Exhibit 99.1

ChannelRe Holdings Ltd.

(Incorporated in Bermuda)

Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(expressed in U.S. dollars)

June 10, 2008

Report of Independent Auditors

To the Audit Committee of the Board of Directors and Management of

ChannelRe Holdings Ltd.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in deficiency of assets / shareholders’ equity and comprehensive income (loss) and of cash flows present fairly, in all material respects, the financial position of ChannelRe Holdings Ltd. at December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in notes 2 and 3 to the financial statements, the Company recorded significant losses in 2007 which resulted in a deficiency in assets as of December 31, 2007.

/s/ PricewaterhouseCoopers

Chartered Accountants

A list of partners can be obtained from the above address

PricewaterhouseCoopers refers to the members of the worldwide PricewaterhouseCoopers organization

ChannelRe Holdings Ltd.

Consolidated Balance Sheets

As at December 31, 2007 and 2006

(U.S. dollars in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

ChannelRe Holdings Ltd.

Consolidated Statements of Operations

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

ChannelRe Holdings Ltd.

Consolidated Statements of Changes in Deficiency of Assets / Shareholders’ Equity and Comprehensive Income (Loss)

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

ChannelRe Holdings Ltd.

Consolidated Statements of Cash Flows

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

ChannelRe Holdings Ltd. (“the Company”) was funded and commenced operations as a Bermuda-domiciled holding company on February 12, 2004. The Company was incorporated with limited liability under the Bermuda Companies Act 1981. The Company is the majority shareholder (72.09%) of Channel Reinsurance Ltd. (ChannelRe). ChannelRe was also founded and commenced operations as a Bermuda-domiciled financial guarantee reinsurer on February 12, 2004. ChannelRe was incorporated with limited liability under the Bermuda Companies Act 1981 and is registered as a Class 3 insurer under The Insurance Act 1978, amendments thereto and related regulations (“The Act”).

The sole shareholders of the Company are Koch Financial Re, Ltd. (Koch) (a wholly-owned subsidiary of Koch Industries); MBIA Insurance Corporation (MBIA) (a wholly-owned subsidiary of MBIA Inc.); Partner Reinsurance Company Ltd. (Partner Re); and RenaissanceRe Holdings Ltd. (RenRe). The Company’s initial capitalization was $264 million. In June 2007 the Company repurchased shares pro rata for a total consideration of $27.0 million (see note 8).

Under reinsurance treaties entered into with MBIA, ChannelRe assumed a $26 billion portfolio of in force business from MBIA in 2004 and continues to reinsure a share of MBIA business on both a treaty and facultative basis with the majority of business assumed on a facultative basis (See Note 24). The treaty is annually renewable on July 1 of each year.

As of December 31, 2007 and 2006, ChannelRe was rated Aaa by Moody’s and AAA by Standard & Poor’s (“S&P”). Subsequent to December 31, 2007, Moody’s downgraded ChannelRe to Aa3 (negative outlook) and S&P downgraded ChannelRe to AA with negative outlook (see Note 24).

Adverse developments in credit markets, principally stemming from the sub prime mortgage crisis, have resulted in an adverse effect on the ChannelRe’s business, results of operations, and financial condition. These effects include significant mark-to-market losses on ChannelRe’s portfolio of reinsured credit default swaps, which are accounted for as derivative contracts and are marked to fair value as described in Notes 4(d) and 5. In 2007, ChannelRe recorded a $752.3 million loss in respect of these derivative contracts and this resulted in the Company’s deficiency of assets (negative shareholders’ funds) of $109.6 million at December 31, 2007.

ChannelRe continues to be materially exposed to risks associated with continuing deterioration in the credit market sectors discussed above, as well as the spread of such deterioration to other sectors of the economy to which ChannelRe has material business exposure (see note 19). The extent and duration of any continued deterioration of the credit markets is unknown, as is the effect, if any, on potential claim payments and the ultimate amount of losses ChannelRe may incur on obligations it has guaranteed.

ChannelRe believes that as its book of insured credit default swaps (“CDS”) does not contain typical CDS market standard features (see note 5) estimates of credit impairments are a better indicator of eventual losses than the mark to market losses and related derivative liability. Current estimated credit impairments on the ChannelRe’s credit default swap contracts are significantly less than the derivative liability recorded on the balance sheet.

At December 31, 2007 the derivative liability was $752.1 million and the estimated credit impairments on CDS contracts were $153 million based upon the most recent available information as reported by MBIA.

(1)

ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

ChannelRe has prepared a cash flow forecast that assumes $78 million of the $153 million in CDS credit impairments as of December 31, 2007 will be paid over the next 5 years, with the remainder ($75 million) being paid out beyond 5 years (see Note 5). Cash flow is forecasted to be positive throughout this time frame. Accordingly, ChannelRe believes that it has, for at least the next 12 months, sufficient liquidity to fund its obligations and its statutory capital is sufficient to comply with its regulatory solvency requirements.

Due to ChannelRe’s credit rating downgrades subsequent to year end (see Note 24), MBIA in accordance with the reinsurance agreement between ChannelRe and MBIA has the option to terminate the reinsurance agreement and either take back all the ceded business or discontinue ceding new business to ChannelRe. Alternatively MBIA has the option to increase the ceding commission it charges on a prospective basis.

The Company is currently considering its future strategic options to address the Company’s deficiency in assets and the slow down in ChannelRe’s business. In May 2008, ChannelRe and MBIA reached an agreement in principle that includes, among other things, the cancellation of seven reinsurance transactions previously assumed by ChannelRe and the stipulation that MBIA will not exercise its option to increase its ceding commissions charged to ChannelRe.

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany balances and transactions have been eliminated on consolidation.

Minority interests consist of direct investments by MBIA and Koch (27.91%) in ChannelRe.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The most significant estimates, which as at December 31, 2007 are significantly more judgmental than in prior years, involve determining the fair value of derivative instruments (Note 4d) and the setting of loss and loss adjustment expenses (Note 4g). Certain amounts in prior years were reclassified to conform to the current year presentation.

The fixed-maturity investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses reflected in accumulated other comprehensive income (loss) in shareholders’ equity (deficit). The fair value of fixed-maturity securities available for sale is based upon quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

The Company’s process for identifying declines in the fair value of investments that are other than temporary involves consideration of several factors. These factors include (i) the time period during which there has been a significant decline in value, (ii) an analysis of the liquidity, business prospects and overall financial condition of the issuer, (iii) the significance of the decline, (iv) an analysis of the collateral structure and other credit support, as applicable of the securities in question and (v) management’s intent and ability to hold the investment for a sufficient period of time for the value to recover. Where the analysis of the above factors results in the conclusion that declines in fair values are other than temporary, the cost of the security is written down to fair value and the previously unrealized loss is therefore realized in the period such determination is made.

(2)

ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information, market conditions generally and assessing value relative to other comparable securities. Bond discounts and premiums are amortized using the effective yield method over the remaining term of the securities. For pre-refunded bonds, the remaining term is determined based on the contractual refunding date. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by specific identification and are included in the statement of operations under the caption “net realized gains/losses on investments.”

Short-term investments are carried at fair value, and include all fixed-maturity securities with a remaining term to maturity of less than one year.

Cash and cash equivalents include cash on hand and demand deposits with banks with original maturities of less than 90 days.

Derivatives are accounted for under SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted. Transactions entered into that are accounted for under SFAS No.133, as amended, are comprised of certain financial guarantee contracts (credit default swaps) assumed from MBIA and a put option agreement with Two Rock ABC Trust. Changes in the fair value of these derivative instruments are recorded each period in current results as a realized gain or loss and on the balance sheet as derivative assets or liabilities.

ChannelRe has reinsured credit derivatives as an alternative form of financial guarantee. These reinsured credit derivative contracts are accounted for at fair value with changes in fair value recorded in earnings since they do not qualify for the financial guarantee scope exception under SFAS 133, as amended. ChannelRe has reinsured portions of MBIA’s credit derivative portfolio which primarily consists of structured pools of credit default swaps (“CDS contracts”). The CDS contracts principally reference obligations consisting of various asset classes. These contracts have different terms than the typical market standard CDS contracts that are traded between other capital markets participants. In general, the reinsured CDS contracts are held until maturity, do not require the posting of collateral, the payment terms are structured on a “pay as you go basis”, and the contracts generally cannot be accelerated unless at MBIA’s option.

Consistent with industry practice in 2007, the Company presents the premium for reinsured CDS policies as premium revenue, and the related commission expense as acquisition costs. The financial guaranty industry has discontinued this practice in 2008.

Historically, there has not been a market for the transfer of such highly structured insured credit derivative contracts, in part because of the contractual differences noted above. Since there are no active market transactions in these exposures, MBIA generally uses vendor-developed and proprietary models, depending on the type and structure of the contract, to estimate the fair value of the derivative contracts. The MBIA CDS valuation model simulates what MBIA believes a bond insurer would charge to guarantee the transactions on the measurement date, based on the market-implied default risk and subordination of the underlying collateral and any estimated impairment. ChannelRe records its relative share of the reported MBIA mark. Management reviews the mark for reasonableness and, on an individual transaction basis, will adjust the mark to reflect the estimated credit impairment if additional information becomes available. Credit impairments on derivative transactions are reflected in “net (losses) gains on derivative

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ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

instruments and foreign exchange” in the statement of operations and the related liability is presented on the balance sheet in the line “derivative liabilities”.

Instalment premiums are recorded as written at each instalment due date and are earned over the respective instalment period, which equates to the period of risk and is generally less than one year. All other premiums are recorded as written at the inception of the policy and are earned in proportion to the expiration of the related risk. Therefore, for transactions in which the premium is received upfront, premium earnings are greater in the earlier periods when there is a higher amount of exposure outstanding. The upfront premiums are apportioned to individual sinking fund payments of a bond issue according to an amortization schedule. After the premiums are allocated to each scheduled sinking fund payment, they are earned on a straight-line basis over the period of that sinking fund payment. When a policy is retired or defeased prior to the end of the expected period of coverage, the remaining deferred premium, less any amount credited to a refunding issue reinsured by ChannelRe, is recognized in income at that time. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired terms of policies in force.

Policy acquisition costs include only those expenses that vary with and are primarily related to the production of business. Such costs include ceding commissions paid to MBIA on reinsurance assumed, salaries and related costs of underwriting personnel, premium taxes, and certain other underwriting expenses. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. Deferred policy acquisition costs are limited to their estimated realizable value based on the related unearned premiums. Anticipated losses and loss adjustment expenses, based on historical and current experience, and anticipated investment income related to those premiums are considered in determining the recoverability of deferred acquisition costs.

The Company’s liability for losses and loss adjustment expenses consists of case basis reserves and an unallocated reserve and are recorded based on management’s best estimate.

Case basis reserves and LAE are established based on reports received from MBIA, supplemented by management’s judgment, and represent ChannelRe’s best estimate of identified losses, including costs of settlement on the obligations it has reinsured in reinsurance form. It does not include impairments on CDS assumed in derivative form as described in 4(d) above. ChannelRe records a case basis provision for losses and related LAE when reported by MBIA or when, in ChannelRe’s opinion, an insured risk is in default or a default is probable and the amount of the loss is reasonably estimable. The amount of the case basis reserve with respect to any policy is based on the net present value of the expected ultimate losses and loss adjustment expense payments that ChannelRe expects to pay with respect to such policy, net of expected recoveries under salvage and subrogation rights. The amount of the expected loss, net of expected recoveries, is reported on a discounted basis by MBIA. The discount rate used at December 31, 2007, 2006 and 2005 was approximately 5.0%. This discount rate approximates the yield to maturity of the ChannelRe’s fixed-income portfolio. ChannelRe believes this yield is an appropriate rate of return for present valuing its reserves as it reflects the rate of return on the assets supporting future claim payments by the ChannelRe. Management reviews the insured portfolio on a continuous basis to identify problem credits.

Establishment of case basis reserves for losses and loss adjustment expenses requires the use and exercise of significant judgment, including estimates regarding the likelihood of occurrence and amount of a loss on an insured obligation. Actual experience may differ from estimates and such difference may be material, due to the fact that the ultimate dispositions of claims are subject to the outcome of events that

(4)

ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

have not yet occurred and, in certain cases, will occur over many years in the future. Examples of these events include changes in the level of interest rates and credit deterioration of insured obligations.

The unallocated loss reserve is established on an undiscounted basis. ChannelRe’s unallocated loss reserve represents ChannelRe’s estimate of losses that have or are probable to occur as a result of credit deterioration in the ChannelRe’s insured portfolio but which have not yet been specifically identified and applied to specific insured obligations. ChannelRe currently allocates 12% of scheduled earned premium to the unallocated loss reserve. ChannelRe bases this policy on MBIA’s policy, which allocates the same percentage of earned premium to unallocated loss reserves. ChannelRe adopted the MBIA policy based on management’s assessment that the credit characteristics of the ChannelRe insured portfolio are similar to the MBIA insured portfolio. Management reviews the continued applicability of the 12% factor to the ChannelRe’s portfolio on an on going basis, and if appropriate based on management’s judgment, adjusts the unallocated loss reserve in order to maintain an adequate level of loss reserves.

Additionally, for the year ended December 31, 2005, ChannelRe followed an internal guideline that limited the reduction of the unallocated loss reserve in respect of a single default. Specifically, no more than 15% of the unallocated loss reserve balance at quarter end could be used to offset a case reserve associated with a single default. In 2006, based on management’s assessment of ChannelRe’s unallocated loss reserves, this internal guideline was removed provided that in management’s opinion the Unallocated Reserve remains reasonable.

Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating transactions in foreign currencies are translated at average rates of exchange prevailing during the year. Gains and losses resulting from foreign currency are recorded in current results.

Minority interest reflects MBIA and Koch’s direct investments in ChannelRe. Their minority interest in ChannelRe’s income (loss) is reflected as a reduction to net income (loss) on the statement of operations. The minority interest in ChannelRe’s net assets (deficiency) is reported on the balance sheet.

ChannelRe recognizes that there is diversity in practice among financial guarantee insurers and reinsurers with respect to their accounting policies for loss reserves. Current accounting literature, specifically Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 60 “Accounting and Reporting by Insurance Enterprises” (FAS 60) and FASB Statement of Financial Accounting Standards No. 97 “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments” (FAS97), do not specifically address the unique characteristics of financial guarantee insurance contracts. Consequently, the accounting principles applied by the industry, which are followed by ChannelRe, have evolved over time and incorporate the concepts of both short-duration contracts, accounted for under the provisions of FAS 60, and long-duration contracts accounted for under the provisions of FAS 97, as well as other accounting literature, such as FASB No. 5 “Accounting for Contingencies” and Emerging Issues Task Force (EITF) Issue No.85-20 “Recognition of Fees for Guaranteeing a Loan.”

In May 2008, the FASB issued SFAS 163, Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60 (“SFAS 60”). This Statement clarifies how SFAS 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts. This standard, among other things, changes current industry practices with respect to the recognition of premium revenue and claim liabilities. Under this standard, a claim liability on a financial guarantee insurance contract would

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ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

be recognized when the insurance enterprise expects that a claim loss will exceed the unearned premium revenue (liability) for that contract based on expected cash flows. The discount rate used to measure the claim liability would be based on the risk-free market rate and updated each quarter. Premium revenue recognition, under the standard, will be based on applying a fixed percentage of the premium to the amount of outstanding exposure at each reporting date (referred to as the level-yield approach). In addition, in regard to financial guarantee insurance contracts where premiums are received in installments the standard requires that an insurance enterprise should recognize an asset for the premium receivable and a liability for the unearned premium revenue at inception of a financial guarantee insurance contract. The standard also requires expanded disclosures about financial guarantee insurance contracts. The Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management activities. Disclosures about the insurance enterprise’s risk-management activities are effective the first period beginning after issuance of the Statement. The Company expects that the initial effect of applying the provisions of the standard will be material to the Company’s financial statements. In particular, the Company expects that implementation of this guidance will cause the Company to de-recognize some or all of its reserves for unallocated losses and loss adjustment expenses and preclude it from providing such reserves in the future (see Note 15).

In February 2007, the FASB issued FAS No. 159 (“FAS 159”), Fair Value Option for Financial Assets and Financial Liabilities. This Statement provides companies with an option to report selected financial assets and liabilities at fair value. The Statement requires the fair value of the assets and liabilities that the company has chosen to fair value be shown on the face of the balance sheet. The standard also requires companies to provide additional information to enable users of the financial statements to understand the company’s reasons for electing the fair value option and how changes in the fair values affect earnings for the period. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for fiscal years beginning on or after November 15, 2007. Management has not currently elected to apply the option and, therefore, does not anticipate this Statement will have a material impact on the Company’s financial statements for the first quarter of 2008.

In September 2006, the FASB issued FAS No. 157 (“FAS 157”), Fair Value Measurements. This Statement provides guidance for using fair value to measure assets and liabilities and associated disclosures about fair value measurement. Under this standard, the definition of fair value focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). FAS 157 clarifies that fair value is a market-based measurement, not an entity-specific measurement, and establishes a fair value hierarchy with the highest priority being quoted prices in active markets and the lowest priority to unobservable data. Further, FAS 157 requires expanded disclosures of the fair value measurements by level within the fair value hierarchy. FAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157”, which delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company will adopt the provisions of FAS 157, excluding non-financial assets and liabilities per FSP FAS 157-2, beginning January 1, 2008. Management is currently evaluating the specific effects of the implementation of this Statement on the Company’s financial statements for 2008 and the impact is expected to be significant.

The Company has one reportable segment, financial guarantee reinsurance.

(6)

ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

Credit default swaps

ChannelRe has reinsured a number of CDS transactions originated by MBIA. As these transactions are derivatives under FAS 133, they are required to be marked to market (fair valued). CDS transactions ceded to ChannelRe are marked to market based on the relative proportion of the MBIA mark. As there are no directly observable market valuations available for these transactions they are marked to market by MBIA utilizing an internally developed model. Management reviews the mark for reasonableness and, on an individual transaction basis, will adjust the mark to reflect the estimated credit impairment if additional information becomes available.

At December 31, 2007 the total change in mark to market on ChannelRe’s insured CDS portfolio gave rise to a derivative liability of $752.1 million (2006 – derivative asset $0.2 million).

ChannelRe’s credit default swaps are primarily guarantees of collateralised debt obligations (“CDOs”). The collateral for the reinsured derivatives are cash securities and credit default swaps referencing primarily corporate, asset-backed, residential mortgage-backed, commercial mortgage-backed and collateralised debt obligation securities.

The reinsured CDS contracts are written to replicate the economics of ChannelRe’s financial guarantee policies and do not contain typical CDS market standard features. Specifically, ChannelRe is not required to post collateral. Further, ChannelRe’s obligations are generally for timely interest and ultimate principal thus any loss payments are on a “pay-as-you-go” basis so the bulk of any loss payments are most likely to be at final maturity many years into the future. CDS protection is generally provided at the most senior liabilities of structured finance transactions and at inception of the contract generally had more subordination than needed to achieve triple-A ratings from credit rating agencies.

A significant widening of credit spreads in the latter half of 2007, combined in certain instances with some deterioration in the underlying collateral, resulted in ChannelRe recording very significant mark-to-market losses on reinsured CDS contracts of $752.3 million for the year ended December 31, 2007. For the years ended December 31, 2006 and 2005, ChannelRe recorded mark-to-market gains of $0.3 million and $0.1 million, respectively. The fair value adjustment relating to the contingent capital facility put option discussed below is netted from this change in the statement of operations in the caption “net (losses) gains on derivative instruments and foreign exchange”.

ChannelRe believes that mark-to-market losses are not necessarily predictive of future claims and, except for the credit impairment element (see below), the remaining marks will net to zero over the remaining life of the reinsured credit derivatives. ChannelRe currently anticipates that MBIA will hold the affected credit derivatives to maturity in line with the normal practice for primary financial guarantor companies.

At December 31, 2007 ChannelRe reinsured 9 CDS contracts with credit impairment. MBIA has provided ChannelRe with a discounted loss estimate of $153 million on these transactions. Three of these transactions are CDO-squared transactions, which are CDOs collateralised primarily by other CDOs, and have a loss estimate of $78 million that is expected to be paid out over the next 5 years. On the remaining 6 transactions, which are multi-sector ABS CDOs, losses are estimated to be $75 million and are expected to be paid out beyond 5 years. This estimated credit impairment is included within the mark to market losses included in the caption “net (losses) gains on derivative instruments and foreign exchange” in the statement of operations and the derivative liability is reflected on the balance sheet. Accordingly, these credit impairments are not included

(7)

ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

in Losses incurred or Loss and loss adjustment expense reserves. See note 2 for risks and uncertainties relating to these estimates.

For the years ended December 31, 2007, 2006 and 2005 the impact on income (loss) from reinsured CDS transactions is summarized below:

Contingent capital facility

In February 2005, ChannelRe entered into a put option agreement with Two Rock ABC Trust (“the Trust”). The put option agreement provides ChannelRe with the irrevocable right at any time to put up to $100 million of its non-cumulative perpetual Series B Preferred Shares in $25 million increments. Under the terms of the put option agreement, ChannelRe is obligated to reimburse the Trust quarterly for certain fees and ordinary expenses. The put option agreement is perpetual but would terminate on delivery of notice by ChannelRe on or after February 11, 2010, or under certain defined circumstances, such as the failure of ChannelRe to pay the put option premium when due or bankruptcy. The put option is a derivative and as such is recorded at fair value with changes in fair value recognized in earnings. For the years ended December 31, 2007, 2006 and 2005, the fair value adjustment was a $60.0 million credit to income, an $8 thousand charge to income, and a $36 thousand credit to income, respectively, and is netted from the fair value adjustment relating to reinsured CDS contracts within the caption “net (losses) gains on derivative instruments and foreign exchange” in the statement of operations. As at December 31, 2007 and 2006, the derivative asset was $60.0 million and $28 thousand, respectively.

ChannelRe estimates the fair value of the put option by comparing the estimate of the market value of the underlying Trust units to the fair value of the underlying Trust assets of $100 million. This basis of measuring fair value is used as, in the opinion of management, the put option is inextricably linked to the Trust and investors look through to the credit quality of ChannelRe since ChannelRe has the irrevocable right at any time to exercise the put option and issue the non-cumulative perpetual Series B Preferred Shares. The market value of the Trust units is estimated based on management’s assessment of valuations received from an investment bank which uses quoted market prices (if available), market trades of similar financial instruments (if available) and/or broker quotes. Although the valuation represents the best available market pricing information, it is a function of the currently stressed credit markets and future developments in the market will cause changes to the estimated fair value of the put option.

ChannelRe entered into trust agreements with MBIA on February 12, 2004 (and as amended February 11, 2005) for the benefit of MBIA and any future cedants. Under the agreements, premiums plus any proceeds from exercising the put option on the contingent capital facility will be deposited into the Trust accounts. The

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ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

trust accounts are subject to withdrawal by the beneficiaries to satisfy any unpaid portion of ChannelRe’s reinsurance obligations and are not available for general corporate purposes. At December 31, 2007 and 2006, the balance in the trust accounts totalled $495.0 million and $463.8 million, respectively. The balance in the trust accounts is invested in fixed maturity securities, short term investments and cash and cash equivalents. Amounts invested in cash and cash equivalents at December 31, 2007 and 2006 were $4.3 million and $18.3 million, respectively. These amounts are therefore restricted from being available for the benefit of any other creditors or shareholders.

The Company was not permitted to declare a dividend or purchase its own shares prior to February 12, 2007. Since that date, if the board of directors of the Company determines that excess capital exists, it may declare a pro-rata share repurchase or a dividend that is less than or equal to available excess, as such term is calculated pursuant to the Shareholders Agreement by and among the Company and its shareholders. Any reduction in capital resulting from the pro-rata share repurchase must be approved by an affirmative vote of at least 9 directors of the board of directors; provided that such pro-rata share repurchase may only be made under circumstances where a dividend of equal amount would be permitted. The Company may not declare a share repurchase that is not pro-rata. The distributable net income of the Company is restricted by the arrangements with related parties described in note 22 and the cash amounts that may be distributed are restricted as described in note 6.

The Company may not repurchase its shares if such repurchase would, in the opinion of the board of directors, cause adverse tax consequences either to the Company or any of its shareholders.

In the event the Master Agreement between ChannelRe and MBIA Insurance Corporation expires, then there are certain restrictions on the declaration and payment of dividends unless ChannelRe’s exposure under all reinsurance agreements has been eliminated by means of novation, commutation or otherwise.

On May 17, 2007 the board of directors approved the pro rata share repurchase of 8,874 Common shares, for a total consideration of $27.0 million provided from share capital ($9 thousand), share premium ($19.5 million), and retained earnings ($7.5 million). The share repurchase was completed in June 2007. There was no change in the proportionate voting interest of the holders of the Class A common shares as a result of the share repurchase. Additionally, the minority interest was reduced on a parri passu basis with the reduction in the common share capital for a consideration of $10.5 million.

The authorized share capital of the Company consists of 120,000 common shares, par value U.S. $1.00 per share.

For the years ended December 31, 2007, 2006 and 2005, premiums earned included $7.6 million, $11.2 million and $3.8 million, respectively, related to refunded and called reinsured bonds.

ChannelRe’s investment objective is to maximize total returns while emphasizing the preservation of capital through maintenance of high quality investments with adequate liquidity. ChannelRe’s investment policies limit

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ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

the amount of credit exposure to any one issuer. The fixed maturity portfolio is comprised of high quality investments of diversified maturities.

The amortized cost, fair value and related unrealized gains (losses) of investments are as follows:

As of December 31, 2007 gross unrealized losses totalled $4.6 million (2006—$9.7 million). There were 51 securities (2006 – 118 securities) in an unrealized loss position for a continuous twelve month period or longer, and none of these securities had unrealized losses in which their book value exceeded the market value by more than 6%. ChannelRe management has concluded that the unrealized losses are temporary in nature because there was no deterioration in credit quality and all securities were rated A or better. Additionally,

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ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

ChannelRe has both the ability and intent to hold these investments until the value recovers to an amount at least equal to amortized cost or to maturity.

The contractual maturities of fixed maturity securities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2007 the portfolio’s long-term average maturity was 4.41 years (2006 – 4.79 years); the portfolio’s duration was 2.95 years (2006 – 3.06 years).

The credit quality of the investments at December 31, 2007 and December 31, 2006, based on the lower of the Moody’s and S&P rating for each security, was as follows:

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ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

Net investment income is derived from the following sources:

Proceeds from sales and maturities of fixed maturity securities for the years ended December 31, 2007, 2006 and 2005 were $15,656 million, $5,134 million and $154 million, respectively. During 2007 and 2006, ChannelRe maintained a short portion of its investment portfolio which was rolled over on a regular basis and resulted in a high level of proceeds from maturities. Gross gains of $nil, $51 and $381, were realized for the years ended December 31, 2007, 2006 and 2005, respectively. Gross losses of $38, $391 and $2,026 were realized for the years ended December 31, 2007, 2006 and 2005, respectively. There were no losses due to other than temporary impairments in 2007, 2006 or 2005.

Acquisition costs deferred for amortization against future income and related amortization charged to expenses are as follows:

Included in Other assets is a $1.2 million (December 31, 2006—$nil) salvage recoverable (as advised by MBIA) relating to the underlying assets of a previously reinsured credit, on which a loss was paid in 2007.

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ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

The liability for losses and loss expenses is comprised of both the estimated liability for case specific losses and a reserve for unallocated losses. Activity in the liability for losses and loss expenses was as follows (for the years ended December 31):

For the years ended December 31, 2006 and 2005, case incurred losses primarily consisted of reinsured obligations on three sub-prime housing market deals issued by Provident Bank Home Equity Loan Trust (“Provident”). For the year ended December 31, 2007, case incurred losses consisted primarily of both obligations on Provident, and reinsured prime home equity lines of credit and closed-end second mortgage-backed securities (“HELOC and CES”).

In 2005, ChannelRe established case losses for Provident in the amount of $4.5 million and as the amount of the loss incurred was in excess of 15% of the unallocated reserve balance at that time, the transfer from unallocated loss reserves for this case loss was limited to 15%, or $1.6 million, with $2.9 million being charged to income. In 2006, ChannelRe increased case losses for Provident in the amount of $1.2 million, net of paid losses of $1.1 million. In 2007 ChannelRe increased case losses for Provident in the amount of $1.5 million, net of paid losses of $2.3 million. The incurred losses on Provident in 2007 and 2006 were fully absorbed by the unallocated reserve.

Also in 2007, the Company established case basis losses of $14.0 million related to HELOC and CES insured obligations. Based on management’s assessment on the adequacy of the unallocated reserve, only $0.8 million was absorbed by the unallocated reserve, and $13.2 million was charged to income.

During 2007, 2006 and 2005 the Company raised its unallocated loss reserves by an amount equal to 12% of scheduled earned premium, as discussed in note 4g.

In 2007 there was adverse development of $4.7 million in respect of prior year case basis losses recorded in the current year, being mainly Provident. In 2006 adverse development of prior year case basis losses was $2.7 million, again being mainly Provident. In 2005 prior year case basis losses improved by $0.1 million. New case basis losses established during 2007, 2006 and 2005 were $14.0 million, $0.3 million and $4.6 million, respectively.

(13)

ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

Total incurred losses for the years ended December 31, 2007, 2006 and 2005 were $20.3 million, $6.7 million and $10.1 million respectively. This represents an amount equal to 12% of scheduled earned premium in each year plus amounts of $13.2 million, $nil and $2.9 million for each year, respectively. The $13.2 million addition in 2007 is comprised of additional case reserves for HELOC and CES reinsured obligations. The $2.9 million addition in 2005 represents reserve increases for Provident that were in excess of 15% of the unallocated reserve at that time.

ChannelRe is following derivative accounting presentation. MBIA has reported to ChannelRe credit impairments of $153 million on reinsured credit default swaps that are accounted for as derivative transactions. These credit impairments are reflected in the statement of operations and the derivative liability reflected on the balance sheet and, therefore, are not included in losses incurred or in loss and loss adjustment reserves.

Over the last several months, there has been growing stress in the U.S. residential mortgage market, particularly related to mortgage loans originated during 2005, 2006 and 2007 to which ChannelRe is exposed to both prime and subprime mortgages through its reinsurance of MBIA. As a reinsurer, ChannelRe does not have direct U.S. subprime exposure to mortgage loans originated from 2005 to 2007 as of December 31, 2007 or 2006. ChannelRe’s U.S. RMBS direct subprime exposure for years prior to 2005 was $96 million as of December 31, 2007 (December 31, 2006 – $135 million)

At December 31, 2007 ChannelRe also had non-U.S. RMBS direct subprime exposure of $18.0 million (December 31, 2006 – $74.6 million).

Additionally, ChannelRe has exposure to both U.S. RMBS and non U.S. RMBS within CDOs – see note 18.

The stress in the U.S. residential mortgage market has extended to prime home equity lines of credit and closed-end second mortgage backed securities. Through its reinsurance of MBIA, ChannelRe has exposure to HELOC and CES for certain reinsured credits and has established case basis loss reserves – see Note 15. At December 31, 2007 ChannelRe’s exposure to U.S. HELOC and CES was $347.1 million (December 31, 2006 – $325.7 million) and exposure to non-U.S. HELOC and CES was $51.6 million (December 31, 2006 – $46.6 million). Of the U.S. HELOC and CES exposure at December 31, 2007, $205.0 million was in respect of loans originated from 2005 to 2007 (December 31, 2006 – $71.2 million).

Additionally, ChannelRe has exposure to both HELOC and CES within CDOs – see note 18.

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ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

Through its reinsurance of MBIA, ChannelRe provides guarantees on tranches of CDOs as well as on structured CMBS and corporate credit pools. These were generally written in credit default swap form as discussed in note 5. The collateral is diversified by vintage and collateral type and is detailed below (in millions).

High yield assets largely comprise corporate loan transactions that are diversified by vintage and geography.

Investment grade assets largely reference pools of investment grade corporate credits.

Multi-sector CDOs are transactions that include a variety of structured finance asset classes in their collateral pools. The collateral includes asset backed, residential mortgage backed – both prime and subprime, commercial mortgage backed and other CDO securities.

CMBS pools and commercial real estate (“CRE”) CDOs are structured pools primarily supported by collateral from the commercial real estate sector.

(15)

ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

ChannelRe’s policies reinsure the scheduled payments of principal and interest on municipal and asset-backed obligations. The principal amount reinsured and the terms to maturity (inclusive of the exposures detailed in notes 17, 18 and 19) are as follows (in millions):

December 31, 2007

December 31, 2006

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ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

ChannelRe seeks to maintain a diversified portfolio of reinsured municipal and asset-backed obligations designed to spread its risk across a number of geographic areas. The distribution of principal reinsured as of December 31, 2007 and 2006 is set forth in the following table (in millions):

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ChannelRe Holdings Ltd.

Notes to Consolidated Financial Statements

For the years ended December 31, 2007, 2006 and 2005

(U.S. dollars in thousands, except per share amounts)

As of December 31, 2007 and 2006, the insured portfolio was diversified by type of insured obligation as shown in the following table (in millions):