Appeals Court Upholds Dismissal of PXRE Lawsuit

A federal appeals court has upheld a lower court's decision to dismiss a class-action securities lawsuit filed against PXRE Group Ltd., a Bermuda insurer in runoff after being devastated by Hurricane Katrina losses.

The 2nd U.S. Circuit Court of Appeals affirmed the March 4, 2009, ruling of U.S. District Judge for the Southern District of New York, Richard J. Sullivan. The appeals court issued a three-page brief that affirmed Sullivan's decision on Dec. 21.

Sullivan had dismissed the case with prejudice, noting it was the fourth time that plaintiff Chad Condra had pleaded the case.

According to the lawsuit, Condra sought class-action status against PXRE and three of its officers, Jeffrey L. Radke, president and chief executive officer; John M. Modin, chief financial officer; and Guy Hengesbaugh, chief operating officer.

Condra had purchased PXRE stock from Sept. 11, 2005, through Feb. 22, 2006. Condra alleged that PXRE and its leaders were motivated to "materially understate" PXRE's estimated losses from hurricanes Katrina, Rita and Wilma.

However, the court said unlike insider trading -- a classic example of securities fraud -- there was no personal benefit for PXRE to underestimate its losses, Sullivan found.

"The alleged motivation of a corporation to raise money to prevent the negative ramifications of a resultant drop of a credit rating or a stock price -- even if such a drop would allegedly threaten the 'survival of the company' -- is far too generalized...to allege the proper 'concrete and personal' benefit required" by case law, Sullivan wrote in his decision.

PXRE Reinsurance Co. is effectively in run-off as of fourth quarter 2006 following substantial losses in 2005 from Katrina, Rita and Wilma, according to BestLink. Attempts to reach the company were not immediately successful.

According to BestLink, effective Dec. 31, 2007, Argo Group merged two of its Bermuda domiciled insurance companies, Peleus Reinsurance Ltd. and PXRE Reinsurance Ltd., into one Bermuda Class 4 general business insurer. The unified Bermuda insurer goes forward under the name Argo Re Ltd. (formerly Peleus Reinsurance Ltd.). Concurrently, all U.S. subsidiaries of Argo Group are now wholly owned by one intermediate U.S. holding company as Argo Group's two intermediate Delaware holding companies: Argonaut Group Inc. -- which owned the assets of the former U.S. publicly traded company by the same name -- and PXRE Corp., the surviving entity in the merger.

The unified U.S. holding company goes forward under the name Argo Group US Inc. (formerly Argonaut Group, Inc.). The latter is owned by PXRE Holding (Ireland) Ltd., which is wholly owned by Argo Re Ltd.

On Nov. 5, 2007, Argo Group agreed to sell the stock of PXRE Reinsurance Co. to WT Holdings Inc., a Delaware corporation, which is a wholly owned subsidiary of Tawa plc, a U.K.-quoted nonlife run-off consolidator. The company paid a cash dividend of $75 million to its direct parent, Argo Group US Inc., prior to the close of the sale. The acquisition was completed on March 31, 2008.

(By Meg Green, senior associate editor, BestWeek: [email protected])