Línea Directa Aseguradora S A : Solvency and Financial Condition Report 2021

TABLE OF CONTENTS

• 1. EXECUTIVE SUMMARY ................................................................................ 3

• 2. ACTIVITY AND RESULTS ............................................................................. 7

• 3. GOVERNANCE SYSTEM .............................................................................. 13

• 4. RISK PROFILE .......................................................................................... 30

• 5. VALUATION FOR SOLVENCY PURPOSES ................................................... 41

• 6. CAPITAL MANAGEMENT ............................................................................ 55

• 7. ANNEXES .................................................................................................. 64

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1. EXECUTIVE SUMMARY

This Solvency and Financial Condition Report (SFCR) for the year ended 31 December 2021 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 on the Company with a summary of the results of its activity detailed by lines of business in the reporting period.
Governance system	Information on the Company's organisational structure, with a description of its structure of committees and their responsibilities for risk management.
Risk profile	Information on the Company's risk profile and qualitative and quantitative information on the risks it faces.
Valuation for solvency purposes	A description of the valuation differences in the solvency balance sheet and the financial statements. The assumptions and methodologies used to obtain the balance sheet for solvency purposes are also reported.
Capital management	Information on 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

The COVID-19 pandemic has triggered a global health, social and economic crisis on a scale unprecedented in modern times. Just as 2020 was dominated by the pandemic, so was 2021, albeit on a somewhat smaller scale. However, COVID-19 mutated into more transmissible variants and generated 3 new waves worldwide.

In terms of operations, the Company continued to provide continuity of operations and maintained normal customer service in 2021 as it did in 2020 thanks to the contingency plans in place, which were effectively and efficiently implemented within 4 days of the declaration of the state of alarm by the authorities.

A key indicator in the Motor sector has been the weakening in new vehicle sales. 2021 had a modest increase of 0.9% but was still far from the pre-pandemic figures of 2019, with a decrease of 31.7% compared to 2019. This complex situation has been exacerbated the severe supply crisis in the automotive industry and indirectly impacted sales in the insurance business, as the used car market typically has more basic and lower average premiums.

The motor insurance market continues to be characterised by strong competition, with downward pressure on average premiums.

The Household and Health segments have shown very solid development.

Regarding accidents, the reduction of mobility barriers in 2021 caused the accident rate in the automotive sector to rebound significantly compared to 2020.

Despite the prevailing crisis environment affecting all sectors of the Spanish economy, in 2021 the Company reported net reinsurance premiums for the year of 883 million euros, up 0.5% on the previous year.

The number of policyholders in the portfolio increased by around 4.1% compared to 2020, to 3.3 million.

The technical account for non-life insurance made a profit of 134.05 million euros. In 2021, net reinsurance claims incurred stood at 68.02%, compared to 63.23% in 2020.

Turnover was 748.1 million euros in the motor vehicle business line, a decrease of 0.9% compared to the previous year.

Premium turnover for the home business line amounted to 131.2 million euros in 2021, an increase of 8.8% compared to the previous year. The turnover for health assistance in the Health line of business amounted to 26.4 million euros in 2021, while turnover for Assistance was 1.4 million euros.

The average rate of return on fixed-income securities was 1.95%, while the return on the equity portfolio was 8.29%. The performance of equities is partly due to buybacks from private equity funds, in particular from renewable energy funds.

The Company has continued to pursue its investment policy with the aim of guaranteeing the security, liquidity and profitability of its investments, applying principles of dispersion and diversification and ensuring a suitable mix of investment maturities (terms) in respect of the technical liabilities to be covered, in a bid to mitigate market, credit, liquidity and cash flow risks.

Governance system

The Company's risk governance system is organised around three lines of defence. This means that the Board of Directors understands and manages the risks and exercises the management, administration and control functions for the Company, in accordance with the provisions of the Spanish Limited Liability Companies Law. It also acts through the Audit and Compliance Committee and the Appointments, Remuneration and Corporate Governance Committee. In addition to the first line of defence of the operational areas, the second line of defence consists of the three key functions of Risk Management and Internal Control, Actuarial Function and Regulatory Compliance, and the third line of defence is the Internal Audit function.

The governance system implemented in the Company, comprising 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 the start of its activity in 1995. Its pursuit of business growth over these years has led to a volume of over 907 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 at 31 December 2021 and 2020.

Solvency Capital Requirement (SCR)
(thousands of euros)	31.12.2020	31.12.2021
Underwriting risk	161,004	171,657
Market risk	113,510	132,271
Counterparty risk	15,291	13,086
Health insurance underwriting risk	2,778	3,134
Diversification	(65,218)	(71,482)
Basic Solvency Capital Requirement (BSCR)	227,365	248,666
Operational risk	26,935	27,166
Deferred tax adjustment	(63,575)	(68,958)
Solvency Capital Requirement (SCR)	190,725	206,874

Valuation for solvency purposes

The following table presents a comparison of the assets, liabilities and funds in the solvency balance sheet and financial statements at 31 December 2021 and 2020.

31 December 2021:

ASSETS AND LIABILITIES
(thousands of euros)	Capital adequacy	Financial statements
Total assets Total liabilities	1,240,724 835,182	1,326,080 981,153
Excess assets over liabilities	405,542	344,927

31 December 2020:

ASSETS AND LIABILITIES
(thousands of euros)	Capital adequacy	Financial statements
Total assets Total liabilities	1,316,740 790,729	1,398,645 962,846
Excess assets over liabilities	526,011	435,799

The main differences that caused the funds available for solvency purposes to increase by 60.615 million euros and 90.112 million euros in 2021 and 2020, 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 the provision for premiums.