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Hat tip to TradingBR:

Rating Action: Channel Reinsurance Ltd.

Moody's puts Channel Re and Two Rock on review for downgrade

New York, January 23, 2008 -- Moody's Investors Service announced today that it has placed the Aaa insurance financial strength rating of Channel Reinsurance Ltd. (Channel Re) on review for downgrade. At the same time, Moody's also placed on review for downgrade the Aa3 rating assigned to contingent capital securities issued by Two Rock Pass Through Trust, a related financing trust.

Channel Re is a financial guaranty reinsurance company dedicated to providing reinsurance capacity to MBIA Insurance Corporation (MBIA), the New York based financial guaranty insurance company. Channel Re has reinsured a broad range of risks from MBIA, including recent vintage second-lien mortgage securitizations, as well as significant amounts of ABS CDOs containing such exposures.

Moody's stated that today's rating actions were motivated by growing concern about the possible effect of these mortgage-related risks on Channel Re's credit profile in light of the prospect for worsening performance in the mortgage market and the inherent volatility in RMBS and ABS CDO exposures.

"As part of its review, Moody's will evaluate the possible impact of this exposure on Channel Re's risk-adjusted capital adequacy and franchise value", said Ranjini Venkatesan, a Moody's analyst. "We will also assess possible changes in the value that Channel Re provides to MBIA as a result of both companies' evolving credit and franchise profiles in the rapidly changing financial guaranty markets."

Moody's additionally noted that Channel Re's credit profile also has implications for the credit profile of MBIA, with strain at Channel Re placing incremental pressure on MBIA's capital adequacy, and will be a consideration in the ongoing review of MBIA's ratings. MBIA's ratings were placed on review for downgrade on January 17, 2008.

Now, the owner's of Channel Re, Rennaisance Re and Partner Re have already marked their investments in Channel Re down to near zero (see my take ). Again, Moody's is way behind the curve, being much more reactive and not very predictive. More importantly, Channel Re was formed exclusively to reinsure MBIA, forcing an extreme amount of concentration and correlation risk. MBIA also owne 17% of Channel Re, and is also on negative ratings watch. Given the outlook of the owners of Channel Re, a downgrade should be inevitable, but who knows when dealing with the big three. If a downgrade were to occur, it should immediately undercapitalize MBIA, and will compound the problems that would occure if they themselves get downgraded.


Today's rating actions are as follows:


Channel Reinsurance Ltd.

Current Rating: Aaa, on review for downgrade

Prior Rating: Aaa


Contingent Capital Securities issued by Two Rock Pass Through Trust

Current Rating: Aa3, on review for downgrade

Prior Rating: Aa3


In addition:

MGIC Provides Investor Update
MILWAUKEE (January 22, 2008) — MGIC Investment Corporation (NYSE:MTG) announced today that year-end 2007 delinquency inventory was 107,120 loans, an increase of approximately 16,000 loans from the end of the third quarter. Cure rates have continued to deteriorate, resulting in a higher percentage of delinquent loans that become claims, and average claim size has also continued to increase. As a result, the Company expects incurred losses for the fourth quarter of 2007 to approximate $1.3 billion. The Company said its insurance in force at year-end 2007 was $211.7 billion.
The Company also said it is increasing its paid loss forecast for 2008 to $1.8 — $2.0 billion.
During the fourth quarter, the Company made a decision to stop writing the portion of its bulk business that insures loans which are included in Wall Street securitizations. The Company is analyzing the accounting implications of that decision on its fourth quarter results.
The Company is issuing this press release to provide current information to all investors in advance of its February 13, 2008 earnings call. The Company is not undertaking any obligation to update any information in this press release regarding the Company’s expectations or any forward-looking statements. No investor should rely on the fact that such information is current at any time other than the time at which this press release was issued.
The failure of the pure mortgage insurers to pay claims will fall directly on the GSEs such as Fannie Mae and Ginnie Mae, who buy high LTV loans that are insured by PMI and MGIC. If this occurs, and draws down the capital of this nation's backstop for mortgage financing, the housing mess we see now will seem like Disney Land compared to what may lie ahead.