A.M. Best has revised the outlook to negative from stable and
affirmed the financial strength rating of A (Excellent) and the issuer
credit ratings of "a" of Balboa Insurance Company (Irvine, CA)
and its wholly owned subsidiaries, Meritplan Insurance Company
(Irvine, CA) and Newport Insurance Company (Phoenix, AZ), which
operate under an intercompany reinsurance pooling agreement,
collectively referred to as Balboa Insurance Group (Balboa). All
companies are owned by the BA Insurance Group, Inc., which is ultimately
owned by Bank of America Corporation (BAC).
The rating affirmations reflect Balboa's continuing business activities,
despite its waning status as an active insurer of lender-placed
insurance products and its solid level of capital that has been
maintained during the ongoing transfer of lender-placed and other
business to QBE Insurance Group Limited (QBE) (Australia). The
transfer began in 2011, and is expected to be substantially completed by
the middle of 2014, which will result in Balboa being in a relatively
dormant status, hence the revised outlook.
The ratings also reflect the substantial quota share reinsurance support
in place with QBE during the transition period. 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 of Balboa with 100%
quota share reinsurance. The reinsurance contracs, 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.
Additionally, Balboa continues to benefit from contractual agreements
with a BAC affiliate and QBE for the support they have been providing to
Balboa's policyholders to fully service the business that it writes and
has written on a direct and gross basis during the period when its
portfolio is being transferred.
Offsetting these positive attributes is Balboa's diminishing business
profile as it moves closer to being inactive once the transfer of its
lender-placed and other business to QBEIC is completed. It is expected
that Balboa will be placed into run off once the transfer of its
business is largely completed later this year-a key driver for the
change in the outlook from stable to negative. In addition, Balboa is
exposed to a significant amount of credit risk given its 100%
reinsurance with QBEIC. However, this credit risk is tempered by the
credit quality of QBE.
Presently, there is no potential for upward movement on the ratings of
Balboa given its diminishing business profile and the expectation that
any remaining business will soon be placed into run off. The majority of
the remaining liabilities expected to be administered by Balboa are
automobile GAP insurance policies averaging five years, the last of
which is expected to expire sometime in 2016.
Negative rating pressures could occur as the transfer of business nears
completion and the companies move closer to 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.
The methodology used in determining these ratings is Best's Credit
Rating Methodology, which provides a comprehensive explanation of A.M.
Best's rating process and contains the different rating criteria
employed in the rating process. Best's Credit Rating Methodology can be
found at www.ambest.com/ratings/methodology.
A.M. Best Company is the world's oldest and most authoritative
insurance rating and information source. For more information, visit www.ambest.com.
Copyright © 2014 by A.M. Best Company, Inc. ALL RIGHTS
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