DBRS Morningstar Confirms Domestic & General Insurance PLC’s Financial Strength Rating at BBB

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

KEY RATING CONSIDERATIONS
The rating reflects DGI PLC’s moderate franchise, which, while benefitting from a leading position as part of Domestic & General Group (D&G Group or the Group) in the UK home appliance insurance sector, has limited diversification. It also reflects the Company’s generally low risk profile, underpinned by stable and predictable claims flow, limited market and credit risks, as well as risk management systems, which, while adequate, are constrained by the limited scale of the organisation. The Company benefits from strong earnings generation ability, and its financial performance has remained resilient to the adverse impact from the Coronavirus Disease (COVID-19) pandemic. The Return on Equity (ROE) and combined ratio metrics are in the upper range of the peer group. DGI PLC’s profitability is to a large extent centred on selected business partnerships, which increases the Group’s concentration risk. DGI PLC’s liquidity risk is low, and solvency capital significantly exceeds regulatory requirements and benefits from strong capital generation. Our view of capitalisation is adversely affected by the substantial leverage and negative equity at the holding company.

RATING DRIVERS
The rating would be upgraded in the case of DGI PLC continuing its business growth, leading to reduced reliance on selected business partnerships and higher profits, and strengthening capitalisation, while maintaining a conservative risk profile.

A rating downgrade would be driven by any of the following factors: a decline in DGI PLC's solvency ratio below 130%; failure to extend contracts with key business partners, triggering a substantial reduction in profitability; a sustained deterioration in the financial performance; or overreliance on the largest partners for earnings generation persisting in the medium to long term.

RATING RATIONALE
DGI PLC is a specialist provider of appliance care services for domestic appliances and consumer electronic products in the UK, its largest market, and in several international markets. The Company is the main regulated entity of D&G Group, which has a substantial market share in the cover of home appliances in the UK. At the financial year ended 31 March 2021 (FY2021), D&G Group had 5.8 million subscription customers and 9 million subscription plans. In the UK, one in three households using appliance insurance were customers of D&G Group. The principal activity of DGI PLC is the provision of protection for home products, such as electronics, boilers, large domestic and electrical appliances, and mobile phones. Products are distributed through several channels, and repairs and replacement services are sourced directly from manufacturers or through third-party repair companies. The strategy is focused on growing the subscription business, which generates high overall customer lifetime values. The Company benefits from exclusive long‐term partnerships with strategic partners and has a good track record in extending them. A substantial part of the business partnerships are based on fixed margin contracts, which contributes to earnings stability. However, the Company operates in a specialist niche and has limited diversification.

DGI PLC’s risk profile is moderate, supported by a focus on low risk products, highly granular and relatively short-dated exposures, and substantial underwriting expertise. Cost of claims is controlled under contracts with partners, and the Company’s claims ratio was sustained at relatively low levels in recent years. The Company is not exposed to natural catastrophe or appliance recall risks. DBRS Morningstar considers DGI PLC’s market risk to be very low with the portfolio invested solely in bank accounts and money market funds concentrated in liquid and low risk investments. We view risk controls as adequate, however, somewhat constrained by the relatively small size of the organisation.

The Company’s revenues have grown consistently in recent years. Despite the adverse impact of the pandemic, DGI PLC's financial performance remained resilient with total premiums remaining on a growth trend and ROE remaining very strong, highlighting the resilience of its business model. DGI PLC’s three‐year average ROE and the combined ratio were 36.4% and 91.4%, respectively, over the last three financial years. The Company expects premium growth to remain strong in the near to medium term, however pressure on profitability could intensify following the reallocation of new business origination for some types of cover to DGI PLC from DGS, an unregulated subsidiary of D&G Group company (the “Customer First” project). New business relationships tend to generate lower profitability in the early years due to the associated acquisition costs. We highlight that a substantial share of DGI PLC’s earnings are generated under the contract with a single important business partner, and this concentration risk constrains DGI PLC’s rating.

DBRS Morningstar considers DGI PLC’s liquidity risk to be low, reflecting the high predictability of claims and adequate liquid assets, which consist of cash, deposits with credit institutions, and money market funds, held mainly with institutions rated at “A” or higher. DGI PLC’s liquidity position is also supported by stable cash flows from policyholders. The Company maintains high solvency ratios, which significantly exceed the regulatory requirements. At end‐FY2021, DGI PLC’s Solvency II Regulatory Ratio was 189%, compared with 202% a year earlier. Of the qualifying capital resources (GBP 128 million), GBP 30 million was in the form of irrevocable standby letters of credit provided out of the revolving credit facilities drawn by the Group. While DGI PLC is committed to maintain its regulatory solvency of at least 130%, its solvency ratio could decline somewhat over the course of FY2022 in the event of a dividend payment. In its assessment of capitalisation, DBRS Morningstar takes into account DGI PLC’s strong capital generation. However, our view of the Company’s capitalisation is constrained by the negative equity and substantial indebtedness of the Group (as reported at the Galaxy Finco Limited level).

ESG CONSIDERATIONS
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/373262.

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 (July 16, 2021; https://www.dbrsmorningstar.com/research/381667). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

The sources of information used for this rating include Company Documents, Meetings with Management, DGI PLC Financial Statements for FY21 to FY16, DGI PLC Limited Regular Supervisory Report for FY21, DGA Limited/DGI PLC Solvency and Financial Condition Reports for FY21 to FY17, Galaxy Finco Limited Results Statements for Q2 FY22 to FY16, Galaxy Finco Limited Q2 FY22 to FY16 Investor Presentations, Galaxy Finco Limited Annual Report and Accounts forFY21 to FY16, and S&P Global Market Intelligence. 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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: http://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/389525

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Tomasz Walkowicz, Vice President, Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman, Managing Director, Global Financial Institutions Group
Initial Rating Date: 14 December 2020
Last Rating Date: 14 December 2020

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