A.M. Best Company said it has downgraded the financial strength rating of Scottish Re Group Ltd. insurance subsidiaries, and given them a negative outlook based on declining subprime mortgage investments.

The Cayman Island firm's financial strength was dropped to “B” (Fair) from “B-plus” (Good) and its issuer credit ratings to “bb” from “bbb-minus.”

Oldwick, N.J.-based Best said the outlook for all ratings is negative.

The rating actions, Best said, are based on the opinion that “continuing market deterioration in the subprime mortgage loan market will result in additional delinquencies and losses,” adding that “the uncertainty surrounding the ultimate impact of investment write-downs on Scottish Re, its subsidiaries and special-purpose vehicles such as Ballantyne Re are not appropriate for 'Secure' financial strength ratings.”

Best said downgrades also reflect concerns with the ongoing “pricing, volatility, valuation and default risk in the mortgage-backed securities market,” which could result in substantial negative impact on the company's consolidated balance sheet.

The rating firm noted that Scottish Re remains heavily dependent upon off-shore securitizations for reserves that meet the Regulation XXX Actuarial Guideline.

It said that while a majority of Scottish Re's XXX reinsurance structures are “bankruptcy remote,” an additional rating concern is the deterioration in the market value of the underlying collateral, which reduces the amount available to fund future reserve increases.

Large write-downs on subprime loans held in the special-purpose vehicle's investment portfolio could potentially deplete the capital held within those structures, according to Best, which said that if any deficiency were to develop, Scottish Re's operating subsidiaries may be required to pledge additional assets to secure reserve credit outside of the securitization structure.

Given the increased risk commonly associated with lower-rated companies, Best said it has widened the notching for its debt ratings and downgraded the senior debt.

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Scottish Re Gets Best Downgrade

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