Morningstar DBRS Confirms Awbury Insurance Ltd.’s Issuer Rating and Financial Strength Rating at “A,” Stable Trend

DBRS Limited (Morningstar DBRS) confirmed Awbury Insurance Ltd.'s (Awbury or the Company) Issuer Rating and Financial Strength Rating at "A." The trend on both credit ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings and Stable trend reflect Awbury's evolving franchise, strong earnings ability, sound liquidity position, and strong regulatory capital levels. The Company is an internationally diversified underwriter of specialty insurance that tends to underwrite fewer contracts but generate better underwriting profitability than conventional property and casualty (P&C) insurance companies, in part because of the underwriting and pricing flexibility associated with its specialty lines and products. Awbury has limited exposure to market risk as it does not have any material investments in bonds or equities. The Company relies heavily on reinsurance arrangements, which are structured, in most cases, to reduce Awbury's counterparty credit risk exposures to those reinsurers, thereby improving its risk profile and liquidity. There is a small exposure to credit risk because of the material amount of commission receivables on its balance sheet as a result of Awbury's significant reliance on reinsurance. Awbury had no debt on its balance sheet as at YE2023, resulting in a 0% leverage ratio.

CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS would upgrade the credit ratings if Awbury were to materially improve its scale and increase product diversification while maintaining strong capital ratios and profitability.

Conversely, Morningstar DBRS would downgrade the credit ratings if there were a material operational misstep resulting in reputational damage combined with a sustained deterioration in either overall earnings ability or capitalization.

CREDIT RATING RATIONALE
Franchise Building Block (BB) Assessment: Moderate
The Company is domiciled in Bermuda with affiliates globally, including in the U.S., London, and Singapore. Awbury provides its clients with specialized insurance and capital solutions across a range of complex credit and investment products as well as economic and financial risks.

The distribution of premiums written is diversified geographically, with the Company generating revenue from the U.S., Europe, Canada, Australia, and Asia. Awbury focuses on areas where insurance acts as an alternative form of capital for its clients. Awbury has a business model by which it establishes segregated accounts for the majority of risks that it has insured.

The Company operates a direct channel distribution model for revenue generation. Awbury generally deals directly with clients, rather than through insurance intermediaries, such as brokers or agents, and is subject to various regulatory requirements in the countries where the Company operates. Awbury has been successful in executing its unique business model and maintaining competitiveness within its niche market. The Company is not focused on top-line growth and generally avoids high-volume flow insurance business.

Earnings Building Block (BB) Assessment: Strong/Good
A significant portion of the revenue that the Company generates is from reinsurance commissions on ceded business. Because of Awbury's highly specialized product offerings, premium volumes are lower compared with those of traditional P&C insurance companies that write flow business. However, the Company's profitability, as measured by return on equity (ROE) as calculated by Morningstar DBRS, is well above that of its peer group. The three-year weighted-average ROE of 31% was also substantially higher than the P&C insurance industry average for the three calendar years up to 2023, which is indicative of Awbury's strong earnings ability.

Risk Building Block (BB) Assessment: Good
Awbury has managed operational risk exposures well, evidenced by the Company's successful track record of transacting business relating to multiple jurisdictions. Awbury has minimal exposure to market risk because it does not have any investments in bonds or equities. The Company's transactions are generally executed via a unique segregated account created for each policy. When the policy is issued, each participating reinsurer assumes a portion of the insured exposure via a documented reinsurance arrangement. Any claims due under any policy are either paid by participating reinsurers or, with respect to Awbury's portion of the claim, guaranteed by the reinsurers. This results in the reinsurers being exposed to a certain amount of credit risk from Awbury, which is different from how reinsurance programs are traditionally structured. The Company's corporate governance, board committee structures, and risk reporting processes are aligned with the size and complexity of its business model.

Funding and Liquidity Building Block (BB) Assessment: Good
The majority of the Company's claim obligations are paid directly by its reinsurers to the insured party, which is positive for Awbury's liquidity. The Company maintains appropriate reinsurance commensurate with risk and an adequate amount of cash on its balance sheet supported by a committed line of credit. Awbury does not offer traditional property insurance products, so it has no first-order exposure to weather-related catastrophic events that could dampen liquidity because of large weather-related property losses. The Company's reinsurance program mitigates the potential impacts of claims severity because the majority of premiums written are ceded to reinsurance counterparties.

Capitalization Building Block (BB) Assessment: Strong/Good
The Company has no debt or leverage at the operating or group level, resulting in a leverage ratio of 0%. The lack of debt outstanding gives Awbury financial flexibility to access the capital markets, if needed. However, Awbury is private, making raising equity more difficult. Overall, the Company is significantly capitalized, with available capital well above the required regulatory minimums set by the Bermuda Monetary Authority.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (April 15, 2024), https://dbrs.morningstar.com/research/431180. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030, in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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