Direct Line Insurance : SFCR Report

DIRECT LINE INSURANCE GROUP PLC, U K INSURANCE LIMITED AND

CHURCHILL INSURANCE COMPANY LIMITED

SINGLE SOLVENCY AND FINANCIAL CONDITION REPORT

FOR THE YEAR ENDED 31 DECEMBER 2021

CONTENTS

Page

Page

INTRODUCTION EXECUTIVE SUMMARY

• A. BUSINESS AND PERFORMANCE

• A.1 Business

• A.2 Underwriting performance

• A.3 Investment performance

• A.4 Performance of other activities

• A.5 Any other information

• B. SYSTEM OF GOVERNANCE

  Introduction: Assessment of the adequacy of the Group's system of governance

• B.1 General information on the system of governance

• B.2 Fit and proper requirements

• B.3 Risk management system, including the Own Risk and Solvency Assessment

B.4.1 Internal control system

B.4.2

Compliance function

• B.5 Internal audit function

• B.6 Actuarial function

• B.7 Outsourcing

• B.8 Any other information

• C. RISK PROFILE

  Introduction: Prudent person principle and management of invested assets

• C.1 Underwriting risk

• C.2 Market risk

• C.3 Credit risk

• C.4 Liquidity risk

• C.5 Operational risk

• C.6 Other material risks

• C.7 Any other information

• D. VALUATION FOR SOLVENCY PURPOSES

• D.1 Assets

• D.2 Technical provisions

• D.3 Other liabilities

• D.4 Alternative methods of valuation

• D.5 Any other information

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E. CAPITAL MANAGEMENT 51

E.1 Own funds 52 E.2 Solvency capital requirement and

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minimum capital requirement 56

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E.3 Use of the duration-based equity risk sub-module in the calculation of the

10

solvency capital requirement 59

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E.4 Use of the internal model 59

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E.5 Non-compliance with the minimum capital requirement and non-compliance with the solvency capital

18

requirement 62

E.6 Any other information 62

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F. OTHER INFORMATION 63

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F.1 Approval by the Boards 64

F.2 Report of the external independent 65 Auditor

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F.3 Forward-looking statements disclaimer 70

F.4 Glossary 71

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G. QUANTITATIVE REPORTING TEMPLATES 73

28

G.1 Summary of Quantitative Reporting

29

Templates 74

29

G.2 Direct Line Insurance Group plc 75

30

G.3 U K Insurance Limited 90

G.4 Churchill Insurance Company Limited 110

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INTRODUCTION

Direct Line Insurance Group plc (the "Company") together with its subsidiaries (the "Group") has prepared a Single Solvency and Financial Condition Report ("SFCR") as at 31 December 2021 in accordance with permission granted by the Prudential Regulation Authority ("PRA") in December 2015 to produce a Single SFCR. This permission allows the Group to produce one SFCR that covers both the Group and its individual regulated subsidiaries and is valid until 30 June 2025.

The Group's regulated entities are U K Insurance Limited ("UKI") and Churchill Insurance Company Limited ("CIC"). In meeting the requirements for a Single SFCR, information is reported for the Group, UKI and CIC separately except where that information is equivalent in both nature and scope at Group level to that at regulated subsidiary level. The Boards of Directors of the Company, UKI and CIC (the "Boards") have the same membership. Much of the information in the SFCR is equally relevant to the Group, UKI and CIC. Where this is not the case, this has been highlighted.

The requirement to produce an SFCR follows the introduction of Solvency II as the solvency framework which was implemented on 1 January 2016 as the capital adequacy regime for the European insurance industry. Solvency II has established a set of EU-wide capital requirements and risk management standards with the aim of increasing protection for policyholders. The UK continues to follow the solvency framework after the UK left the EU on 31 January 2020 and following the post-Brexit transition period which ended on 31 December 2020.

The SFCR presents information on the business and performance, system of governance, risk profile, valuation for solvency purposes and capital management of the Group, UKI and CIC. Relevant information about the business of the Group is also included in the Group's Annual Report & Accounts which is the primary vehicle for reporting performance, consolidated financial statements, corporate governance and risk management to the Group's investors. The Group's Annual Report & Accounts 2021 was published on its website in March 2022 and a copy can be found at:www.directlinegroup.co.uk/en/investors

Some elements of this report are subject to external audit as detailed in the Auditor's report, which can be found on page 65.

EXECUTIVE SUMMARY

SECTION A - Business and performance summary

The Group

The Group's vision is to create a world where insurance is personal, inclusive and a force for good with a purpose to help people to carry on their lives, giving them peace of mind now and in the future.

The Group is Britain's leading private motor insurer represented through its well-known brands Direct Line, Churchill, Privilege and Darwin and through its partners.

The Group is one of Britain's leading personal home insurers. The Group reaches its customers by selling home insurance products through its brands Direct Line, Churchill and Privilege, and its partners including NatWest Group.

The Group is also one of the leading providers of rescue and pet insurance in the UK. The Group's rescue brand, Green Flag, is the third largest roadside recovery provider. The Group is also the fourth largest pet insurer. The Group protects commercial businesses through its brands, including NIG and Direct Line for Business.

In 2021, the Group continued transforming the business by using technology, data and digital tools to deliver more for its customers, backed by powerful brands, great service and market-leading claims capabilities. The Group is focused on building an insurance company of the future by putting sustainability at the heart of how it does business as it allows great people to thrive, creates a better corporate culture, drives competitiveness and provides a foundation for long-term rewards to its shareholders.

Solvency II lines of business

The policies underwritten by the Group are spread across the Solvency II lines of business including motor vehicle liability insurance, other motor insurance, fire and other damage to property insurance, general liability insurance, income protection insurance, legal expenses insurance, assistance and miscellaneous financial loss.

Business performance in 2021

On an International Financial Reporting Standards ("IFRS") basis in 2021 the Group delivered another year of strong profitability at the same time as growing its direct own brand policy count.

The Group has navigated the complexities and uncertainties of a challenging market, impacted by the pandemic. Commercial, Home own brands and Rescue have grown, benefiting from the investments made in recent years in technology and pricing, whilst in Motor the Group has prepared for future growth while steering a smart path through a period of falling premium and uncertain claims frequency as the market seeks to predict the shape of the pandemic and its effect on customer driving behaviour.

On strategic progress, after several years replacing the technology across the business, introducing agile ways of working and building data foundations, the Group has completed the main elements of its technology build. Through that transformation the Group has improved the profitability of the business written, with releases from older reserve years no longer such a significant part of annual profits. Performance has been delivered across the business, including the quality of claims management, pricing and improvements in cost efficiency.

Section A of the SFCR has more information on the Group's business and performance in 2021: see pages 6 to 17 of this report.

SECTION B - System of governance summary

The Board oversees the system of governance in operation throughout the Group. This includes a robust system of internal controls and a sound Risk Management Framework. The Board has established a risk management model that separates the Group's Risk Management responsibilities into three lines of defence. An explanation of these responsibilities can be found on page 89 of the Group's Annual Report & Accounts 2021 atwww.directlinegroup.co.uk/en/investors

The Group's governance framework is detailed in the Group's High Level Control and System of Governance Framework document. This document also details how the Group meets Solvency II and the PRA requirements to identify key functions and to have and maintain a Responsibilities Map in respect of the PRA and Financial Conduct Authority's ("FCA") Senior Managers and Certification Regime requirements. The Board reviews this document annually.

The Structure of the Board, Board Committees and executive management together with the roles and responsibilities of the Board can be found on page 105 of the Group's Annual Report & Accounts 2021atwww.directlinegroup.co.uk/en/investors

The terms of reference for each Committee can be found on the corporate website at:www.directlinegroup.co.uk/en/who-we-are/leadership/board-committees

Section B of the SFCR has more information on the Group's system of governance: see pages 18 to 30 of this report.

EXECUTIVE SUMMARY continued

SECTION C - Risk profile summary

The Group's partial internal model and UKI's internal model are used to calculate the Group and UKI solvency capital requirements respectively.

The following chart shows the UKI solvency capital requirement ("SCR") of £1,304.7 million as at 31 December 2021, calculated using the approved internal model, by risk type. The SCR for the Group as at 31 December 2021 using its approved model was £1,354.2 million.

The risk profile of the Group and UKI has not changed materially over the reporting period.

Underwriting risk is the risk that future claims experience on business written is materially different from the results expected, resulting in current-year losses. Underwriting risk includes catastrophe risk and the risk of loss, or of adverse change in the value of the insurance liabilities resulting from significant uncertainty of pricing, underwriting and provisioning assumptions related to extreme or exceptional circumstances.

Market risk is the risk of loss resulting from fluctuations in the level and in the volatility of market prices of assets, liabilities and financial instruments.

Operational risk is the risk of loss due to inadequate or failed internal processes, human error, systems, or from external events.

Counterparty default risk is the risk of loss from unexpected default or deterioration in the credit standing of the counterparties and debtors of Group undertakings.

The Group continues to assess the risks relating to the impact of the FCA's Pricing Practices regulatory changes on customer behaviour, the legislative and regulatory environment and the likely time period of continued Covid-19 related effects including the impact on the underwriting cycle, motor claims frequency, travel and supply chain disruption and claims inflation.

Section C of the SFCR has more information on the Group's risk profile: see pages 31 to 39 of this report.

SECTION D - Valuation for solvency purposes summary

In accordance with the Solvency II requirements, the Group values all assets and liabilities on the balance sheets of the Group and its regulated entities at fair value, which represents an amount for which they could be exchanged between knowledgeable willing parties in an arm's length transaction. Goodwill and intangible assets are valued at zero.

An analysis of the Solvency II material classes of assets and liabilities is provided in sections D.1 and D.3 respectively. Section D details the recognition and valuations bases, the judgements and any assumptions made, including sources of estimation uncertainty applied for Solvency II, and compares these with judgements and assumptions made in the preparation of IFRS financial statements.

Section D.2 describes the bases, methods and assumptions for the valuation of Solvency II technical provisions, including the estimation uncertainty, and compares these with the bases, methods and assumptions used in the preparation of the IFRS financial statements.