Línea Directa Aseguradora S A Compañía de Seguros y Reaseguros : Solvency and Financial Condition Report 2022

LÍNEA DIRECTA

ASEGURADORA S.A.

Compañía de Seguros y Reaseguros (C0720)

Solvency and Financial

Condition Report

at 31 December 2022

Tres Cantos, 30 March 2023

The information contained in this document is confidential and is the property of Línea Directa Aseguradora, S.A. de Seguros y Reaseguros. It may not be used or disclosed without the express written permission thereof.

All rights are reserved, including duplication, reproduction, use and access to its content, or any part thereof. No part of this document may be transferred to third parties, processed, reproduced, distributed or used for publication without written permission from Línea Directa Aseguradora.

Solvency and Financial Condition Information

	CONTENTS
EXECUTIVE SUMMARY	3
A. ACTIVITY AND RESULTS	7

B. GOVERNANCE SYSTEM

15

C. RISK PROFILE

35

D.

VALUATION FOR SOLVENCY PURPOSES

46

E.	CAPITAL MANAGEMENT	60
F.	APPENDICES	69

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Solvency and Financial Condition Information

EXECUTIVE SUMMARY

This Solvency and Financial Condition Report (SFCR) for the year ended 31 December 2022 is an annual report issued by the Company under the requirements of the Solvency II regime (EU regulations under Articles 292 to 298 and Annex XX of Delegated Regulation (EU) 2015/35, as well as national legislation, mainly Chapter III of Royal Decree 1060/2015 of 20 November on the management, supervision and solvency of insurance companies and reinsurance companies).

The structure required by these regulations is as follows:

	Topics			Content
	Activity and results			Basic information about the Company with a summary of the results of its
			activity detailed by business lines in the reporting period.
	Governance system			Information about the Company's organisational structure, with a description
			of its committee structure and the responsibilities of each of these committees
				for risk management.
	Risk profile			Information about the Company's risk profile and qualitative and quantitative
			information about the risks that it faces.
	Valuation for solvency			A description of the valuation differences in the solvency balance sheet and
			the financial statements. The assumptions and methodologies used to obtain
	purposes
			the balance sheet for solvency purposes are also reported.
	Capital management			Information about the capital required for solvency purposes and a
			comparison with eligible funds to determine the Company's solvency
				position.

The Company publishes its SFCR report on its website.

Activity and results

Developments on the Spanish insurance market

2022 saw clear signs of a slowdown in global economic activity, due to, among other factors, the ongoing war in Ukraine, high inflation rates and the tightening of monetary policies. Economic activity, however, has held up well, partly due to the dynamism of labour markets and fiscal policy measures.

The insurance industry has been directly impacted by the aforementioned challenges, but it is still highly robust. In 2022, the Non-Life segment increased its turnover by 5.2% to 40.239 billion euros.

The turnover for the Motor segment bounced back, posting growth of 3.3% as of December 2022 compared to the 0.9% decline recorded in 2021. However, new car registrations fell by 5.5% in 2022. Compared with pre-pandemic levels, new car registrations have fallen by 35%. In particular, this is affecting the average age of cars on the road in Spain, which is among the oldest in Europe. Two third of Spanish insured vehicles are over 10 years old, with more polluting and unsafe vehicles.

Meanwhile, the Home segment performed very well over the year, with a 5.5% increase in its premium volume. Activity and prices in the real estate market have continued to increase, but there are signs of a slowdown against a backdrop of rising interest rates, with the resulting increase in the cost of financing and the worsening of the economic outlook.

The Health segment also recorded turnover growth of more than 7.4%, consolidating its status as one of the driving forces for the Non-Life segment as a result.

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Solvency and Financial Condition Information

The combined ration for the Motor segment was significantly up as a result of higher claim frequency and fierce inflation, which was reflected in the cost of claims.

Trends in the Company's business performance

Despite the difficult economic conditions throughout the year, the Company achieved net earned reinsurance premiums for the year of 901 million euros, up 2.03% on the previous year.

The number of policyholders increased by 3.41% compared to 2021, to 3.5 million.

Turnover was 772.8 million euros in the motor vehicle business line, an increase of 3.3% compared to the previous year.

Premium turnover for the home segment amounted to 143.7 million euros in 2022, an increase of 9.50% compared to the previous year. In September 2017, Línea Directa Aseguradora launched the Vivaz brand to operate in the health insurance sector. The Health segment generated premium income of 29.1 million euros, while the Assistance branch generated premium income of 1.1 million euros.

The technical result showed a profit of 68.1 million euros, down 49.16% on the profit achieved in 2021. The main factor behind this decline is the increase in claims incurred during the year to 76%, compared to 68.2% in 2021 as a result of inflationary pressures on the cost of claims. The cost of claims was particularly impacted by the marked increase in repair and replacement costs, the higher injury expense and the 13% increase in fatal accidents, in addition to the ageing car population, with a higher claims frequency.

The average rate of return was 2.48% for fixed income securities and 11.55% for equities.

The financial result amounted to 37 million euros, up 13.9% on the previous year, mainly due to the increase in net realised capital gains.

Governance system

The Company's risk governance system is configured around three lines of defence. The first of its lines of defence is made up of the operational areas. The second line is made up of the three key functions, i.e. Risk Management and Internal Control, Actuarial Function and Regulatory Compliance The third line of defence that makes up this structure is the Internal Audit function. The board of directors determines and manages the risk control and management policy, supervises its internal information and control systems, and exercises its Company administration and control functions, in accordance with the Spanish Corporate Enterprises Act and through its two advisory committees: the Audit and Compliance Committee, and the Appointments, Remuneration and Corporate Governance Committee.

The governance system implemented within the Company, which is made up of the organisational structure and risk management, internal control and compliance systems, is considered to be effective. It provides optimal support for the Company's strategic objectives, ensuring that the board makes business decisions with comprehensive understanding of their impact on risk exposure, within the limits set by its risk appetite.

Risk profile

The Company has maintained its distinctive personality based on organic growth, commitment to technology and innovation, and use of the direct channel, since it started operations in 1995. Its pursuit of business growth over these years has led to a volume of over 947 million euros in premiums and more than 3.4 million risks. This objective of volume growth has been pursued hand-in-hand with

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Solvency and Financial Condition Information

a profitability target. It has been achieved through rigorous underwriting, prudent investment and containing operating expenses.

The Company was authorised to apply a specific parameter for premium risk in the other motor insurance business line in 2016, which it uses in calculating its solvency capital requirement (SCR). This was as follows as at 31 December 2022 and 2021.

Solvency capital requirement (SCR)
(thousand euro)	31.12.2021	31.12.2022
Underwriting risk	171,657	172,651
Market risk	132,271	91,899
Counterparty risk	13,086	7,027
Health insurance underwriting risk	3,134	3,142
Diversification	(71,482)	(55,772)
Basic solvency capital requirement (BSCR)	248,666	218,947
Operational risk	27,166	27,795
Deferred tax adjustment	(68,958)	(61,686)
Solvency capital requirement (SCR)	206,874	185,057

Valuation for solvency purposes

The following table presents a comparison of the assets, liabilities and funds in the solvency balance sheet and financial statements as at 31 December 2022 and 2021.

As at 31 December 2022:

		ASSETS AND LIABILITIES
	(thousand euro)		Solvency		Financial
			statements
	Total assets	1,063,114	1,165,105
	Total liabilities	714,491	897,290
	Excess assets over liabilities	348,623	267,815

As at 31 December 2021:

		ASSETS AND LIABILITIES
	(thousand euro)		Solvency			Financial
				statements
	Total assets	1,240,724		1,326,080
	Total liabilities	835,182		981,153
	Excess assets over liabilities	405,542		344,927

The main differences that caused the funds available for solvency purposes to increase by 80,806 thousand euros and 60,615 thousand euros in 2022 and 2021, respectively, compared to the own funds in the financial statements are as follows:

There are no significant valuation differences for assets, as the investment portfolio, which is the largest category on the asset side of the balance sheet, is valued at market value in both cases. Intangible assets and acquisition expenses are eliminated from the asset side of the solvency balance sheet, while, in the opposite direction, capital gains on property and holdings in subsidiaries, which

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