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S&P slashes Scottish Re ratings with four notch downgrade

Ratings agency Standard & Poor’s (S&P) has hit beleaguered Bermudian life reinsurer Scottish Re with a four notch downgrade sinking the firm deep into junk territory.

S&P lowered its counterparty credit rating on Scottish Re Group Ltd to CCC- from B and its counterparty credit and financial strength ratings on Scottish Re’s operating companies to B- from BB.

All of the company’s ratings remain on CreditWatch with negative implications.

S&P said: “The downgrade reflects our materially increased estimate of expected losses on Scottish Re’s residential mortgage-backed securities investments since initially placing the ratings on CreditWatch on 31 January 2008. Because of the disclosure of a material weakness in their accounting controls and the pending revised application of accounting principles to its distressed assets S&P believes Scottish Re’s financial flexibility could be severely limited.”

The agency said that although Scottish Re had reduced its exposure to XXX securitisations its ability to post capital was increasingly strained.

S&P added: “The ratings will remain on CreditWatch negative until we can determine the full extent to which the company's limited financial flexibility and reduced financial strength are weakened. This will not likely be determinable until the company is able to file its outstanding financial reports. We will lower the ratings further if the deterioration is more severe than expected.”

In March the company had its stock suspended by the New York Stock Exchange and has an application pending with the Securities and Exchange Commission to delist the firm.

Scottish Re has twice now postponed the release of its 2007 results 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.

Scottish Re also said it expects losses to be worse last year than they were in 2006, when it reported a full-year loss of $376.7mn.

S&P had already downgraded the firm after it revealed $102mn of realised capital losses in its third quarter results and an additional $279mn in unrealised capital losses during the quarter and said it was exposed to $1.9bn of sub-prime and Alt-A mortgage securities of $1.1bn.

While AM Best downgraded the company’s financial strength rating to B- (Fair) from B (Fair) and its issue credit rating to bb- from bb. All ratings were placed under review with negative implications.

The agency said it had “noted a heightened lack of clarity with respect to 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”.

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