Morningstar DBRS Assigns Credit Rating of BBB With a Stable Trend to Spinnaker Insurance Company's Surplus Notes

DBRS Limited (Morningstar DBRS) assigned a credit rating of BBB with a Stable trend to the surplus notes (the Notes) of Spinnaker Insurance Company (Spinnaker or the Company).

KEY CREDIT RATING CONSIDERATIONS
The credit rating assigned to the Notes reflects the Company's success at building a profitable hybrid fronting property and casualty (P&C) platform to service the U.S. market. While Spinnaker remains relatively small compared with other P&C insurers, it has developed the infrastructure to scale by onboarding additional fronting programs and it has extensive relationships with multiple program administrators and reinsurers. Although property insurance is a significant portion of its insurance business, the Company has manageable exposure to catastrophe risk because of the low retention inherent to the fronting business model. Spinnaker's leadership team has extensive experience in the insurance industry and the Company has historically benefited from operational and capital support from its current owner, Hippo Holdings Inc. (Hippo). Spinnaker's reliance on third-party relationships at the core of its business model results in elevated operational and counterparty credit-risk exposures. The Company's investment portfolio is conservative and highly liquid, and it has a prudent regulatory capital position with low leverage.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade the credit rating if Spinnaker sustained solid earnings while building more scale, including more diversified premium revenues across additional fronting programs, and maintaining an appropriate risk appetite and capital buffer. Conversely, Morningstar DBRS would downgrade the credit rating if Spinnaker were to suffer sustained annual losses or a sizeable operational or risk-management failure. In addition, the credit rating on the Notes would be downgraded if Spinnaker were to issue debt securities that ranked ahead of surplus noteholders.

CREDIT RATING RATIONALE
Franchise Building Block Assessment: Moderate/Weak
Spinnaker has successfully operated for 10 years in the U.S. P&C specialty insurance market through a hybrid fronting business model. Through relationships with program administrators and reinsurers, the Company has built a platform and delivered sufficient growth to achieve adequate profitability levels and capital self-sufficiency. Spinnaker offers a diversified suite of products through multiple program administrators and benefits from operational support from its parent company, Hippo. Spinnaker aims to deliver sustainable long-term growth through existing program relationships and through its new program's onboarding capabilities.

Earnings Building Block Assessment: Good/Moderate
Spinnaker's earnings increased 49.4% in 2024 compared with 2023 (on a GAAP basis), mainly driven by growing fronting fee income, good underwriting performance, and higher investment income. As of Q1 2025, Spinnaker incurred a loss driven mainly by a weak underwriting performance reflecting the California wildfires . F2024 earnings resulted in a return on equity of 23.1% that compares favorably with most U.S. P&C insurers, showing the potential of Spinnaker's hybrid fronting business model. However, given the Company's relatively short track record and fast growth in recent years, the risk of above-average earnings volatility remains, especially on programs with higher rates of retention.

Risk Building Block Assessment: Good/Moderate
Spinnaker's focus on specialty P&C insurance products and heavy use of reinsurance limits its exposure to traditional insurance risks. However, the Company's underwriting performance remains critical as its retained business and its attractiveness to reinsurance partners is subject to this performance. While specialty risks may be less correlated and less competitively priced than more mainstream P&C risks, Spinnaker has a significant exposure to property insurance that is subject to catastrophe risk. The large volume of insurance business inherent to the fronting business model also exposes the Company to reinsurance counterparty credit risk and to various operational risks. Spinnaker has a conservative investment portfolio almost exclusively composed of cash and fixed-income securities rated investment grade or better. The Company has a developed risk management infrastructure integrated with its parent company Hippo.

Funding and Liquidity Building Block Assessment: Good/Moderate
As a hybrid fronting company, Spinnaker handles substantial premium and claims cash flows through third-party program administrators and reinsurers. In addition, most of the Company's insurance liabilities are short term and therefore Spinnaker maintains a large portion of its assets in cash and cash equivalents. Spinnaker also has access to Federal Home Loan Bank financing and has $201 million in short-term and high-quality fixed-income securities.

Capitalization Building Block Assessment: Good
Spinnaker maintains a high risk-based capital ratio of 947% as regulatory capital requirements for its mostly reinsured insurance business are limited. This provides a good buffer to absorb potential losses or to fund business growth. In absolute terms, the Company's capital base remains relatively small at approximately $200 million. Spinnaker has a prudent leverage ratio and has ample capability to meet debt interest payments based on current profitability

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
Environmental concerns regarding Climate & Weather Risks are relevant to the credit rating but did not affect the assigned credit rating or trend. As part of its product offering, Spinnaker is exposed to property insurance risk, which is subject to weather-related losses from natural catastrophic events such as wind, wildfire, hail, flooding, and other extreme weather events. These events can lead to earnings volatility or increased reinsurance cost. Spinnaker's risk management framework provides consideration to climate risk, including at the board level.

Governance (G) Factors
Corporate Governance is a relevant factor to the credit rating but did not affect the assigned credit rating or trend. Spinnaker has key commercial relationships with its parent company, Hippo, and some of its subsidiaries. It also shares risk management and other operational functions with Hippo, which is not regulated as insurer. While there is no indication of adverse interference because of this relationship, it is taken into consideration for the credit analysis. There have been no reported cases of failures in governance at Spinnaker.

There were no Social factors that had a relevant or significant 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 (May 16, 2025) https://dbrs.morningstar.com/research/454196

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 (May 16, 2025) https://dbrs.morningstar.com/research/454196 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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