PXRe's Continuing Woes Prompt Further Downgrades

Rating agencies Standard & Poor's and AM Best have both downgraded Bermudian catastrophe reinsurer PXRe again after it increased its loss estimates by more than previously disclosed. S&P cut the company's financial strength rating two notches to BBB- from BBB+ on Feb. 23, only a week after it downgraded the company to BBB+ from A-. On the same day, AM Best cut PXRe's financial strength rating to B+ from B++.

In its full-year results, released on Feb. 22, PXRe said it would increase its pre-tax loss estimates for hurricanes Katrina, Rita and Wilma by $330 million. On Feb. 16 it said it expected the increase to be between $281 million and $311 million more than its previous announcements. This latest increase means the storms' effect on PXRe's 2005 results could be as much as $807.3 million.

PXRe revised its estimate because of recent loss reports, and the fact that the earlier loss of its A- ratings from S&P and AM Best and other changes had prompted two of its counterparties to cancel and commute retrocession coverage with the reinsurer. More than 75% of PXRe's reinsurance clients, measured by premium volume, now have the right to cancel their reinsurance contracts with the company because of the loss of the A- ratings or because of the company's reduced capital.

The loss of the A- ratings has also forced the company to reduce the value of its income tax recoverables to $6.3 million at Dec. 1, from $47.8 million at September 30 2005. Because of this, the company will no longer be getting $30.9 million of tax benefits that it was expecting, which had reduced the net effects of Katrina, Rita and Wilma on its nine-month results for 2005.

All this prompted S&P and AM Best to cut PXRe's ratings further. "The downgrades reflect PXRe's announcement of a writedown of its deferred tax asset, the adverse impact of two counterparties cancelling their reinsurance contracts, and an increase in the group's estimated 2005 hurricane losses," said S&P credit analyst Steven Ader in a statement.

Both AM Best and S&P's ratings of PXRe remain on review with negative implications.

It now seems more unlikely that PXRe will be able to continue writing business independently. "We are hopeful that our financial soundness and strong service track record will allow us to continue trading with our clients and brokers," said Jeff Radke, PXRe's chief executive, in a statement accompanying the firm's 2005 results. "Nevertheless, more than 75% of our current reinsurance clients, as measured by the premium volume, have the right to cancel their reinsurance contracts as a result of either the recent ratings downgrade or reduction of our capital, which, if such rights were exercised, could cause a substantial loss in premium volume." He added: "We are therefore continuing to explore a range of strategic alternatives for the company."

PXRe made a net loss of $697.6 million for 2005, compared with a profit of $16.3 million for 2004.