A.M. Best Co. said it has downgraded the financial strength rating and issuer credit rating of Bermuda-based Lehman Re Limited, a wholly owned reinsurance subsidiary of financially embattled Lehman Brothers Holding Inc. The outlook is negative.

A.M. Best lowered Lehman Re's FSR to "A-minus" from "A" and ICR to "a-minus" from "a," citing concerns about the "perceived financial difficulties" of the reinsurer's parent company, Lehman Brothers.

The Oldwick, N.J.-based rating agency said, "Lehman Brothers has experienced a significant decline in its market capitalization, and A.M. Best believes that this rapid deterioration in investor confidence generates uncertainty as to the ability of the parent to raise capital to support Lehman Re, if needed."

Best noted that the financial condition of Lehman Re is so far unaffected by challenges faced by Lehman Brothers.

However, the firm said, "While A.M. Best believes that Lehman Re's current stand-alone capital position adequately supports its ratings, the negative perception surrounding the parent company may potentially impact Lehman Re's ability to attract and retain business."

Best analyst Richard Baldwin said that a concern is that Lehman Brothers may no longer be able to provide capital to Lehman Re if the reinsurer needed it. He said Lehman Re's ratings have always come with an understanding that it would enjoy support from Lehman Brothers if necessary.

But Mr. Baldwin cited Lehman Brothers' stock price as a sign that that may no longer be possible. "In our view, Lehman Brothers has probably lost the confidence of the market," he said, noting that the stock price has dropped sharply over the last week and significantly over the past year.

Given the condition of Lehman Brothers, Mr. Baldwin said it cannot raise capital that it could then, in turn, transfer to Lehman Re.