Ratings agency Standard & Poor's has downgraded Bermuda bond reinsurer Ram Reinsurance's financial strength and financial enhancement ratings from AAA to AA and put a negative outlook on the ratings.

Ram chief executive officer Vernon Endo said he believed the ratings agencies now regarded financial guaranty reinsurance as a AA rather than a AAA industry.

In its report, S&P stated that the AA rating reflects its view of Ram Re's weakened capital adequacy position, which is the result of a significant amount of projected losses relating to reinsured sub-prime and residential mortgage-backed securities (RMBS) and asset-backed security collateralised debt obligations (ABS CDOs).

S&P stated that the negative outlook for the 'AA' rating reflects S&P's view that, in light of the unprecedented level of mortgage market deterioration that has occurred, S&P remains circumspect about assigning stable outlooks to insurers even if they have sufficient capital when measured against its projected stress case losses.

Accordingly, S&P stated that it will assign negative outlooks to those firms with significant exposure to domestic non-prime mortgages and/or meaningful lower credit quality exposures. The rating and outlook would be reassessed in the event Ram Re's sub-prime exposure deteriorates further and strains the company's claims paying resources.

The rating also reflects S&P's expectation that Ram Re will continue to maintain strong reinsurance relationships with the primary insurer community in the wake of its rating downgrade. S&P stated that lastly, the rating reflects its understanding that RAM will continue to take proactive steps toward improving its historically below-average return on equity (ROE).

Parent company Ram Holdings Ltd. posted a first-quarter net loss of $189.5 million last month largely because of a fall in the value of the credit derivatives it reinsures.

Vernon Endo, president and chief executive officer of Ram, said: "We are disappointed but not surprised by S&P's ratings action. We believe that the financial guaranty reinsurance industry in general is now considered to be a AA industry by the rating agencies and all of our major competitors are rated AA.

"At the AA-level, we provide 70-percent reinsurance credit to our AAA-rated customers, without taking into account any potential benefit of the trust agreements we have in place on behalf of our US-regulated customers. While some of our customers have the right to terminate our treaties and re-assume their business with us after a cure period has expired, we do not expect any of our customers to exercise this right in the near term, if at all.

"As a result of the downgrade, and assuming business is not recaptured, under current treaty terms we estimate the increase in ceding commissions to result in a one-time reduction of $5.6 million on unearned premium.

"We estimate that commission expense going forward will increase on average about two percent. We continue to make progress on limited, negotiated re-assumption transactions with our customers to improve our capital position and, in the course of those discussions, we will address the downgrade consequences as well."