DBRS Morningstar Revises Domestic & General Insurance PLC’s Trend to Positive; Confirms the Financial Strength Rating at BBB

DBRS Ratings GmbH (DBRS Morningstar) changed the trend to Positive from Stable, and confirmed the Financial Strength Rating of Domestic & General Insurance PLC (DGI PLC or the Company) at BBB.

KEY CREDIT RATING CONSIDERATIONS
The change in the trend to positive reflects DGI’s continued strong profitability in 2023 (financial year ending on March 31, 2023), notwithstanding the challenging operating environment. Repricing initiatives implemented during the year more than offset the inflation-driven increase in claims, leading to persistent robust underwriting performance and income stability. DGI PLC’s high profitability translates into strong capital generation and the resulting high solvency levels.

The confirmation of the credit rating reflects the Company’s moderate franchise affected by the limited level of geographic and business diversification but supported by a leading market position in the home appliance insurance sector in the UK. The credit rating also takes into account the Company’s generally low business risk profile with manageable product risk exposure supported by high underwriting expertise and a low and predictable profile of claims. Our view of capitalisation remains adversely affected by the substantial leverage and negative equity at the holding company.

CREDIT RATING DRIVERS
The credit rating would be upgraded if the Company maintains its current level of profitability, high regulatory solvency ratio and relatively low risk profile.

A credit rating downgrade is unlikely given the Positive trend. However, the trend would return to Stable if the Company experiences a significant drop in its underwriting profitability or in its solvency ratio below the 130% target.

CREDIT RATING RATIONALE
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 (DGI Europe AG) through which it serves selected markets in the EU including Spain, Germany, France, Portugal and Italy. Nevertheless, DGI PLC main market remains the UK which still accounted for the vast majority of the Company’s revenue, around 80% of total in 2023. Through its product proposition, the Company protects its customers from the cost of the home appliances breakdown by either repairing or replacing domestic items including washing machines, boilers and heating appliances, TVs, and other consumer electronics.

DGI PLC's risk profile is considered moderate, supported by a focus on low-risk products and high underwriting expertise. The Company demonstrated resiliency in adjusting pricing to face the inflationary environment while maintaining its fixed-margin contracts with business partners and fixed term agreements with engineers in order to keep the cost of claims under control. DGI PLC's investment strategy is prudent, with the majority of the portfolio invested in fixed income securities and no exposure towards equity or illiquid assets in the investment portfolio. However, there has been a slight pivot toward lower-rated fixed income securities. D&G Group's internal risk control framework appears adequate for a company of this size and scale.

DGI PLC has been reporting solid profitability metrics over time. Notwithstanding the difficult operating environment characterised by high inflation and sluggish market for domestic appliances, the Company reported a return-on-equity (ROE) of 32.6% in 2023, up from 32.2% in 2022. Re-pricing initiatives supported revenue generation which mitigated the increase in claims costs. As a result, the combined ratio remained stable in the low 90s range. In 2023, the Company reported GBP 665 million total premiums written (versus GBP 587 million in 2022) of which 77% is related to the UK and 23% is generated in the form of inward reinsurance premiums transferred from the EU subsidiary.

DGI PLC's overall liquidity risk is low due to the high predictability of claims and adequate liquid funds. The most significant payments which DGI PLC incurs are claims and repair expenses, both of which are highly predictable. We note that, in April 2021, DGI PLC moved away from a strictly deposit and money market fund allocation and increased its investment allocation in fixed income securities. While the portfolio is mostly invested in high quality bonds, we note that in 2023 the Company increased its share of bonds rated B or below to 41% of total fixed-income portfolio, from 24% at end-2022. Nevertheless, cash held with credit institutions amounted to GBP 4 million or 18% of total investments.

DGI PLC benefits from strong capital generation which supported the Company’s high solvency levels over the years. The Solvency II ratio at end-March 2023 was 188.4%, stable compared to 189.9% at end-March 2022. On the other hand, capital flexibility is somewhat constrained, in our view, because dividends upstreamed from DGI PLC contribute to the Group's costs, primarily debt servicing and investments in digitalisation and U.S. expansion. DBRS Morningstar's view of DGI PLC’s capital is adversely affected by negative equity and the substantial indebtedness of the Group, with pressure on earnings due to additional investment in digital capabilities and the development of the US business.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social and Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023) at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The Grid Summary Grades for Domestic & General Insurance Plc are as follows: Franchise Strength – Moderate/Weak; Risk Profile – Good/Moderate; Earnings Ability – Strong/Good; Liquidity – Good/Moderate; Capitalization – Moderate/Weak.

On 18 January 2024, Morningstar DBRS amended the above press release to replace “Financial Strength” with “Franchise Strength” in the Grid Summary Grades disclosure.

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 https://www.dbrsmorningstar.com/research/417109/global-methodology-for-rating-insurance-companies-and-insurance-organizations (14 July 2023). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The sources of information used for this credit rating include Morningstar Inc. and Company Documents and DGI PLC Annual Report and Financial Statements FY23 – FY18, Domestic & General Acquisitions Limited Solvency and Financial Condition Reports FY23 – FY18, Galaxy Finco Limited Consolidated Financial Statements FY23 – FY18, Galaxy Finco Limited FY23 – FY18 Investor Presentations.

DBRS Morningstar 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. DBRS Morningstar's outlooks and credit ratings are under regular surveillance.

For further information on DBRS Morningstar 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 DBRS Morningstar 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/424888/.

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

Lead Analyst: Mario De Cicco, Vice President, Insurance, Global FIG
Rating Committee Chair: Marcos Alvarez, Senior Vice President, Global Head of Insurance, Global FIG
Initial Rating Date: 14 December 2020
Last Rating Date: 7 December 2022

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