Morningstar DBRS Confirms Awbury Insurance Ltd.'s Issuer Rating and Financial Strength Rating at "A" With Stable Trends

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

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect Awbury's unique franchise, and strong/good earnings ability, liquidity, and capitalization. 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. This is partly driven by the underwriting and pricing flexibility associated with Awbury's specialty lines of product offerings. The Company has limited exposure to market risk because it does not have any material investments in bonds or equities. Awbury relies heavily on reinsurance arrangements. These reinsurance contracts are structured, in most cases, to reduce the Company's counterparty credit risk exposures to the reinsurers, thereby improving Awbury's risk profile and liquidity. However, there is a small exposure to credit risk because of the material amount of commission receivable on its balance sheet. Awbury had no debt on its balance sheet as at YE2024, resulting in a 0% leverage ratio.

CREDIT RATING DRIVERS
The credit ratings are well placed in the current credit rating category. 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 Strength Building Block Assessment: Moderate
Awbury is a Bermuda-domiciled insurance company with affiliates globally, including in the U.S., UK, Belgium, and Singapore. The Company focuses on areas where insurance acts as an alternative form of capital for its clients. Awbury provides its clients with specialized insurance and capital solutions across a range of complex credit and investment products. The Company operates a bankruptcy-remote segregated account structure to deliver regulation-compliant protection backed by its diverse panel of reputable reinsurers. The distribution of premiums written is diversified geographically, with Awbury generating revenue from the U.S., Europe, Canada, Australia, and Asia. Awbury operates a direct-channel distribution model for revenue generation, meaning that the Company deals directly with clients for most transactions, rather than using insurance intermediaries, like brokers or agents. Awbury is subject to various regulatory requirements in the countries in which it operates. The Company has been successful in executing its unique business model and maintaining competitiveness within its niche market. Awbury is not focused on top-line growth and generally avoids high-volume, low-complexity flow insurance business.

Earnings Ability Building Block Assessment: Strong/Good
Awbury's reported written premiums are primarily driven by the amount of clients' borrowing and loan repayment activity that take place during the year. In addition, the Company generates a significant portion of its revenue 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 25.8% was also substantially higher than the P&C insurance industry average for the three calendar years up to 2024, which is indicative of Awbury's good earnings ability. Awbury reported a decline in premiums written compared with the prior year, driven in part by a substantial increase in the volume of loan repayments made by borrowers of insured clients during the year, which reduces the need for insurance coverage.

Risk Profile Building Block Assessment: Good
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 claim due on an insurance policy is paid by participating reinsurers. Awbury's portion of the claim is generally guaranteed by the participating reinsurers. As a result, the reinsurers are exposed to a certain amount of credit risk from Awbury, which is the opposite of how reinsurance programs are traditionally structured. The Company has minimal exposure to market risk because it does not have any investment in bonds or equities. Awbury has managed its operational risk exposures well, evidenced by the Company's successful track record of transacting business across multiple jurisdictions. The Company's corporate governance, board committee structures, and risk reporting processes are aligned with the size and complexity of its business model.

Liquidity Building Block Assessment: Strong/Good
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. Most of the Company's claims obligations are paid for 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. The Company's reinsurance program mitigates the potential impacts of claims severity because most premiums written are ceded to reinsurance counterparties.

Capitalization Building Block 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 debt capital markets, if needed. However, Awbury is a private company, which makes raising equity difficult. Overall, the Company is significantly capitalized, with available capital well above the required regulatory target 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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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 (September 10, 2024) https://dbrs.morningstar.com/research/439195. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends 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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