The merged entity will be called Argo Group International Holdings Ltd (Argo) and will become the Bermuda holding company for PXRE's existing insurance subsidiaries, Argonaut's US operations, and Peleus Re.
San Antonio Texas-based Argonaut's president and CEO Mark Watson III will fill the same positions at Argo, with the new company's board made up of nine Argonaut directors and four from PXRE.
PXRE, which took an eventual $807mn net hit from Katrina, Rita and Wilma, had looked set to slide into run-off after most of its reinsureds cancelled or non-renewed after its ratings slipped out of the A range in February 2006.
Nevertheless, the reinsurer's president and CEO Jeff Radke had continued to express his optimism that a solution would be found "other than run-off".
Commenting on the Argonaut deal, Radke said: "After extensive evaluation of numerous alternatives by a special committee of PXRE's board of directors, it became clear that the best opportunity to maximise the value of PXRE's existing franchise for its shareholders was through a combination with an established and well diversified property and casualty company such as Argonaut Group."
He added that the new combine would be able to "leverage PXRE's substantial assets, international platform and reinsurance capabilities to their fullest on behalf of its newly expanded shareholder base".
Peleus Re will be headed up by Barbara Bufkin as president, who is currently Argonaut's senior vice president of corporate business development, and will seek an AM Best rating.
The merged group will have assets of $5bn and shareholders' equity of around $1.3bn.
Terms of the deal will see around 73 percent of the new group owned by former holders of Argonaut shares, with the remainder held by former PXRE shareholders.
Separately, PXRE reported 2006 net income of $28.5mn, which included a fourth quarter net loss of $19.7mn.
The fourth quarter loss was driven by $17.6mn termination charges from the early commutation of its reinsurance contract with SPV Atlantic & Western Re Ltd, along with a fall-off of business following the company's downgrade.