Standard & Poor's downgraded the counterparty credit and financial strength ratings on PXRe Reinsurance Ltd. two notches to "BBB-" from "BBB+" last night just minutes before the troubled Bermuda-based property-catastrophe reinsurer began its earnings call to discuss its "extremely disappointing fourth quarter results".

This is the second time in a week that S&P downgraded the company with the latest action stemming from 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".

PXRe disclosed last week it had increased its pretax cost estimates for the Gulf Coast hurricanes between $281 million and $311 million

S& P credit analyst Steven Ader also cut the company's senior debt by another notch to "BB-minus," a junk grade.

The ratings remain on CreditWatch with negative implications.

Jeffrey L. Radke, president & chief executive officer of PXRe Group, told the earnings call last night that he expects more agency reaction.

Last week A.M. Best downgraded PXRe's financial strength rating to "B++ (Very Good)" from "A-minus (Excellent)," with a negative outlook and also lowered the company's senior unsecured debt to "junk" status, to "bb" from "bbb-minus."

Moody's cut PXRe's financial strength rating to "Baa2" from "Baa1." Fitch cut it to "BB-plus" from "BBB-plus." "The ratings agencies have confirmed that the ratings they most recently gave us were predicated on the notion we were going to raise significant amount of equity capital," he said adding that the board felt it was inappropriate to raise capital at the present time without a clear certainty that PXRe would achieve an "A-" or better rating.

Mr. Radke told the call that while the actions will impact the company's ability to renew and write business, PXRe "will be able to retain a portion of the business we renewed at January 1, 2006 and [will be able to continue working with clients and brokers going forward without ratings in the "A" range."

PXRe previously disclosed that it could lose 75 percent of its clients as a result of downgrade triggers. Last night less than 7.5 percent of contracts in force representing less than 7.5 percent of premium base on January 1 had advised PXRe that they are cancelling their contracts, Mr. Radke told the call.

Clients who had not made a decision on whether to cancel ran the gamut from those who said they would not feel it was appropriate to cancel if PXRe collatoralised the unearned premium reserve to others who make their own determinations on reinsurance security rather than rely at least exclusively on ratings agencies.

"We have heard from another group of clients that have agreed to wait to make a decision to see results of our strategic review and some customers we just haven't heard from," he said.

"An obvious area of concern following downgrade is companies' exposure to debt covenants and a strain on liquidity resources of the company. We are in a good position on both fronts," he said.

CFO John Modin told the call last night that PXRe Group has approximately $930m in fixed income, short term securities and cash that were held free and clear and it was in the process of reallocating a "significant portion of these securities" from its fixed income portfolio to its short term and cash equivalent portfolio to improve its liquidity position.

"In our Bermuda operating company we sold $426 million of our fixed income portfolio and plan to sell an additional $180 million of securities in the next few days.

"The Bermuda company is where we write most of our business and is also where we have most losses from hurricanes this past fall and the proceeds of these sales will be invested in cash equivalents," he said adding that late last week PXRe executed redemption orders on its entire group wide hedge fund portfolio which totalled $148 million.

S&P said in its downgrade last night that although PXRe's capital and liquidity are "sufficient to meet know obligations", its competitive position has "materially diminished", as demonstrated by its disclosure that a substantial loss in premium volume could result from current reinsurance clients exercising their right to cancel their reinsurance contracts.

This possibility also materially hampers PXRe's financial flexibility borne from prospective business opportunities and PXRe's disclosure that it is precluded under Bermuda law from declaring or paying dividend subject to a shareholder vote in April 2006, S&P said. PXRe previously announced that it had retained Lazard Ltd. as a financial adviser to help it explore a broad range of strategic alternatives.

"Our board's primary objective is to determine the strategy that will best maximise shareholder value. "The board has not made any determination on strategic alternative at this time," Mr. Radke said declining to expand on some of the other possible alternatives.

PXRe shares fell six percent to close at $3.99 last night on the New York Stock Exchange.

More than 7.1 million shares moved yesterday with PXRe falling to a low of $3.80 in midday trading, an price just 20 cents off of the all-time low which PXRe hit last Thursday when it announced the revised hurricanes estimates.