Bermuda-based bond reinsurer Ram Reinsurance Co. Ltd.'s outlook has been changed to negative by Moody's Investors Service, reflecting continued uncertainty over the performance of mortgage and mortgage-related collateralised debt obligation (CDO) exposures and the company's future underwriting prospects given its reliance on the primary financial guarantors for business.

Moody's said it also confirmed its 'Aa3' insurance financial strength rating on RAM Re, along with its 'Baa1' rating on preference shares issued by Bermuda-based RAM Holdings Ltd., and 'A2' contingent capital securities rating of Blue Water Trust I, a related financing trust.

Ram Holdings' share price rose 10 cents to $1.46 in New York trading yesterday.

The rating action reflects Moody's updated assessment of RAM Re's risk-adjusted capitalisation in light of the company's exposure to the US residential mortgage market.

"We are pleased that Moody's has confirmed our Aa3 rating," said Vernon Endo, Ram's chief executive officer. "We will continue to pursue alternatives to strengthen our capital position with the goal of returning to a stable rating over time."

Ram is pursuing a number of alternatives to improve its capital position, including seeking reinsurance and reducing its growth. But the company said that "due to current market conditions, Ram does not expect to raise new capital at the present time".

Moody's said Ram Re remains adequately capitalised for its rating level, in part, because the company entered this difficult market environment with a relatively healthy capital position, but its exposure to mortgage-related risk could have consequences for its business and financial profile.

Moody's said the company's core profitability may also be affected over the medium term due to stress within its residential mortgage-backed securities and asset-backed securities CDO books. The rating agency said that demand for Ram Re's product may increase as a result, although the company's ability to write new business in this favourable environment is somewhat constrained by its current capital position.