Morningstar DBRS Upgrades the Credit Rating of Domestic & General Insurance PLC to BBB (high), Trend Now Stable

DBRS Ratings GmbH (Morningstar DBRS) upgraded the Financial Strength Rating (FSR) of Domestic & General Insurance PLC (DGI PLC or the Company) to BBB (high) from BBB. The trend is now Stable.

KEY CREDIT RATING CONSIDERATIONS
The FSR upgrade reflects the Company's strong and stable profitability in 2024 (year-end 31st of March) which continued to benefit from sound underwriting performance and business growth. The Company's high profitability supports its sound Solvency II regulatory ratio, which is well above both the minimum requirement and management's internal risk appetite threshold. DGI PLC's low risk profile is supported by the low underwriting risk of its product portfolio as well as strong underwriting expertise.

The credit rating also takes into account DGI PLC's modest franchise, due to limited product diversification, notwithstanding the Company's strong market position in the home appliance insurance sector in the UK. Morningstar DBRS views DGI PLC as having weak capital flexibility, with capital adversely impacted by the substantial leverage at the holding company.

CREDIT RATING DRIVERS
The credit rating would be upgraded if the Company manages to significantly improve its capital flexibility, including having lower leverage at the group level, while maintaining the current levels of profitability and a similar risk profile.

The credit rating would be downgraded if the Company experiences a significant deterioration in profitability metrics or if its Solvency II ratio falls below the management internal risk appetite threshold of 130%.

CREDIT RATING RATIONALE
Franchise Strength Building Block Assessment: Moderate/Weak
DGI PLC is the main regulated entity of Domestic & General Group (D&G or the Group) and the leading provider of breakdown protection for domestic appliances in the UK. The Company has an EU subsidiary (Domestic & General Insurance Europe AG) through which it serves select markets in the EU including Spain, Portugal, Germany, France, and Italy. DGI PLC's main market is the UK, where it benefits from a leading market position. In 2021, the Group launched its U.S. business, which is growing at a relatively high pace both organically and through strategic acquisitions. The U.S. business remains fully unregulated. Notwithstanding DGI PLC's consolidated business model, which benefits from long-standing partnerships with original equipment manufacturers and retailers as well as engineers, Morningstar DBRS views the Company's franchise as constrained by limited product diversification.

Earnings Ability Building Block Assessment: Strong/Good
DGI PLC continued to report solid profitability metrics in 2024 (financial year ending on March 31, 2024). Specifically, the Company reported GBP 704 million total premiums written in 2024, an improvement from GBP 665 million in 2023. DGI PLC also maintained a strong return on equity of 29.2% in 2024, albeit down from 34.3% in 2023. Meanwhile, the combined ratio remained sound at 95.6% in 2024, even though it deteriorated from 93.3% in 2023. Overall, earnings ability is expected to remain resilient in the short/medium term thanks to continued growth in the subscription business in the UK and international operations. Although the home appliance market is likely to remain affected by the high cost of living, especially in the UK, Morningstar DBRS notes that DGI PLC's customer churn rates have been historically low and have been only marginally affected by upward adjustments of insurance policy prices.

Risk Profile Building Block Assessment: Good/Moderate
DGI PLC's risk profile is sound, supported by the Company's focus on low-risk products and strong underwriting expertise. The Company demonstrated resiliency in customer retention while adjusting pricing in line with inflationary pressures. DGI PLC has also effectively managed its fixed-margin contracts with business partners and fixed-term agreements with engineers, keeping the cost of claims under control. The Company's investment strategy is conservative, with its investment portfolio mostly allocated towards investment-grade fixed income securities with no exposure to equities or illiquid assets. The Group's internal risk control framework remains adequate for a company of its size and scale.

Liquidity Building Block Assessment: Good/Moderate
DGI PLC's liquidity profile is good, supported by a relatively high predictability of claims and adequate liquid resources. A significant portion (23%) of total financial assets are cash in hand or deposits with credit institutions, while the rest is allocated largely to highly liquid investment-grade bonds. The most significant payments that DGI PLC incurs are claims and repair expenses, both of which are highly predictable.

Capitalisation Building Block Assessment: Moderate/Weak
DGI PLC benefited from high solvency levels over the years. The Company's Solvency II regulatory ratio at the end of March 2024 was 170% compared with 169% at the end of March 2023 (restated from 188% to incorporate interim dividends that the Company approved in June 2023). DGI PLC's capital position is adversely affected by the substantial indebtedness of the Group, with pressure on earnings from additional investments in digital capabilities and the development of the U.S. business.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or 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 (13 August 2024) at https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (10 September 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 sources of information used for this credit rating include Morningstar, Inc. and company documents, DGI PLC Annual Report and Financial Statements FY24 - FY18, Domestic & General Acquisitions Limited Solvency and Financial Condition Reports FY24 - FY18, Galaxy Finco Limited Consolidated Financial Statements FY24 - FY18, Galaxy Finco Limited FY24 - FY18 Investor Presentations. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

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 further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/443581.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mario De Cicco, Vice President, Global Insurance & Pensions Ratings
Rating Committee Chair: Michael Driscoll, Credit Rating Officer, Global Financial Institution Ratings
Initial Rating Date: 14 December 2020
Last Rating Date: 4 December 2023

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