Bermuda property-catastrophe reinsurer PXRe saw its market value plunge 66 percent on Friday as the company faced the threat of a customer exodus.

PXRe, which sells reinsurance to insurers as well as high-priced policies to absorb risks from other reinsurers, faced customers pulling their business on the heels of the company?s ability to pay claims being questioned by rating agencies.

A.M. Best Co., Standard & Poor?s and Moody?s Investor Services all cut PXRe?s ratings down to the ?B? range after the company on Thursday doubled its estimate of how much it could pay in claims from damage in last year?s hurricanes, adding up to $311 million to an earlier claims estimate of between $462 million and $477 million.

The financial strength ratings assigned by the ratings firms are closely watched by customers who want to be sure any losses they have laid off to the reinsurer can be met. A reinsurer such as PXRe that sells to other reinsurers is called a retrocessional reinsurer.

?It is the old story,? said Andy Barile, a former Bermuda reinsurer who now consults for the industry from Rancho Sante Fe, California. ?The problem is if you don?t have an A, you face hurdles.?

PXRe?s stock fell $7.84 on Friday to $4.05 in composite trading on the New York Stock Exchange, pushing the company?s market capitalisation down to $292.9 million, lower than any of its peers. PXRe, which was formerly known as Phoenix Re, has been publicly traded since 1987.

In a filing with the US Securities Exchange Commission last year, PXRe said many of its contracts carried a clause that gives the insured the option of rescinding the agreement, or making certain demands, if its ratings were to fall below ?A-?.

PXRe?s troubles could make it an acquisition target, Mr. Barile said. The company on Thursday said it had hired investment bank Lazard to advise it on ?strategic alternatives?. ?All kinds of horse-trading is going to go on with this scenario,? Mr. Barile said.

Some in the Bermuda market thought the reinsurer, given its troubles, would be a hard sell.

Of concern for the rating agencies is the volatility PXRe, as a small reinsurer that is at risk of heavy losses from its retrocessional policies, faces.

Shareholders? equity at the end of September was $439.95 million. The company isn?t due to announce its year-end results until this Wednesday, which should give a better picture of the company?s current capitalisation. The company raised $474 million in the fourth quarter, but a large percentage of that could be eaten away by the recent announcement that 2005 claims have grown.

And the company could see its situation worsen if customers invoke contract exit clauses. S&P and Moody?s have said they could make further downgrades, making it a stronger possibility that PXRe may have to give back premium, or collateralise its obligations to reinsurers it has reinsured.

?There will be a lot of pressure? on customers, Mr. Barile said, to distance them from PXRe?s troubles. ?Buyers protect themselves? or face the possibility of shareholder lawsuits.

Two of the reinsurers who could be putting demands on the reinsurer in the near future are Bermuda peers. Montpelier Re chief executive Tony Taylor told analysts and investors on a Friday earnings conference call that it had bought a ?small? amount of retrocessional reinsurance from PXRe and that it was looking at the possibility of voiding its contracts, or moving the business to another reinsurer.

Mr. Taylor said PXRe was the only reinsurer rated below ?A-? that it had outstanding claims against.

And Aspen Insurance management, also in an earnings conference call, said PXRe owed it $53 million, and that it could demand collateral to secure the claim.

Management of a reinsurer that has seen its ratings fall below the ?A? range can consider a number of options. Continuing in business is a possibility if it can attract customers, and afford the higher capital costs.

Some are sold and others bow out of the market through a process called a ?run-off?, which means the company stays open with a skeleton staff to honour any claims on outstanding policies.

In PXRe?s case however, what happens may be driven more by buyers and investors than by management.

?The company is mostly owned by institutions, management don?t own enough,? Mr. Barile said.

Senior management hold a fraction of one percent of PXRe?s outstanding shares, according to 2005 Bloomberg data.

Gerald Radke, chairman, and his son, Jeffrey, chief executive, between them owned 0.105 percent of the company, according to records from last year.

Other senior managers also held similarly small stakes.

According to the records, the senior Radke held the smallest number of shares amongst senior management.

Records from last year show that a number of large hedge funds, including D.E. Shaw & Co., Eton Park Capital and Och-Ziff Management, had bought up a significant stake in the reinsurer.

These companies own more than 20 percent, the dated records show, and other institutions own about 65 percent more of the company.