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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 2019 CONTENTS Page Page INTRODUCTION 1 E. CAPITAL MANAGEMENT 50 EXECUTIVE SUMMARY 2 E.1 Own funds 51 E.2 Solvency capital requirement and minimum A. BUSINESS AND PERFORMANCE 6 capital requirement 55 E.3 Use of the duration-based equity risk sub- A.1 Business 7 module in the calculation of the solvency A.2 Underwriting performance 10 capital requirement 58 A.3 Investment performance 14 E.4 Use of the internal model 58 A.4 Performance of other activities 16 E.5 Non-compliance with the minimum capital A.5 Any other information 17 requirement and non-compliance with the solvency capital requirement 61 E.6 Any other information 61 B. SYSTEM OF GOVERNANCE 18 Introduction: Assessment of the adequacy of the Group’s system of governance 19 F. OTHER INFORMATION 62 B.1 General information on the system of F.1 Approval by the Boards 63 governance 20 F.2 Report of the external independent Auditor 64 B.2 Fit and proper requirements 24 F.3 Forward-looking statements disclaimer 69 B.3 Risk management system, including the F.4 Glossary Own Risk and Solvency Assessment 24 70 B.4 Internal control system 27 72 B.5 Internal audit function 28 G. QUANTITATIVE REPORTING TEMPLATES B.6 Actuarial function 29 G.1 Summary of Quantitative Reporting Templates 73 B.7 Outsourcing 29 G.2 Direct Line Insurance Group plc 74 B.8 Any other information 30 G.3 U K Insurance Limited 89 G.4 Churchill Insurance Company Limited 108 C. RISK PROFILE 31 Introduction: Prudent person principle and management of invested assets 32 C.1 Underwriting risk 32 C.2 Market risk 34 C.3 Credit risk 36 C.4 Liquidity risk 36 C.5 Operational risk 37 C.6 Other material risks 38 C.7 Any other information 38 D. VALUATION FOR SOLVENCY PURPOSES 39 D.1 Assets 40 D.2 Technical provisions 44 D.3 Other liabilities 47 D.4 Alternative methods of valuation 47 D.5 Any other information 48 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 2019, 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 31 December 2020. 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 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 2019 was published on its website in March 2020 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 64. 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 and its purpose is to help people carry on with their lives, giving them peace of mind now and in the future. The Group believes that by serving the needs of its customers it can create value for its people, society, the planet and its shareholders. In the midst of significant business change, a highly competitive market and an evolving regulatory backdrop, the Group has delivered another good set of financial results, with improved quality, demonstrating its discipline and the value of its business model. The Group is Britain’s leading personal motor insurer measured by in-force policies, mainly represented through its well- known brands Direct Line, Churchill, Privilege, and its new Darwin brand, and also through its partners. The Group is also one of Britain’s leading personal home insurers measured by in-force policies selling home insurance products through its brands Direct Line, Churchill and Privilege, and its partners Royal Bank of Scotland and NatWest. The Group is one of the leading providers of rescue, travel and pet insurance in the UK. Green Flag is the third largest roadside recovery provider. The Group is also the second largest travel and fourth largest pet insurer, as well as providing insurance for mid-to-high-net worth customers. The Group protects commercial businesses through its brands, NIG, Direct Line for Business and Churchill. NIG sells its products exclusively through brokers operating across the UK, whilst Direct Line for Business sell insurance policies direct via phone and online and Churchill sell insurance policies direct via phone, online and through price comparison websites. 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 2019 On an International Financial Reporting Standards (“IFRS”) basis in 2019, underwriting profit decreased to £232.1 million (2018 restated: £259.8 million) as lower prior-year reserve releases of £294.5 million, including the effects of changes to the Ogden discount rate detailed below, were partially offset by lower operating expenses and reduced weather-related claims of £6 million (2018: £75 million weather-related claims). Operating profit decreased by £59.5 million to £546.9 million (2018 restated: £606.4 million) as a result of reductions in underwriting profit, instalment and other operating income and investment return. Current year operating profit, as a proportion of total operating profit improved, making progress towards the Group’s target of achieving more than half of the Group’s annual operating profit from current year earnings by the end of 2021. Following a Government review, as dictated by the terms of the Civil Liability Act 2018, on 15 July 2019 the Lord Chancellor announced a new Ogden discount rate of minus 0.25% to take effect from 5 August 2019. Compared to an assumed Ogden discount rate of 0% this resulted in a £16.9 million increase in reserves split across the Motor and Commercial segments. In 2018, following the granting of royal ascent for the Act in December 2018, the Group reviewed the Ogden discount rate for reserves for large bodily injury claims and selected an assumed rate of 0% for reserving purposes as at 31 December 2018. This resulted in a release of £54.8 million in 2018. Section A of the SFCR has more information on the Group’s business and performance in 2019: see pages 6 to 17 of this report. SECTION B – System of governance summary The Group’s Board of Directors (the “Board”) is committed to promoting a culture of high standards of corporate governance, business integrity, ethics and professionalism in all of its activities. The Board endorses the UK Corporate Governance Code 2018 (the “Code”), which applied to the 2019 financial year, and the related Guidance on Board Effectiveness. The Board is committed to underpinning all of the Group’s activities with the highest standards of corporate governance to help support the creation of long-term sustainable value for the Group’s shareholders and other stakeholders. The Board has resolved to approve and adopt a High Level Control and System of Governance Framework document as a statement of the governance structure and requirements applicable to each Company and the Group. The Group has an embedded Enterprise Risk Management Framework (“risk management framework”) with clear accountabilities and risk ownership designed to ensure that we identify, manage, mitigate and report on all key risks and controls through the three lines of defence model: − First line: Management is responsible for embedding risk management into business as usual, and change processes whilst creating transparent reporting of risks and management actions; − Second line: The Risk function is responsible for the design and recommendation to the Board Risk Committee of the risk management framework, its implementation across the Group and the provision of proportionate oversight of risks, events and management actions throughout the Group; and − Third line: Group Audit is responsible and accountable for providing an independent and objective view of the adequacy and effectiveness of the Group’s risk management, governance and internal control framework.

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