Moody's Investors Service yesterday downgraded Channel Reinsurance Ltd. to Baa1 with a negative outlook from Aa3, citing uncertainty about the reinsurer's business prospects and mortgage-related collateralized debt obligation exposures.

As the primary reinsurer of MBIA Insurance Corp., Channel Re has written little new business this year, weakening its franchise value and financial flexibility, Moody's said.

In addition, Moody's estimates for Channel Re's stress-case losses on its CDOs of asset-backed securities increased by $150 million to $377 million. Channel Re fell $55 million below Moody's 1.3 times capital target level for the Aa3 rating and sits $140 million above that level for the Baa1 rating. Channel Re has claims paying ability of $959 million, according to the rating agency.

Channel Re's portfolio outside of mortgage-related exposure contains primarily low-risk municipal products and structured risks with high underlying ratings, Moody said. But some of those structured products expose Channel Re to products such as commercial real estate CDOs that are performing well now, but "because of their leverage structure and sector concentration, may be more sensitive to severe economic or sector deterioration."

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