Moody's Investors Service has downgraded the financial strength rating of Channel Reinsurance from "Aa3″ to "Baa1," citing Channel Re's "overall credit profile in the current environment." The outlook for the rating is negative.
Moody's said that market perceptions about Channel Re's "only primary client," the bond insurer MBIA, have impacted Channel Re's ability to write new business in the last few months. "If business volumes continue to remain weak, Channel Re's investors could decide to reconsider their long-term commitment to the financial guaranty reinsurance business, potentially resulting in a change in strategy or a downsizing of the firm's capital base going forward," Moody's said.
Moody's also said that any change in strategy by Channel Re would be affected because two trust accounts which Channel Re uses to provide collateral protection to MBIA hold "a large portion" of Channel Re's assets.
The rating agency said that, based on a revised assessment of the risks in Channel Re's portfolio which focused on the company's mortgage-related asset backed securities collateralized debt obligation (ABS CDO) exposures, estimated stress-case losses would approximate $780 million at the "Aa3″ threshold and $630 million at the "Baa1″ threshold.
"This compares to Moody's estimate of Channel Re's claims paying resources of approximately $959 million," the rating firm said.
It said Channel Re is currently $55 million below Moody's "Aa3″ reserves target level, and $140 million above the "Baa1″ target level.
Beyond Channel Re's affected mortgage related exposures, Moody's said that portfolio risks "appear to be well contained as reflected in its low risk municipal portfolio and structured risks with high underlying ratings."
Moody's also downgraded the rating of Two Rock Pass Through Trust, a related contingent capital facility, to "Ba1″ from "A3."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.