Scottish Re Group's financial strength rating (FSR) has been downgraded to B (fair) from B+ (good) and its issuer credit ratings (ICR) have been slashed to "bb" from "bbb-" by AM Best following concerns over continued sub-prime mortgage loan market deterioration.

Best also has downgraded the ICR to "b-"from "bb-" and the various debt ratings of Scottish Re. The outlook for all ratings is negative.

These rating actions are based on Best's opinion that continuing deterioration in the sub-prime mortgage loan market will result in additional delinquencies and losses and that the uncertainty surrounding the ultimate impact of investment write-downs on Scottish Re, its subsidiaries and special purpose vehicles (SPV) such as Ballantyne Re are not appropriate for "secure" FSRs.

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 substantial 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. 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 sub-prime loans held in the SPV's investment portfolio could potentially deplete the capital held within those structures. 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 securitisation structure.

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