Fitch Assigns International IFS Rating of 'BBB+' Outlook Stable to Balboa Reinsurance Ltd.

Business Wire

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned Balboa Reinsurance Ltd. (Balboa) an International Insurer Financial Strength Rating (IFS) of 'BBB+' Outlook Stable. The assigned rating is based on Fitch's assessment of the creditworthiness of the company as part of Citigroup Inc.

Key Rating Drivers

The rating assigned to Balboa is based on the willingness of its parent, Citigroup, Inc. (Citi), to provide support to Balboa, given the strategic importance of this start-up captive reinsurance company to the parent corporation. Balboa's rating is based solely on Citi's ability to provide support when needed, given its financial strength (rated with a long-term local-currency Issuer Default Rating of 'A', with a Stable Outlook).

Balboa's current business plan anticipates rapid growth of reinsurance premiums, but well balanced with the current equity base. As such, total premiums at the end of year three will reach around USD4 million while the current equity is USD5 million. Given the retail nature of the underwritten business, Balboa expects to retain in full the expected premiums and profits. Balboa has also not provided a CAT and a high-claims retrocession program, which is expected to be set up when Balboa begins its underwriting process.

Underpinning this forecast is the expectation that operating costs will remain less than 50% of gross premiums (including acquisition costs), because of the flexible operating platform in place and the synergies with other Citi subsidiaries. The claims ratio should remain below 20%.

Balboa is considered by Fitch to be 'strategically important' to Citi. However, the current start-up profile and the fact that the expected business plan will remain modest compared to Citi's overall footprint in Latin America and compare to its insurance business in the region, suggest that a disposition/run off of the company, will not alter the operating profile of its sponsor.

Balboa will ultimately provide reinsurance coverage to local primary insurers in Central America as well as business related to Citi's bank-assurance activities in the region. Aided by the network of Citi's banks in the region, the Balboa business will be solely dedicated to providing reinsurance coverage to the credit-card protection business, and individual and group life coverage sold by Citi's subsidiaries in the region. Balboa will not underwrite third-party business. The ceding companies are self-established and well-run local insurance companies in Central American countries.

In Fitch opinion, Balboa's management will have the ability to reach the financial projections stated in its business plan, given its good track record and Citi's vast experience in bank assurance lines and the sizable share of operations of the parent within Central and South America. Fitch also believes that there is complete synergy alignment of incentives between Balboa management and Citi's objectives.

While the Turks and Caicos' captive's regulations require annual audited financial statements and limits investment instruments, they do not include stringent requirements on most critical aspects, which leaves Balboa basically self-regulated. This weakness of the operating environment is compensated by the longstanding record of conservative and effective risk policies followed by Citi in their operations all over the world.

Rating Sensitivities

Changes in Support: Future rating actions will be a function of changes in Citi's willingness and ability to support Balboa, as the rating of the Balboa is dependent on the rating of Citi. An unexpected sale of Balboa by Citi may result in a multi-notch downgrade of its ratings. Considering the current business plan and strategic importance of Balboa to Citi, there is limited upside potential for Balboa's ratings.

Additional information is available at 'www.fitchratings.

Applicable Criteria and Related Research:

-- 'Rating FI Subsidiaries and Holding Companies', Aug. 10, 2012.

-- 'Insurance Rating Methodology - Global Master Criteria', Jan. 11, 2013.

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793730

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Contact:
Fitch Ratings
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or
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Senior Director
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or
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