S&P, Fitch Lower PXRE Ratings below ‘A’ Grade

Standard & Poor’s Ratings Services and Fitch Ratings joined A.M. Best (See related article) in lowering their ratings on Bermuda-based PXRE Reinsurance Ltd. (PXRE Bermuda) and U.S.-based PXRE Reinsurance Co. (collectively, PXRE).

S&P lowered its counterparty credit and financial strength ratings to “BBB+” from “A-” and placed the ratings on CreditWatch with negative implications. It also lowered its counterparty credit and senior debt ratings on holding company PXRE Group Ltd. to “BB+” from “BBB-“, and lowered its subordinated debt rating to “BB-” from “BB+” and its preferred stock rating to “B+” from “BB”. In addition, S&P lowered its counterparty credit rating on holding company PXRE Corp. to “BB+” from “BBB-” and its preferred stock rating to “B+” from “BB” and placed all these ratings on CreditWatch with negative implications.

Fitch lowered its ratings on PXRE to “BB+” from “BBB+”, and downgraded its long-term rating on PXRE to “BB-” from “BB+”, as well as its rating on PXRE Capital Trust I’s preferred securities to “B+” from “BB.” S&P lowered the Trust’s ratings to “B+” from “BB” and also put them on CreditWatch.

“The ratings actions reflect PXRE’s announcement that reported fourth-quarter 2005 financial results will be hindered by $281 million-$311 million of net pretax adverse development on previously reported Katrina, Rita, and Wilma hurricane losses,” explained S&P credit analyst Steven Ader. “The material nature of this development, relative to previous estimates of a net pretax impact between $462 million-$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 percent of 2005 net premium volume, is not consistent with the prior rating.”

Fitch said its “rating actions follow PXRE’s recent announcement of updated estimates for hurricane losses and its decision to ‘explore strategic alternatives’. Today’s rating actions reflect Fitch’s current view of the catastrophe risk inherent in PXRE’s monoline retrocessional book of business, and resultant significant capital and earnings volatility, the company’s questionable risk management capabilities and recent management changes, and its lack of financial flexibility going forward.”

S&P did indicate that PXRE’s “recently completed capital raising and exposure reduction initiatives somewhat offset the adverse capital impact of the announced reserve addition.” But S&P said the “rating action reflects our belief that PXRE’s retro focused competitive profile and risk management capabilities, though currently addressed by a strong level of reinsurance and catastrophe bond protection, is no longer consistent, due to its inherent volatility with the prior rating.”

Fitch pointed out that the “Company’s year-to-date hurricane related losses equate to roughly 100 percent of PXRE’s beginning of the year shareholders’ equity.” It also said that “although the company has been able to raise capital to replenish a portion of the losses, this large percentage of capital-at-risk is significantly higher than Fitch’s expectations for the rating category, even for a company with PXRE’s business profile which includes an expectation of periodic high severity losses.”

Both rating agencies indicated they remained concerned about PXRE’s financial condition, which certainly won’t be helped by their decision, in company with A.M. Best, to lower their ratings below “A” grade. A high proportion of reinsurance treaties require that the reinsurer be in the “A” range. When a company falls below that standard cancellations and non-renewals inevitably follow. Converium, for example, lost half its business when it was downgraded two years ago.

S&P said it would either affirm the present ratings, or lower them again by not more than two notches, depending on future developments.

Fitch explained that its “Negative Rating Watch reflects PXRE’s announcement that it is now ‘exploring strategic alternatives’. Fitch believes this development often translates to a distressed situation. The Negative Watch also reflects the potential for shareholder lawsuits, ratings triggers in various collateral agreements, and further adverse loss development on the revised hurricane loss estimates.”

Both rating agencies said they would continue to monitor the situation.