Línea Directa Aseguradora S A Compañía de Seguros y Reaseguros : Solvency and Financial Condition Report 2023

LÍNEA DIRECTA

ASEGURADORA S.A.

Compañía de Seguros y Reaseguros (C0720)

Solvency and Financial

Condition Report

at 31 December 2023

Tres Cantos, 19 March 2024

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

14

C. RISK PROFILE

33

D.

VALUATION FOR SOLVENCY PURPOSES

44

E.	CAPITAL MANAGEMENT	58
F.	APPENDICES	66

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Solvency and Financial Condition Information

EXECUTIVE SUMMARY

This Solvency and Financial Condition Report (SFCR) for the year ended 31 December 2023 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.
				Information about the Company's organisational structure, with a description
	Governance system			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.
				Information about the capital required for solvency purposes and a
	Capital management			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

In 2023, global economic activity remained buoyant despite the tightening of global monetary policy and multiple sources of geopolitical uncertainty. Israel's incursion into Gaza dominated the latter part of the year and the whole of the Middle East and the West are watching the situation closely due to the risk of a further escalation. In the meantime, there has still been no solution to the ongoing conflict in Ukraine.

In any case, GDP growth slowed markedly - with considerable heterogeneity across regions - and is not expected to pick up appreciably in 2024, partly as a result of the expected loss of growth momentum in the United States and China.

The insurance sector, with its countercyclical nature, reached a premium volume of 76,463 million euros, a growth of 18%, well above the 4.8% recorded in 2022. Premiums in the Non-Life branch increased by a solid, but much more moderate 6.8%, up to 43,011 million, according to data published by the Insurance sector association (ICEA).

The Motor segment, which represents 28% of total non-life turnover, grew by 6.6% (compared to a growth of 3.3% in 2022), mainly due to the increase in average premiums among the industry in general in response to strong inflation, which was passed on to the cost of claims.

The Home segment recorded an outstanding year of growth, despite the transmission of the tightening of monetary policy to credit and the sharp slowdown in home sales, with the figure for November dropping 15% year-on-year. The drop adds to the declines seen in the last eleven months, according

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Solvency and Financial Condition Information

to the Spanish National Statistics Institute (INE). Despite this, the Home segment grew by 6.4% in 2023, compared to a growth of 5.5% in 2022, thanks to rate adjustments and increased penetration.

Likewise, the Health segment grew by 6.6%, slightly less than the 7.6% recorded in 2022. The segment now accounts for more than 26% of total non-life turnover, second only to Motor.

Trends in the Company's business performance

The year presented notable challenges, especially in cost management due to the sharp increase in inflation, which fed through to the statement of profit or loss in the cost of claims cost item. Despite the difficult economic conditions throughout the year, the Company achieved net earned reinsurance premiums for the year of 937 million euros, up 3.99% on the previous year.

The number of policyholders decreased by 4.16% compared to 2022, to 3.3 million.

Turnover was 792.7 million euros in the motor vehicle business line, an increase of 2.57% compared to the previous year.

Premium turnover for the home segment amounted to 149.4 million euros in 2023, an increase of 3.98% 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 30.4 million euros.

However, the technical result showed a loss of 25.2 million euros, down 137% on the profit obtained in 2022. The main factor behind this decline is the increase in claims incurred during the year to 85.94%, as a result of inflationary pressures on the cost of claims. In particular, the cost of claims was heavily impacted by the sharp increase in repair and replacement costs, higher expenditure on personal injury claims and higher hospital charges.

The average rate of return was 2.61% for fixed income securities and 4.75% for equities.

The financial result amounts to €29 million, a decrease of 20.5% compared with the previous year.

Governance system

The organisational structure of risk management and control is based upon the principles of independence and segregation of duties between business units and risk monitoring and control units. 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 three key functions: Risk Management and Internal Control, Actuarial Function and Regulatory Compliance. The third line of defence that makes up this key 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 Committe.

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.

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Solvency and Financial Condition Information

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 973 million euros in premiums and more than 3.3 million risks. This objective of volume growth has been pursued hand-in-hand with a profitability target. It has been achieved through rigorous underwriting, prudent investment and a policy of 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 2023 and 2022.

Solvency capital requirement (SCR)
(in thousand euro)	31.12.2022	31.12.2023
Underwriting risk	172,651	192,387
Market risk	91,899	91,493
Counterparty risk	7,027	6,076
Health insurance underwriting risk	3,142	3,499
Diversification	(55,772)	(57,125)
Basic solvency capital requirement (BSCR)	218,947	236,330
Operational risk	27,795	28,812
Deferred tax adjustment	(61,686)	(66,286)
Solvency capital requirement (SCR)	185,057	198,856

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 2023 and 2022.

31 December 2023:

	ASSETS AND LIABILITIES
	(in thousand euro)		Capital adequacy		Financial
			statements
	Total assets	1,175,394	1,281,464
	Total liabilities	817,392	1,004,898
	Excess assets over liabilities	358,002	276,566

As at 31 December 2022:

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

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Solvency and Financial Condition Information

The main differences that caused the funds available for solvency purposes to increase by 81,436 thousand euros and 80,806 thousand euros in 2023 and 2022, 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 are not included in the balance sheet in the financial statements, are included. Premiums paid in instalments in the economic balance sheet are included in liabilities netting the premium provision.

The differences for liabilities arise mainly from the valuation of technical provisions:

• The provision for unearned premiums in the financial statements is eliminated from the solvency balance sheet and is replaced by the provision for premiums.
• The provisions for claims in the financial statements are calculated on the solvency balance sheet on the best estimate basis, discounting the flows using the risk-free interest rate structure.
• The solvency balance sheet includes a risk margin. This is a concept that is not used in the balance sheet in the financial statements.

In January 2019, the IFRS 16 lease rule entered into force, recognising the right to use a leased property as a new asset and the obligation to pay leases as a new liability, on the balance sheet. Both the asset and the liability must be valued as per this criterion.

The previous system did not allow the calculation of the stabilisation reserve as eligible equity for the solvency capital requirement, while the new system does consider it eligible equity. As of 31 December 2023, this amounted to €43,839 thousand, net of taxes. As at 31 December 2022, this amount stood at 93,608 thousand euros.

This Solvency and Financial Condition Report was reviewed and approved by the board of directors at its meeting on 19 March 2023.

Capital management

The Company's capital planning reflects its projected own-funds requirements over a three-year period for its solvency capital requirement (SCR) calculated as its overall solvency requirements (economic capital) estimated through its own risk and solvency assessment (ORSA), with a minimum solvency threshold set by the board of directors, which is always above 120% (with a risk appetite of 150%). The Company calculates its solvency capital requirement on a quarterly basis, broken down by risk category and available funds, in order to assess its solvency ratio.

The solvency ratio is a risk indicator that is monitored and considered by the Company's Board of Directors when implementing its capital management policy (such as setting the dividend policy for shareholders and decisions on investment policy) and its strategy for the business (such as launching new products or business lines, or acquiring risk mitigators). The solvency ratio at 31 December 2023 and 2022 was as follows:

	(in thousand euro)	31.12.2022	31.12.2023
	Eligible own funds	347,531	358,002
	Solvency capital requirement (SCR)	185,057	198,857
	Ratio of eligible own funds to the SCR	188%	180%

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Solvency and Financial Condition Information

In 2023, the Bank's Board of Directors did not suggest that dividends be shared.

If in any year it is decided to share dividends, the decision would be based on a thorough and thoughtful analysis of the Company's situation, which does not compromise either its future solvency or the protection of the interests of policyholders and insured persons, and would be made in the context of the supervisors' recommendations on this area. The Company will perform a prospective analysis to verify that solvency is not compromised.

All the available funds are classified as Tier 1, i.e., they are of the highest quality and are eligible for coverage of both the SCR and the MCR (Minimum Capital Requirement).

A. ACTIVITY AND RESULTS

ACTIVITY

Company details

Línea Directa Aseguradora, S.A. de Seguros y Reaseguros (LDA) is an insurance company, head of the Línea Directa Group and under the supervision of the Directorate General of Insurance and Pension Funds, with reference no. C0720.

Its registered office is at Calle Isaac Newton 7, Tres Cantos, Madrid, Spain.

Supervisory authority

The Company is supervised by the Spanish regulator:

Directorate General of Insurance and Pension Funds Calle de Miguel Angel 21

28010 Madrid, Spain

The Company operates under the reference code C0720.

External auditor

The external auditor of the Company's financial statements and this report on its financial position is:

PricewaterhourseCoopers, auditores, S.L. Paseo de la Castellana 259, B 28046, Madrid, Spain.

Corporate and solvency structure

The Company is the parent company of the Línea Directa Group, which was listed on the Spanish stock market on 29 April 2021.

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Solvency and Financial Condition Information

The main shareholders as at the end of 2023 are as follows:

Shareholder	% Shareholding
Cartival	19.90%
Bankinter, S.A.	17.42%
Fernando Masaveu	5.38%
Norbel	5.00%
Lazard Asset Management	3.20%
Brandes	3.00%
Candriam	2.72%
Fidelity	2.02%
Other	41.36%

The Company is required to draw up consolidated financial statements in accordance with International Financial Reporting Standards adopted by the European Union.

The tax and financial years of both the Company and the consolidated group of which it is parent company, end on 31 December.

The Company is the parent of several ancillary insurance and investment subsidiaries, none of which are involved in insurance or reinsurance activity. It is not treated as a supervised group under Article

132.1 of Law 20/2015, of 14 July 2015, on the management, supervision and solvency of insurance and reinsurance companies.

Subsidiary companies	Corporate purpose		Shareholding
Línea Directa Asistencia, S.L.U.	Vehicle inspections and assistance		100%
Moto Club LDA S.L.U.	Provision of motorcycle services		100%
Centro Avanzado de Reparaciones	Provision of vehicle-repair services		100%
CAR, S.L.U.
LD Activos, S.L.U.	Asset management on behalf	of	100%
insurance companies
Ambar Medline, S.L.U.	Insurance brokerage		100%
LDA Reparaciones,S.L.U.*	Provision of home repair services.		100%

*LDA Reparaciones was dissolved by agreement dated 22 November 2023, registered in the Madrid Trade and Companies Register on 1 December 2023.

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Solvency and Financial Condition Information

Business lines and geographical distribution

Línea Directa Aseguradora S.A.'s corporate purpose Compañía de Seguros y Reaseguros' corporate purpose is providing insurance and reinsurance for motor vehicles, the home and other non-life segments. It is authorised to perform this activity by the Spanish Directorate General of Insurance and Pension Funds.

The Company operates entirely in Spanish territory, except for the Assistance sector, in which the Company is authorised to operate in Portugal (premiums in Portugal amounted to 87 and 80 thousand euros in 2023 and 2022 respectively). Its business distribution channels are mainly telephone and internet sales.

UNDERWRITING RESULTS

The Company's business lines and the main figures for its technical account are set out in the following table:

2023:

2023 TECHNICAL ACCOUNT BY BUSINESS LINES

Motor, third-

Motor, other

Fire and other

Medical

(in thousand euro)

TOTAL

party

damage to

Attendance

coverages

expenses

liability

property

1. Premiums earned, net of reinsurance
2. Investment income
3. Other technical income
4. Claims incurred net of reinsurance
5. Profit sharing
6. Net operating expenses
7. Other technical expenses
8. Investment costs

936,617	362,373	415,409	141,956	773	16,105
48,004	26,922	14,401	4,028	23	2,629
0	0	0	0	0	0
804,948	384,527	308,637	97,244	84	14,457
393	0	0	0	393	0
208,003	65,521	87,923	41,866	58	12,635
(22,094)	(27,538)	5,441	0	0	3
18,574	12,101	6,473	0	0	0

Technical account result	(25,204)	(45,315)	21,337	6,874	261	(8,361)
(1+2+3-4-5-6-7-8)

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Solvency and Financial Condition Information

2022:

2022 TECHNICAL ACCOUNT BY BUSINESS LINES

Motor, third-

Motor, other

Fire and other

Medical

(in thousand euro)

TOTAL

party

damage to

Assistance

coverages

expenses

liability

property

1. Premiums earned, net of reinsurance
2. Investment income
3. Other technical income
4. Claims incurred net of reinsurance
5. Profit sharing
6. Net operating expenses
7. Other technical expenses
8. Investment expenses

900,647	346,293	406,985	129,800	1,065	16,504
68,429	38,099	22,376	5,119	39	2,796
-	-	-	-	-	-
684,515	311,432	276,714	82,038	10	14,321
637	-	-	-	637	-
201,412	66,587	83,442	41,990	65	9,328
(17,021)	(21,649)	4,143	241	-	243
31,388	19,774	11,614	-	-	-

Technical account result	68,145	8,248	53,447	10,650	392	(4,592)
(1+2+3-4-5-6-7-8)

The business lines for solvency purposes are directly equivalent to the segments reported by the Company in its financial statements. The "Fire and other damage to property" business line includes the home insurance segment.

INVESTMENT PERFORMANCE

The Company's investment activity follows the guidelines in its investment policy. The Investment Committee is responsible for monitoring and oversight.

The Company has continued its investment policy with the aim of ensuring the security, liquidity and profitability of its investments, applying principles of dispersion, diversification and adequacy of maturities to the technical liabilities to be covered, in order to offset market, credit, liquidity and cash- flow risks, taking into account the economic backdrop, with rising rates of return on fixed income assets.

The average rates of return on fixed-income securities were 2.40%, while the return on the equity portfolio was 7.58%.

All financial income and expenses are allocated to the technical account by business line, except 2,800 thousand euros from a dividend received for the shareholding in the Línea Directa Asistencia, S.L.U. subsidiary, which was allocated to the non-technical account.

The distribution of the portfolio, based on the economic balance sheet and including holdings, as at

31 December 2023 and 2022 is set out in the following table:

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