Rating agencies AM Best and Standard & Poor’s have cut PXRe‘s A- ratings, putting the future of the Bermudian reinsurer into doubt. PXRe says it is looking at strategic alternatives for the company.
AM Best downgraded the reinsurer to B++ from A- and S&P downgraded it to BBB+ from A-. Both ratings have a negative outlook. The downgrades followed PXRe’s announcement that it expects hurricanes Katrina, Rita and Wilma to cost it between $281 million and $311 million more than expected for 2005.
This brings its total pre-tax loss estimates from the storms to between $743 million and $788 million. The company had previously estimated that the pre-tax effect on its 2005 results would be between $462 million and $477 million.
“As a result of the magnitude and composition of this most recent loss revision and with consideration of the company’s longer-term track record, AM Best now has greater concern regarding PXRe’s risk management capability,” said AM Best in a statement. “The most recent range of loss increase accounts for over 60% of reported actual shareholder’s equity on Sept. 30, which resulted in a deterioration of PXRe’s risk-adjusted capital position.”
Steven Ader, credit analyst at S&P, said in a statement: “The material nature of this development, relative to previous estimates of a net pre-tax impact between $462 million and $477 million and the overall impact of the 2005 hurricane season relative to PXRe’s capital base, support our conclusion that PXRe’s enterprise risk management capabilities, in terms of adequately measuring and managing the high volatility of PXRe’s core retrocessional business comprising approximately 36% of 2005 net premium volume, is not consistent with the prior rating.”
The downgrades come despite PXRe raising capital and reducing its exposures. AM Best says its rating has been assigned a negative outlook until these new strategies and risk mitigation procedures have been fully tested. S&P expects to resolve its credit watch after a review of PXRe’s 2005 financial statements.
PXRe says it will explore strategic alternatives for the company in light of the downgrades. It has retained investment bank Lazard as a financial adviser to assist this process.
Before the downgrades were announced, Jeffrey Radke, CEO of PXRe, said in a statement: “PXRe has taken steps that substantially improve our risk profile, including increased reinsurance coverage, reducing our peak zone exposure and reducing our exposure to certain large events and second events through catastrophe bond transactions. In light of these steps and our strong track record, we are disappointed by the expected rating agency action. Although the agencies have acknowledged that we have dramatically reduced the risk in our portfolio, they are of the view that our book of business may be too volatile for a rating in the A range.”