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Best’s News & Research Service - February 21, 2014 06:05 PM (EST)

A.M. Best Revises Outlook to Negative for Balboa Insurance Company and Its Subsidiaries

Oldwick //BestWire// - 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 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.

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

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.

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