Financial guarantee reinsurer Ram Re’s triple-A financial strength rating could be under threat, after Standard & Poor’s revised its outlook on the firm to negative from stable. At the same time, S&P revised its outlook on Ram Re parent Ram Holdings’ A-plus rating to negative from stable.

In a report, the rating agency said it made the moves on the Bermuda-based company because of concern over its consistently below-average earnings and returns on equity over the past several years, as well as uncertainty about the company’s ability to improve its performance in the near- to mid-term. S&P credit analyst Dick Smith says that unless Ram Re improves its performance, the rating could be under pressure. Smith told Reactions that the company made a return on shareholders’ equity of 6.2% in 2005, and that its highest return on equity was 9.6% in 2001. “In its history the company has never recorded a return on equity in double digits,” he says. “By the time a company is eight years old, it should be showing maturity. A return on equity somewhere in the mid-teens would be more appropriate.”

According to S&P, Ram Re has been achieving below-average returns for a number of reasons, many of them one-off costs. These include expenses relating to the company’s April 2006 initial public offering, extraordinary legal and personnel expenses, the need for regular capital infusions, and growing losses and loss reserve accruals. “A variety of factors have conspired to not allow the company to get returns that the owners and investors want,” says Smith.

The negative outlook typically gives companies a maximum of two years to improve before S&P takes further rating action, says Smith. “Whether Ram Re achieves a return on equity in the mid-teens is not so important,” he says. “But they do need to show some significant improvement.”

The rating agency affirmed Ram Re’s triple-A rating and praised the company’s sound capital position, well-managed reinsurance strategy and strong reinsurance relationships and said it expected Ram Re to make progress towards improving its return on equity.

Vernon Endo, president and CEO of Ram Holdings, told Reactions that the company plans increase the size of the company’s portfolio. In a press release, Endo said, “While we are disappointed by S&P’s changed outlook, we will continue to improve earnings and ROE as a priority. As S&P indicated, our recent performance has been adversely impacted by non-recurring items, including expenses in anticipation of our recent public offering and sector specific loss reserve increases. Although we remain cautious about market conditions for the remainder of 2006, given our historic growth and as we improve operating leverage, we believe we are on track to show significant improvement in our ROE over the near-term, and to achieve our ROE growth-objectives over the mid-term.”