S&P Lowers Channel Re Outlook to Negative; Affirms ‘AAA’ Rating

June 16, 2005

Standard & Poor’s Ratings Services announced that it has revised its outlook on Channel Reinsurance Ltd.’s “AAA” financial strength and financial enhancement ratings to negative from stable.

“While Channel Re acts as a reinsurer to MBIA, concerns have arisen regarding the level of staffing at Channel Re relative to the size of its portfolio and volume of business, as well as the performance and processes of its board and committees, resulting in the outlook revision to negative,” stated S&P credit analyst David Veno.

S&P warned that should “current investigations result in changes to Channel Re’s and MBIA’s reinsurance relationship, a reassessment of Channel Re’s rating would occur.”

S&P said, however, that it has “affirmed the ‘AAA’ ratings based on Channel Re’s strong capital position and steps taken by the investors to ensure parity between the risk assumed by the company and that retained by MBIA Insurance Corp. (MBIA), its sole source of business.

“As of Dec. 31, the company’s margin of safety was in the 1.60x-1.70x range, which exceeded Standard & Poor’s minimum ‘AAA’ requirement of 1.25x. The investors in Channel Re have a keen awareness of the risks that have faced reinsurers in the past, namely adverse selection in business assumed. Steps have been taken to ensure that business ceded by MBIA is similar in risk profile and premium rates to that retained by MBIA.

“Additionally, the investment in Channel Re by MBIA and its need for ‘AAA’ reinsurance capacity somewhat align the interests of MBIA with the financial performance of Channel Re.”

However, S&P said that it “believes that certain aspects of Channel Re’s corporate governance policies and procedures should be strengthened, as should its ability to perform underwriting and portfolio analysis.”

The rating agency also expressed concerns about the “outcome of the current inquires, conducted by the Securities and Exchange Commission and the New York State attorney general, of various topics including MBIA’s relationship with Channel Re. As the current inquires continue, Standard & Poor’s will closely monitor their progress and any implications these proceedings have for Channel Re’s business and financial strength.”

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