
To the Shareholders of PXRE Group Ltd.:
 
The special general meeting of the shareholders of PXRE Group Ltd., which we refer to as PXRE, will be held on [•], 2007 at [•], at [•], local time, unless adjourned to a later date. The special general meeting is being held for the following purposes, all as described in the accompanying joint proxy statement/prospectus:
 
Proposal in connection with the proposed merger:
 
1. To approve the issuance of common shares of PXRE pursuant to the Agreement and Plan of Merger, dated as of March 14, 2007, by and among PXRE, PXMS Inc., a direct, wholly owned subsidiary of PXRE, and Argonaut Group, Inc., a copy of which is attached as Annex A to the accompanying joint proxy statement/prospectus;
 
Proposals conditioned upon and subject to the completion of the merger:
 
2. To approve the reverse split of the common shares of PXRE at a ratio of one share of PXRE for each ten shares of PXRE held or entitled to be received in the merger;
 
3. To approve the change of name of “PXRE Group Ltd.” to “Argo Group International Holdings, Ltd.”;
 
4. To approve an increase in the authorized share capital of PXRE from $380 million to $530 million;
 
5. To increase the maximum number of directors of PXRE from 11 directors to 13 directors (if the affirmative vote of 662/3% of the voting power of the outstanding shares is obtained) or to 12 directors;
 
6. To approve an amendment and restatement of PXRE’s memorandum of association;
 
7. To approve an amendment and restatement of PXRE’s bye-laws (some of which amendments require the affirmative vote of 662/3% of the voting power of the outstanding shares);
 
Adjournments of the Meeting; Other Action:
 
8. To approve adjournments of the PXRE special general meeting to a later date, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special general meeting to approve the above proposals; and
 
9. To approve actions upon any other business that may properly come before the special general meeting or any reconvened meeting following an adjournment of the special general meeting.
 
These items are described in the accompanying joint proxy statement/prospectus, and we urge you to read it carefully.
 
On March 13, 2007, after careful consideration, PXRE’s board of directors unanimously determined that the merger is in the best interests of PXRE and its shareholders and unanimously approved the merger agreement and the transactions contemplated by the merger agreement, including the issuance of PXRE common shares pursuant to the merger agreement. PXRE’s board of directors unanimously recommends


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that you vote FOR the issuance of PXRE common shares pursuant to the merger agreement and each of the other proposals listed above.
 
Pursuant to a general permission issued by the Bermuda Monetary Authority in 2005, PXRE may issue its common shares to non-residents without the prior permission of the Bermuda Monetary Authority provided its shares are listed on an appointed stock exchange which, by definition, includes the NYSE and NASDAQ.
 
Your vote is very important. The increase of the maximum number of directors of PXRE from 11 directors to 13 directors and certain other amendments to PXRE’s bye-laws require the affirmative vote of 662/3% of the voting power of the outstanding PXRE shares. The remaining proposals are required to be approved by an ordinary resolution, that is, a simple majority of the votes cast on the Item. To ensure that your PXRE shares are represented at the special general meeting, please complete, date, sign and return the enclosed proxy/voting instruction card and mail it promptly in the envelope provided. Shares represented at the special general meeting by a properly executed and returned proxy/voting instruction card will be voted at the special general meeting in accordance with the instructions noted thereon, or, if no instructions are noted, the proxy/voting instruction card will be voted in favor of the proposals set forth above. Completing a proxy/voting instruction card now will not prevent you from being able to vote at the special general meeting by attending in person and casting a vote but will help to secure a quorum and avoid additional solicitation costs. Any proxy/voting instruction card given may be revoked by delivery to us, at least two (2) hours prior to the commencement of the special general meeting, either by a written notice of such revocation or a duly executed proxy/voting instruction card bearing a later date at PXRE’s mailing address, P.O. Box HM 1282, Hamilton HM 08, Bermuda, Attn: Secretary, or by attending the special general meeting and voting in person.
 
All PXRE shareholders are cordially invited to attend this special general meeting, although only those shareholders of record at the close of business on [•], 2007 will be entitled to receive notice of, and to vote at, the PXRE special general meeting or any adjournment thereof.
 
Your vote is very important. Whether or not you plan to be present at the special general meeting, please complete, sign, date and return the enclosed proxy/voting instruction card.
 
By Order of the Board of Directors,
 
David J. Doyle
Secretary
 
[•], 2007


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(ARGONAUT GROUP LOGO)
 
10101 Reunion Place, Suite 500
San Antonio, Texas 78216
 
 
 
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [•], 2007
 
To the Shareholders of Argonaut Group, Inc.:
 
A special meeting of shareholders of Argonaut Group, Inc., which we refer to as Argonaut, will be held on [•], 2007 at [•], at [•], local time, unless adjourned to a later date. The special meeting is being called for the following purposes:
 
1. To consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of March 14, 2007, by and among PXRE Group Ltd., PXMS Inc., a direct, wholly owned subsidiary of PXRE Group Ltd., and Argonaut, whereby PXMS Inc. will merge with and into Argonaut, with Argonaut as the surviving company. A copy of the merger agreement is included as Annex A to the accompanying joint proxy statement/prospectus;
 
2. To approve adjournments of the special meeting to a later date if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the above proposals; and
 
3. To consider and take action upon any other business that may properly come before the special meeting or any reconvened meeting following an adjournment of the special meeting.
 
These items are described in the accompanying joint proxy statement/prospectus and we urge you to read it carefully. Only shareholders who owned shares of Argonaut common stock at the close of business on [ * ], 2007, the record date for the special meeting, are entitled to notice of, and to vote at, the special meeting and any adjournment of it. A list of such shareholders will be open to examination by any shareholder at the special meeting and for a period of ten (10) days prior to the date of the special meeting during ordinary business hours at the Argonaut Group, Inc. Corporate Offices, 10101 Reunion Place, Suite 500, San Antonio, Texas 78216.
 
On March 14, 2007, after careful consideration, Argonaut’s board of directors unanimously determined that the merger is advisable, fair to and in the best interests of Argonaut and its shareholders and unanimously approved the merger agreement and the proposed merger. Argonaut’s board of directors unanimously recommends that you vote FOR each of the proposals listed above, all of which are described in detail in the accompanying joint proxy statement/prospectus.
 
Under Delaware law, appraisal rights will not be available to Argonaut shareholders in connection with the merger.
 
Your vote is very important. The affirmative vote of the holders of a majority of the outstanding shares of Argonaut common stock is necessary to approve and adopt the merger agreement. To ensure that your shares of Argonaut stock are represented at the special meeting, please complete, date, sign and return the enclosed proxy/voting instruction card and mail it promptly in the envelope provided or vote your shares by telephone or over the Internet as described in the accompanying joint proxy statement/prospectus. Completing a proxy/voting instruction card now will not prevent you from being able to vote at the special meeting by attending in person and casting a vote but will help to secure a quorum and avoid added solicitation costs.
 
Argonaut’s shareholders may revoke their proxy/voting instruction card in the manner described in the accompanying joint proxy statement/prospectus before it has been voted at the special meeting.


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All Argonaut shareholders are cordially invited to attend this special meeting, although only those shareholders of record at the close of business on [•], 2007 will be entitled to receive notice of, and to vote at, the special meeting or any adjournment thereof.
 
Your vote is very important. Whether or not you plan to be present at the special meeting, please complete, sign, date and return the enclosed proxy/voting instruction card or vote by telephone or over the Internet as provided on the proxy/voting instruction card.
 
By Order of the Board of Directors,
 
Craig S. Comeaux
Secretary
 
[•], 2007


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No Dissenters’/Appraisal Rights
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Selected Unaudited Pro Forma Combined Per Share Data
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  A-1
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  II-5
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  II-7
 EX-5.1: OPINION OF CONYERS DILL & PEARMAN
 EX-8.1: FORM OF OPINION OF DEWEY BALLANTINE LLP
 EX-8.2: FORM OF OPINION OF LEBOEUF, LAMB, GREENE & MACRAE LLP
 EX-23.1: CONSENT OF KPMG LLP
 EX-23.2: CONSENT OF ERNST & YOUNG LLP
 EX-99.4: CONSENT OF KEEFE, BRUYETTE & WOODS, INC.
 EX-99.5: CONSENT OF BEAR, STEARNS & CO. INC.
 EX-99.6: CONSENT OF GARY V. WOODS
 EX-99.7: CONSENT OF H. BERRY CASH
 EX-99.8: CONSENT OF HECTOR DE LEON
 EX-99.9: CONSENT OF ALLAN W. FULKERSON
 EX-99.10: CONSENT OF DAVID HARTOCH
 EX-99.11: CONSENT OF FRANK MARESH
 EX-99.12: CONSENT OF JOHN R. POWER, JR.
 EX-99.13: CONSENT OF FAYEZ F. SAROFIM
 EX-99.14: CONSENT OF MARK E. WATSON III


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QUESTIONS AND ANSWERS
ABOUT THE SHAREHOLDER MEETINGS AND THE MERGER
 
The following questions and answers briefly address some commonly asked questions about the shareholder meetings and the merger. They do not include all the information that may be important to you. PXRE and Argonaut urge you to read carefully this entire joint proxy statement/prospectus, including the annexes and the other documents referenced in this joint proxy statement/prospectus. Except where specifically noted, the following information and all other information in this joint proxy statement/prospectus do not take into account the reverse share split described in the section entitled “PXRE Special General Meeting — Proposals to be Considered at the PXRE Special General Meeting — Reverse Share Split.
 
  Q:   Why am I receiving this joint proxy statement/prospectus?
 
  A:   PXRE and Argonaut have agreed to enter into a merger transaction whereby a subsidiary of PXRE would be merged with and into Argonaut with Argonaut shareholders receiving PXRE common shares in exchange for their common stock in connection with the merger. The terms of the merger are set forth in the Agreement and Plan of Merger, dated as of March 14, 2007, which we refer to as the merger agreement, that is described in this joint proxy statement/prospectus. A copy of the merger agreement is attached to this joint proxy statement/prospectus as Annex A.  
 
To complete the merger, PXRE shareholders must vote to approve the issuance of PXRE common shares and certain other proposals in connection with the merger and Argonaut shareholders must vote to adopt the merger agreement. PXRE will hold its special general meeting, which we refer to as the special general meeting, and Argonaut will hold a separate special meeting, which we refer to as the special meeting, of their respective shareholders to obtain these approvals. See the sections entitled “PXRE Special General Meeting” and “Argonaut Special Meeting.”
 
This joint proxy statement/prospectus, which you should read carefully, contains important information about the merger, the merger agreement and the shareholder meetings. The enclosed voting materials allow you to vote your shares without attending your company’s shareholder meeting.
 
Your vote is very important. We encourage you to vote as soon as possible.
 
  Q:   How do I vote?
 
  A:   You may vote before your shareholder meeting in one of the following ways:
 
  •  for Argonaut shareholders, use the phone number shown on your proxy/voting instruction card;
 
  •  for Argonaut shareholders, visit the website shown on your proxy/voting instruction card to vote over the Internet; or
 
  •  for PXRE shareholders and Argonaut shareholders, complete, sign, date and return the enclosed proxy/voting instruction card in the enclosed postage-paid envelope.
 
  Q:   If my shares are held in “street name” by my broker, will my broker automatically vote my shares for me?
 
  A:   No. Your broker does not have authority to vote on the proposals in connection with the merger without instruction from you. Your broker will vote your shares held by it in “street name” only if you provide instructions to it on how to vote with respect to these matters. You should follow the directions your broker provides.
 
  Q:   What if I do not vote my shares on the matters relating to the merger?
 
  A:   If you are a PXRE shareholder and you fail to respond with a vote or instruct your broker how to vote on the proposal to issue PXRE common shares in connection with the merger, which we refer to as a broker non-vote, your vote will not be counted towards determining whether the required number of votes on the proposal have been voted in favor of the proposal. With respect to those matters requiring a special resolution of the PXRE shareholders (that is a resolution passed by the affirmative vote of 66 2/3% of the


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  voting power of the outstanding PXRE shares entitled to vote on the matter), if you respond and abstain from voting, your abstention from voting will have the same effect as a vote against such proposals. If you respond but do not indicate how you want to vote on the proposal, your proxy/voting instruction card will be counted as a vote in favor of the proposal.
 
If you are an Argonaut shareholder and you fail to respond with a vote or instruct your broker how to vote on the merger proposal, it will have the same effect as a vote against the proposal. If you respond and abstain from voting, your proxy/voting instruction card will have the same effect as a vote against the proposal. If you respond but do not indicate how you want to vote on the proposal, your proxy/voting instruction card will be counted as a vote in favor of the proposal.
 
  Q:   When is the merger expected to be completed?
 
  A:   If the requisite approvals of the shareholders of PXRE and Argonaut are obtained, we expect to complete the merger as soon as practicable after the satisfaction of the other conditions to the merger, including the receipt of required regulatory approvals. There may be a substantial period of time between the approval of the shareholders at the PXRE and Argonaut shareholder meetings and the effectiveness of the merger. We currently anticipate that the merger will be completed by August 31, 2007.
 
  Q:   Is the merger taxable?
 
  A:   PXRE and Argonaut expect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986 (as amended from time to time), which we refer to as the Code. Even if the merger qualifies as such a reorganization, for United States federal income tax purposes, holders of Argonaut common stock whose shares of Argonaut common stock are exchanged in the merger for common shares of PXRE will recognize gain (but not loss) on such exchange in accordance with Section 367(a) of the Code. Moreover, the holders of Argonaut common stock will recognize gain or loss on any cash received in lieu of fractional PXRE common shares. The merger will be tax free to PXRE shareholders; however, PXRE shareholders will recognize gain or loss on any cash received in lieu of fractional shares they would be entitled to receive as a result of the reverse share split.
 
If, contrary to the expectations of PXRE and Argonaut, the merger does not qualify as a reorganization within the meaning of Section 368(a) of the Code, the U.S. federal income tax consequences will be the same as described above with the exception that holders of Argonaut common stock will recognize gain or loss on the exchange of Argonaut common stock for PXRE common shares pursuant to the merger (such gain or loss will be the difference between the fair market value, at the time of the exchange, of the PXRE common shares received and the adjusted basis of the Argonaut common stock exchanged).
 
Tax matters are very complicated, and the tax consequences of the merger to a particular shareholder will depend in part on such shareholder’s circumstances. Argonaut and PXRE shareholders are urged to read the discussion in the section entitled “Material Tax Considerations — Tax Consequences of the Merger” beginning on page 117 of this joint proxy statement/prospectus and to consult their tax advisors as to the United States federal income tax consequences of the merger, as well as the effect of state, local and non-United States tax laws.
 
  Q:   Who can answer questions about the merger?
 
  A:   If you have any questions about the merger or your shareholder meeting, need assistance in voting your shares, or need additional copies of this joint proxy statement/prospectus or the enclosed proxy/voting instruction card:
 
Both PXRE and Argonaut shareholders should contact:
 
Georgeson, Inc.
17 State Street
New York, New York 10004
 
     
PXRE Shareholders:   Argonaut Shareholders:
(866) 577-4838 (toll-free)   (866) 574-4071 (toll-free)


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  Q:   What should I do now?
 
  A:   You should read this joint proxy statement/prospectus carefully, including the annexes. If you own shares in your own name, return your completed, signed and dated proxy/voting instruction card by mail in the enclosed postage-paid envelope (or, for Argonaut shareholders, vote by telephone or over the Internet) as soon as possible so that your shares will be represented and voted at your shareholder meeting. If your shares are held in “street name” through a broker, bank or other nominee, please follow the voting instructions provided by your broker, bank or other nominee.
 
  Q:   Should I send in my share certificates now?
 
  A:   No. Shareholders should not send in any share certificates now. After the merger is completed, the exchange agent will send shareholders a letter of transmittal explaining what they must do to exchange their share certificates.
 
  Q:   If I am going to attend my shareholder meeting, should I return my proxy/voting instruction card?
 
  A:   Yes. Returning your signed and dated proxy/voting instruction card (or, for Argonaut shareholders, voting by telephone or over the Internet) ensures that your shares will be represented and voted at your shareholder meeting. See “PXRE Special General Meeting — How to Vote” beginning on page 61 and “Argonaut Special Meeting — How to Vote” beginning on page 75.
 
  Q:   What does it mean if I receive multiple proxies?
 
  A:   If you receive multiple proxies, your shares may be registered in more than one account, such as a brokerage account and a 401(k) account. It is important that you complete, sign, date and return each proxy/voting instruction card you receive (or, for Argonaut shareholders, vote by telephone or over the Internet) as described in the section entitled “The PXRE Special General Meeting — How to Vote” for PXRE shareholders and the section entitled “The Argonaut Special Meeting — How to Vote” for Argonaut shareholders.
 
  Q:   Can I change my vote after I deliver my proxy/voting instruction card?
 
  A:   Yes. You may change your vote at any time before the vote takes place at your shareholder meeting. To change your vote, you may submit a new proxy/voting instruction card by mail (or, for Argonaut shareholders, submit a new proxy/voting instruction card by telephone or over the Internet). A PXRE shareholder of record may also send a signed written notice delivered to PXRE’s Corporate Secretary at least two (2) hours prior to the commencement of the PXRE special general meeting stating that he/she would like to revoke his/her proxy/voting instruction card and an Argonaut shareholder of record may send a signed written notice to Argonaut’s Corporate Secretary stating that he/she would like to revoke his/her proxy/voting instruction card. If your shares are held in a “street name” account, you must contact your broker, bank or other nominee to change your vote.
 
You may also change your vote by attending your shareholder meeting and voting in person. However, if you elect to vote in person at the shareholder meeting and your shares are held by a broker, bank or other nominee, you must bring to the meeting a legal proxy from the broker, bank or other nominee authorizing you to vote the shares.
 
  Q:   Where can I find more information about PXRE and Argonaut?
 
  A:   You can find more information about PXRE and Argonaut from various sources described under “Where You Can Find More Information” beginning on page 177.


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SUMMARY
 
This summary highlights selected information contained in this joint proxy statement/prospectus and may not include all the information that is important to you. To understand fully the proposed merger, and for a more detailed description of the terms and conditions of the merger and certain other matters being considered at your shareholder meeting, you should read this entire joint proxy statement/prospectus and the documents to which we have referred you. See “Where You Can Find More Information” beginning on page 177. We have included page references parenthetically in this summary to direct you to a more detailed description of each topic presented in this summary.
 
THE COMPANIES
 
Information about PXRE (See page 140)
 
PXRE is an insurance holding company organized in Bermuda. PXRE historically provided reinsurance products and services to a worldwide marketplace through its subsidiary operations located in Bermuda, Europe and the United States. PXRE’s primary focus historically was providing property catastrophe reinsurance and retrocessional coverage. PXRE also provided marine, aviation and aerospace products and services. In February 2006, PXRE announced that it would be increasing its estimates of the net pre-tax impact of Hurricanes Katrina, Rita and Wilma on PXRE’s operating results for the year ended December 31, 2005 and also first announced PXRE’s intention to explore strategic alternatives due to the potential negative impact on PXRE’s credit ratings resulting from the hurricane losses. Following these announcements, PXRE’s counterparty credit and financial strength ratings were downgraded by the major rating agencies to a level that was generally unacceptable to many of PXRE’s reinsurance clients. These ratings downgrades have had a significant negative impact on PXRE’s operating results and profitability because they have impaired PXRE’s ability to retain and renew PXRE’s existing reinsurance business. At December 31, 2006, PXRE had consolidated assets of approximately $1,401,343,000 and consolidated shareholders’ equity of approximately $496,767,000. For more information on PXRE and its business, see “Where You Can Find More Information” beginning on page 177.
 
PXRE GROUP LTD.
110 Pitts Bay Road
Pembroke HM 08
Bermuda
(441) 296-5858
www.pxre.com
 
Concurrently with the announcement of the merger, PXRE also announced the formation of a new Bermuda based reinsurance subsidiary, Peleus Reinsurance Ltd., which we refer to as Peleus Re. Peleus Re will focus on underwriting medium to small commercial property reinsurance risks on a pro rata and risk excess basis, and property catastrophe reinsurance risk on a controlled basis. It is also expected to provide reinsurance of casualty risks. Following the merger, Peleus Re will provide quota share reinsurance to Argonaut for its property and casualty risks.
 
Information about Argonaut (See page 145)
 
Argonaut, a Delaware corporation, is, through its subsidiaries, a national underwriter of specialty insurance products in niche areas of the property and casualty market. Argonaut provides a variety of specialty products in all 50 states on both an admitted and non-admitted basis, underwriting multi-line coverages in three ongoing segments: Excess and Surplus Lines, Select Markets and Public Entity. Argonaut is headquartered in San Antonio, Texas. At December 31, 2006, Argonaut had consolidated assets of approximately $3,721,500,000 and consolidated stockholders’ equity of approximately $847,700,000. For more information on Argonaut and its business, see “Where You Can Find More Information” beginning on page 177.
 
ARGONAUT GROUP, INC.
10101 Reunion Place, Suite 500
San Antonio, TX 78216
(210) 321-8500
www.argonautgroup.com


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Information about PXMS Inc.
 
PXMS Inc., which we refer to as PXMS, is a direct, wholly owned subsidiary of PXRE, which was formed exclusively for the purpose of completing the merger.
 
Information about the Resulting Company
 
Upon completion of the merger, the resulting company, which we refer to as Argo Group, will operate as a combined business including underwriting insurance products in Argonaut’s three ongoing business segments: Excess and Surplus Lines, Select Markets and Public Entity, as well as in a fourth business segment, Reinsurance, through Peleus Re.
 
THE MERGER AND THE MERGER AGREEMENT
 
The Merger (See page 78)
 
On March 14, 2007, PXRE, PXMS and Argonaut entered into the merger agreement which provides for the merger of PXMS with and into Argonaut, with Argonaut surviving as a direct, wholly owned subsidiary of PXRE. At the effective time of the merger, Argonaut shareholders will be entitled to receive newly issued PXRE common shares for their shares of Argonaut common stock. The number of PXRE common shares that Argonaut shareholders will receive will be based on an exchange ratio. The exchange ratio as specified in the merger agreement provides that Argonaut shareholders will be entitled to receive 6.4672 PXRE common shares in exchange for each share of Argonaut common stock they hold, subject to adjustment in the event that (i) Argonaut’s planned special dividend to its shareholders prior to the closing of the merger is less than $60 million, or (ii) Argonaut pays certain other dividends, incurs losses on sales of assets and/or engages in dilutive sales or purchases of Argonaut shares. The number of PXRE common shares that Argonaut shareholders will be entitled to receive will be adjusted, proportionately among all PXRE common shareholders, upon completion of a reverse share split of PXRE shares immediately after the merger (subject to the approval of PXRE’s shareholders), as described below. PXRE will not issue fractional shares in connection with the merger or in connection with the reverse share split. The value of any fractional shares will be paid in cash. The reverse share split would affect all of PXRE’s shareholders uniformly, including the former shareholders of Argonaut entitled to receive PXRE shares as merger consideration in the merger, and will not affect any shareholder’s percentage ownership interests in PXRE or proportionate voting power, except to the extent that the reverse share split would otherwise result in a shareholder owning a fractional share for which it will receive cash in lieu of such fractional share.
 
The exchange ratio will not be adjusted based on changes in market price, although the exchange ratio is subject to adjustment to prevent dilution under certain circumstances. Because we cannot predict the market price of PXRE common shares at the effective time of the transactions, we cannot predict the value of the PXRE common shares Argonaut shareholders will receive. The value of the consideration received for each share of Argonaut common stock at that time, based on reported market prices, may be significantly higher or lower than the value of the consideration on the date of this joint proxy statement/prospectus.
 
Upon completion of the merger, we estimate that PXRE’s shareholders will own approximately 27% and Argonaut shareholders will own approximately 73% of the then-outstanding PXRE common shares.
 
Upon completion of the merger, the parties intend to have the PXRE common shares delisted from the New York Stock Exchange, which we refer to as the NYSE, and listed on the NASDAQ Global Select Market, which we refer to as the NASDAQ, under the trading symbol “AGII.” Initially, a fifth character “D” will be appended to the “AGII” symbol for 20 trading days to reflect the reverse share split. PXRE’s name will be changed to “Argo Group International Holdings, Ltd.” The common stock of Argonaut will be delisted from the NASDAQ and deregistered under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act.
 
In addition to the approval by the PXRE shareholders of the issuance of common shares of PXRE in the merger and the approval by the Argonaut shareholders of the merger agreement, there are a number of conditions to the completion of the merger, several of which require shareholder approval. These are described below under “Shareholder Meetings, Actions to be Taken and Recommendations of the Boards of Directors.” We currently


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expect to complete the merger by August 31, 2007, subject to the receipt of required shareholder and regulatory approvals and satisfaction or, where permitted, waiver of the other conditions to completion of the merger.
 
A copy of the merger agreement is attached as Annex A to this joint proxy statement/prospectus. PXRE and Argonaut encourage you to read the entire merger agreement carefully because it is the principal document governing the merger.
 
The initial proposal regarding a merger with Argonaut contemplated the departure of PXRE’s chief executive officer, who is also a member of the PXRE board of directors, and the conversion of PXRE’s outstanding convertible preferred shares, the holders of which nominated three of the members of the PXRE board of directors. In order to avoid potential conflicts with these directors, a special committee of independent directors of the PXRE’s board of directors, which we refer to as the special committee, was formed upon PXRE’s receipt of the initial merger proposal in late November 2006 to negotiate the merger agreement with Argonaut, a separation agreement with PXRE’s chief executive officer, and a voting and conversion agreement, which we refer to as the voting agreement, with the PXRE preferred shareholders, as described below.
 
The Voting Agreement (See page 138)
 
In April 2002, PXRE sold convertible preferred shares to Capital Z Partners, Ltd. and affiliates, Reservoir Capital Management L.L.C. and affiliates and RER Reinsurance Holdings, L.P., which we collectively refer to as the PXRE preferred shareholders. The PXRE preferred shareholders also hold PXRE convertible common shares and PXRE common shares. The PXRE preferred shareholders have a right to nominate four directors for election to the PXRE board of directors. Currently, there are three directors serving on the PXRE board of directors who were so nominated: Bradley E. Cooper and Jonathan Kelly, who are partners of Capital Z Partners, Ltd., and Craig A. Huff, who is President and co-founder of Reservoir Capital Group.
 
The terms of the PXRE convertible preferred shares provide the PXRE preferred shareholders with the ability to veto certain corporate actions by PXRE, including the merger with Argonaut. In addition, in the course of the merger negotiations between PXRE and Argonaut, Argonaut requested that PXRE have only one class of equity securities outstanding following the merger. In order to obtain the consent of the PXRE preferred shareholders to the merger and to provide for the conversion of the convertible preferred shares and convertible common shares into PXRE common shares, PXRE and Argonaut entered into the voting agreement with the PXRE preferred shareholders pursuant to which the PXRE preferred shareholders consented to the merger and the convertible preferred shares will be converted into common shares of PXRE immediately prior to the merger at a reduced conversion price of $6.24. The reduction of the conversion price, from $11.28 to $6.24 per share, will result in the dilution of the value of the PXRE common shares of approximately 5.1% more than what would have resulted from the conversion of the convertible preferred shares at the existing conversion price.
 
The voting agreement will terminate on the earliest of (a) the effective time of the merger, (b) the termination of the merger agreement and (c) August 31, 2007.
 
Mr. Cooper, a PXRE director who is a partner of Capital Z Partners, Ltd., one of the PXRE preferred shareholders, is expected to continue as a director of the resulting company after the merger.
 
A copy of the voting agreement is attached as Annex D to this joint proxy statement/prospectus. PXRE and Argonaut encourage you to read the voting agreement carefully.
 
Treatment of Options and Other Equity-Based Awards
 
When we complete the merger, all outstanding options to purchase PXRE common shares held by existing option holders will become exercisable and will continue in full force and effect. All outstanding restricted shares will vest and continue outstanding except for 165,880 restricted shares granted in 2007 to non-executive officers, which vest over four years.
 
With the exception of the possible acceleration of vesting of certain outstanding equity awards held by the five executive officers named in Argonaut’s annual proxy statement dated March 30, 2007 and one other executive officer of Argonaut, when we complete the merger, all equity awards outstanding as of the effective time of the


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merger will be converted into equivalent equity awards of PXRE. Each outstanding vested and unvested option to acquire shares of Argonaut common stock will be automatically converted into an option to acquire a number of whole common shares of PXRE equal to the product of the number of shares of Argonaut common stock that were subject to the original Argonaut stock option multiplied by the exchange ratio (rounded down to the nearest whole share) at a per share exercise price of the original Argonaut stock option divided by the exchange ratio (rounded up to the nearest whole cent). Upon completion of the reverse share split, proportionate adjustments will be made to the per share exercise price and the number of shares issued upon the exercise of all outstanding options entitling the holders to purchase PXRE common shares, which will result in approximately the same aggregate amount being required to be paid for such options upon exercise immediately preceding the reverse share split. The unvested number of shares in a restricted stock grant will be converted into a number of whole common shares of a PXRE restricted share grant equal to the product of the number of unvested shares of Argonaut stock that were subject to the original Argonaut restricted stock grant multiplied by the exchange ratio (rounded down to the nearest whole share). The resulting number of shares will then be divided by ten to reflect the reverse share split and rounded down to the nearest whole share to eliminate fractional shares. No fractional shares will be issued and no cash payment for fractional shares will be made to holders of unvested restricted stock grants. Each converted Argonaut stock option will otherwise continue unaltered and have substantially the same terms and conditions as were in effect immediately prior to the completion of the transactions, including, as applicable, vesting and term of exercise, and no other change will be made to each unvested restricted stock grant, and the terms and conditions in effect immediately before the completion of the transactions, including vesting, will be unchanged, except in each case as described in “The Merger — Effect of the Merger; Consideration to be Received in the Merger; Treatment of Options and Other Equity-Based Awards” beginning on page 78.
 
The reverse share split will be achieved under Bermuda law by (i) the consolidation and division of PXRE’s shares into a larger par value, (ii) the cancellation of the excess par value in the amount of $9.00 per share which was created by step (i) above, and (iii) the re-characterization of the cancelled par value as contributed surplus.
 
United States Federal Income Tax Consequences of the Merger to PXRE and Argonaut Common Shareholders (See page 117)
 
PXRE and Argonaut expect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Even if the merger qualifies as such a reorganization, for United States Federal income tax purposes, holders of Argonaut common stock whose shares of Argonaut common stock are exchanged in the merger for shares of PXRE common shares will recognize gain (but not loss) on such exchange in accordance with Section 367(a) of the Code. Moreover, the holders of Argonaut common stock will recognize gain or loss on any cash received in lieu of fractional PXRE common shares. The merger will be tax free to PXRE shareholders; however, PXRE shareholders will recognize gain or loss on any cash received in lieu of fractional shares they would be entitled to receive as a result of the reverse share split.
 
If, contrary to the expectations of PXRE and Argonaut, the merger does not qualify as a reorganization within the meaning of Section 368(a) of the Code, the U.S. federal income tax consequences will be the same as described above with the exception that holders of Argonaut common stock will recognize gain or loss on the exchange of Argonaut common stock for PXRE common shares pursuant to the merger (such gain or loss will be the difference between the fair market value, at the time of the exchange, of the PXRE common shares received and the adjusted basis of the Argonaut common stock exchanged).
 
Argonaut intends to treat the special cash dividend to be paid to Argonaut common shareholders as a distribution with respect to Argonaut common stock, and not as consideration in connection with the merger.
 
Tax matters are very complicated, and the tax consequences of the merger to a particular shareholder will depend in part on such shareholder’s circumstances. Argonaut and PXRE shareholders are urged to read the discussion in the section entitled “Material Tax Considerations — Tax Consequences of the Merger” beginning on page 117 of this joint proxy statement/prospectus and to consult their tax advisors as to the United States federal income tax consequences to them of the merger, as well as the effect of state, local and non-United States tax laws.


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Shareholder Meetings, Actions to be Taken and Recommendations of the Boards of Directors
 
PXRE (See page 58)
 
The PXRE special general meeting will be held at [•], local time, on [•], 2007, at [•]. At the PXRE special general meeting, shareholders of PXRE are being asked to consider and vote on the following proposals, which, if approved by the shareholders, would be effective only upon completion of the merger:
 
  •  to approve the issuance of common shares of PXRE pursuant to the merger agreement;
 
  •  to approve a reverse split of the common shares of PXRE, at a ratio of one share of PXRE for each ten shares of PXRE held or entitled to be received in the merger;
 
  •  to approve the change of name of “PXRE Group Ltd.” to “Argo Group International Holdings, Ltd.”;
 
  •  to approve an amendment to PXRE’s bye-laws, to increase the maximum number of directors that may constitute the entire board of directors of PXRE from 11 to 13 directors (if the affirmative vote of 662/3% of the voting power of the outstanding shares is obtained) or to 12 directors;
 
  •  to approve an increase in the authorized share capital of PXRE from $380 million to $530 million;
 
  •  to approve an amendment and restatement of PXRE’s memorandum of association; and
 
  •  to approve an amendment and restatement of PXRE’s bye-laws (some of which amendments require the affirmative vote of 662/3% of the voting power of the outstanding shares).
 
Other than as specified above, the foregoing proposals are required to be approved by an ordinary resolution, that is, a simple majority of the votes cast on the Item. See “PXRE Special General Meeting — Proposals to be Considered at the PXRE Special Meeting” beginning on page 62.
 
THE MERGER WILL NOT BE COMPLETED UNLESS PXRE SHAREHOLDERS APPROVE THE ISSUANCE OF COMMON SHARES OF PXRE PURSUANT TO THE MERGER AGREEMENT. IN ADDITION, THE MERGER WILL NOT BE COMPLETED UNLESS THE REVERSE SPLIT OF THE COMMON SHARES OF PXRE AND THE CHANGE OF PXRE’S NAME TO “ARGO GROUP INTERNATIONAL HOLDINGS, LTD.,” ARE APPROVED BY PXRE SHAREHOLDERS OR ARE WAIVED BY ARGONAUT.
 
After careful consideration, the PXRE board of directors on March 13, 2007, acting upon the unanimous recommendation of the special committee, unanimously approved the merger agreement and the transactions contemplated thereby, including each of the foregoing proposals. For the factors considered by the PXRE board of directors in reaching its decision to approve the merger agreement and the transactions contemplated thereby, including each of the foregoing proposals, see the section entitled “The Merger — PXRE’s Reasons for the Merger and Recommendation of PXRE’s Board of Directors” beginning on page 84. The PXRE board of directors believes that the merger is advisable and in the best interests of PXRE and its shareholders, and unanimously recommends that the PXRE shareholders vote FOR each of the foregoing proposals.
 
In addition, PXRE shareholders are being asked to vote upon the following proposals at the special general meeting:
 
  •  to approve any proposal to adjourn the PXRE special general meeting to a later date, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special general meeting to approve the above proposals; and
 
  •  to approve actions upon any other business that may properly come before the special general meeting or any reconvened meeting following an adjournment of the special general meeting.
 
The PXRE board of directors unanimously recommends that the PXRE shareholders vote FOR each of the foregoing proposals.


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Argonaut (See page 73)
 
The Argonaut special meeting will be held on [•], 2007, at [•], local time, at [•]. At the Argonaut special meeting, holders of Argonaut common stock are being asked to consider and vote on the following proposals:
 
  •  to approve the merger agreement;
 
  •  to approve any proposal to adjourn the Argonaut special meeting to a later date, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of Argonaut’s special meeting to approve the above proposals; and
 
  •  to approve actions upon any other business that may properly come before the special meeting or any reconvened meeting following an adjournment of the special meeting.
 
The affirmative vote of the holders of a majority of the outstanding shares of Argonaut common stock is necessary to approve and adopt the merger agreement.
 
THE MERGER WILL NOT BE COMPLETED UNLESS ARGONAUT SHAREHOLDERS APPROVE THE MERGER AGREEMENT.
 
After careful consideration, the Argonaut board of directors, on March 14, 2007, unanimously approved the merger agreement. For the factors considered by the Argonaut board of directors in reaching its decision to approve the merger agreement, see the section entitled “The Merger — Argonaut’s Reasons for the Merger and Recommendation of the Merger by the Argonaut Board of Directors” beginning on page 86. Argonaut’s board of directors believes that the merger is advisable, fair to and in the best interests of Argonaut and its shareholders, and unanimously recommends that Argonaut shareholders vote FOR the foregoing proposals.
 
Opinion of PXRE’s Financial Advisor (See page 88)
 
Keefe, Bruyette & Woods, Inc., which we refer to as KBW, acted as the financial advisor to the special committee in connection with the merger. On March 12, 2007, KBW delivered its oral opinion to the special committee, which was subsequently confirmed by delivery of a written opinion, dated March 12, 2007, that, as of that date and based upon and subject to the factors and assumptions set forth in the written opinion, the consideration paid in the merger, after giving effect to the transactions contemplated by the voting agreement with the PXRE preferred and convertible common shareholders was fair from a financial point of view to the holders of the PXRE common shares (other than the PXRE common shareholders party to the voting agreement). The full text of KBW’s written opinion, dated March 12, 2007, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with its opinion, is attached to this joint proxy statement/prospectus as Annex E. A summary of KBW’s opinion is set forth in this joint proxy statement/prospectus and is qualified by reference to the full text of its opinion, which we urge you to read in its entirety. KBW provided its opinion for the information and assistance of the special committee in connection with its consideration of the merger. The KBW opinion is not a recommendation as to how PXRE shareholders should vote in connection with the merger or the merger agreement.
 
Opinion of Argonaut’s Financial Advisor (See page 98)
 
Bear, Stearns & Co. Inc., which we refer to as Bear Stearns, acted as the financial advisor to Argonaut in connection with the merger. On March 14, 2007, Bear Stearns delivered its oral opinion to the board of directors of Argonaut, which was subsequently confirmed in writing, that as of March 14, 2007, and based upon and subject to the assumptions, qualifications and limitations set forth in the written opinion, the exchange ratio was fair, from a financial point of view, to the shareholders of Argonaut. The full text of Bear Stearns’ written opinion, dated March 14, 2007, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with its opinion, is attached to this joint proxy statement/prospectus as Annex F.  A summary of Bear Stearns’ opinion is set forth in this joint proxy statement/prospectus and is qualified by reference to the full text of its opinion, which we urge you to read in its entirety. Bear Stearns provided its opinion for the information and assistance of Argonaut’s board of directors in connection with its consideration of the


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merger. Bear Stearns’ opinion is not a recommendation as to how Argonaut shareholders should vote in connection with the merger or the merger agreement.
 
Interests of PXRE Directors and Executive Officers in the Merger (See page 105)
 
When considering the recommendations by the PXRE board of directors, you should be aware that a number of PXRE executive officers and directors have interests in the merger that are different from those of other PXRE shareholders. These interests include:
 
  •  affiliations with the PXRE preferred shareholders, who are parties to and beneficiaries of the voting agreement;
 
  •  severance payments under a separation agreement between PXRE and PXRE’s chief executive officer, upon completion of the merger;
 
  •  payments under employment contracts which may be triggered if an executive officer’s employment terminates under certain circumstances following the merger;
 
  •  vesting of unvested options and restricted shares under PXRE’s 2002 Officer Incentive Plan and Director Stock Plan;
 
  •  continuation of the terms of three (or four if the PXRE shareholder proposal to increase the size of the board of directors to 13 directors is approved) of the members of PXRE’s board of directors on the PXRE board of directors following the merger; and
 
  •  continuing as executive or senior officers of PXRE after the transaction.
 
As a result of these interests, these directors and executive officers may be more likely to support and to vote to approve the merger agreement and the transactions contemplated thereby than if they did not have these interests. Shareholders should consider whether these interests may have influenced those directors and executive officers to support or recommend approval of the merger. As of the close of business on the record date for the PXRE special general meeting, PXRE’s directors and executive officers and their affiliates were entitled to vote approximately [•] shares of the then-outstanding PXRE common shares and [•] shares of the then-outstanding PXRE convertible preferred shares at the PXRE special general meeting, which represented [•] percent and [•] percent, respectively, of the PXRE common shares and PXRE convertible preferred shares outstanding and entitled to vote at the meeting.
 
Interests of Argonaut’s Directors and Executive Officers in the Merger (See page 108)
 
When considering the recommendations by the Argonaut board of directors, you should be aware that a number of Argonaut executive officers and directors have interests in the merger that are different from those of other Argonaut shareholders. These interests include:
 
  •  continuing as executive or senior officers of Argonaut or becoming executive or senior officers of PXRE after the transaction (subject to receipt of Bermuda work permits as described in “Risk Factors — Risks Related to the Resulting Company’s Operations After the Completion of the Merger — Risks Related to Regulation” beginning on page 43);
 
  •  payments under the Argonaut executive severance plan which may be triggered if an executive officer’s employment terminates under certain circumstances following the merger;
 
  •  appointment of all nine of the Argonaut directors to the PXRE board of directors following the merger; and
 
  •  possible acceleration of the vesting of outstanding equity awards held by certain executive officers of Argonaut, as described in “The Merger — Effect of the Merger; Consideration to be Received in the Merger; Treatment of Options and Other Equity-Based Awards” beginning on page 78.
 
In addition to her position as Senior Vice President, Business Development at Argonaut, Barbara Bufkin has been appointed President of Peleus Re.


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As a result of these interests, these directors and executive officers may be more likely to support and to vote to approve the merger agreement and the transactions contemplated thereby than if they did not have these interests. Shareholders should consider whether these interests may have influenced those directors and executive officers to support or recommend approval of the merger. As of the close of business on the record date for the Argonaut special meeting, Argonaut’s directors and executive officers and their affiliates were entitled to vote [•] percent of the then-outstanding shares of Argonaut common stock.
 
Directors and Executive Officers Following the Merger (See page 109)
 
PXRE’s board of directors is currently comprised of nine members and has two vacant seats. PXRE’s bye-laws currently set the size of PXRE’s board of directors at not less than three or more than 12 members. Increasing the size of the board above its current size of 11 directors requires the approval of PXRE’s shareholders. PXRE has agreed to use commercially reasonable efforts to cause the board of directors of the resulting company to consist of 13 directors following the merger. Increasing the size of the board to 13 directors requires an amendment to PXRE’s bye-laws approved by 662/3% of the voting power of the outstanding PXRE shares. Increasing the size of the board to 12 directors requires a simple majority of the votes cast. If PXRE receives the affirmative vote of 662/3% of the voting power of the outstanding PXRE shares to increase the size of the board to 13 directors, the 13 directors immediately following the merger will consist of Argonaut’s nine current directors and four of PXRE’s current directors. A chairman will be elected from the group of 13 directors. If PXRE does not receive the affirmative vote of 662/3% of the voting power of the outstanding PXRE shares to increase the size of the board to 13 directors, but does receive the affirmative vote of a simple majority of the votes cast approving an increase of the size of the board to 12 directors, the board immediately following the merger will consist of Argonaut’s nine current directors and three of PXRE’s current directors. A chairman would be elected from the group of 12 directors.
 
Jeffrey Radke, Wendy Luscombe, Gerald L. Radke, Craig A. Huff and Jonathan Kelly are expected to resign as members of the PXRE board of directors immediately following the merger. F. Sedgwick Browne, Mural R. Josephson and Bradley E. Cooper are expected to continue as members of the PXRE board of directors immediately following the merger if the board is increased to 12 members. Philip R. McLoughlin is expected to continue as a member of the PXRE board of directors immediately following the merger if the board is increased to 13 members, and otherwise he is expected to resign immediately following the merger. If, for any reason, any of the PXRE directors presently expected to continue as a member of the PXRE board is not able or willing to serve as a director following the merger (a situation which is not presently contemplated), one of the resigning directors would instead continue to serve as a director immediately following the merger. See “PXRE’s Board of Directors and Management Following the Merger” beginning in page 109 or information regarding the directors and executive officers of PXRE expected to continue in such capacities following the merger.
 
Upon completion of the merger, Mark E. Watson III, currently President and Chief Executive Officer of Argonaut, is expected to become the President and Chief Executive Officer of the resulting company. Robert P. Myron, currently Executive Vice President, Chief Financial Officer and Treasurer of PXRE, is expected to continue in those positions with the resulting company. Jeffrey L. Radke, currently Chief Executive Officer and President and a director of PXRE, will leave those positions pursuant to a letter agreement entered into between PXRE and Mr. Radke. See “The Merger — Interests of PXRE Directors and Executive Officers in the Merger — Arrangements with PXRE’s President and Chief Executive Officer” beginning on page 105 for information regarding the letter agreement.
 
No Dissenters’/Appraisal Rights (See page 112)
 
No holders of record of PXRE or Argonaut capital stock will be entitled to dissenters’ or appraisal rights in connection with the merger. See “Risk Factors — Risks Related to the Merger — Argonaut may be required to offer appraisal rights to its shareholders in connection with the merger, which may require the renegotiation of the merger agreement and the postponement of the Argonaut special meeting, possibly causing a delay in the completion of the merger. More than a minimal amount of cash payments in respect of the exercise of appraisal rights by Argonaut shareholders could have a material adverse effect on the financial condition of the resulting company” beginning on page 22.


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Regulatory Approvals (See page 112)
 
State insurance laws generally require that, prior to the acquisition of an insurance company, the acquiring party must obtain approval from the insurance commissioner of the insurance company’s state of domicile or obtain an exemption from such insurance commissioner from the filing and approval requirements. Accordingly, the necessary applications (or exemption requests) have been made with the insurance commissioners of Illinois, Louisiana, Ohio, Pennsylvania and Virginia, the states of domicile of Argonaut’s U.S. insurance company subsidiaries, and Connecticut, the state of domicile of PXRE’s U.S. insurance subsidiary.
 
The merger is subject to U.S. antitrust laws. PXRE and Argonaut have separately filed notifications under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to as the HSR Act, with both the Antitrust Division of the Department of Justice and the Federal Trade Commission, which we refer to as the DOJ and the FTC, respectively. Both parties filed notifications on April 5, 2007 and the waiting period for those filings expired on April 17, 2007. The DOJ or the FTC, as well as a state attorney general or private person, may challenge the merger at any time before or after its completion.
 
We currently expect to complete the merger by August 31, 2007, subject to the receipt of required shareholder and regulatory approvals and satisfaction or, where permitted, waiver of the other conditions to completion of the merger.
 
Principal Conditions to Completion of the Merger (See page 135)
 
The obligations of PXRE and Argonaut to complete the transactions are subject to the satisfaction or, where permitted, waiver of the conditions specified in the merger agreement, including the following:
 
  •  the approval of PXRE’s issuance of common shares in the merger by the PXRE shareholders;
 
  •  the approval of the merger agreement by the Argonaut shareholders;
 
  •  the termination or expiration of the applicable waiting period under the HSR Act;
 
  •  the receipt of other requisite governmental approvals or consents required to complete the transactions contemplated by the merger agreement;
 
  •  no temporary restraining order, injunction or other legal restraint preventing any of the transactions;
 
  •  the representations and warranties of the other party being true and correct, subject to the material adverse effect standard provided in the merger agreement;
 
  •  no event having occurred that, individually or in the aggregate, would reasonably be expected to have any material adverse effect, as defined in the merger agreement, with respect to the other party;
 
  •  the other party having complied in all material respects with its obligations required to be complied with by it under the merger agreement;
 
  •  the receipt of an officer’s certificate from executive officers of the other party stating that the three preceding conditions have been satisfied;
 
  •  the receipt of legal opinions addressing certain of the tax consequences of the proposed transactions; and
 
  •  the receipt of a legal opinion addressing the votes or consents of shareholders necessary to complete the transactions under Bermuda law.
 
In addition, Argonaut’s obligation to complete the transactions is subject to the satisfaction of the following additional conditions:
 
  •  the voting agreement entered into by the PXRE preferred shareholders and PXRE convertible common shareholders being in full force and effect without having been amended, modified or supplemented without the consent of all of the parties thereto;
 
  •  the satisfaction of all conditions precedent to the reverse split of the common shares of PXRE;


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  •  the satisfaction of all conditions precedent to the change of name of “PXRE Group Ltd.” to “Argo Group International Holdings, Ltd.”;
 
  •  neither PXRE nor Argonaut receiving notice from either A.M. Best Company, which we refer to as A.M. Best, or Standard & Poor’s, a Division of the McGraw-Hill Companies, Inc., which we refer to as S&P, that any rating assigned to PXRE or Argonaut is subject to being downgraded or has been downgraded; and
 
  •  the conversion of all convertible preferred shares of PXRE into common shares of PXRE.
 
Termination of the Merger Agreement (See page 135)
 
PXRE and Argonaut can jointly agree to terminate the merger agreement at any given time. Either company may also terminate the merger agreement if the merger is not completed by August 31, 2007 or if one of the other termination conditions in the merger agreement occurs.
 
Expenses and Termination Fees (See page 136)
 
Whether or not we complete the proposed transactions, PXRE and Argonaut will each bear its own expenses in connection with the transactions, except that PXRE and Argonaut will each pay one-half of the costs and expenses incurred in connection with the filing and printing of this joint proxy statement/prospectus and the required filings under the HSR Act. If the merger agreement is terminated under specified circumstances, PXRE may be obligated to pay a termination fee of $20 million to Argonaut or Argonaut may be obligated to pay a termination fee of $40 million to PXRE.
 
Accounting Treatment
 
The merger will be accounted for as a business combination using the purchase method of accounting. Argonaut will be the acquirer for financial accounting purposes.
 
Argo Group Annual General Meeting Following the Merger (See page 114)
 
Following the merger and the completion of the related transactions described in this joint proxy statement/prospectus, shareholders will receive notice of the initial annual general meeting of the resulting company, Argo Group. At this initial annual general meeting, shareholders will be asked to consider and vote on:
 
  •  the election of the Class III directors of the resulting company;
 
  •  the replacement of certain PXRE and Argonaut benefit plans with new benefit plans of the resulting company; and
 
  •  the appointment of the independent auditors for the resulting company.


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
Selected Historical Consolidated Financial Data of PXRE
 
The following selected historical financial data for each of the years in the five-year period ended December 31, 2006 has been derived from PXRE’s audited consolidated financial statements as of December 31, 2006, 2005, 2004, 2003 and 2002.
 
PXRE’s historical financial data may not be indicative of the operating results or financial position to be expected in the future. This information is only a summary. The selected financial data should be read together with PXRE’s audited consolidated financial statements and the related notes to those financial statements and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” section included in PXRE’s Annual Report on Form 10-K for the year ended December 31, 2006 which has been filed with the SEC and is incorporated by reference into this joint proxy statement/prospectus.
 
                                         
    For the Year Ended December 31,  
    2006     2005(1)     2004     2003     2002  
    (In millions except per share amounts)  
 
Statement of Operations Data
                                       
Gross written premiums
  $ 138.8     $ 542.3     $ 346.0     $ 339.1     $ 366.8  
Net written premiums
    53.5       407.0       309.8       278.4       294.5  
                                         
Earned premiums
    84.5       388.3       308.1       320.9       269.4  
Net investment income
    60.7       45.3       26.2       26.9       24.9  
Fee income
    0.4       0.9       1.8       5.0       3.4  
Realized investment (loss) gains and other (losses)/gains, net
    (7.8 )     (14.7 )     (0.2 )     2.5       9.0  
                                         
Total revenues
    137.8       419.8       335.9       355.3       306.7  
                                         
Losses and loss expenses incurred
    12.4       1,011.5       226.3       157.6       125.4  
Underwriting, acquisition and operating expense
    63.9       84.6       77.5       87.2       87.4  
Other related reinsurance expense
    17.9       0.9                    
Interest expense
    14.5       14.5       14.4       2.5       2.9  
Minority interest in consolidated subsidiaries
                      10.5       8.6  
                                         
Total expenses
    108.7       1,111.5       318.2       257.8       224.3  
                                         
Income (loss) before income taxes, cumulative effect of accounting change and convertible preferred share dividends
    29.1       (691.7 )     17.7       97.5       82.4  
Provision (benefit) for income taxes
    0.6       5.9       (6.2 )     0.8       17.8  
                                         
Income (loss) before cumulative effect of accounting change and convertible preferred share dividends
    28.5       (697.6 )     23.9       96.7       64.6  
                                         
Cumulative effect of accounting change, net of tax
                (1.1 )            
                                         
Net income (loss) before convertible preferred share dividends
  $ 28.5     $ (697.6 )   $ 22.8     $ 96.7     $ 64.6  
Convertible preferred shared dividends
    4.9       7.0       14.0       13.1       9.1  
                                         
Net income (loss) to common shareholders
  $ 23.6     $ (704.6 )   $ 8.8     $ 83.6     $ 55.5  
                                         
                                         
                                         


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    For the Year Ended December 31,  
    2006     2005(1)     2004     2003     2002  
    (In millions except per share amounts)  
 
Net income (loss) per common share
                                       
Basic
  $ 0.33     $ (21.65 )   $ 0.61     $ 6.97     $ 4.70  
                                         
Diluted
  $ 0.33     $ (21.65 )   $ 0.59     $ 4.10     $ 3.28  
                                         
                                         
Cash dividends declared per common share
  $     $ 0.42     $ 0.24     $ 0.24     $ 0.24  
                                         
                                         
Weighted average number of shares outstanding:
                                       
Basic
  $ 71.9     $ 32.5     $ 14.4     $ 12.0     $ 11.8  
                                         
Diluted
  $ 71.9     $ 32.5     $ 15.0     $ 23.6     $ 19.7  
                                         
                                         
Balance Sheet Data
                                       
Invested assets
  $ 1,204.1     $ 1,646.5     $ 1,149.5     $ 946.5     $ 758.7  
Total assets
  $ 1,401.3     $ 2,116.0     $ 1,454.4     $ 1,359.6     $ 1,237.1  
Reserves for losses and loss adjustment expense
  $ 603.2     $ 1,320.1     $ 460.1     $ 450.6     $ 447.8  
Subordinated debt
  $ 167.1     $ 167.1     $ 167.1     $     $  
Minority interest in consolidated subsidiaries
  $     $     $     $ 156.8     $ 94.3  
Shareholders’ equity
  $ 496.8     $ 465.3     $ 696.6     $ 564.5     $ 453.5  
 
 
(1) Included in loss and loss expenses incurred was $850.8 million due to Hurricanes Katrina, Rita and Wilma.
 
Selected Historical Consolidated Financial Data of Argonaut
 
The following selected historical financial data for each of the years in the five-year period ended December 31, 2006 has been derived from Argonaut’s audited consolidated financial statements as of December 31, 2006, 2005, 2004, 2003 and 2002.
 
Argonaut’s historical financial data may not be indicative of the results of operations or financial position to be expected in the future. This information is only a summary. The selected financial data should be read together with Argonaut’s consolidated financial statements and the related notes to those financial statements and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” section included in Argonaut’s Annual Report on Form 10-K for the year ended December 31, 2006 which has been filed with the SEC and is incorporated by reference into this joint proxy statement/prospectus.
 
                                         
    For the Year Ended December 31,  
    2006     2005     2004     2003(2)     2002(1)  
    (In millions except per share amounts)  
 
Statement of Operations Data
                                       
Gross written premiums
  $ 1,155.6     $ 1,055.7     $ 903.4     $ 788.3     $ 622.1  
Net written premiums
    847.0       769.4       669.5       592.5       484.0  
                                         
Earned premiums
    813.0       699.0       633.9       562.8       378.4  
Net investment income
    104.5       83.9       65.1       53.6       52.9  
Realized investment and other gains, net
    21.2       3.3       5.2       113.6       26.6  
                                         
Total revenue
    938.7       786.2       704.2       730.0       457.9  
Losses and loss adjustment expenses
    477.6       427.2       409.7       395.3       334.6  
Underwriting, acquisition and insurance expense
    285.1       262.5       222.8       191.0       144.4  
Interest expense
    13.0       15.0       11.0       8.4        
                                         

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    For the Year Ended December 31,  
    2006     2005     2004     2003(2)     2002(1)  
    (In millions except per share amounts)  
 
Total expenses
    775.7       704.7       643.5       594.7       479.0  
Income (loss) before income taxes
    163.0       81.5       60.7       135.3       (21.1 )
Provision (benefit) for income taxes
    57.0       1.0       (11.1 )     26.3       65.9  
                                         
Net income (loss)
  $ 106.0     $ 80.5     $ 71.8     $ 109.0     $ (87.0 )
                                         
Net income (loss) per common share:
                                       
Basic
  $ 3.32     $ 2.73     $ 2.51     $ 4.76     $ (4.04 )
                                         
Diluted
  $ 3.13     $ 2.53     $ 2.33     $ 4.40     $ (4.04 )
                                         
Cash dividends declared per common share
  $     $     $     $     $ 0.60  
                                         
Weighted average number of shares outstanding:
                                       
Basic
    31.6       28.6       27.6       22.5       21.6  
                                         
Diluted
    33.9       31.8       30.8       24.8       21.6  
                                         
Balance Sheet Data
                                       
Invested assets
  $ 2,514.1     $ 2,173.0     $ 1,783.9     $ 1,553.2     $ 1,181.3  
Total assets
  $ 3,721.5     $ 3,404.6     $ 3,073.2     $ 2,766.5     $ 2,208.9  
Reserves for losses and loss adjustment expense
  $ 2,029.2     $ 1,875.4     $ 1,607.5     $ 1,480.8     $ 1,281.6  
Junior subordinated debentures
  $ 144.3     $ 144.3     $ 113.4     $ 27.5     $  
Shareholders’ equity
  $ 847.7     $ 716.1     $ 603.4     $ 539.2     $ 327.7  
 
 
(1) Included in losses and loss adjustment expenses is $59.8 million in reserve strengthening in the Runoff Lines primarily attributable to Argonaut’s asbestos exposure. Included in the provision of income taxes is the establishment of a deferred tax asset valuation allowance of $71.9 million.
 
(2) Included in realized investment gains, net, is $57.6 million in gains related to the disposal of four real estate holdings, and $48.8 million in realized gains resulting from Argonaut reallocating its investment portfolio.

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SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
 
For accounting purposes, this transaction will be accounted for as a reverse acquisition with Argonaut as the accounting acquirer. Accordingly, Argo Group will account for the transaction as a purchase business combination, using Argonaut’s historical financial information and accounting policies and applying fair value estimates to the acquired assets, liabilities and commitments of PXRE as of the date of the transaction. See “The Merger — Accounting Treatment” beginning on page 112.
 
The selected preliminary unaudited pro forma combined financial information which follows reflects the purchase method of accounting and is intended to provide information regarding how the companies might have looked had PXRE and Argonaut actually been combined as of the dates indicated. The preliminary selected unaudited pro forma combined financial information does not reflect the effect of revenue enhancements, expense efficiencies, synergies or asset dispositions that may result from the merger. The preliminary selected unaudited pro forma combined financial information should not be relied upon as being indicative of the historical results that would have occurred had the companies been combined or the future results that may be achieved after the merger.
 
The following selected preliminary unaudited pro forma combined financial information has been derived from, and should be read in conjunction with, the preliminary Unaudited Pro Forma Condensed Combined Financial Statements and related notes that begin on page 164. The preliminary Unaudited Pro Forma Condensed Combined Balance Sheet combines the historical consolidated balance sheet of PXRE and the historical consolidated balance sheet of Argonaut as of December 31, 2006, giving effect to the merger as if it had been consummated on that date. The preliminary Unaudited Pro Forma Condensed Combined Statement of Income combines the historical consolidated statements of income of PXRE and Argonaut for the twelve months ended December 31, 2006, giving effect to the merger as if it had occurred on January 1, 2006. We have adjusted the historical consolidated financial information to give effect to pro forma events that are (1) directly attributable to the merger, (2) factually supportable, and (3) with respect to the statement of income, expected to have a continuing impact on the combined results.
 
The preliminary unaudited pro forma adjustments represent management’s estimates based on information available at this time. Actual adjustments to the combined balance sheet and income statement will differ, perhaps materially, from those reflected in these preliminary Unaudited Pro Forma Condensed Combined Financial Statements because the assets and liabilities of PXRE will be recorded at their respective fair values on the date the merger is consummated, and the preliminary assumptions used to estimate these fair values may change between now and the completion of the merger.
 
Selected Unaudited Pro Forma Combined Financial Information
 
         
    For the Year Ended
 
    December 31, 2006  
    (In millions, except
 
    per share amounts)  
 
Total revenues
  $ 1,076.5  
Income from continuing operations
    134.4  
Income per common share — continuing operations:
       
Basic(1)
  $ 4.51  
Diluted(1)
    4.36  
Cash dividends paid per share(2)
    N/A  
 


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    At December 31, 2006  
    (In millions, except
 
    per share amounts)  
 
Total investments
  $ 3,718.2  
Total assets
    5,136.7  
Reserves for losses and loss adjustment expenses
    2,631.0  
Total subordinated debt and note payable
    371.4  
Total liabilities
    3,859.6  
Shareholders’ equity(3)
    1,277.1  
Book value per share(1)
  $ 41.56  
 
 
(1) Reflects a 1:10 reverse share split for Argo Group.
 
(2) Excluding a special dividend of $60 million which Argonaut intends to pay prior to the closing of the merger.
 
(3) Reflects a special dividend of $60 million which Argonaut intends to pay prior to the closing of the merger.
 
SELECTED UNAUDITED PRO FORMA COMBINED PER SHARE DATA
 
The following table presents, for the periods indicated, selected unaudited pro forma combined per share amounts for Argo Group shares, pro forma per share equivalent amounts for shares of Argonaut common stock and the comparative historical per share data for PXRE common shares and Argonaut common stock. The pro forma amounts included in the table below are presented as if the merger had been effective for the period presented, have been prepared in accordance with accounting principles generally accepted in the United States of America and are based on the purchase method of accounting. The pro forma amounts in the tables below do not, however, give consideration to the impact of possible revenue enhancements, expense efficiencies, synergies or asset dispositions, as well as other possible adjustments discussed in Note 1 to the preliminary Unaudited Pro Forma Condensed Combined Financial Statements.
 
You should read this information in conjunction with, and the information is qualified in its entirety by, the consolidated financial statements of PXRE and Argonaut incorporated into this joint proxy statement/prospectus by reference and the preliminary Unaudited Pro Forma Condensed Combined Financial Statements and accompanying discussions and notes beginning on page 164. See also “Where You Can Find More Information” beginning on page 177. The pro forma amounts in the table below are presented for informational purposes only. You should not rely on the pro forma amounts as being indicative of the financial position or results of operations of the combined company that would have actually occurred had the merger been effective during the period presented or of the future financial position or future results of operations of the combined company. The combined financial information as of and for the period presented may have been different had the companies actually been combined as of and during those periods.
 
                                 
    As of and for the Year Ended December 31, 2006  
    Historical
    Historical
    Pro Forma
    Pro Forma
 
    Argonaut     PXRE     Adjustments(1)     Argo Group  
    (In millions, except per share data)  
 
Basic Income Per Common Share from Continuing Operations
                               
Income from continuing operations
  $ 106.0     $ 28.5     $ (0.1 )   $ 134.4  
Income from continuing operations available to common shareholders
    105.0       23.6       4.8       133.4  
Weighted average basic common shares outstanding(2)
    31,641       71,954               29,559  
Basic income per common share(2)
    3.32       0.33               4.51  
                                 
                                 
                                 

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    As of and for the Year Ended December 31, 2006  
    Historical
    Historical
    Pro Forma
    Pro Forma
 
    Argonaut     PXRE     Adjustments(1)     Argo Group  
    (In millions, except per share data)  
 
Diluted Income Per Common Share from Continuing Operations
                               
Income from continuing operations
  $ 106.0     $ 28.5     $ (0.1 )   $ 134.4  
Income from continuing operations available to common shareholders
    105.0       23.6       4.8       133.4  
Weighted average diluted common shares outstanding
    33,900       71,959             30,792 (2)
Diluted income per common share
    3.13       0.33             4.36 (2)
                                 
                                 
Dividends Per Common Share
                               
Common stock dividends
  $     $     $     $ (3)
Dividends per common share
                      (3)
                                 
                                 
Book Value Per Common Share
                               
Total shareholders’ equity
  $ 847.7     $ 496.8     $ (67.4 )   $ 1,277.1 (4)
Shares outstanding at period-end
    33,458       77,504             30,729 (2)
Book value per share
    25.34       6.41             41.56 (2)
 
 
(1) Amounts are based on Argonaut’s historical share amounts adjusted by the exchange ratio in the merger (6.4672 PXRE common shares for each share of Argonaut common stock) as well as other pro forma adjustments.
 
(2) Reflects a 1:10 reverse share split for Argo Group. See Note 4 to the preliminary Unaudited Pro Forma Condensed Combined Financial Statements.
 
(3) Excludes a special dividend of $60 million which Argonaut intends to pay prior to the closing of the merger.
 
(4) Reflects a special dividend of $60 million which Argonaut intends to pay prior to the closing of the merger, as well as other pro forma adjustments.

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RISK FACTORS
 
We urge you to carefully consider all of the information we have included or incorporated by reference in this joint proxy statement/prospectus before you vote. See “Where You Can Find More Information” beginning on page 177. You should also read and consider the risks associated with each of the businesses of PXRE and Argonaut because these risks will also affect the resulting company. These risks can be found in the sections below entitled “— Risks Related to the Resulting Company’s Operations After Completion of the Merger — Risks Related to PXRE — Legacy Issues” and “— Risks Related to Argonaut — Legacy Issues,” as well as in the PXRE and Argonaut annual reports on Form 10-K or 10-K/A for the year ended December 31, 2006 and in subsequent quarterly reports on Form 10-Q and current reports on Form 8-K, which are filed with the United States Securities and Exchange Commission, which we refer to as the SEC, and incorporated by reference into this joint proxy statement/prospectus. In addition, we urge you to carefully consider the following material risks relating to the merger and the business of the resulting company.
 
Risks Related to the Merger
 
Risks Related to the Merger — General
 
We face risks related to the proposed merger.
 
There are significant risks and uncertainties associated with the proposed merger. For example, the merger may not be completed, or may not be completed in the third quarter of 2007 as currently anticipated, as a result of a number of factors, including, without limitation, the inability to obtain regulatory approvals of the merger on the proposed terms or the failure of either company to obtain the shareholder approvals required to complete the merger. If the resulting company is not able to successfully integrate the businesses of Argonaut and PXRE, the anticipated benefits from the merger may not be realized fully or at all or may take longer to realize than expected. For example, it is possible that the integration process could result in the loss of key employees.
 
Moreover, A.M. Best’s rating of Peleus Re assumes that the merger will be completed. If the merger is not completed, there can be no assurance that PXRE will be able to maintain Peleus Re’s current “A−” rating or be able to continue writing reinsurance business.
 
We must obtain several regulatory approvals to complete the merger, which, if delayed, not granted or granted with unacceptable conditions may jeopardize or delay the merger, result in additional expense or reduce the anticipated benefits of the transaction.
 
We must obtain certain approvals in a timely manner from federal and state regulatory authorities prior to the completion of the merger. State insurance laws generally require that, prior to the acquisition of an insurance company, the acquiring party must obtain approval from the insurance commissioner of the insurance company’s state of domicile or, in certain jurisdictions, where such insurance company is commercially domiciled. The regulatory authorities from which we seek approvals have broad discretion in administering relevant laws and regulations. As a condition to the approval of the merger, regulatory authorities may impose requirements, limitations or costs that could negatively affect the way the resulting company conducts business. If PXRE and Argonaut agree to any material conditions or restrictions in order to obtain any approvals required to complete the merger, these conditions or restrictions could adversely affect PXRE’s and Argonaut’s ability to integrate the businesses of PXRE and Argonaut or reduce the anticipated benefits of the merger.
 
Whether or not the merger is completed, the announcement and pendency of the merger could cause disruptions in the businesses of PXRE and Argonaut, which could have an adverse effect on their business and financial results.
 
Whether or not the merger is completed, the announcement and pendency of the merger could cause disruptions in the businesses of PXRE and Argonaut. Specifically:
 
  •  current and prospective employees and agents may experience uncertainty about their future roles with the resulting company, which might adversely affect PXRE’s and Argonaut’s ability to retain key managers and other employees and agents; and


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  •  the attention of management of each of PXRE and Argonaut may be directed toward the completion of the merger and not their ongoing businesses.
 
Some directors and executive officers of PXRE and Argonaut have interests and arrangements that are different from, or in addition to, those of PXRE and Argonaut shareholders.
 
When considering the recommendations of the PXRE and Argonaut boards of directors with respect to the merger, you should be aware that some directors and executive officers of PXRE and Argonaut have interests in the merger that are different from, or in addition to, their interests as shareholders and the interests of shareholders generally. These interests include:
 
  •  continuing as executive or senior officers of Argonaut or continuing as or becoming executive or senior officers of PXRE after the transaction (subject to receipt of Bermuda work permits) as described in “Risk Factors — Risks Related to the Resulting Company’s Operations After the Completion of the Merger — Risks Related to Regulation” beginning on page 43;
 
  •  payments under the PXRE employment contracts which may be triggered if the executive officer’s employment terminates under certain circumstances following the merger;
 
  •  vesting of unvested options and restricted shares under PXRE’s 2002 Officer Incentive Plan and Director Stock Plan;
 
  •  possible acceleration of the vesting of outstanding equity awards held by certain executive officers of Argonaut, as described in “The Merger — Effect of the Merger; Consideration to be Received in the Merger; Treatment of Options and Other Equity-Based Awards” beginning on page 78;
 
  •  continuation of the terms of three (or four if the PXRE shareholder proposal to increase the size of the board to 13 directors is approved) of the members of PXRE’s board of directors and appointment of all of the nine members of the Argonaut board of directors to the PXRE board of directors following the merger; and
 
  •  affiliations with holders of the PXRE convertible preferred shares (who, pursuant to the voting agreement, will be receiving additional shares of PXRE common shares upon conversion of their convertible preferred shares in connection with the merger) and convertible common shares.
 
As a result of these interests, these directors and executive officers may be more likely to support and to vote to approve the merger agreement and the transactions contemplated thereby than if they did not have these interests. Shareholders should consider whether these interests may have influenced those directors and executive officers to support or recommend approval of the merger. As of the close of business on the record date for the PXRE special general meeting, PXRE’s directors and executive officers and their affiliates were entitled to vote approximately [•] shares of the then-outstanding PXRE common shares and [•] shares of the then-outstanding PXRE convertible preferred shares at the PXRE special general meeting which represented [less than one percent] of each of the PXRE common shares and PXRE convertible preferred shares outstanding and entitled to vote at the meeting. As of the close of business on the record date for the Argonaut special meeting, Argonaut’s directors and executive officers and their affiliates were entitled to vote [•] percent of the then outstanding shares of Argonaut common stock. See “The Merger — Interests of Argonaut’s Directors and Executive Officers in the Merger” beginning on page 109.
 
The merger agreement limits PXRE’s and Argonaut’s ability to pursue certain alternative transactions and may require PXRE or Argonaut to pay a termination fee if it does.
 
The merger agreement prohibits PXRE from initiating, soliciting, encouraging or facilitating certain alternative transactions with any third party, subject to exceptions set forth in the merger agreement, and limits Argonaut’s ability to enter into certain significant transactions without PXRE’s consent. See “The Merger Agreement — Alternative Proposals” beginning on page 132.  The merger agreement also provides for the payment of a termination fee of $20 million, in the case of payment by PXRE to Argonaut, and $40 million, in the case of payment by Argonaut to PXRE, if the merger agreement is terminated in certain circumstances, including in connection with PXRE or Argonaut approving or completing certain alternative transactions with third parties. See “The Merger Agreement — Termination” and “— Termination Fees and Expenses” beginning on page 135.


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These provisions limit PXRE’s and Argonaut’s ability to pursue offers from third parties that could result in greater value to PXRE’s or Argonaut’s shareholders. The obligation to pay the termination fee also may discourage a third party from proposing an alternative transaction.
 
The merger is subject to certain closing conditions that, if not satisfied or waived, will result in the merger not being completed, which may cause the market price of PXRE common shares or Argonaut common stock to decline.
 
The merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and approvals of the PXRE and Argonaut shareholders. If any condition to the merger is not satisfied or waived to the extent permitted by law or stock exchange rules, the merger will not be completed. In addition, PXRE and Argonaut may terminate the merger agreement under certain circumstances. If PXRE and Argonaut do not complete the merger, to the extent that the current market prices of those shares reflect a market assumption that the merger will be completed, the market price of PXRE common shares and Argonaut common stock may fluctuate. Further, whether or not the merger is completed, PXRE and Argonaut will also be obligated to pay certain investment banking, financing, legal and accounting fees and related expenses in connection with the merger, which could negatively impact operating results when incurred. In addition, if the merger is not completed, neither company would realize any of the expected benefits of having completed the merger. If the merger is not completed, PXRE and Argonaut cannot assure their respective shareholders that additional risks will not materialize or not materially adversely affect the business, financial condition, operating results and share prices of PXRE or Argonaut.
 
Argonaut may be required to offer appraisal rights to its shareholders in connection with the merger, which may require the renegotiation of the merger agreement and the postponement of the Argonaut special meeting, possibly causing a delay in the completion of the merger. More than a minimal amount of cash payments in respect of the exercise of appraisal rights by Argonaut shareholders could have a material adverse effect on the financial condition of the resulting company.
 
Pursuant to Section 262 of the Delaware General Corporation Law, which we refer to as the DGCL, shareholders of a Delaware corporation are not entitled to appraisal rights in connection with a merger of the Delaware corporation with another company when the shares of stock of the Delaware corporation are traded on NASDAQ and the consideration to be received in the merger by the shareholders of the Delaware corporation is solely in the form of shares of a company that will be traded on NASDAQ (and cash in lieu of fractional shares). Based on this provision of Delaware law, Argonaut shareholders are not entitled to appraisal rights in connection with the merger. However, the recent decision of the Court of Chancery of the State of Delaware in Louisiana Municipal Police Employees’ Retirement System v. Crawford, 2007 WL 582510 (Del. Ch. February 23, 2007), which we refer to as LAMPERS v. Crawford, has created uncertainty as to the application of Section 262 of the DGCL in situations where a cash dividend is paid around the time of a merger. In that case, the acquired company proposed to declare a special cash dividend before its shareholder meeting called to approve a stock-for-stock merger, but payment of the dividend would have been conditioned upon shareholder approval of the merger and would have been paid upon or after the effective time of the merger. The court held that this special cash dividend was fundamentally cash consideration paid by the acquired company on behalf of the acquiring company, thus triggering appraisal rights for the shareholders of the acquired company.
 
Argonaut intends to declare a special cash dividend to its shareholders. However, the dividend would not be declared until after the Argonaut special meeting, after having been declared would not have any conditions to payment and would be paid prior to the effective time of the merger. The dividend would not be paid to Argonaut shareholders on behalf of PXRE, and once declared it will be paid whether or not the merger is completed. Thus, we do not believe that the holding of LAMPERS v. Crawford applies to the proposed Argonaut dividend and the merger. However, it is possible that a Delaware court could determine that our facts are not sufficiently distinguishable from the facts described in LAMPERS v. Crawford and hold that appraisal rights should be offered to Argonaut shareholders. As the possibility of appraisal rights for Argonaut shareholders is not provided for in the merger agreement, Argonaut and PXRE would need to reach an agreement for the amendment of the merger agreement to provide for appraisal rights, and it is possible that the Argonaut special meeting would have to be postponed in order


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to allow for this joint proxy statement/prospectus to be supplemented with a notice that appraisal rights are available to Argonaut shareholders. If any Argonaut shareholders exercise those appraisal rights, PXRE would be required to make cash payments to those shareholders reflecting the appraised fair value of their Argonaut shares in lieu of issuing PXRE shares to those shareholders in the merger. The obligation to make more than a minimal amount of cash payments could have a material adverse effect on the financial condition of the resulting company.
 
Upon the issuance of PXRE common shares in the merger, former Argonaut shareholders will own a controlling block of PXRE voting shares and will have the ability to appoint a majority of the resulting company’s directors.
 
Upon the issuance of PXRE common shares in the merger, former Argonaut shareholders will hold common shares representing approximately 73% of the voting power of all of the shareholders of the resulting company. As a result, if the former Argonaut shareholders were to vote in concert they would have the ability to determine matters requiring shareholder approval, including, without limitation, the election and removal of directors, business combinations, changes of control and sales of all or substantially all of PXRE’s assets. Argonaut has represented that there is no plan, agreement or understanding, oral or written, for its shareholders to vote in concert.
 
Pursuant to a general permission issued by the Bermuda Monetary Authority, which we refer to as the BMA, in 2005, PXRE may issue its common shares to non-residents without the prior permission of the BMA provided its shares are listed on an appointed stock exchange which, by definition, includes the NYSE and NASDAQ.
 
However, it should be noted that any person who, directly or indirectly, becomes a holder of at least 10 percent, 20 percent, 33 percent or 50 percent of the common shares of PXRE must notify the BMAin 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 its holdings of common shares and direct, among other things, that voting rights attaching to such common shares shall not be exercisable. A person that does not comply with such a notice or direction from the BMA will be guilty of an offense.
 
Finally, the BMA may at any time, by written notice, object to a person holding 10 percent or more of the common shares of PXRE 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 common shares and direct, among other things, that voting rights attaching to such 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 offense.
 
Risks Related to the Merger — PXRE Shareholders
 
If the merger is not completed, unless PXRE’s board of directors identifies and implements a strategic alternative, PXRE will not write or earn any material premiums in the future and, as a result, PXRE expects to incur material operating losses, since its remaining revenue may be insufficient to cover its projected operating and other expenses.
 
In the aftermath of Hurricane Katrina, each of the major rating agencies placed the credit ratings of PXRE’s reinsurance subsidiaries on CreditWatch negative or the equivalent, and S&P and A.M. Best initially downgraded their ratings from “A” to “A−.” On February 16, 2006, A.M. Best downgraded PXRE’s financial strength rating from “A−” to “B++” with a negative outlook. In February, 2006, A.M. Best further downgraded PXRE’s financial strength rating from “B++” to “B+” with negative implications and S&P downgraded its counterparty credit and financial strength rating on PXRE Reinsurance Company, which we refer to as PXRE Reinsurance, and PXRE Reinsurance Ltd., which we refer to as 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 rating on PXRE Reinsurance and PXRE Bermuda from “BBB+” to “BBB−.” Moody’s Investors Service, which we refer to as 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.


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In April, 2006, after finding that operational ratings below the critical “A” category provided little value for a reinsurer, PXRE announced that it had requested that the major credit rating agencies withdraw their financial strength and claims paying ratings of PXRE 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 then 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 PXRE’s reinsurance subsidiaries by A.M. Best, S&P and Moody’s, PXRE’s competitive position in the reinsurance industry has suffered and it has been unable to retain its reinsurance portfolio or renew many of its existing reinsurance agreements.
 
If the merger is not completed, unless PXRE is able to implement a strategic alternative that would allow it to provide clients with an acceptably rated counterparty, PXRE does not anticipate being able to underwrite any material amount of new reinsurance business in 2007 and would therefore not be able to generate any material amount of net premiums earned during 2007. The reduction in premium income has and will have a material adverse effect on PXRE’s future operating results, liquidity and financial condition. Net premiums earned were PXRE’s primary source of revenue for the years ended December 31, 2006 and 2005, accounting for 61% and 92% of its revenue, respectively. In 2006 and 2005, revenue from non-premium sources was not sufficient to offset operating expenses and interest expenses. PXRE therefore expects to incur net operating losses in future periods unless it is successful in executing a strategic alternative other than runoff. If such operating losses were to occur, this would result in a decline in PXRE’s shareholders’ equity.
 
Ratings are not evaluations directed to investors in PXRE’s securities (including investors in PXRE’s common shares) or a recommendation to buy, sell or hold PXRE’s securities (including PXRE’s common shares). Ratings may be revised or revoked at the sole discretion of the rating agencies.
 
If the merger is not completed, PXRE may not be able to identify or implement a strategic alternative.
 
PXRE’s counterparty credit and financial strength ratings were downgraded by the major rating agencies in February 2006 to a level that is generally unacceptable to many of PXRE’s reinsurance clients. These ratings downgrades have had a significant negative impact on PXRE’s operating results and profitability. PXRE has not written any new reinsurance business or renewed any expiring reinsurance business since the downgrades occurred. In light of the negative consequences of the rating downgrades, PXRE’s board of directors decided to retain Lazard Frères & Co. LLC, which we refer to as Lazard, as a financial advisor to assist in the process of exploring strategic alternatives. Lazard was subsequently succeeded by KBW as a financial advisor to assist in the process of exploring strategic alternatives, which resulted in the proposed merger with Argonaut.
 
If the merger with Argonaut is not completed, the board of directors of PXRE would likely re-commence its strategic evaluation process, but it may not be able to identify or complete any of the alternatives that PXRE’s board of directors finds to be in the shareholders’ best interests. Even if PXRE is successful in identifying and completing a merger or sale of PXRE or some other strategic alternative, it cannot provide any assurance about the financial impact or timing of the implementation of any such strategic alternative or the ability to obtain any required regulatory approval, or that any individual shareholder will determine that such strategic alternative is in his, her or its best interests.
 
In over one year of considering potential strategic alternatives, the Argonaut merger was found by PXRE’s board of directors to be the most suitable strategic alternative available. If PXRE is not able to complete this merger, it may not be able to identify or implement in the future a strategic alternative that is as attractive as the merger with Argonaut.


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If the merger is not completed and PXRE’s board of directors concludes that no other feasible strategic alternative would be in the best interests of PXRE’s 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.
 
If the merger is not completed, and PXRE’s board of directors concludes that no other feasible strategic alternative would be in the best interests of PXRE’s shareholders, it may determine that the best course of action is to place the reinsurance operations of PXRE into runoff. Once in runoff there are various options available to bring PXRE’s business to a conclusion including pursuing an arrangement with its policyholders in which it estimates and pays out all existing and contingent liabilities with a view to liquidating PXRE in accordance with a procedure which is approved by a statutory majority of policyholders. Under Bermuda law this is referred to as a solvent scheme of arrangement and is, in effect, a global commutation of PXRE’s business.
 
Alternatively, a program of individual commutations could be pursued with a similar result. Following either a scheme or individual commutation program, PXRE would be placed into liquidation as a solvent entity (a voluntary liquidation approved by shareholders). In the event that PXRE were to become insolvent, it would have to be liquidated under the supervision of the Bermuda Supreme Court during which a court appointed liquidator of PXRE may or may not pursue a scheme of arrangement to shorten the time otherwise required to wind up PXRE’s business.
 
In a winding up or liquidation as described above, a liquidator would be appointed and would sell or otherwise dispose of PXRE’s remaining assets, pay its existing liabilities, including contingent obligations (which would have to be estimated in advance of payment) and distribute net proceeds, if any, to PXRE’s shareholders in one or more liquidating distributions. In liquidation, PXRE may not receive any material amounts for the sale or other disposition of its assets. Further, in liquidation, PXRE will have significant obligations, including the costs incurred by the independent liquidator appointed and the work required to estimate liabilities and realize assets. Additionally, if PXRE does not generate sufficient revenue to support its continued operations, PXRE will be required to reduce its cash balance to support its continued operations and the amount of any liquidation proceeds available for distribution to its shareholders would thereby be reduced. Accordingly, the amount and timing of distributions, if any, to shareholders in a liquidation cannot be determined because such would depend on a variety of factors, including the amount of proceeds received from any asset sales or dispositions, the time and amount required to resolve outstanding obligations and the amount of any reserves for future contingencies. If PXRE were to become insolvent, there will be no distributions payable to PXRE’s shareholders.
 
If the merger is not completed and the board of directors of PXRE elects to pursue a strategic alternative that does not involve the continuation of meaningful property catastrophe reinsurance business, there is a risk that PXRE could incur material charges or termination fees in connection with its collateralized catastrophe facility and certain multi-year ceded reinsurance agreements.
 
During the fourth quarter of 2005, PXRE entered into a collateralized catastrophe facility that currently provides $125.0 million of aggregate protection against losses arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California.
 
If the merger is not completed, and the board of directors of PXRE elects to pursue a strategic alternative that materially changes PXRE’s catastrophe risk profile, the board of directors of PXRE may elect to explore the assignment or novation of PXRE’s rights and obligations under the collateralized catastrophe facility to another insurance or reinsurance company. There can be no assurance that any other insurance or reinsurance company would be willing to accept such an assignment or novation, that note holders who funded the facilities would consent to such an assignment or novation, or that the cost of such an assignment or novation would not have a material adverse impact on PXRE. If PXRE was not able to successfully assign or novate its rights and obligations under this collateralized catastrophe facility, PXRE could incur material termination fees and liabilities, which could be as much as $5.8 million, and PXRE would be obligated to make all premium payments up to the date of termination.
 
If the merger is not completed, and the board of directors of PXRE elects to pursue a strategic alternative that materially changes PXRE’s catastrophe risk profile, PXRE will also need to evaluate its obligations under two multi-year ceded reinsurance contracts that provide PXRE with reinsurance protection against catastrophic events


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in 2007 and 2008. In this regard, PXRE will need to evaluate whether it is likely that catastrophe loss exposure assumed by PXRE in 2007 and 2008 has the potential to result in losses that exceed the retention level under these ceded reinsurance protections. PXRE is currently obligated to cede reinsurance premiums of $15.0 million per annum in each of 2007 and 2008 under these multi-year contracts.
 
PXRE’s ability to continue to operate its business, complete the merger and to identify, evaluate and complete any other strategic alternative are dependent on its ability to retain its management and other key employees, and PXRE may not be able to do so.
 
PXRE may have difficulty retaining its management and other key employees on whom PXRE will depend to continue to operate its business and to assist in consummating the merger or in identifying, evaluating and completing any other strategic alternative. If PXRE is unable to do so for at least the time necessary to complete the merger or identify and implement an alternative selected strategy, PXRE’s continued business operations and its ability to identify, evaluate and complete a strategic alternative could be materially and adversely affected. PXRE has entered into a separation agreement with its chief executive officer which provides, among other things, for his last day of employment to be the earlier of the date of the completion of the merger or December 28, 2007. If the merger is not completed prior to December 28, 2007, PXRE’s chief executive officer will no longer be available to assist in completing the merger or another strategic alternative.
 
Upon the completion of the merger, the current holders of PXRE’s common shares will suffer dilution due to a negotiated reduction in the conversion price of PXRE’s convertible preferred shares.
 
Pursuant to the terms of the convertible preferred shares of PXRE, approval of the PXRE preferred shareholders is required to complete the transactions contemplated by the merger agreement. In order to assure that the PXRE preferred shareholders would approve the transactions contemplated by the merger agreement and in furtherance of Argonaut’s desire for PXRE to have only one class of equity securities outstanding following the merger, Argonaut required as a condition to signing the merger agreement that the PXRE preferred shareholders execute a voting agreement, pursuant to which they would agree, among other things, to vote in favor of the transactions and to convert their convertible preferred shares into PXRE common shares immediately prior to the effective time of the merger. After lengthy negotiations between the special committee of the PXRE board of directors and the PXRE preferred shareholders, the conversion price of the convertible preferred shares was reduced from $11.28 per share to $6.24 per share in order to obtain the assent of the PXRE preferred shareholders to execute the voting agreement. This reduced conversion price will only apply in connection with the completion of the merger. Conversion at the reduced conversion price in connection with the merger will result in the dilution of the value of the PXRE common shares of approximately 5.1% more than what would have resulted from conversion of the convertible preferred shares at the existing conversion price of $11.28.
 
In the event that the merger is not completed, the rights and protections afforded to the PXRE preferred shareholders could have a material negative impact on the holders of PXRE’s common shares.
 
The PXRE convertible preferred shares and convertible common shares will be converted in connection with the merger. In the event that the merger is not completed, the rights and protections afforded to the PXRE preferred shareholders will continue. The PXRE preferred shareholders have the right to nominate four directors for election to the board of directors, and were granted demand and other registration rights. They also have the ability to veto certain corporate actions being considered in the context of PXRE’s review of strategic alternatives, including, among other things, (i) the sale or merger of PXRE, (ii) the sale of more than 25% of PXRE’s assets, (iii) the expansion into other lines of business, (iv) the payment of extraordinary dividends, and (v) the voluntary liquidation, dissolution or winding up of PXRE. The interests of the PXRE preferred shareholders may differ materially from the interests of PXRE’s common shareholders, and these investors could take actions or make decisions that are not in the best interests of PXRE’s common shareholders.
 
If the merger is not completed, the anti-dilution protections afforded to the PXRE preferred shareholders could have a material dilutive effect on PXRE’s common shareholders. Each convertible preferred share, in whole or in part, is convertible at any time at the option of the holder into convertible common shares for that series according to a formula set forth in the terms of the convertible preferred shares. The convertible common shares are, in turn,


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convertible into common shares on a one-for-one basis. The number of convertible common shares per convertible 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 convertible preferred shares plus accrued but unpaid dividends thereon, by the conversion price then in effect. The conversion price is subject to adjustment to avoid dilution in the event of recapitalization, reclassification, share 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 or without consideration. If the merger is not completed, 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 for any liability or loss arising out of pending material litigation on December 10, 2001. Because the conversion price for the convertible preferred shares is subject to adjustment for a variety of reasons, including if PXRE has certain types of adverse loss development, the number of PXRE’s common shares into which the convertible preferred shares are ultimately convertible and, accordingly, the amount of dilution experienced by PXRE’s common shareholders, could increase.
 
Furthermore, upon conversion, sales of substantial amounts of common shares by the PXRE preferred shareholders, or the perception that these sales could occur, could adversely affect the market price of the common shares, as well as PXRE’s ability to raise additional capital in the public equity markets at a desirable time and price.
 
If the merger is completed, the convertible preferred shares will be converted pursuant to the voting agreement at a reduced conversion price (approximately $6.24, reduced from approximately $11.28), which will result in the dilution of the PXRE common shares of approximately 5.1% more than what would have resulted from the conversion of the convertible preferred shares at the existing conversion price.
 
Risks Related to the Merger — Argonaut Shareholders
 
The value of the PXRE common shares that Argonaut shareholders receive in the merger may be less than the value of such PXRE common shares on the date on which the merger was publicly announced or on the date on which you vote. Further, at the shareholder meetings, shareholders will not know the exact value of the PXRE common shares that will be issued in the merger.
 
At the effective time of the merger, each outstanding share of Argonaut common stock will be converted into the right to receive approximately 6.4672 PXRE common shares. The ratio at which the shares will be converted is fixed, subject to adjustment in the event that (i) Argonaut’s planned special dividend to its shareholders prior to the closing of the merger is less than $60 million, or (ii) Argonaut pays certain other dividends, incurs losses on sales of assets and/or engages in dilutive sales or purchases of Argonaut shares. See “The Merger — Effect of the Merger; Consideration to be Received in the Merger; Treatment of Options and Other Equity-Based Awards” beginning on page 78. Any changes in the price of PXRE common shares will affect the value of the PXRE common shares that Argonaut shareholders receive in the merger such that, if the price of PXRE common shares declines prior to completion of the merger, the value of the consideration to be received by Argonaut shareholders will decrease. Share price variations could be the result of changes in the business, operations or prospects of PXRE, Argonaut or the resulting company, market assessments of the likelihood that the merger will be completed within the anticipated time or at all, general market and economic conditions, regulatory considerations and other factors which are beyond the control of PXRE and Argonaut.
 
PXRE and Argonaut are working to complete the merger as quickly as possible. However, the time period between the shareholder votes taken at the shareholder meetings and the completion of the merger will depend upon the timing and status of the regulatory approvals that must be obtained prior to the completion of the merger and the satisfaction or waiver of the other conditions described in this joint proxy statement/prospectus, and there is currently no way to predict with certainty how long it will take to obtain these approvals. Because the date when the merger is completed will be later than the date of the shareholder meetings, PXRE and Argonaut shareholders will not know the exact value of the PXRE common shares that will be issued in the merger at the time they vote on the merger proposals.


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Risks Related to the Resulting Company’s Operations After the Completion of the Merger
 
Risks Related to the Integration of PXRE and Argonaut
 
The anticipated benefits of combining PXRE and Argonaut may not be realized.
 
PXRE and Argonaut entered into the merger agreement with the expectation that the merger would result in various benefits including, among other things, enhanced revenues, a strengthened market position for the resulting company in its businesses, cost savings and operating efficiencies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether the businesses of PXRE and Argonaut are integrated in an efficient and effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could materially impact the resulting company’s business, financial condition and operating results.
 
The resulting company may have difficulty integrating the businesses of PXRE and Argonaut and may incur substantial costs in connection with the integration.
 
PXRE and Argonaut currently operate independently, each with its own business, products, customers, employees, culture and systems. Integrating the businesses of PXRE and Argonaut will be a complex, time-consuming and expensive process. The resulting company may experience unanticipated difficulties or expenses in connection with integrating the businesses of PXRE and Argonaut. These factors may include:
 
  •  conditions imposed by regulatory authorities in connection with their decisions whether to approve the merger;
 
  •  potential charges to earnings resulting from the application of purchase accounting to the transaction;
 
  •  the retention of existing clients, agents and wholesalers of Argonaut; and
 
  •  retaining and integrating management and other key employees of the resulting company.
 
After the merger, we may seek to combine certain operations and functions using common information and communication systems, operating procedures, financial controls and human resource practices, including training, professional development and benefit programs. We may be unsuccessful or delayed in implementing the integration of these systems and processes.
 
Any one or all of these factors may cause increased operating costs, worse than anticipated financial performance or the loss of clients, employees and agents. Many of these factors are outside the control of either company.
 
Risks Related to the Resulting Company (Argo Group)
 
The following risk factors assume the merger has been completed and are applicable to the resulting company which we call Argo Group.
 
Argo Group may incur income statement charges if the claims and claim adjustment expense reserves are insufficient. Such income statement charges could be material, individually or in the aggregate, to the resulting company’s financial condition and operating results in future periods and could result in rating agency actions and/or the need to raise capital.
 
Both PXRE and Argonaut maintain claims and claim adjustment expense reserves to cover estimated ultimate unpaid liabilities with respect to reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability, but instead represent management’s estimates, which take into account various statistical and actuarial projection techniques as well as other influencing factors. These reserve estimates represent management’s expectations of what the ultimate settlement and administration of claims will cost based on an assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity and frequency, changing legal theories of liability and other factors. Variables in the reserve estimation process can be affected by both internal and external events, such as changes in


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claims handling procedures, economic inflation, legal trends and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of an insured event and the time it is actually reported to the insurer. Reserve estimates are continually refined in a regular ongoing process as historical loss experience develops and additional claims are reported and settled, and as a consequence, management’s estimates may change from time to time. Because establishment of claims and claim adjustment expense reserves is an inherently uncertain process involving estimates, currently established reserves may not be sufficient or estimates of ultimate claim and claim adjustment expenses may increase.
 
Management of Argo Group will also make decisions regarding the integration of claims handling practices, actuarial practices and other operational procedures after the merger. These decisions may impact management’s estimate of reserves.
 
Because of all of the above, estimates of ultimate claims and claim adjustment expenses may increase in the future. Income statement charges that would result from such increases, if any, cannot now be reasonably estimated. Such charges could be material, individually or in the aggregate, to Argo Group’s future operating results and financial condition and could result in rating agency actions and/or the need to raise capital. Adjustments to reserves are reflected in the results of the periods in which the estimates are changed. You should also be aware that the exposures of Argonaut may be materially different than the exposures of PXRE, and correspondingly that the exposures of Argo Group may be materially different from the separate exposures of either company.
 
For more information about each of PXRE’s and Argonaut’s claims and claim adjustment expense reserves generally, see the information under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in each company’s most recent annual report on Form 10-K and all related disclosures in each company’s quarterly reports on Form 10-Q and current reports on Form 8-K since the period covered by that annual report, in each case as filed with the SEC.
 
There can be no assurance that the merger will not result in a ratings downgrade of PXRE’s reinsurance operating companies, Argonaut or Argo Group, which may result in an adverse effect on Argo Group’s business, financial condition and operating results.
 
Ratings with respect to claims paying ability and financial strength are important factors in establishing the competitive position of insurance companies and will also impact the cost and availability of capital to an insurance company. The combined operations of PXRE and Argonaut will compete with other insurance companies, financial intermediaries and financial institutions on the basis of a number of factors, including the ratings assigned by internationally-recognized rating organizations. Ratings will represent an important consideration in maintaining customer confidence in Argo Group and in its ability to market insurance products. Rating organizations regularly analyze the financial performance and condition of insurers. Any ratings downgrades, or the potential for ratings downgrades, of Argo Group could adversely affect its ability to market and distribute products and services, which could have an adverse effect on Argo Group’s business, financial condition and operating results. Although it is a condition to Argonaut’s obligation to complete the merger that neither PXRE nor Argonaut receive notice from either A.M. Best or S&P that any rating assigned to PXRE or Argonaut is subject to being downgraded or has been downgraded, there can be no assurance that the ratings of PXRE’s reinsurance operating companies, Argonaut or Argo Group will not be downgraded following the merger.
 
Ratings are not in any way a measure of protection afforded to investors and should not be relied upon in making an investment or voting decision.
 
The insurance and reinsurance business is historically cyclical, and Argo Group may experience periods with excess underwriting capacity and unfavorable premium rates; conversely, Argo Group may have a shortage of underwriting capacity when premium rates are strong.
 
Historically, insurers and reinsurers have experienced significant fluctuations in operating results due to competition, frequency and severity of catastrophic events, levels of capacity, general economic conditions and other factors. The supply of insurance and reinsurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate in response to changes in rates of return on investments


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being earned in the insurance and reinsurance industry. As a result, the insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels. Both Argonaut’s and PXRE’s growth from January 1, 2002 through December 31, 2005 related in part to improved industry pricing, but the supply of insurance and reinsurance may increase, either by capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers, which may cause prices to decrease. Any of these factors could lead to an adverse effect on Argo Group’s profits. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance and reinsurance business significantly, and Argo Group expects to experience the effects of such cyclicality.
 
Some aspects of PXRE’s corporate structure and applicable insurance regulations may discourage third-party takeovers and other transactions, may result in the entrenchment of incumbent management and may reduce or increase the voting rights of Argo Group’s common shares.
 
Under PXRE’s bye-laws, subject to certain exceptions and to waiver by PXRE’s board of directors on a case by case basis, no transfer of shares of PXRE is permitted if such transfer would result in a shareholder owning, directly or indirectly, more than 9.9% of the voting power of PXRE’s outstanding shares, including its common shares, or more than 9.9% of the outstanding shares of any class of its share capital. Ownership is broadly defined in PXRE’s bye-laws. If certain amendments to PXRE’s bye-laws are approved pursuant to this joint proxy statement/prospectus, the foregoing provisions will be replaced by the New Transfer Restrictions (as described in “Information about PXRE — Description of Share Capital”), which generally permit transfers unless the board of directors determines a transfer may result in a non-de minimis adverse tax, legal or regulatory consequence to PXRE, any PXRE subsidiary or any direct or indirect shareholder of PXRE or its affiliates. PXRE may refuse to register on its share transfer records any transfer that does not comply with these share transfer restrictions. A transferee will be permitted to promptly dispose of any of PXRE shares purchased which violate the restrictions and as to the transfer of which registration is refused.
 
In the event that PXRE becomes aware of a shareholder owning more than the permitted level of voting power of the outstanding shares of PXRE after a transfer of shares has been registered, PXRE’s bye-laws provide that, subject to the same exceptions and waiver procedures, the voting rights with respect to the shares of PXRE owned by any such shareholder will be limited to the permitted level of voting power, subject only to the further limitation that no other shareholder allocated any such voting rights may exceed the permitted level of voting power as a result of such limitation. The board of directors may waive this limitation, and has determined to waive this limitation with respect to Capital Z Financial Services Fund II, L.P., Capital Z Financial Services Private Fund II, L.P. (which, together with Capital Z Financial Services Fund II, L.P. and certain of Capital Z’s affiliates, we refer to as Capital Z) as a result of their ownership of convertible preferred shares of PXRE. These convertible preferred shares will be converted into common shares immediately prior to the merger, and the waiver of the voting limitation will terminate. If certain amendments to PXRE’s bye-laws are approved pursuant to this joint proxy statement/prospectus, the foregoing provisions will be replaced by the Voting Cutback Provisions (described below), which, among other things, (i) reduce the voting limitation percentage from 9.9% to 9.5% and (ii) only apply the voting limitations to U.S. persons (that own PXRE shares directly or indirectly through non-U.S. entities). The PXRE bye-law amendments also provide for the shareholders of PXRE to govern the vote of PXRE’s non-U.S. subsidiaries’ shares. See “Information about PXRE — Description of Share Capital” beginning on page 142.
 
In addition, PXRE’s ownership of U.S. subsidiaries can, under applicable state insurance company laws and regulations, delay or impede a change of control of PXRE. Under applicable insurance regulations, any proposed purchase of 10% or more of the voting securities of PXRE would require the prior approval of the relevant insurance regulatory authorities.
 
PXRE’s bye-laws provide for a classified board of directors. The directors of the class elected at each annual general meeting hold office for a term of three years, with the term of each class expiring at successive annual general meetings of shareholders. Under PXRE’s bye-laws, the vote of 662/3% of the outstanding shares entitled to vote and the approval of a majority of the board are required to amend bye-laws regarding appointment and removal


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of directors, indemnification of directors and officers, directors’ interests and the procedures for amending bye-laws.
 
The provisions described above may have the effect of making more difficult or discouraging unsolicited takeover bids from third parties. To the extent that these effects occur, shareholders could be deprived of opportunities to realize takeover premiums for their shares and the market price of their shares could be depressed. In addition, these provisions could also result in the entrenchment of incumbent management.
 
The operation of the Voting Cutback Provisions would have the effect of limiting voting rights. In general, and except as provided below, shareholders have one vote for each common share held by them and are entitled to vote at all meetings of shareholders. However, if certain amendments to PXRE’s bye-laws are approved pursuant to this joint proxy statement/prospectus, then, if, and so long as, the shares of a shareholder are treated as “controlled shares” (as determined under section 958 of the Code) of any U.S. Person (that owns shares directly or indirectly through non-U.S. entities) and such controlled shares constitute 9.5% or more of the votes conferred by PXRE’s issued shares, the voting rights with respect to the controlled shares of such U.S. Person, which we refer to as a 9.5% U.S. Shareholder, will be limited, in the aggregate, to a voting power of less than 9.5%, under a formula specified in PXRE’s bye-laws. The formula is applied repeatedly until the voting power of all 9.5% U.S. Shareholders has been reduced to less than 9.5%. In addition, the board of PXRE may limit a shareholder’s voting rights where it deems it appropriate to do so to (i) avoid the existence of any 9.5% U.S. Shareholder; and (ii) avoid certain material adverse tax, legal or regulatory consequences to PXRE, any subsidiary of PXRE or any direct or indirect shareholder or its affiliates. “Controlled shares” includes, among other things, all shares of PXRE that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). We refer to these provisions collectively as the “Voting Cutback Provisions.”
 
Under these provisions, certain shareholders may have their voting rights limited, while other shareholders may have voting rights in excess of one vote per share (as described in “Information about PXRE — Description of Share Capital”). Moreover, these provisions could have the effect of reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct share ownership.
 
PXRE also has the authority under its bye-laws to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be reallocated under the bye-laws. If a shareholder fails to respond to such a request for information or submits incomplete or inaccurate information in response to such a request, PXRE may, in its sole discretion, eliminate such shareholder’s voting rights.
 
Recoveries under PXRE’s collateralized catastrophe facility are triggered by modeled loss to a notional portfolio, rather than PXRE’s actual losses arising from a catastrophe event, which creates a potential mismatch between the risks assumed through Argo Group’s inwards reinsurance business and the protection afforded by this facility.
 
During the fourth quarter of 2005, PXRE entered into a collateralized facility that provides $125.0 million of aggregate protection against losses arising from hurricanes in the Eastern and Gulf coasts of the United States, windstorms in northern Europe and earthquakes in California. The coverage under the facility is based on a modeled loss trigger. PXRE created a series of notional portfolios of reinsurance contracts designed to closely mimic the expected exposures in PXRE’s assumed reinsurance portfolio. Upon the occurrence of a hurricane, windstorm or earthquake in the covered territories, the parameters of the catastrophe event are determined and modeled against the notional portfolios. If the modeled loss to the notional portfolio exceeds the attachment point for the peril at issue, then PXRE will make a recovery under the agreement. If such a hurricane, windstorm or earthquake were to occur, there is a risk that the actual losses incurred by Argo Group could exceed the modeled loss to the notional portfolios and that the actual benefit of this facility could be substantially less than expected.
 
The effects of emerging claim and coverage issues on Argo Group’s business are uncertain.
 
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect Argo Group’s business by either extending coverage beyond its underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after Argonaut has issued insurance or


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reinsurance contracts that are affected by the changes. As a result, the full extent of liability under Argo Group’s insurance or reinsurance contracts may not be known for many years after a contract is issued, and its financial position and results of operations may be adversely affected.
 
Argo Group will have exposure to unpredictable catastrophes, which can materially and adversely affect its business, results of operations and/or financial condition.
 
Argo Group will be subject to claims arising out of catastrophes that may have a significant effect on its business, results of operations, and/or financial condition. Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, hailstorms, explosions, power outages, severe winter weather, fires and intentional man-made events, such as terrorist attacks. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Insurance companies are not permitted to reserve for catastrophes until such event takes place. Therefore, although Argo Group will actively manage its exposure to catastrophes through its underwriting process and the purchase of reinsurance protection, an especially severe catastrophe or series of catastrophes could exceed its reinsurance protection and may have a material adverse impact on Argo Group’s business, results of operations and/or financial condition.
 
As a primary insurer, Argo Group may have significant exposure for terrorist acts.
 
Argo Group may have exposure to losses resulting from acts of terrorism. Even if reinsurers are able to exclude coverage for terrorist acts or price that coverage at rates that Argo Group considers unattractive, direct insurers, like Argo Group’s insurance company subsidiaries, might not be able to likewise exclude terrorist acts because of regulatory constraints. If this does occur, Argonaut, in its capacity as a primary insurer, would have a significant gap in its reinsurance protection and would be exposed to potential losses as a result of any terrorist acts. These events are inherently unpredictable, although recent events may lead to their increased frequency and severity. It is difficult to predict occurrence of such events with statistical certainty or to estimate the amount of loss per occurrence they will generate.
 
The Terrorism Risk Insurance Act of 2002 (as amended by the Terrorism Risk Insurance Extension Act of 2005), which we refer to as TRIA, was enacted to ensure availability of insurance coverage for defined terrorist acts in the United States. This law requires insurers writing certain lines of property and casualty insurance, including Argonaut, to offer coverage against certified acts of terrorism causing damage within the United States or to U.S. flagged vessels or aircraft. In return, the law requires the federal government, should an insurer comply with the procedures of the law, to indemnify the insurer for 85% of covered losses, exceeding a deductible, based on a percentage of direct earned premiums for the previous calendar year, up to an industry limit of $100 billion resulting from covered acts of terrorism. This law does not apply to acts of domestic terrorism or acts that might otherwise be considered acts of terrorism that are not certified by the Secretary of the Treasury to be acts of terrorism under this law. Argonaut continues to attempt to exclude acts of terrorism not covered under the federal act, subject to state approvals.
 
Given the retention limits imposed under this law and that some or many of Argonaut’s policies may not include an exclusion for terrorism, future terrorist attacks may result in losses that have a material adverse effect on Argonaut’s business, results of operations and/or financial condition. The federal terrorism risk assistance provided by TRIA will expire at the end of 2007 and it is not currently clear whether that assistance will renewed. Any renewal may be on substantially less favorable terms.
 
Litigation and legal proceedings against Argo Group’s insurance subsidiaries could have an adverse effect on Argo Group’s business, results of operations and/or financial condition.
 
In the normal course of business, insurance companies may be sued in a class action lawsuit and other major litigation as a result of their insurance operations. Argo Group’s insurance companies may become involved in such lawsuits. An adverse judgment in one or more of such lawsuits could have a material adverse effect on Argo Group’s business, results of operation and/or financial condition.


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Argo Group faces a risk of non-availability of reinsurance, which could materially and adversely affect Argo Group’s ability to write business and its results of operations and financial condition.
 
Market conditions beyond Argo Group’s control, such as the amount of capital in the reinsurance market and natural and man-made catastrophes, determine the availability and cost of the reinsurance protection Argo Group can purchase. Argo Group cannot be assured that reinsurance will remain continuously available to the same extent and on the same terms and rates as are currently available. If Argo Group is unable to maintain its current level of reinsurance or purchase new reinsurance protection in amounts that are considered sufficient, Argo Group would either have to be willing to accept an increase in its net exposures or reduce its insurance writings. Either of these potential developments could have a material adverse effect on its financial position, results of operations and cash flows.
 
Argo Group faces a risk of non-collectibility of reinsurance, which could materially and adversely affect its business, results of operations and/or financial condition.
 
As is common practice within the insurance industry, Argo Group will transfer a portion of the risks insured under its policies to other companies through the purchase of reinsurance. This reinsurance is maintained to protect the insurance subsidiaries against the severity of losses on individual claims, unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss and catastrophic events. Although reinsurance does not discharge Argo Group’s subsidiaries from their primary obligation to pay for losses insured under the policies they issue, reinsurance does make the assuming reinsurer liable to the insurance subsidiaries for the reinsured portion of the risk. A credit exposure exists with respect to ceded losses to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. The collectibility of reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. Argo Group will be selective in regard to its reinsurers, placing reinsurance with those reinsurers with strong financial strength ratings from A.M. Best, S&P, or a combination thereof, although the financial condition of a reinsurer may change based on market conditions. Argo Group will perform credit reviews on its reinsurers, focusing on, among other things, financial condition, stability, trends and commitment to the reinsurance business. Argo Group will also require assets in trust, letters of credit or other acceptable collateral to support balances due from reinsurers not authorized to transact business in the applicable jurisdictions. It has not always been standard business practice to require security for balances due; therefore, certain balances are not collateralized. A reinsurer’s insolvency or inability to make payments under the terms of a reinsurance contract could have a material adverse effect on Argo Group’s business, results of operations and/or financial condition.
 
The failure of the risk mitigation strategies Argo Group will utilize could have a material adverse effect on its financial condition or results of operations.
 
We will utilize a number of strategies to mitigate our risk exposure including:
 
  •  engaging in vigorous underwriting;
 
  •  carefully evaluating terms and conditions of our policies;
 
  •  focusing on our risk aggregations by geographic zones, industry type, credit exposure and other bases; and
 
  •  ceding insurance risk to reinsurance companies.
 
However, there are inherent limitations in all of these tactics. No assurance can be given that an event or series of unanticipated events will not result in loss levels which could have a material adverse effect on Argo Group’s financial condition or results of operations.
 
Argo Group may be unable to attract and retain qualified employees.
 
We depend on our ability to attract and retain experienced underwriting talent and other skilled employees who are knowledgeable about our business. If the quality of our underwriting team and other personnel decreases, we may be unable to maintain our current competitive position in the specialized markets in which we operate and be unable to expand our operations into new markets, which could adversely affect our results.


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Argo Group’s information technology systems may fail or suffer a loss of security which could adversely affect our business.
 
Argo Group’s business will be highly dependent upon the successful and uninterrupted functioning of our computer and data processing systems. We will rely on these systems to perform actuarial and other modeling functions necessary for writing business, as well as to process and make claims payments. We will have a highly trained staff that is committed to the development and maintenance of these systems. The failure of these systems could interrupt our operations. This could result in a material adverse effect on our business results.
 
In addition, a security breach of our computer systems could damage our reputation or result in liability. We retain confidential information regarding our business dealings in our computer systems. We may be required to spend significant capital and other resources to protect against security breaches or to alleviate problems caused by such breaches. It is critical that these facilities and infrastructure remain secure. Despite the implementation of security measures, this infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. In addition, we could be subject to liability if hackers were able to penetrate our network security or otherwise misappropriate confidential information.
 
Because Argo Group will give a select group of wholesale agents limited quoting and binding authority, their failure to comply with our pre-established guidelines could cause our results to be adversely affected.
 
Argo Group will market and distribute some of our insurance products through a select group of wholesale agents who have limited quoting and binding authority and who, in turn, sell our insurance products to insureds through retail insurance brokers. These agencies can bind certain risks that meet our pre-established guidelines without our initial approval. If these agents failed to comply with our underwriting guidelines and the terms of their appointment, we could be bound on a particular risk or number of risks that were not anticipated when we developed the insurance products. Such actions could adversely affect our results of operations.
 
Argo Group’s merger and acquisition strategy may not succeed.
 
Argo Group’s strategy for growth may include merger and acquisition transactions. This strategy presents risks that could have a material adverse effect on the Argo Group’s business and financial performance, including: 1) the diversion of management’s attention, 2) the ability of Argo Group to execute a transaction effectively, including the integration of operations and the retention of employees, and 3) the contingent and latent risks associated with the past operations of and other unanticipated problems arising from a transaction partner. Argo Group cannot predict whether it will be able to identify and complete a future transaction on terms favorable to it. Argo Group cannot know if it will realize the anticipated benefits of a completed transaction or if there will be substantial unanticipated costs associated with the transaction. In addition, a future transaction by Argo Group may result in tax consequences at either or both the shareholder and Argo Group level, potentially dilutive issuances of our equity securities, the incurrence of additional debt and the recognition of potential impairment of goodwill and other intangible assets. Each of these factors could adversely affect the Argo Group’s financial position and results of operations.
 
Risks Related to PXRE — Legacy Issues
 
PXRE faces significant litigation related to alleged securities law violations.
 
PXRE has recently experienced material adverse events, including the downgrading of PXRE’s ratings in February 2006, and the market price of PXRE’s common shares has declined materially and may continue to do so, regardless of PXRE’s financial condition or PXRE’s ability to meet its contractual and financial obligations. Several class action lawsuits have been filed against PXRE and certain of PXRE’s officers on behalf of a putative class consisting of investors who purchased PXRE’s publicly traded securities between July 28, 2005 and February 16, 2006. The complaints allege, among other things, that PXRE made false and misleading statements regarding loss estimates in violation of the federal securities laws. Pursuant to an opinion and order of the United States District Court for the Southern District of New York dated March 30, 2007, these lawsuits have been consolidated into one proceeding. It is possible that additional lawsuits relating to the recent decline in PXRE’s share price may be filed against PXRE and/or certain of PXRE’s current and former officers and directors in the future. It is also possible that regulators may institute administrative or regulatory proceedings against PXRE in the future.


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The pending securities litigation is currently at a very early stage and PXRE has very little information as to the course it will take. This litigation, which could continue for a significant period, and any future proceedings could be expensive and could divert management’s attention and other resources away from other matters. Any such diversion of management’s attention or other resources could negatively and materially impact PXRE’s business. PXRE cannot predict the timing of any trials with respect to the pending securities litigation or any future proceedings. PXRE is not currently able to estimate legal defense costs or the amount of any damages that PXRE may be required to pay in connection with the pending securities litigation or any future proceedings. In view of the inherent difficulty of predicting the outcome of litigation, particularly where there are many claimants and the claimants seek indeterminate damages, PXRE is unable to predict the outcome of these matters and at this time cannot reasonably estimate the possible loss or range of loss with respect to the pending securities litigation or any future proceedings.
 
PXRE has not established any reserves for any potential liability relating to the pending securities litigation, other than $1.0 million for legal fees. PXRE has insurance coverage with respect to claims such as the securities litigation, but it is not currently possible to determine whether such insurance coverage will be adequate to cover PXRE’s defense costs and any losses.
 
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 a private placement memorandum dated on or about September 28, 2005.
 
PXRE’s investment portfolio is subject to significant market and credit risks which could result in an adverse impact on PXRE’s financial position or results.
 
PXRE’s invested assets consist primarily of debt instruments with fixed maturities, short-term investments and, to a lesser extent, hedge funds and interests in mezzanine bond and equity limited partnerships. At December 31, 2006, 98.7% of PXRE’s investment portfolio consisted of fixed maturities and short-term investments and 1.3% consisted of hedge funds and other investments.
 
In February 2006, $490.5 million of fixed maturity investments were liquidated and the proceeds were invested in cash equivalents. As of December 31, 2006, $671.2 million of PXRE’s invested assets were in short-term investments. This could have a material negative impact on PXRE’s future income from its investment portfolio.
 
PXRE’s invested assets are subject to market-wide risks and fluctuations as well as to risks inherent in particular securities. Although PXRE seeks to preserve its capital, PXRE has invested in a portfolio of hedge funds and other privately held securities. These investments were designed to provide diversification of risk; however, such investments entail substantial risks. There can be no assurance that PXRE’s investment objectives will be achieved, and results may vary substantially over time. In addition, although PXRE seeks to employ investment strategies that are not correlated with its reinsurance exposures, losses in PXRE’s investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate such losses’ adverse effect on PXRE. While PXRE’s primary objective is capital preservation, all PXRE’s portfolios have a degree of risk. See “Investments” in Item 7A of PXRE’s Form 10-K for the year ended December 31, 2006.
 
Risks Related to PXRE’s Fixed Maturity Investments.  PXRE is exposed to potential losses from the risks inherent in its fixed maturity investments. The two most significant risks inherent in PXRE’s fixed income portfolio are interest rate risk and credit risk:
 
  •  Interest Rate Risk
 
PXRE’s principal fixed maturity market risk exposure is to changes in U.S. interest rates. Changes in interest rates may affect the fair value of PXRE’s fixed maturity portfolio and borrowings (in the form of trust preferred securities). PXRE’s holdings subject us to exposures in the treasury, municipal, and various asset-backed sectors. Changes in interest rates could also cause a potential underperformance in PXRE’s exited finite coverages and shortfalls in cash flows necessary to pay fixed rate amounts due to exited finite contract counterparties.


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  •  Credit Risk
 
PXRE is also exposed to potential losses from changes in probability of default and from defaulting counterparties with respect to its investments. A majority of PXRE’s investment portfolio consists of fixed maturities and short-term investments rated “A” or “A2” or better by Moody’s or S&P. The average credit rating of the fixed maturities and short-term investments at December 31, 2006 is “AAA.” PXRE’s investment portfolio also contains privately held fixed maturities that are not traded on a recognized exchange. A deterioration in the credit quality of PXRE’s investments or its inability to liquidate any of its privately held investments promptly could have an adverse effect on PXRE’s financial condition.
 
Risks Related to PXRE’s Hedge Fund Investments.  PXRE is exposed to potential losses from the risks inherent in its portfolio of hedge funds. The three most significant risks inherent in PXRE’s hedge fund portfolio are liquidity risk, credit risk and market risk:
 
  •  Liquidity Risk
 
Liquidity risk exists in the hedge fund portfolio because there are delays between giving notice to redeem a hedge fund investment and receiving proceeds. In February 2006, redemption orders were placed with PXRE’s hedge funds in the amount of $150 million. At December 31, 2006, PXRE had $12.8 million in hedge funds subject to redemption notices. The redemption terms are defined in the offering documents and generally require notice periods and time scales for settlement. PXRE remains at risk during the notice period, which typically specifies a month or quarter end reference point at which to calculate redemption proceeds. The risk also exists that a hedge fund may be unable to meet its redemption obligations. A hedge fund may be faced with excessive redemption notices and illiquid underlying investments.
 
  •  Credit Risk
 
Credit risk exists in the hedge fund portfolio where hedge funds are net long in a particular security, or group of correlated securities. Where a hedge fund is net long in a security that defaults, or suffers an adverse credit event, PXRE is exposed to loss. PXRE exposure to any individual hedge fund is limited to the carrying value of the investment, and PXRE invests in a diversified portfolio of hedge funds that utilize different strategies and markets to reduce this risk. However, different hedge funds in the portfolio may be net long in the same or correlated securities at the same time, which could have an adverse effect on the value of the portfolio and thus PXRE’s financial condition.
 
  •  Market Risk
 
PXRE invests in hedge funds that trade in securities using strategies that are generally market neutral. The hedge fund investments do not generally benefit from rising equity or bond markets, and have demonstrated historically low correlation of returns to equity market indices. However, hedge funds may maintain leveraged net long positions, and this can expose PXRE to market risks.
 
PXRE has exited the finite reinsurance business, but claims in respect of finite reinsurance could have an adverse effect on PXRE’s operating results.
 
Finite risk reinsurance contracts are highly customized and typically involve complicated structural elements. Generally accepted accounting principles in the United States, which we refer to as GAAP, govern whether or not a contract should be accounted for as reinsurance. Contracts that do not meet these GAAP requirements may not be accounted for as reinsurance and are required to be accounted for as deposits. As reported in the past few years, certain finite insurance and reinsurance arrangements are coming under scrutiny by the New York Attorney General’s Office, the SEC and other governmental authorities. According to the press, investigators have asserted that the contracts in question were accounted for in an improper or fraudulent manner.
 
PXRE sold finite reinsurance prior to June 30, 2004, and from time to time, has purchased finite reinsurance. Although PXRE has received no request for information or documents in connection with the investigations with respect to any finite reinsurance PXRE sold or purchased from time to time, certain of its customers or reinsurers have been asked to provide or have provided documents and information in the framework of these investigations


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with respect to reinsurance contracts to which PXRE is a party. Any claim challenging the appropriateness of the accounting treatment of the finite contracts PXRE underwrote or purchased could result in negative publicity, costs and, in the event of any regulatory or judicial decision being entered against PXRE, ultimately fines and penalties, all of which could have a material adverse effect on PXRE’s business and operating results.
 
Reserving for losses includes significant estimates, which are also subject to inherent uncertainties.
 
PXRE’s success is dependent upon its ability to accurately assess the risks associated with the businesses that PXRE insures and reinsures. Claim reserves represent estimates involving underwriting, actuarial and statistical projections, at a given point in time, of PXRE’s expectations of the ultimate settlement and administration costs of claims incurred. PXRE utilizes actuarial models as well as historical insurance industry loss development patterns to assist in the establishment of appropriate claim reserves. As a property catastrophe reinsurer, incurred losses are inherently more volatile than those of primary insurers and reinsurers of risks that have an established historical pattern of losses.
 
In reserving for catastrophe losses, PXRE’s estimates are influenced by underwriting and loss information provided by PXRE’s clients, industry catastrophe models and its internal analyses of this information. As an event matures, PXRE relies more and more on its development patterns by type of event as well as contract information to project ultimate losses for the event. This process can cause PXRE’s ultimate estimates to differ significantly from initial projections.
 
PXRE’s estimate of the ultimate incurred gross loss and loss expenses arising from Hurricanes Katrina, Rita and Wilma of $1,023.5 million as of December 31, 2006 is based mainly on modeling, a review of exposed reinsurance contracts, claims notices received from clients, discussions with clients and loss information provided by clients to underwriters as part of the underwriting submissions received in connection with the January 2006 renewal process. Although PXRE has begun to receive loss notices with respect to Hurricanes Katrina, Rita and Wilma, PXRE has paid less than 60% of its net incurred loss with respect to Hurricanes Katrina, Rita and Wilma as of December 31, 2006. In addition, PXRE estimates are subject to a high level of uncertainty arising out of extremely complex and unique causation and coverage issues, including the appropriate attribution of losses to wind or flood damage as opposed to other perils such as fire, business interruption or civil commotion. The underlying policies generally contain exclusions for flood damage; however, water damage caused by wind may be covered. PXRE expects 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.
 
PXRE’s actual losses from Hurricanes Katrina, Rita and Wilma may exceed its estimate as a result of, among other things, the receipt of additional information from clients, the attribution of losses to coverages that for the purpose of its estimates PXRE assumed would not be exposed, and inflation in repair costs due to the limited availability of labor and materials, in which case PXRE’s financial results could be further materially adversely affected.
 
In developing its estimate for Hurricane Katrina, PXRE has also assumed flood damage exclusions contained in its cedent’s underlying insurance policies will be effective. PXRE understands that various lawsuits are pending seeking to invalidate such flood damage exclusions on various grounds. If such lawsuits were to successfully invalidate the underlying flood damage exclusions or if the court or a jury were to find that an insurer had not adequately established that a loss was attributable to flood rather than wind, PXRE’s liabilities for losses and loss expenses relating to Hurricane Katrina could prove to be inadequate, with a consequent adverse impact on PXRE’s shareholders’ equity in future periods. Based on reports in the press, PXRE understands that State Farm, one of the nation’s largest insurers, has been engaging in various settlement discussions concerning claims involving the controversies over the flood exclusion. PXRE does not reinsure State Farm, but it is unclear at this time how any potential settlements by State Farm would impact or influence PXRE’s cedents. If PXRE’s clients were to incur widespread additional losses as a result of settlements or adverse litigation results involving the flood versus wind controversy, it is possible that PXRE’s actual losses from Hurricane Katrina will exceed its estimate.
 
In PXRE’s casualty and finite business, given its limited experience, PXRE does not have established historical loss development patterns that can be used to establish loss liabilities. For these lines of business, PXRE relies on loss development patterns that have been estimated from industry or client data, which may not accurately represent


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the true development pattern for the business PXRE wrote. For property lines of business, reserves may differ from ultimate settlement values due to the infrequency of some types of catastrophe losses, the incompleteness of information in the wake of a major catastrophe and delay in receiving that information. PXRE may also seek to enter into commutations of reinsurance contracts of exited lines of business. Actual claims and claim expenses paid, including commutations, may deviate, perhaps substantially, from the reserve estimates reflected in PXRE’s financial statements.
 
If PXRE’s claim reserves are determined to be inadequate, PXRE will be required to increase claim reserves at the time of such determination with a corresponding reduction in its net income in the period in which the deficiency is rectified. It is possible that claims in respect of events that have occurred could exceed PXRE’s claim reserves and have a material adverse effect on PXRE’s operating results, in a particular period, or its financial condition in general. As a compounding factor, although most insurance contracts have policy limits, the nature of property and casualty insurance and reinsurance is that losses can exceed policy limits for a variety of reasons and could significantly exceed the premiums received on the underlying policies, thereby further adversely affecting PXRE’s financial condition.
 
PXRE has exhausted its retrocessional coverage with respect to Hurricane Katrina, leaving it exposed to further losses.
 
Based on PXRE’s current estimate of losses related to Hurricane Katrina, PXRE has exhausted its retrocessional protection with respect to this event, meaning that PXRE has no retrocessional coverage available should PXRE’s Hurricane Katrina losses prove to be greater than currently estimated. PXRE cannot be sure that retrocessional coverage will be available to it on acceptable terms, or at all, in the future. PXRE’s business, financial condition and operating results could be materially adversely impacted by additional losses related to Hurricane Katrina.
 
PXRE may be adversely affected by foreign currency fluctuations.
 
Although PXRE’s functional currency is the U.S. dollar, premium receivables and loss reserves include business denominated in currencies other than U.S. dollars. PXRE is exposed to the possibility of significant claims in currencies other than U.S. dollars. PXRE may, from time to time, experience losses resulting from fluctuations in the values of these non-U.S. currencies, which could adversely affect its operating results. While PXRE holds positions denominated in foreign currencies to mitigate, in part, the effects of currency fluctuations on its operating results, PXRE currently does not hedge its currency exposures before a catastrophic event that may produce a claim.
 
PXRE’s reliance on reinsurance brokers exposes PXRE to their credit risk.
 
In accordance with industry practice, PXRE frequently pays amounts owed on claims under PXRE’s policies to reinsurance brokers, and these brokers, in turn, pay these amounts over to the insurers that have reinsured a portion of their liabilities with PXRE (we refer to these insurers as ceding insurers). In some jurisdictions, if a broker fails to make such a payment, PXRE might remain liable to the ceding insurer for the deficiency. Conversely, in certain jurisdictions, when the ceding insurer pays premiums for these policies to reinsurance brokers for payment over to PXRE, these premiums are considered to have been paid and the ceding insurer will no longer be liable to PXRE for those amounts, whether or not PXRE has actually received the premiums. PXRE is aware of one instance in recent years, involving an insignificant amount, in which a broker did not forward premiums to PXRE. Consequently, in connection with the settlement of reinsurance balances, PXRE assumed a degree of credit risk associated with brokers around the world. If PXRE completes the merger or implements another strategic alternative, PXRE is likely to continue to rely on such brokers and assume this risk.
 
Risks Related to Argonaut — Legacy Issues
 
If Argonaut’s actual losses from insureds exceed its loss reserves, Argonaut’s financial results would be adversely affected.
 
Argonaut records reserves for specific claims incurred and reported and reserves for claims incurred but not reported. The estimates of losses for reported claims are established judgmentally on an individual case basis. Such


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estimates are based on Argonaut’s particular experience with the type of risk involved and its knowledge of the circumstances surrounding each individual claim. Reserves for reported claims consider Argonaut’s estimate of the ultimate cost to settle the claims, including investigation and defense of the claim, and may be adjusted for differences between costs originally estimated and costs re-estimated or incurred. Reserves for incurred but not reported claims are based on the estimated ultimate cost of settling claims, including the effects of inflation and other social and economic factors, using past experience adjusted for current trends and any other factors that would modify past experience. Argonaut uses a variety of statistical and actuarial techniques to analyze current claim costs, frequency and severity data, and prevailing economic, social and legal factors. While Argonaut’s management believes that amounts included in its consolidated financial statements are adequate, there can be no assurance that future changes in loss development, favorable or unfavorable, will not occur. The estimates are periodically reviewed and any changes are reflected in current operations.
 
Argonaut’s objective is to set reserves that are adequate and represent Argonaut management’s best estimate; that is, the amounts originally recorded as reserves should at least equal the ultimate cost to investigate and settle claims. However, the process of establishing adequate reserves is inherently uncertain, and the ultimate cost of a claim may vary materially from the amounts reserved. The reserving process is particularly imprecise for claims involving asbestos, environmental and other long-tailed exposures (those exposures for which claims take a long time to develop or for which the amount of claims payments are not known for a long period of time) confronting property and casualty insurers. Argonaut regularly monitors and evaluates loss and loss adjustment expense reserve developments to verify reserve adequacy. Any adjustment to reserves is reflected in underwriting results for the accounting period in which the adjustment is made.
 
Argonaut has received asbestos and environmental liability claims arising out of general liability coverage primarily written in the 1970s and into the mid-1980s. Argonaut has a specialized claims unit that investigates and adjusts asbestos and environmental claims. Beginning in 1986, nearly all standard liability policies contained an express exclusion for asbestos and environmental related claims. All policies currently being issued by Argonaut’s insurance subsidiaries contain this exclusion. In addition to the previously described general uncertainties encountered in estimating reserves, there are significant additional uncertainties in estimating the amount of Argonaut’s potential losses from asbestos and environmental claims. Reserves for asbestos and environmental claims cannot be estimated with traditional loss reserving techniques that rely on historical accident year development factors due to the uncertainties surrounding these types of claims. Among the uncertainties impacting the estimation of such losses are:
 
  •  potentially long waiting periods between exposure and emergence of any bodily injury or property damage;
 
  •  difficulty in identifying sources of environmental or asbestos contamination;
 
  •  difficulty in properly allocating responsibility and/or liability for environmental or asbestos damage;
 
  •  changes in underlying laws and judicial interpretation of those laws;
 
  •  potential for an environmental or asbestos claim to involve many insurance providers over many policy periods;
 
  •  long reporting delays from insureds to insurance companies;
 
  •  historical data concerning asbestos and environmental losses, which is more limited than historical information on other types of claims;
 
  •  questions concerning interpretation and application of insurance coverage; and
 
  •  uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.
 
Argonaut’s management believes that these factors continue to render traditional actuarial methods less effective at estimating reserves for asbestos and environmental losses than reserves on other types of losses. Argonaut establishes reserves to the extent that, in the judgment of its management, the facts and prevailing law reflect an exposure for Argonaut not dissimilar to those results the industry has experienced with regard to asbestos and environmental related claims. Argonaut annually reviews its loss and loss adjustment expense reserves for its


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runoff lines of business, including its asbestos and environmental claims. The review entails a detailed analysis of its direct and assumed exposure. Argonaut engages a consulting actuary to assist it in determining a best estimate of ultimate losses, and Argonaut’s management evaluates that estimate in assessing the adequacy of the runoff loss and loss adjustment expense reserves. Argonaut completed the 2006 analysis during the third quarter and updated this analysis during the fourth quarter. As a result of this analysis, Argonaut recorded an additional $12.2 million in loss reserves. Additionally, Argonaut strengthened its unallocated loss and loss adjustment expense reserves by $4.7 million based on this analysis. Argonaut will continue to monitor industry trends and its own experience in order to determine the adequacy of its environmental and asbestos reserves.
 
Through Argonaut’s subsidiary Rockwood Casualty Insurance Company, which we refer to as Rockwood, it has exposure to claims for black lung disease. Those diagnosed with black lung disease are eligible to receive workers compensation benefits from various federal and state programs. These programs are continually being reviewed by the governing bodies and may be revised without notice in such a way as to increase the level of Argonaut’s exposure. Argonaut’s subsidiary, the Colony Group, which we refer to as Colony, also currently underwrites environmental and pollution coverages (on a limited number of policies) for underground storage tanks.
 
Due to the uncertainties discussed above, the ultimate losses may vary materially from current loss reserves which could have a material adverse effect on Argonaut’s future financial condition, results of operations and cash flows.
 
The effects of emerging claim and coverage issues on Argonaut’s legacy business are uncertain.
 
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect Argonaut’s business by either extending coverage beyond its underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after Argonaut has issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under Argonaut’s insurance or reinsurance contracts may not be known for many years after a contract is issued, and its financial position and results of operations may adversely impact Argo Group.
 
Argonaut’s existing business has exposure to unpredictable catastrophes, which can materially and adversely affect its business, results of operations and/or financial condition.
 
Argonaut is subject to claims arising out of catastrophes that may have a significant effect on its business, results of operations, and/or financial condition. Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, hailstorms, explosions, power outages, severe winter weather, fires and intentional man-made events, such as terrorist attacks. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Insurance companies are not permitted to reserve for catastrophes until such event takes place. Therefore, although Argonaut actively manages its exposure to catastrophes through its underwriting process and the purchase of reinsurance protection, an especially severe catastrophe or series of catastrophes could exceed its reinsurance protection and may have a material adverse impact on Argo Group’s business, results of operations and/or financial condition.
 
As a primary insurer, Argonaut’s existing business may have significant exposure for terrorist acts.
 
Argonaut may have exposure to losses resulting from acts of terrorism. Even if reinsurers are able to exclude coverage for terrorist acts or price that coverage at rates that Argonaut considers unattractive, direct insurers, like Argonaut’s insurance company subsidiaries, might not be able to likewise exclude terrorist acts because of regulatory constraints. If this does occur, Argonaut, in its capacity as a primary insurer, would have a significant gap in its reinsurance protection and would be exposed to potential losses as a result of any terrorist acts. These events are inherently unpredictable, although recent events may lead to their increased frequency and severity. It is difficult to predict occurrence of such events with statistical certainty or to estimate the amount of loss per occurrence they will generate.


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TRIA was enacted to ensure availability of insurance coverage for defined terrorist acts in the United States. This law requires insurers writing certain lines of property and casualty insurance, including Argonaut, to offer coverage against certified acts of terrorism causing damage within the United States or to U.S. flagged vessels or aircraft. In return, the law requires the federal government, should an insurer comply with the procedures of the law, to indemnify the insurer for 85% of covered losses, exceeding a deductible, based on a percentage of direct earned premiums for the previous calendar year, up to an industry limit of $100 billion resulting from covered acts of terrorism. This law does not apply to acts of domestic terrorism or acts that might otherwise be considered acts of terrorism that are not certified by the Secretary of the Treasury to be acts of terrorism under this law. Argonaut continues to attempt to exclude acts of terrorism not covered under the federal act, subject to state approvals.
 
Given the retention limits imposed under this law and that some or many of Argonaut’s policies may not include an exclusion for terrorism, future terrorist attacks may result in losses that have a material adverse effect on Argo Group’s business, results of operations and/or financial condition. The federal terrorism risk assistance provided by TRIA will expire at the end of 2007 and it is not currently clear whether that assistance will be renewed. Any renewal may be on substantially less favorable terms.
 
Litigation and legal proceedings against Argonaut’s insurance subsidiaries could have an adverse effect on Argonaut’s business, results of operations and/or financial condition.
 
In the normal course of business, Argonaut’s insurance subsidiaries have been sued in a number of class action lawsuits and other major litigation as a result of their insurance operations. Argonaut’s insurance companies have responded to the lawsuits and believe that there are meritorious defenses and intend to vigorously contest these claims. The plaintiffs in certain of these lawsuits have not quantified the amounts they ultimately will seek to recover. In addition, in the case of class actions, it is uncertain whether a class will be certified, the number of persons included in any class, and the amount of damages that are ultimately sought by the class members. As a result, Argonaut is unable, with any degree of certainty, to determine a range of any potential loss, or whether such an outcome is probable or remote. However, adverse judgments in one or more of such lawsuits could have a material adverse effect on Argonaut’s business, results of operations and/or financial condition.
 
Argonaut faces a risk of non-collectibility of reinsurance, which could materially and adversely affect Argo Group’s business, results of operations and/or financial condition.
 
As is common practice within the insurance industry, Argonaut transfers a portion of the risks insured under its policies to other companies through the purchase of reinsurance. This reinsurance is maintained to protect the insurance subsidiaries against the severity of losses on individual claims, unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss and catastrophic events. Although reinsurance does not discharge Argonaut’s subsidiaries from their primary obligation to pay for losses insured under the policies they issue, reinsurance does make the assuming reinsurer liable to the insurance subsidiaries for the reinsured portion of the risk. A credit exposure exists with respect to ceded losses to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. The collectibility of reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. Argonaut is selective in regard to its reinsurers, placing reinsurance with those reinsurers with strong financial strength ratings from A.M. Best, S&P, or a combination thereof, although the financial condition of a reinsurer may change based on market conditions. Argonaut performs credit reviews on its reinsurers, focusing on, among other things, financial condition, stability, trends and commitment to the reinsurance business. Argonaut also requires assets in trust, letters of credit or other acceptable collateral to support balances due from reinsurers not authorized to transact business in the applicable jurisdictions. It has not always been standard business practice to require security for balances due; therefore, certain balances are not collateralized. A reinsurer’s insolvency or inability to make payments under the terms of a reinsurance contract could have a material adverse effect on Argo Group’s business, results of operations and/or financial condition.


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Risks Related to PXRE through Peleus Re
 
Reinsurance prices may decline, which could affect Peleus Re’s profitability.
 
Demand for reinsurance depends on numerous factors, including the frequency and severity of catastrophic events, levels of capacity, general economic conditions and underwriting results of primary property insurers. The supply of reinsurance is related to prevailing prices, recent loss experience and levels of surplus capacity. All of these factors fluctuate and may contribute to price declines generally in the reinsurance industry. Premium rates or other terms and conditions of trade may vary in the future. If any of these factors were to cause the demand for reinsurance to fall or the supply to rise, Peleus Re’s profitability could be adversely affected.
 
Because of potential exposure to catastrophes in the future, Peleus Re’s financial results may vary significantly from period to period.
 
As a reinsurer of property catastrophe-type coverages in the worldwide marketplace, Peleus Re’s operating results in any given period will depend to some extent on the number and magnitude of natural and man-made catastrophes such as hurricanes, windstorms, hailstorms, earthquakes, volcanic eruptions, fires, industrial explosions, freezes, riots and floods. While Peleus Re may, depending on market conditions, purchase catastrophe retrocessional coverage for its own protection, the occurrence of one or more major catastrophes in any given period could nevertheless have a material adverse impact on Peleus Re’s operating results and financial condition and result in substantial liquidation of investments and outflows of cash as losses are paid.
 
Peleus Re will operate in a highly competitive environment and no assurance can be given that Peleus Re will be able to compete effectively in this environment.
 
Peleus Re will compete with numerous companies, many of whom have credit ratings and substantially greater financial, marketing and management resources. No assurance can be given that Peleus Re will be able to compete successfully in the reinsurance markets in which PXRE has historically operated.
 
Peleus Re will 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 Holdings, Ltd., Renaissance Reinsurance Ltd., Swiss Reinsurance Company and XL Re Ltd. A number of reinsurers were also formed in Bermuda in the wake of Hurricanes Katrina, Rita and Wilma in 2005 that are providing additional competition.
 
Peleus Re’s inability to provide the necessary collateral could affect Peleus Re’s ability to offer reinsurance in certain markets.
 
Peleus Re will not be licensed or admitted as an insurer in any jurisdiction other than Bermuda. Because many jurisdictions do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial statements unless appropriate security mechanisms are in place, Peleus Re anticipates that its reinsurance clients will typically require it to post a letter of credit or other collateral. If Peleus Re is unable to arrange for security on commercially reasonable terms, Peleus Re could be limited in its ability to write business for certain of its clients.
 
As of April 30, 2007, Peleus Re had no committed letter of credit facility and PXRE had $310.0 million of committed letter of credit facilities and an uncommitted facility that allows for letters of credit to be issued subject to satisfactory collateral being provided to the issuing bank by PXRE.
 
At December 31, 2006, PXRE had issued letters of credit in the amount of $239.3 million which are secured by cash and securities with a fair value of $329.5 million.


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Risks Related to Regulation
 
Regulatory constraints may restrict Argo Group’s ability to operate its business.
 
General.  Argo Group’s insurance and reinsurance subsidiaries may not be able to obtain or maintain necessary licenses, permits, authorizations or may be able to do so only at significant cost. In addition, Argo Group may not be able to comply with, or obtain appropriate exemptions from, the wide variety of laws and regulations applicable to insurance or reinsurance companies or holding companies. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws could result in restrictions on Argo Group’s ability to do business or certain activities that are regulated in one or more of the jurisdictions and could subject Argo Group to fines and other sanctions, which could have a material adverse effect on Argo Group s business.
 
Argo Group’s Bermuda Subsidiaries.  PXRE Bermuda is registered as a Class 4 Bermuda insurance and reinsurance company and Peleus Re is registered as a Class 3 Bermuda insurance and reinsurance company. Among other matters, Bermuda statutes, regulations and policies of the BMA require PXRE Bermuda and Peleus Re to maintain minimum levels of statutory capital, surplus and liquidity, to meet solvency standards, to obtain prior approval of ownership and transfer of shares and to submit to certain periodic examinations of its financial condition. These statutes and regulations may, in effect, restrict the ability of PXRE Bermuda and Peleus Re to write insurance and reinsurance policies, to make certain investments and to distribute funds. By agreement with the BMA, PXRE Bermuda may not underwrite any new reinsurance business without the prior consent of the BMA, other than reinsurance of business written by Peleus Re.
 
The offshore insurance and reinsurance regulatory environment has become subject to increased scrutiny in many jurisdictions, including the United States and various states within the United States. Compliance with any new laws or regulations regulating offshore insurers or reinsurers could have a material adverse effect on Argo Group’s business. In addition, although neither PXRE Bermuda nor Peleus Re believes it is or will be in violation of insurance laws or regulations of any jurisdiction outside Bermuda, inquiries or challenges to the insurance or reinsurance activities of PXRE Bermuda or Peleus Re may still be raised in the future.
 
Argo Group’s U.S. Subsidiaries.  Argo Group’s U.S. insurance subsidiaries are subject to extensive regulation which may reduce our profitability or inhibit our growth. Moreover, if we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our financial condition and results of operations.
 
The U.S. insurance industry is highly regulated and supervised. Our insurance subsidiaries are subject to the supervision and regulation of the states in which they are domiciled and the states in which they do business. Such supervision and regulation is designed to protect our policyholders rather than our shareholders. These regulations are generally administered by a department of insurance in each state and relate to, among other things:
 
  •  approval of policy forms and premium rates;
 
  •  standards of solvency, including risk-based capital measurements;
 
  •  licensing of insurers and their producers;
 
  •  restrictions on the nature, quality and concentration of investments;
 
  •  restrictions on the ability of our insurance company subsidiaries to pay dividends to us;
 
  •  restrictions on transactions between insurance company subsidiaries and their affiliates;
 
  •  restrictions on the size of risks insurable under a single policy;
 
  •  requiring deposits for the benefit of policyholders;
 
  •  requiring certain methods of accounting;
 
  •  periodic examinations of our operations and finances;
 
  •  prescribing the form and content of records of financial condition required to be filed; and
 
  •  requiring additional reserves as required by statutory accounting rules.


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State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives.
 
In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. In some instances, we follow practices based on our interpretations of regulations or practices that we believe may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us. This could adversely affect our ability to operate our business.
 
Finally, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect our ability to operate our business.
 
Argo Group’s U.S. insurance subsidiaries will be subject to the risk-based capital provisions under The Insurers Model Act.
 
The risk-based capital system is designed to measure whether the amount of available capital is adequate to support the inherent specific risks of each insurer. Risk-based capital is calculated annually. State regulatory authorities use the risk-based capital formula to identify insurance companies that may be undercapitalized and thus may require further regulatory attention. The formula prescribes a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company. The ratio of a company’s actual policyholder surplus to its minimum capital requirements will determine whether any state regulatory action is required.
 
The risk-based capital system in The Insurers Model Act provides four levels of regulatory activity if the risk-based capital ratio yielded by the calculation falls below specified minimums. At each of four successively lower risk-based capital ratios specified by statute, increasing regulatory remedies become available, some of which are mandatory. The four levels are: (1) Company Action Level Event, (2) Regulatory Action Level Event, (3) Authorized Control Level Event, and (4) Mandatory Control Level Event. As of December 31, 2006, all of our insurance subsidiaries had risk-based capital ratios that exceed specified minimums. If we fall below the minimum acceptable risk-based capital level, we would be subject to additional regulation.
 
Argo Group’s U.S. subsidiaries affiliated company transactions will be subject to regulation by certain states.
 
All states have enacted legislation that regulates transactions with related companies. Such regulation generally provides that transactions between related companies must be fair and equitable. Transfers of assets among such affiliated companies, certain dividend payments from insurance subsidiaries and certain material transactions between companies within the system may be subject to prior notice to, or prior approval by, state regulatory authorities. If Argo Group is unable to obtain the requisite prior approval for a specific transaction, we would be precluded from taking the action which could adversely affect our operations.
 
If PXRE Bermuda or Peleus Re becomes subject to insurance statutes and regulations in jurisdictions other than Bermuda or there are changes in Bermuda law or regulations or the application of Bermuda law or regulations, there could be a significant and negative impact on their businesses.
 
PXRE Bermuda, as a registered Bermuda Class 4 insurer, and Peleus Re, as a registered Bermuda Class 3 insurer, are subject to regulation and supervision in Bermuda. Bermuda insurance statutes, regulations and policies of the BMA require PXRE Bermuda and Peleus Re to, among other things:
 
  •  maintain a minimum level of capital, surplus and liquidity;
 
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  •  restrict dividends and distributions;
 
  •  obtain prior approval of ownership and transfer of shares;
 
  •  appoint an approved loss reserve specialist;
 
  •  maintain a principal office and appoint and maintain a principal representative in Bermuda; and
 
  •  provide for the performance of certain periodic examinations of PXRE Bermuda and its financial condition.
 
In addition to the above, PXRE Bermuda has agreed to submit to additional regulatory oversight by the BMA effective March 12, 2007. Please refer to the section entitled “Risk Factors — Risks Related to the Resulting Company’s Operations After the Completion of the Merger — Risks Related to Regulation” for a full discussion of this matter.
 
These statutes and regulations may, in effect, restrict PXRE’s ability to write reinsurance policies, to distribute funds and to pursue its investment strategy.
 
PXRE does not presently intend that either PXRE Bermuda or Peleus Re will be admitted to do business in any jurisdiction in the United States, the United Kingdom or elsewhere (other than Bermuda). However, PXRE cannot assure you that insurance regulators in the United States, the United Kingdom or elsewhere will not review the activities of PXRE Bermuda or Peleus Re or related companies or their agents and claim that PXRE Bermuda or Peleus Re is subject to such jurisdiction’s licensing requirements. If any such claim is successful and PXRE Bermuda or Peleus Re must obtain a license, PXRE may be subject to taxation in such jurisdiction. (In certain circumstances, PXRE may be subject to tax in a jurisdiction even if it is not licensed by such jurisdiction. See “— Risks Related to Taxation” beginning on page 49.) In addition, PXRE Bermuda and Peleus Re are subject to indirect regulatory requirements imposed by jurisdictions that may limit their ability to provide insurance or reinsurance. For example, the ability of PXRE Bermuda and Peleus Re to write insurance or reinsurance may be subject, in certain cases, to arrangements satisfactory to applicable regulatory bodies. Proposed legislation and regulations may have the effect of imposing additional requirements upon, or restricting the market for, alien insurers or reinsurers with whom domestic companies place business.
 
Generally, Bermuda insurance statutes and regulations applicable to PXRE Bermuda and Peleus Re are less restrictive than those that would be applicable if it were governed by the laws of any state in the United States. In the past, there have been congressional and other initiatives in the United States regarding proposals to supervise and regulate insurers domiciled outside the United States. If in the future either PXRE Bermuda or Peleus Re becomes subject to any insurance laws of the United States or any state thereof or of any other jurisdiction, PXRE cannot assure you that PXRE Bermuda or Peleus Re would be in compliance with those laws or that coming into compliance with those laws would not have a significant and negative effect on the business of PXRE Bermuda or Peleus Re.
 
The process of obtaining licenses is very time consuming and costly, and PXRE may not be able to become licensed in a jurisdiction other than Bermuda, should it choose to do so. The modification of the conduct of PXRE’s business resulting from its becoming licensed in certain jurisdictions could significantly and negatively affect PXRE’s business. In addition PXRE’s inability to comply with insurance statutes and regulations could significantly and adversely affect its business by limiting PXRE’s ability to conduct business as well as subjecting PXRE to penalties and fines.
 
Because PXRE is incorporated in Bermuda, PXRE is subject to changes in Bermuda law and regulation that may have an adverse impact on its operations, including imposition of tax liability or increased regulatory supervision. In addition, PXRE will be exposed to changes in the political environment in Bermuda. The Bermuda insurance and reinsurance regulatory framework recently has become subject to increased scrutiny in many jurisdictions, including in the United States and in various states within the United States. PXRE cannot predict the future impact on its operations of changes in the laws and regulations to which PXRE is or may become subject.


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Argo Group may be unable to obtain extensions of work permits for its employees, which may cause its business to be adversely affected.
 
Under Bermuda law, non-Bermudians (other than spouses of Bermudians or holders of permanent residence certificates) may not engage in any gainful occupation in Bermuda without the specific permission of the appropriate government authority. 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 residence 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 Argo Group’s key officers, including an executive vice president and key reinsurance underwriters of PXRE, are working in Bermuda under work permits that will expire over the next two years. The Bermuda government could refuse to extend these work permits. If any of Argo Group’s senior executive officers were not permitted to remain in Bermuda, Argo Group’s operations could be disrupted and its financial performance could be adversely affected.
 
Risks Related to an Investment in Argo Group’s Common Shares
 
Argo Group’s share price and trading volume may be subject to significant fluctuations in response to a number of events and factors, including:
 
  •  the completion of the merger and the level of success in integrating the businesses of PXRE and Argonaut and pursuing the Peleus Re business plan;
 
  •  potential shareholder litigation and regulatory investigations relating to the recent decline in PXRE’s share price, ratings downgrade and catastrophe losses;
 
  •  natural catastrophes or other events that may impact or be perceived by investors as impacting the insurance industry, generally, and the reinsurance industry, in particular;
 
  •  quarterly variations in Argo Group’s operating results;
 
  •  changes in the market’s expectations about Argo Group’s future operating results;
 
  •  changes in financial estimates and recommendations by securities analysts concerning Argo Group or the reinsurance industry generally;
 
  •  operating and stock price performance of other companies that investors may deem comparable;
 
  •  news reports relating to Argo Group’s business and trends in Argo Group’s markets;
 
  •  changes in the laws and regulations affecting Argo Group’s business;
 
  •  acquisitions and financings by Argo Group or others in Argo Group’s industry; and
 
  •  sales or acquisitions of substantial amounts of Argo Group’s common shares by Argo Group’s directors and executive officers or principal shareholders, or the perception that such sales could occur.
 
In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect Argo Group’s share price, regardless of Argo Group’s operating results.
 
Argo Group will be a holding company and if its subsidiaries do not make dividend payments to Argo Group, Argo Group may not be able to pay dividends or other obligations.
 
Argo Group will be a holding company with no operations or significant assets other than the share capital of its subsidiaries.
 
PXRE effected an internal reorganization of its subsidiaries on March 15, 2005. The purpose of the reorganization was to consolidate all of PXRE’s 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


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the reorganization, PXRE Reinsurance (Barbados) Ltd. 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.
 
Argo Group will rely primarily on cash dividends from its subsidiaries to pay its operating expenses, including debt service payments, shareholder dividends, if any, income taxes and other obligations that may arise from time to time. Argo Group expects future dividends and other permitted payments from these subsidiaries to be its principal source of funds to pay expenses and dividends. The payment of dividends by Argo Group’s insurance and reinsurance subsidiaries to Argo Group is limited under Bermuda law, Irish law and under certain insurance statutes of various U.S. states in which they are licensed to transact business. Argo Group’s U.S. insurance subsidiaries are subject to state regulatory restrictions that limit the maximum amount of annual dividends or other distributions, including loans or cash advances, available to shareholders without prior approval of the state regulatory authorities. As of January 1, 2007, PXRE Reinsurance cannot pay any dividends without the prior approval of the Insurance Commissioner of the State of Connecticut.
 
Bermuda insurance laws require PXRE Bermuda and Peleus Re to maintain certain measures of solvency and liquidity, and further limit the amount by which PXRE can reduce capital and surplus without prior regulatory approval. Moreover, as a precondition to the licensing of Peleus Re, PXRE Bermuda has agreed to submit to additional regulatory oversight by the BMA. PXRE agreed that effective March 12, 2007 PXRE Bermuda will not write any insurance business without the approval of the BMA other than reinsurance of business written by Peleus Re.
 
PXRE also agreed with the BMA that effective March 12, 2007, PXRE Bermuda, before reducing its total statutory capital by 10% or more, in the aggregate, as set out in its previous year’s financial statements, in any calendar year, shall obtain the BMA’s approval. 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 obtain the BMA’s approval. PXRE Bermuda may declare and pay dividends in respect of any financial year which would not exceed 20% of its total statutory capital and surplus as shown on its statutory balance sheet in relation to the previous financial year, provided that at least fourteen days before payment of such dividend it files with the BMA a certificate signed by its principal representative and two of its directors which states that, in the opinion of those signing the certificate, the payment of such dividend will not cause PXRE Bermuda to fail to meet its relevant margins.
 
PXRE Bermuda is prohibited from declaring or paying any dividends during any financial year it is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio. If it fails to meet its minimum solvency margin or minimum liquidity ratio on the last day of any financial year, the insurer will be prohibited, without the approval of the BMA, from declaring or paying any dividends during the next financial year. If its total statutory capital and surplus falls to $75.0 million or less, it will have to comply with additional reporting requirements as mandated by the BMA.
 
U.S. persons who own Argo Group’s common shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.
 
The Companies Act 1981 of Bermuda, which we refer to as the Companies Act, which applies to Argo Group, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. Set forth below is a summary of certain significant provisions of the Companies Act applicable to Argo Group which includes, where relevant, information on modifications thereto adopted pursuant to PXRE’s bye-laws which differ in certain respects from provisions of Delaware corporate law. Because the following statements are summaries, they do not discuss all aspects of Bermuda law that may be relevant to Argo Group and its shareholders. See “Comparison of Shareholder Rights and Corporate Governance Matters” beginning on page 148.


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Interested Directors.  Under Bermuda law and PXRE’s bye-laws, a transaction entered into by Argo Group in which a director has an interest will not be voidable by Argo Group, and such director will not be liable to Argo Group for any profit realized pursuant to such transaction, provided the nature of the interest is disclosed at the first opportunity at a meeting of directors, or in writing to the directors. In addition, PXRE’s bye-laws allow an interested director to be taken into account in determining whether a quorum is present and to vote on a transaction in which that director has an interest following a declaration of the interest pursuant to the Companies Act, provided that the director is not disqualified from doing so by the chairman of the meeting. Under Delaware law, a transaction with an interested director would not be voidable if:
 
  •  the material facts as to the interested director’s relationship or interests were disclosed or were known to the board of directors and the board of directors in good faith authorized the transaction by the affirmative vote of a majority of the disinterested directors;
 
  •  such material facts were disclosed or were known to the shareholders entitled to vote on such transaction and the transaction was specifically approved in good faith by vote of the majority of shares entitled to vote thereon; or
 
  •  the transaction was fair as to the corporation as of the time it was authorized, approved or ratified.
 
Under Delaware law, an interested director could be held liable for a transaction in which such director derived an improper personal benefit.
 
Certain Transactions with Significant Shareholders.  As a Bermuda company, upon the approval of Argo Group’s board of directors, Argo Group may enter into certain business transactions with its significant shareholders, including asset sales, in which a significant shareholder receives, or could receive, a financial benefit that is greater than that received, or to be received, by other shareholders without obtaining prior approval from Argo Group shareholders. Amalgamations, including amalgamations with an interested shareholder, require the approval of the board of directors and a resolution of shareholders approved by the affirmative vote of three-fourths of those voting at such meeting and the quorum shall be two persons holding or represented by proxy of more than one-third of the issued shares of Argo Group. If Argo Group was a Delaware corporation, a business combination (which, for this purpose, includes mergers and asset sales of greater than 10% of Argo Group’s assets that would otherwise be considered transactions in the ordinary course of business) with an interested shareholder, would require, subject to certain exceptions, prior approval from shareholders holding at least two-thirds of its outstanding common shares not owned by such interested shareholder for a period of three years from the time the person became an interested shareholder, unless Argo Group opted out of the relevant Delaware statute.
 
Shareholders’ Suits.  The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders in many U.S. jurisdictions. Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to commence an action in Argo Group’s name to remedy a wrong done to Argo Group where an act is alleged to be beyond Argo Group’s corporate power, is illegal or would result in the violation of Argo Group’s memorandum of association or bye-laws. Furthermore, consideration would be given by the court to acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of Argo Group’s shareholders than actually approved it. The winning party in such an action generally would be able to recover a portion of attorneys’ fees incurred in connection with such action. Argo Group’s bye-laws provide that shareholders waive all claims or rights of action that they might have, individually or in Argo Group’s right, against any director or officer for any act or failure to act in the performance of such director’s or officer’s duties, except with respect to any fraud or dishonesty of such director or officer. Class actions and derivative actions generally are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions, the court has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action.
 
Indemnification of Directors and Officers.  Under Bermuda law and PXRE’s bye-laws, Argo Group may indemnify Argo Group directors, officers or any other person appointed to a committee of the board of directors (and their respective heirs, executors or administrators) to the full extent permitted by law against all actions, costs,


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charges, liabilities, loss, damage or expense incurred or sustained by such person by reason of any act done, concurred in or omitted in the conduct of Argo Group’s business or in the discharge of his/her duties; provided that such indemnification shall not extend to any matter in which any of such persons is found, in a final judgment or decree not subject to appeal, to have committed fraud or dishonesty. Under Delaware law, a corporation may indemnify a director or officer of the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in defense of an action, suit or proceeding by reason of such position if (i) such director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and (ii) with respect to any criminal action or proceeding, such director or officer had no reasonable cause to believe his conduct was unlawful.
 
Committees of the Board of Directors.  PXRE’s bye-laws provide, as permitted by Bermuda law, that the board of directors may delegate any of its powers to committees that the board appoints, and those committees may consist partly or entirely of non-directors. Delaware law allows the board of directors of a corporation to delegate many of its powers to committees, but those committees may consist only of directors.
 
Argo Group’s shareholders may have difficulty effecting service of process on Argo Group or enforcing judgments against PXRE in the United States.
 
PXRE is organized under the laws of Bermuda and Argo Group’s business will be based in Bermuda. In addition, certain of Argo Group’s directors and officers reside outside the United States, and all or a substantial portion of Argo Group’s assets and the assets of such persons are located in jurisdictions outside the United States. As such, Argo Group has been advised that there is doubt as to whether:
 
  •  a holder of Argo Group’s common shares would be able to enforce, in the courts of Bermuda, judgments of United States courts against persons who reside in Bermuda based upon the civil liability provisions of the United States federal securities laws;
 
  •  a holder of Argo Group’s common shares would be able to enforce, in the courts of Bermuda, judgments of United States courts based upon the civil liability provisions of the United States federal securities laws; and
 
  •  a holder of Argo Group’s common shares would be able to bring an original action in the Bermuda courts to enforce liabilities against PXRE or PXRE’s directors or officers, as well as PXRE’s independent accountants, who reside outside the United States based solely upon United States federal securities laws.
 
Further, Argo Group has been advised that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of United States courts, and there are grounds upon which Bermuda courts may not enforce judgments of United States courts. Because judgments of United States courts are not automatically enforceable in Bermuda, it may be difficult for Argo Group’s shareholders to recover against Argo Group based on such judgments.
 
Risks Related to Taxation
 
PXRE and PXRE’s Bermuda subsidiaries may become subject to Bermuda taxes after 2016.
 
Bermuda currently imposes no income tax on corporations. PXRE has obtained an assurance from the Bermuda Minister of Finance, under The Exempted Undertakings Tax Protection Act 1966 of Bermuda, that if any legislation is enacted in Bermuda that would impose 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 will not be applicable to PXRE or PXRE’s Bermuda subsidiaries, until March 28, 2016. PXRE cannot assure you that PXRE or its Bermuda subsidiaries will not be subject to any Bermuda tax after that date. See “Material Tax Considerations — Taxation of PXRE and its Subsidiaries following the Merger — Bermuda” beginning on page 121.


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PXRE and PXRE’s non-U.S. subsidiaries may be subject to U.S. tax, which may have a material adverse effect on PXRE’s financial condition and operating results.
 
PXRE and PXRE’s non-U.S. subsidiaries have operated and intend to continue to operate in a manner that should not cause them to be treated as engaged in a trade or business in the United States (and, in the case of those non-U.S. companies qualifying for treaty protection, in a manner that should not cause any of such non-U.S. subsidiaries to be doing business through a permanent establishment in the United States) and, thus, PXRE believes that it and its non-U.S. subsidiaries should not be subject to U.S. federal income taxes or branch profits tax (other than withholding taxes on certain U.S. source investment income and excise taxes on insurance or reinsurance premiums). However, because there is uncertainty as to the activities that constitute being engaged in a trade or business within the United States, and what constitutes a permanent establishment under the applicable tax treaties, there can be no assurances that the United States Internal Revenue Service, which we refer to as the IRS, will not contend successfully that one of the non-U.S. subsidiaries is engaged in a trade or business, or carrying on business through a permanent establishment, in the United States. See “Material Tax Considerations — Taxation of PXRE and its Subsidiaries Following the Merger — United States” beginning on page 121.
 
Dividends paid by PXRE’s U.S. subsidiaries to PXRE Ireland may not be eligible for benefits under the U.S.-Ireland income tax treaty.
 
Under U.S. federal income tax law, dividends paid by a U.S. corporation to a non-U.S. shareholder are generally subject to a 30% withholding tax, unless reduced by treaty. The income tax treaty between the Republic of Ireland and the United States, which we refer to as the Irish Treaty, reduces the rate of withholding tax on certain dividends to 5%. Were the IRS to contend successfully that PXRE Ireland is not eligible for benefits under the Irish Treaty, any dividends paid by PXRE’s U.S. subsidiaries to PXRE Ireland would be subject to the 30% withholding tax. Such a result could have a material adverse effect on PXRE’s financial condition and operating results.
 
If you are a U.S. non-corporate shareholder, dividends you receive from PXRE will not be eligible for reduced rates of tax upon enactment of certain legislative proposals or after 2010 if legislation is not enacted extending the “qualified dividend” income provisions.
 
Dividends are generally considered to be ordinary income subject, in the case of individuals, to rates of tax up to 35%. However, dividends paid by a qualified foreign corporation, such as PXRE will be, to U.S. non-corporate holders of its common shares are eligible for reduced rates of taxation (based on the long-term capital gain rates) up to a maximum of 15%. The application of these reduced rates is, however, set to expire in 2011. PXRE, therefore, cannot assure you that any dividends paid by PXRE after 2010 would continue to qualify for reduced rates of tax.
 
Moreover, legislation has been introduced in the U.S. Congress that would, if enacted, deny the applicability of reduced rates to dividends paid by any corporation organized under the laws of a foreign country which does not have a comprehensive income tax system, such as Bermuda. It is possible that this legislative proposal could become law before 2011 or that it could apply retroactively. Therefore, depending on whether, when and in what form this legislative proposal is enacted, PXRE cannot assure you that any dividends paid by Argo Group in the future would qualify for reduced rates of tax.
 
If you acquire 10% or more of PXRE’s shares and PXRE or one or more of its non-U.S. subsidiaries is classified as a controlled foreign corporation, which we refer to as a CFC, your taxes could increase.
 
Each United States person (as defined in Section 957(c) of the Code) who (i) owns (directly, indirectly through non-U.S. persons, or constructively by application of certain attribution rules, which we refer to as constructively) 10% or more of the total combined voting power of all classes of shares of a non-U.S. corporation at any time during a taxable year, which we refer to as a 10% U.S. Shareholder, and (ii) owns (directly or indirectly through non-U.S. persons) shares of such non-U.S. corporation on the last day of such taxable year, must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC’s “subpart F income,” even if the subpart F income is not distributed, if such non-U.S. corporation has been a CFC for an uninterrupted period of 30 days or more during such taxable year. A non-U.S. corporation is considered a CFC if 10% U.S. Shareholders own (directly, indirectly through non-U.S. entities, or constructively) more than 50% of the total combined voting power of all


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classes of voting shares of such non-U.S. corporation or more than 50% of the total value of all shares of such corporation. For purposes of taking into account insurance income, a CFC also includes a non-U.S. insurance company in which more than 25% of the total combined voting power of all classes of shares (or more than 25% of the total value of the shares) is owned (directly, indirectly through non-U.S. persons or constructively) by 10% U.S. Shareholders, on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration for the reinsurance or the issuing of insurance or annuity contracts (other than certain insurance or reinsurance related to same country risks written by certain insurance companies not applicable here) exceeds 75% of the gross amount of all premiums or other consideration in respect of all risks. PXRE cannot assure you that PXRE or its non-U.S. subsidiaries will not be classified as CFCs. PXRE believes that because of the anticipated dispersion of its common share ownership, provisions in PXRE’s organizational documents that limit voting power and other factors, no United States person who (i) owns PXRE’s shares directly or indirectly through one or more non-U.S. entities and (ii) has not received a waiver from PXRE’s board of directors of provisions in PXRE’s organizational documents that limit voting power, should be treated as owning (directly, indirectly through non-U.S. entities or constructively) 10% or more of the total voting power of all classes of the shares of PXRE or any of its non-U.S. subsidiaries.
 
Due to the attribution provisions of the Code regarding determination of beneficial ownership, there is a risk that the IRS could assert that PXRE or one or more of its non-U.S. subsidiaries are CFCs and that U.S. holders of PXRE’s shares who own 10% or more of the value of PXRE’s shares should be treated as owning 10% or more of the total voting power of PXRE, and/or its non-U.S. subsidiaries, notwithstanding the reduction of voting power discussed above. See “Material Tax Considerations — Taxation of PXRE Shareholders Following the Merger — United States — Classification of PXRE or its non-U.S. subsidiaries as CFCs” beginning on page 123.
 
If one or more of PXRE’s non-U.S. subsidiaries is determined to have related person insurance income, which we refer to as RPII, you may be subject to U.S. taxation on your pro rata share of such income.
 
If the RPII of any of PXRE’s non-U.S. insurance subsidiaries were to equal or exceed 20% of such company’s gross insurance income in any taxable year and direct or indirect insureds (and persons related to such insureds) own, directly or indirectly through entities, 20% or more of PXRE’s voting power or value, then a U.S. person who owns PXRE’s shares (directly or indirectly through non-U.S. entities) on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes such person’s pro rata share of such non-U.S. insurance subsidiary’s RPII for the entire taxable year, determined as if such RPII were distributed proportionately only to U.S. persons at that date regardless of whether such income is distributed. In addition, any RPII that is includible in the income of a U.S. tax-exempt organization may be treated as unrelated business taxable income. The amount of RPII earned by the non-U.S. insurance subsidiaries (generally, premium and related investment income from the direct or indirect insurance or reinsurance of any direct or indirect U.S. holder of common shares or any person related to such holder) will depend on a number of factors, including the identity of persons directly or indirectly insured or reinsured by the non-U.S. insurance subsidiaries. PXRE believes that the gross RPII of each non-U.S. insurance subsidiary did not in prior years of operation and is not expected in the foreseeable future to equal or exceed 20% of such subsidiary’s gross insurance income. Additionally, PXRE does not expect the direct or indirect insureds of its non-U.S. insurance subsidiaries (and persons related to such insureds) to directly or indirectly own 20% or more of either the voting power or value of its shares. No assurance can be given that this will be the case because some of the factors that determine the existence or extent of RPII may be beyond PXRE’s knowledge and/or control.
 
The RPII rules provide that if a U.S. person disposes of shares in a non-U.S. insurance corporation in which U.S. persons own 25% or more of the shares (even if the amount of RPII is less than 20% of the corporation’s gross insurance income and the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the disposition will generally be treated as ordinary income to the extent of the U.S. person’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the U.S. person owned the shares (whether or not such earnings and profits are attributable to RPII). In addition, such U.S. person will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the U.S. person. These RPII rules should not apply to dispositions of PXRE’s shares because PXRE will not itself be directly engaged in the insurance business. The RPII provisions, however, have never been interpreted


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by the courts or the U.S. Treasury Department in final regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts or otherwise, might have retroactive effect. The U.S. Treasury Department has authority to impose, among other things, additional reporting requirements with respect to RPII. Accordingly, the meaning of the RPII provisions and the application of those provisions to PXRE and its non-U.S. subsidiaries are uncertain. See “Material Tax Considerations — Taxation of PXRE Shareholders Following the Merger — United States — The RPII CFC Provisions” beginning on page 124.
 
If PXRE is classified as a passive foreign investment company, which we refer to as PFIC, your taxes would increase.
 
If PXRE is classified as a PFIC, it would have material adverse tax consequences for U.S. persons that directly or indirectly own PXRE’s shares, including subjecting such U.S. persons to a greater tax liability than might otherwise apply and subjecting such U.S. persons to tax on amounts in advance of when tax would otherwise be imposed. PXRE believes that it should not be, and currently does not expect to become, a PFIC for U.S. federal income tax purposes; however, PXRE cannot assure you that it will not be deemed a PFIC by the IRS based, in part, on PXRE’s recent limited operations. There are currently no regulations regarding the application of the PFIC provisions to an insurance company. New regulations or pronouncements interpreting or clarifying these rules may be forthcoming. PXRE cannot predict what impact, if any, such guidance would have on persons subject to U.S. federal income tax that directly or indirectly own PXRE’s shares. See “Material Tax Considerations — Taxation of PXRE Shareholders Following the Merger — United States — Passive Foreign Investment Companies” beginning on page 127.
 
The reinsurance agreements between PXRE and PXRE’s U.S. subsidiaries (including any that may be entered into with Argonaut and its U.S. subsidiaries upon completion of the merger) may be subject to recharacterization or other adjustment for U.S. federal income tax purposes, which may have a material adverse effect on PXRE’s financial condition and operating results.
 
Under Section 845 of the Code, the IRS may allocate income, deductions, assets, reserves, credits and any other items related to a reinsurance agreement among certain related parties to the reinsurance agreement, recharacterize such items, or make any other adjustment, in order to reflect the proper source, character or amount of the items for each party. No regulations have been issued under Section 845 of the Code. Accordingly, the application of such provisions is uncertain and PXRE cannot predict what impact, if any, such provisions may have on it and its subsidiaries either before or after completion of the merger.
 
U.S. tax-exempt organizations that own PXRE’s shares may recognize unrelated business taxable income.
 
A U.S. tax-exempt organization may recognize unrelated business taxable income if a portion of PXRE’s insurance income is allocated to the organization. In general, insurance income will be allocated to a U.S. tax-exempt organization if either PXRE is a CFC and the tax-exempt shareholder is a 10% U.S. Shareholder or there is RPII and certain exceptions do not apply. Although PXRE does not believe that any U.S. persons should be allocated such insurance income, PXRE cannot be certain that this will be the case. See “Material Tax Considerations — Taxation of PXRE Shareholders Following the Merger — United States — Tax-Exempt Shareholders” beginning on page 126. U.S. tax-exempt investors should consult their tax advisors as to the U.S. tax consequences of any allocation of PXRE’s insurance income.
 
The payment of the special cash dividend to Argonaut shareholders could result in adverse U.S. federal income tax consequences to shareholders and to PXRE under certain circumstances.
 
Argonaut intends to take the position that the amount paid as the special cash dividend is treated as a distribution with respect to the Argonaut common stock, and not as consideration in the merger. Although Argonaut believes its position with respect to the special cash dividend is correct, the IRS may take a contrary position, and to the extent the IRS were to prevail, the amount paid as the special cash dividend would be treated as additional cash received in connection with the merger and not as a distribution for U.S. federal income tax purposes. In such a case,


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holders of Argonaut common stock could have adverse U.S. tax consequences, such as corporate holders not being entitled to a dividends received deduction. In addition, if the special cash dividend were to be treated as merger consideration, it is possible that the special cash dividend would be deemed to be paid from Argonaut to PXRE, in which case a U.S. 30% withholding tax would be imposed on such payment.
 
Holders of Argonaut common stock should consult their advisors as to the U.S. tax consequences of the special cash dividend.
 
If completed, the merger may have adverse U.S. federal income tax consequences on PXRE under certain circumstances.
 
Section 7874 of the Code was added in 2004 by the American Jobs Creation Act of 2004 to address inversion transactions, which refer in relevant part to transactions where a U.S. corporation becomes a subsidiary of a foreign corporation. This provision provides that in certain instances a foreign corporation may be treated as a domestic corporation for U.S. federal income tax purposes.
 
Because the former holders of Argonaut common stock are not expected to own 80 percent or more of the stock (by vote or value) of PXRE immediately after the acquisition, PXRE and Argonaut believe that neither PXRE nor any of its non-U.S. affiliates should be treated as a domestic corporation subject to U.S. taxation under Section 7874 of the Code. Moreover, although the former holders of Argonaut common stock are expected to hold more than 60 percent of the stock (by vote and value) of PXRE immediately after the inversion transaction, both PXRE and Argonaut believe that neither of them should recognize current gain under Section 7874 of the Code or otherwise as a result of the acquisition of Argonaut by PXRE. It is possible that, as a result of certain transfers or licenses of stock or other property, as the case may be, during the applicable period (including the transfer of any income received or accrued during the applicable period by reason of a license of any property by Argonaut), Argonaut could recognize inversion gain during the applicable period. However, PXRE and Argonaut do not anticipate such transfers taking place and thus do not expect to recognize any inversion gain during the applicable period.
 
Changes in U.S. federal income tax law could be retroactive and may subject PXRE or its non-U.S. subsidiaries to U.S. federal income taxation.
 
Legislation has been introduced in the U.S. Congress intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have certain U.S. connections. There are currently pending legislative proposals which, if enacted, could have a material adverse effect on PXRE or its shareholders. It is possible that broader-based or new legislative proposals could emerge in the future that could have an adverse effect on PXRE or its shareholders.
 
The tax laws and interpretations regarding whether a company is engaged in a U.S. trade or business or whether a company is a CFC or PFIC or has RPII or subject to the inversion tax rules are subject to change, possibly on a retroactive basis. There are currently no regulations regarding the application of the PFIC rules to an insurance company. Additionally, the regulations regarding RPII are still in proposed form and the regulations regarding inversion transactions are in temporary form. New regulations or pronouncements interpreting or clarifying such rules will likely be forthcoming from the IRS. PXRE is not able to predict if, when or in what form such guidance will be provided and whether such guidance will be applied on a retroactive basis.


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This document contains various forward-looking statements and includes assumptions concerning PXRE’s, Argonaut’s and the resulting company’s operations, future results and prospects. Statements included herein, as well as statements made by PXRE or Argonaut or on PXRE’s or Argonaut’s behalf in press releases, written statements or other documents filed with the SEC, or in PXRE’s or Argonaut’s 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 Exchange Act. These forward-looking statements, identified by words such as “intend,” “believe,” “anticipate,” or “expects” or variations of such words or similar expressions are based on current expectations, speak only as of the date thereof, and are subject to risk and uncertainties. In light of the risks and uncertainties inherent in all future projections, the forward-looking statements in this joint proxy statement/prospectus should not be considered as a representation by either PXRE or Argonaut or any other person that PXRE’s or Argonaut’s objectives or plans will be achieved. PXRE and Argonaut 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:
 
  •  PXRE and Argonaut may not obtain the approval of their shareholders at their respective shareholder meetings;
 
  •  PXRE and Argonaut may be unable to obtain regulatory approvals required for the merger, or required regulatory approvals may delay the merger or result in the imposition of conditions that could have a material adverse effect on the resulting company or cause us to abandon the merger;
 
  •  PXRE and Argonaut may be unable to complete the merger or completing the merger may be more costly than expected because, among other reasons, conditions to the closing of the merger may not be satisfied;
 
  •  problems may arise with the ability to successfully integrate PXRE’s and Argonaut’s businesses, which may result in the resulting company not operating as effectively and efficiently as expected;
 
  •  the resulting company may not be able to achieve the expected synergies from the merger or it may take longer than expected to achieve those synergies;
 
  •  the merger may involve unexpected costs or unexpected liabilities, or the effects of purchase accounting may be different from our expectations;
 
  •  PXRE faces significant litigation related to alleged securities law violations and PXRE may be subject to further securities litigation, administrative proceedings or both being brought against PXRE;
 
  •  PXRE’s investment portfolio is subject to significant market and credit risks which could result in an adverse impact on PXRE’s financial condition or operating results;
 
  •  PXRE has exited the finite reinsurance business, but claims in respect of finite reinsurance could have an adverse effect on PXRE’s operating results;
 
  •  PXRE’s and Argonaut’s reserving for losses includes significant estimates which are also subject to inherent uncertainties;
 
  •  because of exposure to catastrophes, PXRE’s and Argonaut’s financial results may vary significantly from period to period;
 
  •  PXRE may be overexposed to losses in certain geographic areas for certain types of catastrophe events;
 
  •  PXRE may be overexposed to smaller catastrophe losses and for certain geographic areas and perils due to the cancellations of a substantial portion of our assumed reinsurance contracts following PXRE’s recent ratings downgrades;
 
  •  PXRE and Argonaut operate in a highly competitive environment and no assurance can be given that PXRE, Argonaut or the resulting company will be able to compete effectively in this environment;


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  •  reinsurance prices may decline, which could affect PXRE’s, Argonaut’s or the resulting company’s profitability;
 
  •  PXRE’s reliance on reinsurance brokers exposes PXRE to their credit risk;
 
  •  PXRE may be adversely affected by foreign currency fluctuations;
 
  •  reinsurance and retrocessional coverage subjects PXRE and Argonaut to credit risk and may become unavailable on acceptable terms;
 
  •  PXRE has exhausted its retrocessional coverage with respect to Hurricane Katrina, leaving PXRE exposed to further losses;
 
  •  recoveries under portions of PXRE’s collateralized facilities are triggered by modeled loss to a notional portfolio, rather than PXRE’s actual losses arising from a catastrophe event, which creates a potential mismatch between the risks assumed through PXRE’s inwards reinsurance business and the protection afforded by these facilities;
 
  •  PXRE’s inability to provide the necessary collateral could affect PXRE’s ability to offer reinsurance in certain markets;
 
  •  the insurance and reinsurance business is historically cyclical, and PXRE and Argonaut may experience periods with excess underwriting capacity and unfavorable premium rates; conversely, PXRE may have a shortage of underwriting capacity when premium rates are strong;
 
  •  regulatory constraints may restrict PXRE’s and Argonaut’s ability to operate their businesses;
 
  •  the effects of claim and coverage issues on PXRE’s and Argonaut’s businesses are uncertain;
 
  •  Argonaut may have significant exposure for terrorist acts;
 
  •  as a result of the recent decline in PXRE’s ratings and decline in capital, more than 75% of PXRE’s clients as of January 1, 2006, measured by premium volume, may have the right to cancel their reinsurance contracts and, as of December 31, 2006, almost all of PXRE’s reinsurance contracts had either been cancelled, non-renewed or expired;
 
  •  the downgrades in, and withdrawal of, the ratings of PXRE’s reinsurance subsidiaries by rating agencies which has materially and negatively impacted, and will continue to materially and negatively impact, PXRE’s business and operating results;
 
  •  the decline in, and withdrawal of, PXRE’s ratings and reduction in PXRE’s surplus will allow clients to terminate their contracts with PXRE and, with respect to ceded reinsurance, may require PXRE to transfer premiums retained by PXRE into a beneficiary trust;
 
  •  the lowering of one or more of the credit ratings of the resulting company or its subsidiaries may have an adverse impact on the resulting company’s or its subsidiaries’ ability to raise capital and on its liquidity and financial condition;
 
  •  the lowering of one or more of the insurer financial strength ratings of the resulting company’s insurance subsidiaries may have an adverse impact on the premium writings, policy retention and profitability of our insurance subsidiaries or the resulting company;
 
  •  the actual financial position and operating results of the resulting company may differ significantly from the pro forma financial data contained in this joint proxy statement/prospectus;
 
  •  future legislative, regulatory or tax changes, both domestic and foreign, including changes to statutory reserves and/or risk-based capital requirements, may affect the cost of, or demand for, the resulting company’s products or the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business;
 
  •  the initiation of legal or regulatory proceedings against PXRE, Argonaut or the resulting company and the outcome of any legal or regulatory proceedings, such as proceedings related to present or past business


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  practices common in businesses in which we compete; proceedings brought by federal and state authorities; proceedings involving extra-contractual and class action damages; new decisions which change the law; and unexpected trial court rulings;
 
  •  competitive conditions that may affect the level of premiums and fees that the resulting company will be able to charge for its products;
 
  •  future loss of management or other key employees, agents or brokers;
 
  •  future changes in general economic or business conditions, both domestic and foreign, that may be less favorable than expected and may affect premium levels, claims experience, the level of pension benefit costs and funding, investment results and foreign exchange rates;
 
  •  the market price of PXRE’s common shares has declined and may decline further as a result of PXRE’s announcements of increased loss estimates for losses due to Hurricanes Katrina, Rita and Wilma and the ratings downgrades PXRE has experienced;
 
  •  any determination by the IRS that PXRE or PXRE’s non-U.S. subsidiaries are subject to U.S. taxation could result in a material adverse impact on PXRE’s financial position or results; and
 
  •  any changes in tax laws, tax treaties, tax rules and interpretations could result in a material adverse impact on PXRE’s financial condition or operating results.
 
The risks included here are not exhaustive. The annual reports on Form 10-K, subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and other documents filed by PXRE and Argonaut with the SEC and incorporated herein by reference include additional factors which could impact PXRE’s, Argonaut’s and the resulting company’s businesses and financial performance. Moreover, PXRE and Argonaut operate in a rapidly changing and competitive environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors.
 
Further, it is not possible to assess the impact of all risk factors on PXRE’s, Argonaut’s or the resulting company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, PXRE and Argonaut disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this joint proxy statement/prospectus, except as may be required by law.


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MATERIAL CONTRACTS BETWEEN PXRE AND ARGONAUT
 
With the exception of the merger agreement and the voting agreement, currently there are no material arrangements between Argonaut or its subsidiaries, on the one hand, and PXRE or its subsidiaries, on the other hand. However, prior to the completion of the merger, Peleus Re and Argonaut may choose to enter into agreements, including quota share reinsurance agreements, for the reinsurance by Peleus Re of certain business of the insurance subsidiaries of Argonaut, and similar agreements in the ordinary course of business.


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PXRE SPECIAL GENERAL MEETING
 
General
 
This joint proxy statement/prospectus is being provided to PXRE shareholders as part of a solicitation of proxies by the PXRE board of directors for use at the PXRE special general meeting and at any adjournment thereof. This joint proxy statement/prospectus provides PXRE shareholders with the information they need to know to be able to vote or instruct their vote to be cast at the PXRE special general meeting.
 
Date, Time and Place of the PXRE Special General Meeting
 
The PXRE special general meeting will be held at [•], local time, on [•], 2007, at [•].
 
Purposes of the PXRE Special General Meeting and Voting Rights
 
At the PXRE special general meeting, the PXRE shareholders are being asked to consider and vote on the following proposals:
 
Proposal in connection with the proposed merger:
 
1. To approve the issuance of common shares of PXRE pursuant to the merger agreement;
 
Proposals conditioned upon and subject to the completion of the merger:
 
2. To approve the reverse split of the common shares of PXRE at a ratio of one share of PXRE for each ten shares of PXRE held or entitled to be received in the merger;
 
3. To approve the change of name of “PXRE Group Ltd.” to “Argo Group International Holdings, Ltd.”;
 
4. To approve an increase in the authorized share capital of PXRE from $380 million to $530 million;
 
5. To increase the maximum number of directors of PXRE from 11 directors to 13 directors (if the affirmative vote of 66 2/3% of the voting power of the outstanding shares is obtained) or to 12 directors;
 
6. To approve an amendment and restatement of PXRE’s memorandum of association;
 
7. To approve an amendment and restatement of PXRE’s bye-laws (some of which amendments require the affirmative vote of 66 2/3% of the voting power of the outstanding shares);
 
Adjournments of the Meeting; Other Action:
 
8. To approve adjournments of the PXRE special general meeting to a later date, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special general meeting to approve the above proposals; and
 
9. To approve actions upon any other business that may properly come before the special general meeting or any reconvened meeting following an adjournment of the special general meeting.
 
Certain of the foregoing proposals also require separate approvals of the holders of certain series of PXRE’s convertible preferred shares and convertible common shares voting separately, or in some instances, together, as a single class. However, pursuant to the voting agreement, such holders have provided their consent to such proposals. See “The Voting Agreement” beginning on page 138.
 
Record Date; Shares Entitled to Vote; Outstanding Shares
 
PXRE’s board of directors has fixed the close of business on [•], 2007 as the record date for the determination of shareholders entitled to receive notice of, and to vote at, PXRE’s special general meeting. This means that you must have been a shareholder of record of PXRE common shares at the close of business on that date in order to vote at the special general meeting. As of the record date, (i) [•] common shares were issued and outstanding and held of


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record by approximately [•] shareholders; (ii) 8,855,347 convertible common shares were issued and outstanding and held of record by [•] shareholders; and (iii) 5,813.20 convertible preferred shares were issued and outstanding and held of record by [•] shareholders. The presence at the special general meeting in person or by proxy of the holders representing a majority of the outstanding shares (giving effect to the limitations on voting referred to below) carrying the right to vote on a matter is necessary to constitute a quorum for the transaction of business at PXRE’s special general meeting.
 
Each common share entitles the holder thereof to one vote on each matter to be voted upon at the special general meeting; provided that, if a person (directly, indirectly, beneficially or through attribution) owns more than 9.9% of the total voting power of all issued and outstanding shares entitled to vote on such matter, absent a board waiver the voting rights with respect to such shares will be limited, in the aggregate, to voting power of 9.9%, as specified in PXRE’s bye-laws. The PXRE board has determined to waive this requirement with respect to Capital Z, but not with respect to any other holder of convertible preferred shares, convertible common shares, or common shares. Due to limitations on voting power discussed above, as of the record date, the aggregate votes that may be cast represented at the special general meeting on all matters submitted is [•]. As of the record date, holders of the common shares are entitled to exercise approximately [•]% of the votes that may be cast at the special general meeting on all matters submitted.
 
Each convertible common share entitles the holder thereof to one vote on a fully converted basis with common shares and convertible preferred shares, together as a class, on all of the matters which are being submitted to a vote of shareholders at the special general meeting. As of the record date, PXRE convertible common shareholders are entitled to exercise approximately [•]% of the votes that may be cast at the special general meeting on all matters submitted.
 
Each convertible preferred share entitles the holder thereof to vote on a fully converted basis with the common shares and convertible common shares, together as a class, on all of the matters which are being submitted to a vote of the shareholders at the special general meeting. The convertible preferred shares outstanding on the record date would be convertible into 9,316,026 common shares based on the conversion price on the record date of $6.24. As of the record date, holders of the convertible preferred shares are entitled to exercise approximately [•]% of the votes that may be cast at the special general meeting on all matters submitted. The voting agreement provides for the conversion of the convertible preferred shares into common shares at the reduced conversion price of $6.24 immediately prior to the effective time of the merger. See “The Voting Agreement” beginning on page 138.
 
Pursuant to the voting agreement, PXRE preferred shareholders and PXRE convertible common shareholders have agreed to vote in favor of and consent to the merger and the transactions contemplated thereby. See “The Voting Agreement” beginning on page 138.
 
A complete list of PXRE shareholders entitled to vote at the PXRE special general meeting will be available for inspection at the executive offices of PXRE during regular business hours for at least five business days before the special general meeting.
 
Quorum
 
A quorum of shareholders is necessary to hold a valid special general meeting of PXRE. A majority of all outstanding shares of PXRE entitled to vote and be present, in person or by proxy, at the special general meeting constitutes a quorum. All PXRE common shares represented at the special general meeting, including abstentions and broker non-votes, will be counted for purposes of determining whether a quorum is present. Once a share is represented for any purpose at the special general meeting, it will be deemed present for quorum purposes for the remainder of the meeting (including any meeting resulting from an adjournment of the special general meeting).
 
For a discussion of how broker non-votes and abstentions will affect the outcome of the vote on these proposals, see “— Voting; Proxies — Voting Shares Held in ‘Street Name’” and “— Voting; Proxies — Voting Requirements” beginning on page 60.


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Voting by PXRE’s Directors and Executive Officers
 
As of the record date for the PXRE special general meeting, PXRE’s directors and executive officers and their affiliates were entitled to vote approximately [•] shares of the then-outstanding PXRE common shares and [•] shares of the then-outstanding PXRE convertible preferred shares at the PXRE special general meeting which represented [•]% and [•]%, respectively, of each of the PXRE common shares and PXRE convertible preferred shares outstanding and entitled to vote at the meeting.
 
Voting; Proxies
 
You may vote in person at the PXRE special general meeting or by proxy, which may be done by mail. We recommend you vote by proxy even if you plan to attend the special general meeting. If you vote by proxy, you may change your vote if you attend the special general meeting. If you own PXRE common shares in your own name, you are an “owner of record.” This means that you may use the enclosed proxy/voting instruction card to tell the persons named as proxies how to vote your shares. If you properly complete, sign and date your proxy/voting instruction card, your proxy/voting instruction card will be voted in accordance with your instructions. The named proxies will vote all shares at the meeting that have been properly voted and not revoked. If you sign and return your proxy/voting instruction card but do not mark your proxy/voting instruction card to tell the proxies how to vote your shares on each proposal, your proxy/voting instruction card will be voted FOR each of the proposals presented.
 
Voting Shares Held in “Street Name”
 
If your PXRE shares are held in “street name” through a broker, bank or other nominee, please follow the voting instructions provided by your broker, bank or other nominee.
 
Generally, a broker, bank or other nominee, which we refer to as your broker, may only vote the common stock that it holds in “street name” for you in accordance with your instructions. However, if your broker has not received your instructions, your broker has the discretion to vote on certain matters that are considered routine.
 
If you wish to vote on the proposals set forth above, including the proposal to approve the issuance of PXRE common shares in the merger, you must provide instructions to your broker. If you do not provide your broker with instructions, your broker will not be authorized to vote on the proposals.
 
If you wish to vote on the proposal to approve adjournments of the PXRE special general meeting, you should provide instructions to your broker. If you do not provide instructions to your broker, your broker will not be authorized to vote on any proposal to adjourn the special general meeting solely relating to the solicitation of proxies to approve the transactions contemplated by the merger agreement.
 
Voting Requirements
 
All matters referenced in this joint proxy statement/prospectus upon which the shareholders of PXRE will be asked to consider and vote upon, other than certain of the bye-law amendments and the increase in the size of the PXRE board of directors to 13 directors, will, in accordance with the PXRE bye-laws, be decided by an ordinary resolution. An ordinary resolution is a resolution that has been passed by a simple majority of votes cast, in person, by a representative or by proxy, at a general meeting of which not less than 21 clear days’ notice has been given. Certain of the bye-law amendments and the increase in the size of the PXRE board of directors to 13 directors will be decided by special resolution. A special resolution is a resolution that has been passed by the affirmative vote of shareholders holding not less than 66 2/3% of the voting power of the then outstanding shares entitled to vote, cast by such shareholders in person or, in the case of such shareholders as are corporations, by their respective duly authorized representative or, where proxies are allowed, by proxy, at a general meeting of which not less than 21 clear days’ notice, specifying the intention to propose the resolution as a special resolution, has been duly given. A resolution put to a vote at the special general meeting will be decided on by a show of hands, unless a poll has been demanded pursuant to PXRE’s bye-laws.
 
PXRE shares represented at the special general meeting that abstain from voting, and shares that are represented by “broker non-votes” (that is shares held by brokers that are represented at the special general meeting but with respect to which the broker has not received voting instructions from the beneficial owner and is


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not empowered to vote on a particular proposal) are not included in the tabulation of the PXRE shares voting on such matter, but are counted for quorum purposes.
 
With respect to the proposal to approve certain amendments to PXRE’s bye-laws and the proposal to increase the size of the PXRE board of directors to 13 directors, each of which require a special resolution, a PXRE shareholder’s abstention from voting and a broker non-vote will have the same effect as a vote against those proposals.
 
How to Vote
 
You can vote by mail by signing, dating and mailing your proxy/voting instruction card in the postage-paid envelope included with this joint proxy statement/prospectus.
 
A number of brokers participate in a program that also permits shareholders whose shares are held in “street name” to direct their vote over the Internet or by telephone. This option, if available, will be reflected in the voting instructions from the broker that accompany this joint proxy statement/prospectus. If your shares are held in an account at a broker that participates in such a program, you may direct the vote of these shares by the Internet or telephone by following the voting instructions enclosed with the proxy form from the broker. Directing the voting of your shares will not affect your right to vote in person if you decide to attend the PXRE special general meeting; however, you must first obtain a signed and properly executed legal proxy from your broker to vote your shares held in “street name” at the special general meeting. Requesting a legal proxy will automatically cancel any voting directions you have previously given to your broker by the Internet or by telephone with respect to your shares.
 
Revoking Your Proxy/Voting Instruction Card
 
You can revoke your proxy/voting instruction card at any time before its exercise by:
 
  •  sending a written notice to the Corporate Secretary of PXRE, at PXRE House, 110 Pitts Bay Road, Pembroke HM 08, Bermuda, bearing a date later than the date of the proxy/voting instruction card, that is received at least two (2) hours prior to the commencement of the PXRE special general meeting and states that you revoke your proxy/voting instruction card;
 
  •  signing another proxy/voting instruction card bearing a later date and mailing it so that it is received prior to the special general meeting; or
 
  •  attending the special general meeting and voting in person, although attendance at the special general meeting will not, by itself, revoke a proxy/voting instruction card.
 
If your shares are held in “street name,” you will need to contact your broker to revoke your proxy/voting instruction card.
 
Other Voting Matters
 
Voting in Person
 
If you plan to attend the PXRE special general meeting and wish to vote in person, we will give you a ballot at the special general meeting. However, if your shares are held in “street name,” you must first obtain a legal proxy authorizing you to vote the shares in person, which you must bring with you to the special general meeting.
 
Electronic Access to Proxy Materials
 
This joint proxy statement/prospectus is available on the SEC’s Internet site at www.sec.gov or on PXRE’s Internet site at www.pxre.com.
 
Proxy Solicitations
 
PXRE is soliciting proxies for the PXRE special general meeting from PXRE shareholders. PXRE will bear the entire cost of soliciting proxies from PXRE shareholders, except that PXRE and Argonaut will share equally the expenses incurred in connection with the filing of the registration statement of which this joint proxy statement/


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prospectus forms a part with the SEC and the printing of this joint proxy statement/prospectus. In addition to the mailing of this joint proxy statement/prospectus, PXRE’s directors, officers and employees (who will not receive any additional compensation for their services) may solicit proxies personally, electronically or by telephone. PXRE has also engaged Georgeson, Inc., which we refer to as Georgeson, for a fee of $15,000 (plus certain other charges related to direct telephone solicitation of PXRE shareholders) and reimbursement of certain expenses, to assist in the solicitation of proxies. PXRE and its proxy solicitor will also request that banks, brokerage houses and other custodians, nominees and fiduciaries send proxy materials to the beneficial owners of PXRE common shares and will, if requested, reimburse the record holders for their reasonable out-of-pocket expenses in doing so. The extent to which these proxy-soliciting efforts will be necessary depends upon how promptly proxies are submitted. You should promptly submit your completed proxy/voting instruction card by mail.
 
Shareholders should not submit any share certificates with their proxy/voting instruction card.
 
Adjournments
 
If a quorum is not present at the special general meeting, the chairman of the meeting will have the authority to adjourn the special general meeting to solicit additional proxies without the approval of shareholders. If a quorum is present at the special general meeting but there are not sufficient votes at the time of the special general meeting to approve the issuance of PXRE common shares or the other proposals in connection with the merger, holders of PXRE common shares may be asked to vote on a proposal to approve the adjournment of the special general meeting to permit further solicitation of proxies. Approval by a majority of the votes cast on the proposal to adjourn the meeting will be required. In addition, if the new date, time or place of the new meeting is not given at the adjourned meeting or if after the adjournment a new record date is fixed for an adjourned meeting, which it must be if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting, notice of the adjourned meeting must be given to each shareholder of record entitled to vote at such special general meeting.
 
Assistance
 
If you need assistance in completing your proxy/voting instruction card or have questions regarding PXRE’s special general meeting, please contact Georgeson, PXRE’s proxy solicitor, at (866) 574-4071 (toll-free) or write to Georgeson, Inc., 17 State Street, New York, NY 10004.
 
Proposals to be Considered at the PXRE Special General Meeting
 
Item 1 — Issuance of Shares in the Merger
 
At the PXRE special general meeting, PXRE shareholders are being asked to consider and vote on a proposal to approve the issuance of common shares of PXRE pursuant to the merger agreement. The merger agreement provides for the merger of PXRE’s direct, wholly owned subsidiary PXMS with and into Argonaut, with Argonaut surviving as a direct, wholly owned subsidiary of PXRE. At the effective time of the merger, Argonaut shareholders will be entitled to receive newly issued PXRE common shares for their shares of Argonaut common stock. The number of PXRE common shares that Argonaut shareholders will receive will be based on an exchange ratio. The exchange ratio as specified in the merger agreement provides that Argonaut shareholders will be entitled to receive 6.4672 PXRE common shares in exchange for each share of Argonaut common stock they hold, subject to adjustment in the event that (i) Argonaut’s planned special dividend to its shareholders prior to the closing of the merger is less than $60 million, or (ii) Argonaut pays certain other dividends, incurs losses on sales of assets and/or engages in dilutive sales or purchases of Argonaut shares. The number of PXRE common shares that Argonaut shareholders will be entitled to receive will be adjusted, proportionately among all PXRE common shareholders, upon completion of a reverse share split of PXRE shares immediately after the merger (subject to the approval of PXRE’s shareholders), as described below. PXRE will not issue fractional shares in connection with the merger or in connection with the reverse share split. The value of any fractional shares will be paid in cash. The reverse share split would affect all of PXRE’s shareholders uniformly, including the former shareholders of Argonaut entitled to receive PXRE shares as merger consideration in the merger, and will not affect any shareholder’s percentage ownership interests in PXRE or proportionate voting power, except to the extent that the reverse share split would


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otherwise result in a shareholder owning a fractional share for which it will receive cash in lieu of such fractional share.
 
The merger will not be completed unless PXRE shareholders approve the issuance of common shares proposed in this Item 1.
 
Pursuant to a general permission issued by the BMA in 2005, PXRE may issue its common shares to non-residents without the prior permission of the BMA provided its shares are listed on an appointed stock exchange which, by definition, includes the NYSE and NASDAQ.
 
However, it should be noted that any person who, directly or indirectly, becomes a holder of at least 10 percent, 20 percent, 33 percent or 50 percent of the common shares of PXRE 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 its holding of common shares and direct, among other things, that voting rights attaching to such common shares shall not be exercisable. A person that does not comply with such a notice or direction from the BMA will be guilty of an offense.
 
Finally, the BMA may at any time, by written notice, object to a person holding 10 percent or more of the common shares of PXRE 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 common shares and direct, among other things, that voting rights attaching to such 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 offense.
 
Vote Required for Approval of Item 1
 
Item 1 must be approved by an ordinary resolution, that is, a simple majority of the votes cast on the Item, provided a quorum is present.
 
The PXRE board of directors unanimously recommends that PXRE shareholders vote FOR the issuance of PXRE common shares pursuant to the merger agreement.
 
Item 2 — Reverse Share Split
 
At the PXRE special general meeting, PXRE shareholders are being asked to consider and vote on a proposal to approve a reverse share split of the common shares of PXRE at a ratio of one share of PXRE for each ten shares of PXRE held or entitled to be received in the merger. If approved, the reverse share split would be effected immediately after the effective time of the merger. No fractional shares will be issued in connection with the reverse share split. The value of any fractional shares will be paid in cash.
 
Upon completion of the reverse share split, proportionate adjustments will be made to the per share exercise price and the number of shares issued upon the exercise of all outstanding options entitling the holders to purchase PXRE common shares, which will result in approximately the same aggregate amount being required to be paid for such options upon exercise immediately preceding the reverse share split. The reverse share split will be achieved under Bermuda law by (i) the consolidation and division of PXRE’s shares into a larger par value, (ii) the cancellation of the excess par value in the amount of $9.00 per share which was created by step (i) above, and (iii) the re-characterization of the cancelled par value as contributed surplus.
 
In connection with the reverse share split, the number of authorized and the number of issued and outstanding PXRE common shares will be reduced based on the reverse share split ratio. As of [April] [•], 2007, PXRE had [•] authorized common shares, approximately [•] of which were issued and outstanding, and [•] authorized convertible preferred shares, [•] of which were issued and outstanding. After the reverse share split, PXRE will have [•] authorized common shares, approximately [•] million of which will be issued and outstanding, and [•] authorized convertible preferred shares, [•] of which will be issued and outstanding.
 
The last sale price of PXRE’s common shares on the NYSE on that date was $[•] and over the past 52 weeks PXRE’s share price has ranged from $[•] to $[•]. The board of directors believes that effecting the reverse share split


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on a 1 for 10 ratio is likely to increase the market price and trading ranges for PXRE common shares as fewer shares will be outstanding in the market.
 
Certain Risks Associated with the Reverse Share Split
 
[There can be no assurance that the market price of PXRE common shares after the reverse share split will increase in proportion to the reduction in the number of PXRE common shares issued and outstanding before the reverse share split. For example, based on the closing price on the NYSE of PXRE common shares on [•] of $[•] per share, if the board of directors decided to implement the reverse share split, there can be no assurance that the post-split market price of PXRE common shares would be at least $[•] per share. Accordingly, the total market capitalization of PXRE common shares after the proposed reverse share split may be lower than the total market capitalization before the proposed reverse share split. In the future, the market price of PXRE common shares following the reverse share split may not exceed or remain higher than the market price prior to the proposed reverse share split.]
 
Impact of the Proposed Reverse Share Split if Effected
 
If approved by the PXRE shareholders, the reverse share split will be effected immediately following the completion of the merger and conversion of Argonaut common shares into the right to receive PXRE common shares as merger consideration in the merger. Therefore, the reverse share split would affect all of PXRE’s shareholders uniformly, including the former shareholders of Argonaut entitled to receive PXRE shares as merger consideration in the merger, and will not affect any shareholder’s percentage ownership interests in PXRE or proportionate voting power, except to the extent that the reverse share split would otherwise result in a shareholder owning a fractional share for which it will receive cash in lieu of such fractional share.
 
As described below, shareholders otherwise entitled to fractional shares as a result of the reverse share split will receive cash payments in lieu of such fractional shares. These cash payments will reduce the number of post-reverse share split shareholders to the extent there are presently shareholders who would otherwise receive less than one PXRE common share after the reverse share split.
 
The principal effects of the reverse share split will be that:
 
  •  the number of PXRE common shares issued and outstanding will be reduced from approximately [•] to approximately [•] shares;
 
  •  based on the reverse share split ratio, proportionate adjustments will be made to the per share exercise price and the number of shares issuable upon the exercise of all outstanding options entitling the holders to purchase PXRE common shares, which will result in approximately the same aggregate amount being required to be paid for such options upon exercise immediately preceding the reverse share split;
 
  •  the number of shares reserved for issuance under benefit plans and incentive plans will be reduced proportionately based on the reverse share split ratio; and
 
  •  the reverse share split will increase the number of shareholders who own odd lots (less than 100 shares). Shareholders who hold odd lots may experience an increase in the cost of selling their shares and may have greater difficulty in executing sales.
 
Effect on Fractional Shareholders
 
Shareholders will not receive fractional shares in connection with the reverse share split. Instead, the transfer agent will aggregate all fractional shares and sell them as soon as practicable after the effective date at the then prevailing prices on the open market, on behalf of those holders who would otherwise be entitled to receive a fractional share. We expect that the transfer agent will conduct the sale in an orderly fashion at a reasonable pace and that it may take several days to sell all of the aggregated fractional common shares. After completing the sale, you will receive a cash payment from the transfer agent in an amount equal to your pro rata share of the total net proceeds of that sale. No transaction costs will be assessed on this sale. However, the proceeds will be subject to federal income tax. In addition, you will not be entitled to receive interest for the period of time between the


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effective date of the reverse share split and the date you receive your payment in respect of the fractional share to which you otherwise would have been entitled. The payment will be made in the form of a check in accordance with the procedures outlined below. After the reverse share split, you will have no further interest in PXRE with respect to your fractional share, and you will not have any voting, dividend or other rights except to receive payment as described above.
 
NOTE: If you do not hold sufficient PXRE shares to receive at least one share in the reverse share split and you want to continue to hold PXRE common shares after the reverse share split, you may do so by taking either of the following actions far enough in advance so that it is completed by the effective date:
 
  •  purchase a sufficient number of PXRE common shares so that you hold at least an amount of PXRE common shares in your account prior to the reverse share split that would entitle you to receive at least one PXRE common share on a post-reverse share split basis; or
 
  •  if you have PXRE common shares in more than one account, consolidate your accounts so that you hold at least an amount of shares of PXRE common shares in one account prior to the reverse share split that would entitle you to receive at least one PXRE common share on a post-reverse share split basis. Shares held in registered form (that is, shares held by you in your own name in PXRE’s share register records maintained by PXRE’s transfer agent) and shares held in “street name” (that is, shares held by you through a bank, broker or other nominee) for the same investor will be considered held in separate accounts and will not be aggregated when effecting the reverse share split.
 
You should be aware that, under the abandoned property laws of certain jurisdictions, sums due for fractional shares that are not timely claimed after the funds are made available may be required to be paid to the designated abandoned property agent for each such jurisdiction. Thereafter, shareholders otherwise entitled to receive such funds may have to obtain the funds directly from the designated abandoned property to which they were paid.
 
Effect on PXRE Employees and Directors
 
The number of shares reserved for issuance under PXRE’s existing plans will be reduced proportionately based on the reverse share split ratio. In addition, the number of shares issuable upon the exercise of options and the exercise price for such options will be adjusted based on the reverse share split ratio.
 
Effect on Registered and Beneficial Shareholders
 
The reverse share split would be effected immediately after the effective time of the merger. Beginning on the effective date, each share certificate representing pre-reverse share split shares will be deemed for all corporate purposes to evidence ownership of post-reverse share split shares.
 
Effect on Registered “Book-Entry” Shares
 
PXRE’s registered shareholders may hold some or all of their shares electronically in book-entry form. These shareholders will not have share certificates evidencing their ownership of PXRE common shares. They are, however, provided with a statement reflecting the number of shares registered in their accounts.
 
If you hold registered shares in a book-entry form, you do not need to take any action to receive your post-reverse share split shares or your cash payment in lieu of any fractional share, if applicable.
 
If you are entitled to post-reverse share split shares, a transaction statement will automatically be sent to your address of record indicating the number of shares you hold.
 
If you are entitled to a payment in lieu of any fractional share, a check will be mailed to you at your registered address as soon as practicable after the effective date. By signing and cashing this check, you will warrant that you owned the shares for which you received a cash payment. This cash payment is subject to applicable federal and state income tax and the abandoned property laws of certain jurisdictions. In addition, you will not be entitled to receive interest for the period of time between the effective date of the reverse share split and the date you receive your payment.


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Effect on Registered Certificated Shares
 
Some registered shareholders hold all their shares in certificate form or a combination of certificate and book-entry form. If any of your shares are held in certificate form, you will receive a transmittal letter from PXRE’s transfer agent as soon as practicable after the effective date of the reverse share split. The letter of transmittal will contain instructions on how to surrender your certificate(s) representing your pre-reverse share split shares to the transfer agent. Upon receipt of your share certificate(s), you will be issued the appropriate number of shares electronically in book-entry form. No new shares in book-entry form will be issued to you until you surrender your outstanding certificate(s), together with the properly completed and executed letter of transmittal, to the transfer agent. At any time after receipt of your statement reflecting the number of shares registered in your book-entry account, you may request a share certificate representing your ownership interest.
 
If you are entitled to a payment in lieu of any fractional share, payment will be made as described above under “Effect on Fractional Shareholders.”
 
Effect on Shares Held in Street Name
 
Upon the reverse share split, we intend to treat shareholders holding PXRE common shares in “street name,” through a broker or other nominee, which we refer to as a broker, in the same manner as registered shareholders whose shares are registered in their names. Brokers will be instructed to effect the reverse share split for their beneficial holders holding PXRE common shares in “street name.” However, these brokers may apply their own specific procedures for processing the reverse share split. If you hold your shares with a broker, and if you have any questions in this regard, we encourage you to contact your broker.
 
SHAREHOLDERS SHOULD NOT DESTROY ANY SHARE CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY SHARE CERTIFICATE(S) UNTIL REQUESTED TO DO SO.
 
Federal Income Tax Consequences of the Reverse Share Split
 
The following is a summary of certain material United States federal income tax consequences of the reverse share split. It does not purport to be a complete discussion of all of the possible federal income tax consequences of the reverse share split and is included for general information only. Further, it does not address any state, local or foreign income or other tax consequences. Also, it does not address the tax consequences to holders that are subject to special tax rules, such as banks, insurance companies, regulated investment companies, personal holding companies, foreign entities, nonresident alien individuals, broker-dealers and tax-exempt entities. The discussion is based on the provisions of the United States federal income tax law as of the date hereof, which is subject to change retroactively as well as prospectively. This summary also assumes that the pre-reverse share split shares were, and the post-reverse share split shares will be, held as a “capital asset,” as defined in the Code, as amended (i.e., generally, property held for investment). The tax treatment of a shareholder may vary depending upon the particular facts and circumstances of such shareholder. Each shareholder is urged to consult with such shareholder’s own tax advisor with respect to the tax consequences of the reverse share split. As used herein, the term United States holder means a shareholder that is, for federal income tax purposes: a citizen or resident of the United States; a corporation or other entity taxed as a corporation created or organized in or under the laws of the United States, any State of the United States or the District of Columbia; an estate the income of which is subject to federal income tax regardless of its source; or a trust if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.
 
Other than the cash payments for fractional shares discussed below, no gain or loss should be recognized by a shareholder upon such shareholder’s exchange of pre-reverse share split shares for post-reverse share split shares pursuant to the reverse share split. The aggregate tax basis of the post-reverse share split shares received in the reverse share split (including any fractional post-reverse share split share deemed to have been received) will be the same as the shareholder’s aggregate tax basis in the pre-reverse share split shares exchanged therefor. The shareholder’s holding period for the post-reverse share split shares will include the period during which the shareholder held the pre-reverse share split shares surrendered in the reverse share split. In general, the receipt of cash instead of a fractional PXRE common share by a United States holder of PXRE common shares will result in a taxable gain or loss to such holder for federal income tax purposes based upon the difference between the amount of


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cash received by such holder and the holder’s adjusted tax basis in the fractional shares as determined above. The gain or loss will constitute a capital gain or loss and will constitute long-term capital gain or loss if the holder’s holding period is greater than one year as of the effective date.
 
PXRE’s view regarding the tax consequences of the reverse share split is not binding on the IRS or the courts. ACCORDINGLY, EACH SHAREHOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR WITH RESPECT TO ALL OF THE POTENTIAL TAX CONSEQUENCES TO HIM OR HER OF THE REVERSE SHARE SPLIT.
 
Transfer of Excess Share Capital to Contributed Surplus
 
Immediately following the reverse share split, all amounts of share capital in excess of $1.00 per share, including all amounts paid in respect of the par value attributable to the PXRE common shares cancelled pursuant to the reverse share split, shall be transferred to PXRE’s contributed surplus.
 
The reverse share split is conditioned upon and subject to the completion of the proposed merger. If the merger is not completed, the reverse share split proposed in this Item 2 will not occur.
 
Vote Required for Approval of Item 2
 
Item 2 must be approved by an ordinary resolution, that is, a simple majority of the votes cast on the Item, provided a quorum is present.
 
The PXRE board of directors unanimously recommends that PXRE shareholders vote FOR the reverse share split and the transfer of excess share capital to contributed surplus pursuant to the merger agreement.
 
Item 3 — Name Change
 
At the PXRE special general meeting, PXRE shareholders are being asked to consider and vote on a proposal to change the name of “PXRE Group Ltd.” to “Argo Group International Holdings, Ltd.” The primary purpose of the name change is to enable the resulting company to operate under a name which better reflects the resulting company upon completion of the merger.
 
Under Bermuda law, a company may change its name if the Bermuda Registrar of Companies has approved the proposed name and the change has been approved by both the board of directors and shareholders of the company. On March 13, 2007, the Registrar of Companies approved the proposed name. Also on March 13, 2007, the PXRE board of directors unanimously approved, effective immediately after the effective time of the merger, a change in the name of PXRE from “PXRE Group Ltd.” to “Argo Group International Holdings, Ltd.”
 
Under Bermuda law, the change of name of a company does not affect any rights or obligations of the company, or render defective any legal proceedings by or against it, and any legal proceedings that might have been continued or commenced against it in its former name may be continued or commenced against it in its new name.
 
The name change is conditioned upon and subject to the completion of the proposed merger. If the merger is not completed, the name change proposed in this Item 3 will not occur.
 
Vote Required for Approval of Item 3
 
Item 3 must be approved by an ordinary resolution, that is, a simple majority of the votes cast on the Item, provided a quorum is present.
 
The PXRE board of directors unanimously recommends that PXRE shareholders vote FOR the name change pursuant to the merger agreement.
 
Item 4 — Increase Authorized Share Capital
 
As discussed elsewhere in this joint proxy statement/prospectus at the PXRE special general meeting, PXRE shareholders are being asked to consider and vote on a proposal to approve an increase in PXRE’s authorized share capital from $380 million to $530 million, effective immediately after the effective time of the merger. The primary


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purpose of the increase in share capital is to restore PXRE’s common share capital following the issuance of common shares in the merger in order to provide PXRE with financial flexibility in the future.
 
In connection with the merger, PXRE would issue common shares to Argonaut Shareholders as merger consideration. This would result in a substantial reduction of PXRE’s available common share capital. In order to allow for additional authorized share capital, PXRE’s bye-laws must be amended.
 
The increase in authorized share capital is conditioned upon and subject to the completion of the proposed merger. If the merger is not completed, the increase in authorized share capital proposed in this Item 4 will not occur.
 
Vote Required for Approval of Item 4
 
Item 4 must be approved by an ordinary resolution, that is, a simple majority of the votes cast on the Item, provided a quorum is present.
 
The PXRE board of directors unanimously recommends that PXRE shareholders vote FOR the increase in authorized share capital pursuant to the merger agreement.
 
Item 5 — Increase in the Size of PXRE’s Board of Directors
 
At the PXRE special general meeting, PXRE shareholders are being asked to consider and vote on a proposal to increase the maximum number of directors of PXRE from 11 directors to 13 directors (if the affirmative vote of 662/3% of the voting power of the outstanding share is obtained) or to 12 directors, effective immediately after the effective time of the merger.
 
PXRE’s board of directors is currently comprised of 11 seats. There are currently nine members and two vacant seats. PXRE’s bye-laws currently set the size of PXRE’s board of directors at not less than three or more than 12 members. Increasing the size of the board above its current size of 11 seats requires the approval of PXRE’s shareholders. PXRE has agreed to use commercially reasonable efforts to cause the board of directors of PXRE to consist of 13 directors following the merger. Increasing the size of the board to 13 directors requires an amendment to PXRE’s bye-laws approved by 662/3% of the voting power of the outstanding PXRE shares. Increasing the size of the board to 12 directors requires the vote of a simple majority of PXRE’s shareholders. If 662/3% of the voting power of the outstanding PXRE shares approve this Item 5, PXRE’s bye-laws will be amended to increase the maximum size of the board to 13 directors following the merger and the 13 directors immediately following the merger will consist of Argonaut’s nine current directors and four of PXRE’s current directors. A chairman will be elected from the group of 13 directors. If this Item 5 is not approved by 662/3% of the voting power of the outstanding PXRE shares, but is approved by the affirmative vote of a majority of the votes cast, the PXRE board of directors following the merger will be increased to 12 directors and the 12 person board immediately following the merger will consist of Argonaut’s nine current directors and three of PXRE’s current directors. A chairman would be elected from the group of 12 directors. In either case, the PXRE board of directors will continue to be classified, and there will be three classes, each to be elected for a term of three years.
 
Jeffrey Radke, Wendy Luscombe, Gerald L. Radke, Craig A. Huff and Jonathan Kelly are expected to resign as members of the PXRE board of directors immediately following the merger. F. Sedgwick Browne, Mural R. Josephson and Bradley E. Cooper are expected to continue as members of the PXRE board of directors immediately following the merger if the board is increased to 12 members. Philip R. McLoughlin is expected to continue as a member of the PXRE board of directors immediately following the merger if the board is increased to 13 members, and otherwise he is expected to resign immediately following the merger. If, for any reason, any of the PXRE directors presently expected to continue as a member of the PXRE board is not able or willing to serve as a director following the merger (a situation which is not presently contemplated), one of the resigning directors would instead continue to serve as a director immediately following the merger.
 
Upon completion of the merger, Mark E. Watson III, currently President and Chief Executive Officer of Argonaut, is expected to become the President and Chief Executive Officer of the resulting company. Robert P. Myron, currently Executive Vice President, Chief Financial Officer and Treasurer of PXRE, is expected to continue in those positions with the resulting company. See “The Merger — PXRE’s Board of Directors and Management


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Following the Merger” beginning on page 109 for information regarding the directors and executive officers of PXRE and Argonaut expected to serve as directors and executive officers of the resulting company following the merger. Jeffrey L. Radke, currently Chief Executive Officer and President and a director of PXRE, will leave those positions pursuant to a letter agreement entered into between PXRE and Mr. Radke. See “The Merger — Interests of PXRE Directors and Executive Officers in the Merger — Arrangements with PXRE’s President and Chief Executive Officer” beginning on page 105 for information regarding the letter agreement.
 
The increase in the size of PXRE’s board of directors is conditioned upon and subject to the completion of the proposed merger. If the merger is not completed, the increase in the size of PXRE’s board of directors proposed in this Item 5 will not occur.
 
Vote Required for Approval of Item 5
 
In order to increase the maximum size of the PXRE board of directors to 13 directors, an amendment to PXRE’s bye-laws must be approved by at least 662/3% of the voting power of PXRE’s outstanding shares. In the event such approval is not obtained, but this Item 5 is approved by a simple majority of the votes cast on the Item, provided a quorum is present, the size of the PXRE board of directors will be increased to 12 directors.
 
The PXRE board of directors unanimously recommends that PXRE shareholders vote FOR the increase in the maximum number of directors of PXRE from 11 directors to 13 directors.
 
Item 6 — Amendment and Restatement of Memorandum of Association
 
At the PXRE special general meeting, PXRE shareholders are being asked to consider and vote on a proposal to approve the amendment and restatement of PXRE’s memorandum of association, effective immediately after the effective time of the merger.
 
Effective December 29, 2006, the Bermuda Legislature made a number of significant amendments to Bermuda company law. These amendments now permit a Bermuda company, among other things, to state in its memorandum of association that the company have unrestricted objects, meaning that a company may be formed and incorporated for the purpose of undertaking any lawful activity, and that a company may have the capacity, rights, powers and privileges of a natural person. The new provisions also now permit Bermuda companies to hold treasury shares. The PXRE board of directors unanimously recommends that PXRE amend its memorandum of association in accordance with these new provisions which will permit PXRE after such amendment to have the corporate capacity to undertake any lawful activity, rather than being limited to undertaking activities within the objects that are presently specifically listed in its memorandum of association, and to permit PXRE to hold treasury shares.
 
The text of the proposed amended and restated memorandum of association is set forth in Annex B to this joint proxy statement/prospectus. Additions to the memorandum of association are shown as underlined text and deletions are shown with strike through text.
 
The amendment and restatement of PXRE’s memorandum of association is conditioned upon and subject to the completion of the proposed merger. If the merger is not completed, the amendment and restatement of PXRE’s memorandum of association proposed in this Item 6 will not occur.
 
Vote Required for Approval of Item 6
 
Item 6 must be approved by an ordinary resolution, that is, a simple majority of the votes cast on the Item, provided a quorum is present.
 
The PXRE board of directors unanimously recommends that PXRE shareholders vote FOR the amendment and restatement of PXRE’s memorandum of association.
 
Item 7 — Amendment and Restatement of Bye-Laws
 
At the PXRE special general meeting, PXRE shareholders are being asked to consider and vote on a proposal to approve the amendment and restatement of PXRE’s bye-laws, effective immediately after the effective time of the merger.


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The text of the proposed amended and restated bye-laws is set forth in Annex C to this joint proxy statement/prospectus. Additions to the bye-laws are shown as underlined text and deletions are shown with strike through text. The additions and deletions requiring the approval of at least 662/3% of the voting power of PXRE’s outstanding shares are in bold italics and will only be made if such vote is obtained. The additions and deletions requiring the approval by an ordinary resolution, that is, a simple majority of votes cast, are in bold roman type. The following summary discusses the two sets of changes to PXRE’s bye-laws.
 
PXRE’s bye-laws currently contain certain provisions designed to mitigate the risk that U.S. Persons (as that term is defined under “Material Tax Considerations”) will be required to include earnings of PXRE in their U.S. federal gross income under the controlled foreign corporation rules (see the discussion under “Material Tax Considerations”). These provisions were enacted at the time of PXRE’s formation in 1999 and are generally described in “Information about PXRE — Description of Share Capital.” They include voting adjustments and ownership and transfer restrictions.
 
It has been proposed that these provisions be amended in order to incorporate provisions designed to further mitigate the risk that U.S. Persons will be required to include earnings of PXRE in their U.S. federal gross income under the controlled foreign corporation rules. These provisions are generally described in “Information about PXRE — Description of Share Capital.” They include voting adjustments, a subsidiary share voting provision and ownership and transfer restrictions. The proposed amendments include the following:
 
  •  The addition, deletion and amendment of defined terms in bye-law 1;
 
  •  The deletion in bye-law 2(2) of a limitation on the amount of voting shares that can be held by any person (the “Ownership Limitation”);
 
  •  The addition in bye-law 3 of (i) language clarifying that shareholders voting rights are subject to adjustment under bye-law 20 and (ii) a provision permitting the board of directors to prohibit the issuance or grant of shares, options or warrants, if the board of directors determines that such issuance or grant may result in a non-de minimis adverse tax, legal or regulatory consequence to PXRE, any subsidiary of PXRE or any direct or indirect shareholder or its affiliates;
 
  •  The addition in bye-law 4(2) and 4(4), respectively, of (i) a provision permitting the board of directors to prohibit the issuance or grant of convertible preferred shares, options or warrants, if the board of directors determines that such issuance or grant may result in a non-de minimis adverse tax, legal or regulatory consequence to PXRE, any subsidiary of PXRE or any direct or indirect shareholder or its affiliates and (ii) a provision permitting the board of directors to prohibit the consolidation, division or subdivision of convertible preferred shares, if the board of directors determines that such consolidation, division or subdivision may result in a non-de minimis adverse tax, legal or regulatory consequence to PXRE, any subsidiary of PXRE or any direct or indirect shareholder or its affiliates;
 
  •  The addition in bye-law 6(1) of a provision permitting the board of directors to prohibit the repurchase or acquisition of PXRE shares, if the board of directors determines that such repurchase or acquisition may result in a non-de minimis adverse tax, legal or regulatory consequence to PXRE, any subsidiary of PXRE or any direct or indirect shareholder or its affiliates;
 
  •  The amendment of bye-law 7 to (i) include a provision permitting the board of directors to prohibit the alteration of rights of any class of shares, if the board of directors determines that such alteration of rights may result in a non-de minimis adverse tax, legal or regulatory consequence to PXRE, any subsidiary of PXRE or any direct or indirect shareholder or its affiliates and (ii) remove a provision that interacts with the Ownership Limitation;
 
  •  The amendment of bye-law 8(1) to (i) include a provision permitting the board of directors to prohibit the issuance of warrants, if the board of directors determines that such issuance may result in a non-de minimis adverse tax, legal or regulatory consequence to PXRE, any subsidiary of PXRE or any direct or indirect shareholder or its affiliates and (ii) remove a provision that interacts with the Ownership Limitation;
 
  •  The amendment of bye-law 13 to (i) include a provision permitting the board of directors to prohibit the transfer of shares, if the board of directors determines that such transfer may result in a non-de minimis


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  adverse tax, legal or regulatory consequence to PXRE, any subsidiary of PXRE or any direct or indirect shareholder or its affiliates and (ii) remove a provision that interacts with the Ownership Limitation;
 
  •  The amendment of bye-law 14(2) to (i) include a provision permitting the board of directors to decline to approve or register or permit the registration of shares, if the board of directors determines that such registration may result in a non-de minimis adverse tax, legal or regulatory consequence to PXRE, any subsidiary of PXRE or any direct or indirect shareholder or its affiliates and (ii) remove a provision that interacts with the Ownership Limitation;
 
  •  The revision of the voting cut-back provisions of bye-law 20 to incorporate procedures designed to further mitigate the risk that U.S. Persons will be required to include earnings of PXRE in their U.S. federal gross income under the controlled foreign corporation rules while allowing more flexibility and simplifying the analysis, including (i) reducing the vote a U.S. person can hold from 9.9% to 9.5%, (ii) analysis by an accounting firm, (iii) not extending the analysis to purely constructive owners, (iv) not applying the cut-back to non-U.S. persons, (v) board of directors’ override provisions and (vi) confidentiality safeguards;
 
  •  The addition of a new bye-law 20A providing for a “push-up” of the vote with respect to all material PXRE subsidiary shareholder matters to the PXRE shareholders; and
 
  •  The deletion of bye-law 40, which allows the waiver of the Ownership Limitation, the voting cut-back provisions and assorted related provisions.
 
PXRE’s bye-laws also contain restrictions in bye-law 27(12) with respect to the use of unanimous written resolutions by the board of directors which are designed to mitigate the risk that PXRE will be characterized as engaged in a U.S. trade or business and subject to U.S. federal income tax and the additional branch profits tax (see “Material Tax Considerations” beginning on page 116). It has been proposed that bye-law 27(12) be amended in order to allow more flexibility for the board of directors to utilize unanimous written resolutions with respect to ministerial matters.
 
PXRE’s bye-laws currently contain a provision in bye-law 41 requiring a special resolution, that is the approval of at least 662/3% of the voting power of PXRE’s outstanding shares, to amend certain bye-laws. It has been proposed that this provision be amended to eliminate the requirement for a special resolution to amend any bye-law in order to allow a majority vote of shareholders to determine the appropriateness of amendments to the bye-laws.
 
In addition to the foregoing U.S. federal income tax related bye-law amendment proposals, non-material clarifying bye-law amendments have been proposed to the following bye-laws: 1(1), 1(2), 1(3), 1(4), 2, 7(1), 7(3), 9(1), 10(1), 11, 13(1), 17(1), 18(1), 22(1), 22(8), 25(3), 26(1), 26(4), 27(2), 27(9), 28(1), 33(10), 33(13), 36(3) and 41.
 
As noted above, PXRE’s bye-laws were enacted at the time of PXRE’s formation in 1999, since that time certain changes have been made to the Companies Act 1981 of Bermuda. In order to bring PXRE’s bye-laws up to date with these changes, amendments have been proposed in particular to bye-laws 6(2) and 31. Bye-law 6(2) now permits PXRE to purchase and hold its shares as treasury shares. As respects the proposed changes to bye-law 31, it is no longer a mandatory requirement under Bermuda law that deeds or other documents be executed under seal in order to be effective as a matter of Bermuda law. While the corporate seal still has a role, that role is now limited and the revised bye-law provides for increased flexibility for its use. In addition, updating amendments have been proposed to bye-laws 8(3), 13(6), 13(7), 20(3), 20(9), 20(21) and 26(5) through 26(11).
 
The proposed amendments to bye-laws 1, 3, 4, 13, 17, 18, 20, 22, 40 and 41 require a special resolution of the PXRE shareholders, that is, the approval of at least 662/3% of the voting power of PXRE’s outstanding shares.
 
The amendment and restatement of PXRE’s bye-laws is conditioned upon and subject to the completion of the proposed merger. If the merger is not completed, the amendment and restatement of PXRE’s bye-laws proposed in this Item 7 will not occur.


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Vote Required for Approval of Item 7
 
As noted, the amendments to the bye-laws in bold italics in Annex C require the approval of at least 662/3% of the total voting power of PXRE’s outstanding shares. The remaining proposed bye-law amendments, reflected in bold roman type in Annex C, must be approved by an ordinary resolution, that is, a simple majority of the votes cast, provided a quorum is present.
 
The PXRE board of directors unanimously recommends that PXRE shareholders vote FOR the amendment and restatement of PXRE’s bye-laws.
 
Item 8 — Approve Adjournments of the Special Meeting to a Later Date, if Necessary, to Permit Further Solicitation of Proxies
 
PXRE shareholders may be asked to consider and vote on a proposal to adjourn the special general meeting to a later date, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special general meeting to approve the foregoing proposals. See the discussion regarding adjournments above in “— Other Voting Matters — Adjournments” beginning on page 62.
 
Vote Required for Approval of Item 8, if Necessary
 
Item 8, if necessary, must be approved by an ordinary resolution, that is, a simple majority of the votes cast on the Item, provided a quorum is present.
 
The PXRE board of directors unanimously recommends that PXRE shareholders vote FOR the proposal to adjourn, if necessary, the PXRE special general meeting.


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ARGONAUT SPECIAL MEETING
 
General
 
This joint proxy statement/prospectus is being provided to holders of Argonaut common stock as part of a solicitation of proxies by Argonaut’s board of directors for use at Argonaut’s special meeting and at any adjournment thereof. In addition, this joint proxy statement/prospectus is being furnished to Argonaut shareholders as a prospectus for PXRE in connection with its issuance of PXRE common shares to Argonaut shareholders in connection with the merger. This joint proxy statement/prospectus provides Argonaut shareholders with the information they need to know to be able to vote or instruct their vote to be cast at the Argonaut special meeting.
 
Date, Time and Place of the Argonaut Special Meeting
 
The Argonaut special meeting will be held at [•], local time, on [•], 2007, at [•].
 
Purposes of the Argonaut Special Meeting
 
At the Argonaut special meeting, Argonaut shareholders will be asked:
 
  •  to approve the merger agreement;
 
  •  to approve adjournments of the Argonaut special meeting, to a later date if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of Argonaut’s special meeting to approve the above proposal; and
 
  •  to consider and vote upon other matters that may properly be submitted to a vote at the Argonaut special meeting or any reconvened meeting following an adjournment of the special meeting.
 
Record Date; Shares Entitled to Vote; Outstanding Shares
 
The record date for the special meeting for Argonaut shareholders was [•], 2007. This means that you must have been a shareholder of record of Argonaut common stock at the close of business on [•], 2007 in order to vote at the special meeting. You are entitled to one vote for each share of Argonaut common stock you own on the record date. On Argonaut’s record date, Argonaut had [•] shares of Argonaut common stock outstanding.
 
A complete list of Argonaut shareholders entitled to vote at the Argonaut special meeting, arranged in alphabetical order for each class of stock showing the address of each such shareholder and the number of shares registered in such shareholder’s name, shall be open to the examination of any such shareholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held.
 
The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such shareholder who is present. This list shall presumptively determine the identity of the shareholders entitled to vote at the meeting and the number of shares held by each of them.
 
Quorum and Voting Rights
 
A quorum of shareholders is necessary to hold a valid special meeting of Argonaut. A majority of all outstanding shares of Argonaut entitled to vote and be present, in person or by proxy, at the special meeting constitutes a quorum. All shares of Argonaut common stock represented at the special meeting, including abstentions and broker non-votes, will be counted for purposes of determining whether a quorum is present. “Broker non-votes” are shares held by a broker that are represented at the meeting, but with respect to which the beneficial owner has not instructed the broker on the particular proposal and the broker does not have discretionary voting power on such proposal. Once a share is represented for any purpose at the special meeting, it will be deemed present for quorum purposes for the remainder of the meeting (including any meeting resulting from an adjournment of the special meeting, unless a new record date is set). For purposes of voting on each of the proposals set forth below, the owners of shares of Argonaut common stock vote together as one class.


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The votes required to approve the respective proposals at the Argonaut special meeting are:
 
  •  the affirmative vote of a majority of the outstanding shares of Argonaut common stock voting together as a single class is required to adopt the merger agreement; and
 
  •  approval of any necessary adjournment of the special meeting to a later date, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the Argonaut special meeting to approve the above proposals, may be obtained by the affirmative vote of the holders of a majority of the shares present in person or by proxy, even if less than a quorum.
 
Item 1 — The Merger
 
As discussed elsewhere in this joint proxy statement/prospectus, Argonaut shareholders are considering and voting on a proposal to approve the merger agreement. You should read carefully this joint proxy statement/prospectus in its entirety for more detailed information concerning the merger agreement and the merger. In particular, you are directed to the merger agreement, which is attached to this joint proxy statement/prospectus as Annex A.
 
The Argonaut board of directors unanimously recommends that Argonaut shareholders vote FOR the merger agreement.
 
Item 2 — Approve Adjournments of the Special Meeting to a Later Date, If Necessary, to Permit Further Solicitation of Proxies
 
Shareholders may be asked to vote on a proposal to adjourn the special meeting to a later date, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the above proposal.
 
The Argonaut board of directors unanimously recommends that Argonaut shareholders vote FOR the proposal to adjourn, if necessary, the Argonaut special meeting.
 
Voting by Argonaut’s Directors and Executive Officers
 
As of the record date for the Argonaut special meeting, Argonaut’s directors and executive officers and their affiliates were entitled to vote approximately [•] shares of the then outstanding Argonaut common stock at the Argonaut special meeting, which represented [•]% of the Argonaut common stock outstanding and entitled to vote at the meeting.
 
Voting; Proxies
 
You may vote in person at the Argonaut special meeting or by proxy. We recommend that you vote by proxy even if you plan to attend the special meeting. If you vote by proxy, you may change your vote if you attend the special meeting. If you own Argonaut common stock in your own name, you are an “owner of record.” This means that you may use the enclosed proxy/voting instruction card to tell the persons named as proxies how to vote your shares. If you properly complete, sign and date your proxy/voting instruction card, or vote by telephone or over the Internet, your proxy/voting instruction card will be voted in accordance with your instructions. The named proxies will vote all shares at the meeting that have been properly voted (whether by Internet, telephone or mail) and not revoked. If you sign and return your proxy/voting instruction card but do not mark your proxy/voting instruction card to tell the proxies how to vote your shares on each proposal, your proxy/voting instruction card will be voted FOR each of the proposals presented.
 
If you hold Argonaut shares in a stock brokerage account or through a broker, bank or other nominee, or, in other words, in “street name,” please follow the voting instructions provided by your broker, bank or other nominee. Also, see “— Voting Shares Held in ‘Street Name’ ” beginning on page 75.


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Voting Shares Held in “Street Name”
 
Generally, a broker, bank or other nominee may only vote the common stock that it holds in “street name” for you in accordance with your instructions. However, if your broker has not received your instructions, your broker has the discretion to vote on certain matters that are considered routine.
 
If you wish to vote on the proposal to approve the merger agreement, you must provide instructions to your broker because this proposal is not routine. If you do not provide your broker with instructions, your broker will not be authorized to vote on the proposal to approve the merger agreement. Abstentions and broker non-votes will count as votes against the merger agreement. However, they will be deemed as votes present for quorum purposes.
 
If you wish to vote on any proposal to approve adjournments of the Argonaut special meeting, you should provide instructions to your broker. If you do not provide instructions to your broker, your broker generally will have the authority to vote on proposals such as the adjournment of meetings. However, your broker will not be authorized to vote on any proposal to adjourn the special meeting solely relating to the solicitation of proxies to approve the merger agreement.
 
Abstaining from Voting
 
Your abstention from voting will have the following effects:
 
  •  Abstentions will have the same effect as a vote against the approval of the merger agreement. Abstentions will, however, increase the percentage of votes cast on the proposal and thus could have the effect of causing the proposal to pass if the majority of the votes otherwise cast on the proposal have been voted in favor of the proposal and the abstentions cause the percentage of votes cast on the proposal to total more than 50% of the outstanding shares.
 
  •  Abstentions will have no effect on any proposal to approve adjournments of the Argonaut special meeting.
 
How to Vote
 
You have three voting options:
 
  •  Internet:  You can vote over the Internet at the Internet address shown on your proxy/voting instruction card. Internet voting is available 24 hours a day. If you vote over the Internet, do not return your proxy/voting instruction card.
 
  •  Telephone:  You can vote by telephone by calling the toll-free number on your proxy/voting instruction card. Telephone voting is available 24 hours a day. Easy-to-follow voice prompts allow you to vote your shares and confirm that your instructions have been properly recorded. If you vote by telephone, do not return your proxy/voting instruction card.
 
  •  Mail:  You can vote by mail by simply signing, dating and mailing your proxy/voting instruction card in the postage-paid envelope included with this joint proxy statement/prospectus.
 
A number of brokerage firms and banks participate in a program that also permits shareholders whose shares are held in “street name” to direct their vote over the Internet or by telephone. This option, if available, will be reflected in the voting instructions from the brokerage firm or bank that accompany this joint proxy statement/prospectus. If your shares are held in an account at a brokerage firm or bank that participates in such a program, you may direct the vote of these shares by the Internet or telephone by following the voting instructions enclosed with the proxy form from the brokerage firm or bank. Directing the voting of your shares will not affect your right to vote in person if you decide to attend the Argonaut special meeting; however, you must first obtain a signed and properly executed legal proxy from your broker, bank or other nominee to vote your shares held in “street name” at the special meeting. Requesting a legal proxy will automatically cancel any voting directions you have previously given to your broker, bank or other nominee by the Internet or by telephone with respect to your shares.


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Revoking Your Proxy/Voting Instruction Card
 
You can revoke your proxy/voting instruction card at any time before its exercise by:
 
  •  sending a written notice to Craig S. Comeaux, the Corporate Secretary of Argonaut, at 10101 Reunion Place, Suite 500, San Antonio, Texas 78216, bearing a date later than the date of the proxy/voting instruction card, that is received prior to the Argonaut special meeting and states that you revoke your proxy/voting instruction card;
 
  •  voting again over the Internet or by telephone;
 
  •  signing another proxy/voting instruction card bearing a later date and mailing it so that it is received prior to the Argonaut special meeting; or
 
  •  attending the Argonaut special meeting and voting in person, although attendance at the special meeting will not, by itself, revoke a proxy/voting instruction card.
 
If your shares are held in “street name,” you will need to contact your broker, bank or other nominee to revoke your proxy/voting instruction card.
 
Other Voting Matters
 
Voting in Person
 
If you plan to attend the Argonaut special meeting and wish to vote in person, we will give you a ballot at the special meeting. However, if your shares are held in “street name,” you must first obtain a legal proxy authorizing you to vote the shares in person, which you must bring with you to the special meeting.
 
Electronic Access to Proxy Materials
 
This joint proxy statement/prospectus is available on the SEC’s Internet site at www.sec.gov or on Argonaut’s Internet site at www.argonautgroup.com.
 
Proxy Solicitations
 
Argonaut is soliciting proxies for the Argonaut special meeting from Argonaut shareholders. Argonaut will bear the entire cost of soliciting proxies from Argonaut shareholders, except that Argonaut and PXRE will share equally the expenses incurred in connection with the filing of the registration statement of which this joint proxy statement/prospectus forms a part with the SEC and the printing and mailing of this joint proxy statement/prospectus. In addition to this mailing, Argonaut’s directors, officers and employees (who will not receive any additional compensation for their services) may solicit proxies personally, electronically or by telephone. Argonaut has also engaged Georgeson, for a fee of $10,000 and reimbursement of certain expenses, to assist in the solicitation of proxies. Argonaut and its proxy solicitor will also request that banks, brokerage houses and other custodians, nominees and fiduciaries send proxy materials to the beneficial owners of Argonaut common stock and will, if requested, reimburse the record holders for their reasonable out-of-pocket expenses in doing so. The extent to which these proxy-soliciting efforts will be necessary depends upon how promptly proxies are submitted. You should promptly vote by telephone or over the Internet or submit your completed proxy/voting instruction card by mail.
 
Adjournments
 
If a quorum is not present at the special meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, will have the authority to adjourn the meeting to another place, date, or time without notice other than announcement at the meeting, until a quorum shall be presented or represented.
 
When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the


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place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting.
 
Assistance
 
If you need assistance in completing your proxy/voting instruction card or have questions regarding Argonaut’s special meeting, please contact Argonaut Investor Relations at (210) 321-8555 or write to Argonaut Group, Inc., Investor Relations, 10101 Reunion Place, Suite 500, San Antonio, Texas 78216, or contact Georgeson, Argonaut’s proxy solicitor, at (866) 574-4071 (toll-free) or write to Georgeson, Inc., 17 State Street, New York, NY 10004.


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THE MERGER
 
The following discussion contains material information pertaining to the merger. This discussion is subject and qualified in its entirety by reference to the merger agreement and the related documents attached as Annexes to this joint proxy statement/prospectus. We urge you to read the entirety of those documents as well as the discussion in this joint proxy statement/prospectus.
 
Effect of the Merger; Consideration to be Received in the Merger; Treatment of Options and Other Equity-Based Awards
 
At the effective time of the merger, Argonaut shareholders will be entitled to receive newly issued PXRE common shares for their shares of Argonaut common stock. The number of PXRE common shares that Argonaut shareholders will receive will be based on an exchange ratio. The exchange ratio as specified in the merger agreement provides that Argonaut shareholders will be entitled to receive 6.4672 PXRE common shares in exchange for each share of Argonaut common stock they hold, subject to adjustment in the event that (i) Argonaut’s planned special dividend to its shareholders prior to the closing of the merger is less than $60 million, or (ii) Argonaut pays certain other dividends, incurs losses on sales of assets and/or engages in dilutive sales or purchases of Argonaut shares. The number of PXRE common shares that Argonaut shareholders will be entitled to receive will be adjusted, proportionately among all PXRE common shareholders, upon completion of a reverse share split of PXRE shares immediately after the merger (subject to the approval of PXRE’s shareholders). See “PXRE Special General Meeting — Proposals to be Considered at the PXRE Special General Meeting — Item 2 — Reverse Share Split — Impact of the Proposed Reverse Share Split if Effected” beginning on page 64. PXRE will not issue fractional shares in connection with the merger or in connection with the reverse share split. The value of any fractional shares will be paid in cash. The reverse share split would affect all of PXRE’s shareholders uniformly, including the former shareholders of Argonaut entitled to receive PXRE shares as merger consideration in the merger, and will not affect any shareholder’s percentage ownership interests in PXRE or proportionate voting power, except to the extent that the reverse share split would otherwise result in a shareholder owning a fractional share for which it will receive cash in lieu of such fractional share.
 
The exchange ratio will not be adjusted based on changes in market price, although the exchange ratio is subject to adjustment to prevent dilution under certain circumstances. Because we cannot predict the market price of PXRE common shares at the effective time of the transactions, we cannot predict the value of the PXRE common shares Argonaut shareholders will receive. The value of the consideration received for each share of Argonaut common stock at that time, based on reported market prices, may be significantly higher or lower than the value of the consideration on the date of this joint proxy statement/prospectus.
 
Upon completion of the merger, we estimate that PXRE’s shareholders will own approximately 27% and Argonaut shareholders will own approximately 73% of the then-outstanding PXRE common shares.
 
When we complete the merger, all outstanding options to purchase PXRE common shares held by existing option holders will become exercisable and will continue in full force and effect. All outstanding restricted shares will vest and continue outstanding except for 165,880 restricted shares granted in 2007 to non-executive officers, which vest over four years.
 
The Argonaut Amended and Restated Stock Incentive Plan, which we refer to as the Argonaut stock incentive plan, provides that all unvested stock options and restricted stock awards granted thereunder will terminate upon the effective time of the merger unless the Argonaut board of directors affirmatively acts to implement one or more of the alternative arrangements enumerated therein. As noted in “The Merger — Resulting Company’s Initial Annual General Meeting Following the Merger — Replacement of Certain PXRE and Argonaut Benefit Plans with New Resulting Company Benefit Plans” beginning on page 115, the board of directors of Argonaut has determined that it is in the best interests of Argonaut and its shareholders to avoid early termination of grants made under the Argonaut stock incentive plan by reason of the merger. Accordingly, the merger agreement provides for the Argonaut stock incentive plan to be adopted by Argo Group and for all outstanding awards under the Argonaut stock incentive plan to be assumed by Argo Group, as of the effective time of the merger, thereby avoiding the termination of any existing grant.


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With the exception of the possible acceleration of vesting of certain outstanding equity awards held by the five executive officers named in Argonaut’s annual proxy statement dated March 30, 2007 and one other executive officer of Argonaut as described below, when we complete the merger, all equity awards outstanding as of the effective time of the merger will be converted into equivalent equity awards of PXRE. Each outstanding vested and unvested option to acquire shares of Argonaut common stock will be automatically converted into an option to acquire a number of whole common shares of PXRE equal to the product of the number of shares of Argonaut common stock that were subject to the original Argonaut stock option multiplied by the exchange ratio (rounded down to the nearest whole share) at a per share exercise price of the original Argonaut stock option divided by the exchange ratio (rounded up to the nearest whole cent). Upon completion of the reverse share split, proportionate adjustments will be made to the per share exercise price and the number of shares issued upon the exercise of all outstanding options entitling the holders to purchase PXRE common shares, which will result in approximately the same aggregate amount being required to be paid for such options upon exercise immediately preceding the reverse share split. Each converted Argonaut stock option will otherwise continue unaltered and have substantially the same terms and conditions as were in effect immediately prior to the completion of the transactions, including, as applicable, vesting and term of exercise. The unvested number of shares in a restricted stock grant will be converted into a number of whole common shares of a PXRE restricted share grant equal to the product of the number of unvested shares of Argonaut stock that were subject to the original Argonaut restricted stock grant multiplied by the exchange ratio (rounded down to the nearest whole share). The resulting number of shares will then be divided by ten to reflect the reverse share split and rounded down to the nearest whole share to eliminate fractional shares. No fractional shares will be issued and no cash payment for fractional shares will be made to holders of unvested restricted stock grants. No other change will be made to each unvested restricted stock grant, and the terms and conditions in effect immediately before the completion of the transactions, including vesting, will be unchanged.
 
With respect to the five executive officers named in Argonaut’s annual proxy statement dated March 30, 2007 and one other executive officer of Argonaut, the Argonaut board of directors has determined that it is in the best interests of Argonaut and its shareholders to provide for the accelerated vesting of certain unvested stock options and unvested restricted stock grants held by them, provided that each executive officer agrees (i) to exercise all of their outstanding stock options prior to the effective time of the merger (including those vested in the ordinary course prior to the acceleration) and (ii) to enter into a lockup agreement with Argo Group restricting transfer of a substantial portion of the Argo Group common shares owned by such executive officer for a period of three years following the effective time of the merger (a period that generally exceeds the previous vesting period for the accelerated grants), and provided further that suitable arrangements are made for the orderly disposition of any shares sold prior to the effective time of the merger to cover the exercise price and income tax liability payable by each such executive officer in connection with any accelerated vesting of their grants.
 
The number of Argo Group common shares subject to the three-year restriction on transfer will be equal in value to 140% to 150% of the net after-tax value of the accelerated unvested grants immediately prior to the effective time of the merger. As a result, it is anticipated that substantially all of the Argo Group common shares received by each such executive officer as a result of the accelerated vesting will be subject to the lockup agreements. In addition, a substantial portion of the shares of Argonaut common stock already beneficially owned and freely transferable by each such executive officer prior to the merger may become subject to the lockup upon conversion to Argo Group common shares following the merger. Shares required to be held pursuant to the lockup agreements, while not subject to forfeiture, will remain subject to the restrictions on transfer regardless of whether the executive officer remains employed by Argo Group during the three-year period. Exceptions to the duration of the lockup period and/or of the value of the Argo Group common shares required to be held may be made by the Argo Group board of directors with respect to certain executive officers who elect to retire or to assume different functions within the organization, and for other appropriate reasons.
 
The Argonaut board of directors believes that the above measures relating to such key executive officers will further the long-term incentive goals of the executive compensation programs pursuant to which the original equity grants to these executive officers were made and promote continued alignment of the economic interests of these executive officers with Argo Group’s shareholders following the merger. In reaching this determination, the Argonaut board of directors also took into consideration the possibility that the value of all outstanding options, vested and unvested, as well as the value of all unvested restricted shares, beneficially owned by each of these


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executive officers upon conversion to equivalent grants of Argo Group equity, could be subject to a 15% excise tax payable by each executive officer if Section 4985 of the Code applies to the merger. Pursuant to the merger agreement, Argo Group has an indemnification obligation to the officers and directors of both PXRE and Argonaut in the event any such officer or director incurs additional tax liability solely as a result of the merger. If Section 4985 applies to the merger, the excise tax would not apply to the value of any grant for which all taxable income and gain has been recognized by such officer or director. The measures described above will result in the recognition of a taxable event by each of the executive officers who could be affected by the excise tax under Section 4985 and the payment of any applicable taxes on income or gains associated with equity grants that otherwise would have remained unvested or unexercised at the time of merger. If the excise tax were to be levied on unvested or unexercised equity grants held by the six key executive officers following the effective time of the merger, the indemnity obligation of Argo Group to such executive officers could be as much as $9 million. This compares to no additional cash expense to Argonaut if the unvested stock options and unvested restricted stock are accelerated. However, as a result of the acceleration of vesting of the outstanding equity awards held by such executive officers, Argonaut will incur approximately $10.5 million in non-cash compensation expense in 2007 that otherwise would have been incurred in future periods over the normal vesting periods of the accelerated grants.
 
If Section 4985 applies to the merger, the measures described above do not address any excise tax that could be levied on the value of deferred stock units beneficially owned at the time of the merger by certain Argonaut directors pursuant to the Argonaut Deferred Compensation Plan for Non-Employee Directors, which will not be accelerated. In the event excise taxes became payable by these Argonaut directors with respect to the deferred stock units as a result of the merger, the indemnification obligation of Argo Group to such directors could amount to approximately $400,000. Stock options granted to certain Argonaut directors under the Argonaut Non-Employee Director Stock Option Plan will not be accelerated as they will, by their terms, already be vested, and are expected to be exercised, prior to the effective time of the merger. If such stock options are not exercised prior to the effective time of the merger, and an excise tax were to be levied on the unexercised stock options held by these Argonaut directors following the effective time of the merger, the indemnification obligation of Argo Group to such directors could be as much as an additional $600,000.
 
Background of the Merger
 
Hurricane Losses and Ratings Downgrades
 
PXRE incurred a net loss before convertible preferred share dividends of $697.6 million in the year ended December 31, 2005. The primary cause of this net loss was the net impact of catastrophe losses arising from Hurricanes Katrina, Rita and Wilma of $806.9 million, after reinsurance recoveries on PXRE’s outwards reinsurance program and the impact of inwards and outwards reinstatements and additional premiums.
 
Hurricane Katrina made its second landfall in the United States on August 29, 2005 and Hurricane Rita struck Texas on September 24, 2005. As a result of these hurricanes, PXRE reported a net loss before convertible preferred share dividends of $317.3 million during the quarter ended September 30, 2005.
 
Hurricane Wilma then occurred, making landfall in Mexico on October 21, 2005 and Florida on October 24, 2005. As of December 31, 2005, the net impact of Hurricane Wilma was $138.0 million, after reinsurance recoveries on PXRE’s outwards reinsurance program and the impact of inwards and outwards reinstatements and additional premiums.
 
In the beginning of 2006, as part of PXRE’s 2005 year-end closing process, PXRE reassessed its liability for claims arising from Hurricanes Katrina and Rita. As part of this year-end assessment, PXRE determined that claims reported by clients relating to Hurricanes Katrina and Rita were significantly higher than expected, especially following a significant influx of reported claims beginning in late November through January 2006. PXRE’s year-end assessment of Hurricane Katrina and Rita also included a review of the loss information included in the underwriting submission information provided by clients as part of the January 1, 2006 renewal process.
 
As a result of this year-end review, on February 16, 2006, PXRE announced that PXRE would be increasing its estimates of the net pre-tax impact of Hurricanes Katrina, Rita and Wilma on PXRE’s operating results for the year ended December 31, 2005. PXRE recorded an additional net liability in the fourth quarter of $238.1 million with


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respect to Hurricane Katrina and $48.2 million with respect to Hurricane Rita, in each case net of reinsurance recoveries on its outwards reinsurance program and the impact of inwards and outwards reinstatements and additional premiums. PXRE also first announced its intention to explore strategic alternatives due to concerns about the hurricane losses and the resulting potential negative impact on PXRE’s credit ratings. Following these announcements, in February 2006 PXRE’s counterparty credit and financial strength ratings were downgraded by each of the major rating agencies to a level that was generally unacceptable to many of PXRE’s reinsurance clients. These ratings downgrades have had a significant negative impact on PXRE’s operating results and profitability because they have impaired PXRE’s ability to retain and renew PXRE’s existing reinsurance business. In light of the negative consequences of rating downgrades, PXRE’s board of directors decided to retain Lazard (which has since been succeeded by KBW) as its financial advisor to assist in the process.
 
On February 23, 2006, S&P further downgraded its counterparty credit and financial strength rating on PXRE Reinsurance and PXRE Bermuda from “BBB+” to “BBB-.” On February 24, 2006, A.M. Best further downgraded its financial strength rating on these entities from “B++” to “B+” with a negative implication. On February 28, 2006, 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.
 
On April 11, 2006, PXRE announced that PXRE had requested that the major credit rating agencies withdraw their financial strength and claims paying ratings of PXRE and its operating subsidiaries after finding that operational ratings below the critical “A” category provided little value for a reinsurer. 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 then 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 recent ratings downgrades and withdrawal of the operational ratings of PXRE’s reinsurance subsidiaries by A.M. Best, S&P and Moody’s, PXRE’s competitive position in the reinsurance industry has suffered and PXRE has been unable to retain its reinsurance portfolio or renew many of PXRE’s existing reinsurance agreements. This has resulted in a substantial loss of business as ceding companies and brokers that place such business move to other reinsurers with higher ratings. As PXRE’s revenue from non-premium sources has historically not been sufficient to offset PXRE’s operating expenses and interest expenses, and PXRE’s ability to write new business has been impaired due to the recent ratings downgrades and withdrawal of the operational ratings of PXRE’s reinsurance subsidiaries, PXRE has been faced with incurring net operating losses in future periods unless it is successful in executing a strategic alternative other than runoff. If such operating losses were to occur, this would result in a decline in PXRE’s shareholders’ equity.
 
Events Leading to Transaction
 
Between February of 2006 and PXRE’s engagement of KBW in August of 2006, Lazard approached a number of potentially interested parties regarding a strategic transaction with PXRE. Of the over 60 parties contacted, 17 parties executed non-disclosure agreements. Seven of these parties submitted proposals for transactions with PXRE. None of these proposals were deemed adequate by the board of directors of PXRE. During this process, Argonaut executed a nondisclosure agreement and received preliminary due diligence materials in connection with this process, but elected not to participate further at that time.
 
In April 2006, Mark Watson, President and Chief Executive Officer of Argonaut, contacted Jeffrey Radke, President and Chief Executive Officer of PXRE, to propose a strategic alliance between the two companies in lieu of an outright purchase or merger transaction. Mr. Radke invited Mr. Watson to present his proposal to the board of directors of PXRE.
 
On May 8, 2006, at a regularly scheduled meeting of the board of directors of PXRE, representatives from Argonaut made a presentation regarding their proposal for a strategic alliance between the parties. The transaction discussed at the time involved an investment by Argonaut in PXRE and formation of a new reinsurance subsidiary of PXRE that would enter into certain quota share reinsurance agreements with Argonaut.


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The representatives of Argonaut and PXRE continued discussions and in August 2006, developed a joint business plan, which contemplated the formation of a new Bermuda-based property casualty reinsurer (later named Peleus Re). Pursuant to the business plan, initially the business of Peleus Re was to consist of casualty reinsurance pursuant to a quota share agreement with Argonaut, and property reinsurance of other third-party cedents. These discussions continued into the fall of 2006, and included extensive discussions with A.M. Best regarding the rating that Peleus Re might be assigned. However, no final agreement between PXRE and Argonaut was reached.
 
In late November 2006, prior to reaching final agreement on the terms of the Peleus Re transaction, Argonaut advised PXRE that it would prefer to pursue a business combination with PXRE. On November 26, 2006, Mr. Radke met with Mr. Watson to discuss the possibility of continuing discussions regarding a possible transaction. At this meeting, Mr. Watson stated that Argonaut would be interested in pursuing a merger with PXRE.
 
In order to avoid potential conflicts relating to the negotiation of a separation agreement with Mr. Radke which would provide for certain payments and benefits in the event of the completion of a transaction and the potential that preferred shareholders, including those of which certain directors of PXRE are affiliates, might receive treatment which would be different from the treatment of other shareholders of PXRE in connection with the completion of a transaction, in late November 2006 PXRE’s board of directors authorized the creation of a special committee comprised entirely of independent directors, which we refer to as the special committee, to evaluate the merger. Appointed to the PXRE special committee were Philip R. McLoughlin (as chairman), Wendy Luscombe, Mural R. Josephson and F. Sedgwick Browne. From the time of the creation of the PXRE special committee until the signing of the merger agreement, the special committee met a total of 25 times to evaluate the merger, the terms of the related agreements, alternatives to the merger and related issues impacting PXRE and its shareholders.
 
Since being engaged as financial advisor in August of 2006, KBW interacted with a number of interested parties at the direction of the board of directors and, subsequent to its creation, solely at the direction of the special committee. In December 2006, under the direction of the PXRE special committee, representatives of KBW met with representatives of Argonaut’s financial advisor, Bear Stearns, who stated that Argonaut would be willing to make a proposal to acquire PXRE in a transaction that would value PXRE at 0.9x book value and Argonaut at 1.4x book value. In further discussions between the PXRE special committee, Argonaut and their financial advisors, Argonaut provided further terms to their proposal. The proposal provided for a 100% stock, fixed exchange ratio transaction that would value PXRE at 0.9x book value as of September 30, 2006, and Argonaut at 1.4x book value as of the same date. In addition, it contemplated that a special dividend of approximately $60 million would be distributed to Argonaut shareholders immediately prior to the closing of such a transaction and was conditioned upon receiving certain specified financial strength ratings for Peleus Re and Argonaut.
 
Since December 2006, two additional parties submitted proposals for transactions with PXRE. However, such proposals included conditions or contingencies which, after careful consideration and consultation with its advisors, caused the special committee to deem such proposals unacceptable. On December 18, 2006, PXRE, Argonaut and their respective advisors commenced their due diligence investigations of one another, which continued until just prior to signing the merger agreement on March 14, 2007.
 
From late December until the signing of the merger agreement, representatives of the PXRE special committee and Argonaut, and their respective advisors, negotiated the terms of the merger agreement. In addition, the PXRE special committee and its advisors negotiated the terms of the voting agreement with the holders of convertible preferred shares and convertible common shares of PXRE. As such holders had the power to reject the merger, Argonaut required execution of the voting agreement as a condition to signing the merger agreement. Throughout this period, PXRE and Argonaut negotiated with each other to determine the appropriate exchange ratio and other issues of the transaction. The parties’ legal representatives continued to revise the proposed definitive agreements.
 
At various times during this period, the PXRE special committee met to review the status of the transaction, including the proposed exchange ratio, the results of the due diligence investigations conducted by Argonaut and its advisors on PXRE, the results of the financial, accounting, actuarial and legal due diligence investigations conducted by PXRE and its advisors on Argonaut, the terms of the merger agreement, the terms of the voting agreement and other proposed transactions. During these meetings, the special committee received briefings on the proposed merger from PXRE’s senior management and representatives of KBW and Dewey Ballantine LLP, which we refer to as Dewey Ballantine, legal counsel to the special committee, on the status of the proposed merger. The


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special committee considered the strategic benefits of the proposed business combination, the opportunities it created for PXRE and the potential value created for PXRE’s shareholders.
 
From May 2006 through December 2006, Argonaut’s board of directors met on eight occasions to review and discuss the status of proposals for a possible transaction with PXRE, as well as to review information regarding other potential strategic transactions which did not involve PXRE. During these meetings, the board of directors received briefings on each potential transaction from Argonaut’s senior management, including the structure, key legal and financial terms, and results of the due diligence investigations associated with such proposals.
 
On February 6, 2007, representatives of LeBoeuf, Lamb, Greene & MacRae LLP, which we refer to as LeBoeuf Lamb, legal counsel to Argonaut in the PXRE transaction, met with Argonaut’s board of directors and presented information and answered questions regarding the potential tax implications to shareholders, directors and officers with respect to business combinations involving foreign corporations. LeBoeuf Lamb also gave a presentation regarding the fiduciary duties of directors as they relate to the type of transaction being considered by Argonaut and responded to questions on this issue. At the same meeting, representatives of Bear Stearns provided an update on the status of negotiations with both PXRE and the other potential strategic partners. Argonaut’s board of directors also met on February 21 and February 27, 2007 to receive updates from Argonaut’s senior management on due diligence on PXRE and the progress of negotiations with the PXRE transaction and other potential strategic partners and to discuss the strategic benefits of the proposed business combinations, including the possible accounting and tax effects of the various transactions being considered, the opportunities created for Argonaut and the potential value created for Argonaut shareholders.
 
At a meeting of Argonaut’s board of directors on March 7, 2007, Bear Stearns provided its preliminary views about the financial aspects of the proposed transaction with PXRE. LeBoeuf Lamb reviewed for Argonaut’s board of directors its fiduciary obligations and the terms of the merger agreement, the voting agreement and certain other transaction agreements. Ernst & Young LLP reported on the results of certain financial due diligence inquiries on PXRE it conducted for Argonaut under engagements separate from its role as Argonaut’s independent audit firm.
 
On March 12, 2007, the representatives from KBW made a financial presentation and delivered its oral opinion to the PXRE special committee, which was subsequently confirmed in writing, to the effect that, based upon and subject to the considerations set forth in such opinion, as of March 12, 2007, the merger consideration, after giving effect to the transactions contemplated by the voting agreement, was fair, from a financial point of view, to the common shareholders of PXRE (other than the PXRE common shareholders party to the voting agreement). Dewey Ballantine and Conyers Dill & Pearman, Bermuda counsel to the special committee, reviewed for the special committee its fiduciary obligations and the terms of the merger agreement, the voting agreement and certain other transaction agreements. On March 13, 2007, after KBW made its financial presentation to the full PXRE board of directors confirming its opinion dated as of March 12, 2007, the PXRE special committee, after further discussion and deliberation, unanimously recommended that the board of directors of PXRE approve the merger agreement and the related transactions, including the issuance of PXRE common shares in the merger, and recommend to the shareholders of PXRE to vote to approve such transactions. On March 13, 2007, the PXRE board of directors unanimously declared advisable the merger agreement and the related transactions, including the issuance of PXRE common shares in the merger and resolved to recommend to the shareholders of PXRE to vote to approve the transactions contemplated by the merger agreement, including the issuance of PXRE common shares in the merger, subject to the completion of the definitive documentation. The parties continued discussions on March 13, 2007.
 
On March 14, 2007, Bear Stearns made its presentation to Argonaut’s board of directors regarding the financial aspects of the proposed transaction with PXRE and delivered its oral opinion, which was subsequently confirmed in writing, that as of that date and based upon and subject to the assumptions, qualifications and limitations set forth in the written opinion, the exchange ratio was fair from a financial point of view to the shareholders of Argonaut. Argonaut’s board of directors, after receiving a presentation from LeBoeuf Lamb regarding the material terms of the final merger agreement, discussion and deliberation, unanimously approved the merger agreement and the related transactions, and unanimously recommended to the shareholders of Argonaut that they vote to approve such transactions, subject only to completion of definitive documentation. Later in the day on March 14, 2007, the parties finalized the definitive documentation, and PXRE and Argonaut signed the merger agreement and issued a joint press release announcing that they had entered into the merger agreement.


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PXRE’s Reasons for the Merger and Recommendation of PXRE’s Board of Directors
 
The PXRE board of directors believes that the merger agreement and the transactions contemplated by the merger agreement, including the merger and the issuance of PXRE common shares in the merger, are in the best interests of PXRE and its shareholders and are consistent with, and in furtherance of, the long-term business strategies and goals of PXRE. Accordingly, the PXRE board of directors has unanimously approved the merger agreement and recommends that PXRE shareholders vote FOR approval of the issuance of PXRE common shares and the other proposals in connection with the merger.
 
The PXRE board of directors, in reaching its decision to approve the merger agreement, acted upon the unanimous recommendation of the special committee, consulted with its management, as well as with its financial, accounting, actuarial and legal advisors, carefully reviewed a significant amount of information and considered a variety of factors weighing positively towards the merger, including, without limitation, the following:
 
  •  The strategic nature of the merger, which will combine highly complementary businesses to create a resulting company with:
 
  •  broadened product portfolios, combining Argonaut’s strength in Excess and Surplus Lines, Select Markets and Public Entity insurance businesses, with PXRE’s strength in reinsurance products and services to a worldwide marketplace through PXRE wholly owned subsidiary operations located in Bermuda, Europe, and the United States;
 
  •  an attractive platform for growth fueled by a larger and more diversified earnings base with a mix of insurance and reinsurance earnings and equity-driven earnings, which could create a natural hedge against interest rate exposure and equity market risk exposure;
 
  •  strong capital flexibility and attractive risk profile;
 
  •  financial flexibility to pursue further strategic and product initiatives; and
 
  •  access to a proven management team.
 
  •  Its analysis of the business, operations, financial condition, earnings and prospects of both PXRE and Argonaut, including the results of PXRE’s due diligence review of Argonaut and its business.
 
  •  The continuity of certain members of PXRE’s senior management in the resulting company as well as three or four of PXRE’s current directors on the resulting company’s board of directors.
 
  •  The probability that the financial strength ratings for the resulting company will be more favorable than the current comparable ratings for PXRE.
 
  •  The alternatives reasonably available to PXRE, including:
 
  •  remaining a stand-alone entity and pursuing acquisitions of strategic assets or engaging in a capital reorganization;
 
  •  the sale of PXRE or substantially all of its assets to a third party;
 
  •  the possibility of pursuing an alternative strategic business combination with a third party; and
 
  •  placing the reinsurance operations of PXRE into runoff and eventually commencing an orderly winding up and liquidation of PXRE operations over some period of time.
 
  •  The potential for the merger to be accretive to PXRE’s earnings in the first year following completion of the merger (excluding one-time costs), which will inure to a significant degree to the benefit of PXRE’s shareholders as well as Argonaut’s shareholders.
 
  •  The financial opinion of KBW described in the section entitled “— Opinions of PXRE’s Financial Advisor” beginning on page 88, to the effect that, as of the date of their opinion and based on and subject to the assumptions, limitations and qualifications described in their opinion, the merger consideration under the merger agreement was fair from a financial point of view to the holders of PXRE common shares (other than PXRE common shareholders party to the voting agreement).


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  •  The terms of the merger agreement relating to third-party offers, including:
 
  •  the limitation on PXRE’s ability to solicit offers for alternative business combinations; and
 
  •  the ability of PXRE’s board of directors to change its recommendation to shareholders to vote in favor of PXRE issuing shares in the merger to the extent that PXRE’s board of directors reasonably determines (upon advice of outside legal counsel) that such change of recommendation complies with its fiduciary duties under applicable law.
 
  •  The other terms of the merger agreement, including:
 
  •  the representations and warranties of Argonaut;
 
  •  the covenants of PXRE and Argonaut and their effect on the operations of PXRE and Argonaut prior to the merger; and
 
  •  the conditions required to be satisfied prior to completion of the merger. See “The Merger Agreement” beginning on page 129.
 
  •  The expectation that the merger will be treated as a reorganization for United States federal income tax purposes as described in the section entitled “Material Tax Considerations” beginning on page 116.
 
  •  The prospects for the merger receiving necessary regulatory approvals and the anticipated timing and conditions of those approvals.
 
  •  The current and prospective industry, economic and market conditions and trends, including increased competition in the industry in which PXRE operates, and the belief that the resulting company with greater size, scale and diversification would be better positioned to succeed in an industry in which critical mass and market presence are increasingly important.
 
  •  The prospects of providing PXRE with greater brand awareness by aligning PXRE with Argonaut, a strong, well-established brand name in the insurance industry.
 
In addition to these factors, the PXRE board of directors also considered the potential adverse impact of other factors weighing negatively against the merger. These included the following:
 
  •  The challenges of combining the businesses and workforces of Argonaut and PXRE.
 
  •  The risk inherent in businesses that will be new to PXRE shareholders, such as the Excess and Surplus Lines, Select Markets and Public Entity insurance businesses of Argonaut, including, without limitation, the significantly increased exposure to potential equity market volatility.
 
  •  The risk that the cost savings, synergies and other benefits expected to be obtained in the transaction might not be fully realized.
 
  •  The disparities in compensation levels and operating philosophy that may pose cultural and management challenges for the resulting company.
 
  •  The potential disruption to PXRE’s business that could result from the announcement of the merger, including the potential loss of existing customers and employees.
 
  •  The limitations imposed in the merger agreement on the conduct of business by PXRE prior to completion of the merger.
 
  •  The risk that the merger might not be completed and the effect of the resulting public announcement of the termination on:
 
  •  the market price of PXRE common shares;
 
  •  PXRE’s operating results, particularly in light of the costs incurred in connection with the proposed transaction, including the potential requirement to make a termination payment;
 
  •  PXRE’s ability to attract and retain key personnel; and


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  •  PXRE’s ability to complete an alternative transaction.
 
  •  The possibility of significant costs and delays resulting from seeking regulatory approvals necessary for completion of the proposed merger and the possibility of not completing the merger if these approvals are not obtained, including any approval by a state insurance regulatory authority.
 
  •  The impact of the terms of the voting agreement, including the reduction in conversion price of the convertible preferred shares from $11.28 to $6.24 and dilution resulting therefrom, on the shareholders of PXRE.
 
The PXRE board of directors, in reaching its decision to approve the merger agreement and the transactions contemplated thereby, also considered the interests that certain PXRE executive officers and directors may have with respect thereto, in addition to their interests as PXRE shareholders generally. The PXRE board of directors considered the fact that certain directors are affiliates of certain shareholders that are parties to the voting agreement. In addition, the PXRE board of directors considered the terms and conditions of the agreements entered into in connection with the merger, including the voting agreement, and the effect on the PXRE shareholders of the conversion of the convertible preferred shares at a reduced conversion price and the conversion of the convertible common shares on the terms provided in the voting agreement.
 
The PXRE board of directors concluded that the positive aspects of the merger significantly outweighed the negative factors.
 
This discussion of the information and factors considered by the PXRE board of directors includes all the material positive and negative factors considered by the PXRE board of directors, but it is not intended to be exhaustive and may not include all of the factors considered by the PXRE board of directors. The PXRE board of directors did not quantify or assign any relative or specific weights to the various factors that it considered in reaching its determination that the merger agreement and the merger are advisable and in the best interests of PXRE and its shareholders. Rather, the PXRE board of directors viewed its position and recommendation as being based on the totality of the information presented to and factors considered by it. In addition, individual members of the PXRE board of directors may have given differing weights to different factors.
 
In considering the recommendation of the PXRE board of directors with respect to the merger agreement, the merger and the issuance of PXRE common shares in the merger, you should be aware that certain PXRE directors and executive officers have arrangements that cause them to have interests in the transaction that are different from, or are in addition to, the interests of PXRE shareholders generally. See “— Interests of PXRE Directors and Executive Officers in the Merger” beginning on page 105.
 
Argonaut’s Reasons for the Merger and Recommendation of Argonaut’s Board of Directors
 
In reaching its decision to approve the merger agreement and proceed with the business combination with PXRE, Argonaut’s board of directors consulted with Argonaut’s management and legal, accounting, actuarial and financial advisors regarding the strategic, operational and financial aspects of the merger. In the course of reaching its decision to approve the merger agreement, the board of directors considered a variety of factors, including the following material factors:
 
Strategic Considerations.  Argonaut’s board of directors believes that the merger of Argonaut with a subsidiary of PXRE will provide a number of significant opportunities and benefits, including the following:
 
  •  the capabilities and competitiveness of the combined group will be enhanced in the following ways:
 
  •  the combined group will have a more extensive distribution network and greater range of products, thus being able to better serve customers;
 
  •  the complementary operations and capabilities of Argonaut and PXRE should allow the combined group to benefit from economies of scale and other efficiencies in certain functional disciplines;
 
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  •  the greater scale, scope and reach of the combined group should make it a more attractive partner for potential customers with national or international business models;
 
  •  the merger will result in a company that, because of increased size and economies of scale, will have greater capital flexibility, a greater ability to respond to competitive pressures, greater diversification opportunities and an enhanced ability to compete profitably, which may result in better debt and financial ratings;
 
  •  the combination of Argonaut’s and PXRE’s businesses through the merger will result in greater product offerings and improved market position;
 
  •  the addition of a reinsurance platform will provide Argonaut access to a multi-billion dollar business segment and should allow us to better serve our customers;
 
  •  the establishment of a Bermuda domicile should provide Argonaut with a strategic platform for further expansion; and
 
  •  the combination has the potential to increase return on equity for shareholders of Argonaut over the long term and be accretive to Argonaut shareholders in terms of book value per converted share in Argo Group after the merger.
 
Other Factors Considered by the Argonaut Board.  In addition to considering the strategic factors listed above, the Argonaut board of directors considered the following additional factors:
 
  •  the environments in which Argonaut and PXRE operate, including national and regional insurance industry, economic and market conditions and trends, and the likely effect of these factors on Argonaut’s potential growth, development, productivity and profitability;
 
  •  the likelihood of continuing consolidation and increased competition in the insurance industry;
 
  •  the strategic fit between PXRE and Argonaut;
 
  •  the execution risk of the merger;
 
  •  the potential financial benefits to Argonaut and Argonaut’s shareholders;
 
  •  the financial analyses of Argonaut’s financial advisor and its opinion that, as of March 14, 2007, and based upon and subject to the assumptions, qualifications and limitations set forth in its written opinion, the exchange ratio was fair, from a financial point of view, to the shareholders of Argonaut;
 
  •  the likelihood that the merger will be completed on a timely basis, including the likelihood that the merger will receive all necessary antitrust and other regulatory approvals without unacceptable conditions on a timely basis; and
 
  •  the board and management structure of the resulting company provided for under the merger agreement, including Argonaut’s board representation and the staffing of the executive positions of the resulting company, as described in greater detail under “— PXRE’s Board of Directors and Management Following the Merger.”
 
Argonaut’s board of directors also considered the potential adverse impact of other factors, including the following:
 
  •  the risk that the cost savings synergies and other benefits expected to be obtained in the transaction might not be fully realized;
 
  •  the risk of diverting management’s attention from other strategic priorities to implement merger integration plans;
 
  •  the risk associated with the start-up nature of Peleus Re, which carries a degree of execution risk that is higher than the risk related to Argonaut’s existing book of business;
 
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  •  the risk that the combined group will have a level of volatility higher than Argonaut’s following the merger as a result of additional catastrophe risk exposure; and
 
  •  the possibility that the trading multiple of the combined group will contract due to a change in the business model.
 
The foregoing discussion of the information and factors considered by Argonaut’s board of directors is not meant to be exhaustive but is believed to describe the more prominent economic and operational issues considered by it in connection with its determination that the terms of the merger agreement, including the merger, are advisable and in the best interests of Argonaut and its shareholders. Argonaut’s board also considered each of the factors contained in the Bear Stearns’ fairness opinion discussed on pages 98 through 105 below, as well as a variety of legal, accounting and tax factors presented to the board of directors by management, its counsel, LeBoeuf Lamb, and its auditors, Ernst & Young LLP. In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, the Argonaut board of directors did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these and other factors. In addition, the Argonaut board of directors did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to its ultimate decision, but rather the Argonaut board of directors conducted an overall analysis of the factors described above, including through discussions with, and the questioning of, Argonaut’s management team and outside financial, actuarial and legal advisors. In considering the factors described above, individual members of the Argonaut board of directors may have given different weight to different factors.
 
In considering the recommendation of the Argonaut board of directors with respect to the merger agreement and the merger, you should be aware that certain Argonaut directors and executive officers have arrangements that cause them to have interests in the transaction that are different from, or are in addition to, the interests of Argonaut shareholders generally. See “Risk Factors — Risks Related to the Merger — General — Some directors and executive officers of PXRE and Argonaut have interests and arrangements that are different from, or in addition to, those of PXRE and Argonaut shareholders” beginning on page 21.
 
Opinions of Financial Advisors
 
PXRE engaged KBW as its financial advisor in August of 2006. KBW acted on behalf of PXRE until the creation of the special committee in late November 2006, at which time KBW’s engagement with PXRE was rescinded and the special committee engaged KBW as its financial advisor in connection with the merger. Once engaged on behalf of the special committee, KBW acted solely on behalf of the special committee. Argonaut retained Bear Stearns pursuant to an engagement letter dated March 6, 2007, as its financial advisor in connection with the merger. A summary of their respective opinions and related financial analyses appears below.
 
Opinion of PXRE’s Financial Advisor
 
KBW acted as the financial advisor to the special committee in connection with the merger. On March 12, 2007, KBW delivered its oral opinion to the special committee, which was subsequently confirmed by delivery of a written opinion, dated as of March 12, 2007, that, as of that date and based upon and subject to the factors and assumptions set forth in the written opinion, the consideration paid in the merger, after giving effect to the transactions contemplated by the voting agreement, was fair from a financial point of view to the holders of PXRE common shares (other than the PXRE common shareholders party to the voting agreement).
 
The full text of the written opinion of KBW, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex E to this joint proxy statement/prospectus and is incorporated by reference. KBW’s opinion was intended for the use and benefit of the special committee in connection with its consideration of the merger, does not address the merits of the underlying decision by PXRE to enter into the merger agreement or any of the transactions contemplated thereby, including the merger, and does not constitute a recommendation to any PXRE shareholder as to how that shareholder should vote on, or take any action with respect to, the merger or any related matter. KBW was not asked to address nor does its opinion address the fairness to, or any other consideration of, the holders of any class of securities, creditors or other constituencies of PXRE.


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Additionally, KBW expresses no opinion as to the prices at which the common shares of either PXRE or Argonaut will trade following the announcement of the merger or at which the common shares of PXRE will trade following the consummation of the merger, or to any legal, tax, regulatory, actuarial or accounting matters. This summary of KBW’s opinion is qualified in its entirety by reference to the full text of the opinion attached to this joint proxy statement/prospectus as Annex E.
 
In preparing its opinion to the special committee, KBW performed various financial and comparative analyses, including those described below. The summary set forth below does not purport to be a complete description of the analyses underlying KBW’s opinion or the presentation made by KBW to the special committee or the PXRE board of directors. The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, KBW did not attribute any particular weight to any analysis or factor considered by it, but rather made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. Accordingly, KBW believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors, or focusing on information presented in tabular format, without considering all of the analyses and factors or the narrative description of the analyses, would create a misleading or incomplete view of the process underlying its opinion.
 
In connection with rendering the opinion described above and performing its related financial analyses, KBW reviewed, among other things:
 
  •  the merger agreement;
  •  the voting agreement;
 
  •  PXRE’s annual reports to shareholders and annual reports on Form 10-K for the years ended December 31, 2003, 2004 and 2005, a draft of its Form 10-K for the year ended December 31, 2006, its quarterly reports on Form 10-Q for the periods ended March 31, 2006, June 30, 2006 and September 30, 2006, a draft of its financial statements for the year ended December 31, 2006 and its current reports on Form 8-K filed since December 31, 2005;
 
  •  Argonaut’s annual reports to shareholders and annual reports on Form 10-K for the years ended December 31, 2004, 2005 and 2006 and its current reports on Form 8-K filed since December 31, 2006;
 
  •  market prices and valuation multiples for PXRE and compared them with those of certain publicly traded companies that KBW deemed relevant;
 
  •  the results and operations of PXRE and compared them with those of certain publicly traded companies that KBW deemed relevant; and
 
  •  other financial information concerning the business and operations of PXRE and Argonaut furnished to KBW by PXRE and Argonaut for the purposes of its analysis.
 
KBW also held discussions with members of PXRE’s and Argonaut’s senior management and PXRE’s board of directors regarding the past and current business operations, regulatory relations, financial condition and future prospects of their respective companies and such other matters as KBW has deemed relevant to its inquiry. In addition, KBW compared certain financial and stock market information for PXRE and Argonaut with similar information for certain other companies the securities of which are publicly traded, reviewed the financial terms of certain recent business combinations in the financial institutions industry and performed such other studies and analyses as KBW considered appropriate. KBW was also advised as to the status of various legal proceedings by PXRE’s counsel and relied thereon. KBW’s opinion is necessarily based upon market, economic and other conditions as they existed and could be evaluated on the date of its opinion and the information made available to it through the date of its opinion.
 
In conducting its review and arriving at its opinion, KBW relied upon the accuracy and completeness of all of the financial, accounting, legal, actuarial, tax and other information provided to it or publicly available and it has not assumed any responsibility for independently verifying the accuracy or completeness of any such information. KBW relied upon the management of PXRE and Argonaut as to the reasonableness and achievability of the


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financial and operating forecasts and projections (and the assumptions and bases therefor) provided to it, and KBW has assumed that such forecasts and projections reflect the best currently available estimates and judgments of such managements and that such forecasts and projections will be realized in the amounts and in the time periods currently estimated by such managements. KBW is not an actuarial firm and is not an expert in the independent verification of the adequacy of reserves for loss and loss adjustment expenses and its services did not include any actuarial determination or evaluation or any attempt to evaluate actuarial assumptions. KBW relied on PXRE’s actuaries with respect to the adequacy of reserves for loss and loss adjustment expenses and it assumed, with the consent of PXRE, that the aggregate reserves for loss and loss adjustment expenses for PXRE and Argonaut are adequate to cover such losses. In that regard, KBW made no analysis of, and expressed no opinion as to, the adequacy of reserves for loss and loss adjustment expenses. In rendering its opinion, KBW did not make or obtain any evaluations or appraisals of the property of PXRE or Argonaut, nor did it examine any individual production or underwriting files of PXRE or Argonaut. In addition, KBW has not assumed any obligation to conduct any physical inspection of the properties or facilities of PXRE or Argonaut.
 
Certain Assumptions
 
In rendering its opinion, KBW was instructed by PXRE to assume that:
 
(i) all representations and warranties in the merger agreement and the voting agreement were accurate and all covenants and agreements to and from PXRE, Argonaut and the PXRE preferred shareholders will be satisfied, such that no indemnification obligations from PXRE, Argonaut or the PXRE preferred shareholders will arise;
 
(ii) as of March 12, 2007 PXRE no longer carried any credit ratings and did not expect to achieve credit ratings sufficient to attract new business, which will continue to limit its ability to write new business, thereby impacting the value of PXRE’s ongoing franchise:
 
(a) On February 16, 2006, S&P 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 also downgraded its financial strength rating from “A−” to “B++” with a negative outlook. On February 17, 2006, 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;
 
(b) 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;
 
(c) In April, 2006, after finding that operational ratings below the critical “A” category provided little value for a reinsurer, PXRE announced that it had requested that the major credit rating agencies withdraw their financial strength and claims paying ratings of PXRE and its operating subsidiaries. As a result of these historical actions by the rating agencies and PXRE’s internal projections, PXRE did not anticipate achieving credit ratings sufficient to write new business, and instructed KBW to make that assumption in its analysis;
 
(iii) if a transaction which included the continuation of PXRE’s past property catastrophe reinsurance business strategy were not announced by the filing of its 2006 10-K, PXRE would potentially have (A) incurred, as of December 31, 2006, a $26.8 million charge due to lack of certainty concerning its ability to utilize certain ceded reinsurance treaties in prospective periods as contemplated under the Peleus Re business plan, (B) terminated PXRE’s second catastrophe bond transaction (A&W II) with an effective date of March 31, 2007, thus incurring a $5.8 million termination charge in the first quarter of 2007, and (C) been subject to certain PXRE preferred shareholders seeking to cause PXRE to pursue an expedited liquidation of PXRE via a loss portfolio transfer of its loss reserves, commutation of its remaining treaties, and/or an


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accelerated runoff of its reserves, the execution of which may not have been in the best interests of PXRE’s common shareholders;
 
(iv) the PXRE convertible preferred shares have a conversion price as of December 31, 2006 of $11.28, and such convertible preferred shares, which are mandatorily convertible on April 4, 2008, would convert at such conversion price, assuming no additional adjustments to the conversion price as provided for in the certificate of designation for the convertible preferred shares;
 
(v) given PXRE’s lack of any credit ratings on March 12, 2007, regulatory concerns and cash and available collateral positions, PXRE’s ability to retain customers, vendors and key employees would continue to deteriorate;
 
(vi) if PXRE pursued a strategy of runoff and/or liquidation, there would be significant risk and uncertainty in the amount and timing of potential cash flows available to meet PXRE’s policyholder obligations, operating expenses, financial obligations, and ability to pay dividends or distributions to its PXRE preferred shareholders and PXRE common shareholders; and
 
(vii) in the runoff scenario, (1) the initial liquidation dividend would be paid after the conversion of the convertible preferred shares (assumed to convert on March 31, 2008 at the contractual conversion price as of December 31, 2006 of $11.28); (2) the maximum allowable dividend from PXRE’s operating subsidiaries would be paid to PXRE and thereafter dividended to shareholders on March 31 of each year; (3) the payout pattern on existing reserves would be 48%, 18%, 9%, 8% and 17% in each of 2007 through 2011, respectively; (4) in the upside case, reserves would develop favorably by 5.8% and claims would be settled quickly, enabling a terminal dividend to be paid to shareholders on December 31, 2009; (5) in the base case, reserves would develop and claims would be settled as per the expected actuarial results, enabling a terminal dividend to be paid on December 31, 2010; and (6) in the downside case, reserves would develop unfavorably by 8.8% plus an additional $51 million related to the 2005 hurricanes, and claims would be settled more slowly, enabling a terminal dividend to be paid to shareholders on December 31, 2011.
 
KBW did not express any opinion as to the prices at which the common shares will trade at any time following completion of the merger and its opinion did not address the relative merits of the merger as compared to any alternative transaction that might be available to PXRE. KBW did not express any opinion as to the transactions contemplated by the voting agreement. In rendering its opinion, KBW assumed that the merger and the transactions contemplated thereby will be completed, and that all governmental, regulatory or other consents and approvals necessary for completion of the merger will be obtained, without any adverse effect on PXRE or on the expected benefits of the merger in any way meaningful to KBW’s analysis.
 
Transaction Process and Various Analyses
 
The following is a summary of the transaction process and various financial analyses reviewed by KBW with the special committee in connection with KBW rendering its opinion. The following summary, however, does not purport to be a complete description of the transaction process or financial analyses reviewed by KBW with the PXRE board of directors or by KBW for purposes of its analysis.
 
The assumptions set forth in clauses (i) through (vii) under “Certain Assumptions” above were particularly important to KBW’s analysis. The order of analyses described below does not represent relative importance or weight given to those analyses by KBW. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of the financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before March 12, 2007, and is not necessarily indicative of current market conditions.
 
Overview of Key Events in the Transaction Process
 
KBW reviewed with the special committee the key events in the transaction leading up to the proposed merger. This included a review of the broad solicitation process undertaken in which over 60 parties were contacted, of which 17 parties signed a confidentiality agreement with PXRE. KBW noted that in addition to the bid by Argonaut,


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a total of nine bids were received by PXRE, two of which were received during the period of negotiations with Argonaut. All of the nine proposals included conditions or contingencies deemed unacceptable by the PXRE board of directors or the special committee.
 
Calculation of Transaction Value
 
KBW reviewed the financial terms of the merger agreement, and noted that PXRE will issue to Argonaut shareholders according to the preliminary exchange ratio, 6.4672 PXRE common shares for each share of Argonaut common stock. The preliminary exchange ratio was calculated based on an effective value of $33.44 for each share of Argonaut common stock and a price of $5.17 for each PXRE common share outstanding as of December 31, 2006. PXRE’s implied aggregate valuation is computed to be $422.3 million, or approximately 85% of reported shareholders’ equity as of December 31, 2006. The preliminary exchange ratio is fixed, and would be recalculated only in certain extraordinary circumstances, as discussed in Section 4.6 of the merger agreement. For purposes of the determination of fairness, KBW compared the calculated transaction value per share to PXRE’s common shareholders in the merger ($5.17 per common share) to an estimate of the value of PXRE in runoff on a per share basis under three different scenarios (see “— PXRE Estimate of Company Value in Runoff” beginning on page 96).
 
Review of PXRE
 
Historical Stock Trading Analysis
 
KBW reviewed with the special committee and the PXRE board of directors PXRE’s share price performance since August 1, 2005, the first trading day of the month in which Hurricane Katrina made landfall. KBW noted events of significance that may have impacted the trading price of the PXRE shares, such as (i) Hurricane Katrina making its second landfall in the United States on August 29, 2005, (ii) the initial announcement by PXRE of the estimated losses due to Hurricane Katrina on September 11, 2005, (iii) the recapitalization by PXRE through the sale of $375 million of exchangeable perpetual preferred securities and the sale of $114.7 million of common shares, on September 30, 2005 and October 7, 2005, respectively, and (iv) the announcement by PXRE of an increase to loss estimates related to Hurricanes Katrina, Rita and Wilma and the exploration of strategic alternatives, on February 16, 2006.
 
Historical Price to Book Value Ratio Analysis
 
KBW analyzed PXRE’s price-to-book value ratio since September 11, 2001, which before Hurricane Katrina reached a high of 1.28x book value and averaged 0.91x book value. From August 29, 2005, the date on which Hurricane Katrina made its second landfall, to March 9, 2007, PXRE traded at an average of approximately 65% of book value.
 
Historical Financial Performance
 
KBW reviewed with the special committee PXRE’s historical financial performance for the five year period ending in 2006. KBW noted PXRE’s positive results in 2002 and 2003, and the unfavorable results in 2004 due to major catastrophe events related to hurricanes, and in 2005 due to hurricanes Katrina, Rita and Wilma.
 
Review of Argonaut
 
Historical Financial Performance
 
KBW reviewed Argonaut’s historical financial statements for the years ended December 31, 2002 through 2006. KBW also reviewed with the special committee and the PXRE board of directors, Argonaut’s quarterly premium growth and underwriting results since the first quarter of 2000, the quarter during which Mark Watson was named President & Chief Executive Officer of Argonaut. The appointment of Mark Watson as Argonaut’s President & Chief Executive Officer is important as he has successfully pursued a diversification strategy for Argonaut, transforming it from a monoline workers’ compensation insurer into a leading specialist underwriter.


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Historical Stock Trading Analysis
 
KBW reviewed the historical daily trading prices and volumes for the shares of Argonaut’s common stock for the period from January 25, 2000, the date Mark Watson was named Argonaut’s President & Chief Executive Officer, through March 9, 2007. KBW’s analysis showed the following concerning the historical prices for Argonaut:
 
         
    Argonaut  
 
Prior day price (3/9/07)
  $ 34.17  
Trading period high (2/8/07)
  $ 37.30  
Trading period low (4/11/03)
  $ 7.70  
 
Historical Price to Book Value Ratio Analysis
 
KBW reviewed the historical price to book ratio for the shares of Argonaut’s common stock for the period from September 12, 2001 through March 9, 2006. KBW chose this date range because it believes that valuation levels for specialty property and casualty insurance companies changed after the events of September 11, 2001. KBW’s analysis showed the following prices relative to book value for Argonaut:
 
         
    Argonaut  
 
Median P/BV ratio since 9/11/01
    0.96x  
Median P/BV ratio for last twelve months
    1.35x  
P/BV ratio as of 3/9/07
    1.42x  
 
Selected Companies Analysis
 
Using publicly available information, KBW compared the financial performance, financial condition and market valuation of Argonaut to those of a group of specialty companies. These companies were selected based on KBW’s professional judgment considering characteristics such as the type of insurance written, historical and prospective operating performance, and market capitalization. None of the selected companies are directly comparable to Argonaut, and therefore, the results of the selected companies analysis and regression analysis are primarily financial calculations rather than detailed analyses of the differences in operating characteristics and business mixes of the various companies. Appropriate use of the data includes qualitative judgments concerning, among other things, differences among the companies.
 
Companies included in this group of specialty companies were:
 
  •  W.R. Berkeley Corporation;
  •  Markel Corporation;
  •  HCC Insurance Holdings, Inc.;
  •  Philadelphia Consolidated Holdings Corporation;
  •  RLI Corp.;
  •  United America Indemnity, Ltd.;
  •  Navigators Group, Inc.;
  •  Tower Group, Inc.; and
  •  James River Group Inc.
 
Among other statistics, KBW’s analysis showed the following concerning Argonaut’s financial performance and financial condition:
 
                 
        Group
    Argonaut   Median
 
2006 to 2007 estimated earnings per share growth
    10.3 %     4.8 %
2007 estimated return on average equity (excluding AOCI(1))
    11.7 %     16.2 %
2008 estimated return on average equity (excluding AOCI(1))
    11.3 %     15.3 %


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(1) Accumulated other comprehensive income.
 
KBW’s analysis showed the following concerning Argonaut’s market valuation:
 
                 
        Group
    Argonaut   Median
 
Stock price to GAAP book value per share (excluding AOCI(1))
    1.42 x     2.03x  
Stock price to 2007 estimated earnings per share
    11.4 x     11.8x  
Stock price to 2008 estimated earnings per share
    10.5 x     10.5x  
 
 
(1) Accumulated other comprehensive income.
 
KBW also performed a regression analysis comparing the 2007 estimated return on equity for the comparable companies to the price to book value per share multiple excluding AOCI. This analysis indicated that, based on Argonaut’s estimated return on equity of 11.7% for 2007, the implied price to book value ratio for Argonaut was 1.41x.
 
Pro Forma Transaction Analysis
 
KBW conducted a review of the relative historical stock prices of both PXRE and Argonaut, public market valuations of selected companies, a pro forma earnings analysis and peer regression analysis. KBW calculated a mathematically implied trading value for the pro forma resulting company using the regression analysis of price-to-book value ratio and estimated pro forma 2008 return on average equity, based on the projected pro forma earnings of the resulting company, excluding transaction-related expenses and before purchase accounting adjustments. KBW’s analyses were based on information provided by PXRE, including unaudited, non-public GAAP financial statements for the year ended December 31, 2006, detailed long-term financial forecasts prepared by the managements of PXRE and Argonaut, and actuarial reviews of PXRE and Argonaut completed by third parties. KBW’s analysis also relied on audited GAAP financial statements of Argonaut for the year ended December 31, 2006, as found in Argonaut’s 2006 10-K, and financial forecasts prepared by Argonaut’s management and supplied by Argonaut.
 
Historical Stock Trading Analysis and Relative Stock Price Ratio
 
KBW reviewed the historical trading prices for PXRE common shares for the period from September 11, 2001 to March 12, 2007 and for the period from August 1, 2005 (shortly prior to the landfall of Hurricane Katrina) to March 12, 2007 and for shares of Argonaut common stock for the period from January 25, 2000 to March 12, 2007 (January 25, 2000 represents the date on which Mark Watson was appointed CEO of Argonaut). KBW also analyzed the historical trading ratio of the respective common stock of PXRE and Argonaut for various periods during the period from February 17, 2006 to March 12, 2007 as set forth in the table below, and compared it to the preliminary exchange ratio of 6.4672 PXRE common shares for each share of Argonaut common stock to be paid pursuant to the merger agreement:
 
         
Relevant Period