Citing residential mortgage sector problems plaguing the parent company of Balboa Insurance Group, A.M. Best Co. put the insurer's financial strength rating of "A" (excellent) under review yesterday.
Residential mortgage lender Countrywide Financial Services, based in Calabasas, Calif., is the parent of Balboa Insurance Group and Newport E&S Insurance Company, which also had its Best's "A" rating put under review with negative implications.
Balboa Insurance Group, headquartered in Irvine, Calif., has three property-casualty insurance operating units–Balboa Insurance Company, Meritplan Insurance Company and Newport Insurance Company–that are now under review by Oldwick, N.J.-based A.M. Best, along with Plano, Texas-based Newport E&S.
The companies being reviewed write insurance products that protect the collateral on loans–also known as collateral protection insurance. They work with financial institutions offering lender-placed automobile and property coverage, and place coverage through general agents and independent retailers as well.
Balboa Group ranked as the 26th most profitable property-casualty insurance group on National Underwriter's second annual Profit Leaders rankings last year, qualifying for the spot with a six-year average combined ratio of 95. (NU's Profit Leaders, published in NU's Dec. 4, 2006 print edition, were based on average combined ratios for the years 2000-2005 that were calculated from NAIC data compiled by Highline Data, a data affiliate of NU.)
According to NU's more recently published rankings based on premium size, Balboa Group ranked as the 65th largest group with $965.8 million in net premiums written in 2006.
In spite of the past profitability of the insurance businesses, A.M. Best said it is eyeing the ties with Countrywide Financial Corporation (CFC) going forward–and the impact "the financial pressures that currently exist at the group's ultimate parent" could have on the insurance subsidiaries.
Prior to the Best announcement yesterday, Countrywide announced it had arranged to get $11.5 billion from a syndicate of 40 of the world's largest banks shoring up its supply of ready cash for funding mortgage loans.
Best said the insurance ratings will remain under review pending discussions with the management at Balboa and Countrywide. Best hopes to understand any proposed strategic initiatives intended to lessen the "potential negative impact on the insurance operations due to the recent significant deterioration at CFC."
Prior to the conclusion of these discussions, Best said that "any further deterioration in the financial condition at CFC, as perceived by A.M. Best," will result in downgrades of all ratings of Balboa's insurance companies.
As a result of "the volatile and quickly changing market conditions surrounding CFC, Best said, "maintenance of the present ratings will be difficult, due to the perceived drag on the insurance operations."
In the wake of a disappointing earnings report in late July, disclosures that mortgage loan defaults are spreading beyond the subprime sector, and a recent "sell" advisory put out by Merrill Lynch on Countrywide stock, several plaintiffs' law firms have announced filings of class actions securities suits against Countrywide Financial.
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