Scottish Re's primary operating insurance subsidiaries has seen its financial strength rating (FSR) downgraded to B- (rair) from B (rair) and the issuer credit ratings (ICR) to "bb-" from "bb" by AM Best Co.

Best also has downgraded the ICR to "ccc+" from "b-" and the various debt ratings of Scottish Re.

All ratings have been placed under review with negative implications. Subsequent to the February 27, 2008 rating downgrades, the ratings agency has noted a heightened lack of clarity in terms of Scottish Re's financial strength position, underpinned by continuing deterioration in the credit markets and the likely further declines in the market value of its investment portfolio and assets in various special purpose vehicles (SPV).

Scottish Re has twice postponed the filing of its Form 10-K, primarily due to an inability to complete the evaluation of mark-to-market valuations and other temporary impairments in the carrying value of its available for sale securities. The continuing market deterioration in the sub-prime mortgage loan market will result in additional delinquencies and losses and there remains uncertainty surrounding the ultimate impact of investment write-downs on Scottish Re, its subsidiaries and SPVs such as Ballantyne Re plc. (Ballantyne). The rating downgrades also reflect Best's concerns with the ongoing pricing, volatility, valuation and default risk in the mortgage-backed securities market, which could result in an additional negative impact on the company's consolidated balance sheet.

Best notes that Scottish Re remains heavily dependent upon off-shore securitisations for its XXX reserves. Scottish Re recently announced a binding letter of intent with ING North American Insurance Holdings Inc. (ING) and its affiliates in which a pro-rata portion of business ceded to Ballantyne, an orphan offshore SPV, would be recaptured.

The transaction would allow Scottish Re (US) Inc. to continue to receive full NAIC reserve credit for reinsurance for the business currently ceded to Ballantyne. Erosion in the value of the large position in subprime and Alt-A loans held by Ballantyne would further deplete the capital held within this structure. If any further deficiency were to develop, Best believes that absent the completion of the ING transaction, Scottish Re's operating subsidiaries would be required to pledge additional assets to secure reserve credit outside of the securitisation structure.

The company also recently expanded the scope of its strategic evaluation to include the sale of its core North American reinsurance business. Best views this as a departure from Scottish Re's previously announced plans to pursue the disposition of non-core business lines such as its international operations. The ratings will remain under review while Best monitors the performance of the company's subprime and Alt-A mortgage-backed portfolios and assesses the impact of the ING transaction and the revised strategy on Scottish Re's balance sheet.