Best Affirms Balboa Insurance Co., Subs Ratings, as Transfer to QBE Continues

January 25, 2013

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit ratings of “a” of California-based Balboa Insurance Company and its wholly owned subsidiaries, Meritplan Insurance Company and Phoenix-based Newport Insurance Company, which operate under an intercompany reinsurance pooling agreement, collectively referred to as Balboa Insurance Group. All of the companies are owned by the BA Insurance Group, Inc., which is ultimately owned by Bank of America Corporation (BAC). The outlook for all ratings is stable.

The rating affirmations “take into consideration Balboa’s continuing business activities, its status as an active insurer of lender-placed insurance products, while also considering Balboa’s ongoing transfer of lender-placed and other business to QBE Insurance Group Limited (QBE) (Australia), which began in 2011 and should continue through 2013,” Best explained.

These ratings also “reflect the solid levels of capital maintained by Balboa during this business transition period as well as the quota share reinsurance in place with QBE during this transition period,” the report continued. “Per the terms of the reinsurance contracts, QBE Insurance Corporation (QBEIC) (New York, NY), a subsidiary of QBE, the non-operating parent holding company of the QBE group of companies, provides each company with 100 percent quota share reinsurance. The reinsurance contracts, effective April 1, 2011, generally cover all liabilities arising from contracts of insurance or reinsurance issued by Balboa before June 1, 2011, or those issued by the insurers after June 1, 2011 at the direction of QBEIC.”

Best also noted that “Balboa benefits from contractual agreements with a BAC affiliate and QBE for the support they provide to fully service Balboa’s policyholders during the period when its portfolio is being transferred, as QBE continues to develop the extensive systems capabilities needed to support the demands of the portfolio of lender-placed insurance. Balboa will continue to receive considerable back office support from a BAC affiliate and QBE to service the business that it writes and has written on a direct and gross basis.”

As offsetting factors Best cited “Balboa’s diminishing business profile as it moves closer to being inactive and possibly placed into run off once the transfer of its lender-placed and other business to QBEIC is completed. In addition, Balboa is exposed to a significant amount of credit risk given its 100 percent reinsurance cessions to QBEIC. This credit risk, however, is tempered by the high credit quality of QBE.”

Best said at present, “there is no potential for upward movement on the ratings of Balboa given its diminishing business profile and the expectation that its subsidiaries will be in run off beginning sometime in 2014.

“Possible negative pressure on the ratings and/or a revised outlook is likely as the transfer of business nears completion and the companies move closer to a possible inactive run-off status. Other negative pressures could result from Balboa’s significant credit exposure to QBE and any unforeseen dividend demands from BAC that could materially affect the capitalization of these insurers.”

Source: A.M. Best

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