DBRS Morningstar Confirms Domestic & General Insurance PLC’s Financial Strength Rating at BBB; Trend Remains Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Financial Strength Rating of Domestic & General Insurance PLC (DGI PLC or the Company) at BBB. The trend on the rating remained Stable.

KEY RATING CONSIDERATIONS
The Financial Strength Rating reflects DGI PLC’s moderate franchise which benefits from a dominant market share in the UK home appliance insurance sector but lacks a sufficient level of diversification by product and geography.

The Company business is characterised by a generally moderate risk profile, supported by focus on low-risk products and high underwriting expertise as well as stable and predictable claims. Credit and market risk is also low while risk management framework is somewhat constrained by the limited scale of the organisation.

Revenue generation is strong supporting resilient financial performance which benefits from long-lasting relationships with customers and business partners, including manufacturers and repairers. The Company has been reporting historically sound profitability ratios compared to its peers. Concentration risk is high as a significant, albeit decreasing portion of the Company's revenues are sourced from few selected business partnerships. DGI PLC’s liquidity risk is considered low, while capital position is underpinned by strong capital generation which helps solvency capital to remain significantly above regulatory requirements. Our view of capitalisation remains adversely affected by the substantial leverage and negative equity at the holding company.

RATING DRIVERS
A rating upgrade would be driven by DGI’s continued business growth and larger profit levels, lower reliance on key business partnerships, and material improvements in leverage at the parent company level, while maintaining its low risk profile and high solvency ratio.

A rating downgrade would be driven by a decline of the solvency ratio below 130% as well as by a significant reduction in profitability.

RATING RATIONALE
DGI PLC is the main regulated entity of the Domestic and General Group (D&G Group or the Group), a specialist provider of breakdown protection for domestic appliances in the UK and other selected international countries. The Company provides protection to 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 main market is the UK, where it benefits from a leading market position. The Company also operates in the EU, specifically in Spain, Germany, France, Portugal and Italy. In autumn 2021, D&G Group launched its US business which is gaining traction albeit remaining at very early stage. D&G Group's strategy aims at creating and maintaining long-lasting relationships with its customers. As such, the Group remains focused on growing its subscription business which generates high overall customer lifetime values. D&G Group's total subscription plans reached 8.9 million at end-2022, with a retention rate among subscription customers of 85%. DGI PLC benefits from exclusive long-term partnerships with original manufacturers (OEMs) and retailers. Repairs and replacements are sourced thorough the OEMs and/or third party manufacturer approved engineers with whom the Company typically negotiate fixed term contracts on an annual basis. DBRS Morningstar’s assessment of the Company’s franchise strength is constrained by limited diversification and relatively high concentration among business partners.

DBRS Morningstar considers DGI PLC's risk profile as moderate, supported by focus on low-risk products and high underwriting expertise. The Company's business model, which includes fixed-margin contracts with business partners and fixed term agreement with engineers, helps keeping the cost of claims under control. However, the high inflationary environment could likely drive renewal rates up once the agreements become due for renewal. DGI PLC's investment strategy is very prudent, with the majority of the portfolio invested in high-quality fixed income securities and no exposure towards equity or illiquid assets in the investment portfolio. D&G Group internal risk control framework appears adequate albeit commensurate with a company of this size and scale.

DGI PLC has showed a solid track record of strong profitability ratios over time. This reflects the Company's positive underwriting capabilities and overall resilient business model based on high market expertise, reliable business partnerships and long-term customer relationships. In 2022, DGI PLC's continued to report sound revenue generation supported by high retention rates in the consolidated UK business and growing business at the German subsidiary in Europe. In 2022, the Company reported GBP 587 million total premiums written (versus GBP 536 million in 2021) of which 77% related to the UK and 23% generated in the form of inward reinsurance premiums transferred from the EU subsidiary. The uncertain macroeconomic outlook, characterised by high inflation, supply chain disruptions and high energy costs is likely to have a negative impact on the Company's cost of claims going forward. DGI PLC expects to absorb the increasing expenses through a combination of administrative cost management and higher pricing. DBRS Morningstar also notes that a significant portion of the Company's revenues is generated through the relationship with a major business partner, however, this concentration is on a decreasing path.

DGI PLC's overall liquidity risk is considered low due to the Company's high predictability of claims and adequate liquid funds. The most significant payments which DGI PLC incurs are claims and repairment expenses, both of which are highly predictable. We note that, in April 2021, DGI PLC moved away from a strictly deposits and money market fund allocation and increased its investment allocation in fixed income securities. Nevertheless, the portfolio is mostly invested in high quality bonds (76% of total rated in the A range or above) or cash deposits, with no allocation towards more illiquid assets.

DGI PLC maintained high solvency levels at end-March 2022 as its Solvency II Regulatory Ratio slightly increased to 189.9% from 189.2% at end-March 2021. At end-2022, DGI PLC's capital requirements were GBP 75.5 million, increasing from GBP 67.8 million at end-2021. The increase was driven by higher underwriting risk as well as higher market risk stemming from the investments in government and corporate bonds in portfolio.

The Company is committed to a maximum risk appetite of 130% of the Solvency II capital requirement and therefore, the current level of Solvency II ratio could likely decrease in the medium term. DGI PLC benefits from strong capital generation. However, capital flexibility is somewhat constrained because dividends upstreamed from DGI PLC contribute to the servicing of debt by the holding company. DBRS Morningstar's view of DGI PLC’s capital is adversely affected by negative equity and the substantial indebtedness of the Group, while pressure on earnings remains, from the uncertain macroeconomic environment as well as additional investments in digital capabilities and the development of the US business at Group level.

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 at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

The Grid Summary Grades for DGI 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/402220 (August 31, 2022). 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/396929 (May 17, 2022) in its consideration of ESG factors.

The sources of information used for this rating include DGI PLC Annual Report and Financial Statements FY22 – FY18, Domestic & General Acquisitions Limited Solvency and Financial Condition Reports FY22 – FY18, Galaxy Finco Limited Consolidated Financial Statements FY22 – FY18, Galaxy Finco Limited 1H23 – FY18 Investor Presentations. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the 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 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://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/407072

This 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: Elisabeth Rudman, Managing Director, Global Head of Financial Institutions, Global FIG
Initial Rating Date: 14 December 2020
Last Rating Date: 10 December 2021

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