SAN FRANCISCO (MarketWatch) – Shares of reinsurer PXRE Group Ltd lost almost two-thirds of their value Friday morning after the company reported huge costs related to recent hurricanes and its credit rating was cut.
Thursday afternoon, the Bermuda-based company said it is considering its “strategic alternatives” in light of the developments.
fell 64% to $4.27 in early trade.
Hurricanes Katrina, Rita and Wilma will cost PXRE a net $758 million to $788 million before taxes in 2005, the company estimated. That’s up from a previous estimate of between $462 million and $477 million, the reinsurer added.
Influential industry rating agency A.M. Best cut PXRE’s financial-strength and credit ratings to below “a-” after the company unveiled the new loss estimates.
Ratings of at least “a-” are crucial for reinsurers to attract new business. If ratings drop below that level potential customers are less likely to place risks with reinsurers because they worry that the company isn’t financially strong enough to pay future claims.
“In light of the potential negative impact that adverse rating actions would have on the company’s future business, PXRE has decided to explore strategic alternatives,” the reinsurer said in a statement.
PXRE has hired the investment bank Lazard Ltd.
to advise it on options.
PXRE shares slumped 73% to $3.24 during after-hours trading. The stock traded above $25 before the hurricanes hit last year.
“It’s a sinking ship. The market is telling you that,” Andy Barile, an insurance industry consultant in Rancho Santa Fe, Calif., said. “They’re probably going give up their independence.”
PXRE specializes in a type of coverage called retrocessional reinsurance that was particularly hard hit by last year’s unprecedented hurricane season. See full story.
Retrocessional reinsurance is purchased by reinsurers looking to spread risks they’ve taken on from primary insurance companies. It’s often referred to as reinsurance for reinsurers.
The business is considered one of the riskiest in the insurance industry, but also offers potentially big returns. That’s because only really big losses reach far enough down the chain of insurers and reinsurers to reach these so-called retrocessionaires. If the industry avoids big losses, retrocessional reinsurers get to keep the premiums they’ve charged.
Katrina, Rita and Wilma cost the insurance industry more than $50 billion, leaving retrocessional reinsurers with huge losses. PXRE may have been the hardest hit.
Barile said PXRE’s best option may be to sell itself to one of a new clutch of Bermuda-based reinsurers that have sprouted since the hurricanes hit last year.
‘Run on the bank’
However, Ron Bobman of Capital Returns LP, a New York hedge fund focused on the insurance industry, said an outright sale is probably unlikely after the loss of the company’s ‘A-‘ ratings.
When ratings drop below the A range, there are requirements in reinsurance agreements that force companies to post collateral to back all of their outstanding but unpaid obligations, Bobman explained.
“It’s going to look a little like a run on the bank: All of their counterparties that have amounts owed to them are going to come looking for extra capital,” he said. “That will put a tremendous amount of pressure on the company to continue. It’s not a pretty picture.”
PXRE may eventually end up in “run-off,” which is when an insurer or reinsurer stops accepting new business and manages its current policies until all claims are paid, Bobman added.
Both Barile and Bobman said there could be a lot of litigation stemming from PXRE’s troubles.
In October, PXRE raised over $100 million by selling almost nine million shares at $13.25 each. The reinsurer also raised more than $350 million from an offering of perpetual preferred shares in the same month.
At the time, PXRE’s hurricane loss estimates were much lower than those announced on Thursday.
View more information: https://www.marketwatch.com/story/losses-rating-cut-sink-reinsurer-pxre-group