Solvency and Financial Condition Report

CONTENTS

		Page
	INTRODUCTION	1
	EXECUTIVE SUMMARY	2
A	BUSINESS AND PERFORMANCE	6
A.1	Business	7
A.2	Underwriting performance	10
A.3	Investment performance	14
A.4	Performance of other activities	16
A.5	Any other information	16
B	SYSTEM OF GOVERNANCE	18
	Assessment of the adequacy of the
	Group's system of governance	19
B.1	General information on the system of	20
	governance
B.2	Fit and proper requirements	23
B.3	Risk management system, including the	24
	Own Risk and Solvency Assessment
B.4.1	Internal control system	26
B.4.2	Compliance function	27
B.5	Internal audit function	28
B.6	Actuarial function	29
B.7	Outsourcing	29
B.8	Any other information	30
C	RISK PROFILE	31
	Prudent person principle and	32
	management of invested assets
C.1	Underwriting risk	32
C.2	Market risk	35
C.3	Credit risk	37
C.4	Liquidity risk	37
C.5	Operational risk	38
C.6	Other material risk	39
C.7	Any other information	39
D	VALUATION FOR SOLVENCY PURPOSES	41
D.1	Assets	42
D.2	Technical provisions	47
D.3	Other liabilities	50
D.4	Alternative methods of valuation	50
D.5	Any other information	51

• QUANTITATIVE REPORTING

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 2022 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 individual 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 a 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 2022 was published on its website in March 2023 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 66.

1

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's mission is to be brilliant for customers everyday.

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

The Group is also 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 one of the leading providers of rescue and pet insurance in the UK. The Group protects commercial businesses through its brands, including NIG and Direct Line for Business.

Whether customers access its products and services digitally, through a broker or on the phone, the Group's aim is to provide peace of mind now and in the future. It offers insurance through its four main routes to market so customers can choose what works best for them.

The Group believes that by working sustainably it strengthens the Group for the better and creates value for its customers, people, society and the planet.

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 2022

2022 was a difficult year for the Group as its performance in Motor fell below the Group's expectations and did not reflect its previous track record of delivering strong returns for shareholders. Rising claims inflation and new regulatory changes, along with severe weather events resulted in a material fall in Group operating profit and solvency ratio and resulted the in the Board's decision to not recommend a final dividend.

This is deeply disappointing and the Group has already taken and continues to take actions designed to strengthen its solvency position and improve Motor pricing in this difficult trading environment. Enhancing how the Group prices in the Motor market will be a key focus throughout 2023. All other businesses performed broadly in line with the Group's expectations when normalised for weather.

Despite the setbacks in Motor, the long-term earnings potential of the Group remains robust. The Group's diversified business model and fundamental strengths remain a significant asset in the highly competitive UK insurance market. The Group has a strong franchise, some of the most recognisable insurance brands in the UK and strong customer service delivered by a high-quality workforce.

With a determination to enhance its pricing capability and better leverage the benefits of its integrated business model, the Group firmly believes that it can restore its performance in Motor, enabling the Group to get back to delivering for shareholders.

Section A of the SFCR has more information on the Group's business and performance in 2022: 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 86 of the Group's Annual Report & Accounts 2022 at www.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 110 of the Group's Annual Report & Accounts 2022 at www.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.

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 table shows the UKI solvency capital requirement ("SCR") of £1,174.2 million as at 31 December 2022, calculated using the approved internal model, by risk type. The SCR for the Group as at 31 December 2022 using its approved model was £1,207.6 million.

2

EXECUTIVE SUMMARY continued

UKI SCR split by Risk type

The undiversified risk profile of UKI shows that underwriting risk is the largest risk as in previous years. Market risk has reduced following the de-risking of the asset portfolio and higher interest returns, together with a reduction in floating and fixed rate bond values. Operational risk has increased slightly and counterparty default risk has remained stable. As a result of the Group reporting a loss in the year the loss absorbing capacity of deferred taxes reduced to £nil.

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 SCR includes an assessment of the risks relating to the current high inflationary environment and the Group will continue to monitor this area.

Section C of the SFCR has more information on the Group's risk profile: see pages 31 to 40 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.

3