P owszechny Zakład Ubezpieczeń Spółka Akcyjna Group
Consolidated half-year financial statements for 2017
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Consolidated half-year financial statements for 2017
Consolidated half-year financial statements of the Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group for 2017
1. Selected financial data including: Selected consolidated data of the Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group (in accordance with IFRS); Selected standalone financial data of Powszechny Zakład Ubezpieczeń Spółka Akcyjna (in accordance with PAS); Selected standalone financial data of Powszechny Zakład Ubezpieczeń na Życie Spółka Akcyjna (in accordance with PAS). 2. Management Board’s Report on the Activity of the PZU SA Group in H1 of 2017. 3. Condensed interim consolidated financial statements of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group for the 6 months ended 30 June 2017 (in accordance with IFRS). 4. Independent auditor’s report on review of the condensed interim consolidated financial statements of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group for the period from 1 January 2017 to 30 June 2017. 5. Condensed interim standalone financial statements of Powszechny Zakład Ubezpieczeń Spółka Akcyjna for the 6 months ended 30 June 2017 (in accordance with PAS). 6. Independent auditor’s report on review of the condensed interim separate financial statements of Powszechny Zakład Ubezpieczeń Spółka Akcyjna for the period from 1 January 2017 to 30 June 2017.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Consolidated half-year financial statements for 2017
Selected financial data
The below foreign exchange rates have been applied to calculate financial data of subsidiaries and present selected financial data: 1 January – 1 January – 31 December Currency 30 June 2017 30 June 2017 30 June 2016 2016 Euro 4.2474 4.3805 4.2265 4.4240 Ukrainian hryvnia 0.1459 0.1535 0.1424 0.1542 The financial data of foreign entities are converted into Polish zloty: assets and liabilities – at the average exchange rates set by the National Bank of Poland effective at the end of the reporting period; statement of profit and losses items and other comprehensive income items – at the arithmetic mean of the exchange rates set by the National Bank of Poland at the last day of each month of the reporting period.
1. Selected consolidated financial data of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group (in accordance with IFRS)
PLN million PLN million EUR million EUR million Data from the consolidated statement of 1 January - 1 January - 1 January - 1 January - profit or loss 30 June 2017 30 June 2016 30 June 2017 30 June 2016 Gross written premiums 11,606 9,862 2,732 2,251 Net earned premiums 10,347 8,986 2,436 2,051 Fees and commission income 702 395 165 90 Net investment result 3,032 1,405 714 321 Net insurance claims and benefits (7,214) (6,165) (1,698) (1,407) Profit before tax 2,198 1,049 517 239 Profit attributable to the equity holders of the 1,446 660 340 151 parent company Profit attributable to holders of non-controlling 287 130 68 30 interests Basic and diluted weighted average number of 863,516,697 863,473,794 863,516,697 863,473,794 ordinary shares (in units) Basic and diluted earnings per ordinary share 1,67 0,76 0,39 0,17 (in PLN/EUR)
PLN million EUR million Data from consolidated statement of PLN million EUR million 31 December 31 December financial position 30 June 2017 30 June 2017 2016 2016 Assets 295,262 125,345 69,860 28,333 Share capital 86 86 20 19 Equity attributable to the equity holders of the 13,154 13,010 3,112 2,941 Parent Company Non-controlling interests 21,474 4,117 5,081 931 Total equity 34,628 17,127 8,193 3,871 Basic and diluted number of ordinary shares 863,522,776 863,504,300 863,522,776 863,504,300 (in units) Book value per ordinary share (in PLN/EUR) 15,23 15,07 3,60 3,41
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Consolidated half-year financial statements for 2017
PLN million PLN million EUR million EUR million Data from consolidated statement of 1 January - 1 January - 1 January - 1 January - cash flows 30 June 2017 30 June 2016 30 June 2017 30 June 2016 Cash flows from operating activities 2,971 2,117 699 483 Cash flows from investment activities 4,840 (2,130) 1,140 (486) Cash flows from financing activities 946 (731) 223 (167) Total net cash flows 8,757 (744) 2,062 (170)
2. Selected standalone financial data of Powszechny Zakład Ubezpieczeń Spółka Akcyjna (in accordance with PAS)
PLN million EUR million PLN million EUR million Data from balance sheet 31 December 31 December 30 June 2017 30 June 2017 2016 2016 Assets 42,896 37,419 10,149 8,458 Share capital 86 86 20 19 Total equity 12,357 12,219 2,924 2,762 Basic and diluted number of ordinary shares 863,523,000 863,523,000 863,523,000 863,523,000 (in units) Book value per ordinary share (in PLN/EUR) 14,31 14,15 3,39 3,20
Data from technical non-life insurance PLN million PLN million EUR million EUR million account and non-technical profit and 1 January - 1 January - 1 January - 1 January - loss account 30 June 2017 30 June 2016 30 June 2017 30 June 2016 Gross written premiums 6,706 5,258 1,579 1,200 Technical result of non-life insurance 739 262 174 60 Net investment result1) 1,730 1,147 407 262 Net profit 2,101 990 495 226 Basic and diluted weighted average number of 863,523,000 863,523,000 863,523,000 863,523,000 ordinary shares (in units) Basic and diluted earnings per ordinary share 2,43 1,15 0,57 0,26 (in PLN/EUR) 1) Including the item „Share of the net profit (loss) of subordinated entities measured by the equity method.
3. Selected standalone financial data of Powszechny Zakład Ubezpieczeń na Życie Spółka Akcyjna (in accordance with PAS)
PLN million EUR million PLN million EUR million Data from balance sheet 31 December 31 December 30 June 2017 30 June 2017 2016 2016 Assets 28,613 27,894 6,770 6,305 Total equity 3,997 4,810 946 1,087
Data from technical life insurance PLN million PLN million EUR million EUR million account and non-technical profit and 1 January - 1 January - 1 January - 1 January - loss account 30 June 2017 30 June 2016 30 June 2017 30 June 2016 Gross written premiums 4,242 3,989 999 911 Technical result in life insurance 759 744 179 170 Net investment result 714 270 168 62 Profit before tax 587 550 138 126
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Management Board’s Report on the Activity of the PZU SA Group in H1 2017 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Table of Contents
CEO Letter to Shareholders 6 05 Consolidated financial results 57 5.1 Major factors contributing to the financial result 58 01 PZU Group Overview 9 5.2 Income 60
External environment in H1 2017 17 5.3 Claims and technical provisions 63 02 2.1 Main trends in the Polish economy 18 5.4 Administrative and acquisition expenses 63 2.2 Situation on the financial markets 19 5.5 Asset and liability structure 63 2.3 External environment in the Baltic States and Ukraine 20 5.6 Contribution made by the operating segments to the result 65 2.4 Macroeconomic factors that can affect the operations of the Polish insurance sector and the PZU 5.7 Profitability and operational efficiency ratios 73 Group’s activities in 2017 23
06 Risk management 77 03 PZU Group’s operations 25 6.1 Objective of risk management 78 3.1 Structure of the PZU Group 26 6.2 Risk management system 78 3.2 Non-life insurance (PZU, LINK4 and TUW PZUW) 26 6.3 Risk appetite 79 3.3 Life insurance (PZU Życie) 32 6.4 Risk management process 80 3.4 Banking (Pekao, Alior Bank) 35 6.5 PZU Group’s risk profile 81 3.5 Mutual funds (TFI PZU) 39 6.6 Reinsurance operations 87 3.6 International insurance operations 40 6.7 Capital management 88 3.7 Medical services (PZU Zdrowie) 42
3.8 Pension funds (PTE PZU) 43 07 PZU on the capital market and the debt market 91 7.1 PZU share price 92 3.9 Other operating areas 44 7.2 Debt financing of PZU, Pekao and Alior Bank 96
04 Development strategy 47 7.3 Banking sector on the Warsaw Stock Exchange 97 4.1 Fundamental values 48 7.4 Distribution of the PZU’s 2016 net profit 98 4.2 Key strategic objectives 49 7.5 Rating 98 4.3 Pursuit of key projects and initiatives in H1 2017 52 7.6 Calendar of major PZU’s corporate events in 2017 101 4.4 Selected measures of the PZU Group’s 2020 Strategy 55 08 Corporate governance 103 8.1 Entity authorized to audit financial statements 104
8.2 Share capital and PZU shareholders; shares owned by members of its governing bodies 104
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 2 3 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Table of Contents
09 Other 107
Appendix: PZU Group’s financial data 111 10 Appendix: Glossary of terms 125
Photographs from CSR activities of PZU Group in 2016 were used in the report.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 4 5 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 CEO Letter to Shareholders
Dear Shareholders, and current clients in life and non-life insurance. As a result, in H1 2017 the PZU Group generated gross written premium On behalf of the management boards of the PZU Group of PLN 11.6 billion (i.e. a historic, record-breaking level of companies I would like to convey to you our activity report for gross written premium in the first six months of the year) and H1 2017. operating profit of PLN 2.2 billion (up 109.4% y/y).
The first 6 months of 2017 constituted a landmark period In the upcoming periods the Group’s major objective will be to for the PZU Group from the vantage point of the Group’s strengthen its competitive position on the insurance market, future development and the prospects for long-term growth identify and capture new synergies in the banking segment in shareholder value. On 7 June 2017, PZU finalized the and develop strategic initiatives in health and investments. We transaction to acquire a 20% equity stake in Bank Pekao are focused on ensuring that these measures are of (a 32.8% stake jointly with the Polish Development Fund). a fundamental and long-term nature and for their execution Following that deal, PZU has become the largest group to proceed in harmony with the principles of sustainable offering comprehensive financial services in Poland and development. Central and Eastern Europe with a total balance sheet in excess of PLN 295 billion (assets of PZU, Pekao and Alior I would like to thank our employees and all our business Bank). As a result, this has opened the path to pursue partners for their effort to grow PZU’s value. many potential synergies on the insurance, banking and investment market. We intend to build the Group’s position on this foundation as the service provider of first choice on the financial services market in life and non-life insurance, Yours faithfully, health care and banking services. In these endeavors, we are focused on satisfying client needs and expectations as best as possible. Ultimately, the measuring stick for attaining these ambitions, and at the same time the common denominator for all these strategic measures will be the number and quality of interactions with our clients. Paweł Surówka
After finalizing the transaction to acquire an equity stake in Chairman of the Management Board of PZU Pekao, we conducted the largest issue of subordinated bonds in history in the financial sector in Poland. At the same time, it was the first issue in Poland in compliance with Solvency II requirements. Extensive investor interest enabled us to secure attractively-priced financing from the point of view of the Group’s cost of capital and compared to other subordinated The first 6 months of 2017 constituted a issues under way on the Polish market. Consequently, the Group’s strong capital position following the transaction to landmark period for the PZU Group from the acquire an equity stake in Pekao continued to be impeccable, while the solvency ratio under Solvency II remained above the vantage point of the Group’s future develop- median solvency ratio for insurance undertakings in Europe. ment and the prospects for long-term growth In H1 2017 we generated very robust performance in our in shareholder value. core underwriting business. This was related to the conducive market and regulatory environment and to the proper utilization of the Group’s competitive advantages. The Group’s transparent tariff policy, optimum utilization of its size and its Paweł Surówka Chairman of the Management Board of PZU rigorous cost discipline enabled us to grow sales among new
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 6 7 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 01
PZU Group Overview
For more than 200 years, the identity of the PZU Group had been defined by insurance activity focusing on giving our clients peace of mind and a sense of safety by providing them insurance cover in all of the most important areas of their private, public and business lives. In seeking out new directions to develop and responding to its clients’ needs, the PZU Group has been expanding its activity in Investments, Health and Banking. Following its acquisition of a stake in Bank Pekao S.A. PZU has become the largest financial group offering comprehensive financial services in Poland and Central and Eastern Europe.
9 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 PZU Group Overview
The PZU Group is one of the largest financial institutions in PZU had been monitoring targets suitable to PZU Group’s Mission Poland as well as in Central and Eastern Europe. The Group strategy of building a large-scale and highly profitability is led by Powszechny Zakład Ubezpieczeń SA (PZU) – a public banking group and in December 2016 it announced the We are here to provide our clients with peace of mind and safety. Our clients can always company listed on Warsaw Stock Exchange S.A. The PZU signing of an agreement with UniCredit to acquire a 20% rely on us. brand’s traditions date back to 1803 when the first insurance stake in Bank Pekao (a 32.8% stake jointly with the PFR Polish company was established in Poland. Development Fund). The transaction was finalized on 7 June 2017. Following this transaction, PZU became the largest group For more than 200 years, the identity of the PZU Group has offering comprehensive financial services in Poland and Central What we do been defined by insurance activity focusing on giving its and Eastern Europe with total assets of PLN 295 billion (assets PZU Group is one of the largest financial institutions in Poland and in Central and Eastern Europe. The clients peace of mind and a sense of safety by providing them of PZU, Pekao and Alior Bank). Group is led by the Polish insurance company Powszechny Zakład Ubezpieczeń SA – a company quoted insurance cover in all of the most important areas of their on the Warsaw Stock Exchange. The history of the PZU brand goes back to 1803 when the first Polish private, public and business lives. insurance company was established.
~ 16 million clients in Poland
PZU’s activities
POLAND ESTONIA Protection of the Increasing savings Protection of Health care Bank products property future #1 #4 Motor insurance Group and Health insurance Participation units TFI Savings and checking individually continued accounts #1 Non-life insurances protection products Medicine insurance Pillar II of the pension system (OFE) Terms deposits LATVIA Insurances for enterprises Individual life Health care services: insurance TFI PZU #3 Agricultural insurances general health Pilar III of the pension Credits and loans care and additional system (employment OFE PZU #3 #2 Financial insurances services packages pension products - EPP, individual pension Tourism insurances accounts – IKE, and LITHUANIA individual pension #1 security accounts – #1 IKZE)
#2 #6 Our values
UKRAINE Common operating philosophy #9*
#5 #4
Non-life insurance Market position by assets We are fair We are effective We are innovative
Life insurance Our offer is clear and satisfies real We offer friendly customer service We continually adapt to the changing Market position by assets under management Insurance sold in direct sales channels via internet/ expectations of our clients; we follow and competitive prices to our clients; needs of the clients; we proactively telephone transparent rules in operating the we control the costs, ensure that search for ways to improve our organization processes are smooth business * assets controlled by Alior Bank
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 10 11 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 PZU Group Overview
NON-LIFE INSURANCE LIFE INSURANCE BANKING
In H1 2017, PZU increased its exposure to the banking sector Banking assets in the PZU Group (PLN bn) Rapid growth of gross written premium Stable growth gross written premium by finalizing the transaction to acquire a 20% equity stake in PLN 6.6 bn (+23.7% y/y) PLN 4.2 bn (+7.5% y/y) Pekao S.A. PLN 5.3 bn in H1 2016 PLN 3.9 bn in H1 2016 Consequently, the contribution of the banking segment PLN 4.4 bn in H1 2015 PLN 4.0 bn in H1 2015 280% (Pekao, Alior) to the Group’s operating result in H1 2017 was: 232
High profitability achieved in motor insurance High profitability maintained in group life and 53%
measured by COR individually continued insurance: 61 PLN 485 million 40 95.6% (-6.2 p.p. y/y) 19.2% (-1.7 p.p. y/y) 2015 2016 06.2017 101.7% in H1 2016 20.9% in H1 2016 105.6% in H1 2015 20.4% in H1 2015 MUTUAL FUNDS PENSION FUNDS
Market share in direct activity (+1.4 p.p. y/y) Market share in regular premium (+0.8 p.p. y/y) The flexibility of TFI’s offer allowed it to retain its leading OFE PZU maintained its leading position on the IKZE position on the Employee Pension Plan market. At the end of (individual retirement security account) among voluntary 03.2017 37.1% 62.9% 03.2017 45.6% 54.4% June 2017, TFI PZU ran a total of 129 programs (+1.6% y/y) pension funds (VPFs) in terms of the number of members. for 123.8 thousand people (+3.9% y/y) with total net assets At the same time, in June 2016 it posted the highest rate of 03.2016 35.7% 64.3% 03.2016 44.8% 55.2% exceeding: return among all VPFs on the market, i.e. PZU (including LINK4 and TUW PZUW) PZU Życie PLN 3.7 bn (+12.1% y/y) 13.8% (+12.3 p.p. y/y) Other insurance companies Other insurance companies PLN 3.3 bn in June 2016 1.5% in H1 2016
INTERNATIONAL OPERATIONS Assets under Management (+2.8% y/y) Assets under Management (+29.3% y/y) Non-life market share Contribution to Group’s gross written premium Third position on the market in terms of assets Third position on the market in terms of assets Poland under management under management PLN 10,817 mln Lietuvos Draudimas Lietuvos 27.8% 93.2% and PZU Litwa Życie At the end of June 2017, TFI PZU managed net assets of PLN At the end of June 2017, OFE PZU managed net assets of PLN Draudimas PLN 375 mln 27.1% 20,0 billion, of which assets from external clients rose 14.2% 22.5 bn, i.e. up by 29.3% y/y. 26.6% AAS Balta y/y to PLN 7.3 billion. 25.9% International 6.8% AAS Balta PLN 789 mln PLN 188 mln 15.3% Third party client assets Third party client assets PZU Estonia 14.2% 06.2017 7.3 17.4 06.2017 22.5 2.6 PZU Estonia 2.8% 03.2017 PLN 111 mln OFE PZU PZU Ukraina 06.2016 6.4 TFI PZU Pekao Pioneer TFI* 4.3% 03.2016 PZU Ukraina 06.2016 17.4 OFE Pekao Pioneer* PLN 115 mln *As at 30.06.2017 Pekao Bank owned 49% stake in share capital of Pekao Pioneer TFI *As at 30.06.2017 Pekao Bank owned 65% stake in share capital of OFE Pekao
HEALTH SHARES PZU GROUP’S SOLVENCY II/ROE
In H1 2017, PZU acquired two additional medical companies (Revimed and NZOZ Trzebinia). PZU has also been gradually Rate of return on PZU shares in H1 2017 Solvency II ROE** expanding cooperation with health care establishments (1,878 units, or 11.3% up y/y in H1 2017), which consequently led to 277.4% * 06.2017 06.2016 249.8% a 30.0% y/y hike in gross written premium in health insurance. 40% TSR 38.5% -10.0% Health insurance (million) PZU Zdrowie revenues (PLN million) 20% DY 3.1% 7.3% 22.1% 21.0 22.5 06.2017 ~1.4 *06.2017 89 131 220 0% DPS PLN 1.4 PLN 2.1 10.7% 8.4 8.1 PZU TSR* (+38.5%) *06.2016 57 99 157 EPS PLN 1.7 PLN 0.8 06.2016 ~1.1 WIG BANKI (+15.9%) 12.2016 03.2017* 06.2016 06.2017 P/E 26.6x 37.4x Own funds (PLN bn) Health care companies Health insurance and subscriptions WIG (+17.9%) Solvency margin (PLN bn) P/BV 2.9X 2.1x ** parent company ROE * H1 data, regardless of the time of acquisition; the revenues of branches - presented in managerial accounting in a corresponding manner to other health care * Acronyms defined in the glossary centers, i.e. including revenues from PZU Zdrowie * non audited data
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 12 13 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 PZU Group Overview
PZU Group’s consolidated highlights in H1 2015-2017 (PLN million)
1 January – 1 January – 1 January – 30 June 2017 30 June 2016 30 June 2015
Gross written premium 11,606 9,862 9,126
Net revenues from commissions and fees 498 268 103
Net result on investing activity 3,032 1,405 1,086
Net insurance claims and benefits (7,214) (6,165) (6,006)
Acquisition expenses (1,412) (1,252) (1,131)
Administrative expenses (2,025) (1,278) (822)
Interest expenses (426) (346) (62)
Operating profit 2,199 1,050 1,619
Net profit 1,733 790 1,322
Net profit attributable to the parent company 1,446 660 1,322
Total assets 295,262 112,945 66,056
Financial assets in which: 257,125 93,910 54,602
Credit receivables from clients 162,062 33,526 -
Total equity 34,628 15,601 11,853
Equity attributable to the parent company’s 13,154 11,772 11,852 shareholders
Technical provisions 43,785 41,702 40,734
Restated data for period 2015-2016
The PZU Group maintains a high level of security in its business. This is corroborated both by its high solvency ratios and by the A- rating awarded by S&P Global Ratings. This is one grade above Poland’s sovereign rating for foreign currency- denominated debt. SECTION 7.5 RATING A- In connection with the announcement of a PLN 2.25 billion subordinated debt issue on 30 June 2017, on 4 July 2017 Financial strength S&P Global Ratings updated its evaluation of the Company’s rating and credit rating standing. After the update PZU’s rating remained the same. awarded to PZU by S&P
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 14 15 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 02
External environment in H1 2017
Continuation of solid GDP growth - consumption grew dynamically in view of the improving situation on the labor market, while the growth rate of investments remained low.
Economic recovery supported the stock market. Very good state budget performance, diminishing political uncertainty in Europe and lower inflation in Q2 2017 contributed to higher Polish bond prices.
In chapter: 1. Main trends in the Polish economy 2. Situation on the financial markets 3. External environment in the Baltic States and Ukraine 4. Macroeconomic factors that can affect the operations of the Polish insurance sector and the PZU Group’s activities in 2017
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2.1 Main trends in the Polish economy GDP growth decomposition in 2012 - Q1 2017 Inflation, monetary policy and interest rates 2.2 Situation on the financial markets In H1 2017, the prices of consumer goods and services
Gross Domestic Product 6.0% measured by CPI were up 1.9% y/y, compared to a 0.3% The rapid growth of Polish stock market indices that started The Central Statistical Office (CSO) confirmed that GDP drop y/y in H2 2016. At the outset of the year, inflation at the time of the 2016 US presidential election continued in 4.0% growth in Poland accelerated in Q1 2017 to 4.0% y/y visibly increased in connection with the price hike in early 2017. It was accompanied by robust economic data from compared to 2.5% y/y in Q4 2016 driven by rising 3.0% energy commodities on local and global markets. Inflation Poland and the Euro zone that also translated into the financial consumption and inventories. The rate of household subsequently stabilized after the impact of the global performance of the companies listed on the Warsaw Stock consumption growth in Q1 2017 (4.7% y/y) was at its highest commodity price hike subsided, with increasing food prices Exchange. The cautious declarations made by the European since the end of 2008 in the context of robust growth in real 0.0% and gradually rising core inflation associated with economic Central Bank and the Federal Reserve in respect to the pace of income and the very good situation on the labour market. recovery. Core inflation (net of food and energy prices) in tightening monetary policy also supported the equity market. Q414 Q415 Q416 Q117 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q1 15 Q2 15 Q3 15 Q1 16 Q2 16 Q3 16 Inventories continued to contribute materially to GDP growth H1 2017 was 0.6% y/y compared to -0.2% y/y in H2 2016. However, the interest rate hike announced by the Federal
(0.7 p.p.). The increase in inventories however was mainly -3.0% Reserve in March contributed to a certain slowing down of the a reaction to the recovering demand and business activity. Consumption Gross accumulation In the period from January to August 2017, the interest rates upward trend in stock prices. Foreign trade balance GDP growth The poor performance of investments (-0.4% y/y) for which of the National Bank of Poland did not change. The reference private business investments are “responsible” was a negative interest rate remains at the level of 1.5% set in March 2015. At the same time, in Q1 2017, 10-year treasury bond yields surprise. The NBP economic climate survey showed that Labor market and consumption The members of the Monetary Policy Council believe that in Poland temporarily reached a relatively high level of 3.90% uncertainty was an obstacle to higher private investments in In H1 2017, the labor market conditions improved the current level of interest rates is conducive to keeping the that was last recorded in 2014. However, in subsequent businesses with a good financial standing; however, some considerably. In June, the registered unemployment rate was Polish economy on a sustainable growth path and allows it to months, diminishing political risk in Europe following the improvement transpired in Q2. The impact on GDP growth 7.1%, down 1.6 p.p. from the previous year. In that period, preserve macroeconomic balance. elections in the Netherlands and France, accelerating exerted by net exports was nearly neutral. the average monthly employment in the corporate sector economic growth in Poland and the ensuing conducive fiscal increased by almost 203 thousand persons, vs. about Public finance position contributed to a gradual decline in treasury bond GDP growth in Q2 slowed down slightly. According to the flash 127 thousand in the first six months of 2016. The annual The Polish state budget after June of this year recorded yields in Poland. The prices of Polish treasury securities estimate of CSO, it amounted to 3.9% y/y. In that period, growth rate of employment in the corporate sector was a surplus of PLN 5.9 billion. This excellent mid-year result were also supported by statements made by members of the pace of retail sales volume slackened to 6.7% y/y from 4.3% y/y in June 2017, one of its highest levels since is a record-breaking. The annual growth rate of indirect tax the Monetary Policy Council and A. Glapiński, Governor of 7.1% y/y one quarter before. However, in H1 retail sales in H1 2008. The number of job offers at the end of June was proceeds decelerated slightly in June but it is still about 20% the National Bank of Poland, who consistently extinguished constant prices rose 6.9% y/y compared to 5.0% y/y in the 5.1% higher than the year before. Businesses reported an y/y year-to-date, mainly because of the very high growth of expectations of possible hikes in central bank rates. same period of 2016. At that time, the industrial production increasing number of vacancies and rising problems with VAT proceeds (about 28% y/y). The large contribution made growth rate remained solid. In Q2, industrial production finding suitable employees. The improvement on the labor by the National Bank of Poland’s profit lent additional support In May 2017, market volatility increased in connection rose 4.2% y/y, compared to 7.3% y/y in Q1; however, after market was supported by an excellent business climate. to state budget income (PLN 8.7 billion). with, among others, a decline in oil prices that adversely eliminating seasonal variations, these growth rates were Nevertheless, demographic processes increasingly contribute affected emerging markets and higher political risk in the similar to one another (monthly average of 5.7-5.8% y/y) and to cutting the unemployment rate. The Ministry of Finance announced that, after the first half of US. Nevertheless, German and US bonds generally increased markedly higher than in 2016. Construction and installation the year, about 70% of the full-year borrowing needs were in value in Q2 2017, driven by the waning prospects production accelerated significantly in Q2, increasing on Given the improving situation on the labor market, the pace of financed. The level of liquid funds in Polish zloty and foreign for monetary policy tightening as perceived by market average to 8.1% y/y, compared to 4.7% y/y in Q1. In 2016, salary growth rose gradually. In Q1 and Q2 2017, the growth currencies proved to be high at about PLN 80 billion at the end participants, among others due to declining inflation. This construction production was clearly in decline. In Q2 2017, rate of the average monthly salary in the national economy of June. trend, however, reversed in late June. Statements made by investment growth rate will presumably remain low. The sped up to, respectively 4.1% y/y and 5.0% y/y vs. 3.7% M. Draghi, President of the European Central Bank, led to public investment cycle co-funded by the EU was still in an y/y in Q4 2016. The resurgence of inflation contributed to a noticeable increase in yields of German long-term treasury early stage in H1 2017. weakening real salary growth in the economy to 2.1% y/y in bonds, also affecting the global market. Q1 2017 compared to 3.4% y/y one quarter earlier. However, in Q2 the growth rate of the average monthly salary in Ultimately, between the end of December 2016 and the end of national economy climbed to 3.2% y/y in real terms. In these June of this year, the WIG and WIG20 indices surged upward conditions, the increase in household consumption in Q1 2017 by approximately 18%. The Polish yield curve from the end accelerated to 4.7% y/y and was the highest in 8 years. of December 2016 to the end of June 2017 clearly shifted The consumer confidence indicators up to and including downward for longer maturities by about 20 bps for 5-year June consecutively broke records, remaining at their highest treasury bonds and by about 30 bps for 10-year treasury level in the history of the survey (since 1997). Accordingly, bonds (down to about 3.30%). The yield on 2-year bonds fell consumption in Q2 should at least sustain the growth rate of by roughly 10 bps, while yields of annual treasury securities the previous quarter.
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rose by almost 20 basis points (to about 1.60%). Since May, PLN exchange rate in 2016 and H1 2017 In June, the registered the difference between yields offered by Polish and German In Q1 2017, the GDP of Poland grew by unemployment rate was 10-year treasury bonds has been under 300 basis points. PLN4,5 4.5 zł According to our estimates, Poland’s risk premium declined in PLN4,3 4.3 zł H1 2017. 4.0% y/y 7.1% PLN4,1 4.1 zł and dropped by Treasury bond yields in 2016 and H1 2017 driven by rising PLN3,9 3.9 zł consumption and 1.6 p.p. inventories PLN3,7 3.7 zł from the previous year 4,0%4.0% PLN3,53.5 zł 3,5%3.5% 2016 H1 2017
3,0%3.0% EUR/PLN 2,5%2.5% CHF/PLN 2,0%2.0% USD/PLN Core inflation rate in H1 2017 1,5%1.5% reached Household consumption in Q1 2017
1,0%1.0% accelerated to 2016 H1 2017 2.3 External environment in the Baltic States and Ukraine 0.6% y/y Yield 10Y Yield 5Y compared to -0.2% y/y 4.7 % y/y Lithuania Yield 2Y in H2 2016 The improvement in global economic conditions accrued and was the highest in relatively quick implications for Lithuanian exporters. Following the last 8 years The evolution of currency rates in recent months, including a period of decline in the last several quarters, the exports of PLN rates, was affected by changes in market expectations goods increased. As a result, according to the data published concerning the future monetary policy in the US and in the by the Bank of Lithuania, the entire economy posted GDP Euro zone. In H1 2017, the US dollar clearly weakened vs. growth of 3.9% in Q1. According to the forecasts, Lithuania’s In Q1 2017, Latvia’s GDP growth the euro, which may be attributed to disappointment with the real GDP growth in full-year 2017 will be 3.3%. The GDP of Lithuania grew by direction of President D. Trump’s policies. The EUR/USD rate accelerated to rose from about 1.05 to about 1.14, which is approximately Economic growth in Lithuania still largely hinges on domestic 3.9% 8%. The Polish zloty appreciated vs. the major global demand, especially private consumption driven by intensive 4.0% currencies. The Polish currency was supported by diminishing changes on the labor market. Last year, salaries rose by in Q1 2017 and was the highest political risk in Europe, the robust pace of economic growth approximately 8%. The labor market will continue to support growth rate recorded in Poland and the Euro zone, as well as the good condition income from labor, thus private consumption will remain an in five years of the Polish state budget. The USD/PLN rate fell by as much important driver of economic growth. It is expected, however, as 11% at the end of June of this year compared to the end that income from labor will cease to rise at the current pace, of 2016. The EUR/PLN and CHF/PLN rates fell in the period since salary inflation whose growth rate is outpacing labor under analysis by about 4% and 6%, respectively. The Swiss productivity will curtail the competitiveness of businesses. franc exchange rate has remained under PLN 4 since the end The decline in income from labor should also cause household In Q1 2017, Ukraine’s GDP growth was Estonia’s GDP in Q1 2017 rose by of March. spending to decelerate. negative at -0.3% Over the last several years, inflation was fairly low in 4.4% compared to the previous Lithuania. This was partially associated with the global quarter (as a result of economic environment affecting commodity prices. Their from the previous year seasonality). On a y/y and 0.8% on upswing precipitated inflation growth starting at the end basis, the economy posted a quarterly basis of 2016, boosted additionally by higher excise taxes. The global oil price hike had a significant effect on other prices, 2.5% driving not only fuel prices but also import prices of other growth commodities that are following an upward trend again. These
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 20 21 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 External environment in H1 2017
factors have sustained inflation above 3% nearly from the Despite the strong rise in productivity and greater demand 2.4 Macroeconomic factors that can affect economy, even though such fears were prevalent at the outset of 2017. It was 3.5% in June. According to the Bank of for labor, the growth in average salary slowed down in early the operations of the Polish insurance outset of 2017. The consolidation of economic recovery in Lithuania’s current forecasts, inflation in full-year 2017 will be 2017. The increasing vacancy rate indicates strong demand for sector and the PZU Group’s activities in the Euro zone, the rise in yields of European bonds and the 3.2%. labor and higher employee shortages. The unemployment rate 2017 steepening yield curve all contributed to the mitigation of risk hike in H2 2016 proved to be temporary and the stronger rise of disruptions in the European banking sector. Latvia in employment drove the unemployment rate down to 5.6% We expect all economic growth drivers, i.e. consumption, In Q1 2017, Latvia’s GDP growth accelerated to 4.0%. This is after Q1 2017. investments, exports to support GDP growth in 2017 which It is still difficult to predict the overall economic and market the highest GDP growth rate recorded in five years, but the may hit approximately 4.0%. Accomodative monetary and consequences of the possible “hard Brexit”, even though, annual figures are expected to be lower. Salary growth (7.2% The growth in the prices of consumer goods and services fiscal policy also contribute to stimulating domestic demand. so far, the Euro zone economy has seemed immune to the y/y), lower unemployment and improving consumer sentiment accelerated in H2 2016, reaching 3% in the first quarter of As the infrastructural projects co-funded in the new EU process. Geopolitical threats and the risk of a financial crisis in drove the economy. Nevertheless, private consumption and the current year. Inflation accelerated because of internal financial perspective move to the execution stage, the China persist, although the risk of a “hard landing” seems low services are the main driver of the economy. Also, for the and external factors. The main reason was linked to higher acceleration of investment growth will be more visible. Given in the short term. first time in two years, the upswing in investments has made commodity prices on global markets that, through import the high utilization of production capacities, good financial a positive contribution to GDP y/y following the recovery in prices, affected the consumer prices of energy and food. standing of businesses, low interest rates and positive demand private sector investments; to some extent, it also contributed forecasts, private investments should also begin to rise in to stronger growth in the construction sector. Ukraine time. At the same time, the relatively high annual consumption In Q1 2017, Ukraine’s GDP growth was negative at -0.3% growth rate will be maintained, even though it may decelerate In May 2017, exports and imports rose 9.0% and 12.1%, from the previous quarter (as a result of seasonality). On slightly in the second half of the year since payments under respectively, from the levels seen in April. During the first a y/y basis, the economy posted 2.5% growth1. A positive the “Family 500+” program were in full effect one year 5 months of 2017, exports climbed 8% while imports rose growth rate was recorded by most sectors of the real economy before. Inflation will remain relatively low and this will make it 11% y/y. Moreover, imports and exports reported positive (construction +19.4%, retail sales +3.1%, passenger traffic possible to avoid a sudden erosion in real income. growth rates for the seventh month in a row. Exports are +19.4%), except for industrial and agricultural production expected to grow in subsequent periods as well, supported by (down 1% compared to the corresponding period of the The risk posed to economic growth and the situation on the contract signed between the Latvian Railroads and DHL on previous year). In June 2017, inflation reached 15.6% but the financial markets by the elections in the crucial Euro investments in the logistics system. The contract is expected remained within the inflation corridor planned by the National zone countries has diminished significantly. Additionally, to lead to the development of connections between the Bank of Ukraine. protectionism did not increase materially in the global Latvian and Chinese markets. In June 2017, the unemployment rate in Ukraine fell compared The annual inflation rate in June was 3.0%. The price of oil in to the corresponding period of the previous year by 17.8% Data for the Polish economy H1 2017 2016 2015 2014 2013 Latvian tanks fell to their lowest level this year. The impact of and in absolute numbers by 58.7 thousand people to Real GDP growth in % (y/y) 3.9* 2.7 3.8 3.3 1.4 falling oil prices was offset by higher food prices and a gradual 330.2 thousand. Following the minimum salary hike to Increase in individual consumption in % rise in the prices of services. The gradual growth in the prices UAH 3,200 in January 2017, a rise in real salaries was 4.7** 3.8 3.0 2.6 0.3 (y/y) of services stems from two main factors: rising prices of TPL observed in May 2017 by 20.4% compared to May 2016. motor insurance and mobile telephony services. Gross fixed capital formation in % (y/y) (0.4)** (7.9) 6.1 10.0 (1.1)
The stabilization of the FX market was also conducive to Increase in prices of consumer goods and 1.5 0.8 (0.5) (1.0) 0.7 Estonia improving the country’s economic standing. The hryvnia services in % (y/y, end of period) Estonia’s GDP in Q1 2017 rose 4.4% from the previous year appreciated in H1 2017, powered by the seasonal rise in Nominal wage growth in national 5.0*** 3.6 3.5 3.2 3.7 and 0.8% on a quarterly basis. The growth was driven by exports and favorable pricing on international commodity economy in % (y/y) a strong surge in exports and investments, while private markets. An additional factor contributing to the stabilization Unemployment rate in % (end of period) 7.1 8.3 9.7 11.4 13.4 consumption, which drove the economy in recent years, of the local currency was the liberalization of currency and slowed down. The annual growth of private consumption in investment regulations by the National Bank of Ukraine. NBP base rate in % (end of period) 1.50 1.50 1.50 2.00 2.50 constant prices slowed down to 0.6% in the first 3 months of * Flash estimate for Q2 2017 2017. One of the main reasons for slowing down real growth ** Data for Q1 2017 *** Data for Q2 2017 in private consumption was higher inflation and at the current price levels the deceleration in the growth of spending for Source: Central Statistical Office of Poland private consumption was more moderate.
1 Data on GDP, inflation, unemployment, salaries and economic indices are based on information published by the State Statistics Service of Ukraine.
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PZU Group’s operations
The PZU Group has an extensive array of financial services in its offering for individual clients, small and medium enterprises and large corporations. PZU’s clients have access to insurance cover and financial management. The PZU Group is also exposed to the banking sector through its controlling stake in Pekao and Alior Bank. These banks offer a range of banking services to individual and business clients by blending the principles of traditional banking with innovative solutions. The PZU brand is also ever more strongly associated with Health.
In chapter: 1. Structure of the PZU Group 2. Non-life insurance (PZU, LINK4 and TUW PZUW) 3. Life insurance (PZU Życie) 4. Banking (Bank Pekao, Alior Bank) 5. Mutual funds (TFI PZU) 6. International insurance operations 7. Medical services (PZU Zdrowie) 8. Pension funds (PTE PZU) 9. Other operating areas
25 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 PZU Group’s operations
3.1 Structure of the PZU Group • in connection with executing the growth strategy in Health: Structure of the PZU Group (as at 30 June 2017) ◦◦ In 2017 the PZU Group expanded by acquiring a 100%
The PZU Group conducts various activities in insurance and equity stake in NZOZ Centrum Medyczno-Rehabilitacyjne PZU Warsaw - Poland finance. In particular, the PZU Group companies offer the Revimed and a 95.25% equity stake in NZOZ Trzebinia. following services: PZU Zdrowie 4 PZU Życie Lietuvos Draudimas Warsaw - Poland Warsaw - Poland Vilnus - Lithuania LINK4 SA PZU – 100.00% PZU – 100.00% PZU – 100.00% • life insurance, non-life insurance, health insurance in Warsaw - Poland Poland, the Baltic States and Ukraine; 3.2 Non-life insurance (PZU, LINK4 and PZU – 100.00% Centrum Medyczne PTE PZU • banking services through Pekao and Alior Bank; TUW PZUW) Medica 2 Warsaw - Poland TUW PZUW PZU Estonia Płock - Poland PZU Życie – 100.00% Warsaw - Poland o. Lietuvos Draudimas • third party asset management under open-end pension PZU Zdrowie – 100.00% PZU – 100.00% Tallinn - Estonia
funds and mutual funds; and Market situation Prof-med TFI PZU Włocławek - Poland Warsaw - Poland AAS Balta • medical services (through PZU Zdrowie and medical Measured by gross written premium in Q1 2017 the non-life PZU Zdrowie – 100.00% PZU – 100.00% PZU Centrum Operacji Warsaw - Poland Riga - Latvia centers). insurance market in Poland grew by a total of PLN 2,106 PZU – 100.00% PZU – 99.99% million (up 27.2%) in comparison to the corresponding period Centrum Medyczne Gamma Alior Bank 3 Warsaw - Poland Warsaw - Poland PZU Ukraine PZU Zdrowie – 60.46% PZU – 25.3327% PZU Pomoc PZU SA, as the parent company, makes the key decisions of the previous year. The sales growth in motor TPL insurance Kiev - Ukraine PZU Życie – 0.0376% Warsaw - Poland PZU – 83.2292% PZU FIZ AN BIS 2 – 5.9908% PZU – 100.00% PZU Życie – 0.0040% concerning the Group members’ scope of business and (up PLN 1,559 million, +59.3%) and motor own damage Bank Pekao – 0.0002% Medicus PZU Ukraine Life – 16.7668% financials by discharging control functions in their supervisory insurance (up PLN 306 million, +19.2%) made the largest Opole - Poland PZU Zdrowie – 100.00% Bank Pekao 5 bodies. As selected companies focus on their specialization contribution to the higher level of premium, chiefly as the Warsaw - Poland GSU Pomoc Górniczy PZU – 20.00% Klub Ubezpieczonych LLC SOS Services Ukraine Tychy - Poland Elvita Kiev - Ukraine and utilize their membership in the Tax Group, these outcome of the higher average premium (the consequence of PZU Pomoc – 30.00% Jaworzno - Poland PZU Ukraine – 100.00% companies render services to one another on chosen markets the regular price hikes rolled out in 2016 as a response to the PZU Zdrowie – 100.00% EMC Instytut Medyczny Wrocław - Poland PZU Finanse pursuant to an internal cost allocation model (under the Tax persistently negative results on the motor insurance market) PZU FIZ AN BIS 2 – 28.31% Warsaw - Poland PZU Ukraine Life PZU – 100.00% Kiev - Ukraine PZU – 53.4723% Group). and the climbing percentage of premium originating from Proelmed PZU Życie – 0.0053% Łaziska Górne - Poland Tower Inwestycje PZU Ukraine – 46.5224% indirect activity (motor TPL insurance up PLN 431 million year Elvita – 57.00% Warsaw - Poland Ipsilon PZU – 27.47% Warsaw - Poland The following changes transpired in the structure of the on year). PZU Życie – 72.53% PZU – 100.00% PZU Lithuania Life Vilnus - Lithuania PZU Group in H1 2017 up to the date of publication of these NZOZ Trzebinia PZU – 99.34% Trzebinia - Poland Ogrodowa Inwestycje financial statements: In addition, higher sales of insurance against fire and other Elvita – 95.25% Warsaw - Poland Omicron PZU – 100.00% Warsaw - Poland PZU – 100.00% PZU Finance AB • regarding exposure to the banking sector: physical losses (up PLN 197 million, +11.9%, of which Stockholm - Sweden Artimed PZU – 100.00% ◦◦ The transaction to acquire a significant equity stake PLN 77 million pertains to indirect activity) and assistance Kielce - Poland Armatura Group 1 PZU Zdrowie – 100.00% Cracow - Poland Omicron BIS in Bank Polska Kasa Opieki S.A. from UniCredit S.p.A. insurance (up PLN 29 million, +14.5%) made a clearly PZU FIZ AN BIS 2 – 100.00% Warsaw - Poland PZU – 100.00%
was closed on 7 June 2017 by PZU SA acting in positive contribution to the overall non-life insurance market’s Polmedic Radom - Poland Arm Property consortium with Polski Fundusz Rozwoju S.A. pursuant growth. A premium slump was visible only in loan and PZU Zdrowie – 100.00% Cracow - Poland Sigma BIS PZU FIZ AN BIS 2 – 100.00% Warsaw - Poland to the Bank’s equity stake purchase agreement. PZU guarantee insurance (premium down PLN 64 million, -25.6% PZU – 100.00% SA reported this agreement in Current Report no. in comparison to the corresponding period of the previous Specjalistyczna Przychodnia PZU AM 82/2016 on 8 December 2016 and Current Report no. year) as the outcome of the volatile conditions on the financial Medycyny Pracy Warsaw - Poland Radom - Poland PZU – 100.00% 28/2017 on 29 March 2017. As a result of executing insurance market. Polmedic – 100.00%
orders, PZU SA acquired 52,494,007 shares in the Bank Revimed Gdańsk - Poland representing approximately 20% of the total number In Q1 2017 the overall non-life insurance market generated PZU Zdrowie – 100.00% Consolidated companies
of votes and the Polish Development Fund (PFR) a net result of PLN 539 million, signifying incremental growth Affiliates acquired 33,596,165 shares in the Bank representing of PLN 506 million in comparison with the corresponding approximately 12.8% of the total number of votes. The period of 2016. In Q1 2017 the technical result of the non-life share price for each share in the Bank defined in the insurance market rose PLN 608 million to PLN 600 million. The 1 Armatura Group included the following entities: Armatura Kraków SA, Aquaform SA, Aquaform Badprodukte GmbH, Aquaform Ukraine TOW, Aquaform Romania SRL, Morehome.pl sp. z o.o. Agreement is PLN 123, implying a total price of growth in the technical result in motor TPL insurance of 2 Centrum Medyczne Medica Group includes the following entities: Centrum Medyczne Medica Sp. z o.o., Sanatorium Uzdrowiskowe „Krystynka” Sp. z o.o. i Rezo-Medica PLN 10,589,091,156 (ten billion five hundred eighty- PLN 450 million and the class of insurance against fire and sp. z o.o. 3 Alior Bank Group includes the following entities: Alior Bank SA, Alior Services sp. z o.o. , Centrum Obrotu Wierzytelnościami sp. z o.o., Alior Leasing sp. z o.o., nine million ninety-one thousand one hundred fifty six other damage to property losses of PLN 188 million made the Meritum Services ICB SA , Money Makers TFI SA , New Commerce Services sp. z o.o., Absource Sp. z o. o., , Serwis Ubezpieczeniowy Sp. z o.o. 4 zloty) for the entire stake acquired by PZU SA and PFR. largest contribution to this change. Adverse changes were within PZU Zdrowie 2 branches are operating: CM Nasze Zdrowie in Warsaw and CM Cordis in Poznan. 5 Pekao Bank Group includes following entities: Pekao Bank Hipoteczny SA, Centalny Dom Maklerski Pekao SA, Pekao Leasing sp. z o.o., Pekao Investment Banking SA, The price for the stake acquired by PZU SA is posted in general TPL insurance (down PLN 41 million), motor Pekao Faktoring sp. z o.o., Pekao Pioneer PTE SA, Centrum Kart SA, PLN 6,456,762,861 (six billion four hundred fifty-six own damage insurance (down PLN 17 million) and accident Pekao Financial Services sp. z o.o., Centrum Bankowości Bezpośredniej sp. z o.o., Pekao Property SA, Dom Inwestycyjny Xelion Sp. z o.o., Pioneer Pekao Investment Management SA, Pioneer Pekao TFI SA, CPF Management million seven hundred sixty-two thousand eight hundred and illness insurance (down PLN 7 million). The structure does not cover investment funds and entities in liquidation. sixty-one zloty).
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Non-life insurance undertakings - percentage of gross Gross written premium reported by non-life insurance PZU’s share in the motor written premium in Q1 2017 (in %) undertakings in Poland (PLN milion) PZU Group’s share in the non-life insurance market insurance market after Q1 2017 reached (direct business) reached
Others PZU Group* 41.1% 9,835 15.1% (37.1% from direct business) 37.1%, 39.6% UNIQA 7,729 3.0% 6,953 7,037 7,191 (direct business) after Q1 2017 Generali 6,087 3.4% including LINK4 share of VIG Group 3,377 4,221 3,504 3,356 5.5% 2.7% Allianz Polska Group 5.5%
3,449 3,681 3,814 3,508 3,748 Ergo Hestia Group 12.4% PZU Życie’s technical result margin on gross Talanx Group 03.2013 03.2014 03.2015 03.2016 03.2017 Share of PZU Życie in periodic gross written written premium was 14.0% Motor Non-motor premium, which is PZU Życie’s competitive advantage in the market was 13.8% Groups: Allianz – Allianz, Euler Hermes; Ergo Hestia – Ergo Hestia, MTU; Talanx – Warta, Europa, HDI; VIG – Compensa, Benefia, Inter-Risk Source: KNF’s Quarterly Bulletin. Insurance market 1/2017 after Q1 2017, which was The following entities in the PZU Group operate on the non- * PZU Group – PZU, LINK4, TUW PZUW 45.6%, more than two times higher life insurance market in Poland: the Group’s parent company, than the margin obtained by The spike in the technical result in the class of motor TPL i.e. PZU and LINK4; the Polish Mutual Insurance Undertaking after Q1 of 2017 all other companies offering insurance chiefly ensues from the higher earned premium (up (TUW PZUW) joined them in November 2015. life insurance in total PLN 794 million, +44.6%) on the back of the changes made last year to the average premium forming a response to the To respond to client expectations in recent years the PZU market’s deteriorating results, outpacing growth in claims paid Group has extended its offering for retail and corporate clients (up PLN 253 million, +14.9%). (by forming a mutual insurer), thereby steadily growing its TFI PZU managed net assets of the value over OFE PZU Złota Jesień held market share. In Q1 2017 the PZU Group held a 41.1% non- At the same time, higher profitability was posted in the class life insurance market share compared to 36.9% in Q1 2016 of insurance for damage to property losses caused by hail, (37.1% and 35.7%, respectively in direct activity). PLN 20 bn, 12.9% frost and other causes (+PLN 210 million on direct activity) as the effect of a significantly lower level of mass claims caused The PZU Group holds a strong market position in motor which means of the total value of assets of by ground frost and hail precipitation in agricultural insurance. insurance with a market share of 44.7% in motor own damage open pension funds operating in Poland and 46.8% in motor TPL insurance. 7.4% market share
Non-life insurance market - gross written premium (PLN million)
1 January – 31 March 2017 1 January – 31 March 2016 Over Q1 2017 PZU Ukraine obtained
Gross written Market net Market net Maintaining the leading position of Lietuvos 2.8% premium PZU Market of PZU PZU Market of PZU Draudimas in the non-life insurance market in Lithuania MOD 848 1,899 1,051 664 1,593 929 of the gross written premium in the Ukrainian non-life insurance Motor TPL 1,959 4,188 2,229 1,104 2,628 1,524 29.4% sector, while PZU Ukraine Life
Other products 1,230 3,748 2,518 1,085 3,508 2,423 market share after 10.0% TOTAL 4,037 9,835 5,798 2,853 7,729 4,876 H1 2017 of the life insurance market premium Source: KNF’s Quarterly Bulletin. Insurance market 1/2017
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 28 29 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 PZU Group’s operations
In Q1 2017 the PZU Group’s technical result (PZU together „Nie zawsze ujdzie Ci na sucho”[It doesn’t always work out], pertained chiefly to insurance for buildings, structures and In the period under analysis PZU generated a net profit with LINK4 and TUW PZUW) stated as a percentage of the broadcast among others in television, radio and social media residential units as well as insurance dedicated to payment according to Polish Accounting Standards totaling PLN 2,101 overall market’s technical result is 67.2% (the PZU Group’s and offered in PZU branches and by insurance agents. cards. million, of which the dividend from PZU Życie accounted for technical result is PLN 404 million while the overall market’s PLN 1,429 million. technical result is PLN 600 million), illustrating its insurance Most changes in the corporate insurance segment were In H1 2017 PZU generated gross written premium in the portfolio’s high level of profitability. associated with the regular launch of products dedicated to amount of PLN 6,706 million, i.e. 27.6% more than in the LINK4’s activity corporate clients administered and sold in the Everest System; corresponding period of the previous year. At the same time, LINK4 is one of the leaders on the Polish direct insurance The total value of the investments made by non-life insurance work was also continued to enrich the offering with new the sales split underwent slight changes: market. It offers an extensive range of non-life insurance undertakings at the end of Q1 2017 (net of the investments products, inter alia, cyber risks for commercial undertakings. • TPL motor insurance sales came in at PLN 2,956 million products, including motor insurance, property insurance, travel made by subordinated entities) was PLN 53,517 million and and were up 53.2% (+35.6% in direct activity) above insurance and third party liability insurance. was up 3.6% compared to the end of 2016. In its endeavors to diversify its portfolio and augment the corresponding period of the previous year. They the returns on cooperation between smaller commercial represented 44.1% of the overall portfolio, extending In H1 2017 the main emphasis was placed on analyzing The non-life insurance undertakings in total estimated the net undertakings, in H1 2017 PZU modified the rules for selling their percentage by 7.4 p.p. in comparison with H1 2016. the evolving price context, optimizing tariffs to augment technical provisions at PLN 46,045 million, signifying 3.2% insurance guarantees in financial insurance. It introduced The higher value of motor TPL insurance at PZU chiefly the profitability of the portfolio and developing product growth compared to the end of 2016. a new policy for extending collateral to clients with an ensued from the growth in the average premium and the and process-related innovations alike. The most important exposure up to PLN 3 million. The most important activities rising percentage of inward reinsurance from PZU Group activities linked to modifying its product offering were as PZU’s activity involving changes to the product offering included the companies. follows: As the PZU Group’s parent company, PZU offers an extensive launch of a new GAP insurance for financial losses to provide • the PZU Group generated gross written premium of • cooperating with NaviExpert to implement a telematic array of non-life insurance products, including motor protection against the financial risk incurred by a lessee or PLN 1,586 million on motor own damage insurance, i.e. solution to promote safe driving called “LINK4 Money insurance, property insurance, casualty insurance, agricultural borrower in the event of a total loss, thereby enabling PZU to 19.6% more than in H1 2016. The percentage held by Returns” – LINK4’s clients can receive a bonus in the form insurance and third party liability insurance. PZU’s product take advantage of the prospective growth of the lease market. motor own damage in the overall portfolio fell by 1.6 p.p. of a partial premium rebate for every month of safe driving. range encompassed more than 200 insurance products at the to 23.7%; As of 26 April, LINK4 offers navigation with this application end of H1 2017. Motor insurance is the most important group In H1 2017 cooperation was continued with its business • the higher level of sales of insurance for other damage to free of charge along with every motor TPL insurance or of products offered by PZU, both in terms of the number of partners to date and cooperation was established in property losses and losses caused by calamities offered package. It uses telematic solutions to assess a driver’s insurance agreements and its premium stated as a percentage bancassurance with Alior Bank. This cooperation involves mainly to retail clients translating into a higher growth driving style; of total gross written premium. the performance of agreements with 9 banks and 8 strategic rate in premium for non-motor products coupled with the • launching innovative products offering among others partners. PZU’s business partners are leaders in their concurrent decline in its percentage of total premium to insurance for household pets and ADD insurance along with In the mass insurance segment PZU promoted the sales of industries and they have client bases with enormous potential 32.3% (versus 38.1% in H1 2016). insurance in the event of complications following tick bites PZU Home insurance (PZU Dom), also via the web, providing offering an opportunity to extend the offering to include or other insect bites. a broad range of property protection with an additional more products. In strategic partnership, cooperation applied In H1 2017 PZU paid gross claims and benefits of PLN 3,209 package of assistance services to obtain quick assistance from mostly to companies operating in the telcom and power million, i.e. 2.0% more than in the corresponding period of the In H1 2017 Link4 generated gross written premium totaling professionals in the event something breaks down at home. sectors through which insurance for electronic equipment previous year. PLN 514 million (up 68.2% compared to 2016), with motor This offering was accompanied by two campaigns called and assistance services were offered. Bancassurance sales insurance constituting the bulk of that: „Nie zawsze Ci się upiecze” [You are not always lucky] and • motor TPL insurance was PLN 403 million, accounting for PZU’s gross written premium (PLN million) 78.4% of the overall portfolio; • motor own damage was PLN 74 million, accounting for Non-life insurance market - technical results (PLN million) 14.4% of the overall insurance portfolio;
6,706 • the insurance premium for property insurance (classes 1 January – 31 March 2017 1 January – 31 March 2016 8 and 9) represented 2.0% of the overall portfolio. 5,258 Market net Market net 2,956 Technical results PZU Market of PZU PZU Market of PZU 4,337 4,294 4,242 TUW PZUW’s activity 1,930 1,436 1,344 1,353 Towarzystwo Ubezpieczeń Wzajemnych Polski Zakład MOD (5) 38 44 68 55 (13) 1,586 1,326 Ubezpieczeń Wzajemnych [Polish Mutual Insurance Company] 1,028 1,026 1,065 Motor TPL 118 96 (23) (70) (354) (285) has been operating on the insurance market since 29 February 3,071 1,925 1,824 2,002 2,164 Other products 290 466 176 80 292 211 2016 when it launched underwriting operations by selling its first policy. TOTAL 404 600 197 79 (8) (87) 06.2013 06.2014 06.2015 06.2016 06.2017 Motor TPL Motor own damage Other products Source: KNF’s Quarterly Bulletin. Insurance market 1/2017
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 30 31 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 PZU Group’s operations
TUW PZUW offers its clients a flexible insurance program to • possible increase in claims handling costs due to the The evolution in the level and the growth rate of the life these types of products and ultimately to their retraction, optimize the costs and scope of insurance. Since 2016 it has implementation of the VAT tax on the motor claims insurance market premium in recent years has been prompted especially of the former, from the insurance undertakings’ been selling and administering insurance for medical centers handling services rendered in favor of insurance companies mostly by single premiums in investment products. Attention offering. In subsequent years the regulatory authority’s and large economic agents (such as the following companies: and their intermediaries; should be drawn to the fact that the premium expansion guidelines, including guidelines regarding the level of fees PGE, Enea, Energa, PGG, TAURON), thereby contributing to • increase in the prices of spare parts affecting claims for the overall market year on year in Q1 2017 pertained to incurred by clients of unit-linked products led to insurance optimizing the premiums paid by its members. handling costs due to the depreciation of the Polish zloty single premiums to a greater extent (up PLN 331 million, i.e. undertakings constricting their offering of these types of against the euro; 19.9% y/y). The growth rate of this part of life insurance products. Last year’s improvement in the condition of the In H1 2017 the primary emphasis was placed on organizational • implementation of the Insurance Guarantee Fund’s liability market for the corresponding period of 2016 was negative equity market facilitated higher sales of unit-linked products, development, expansion of the team of professionals offering for personal injury in which the indemnity stated in an at -43.7%. The single premium cumulative average growth especially ones offering a single payment. This involves clients better insurance service to the mutual’s members and aligning insurance agreement hinders the full satisfaction of the rate in the period under analysis was -16.3%. The changes re-allocating funds among various products, since, among its offering to its clients’ needs. Providing products consistent injured party’s claims; in circumstances on the capital market and in the legal other, the fees charged for surrenders were reduced. This with prospective and current clients’ needs was an important • emergence of more regulations or financial burdens on environment should be considered to be the underlying upswing was observed primarily in the bancassurance channel. part of development. The most important activities linked to insurance undertakings – among others, the possible causes for the gross written premium on single premium adapting its product offering were as follows: reinstatement of the “Religa tax” (mandatory fee paid to business to fall in recent years. The record-breaking low The outcome of this market evolution over several years • jointly marketing with PGE Obrót a new product called the National Health Service on every TPL motor insurance interest rates contributed to the declining profitability of what was the expanding significance of periodic premium that „Zdrowa Energia PGE” [Health of PGE Energy] giving policy). are known as term deposits packaged as insurance products constitutes PZU Życie’s competitive advantage on the market. a guaranteed fixed price for energy coupled with an (polisolokata in Polish), thereby stimulating greater interest in In Q1 2017 periodic premium was 1.1% higher compared to assistance service such as from an electrician; other investment products. Moreover, as of 1 January 2015, the same period in 2016, with a cumulative average growth • crafting new general terms and conditions of insurance, 3.3 Life insurance (PZU Życie) a tax was implemented on short-term endowment insurance rate of 0.8% since 2013. including directors and officers insurance; products offering a fixed yield or a yield defined using an • extending the offer to include products focusing on another Market situation index; this also contributed to constricting client interest in pillar: local governments. In Q1 2017 TUW PZUW provided Poland’s life insurance market measured by gross written insurance cover to the first local government in the Lower premium was worth PLN 6,124 million in Q1 2017 meaning Poland Region. that over the most recent 5 years it contracted on average by Life insurance market – gross written premium (PLN million) 6.6% per annum. At the same time, gross written premium in In H1 2017 TUW PZUW generated gross written premium Q1 2017 was 6.5% higher than in the corresponding period of 1 January - 31 March 2017 1 January - 31 March 2016 totaling PLN 274 million, with non-motor insurance the previous year. Gross written Market Market constituting the bulk of that. Its premium was PLN 273 million, premium net of PZU net of PZU accounting for 99.5% of the overall portfolio. Gross written premium reported by life insurance PZU Życie Market Życie PZU Życie Market Życie undertakings in Poland (PLN million) Periodic premium 1,881 4,126 2,244 1,830 4,083 2,253 Factors, including threats and risks that will affect the operations of the non-life insurance sector in 2017 Single premium 254 1,998 1,744 153 1,667 1,514 Besides chance events (such as floods, droughts and spring 8,061 TOTAL 2,135 6,124 3,988 1,983 5,749 3,767 ground frost), the following should be treated as the main 6,930 7,188 Source: KNF (www.knf.gov.pl). Quarterly Bulletin. Insurance market 1/2017, Insurance market 1/2016, PZU Życie’s data 6,124 factors that may affect the situation of the non-life insurance 5,749 4,071 sector in 2017: 2,824 2,962 1,667 1,998 • possible slowdown in economic growth in Poland. A poorer financial standing of companies may result in elevated Life insurance market – gross written premium versus technical result (PLN million) 4,107 4,226 4,083 4,126 credit risk and a higher loss ratio on the financial insurance 3,991 portfolio; 1 January - 31 March 2017 1 January - 31 March 2016 • case law regarding the amount of financial compensation 03.2013 03.2014 03.2015 03.2016 03.2017 Gross written Market Market for moral damages under TPL insurance held by owners of Periodical Single premium versus net of PZU net of PZU motor vehicles to the deceased’s closest family members technical result PZU Życie Market Życie PZU Życie Market Życie for the suffered injury (art. 446 of the Civil Code); Source: KNF’s Quarterly Bulletin. Insurance market 1/2017 Gross written premium 2,135 6,124 3,988 1,983 5,749 3,767 • possible increase in claims handling costs due to the implementation of the KNF’s further guidelines regarding Technical result 295 639 344 399 767 368
claims handling; Source: KNF (www.knf.gov.pl). Quarterly Bulletin. Insurance market 1/2017, Insurance market 1/2016, PZU Życie’s data
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 32 33 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 PZU Group’s operations
The total technical result generated by the life insurance rate posted by the other market players who reported an Work was conducted in H1 2017 on PZU’s new group product entailed gross written premium on group and individually undertakings in Q1 2017 was down PLN 128 million (16.6%) outcome of -0.4%. One of the major factors in this respect called In Case of an Accident (W Razie Wypadku) under group continued insurance held by approximately 11 million Poles. from the corresponding period of 2016 to PLN 639 million. The was the rapid growth in the health insurance portfolio. PZU protection insurance. This product chiefly targets portfolio following, in particular, reported a lower result: life insurance Życie now has approximately 1.4 million policies of this type clients to sell up additional risks without having to modify In the same reporting period PZU Życie generated a technical (Class I) - down PLN 110 million, i.e. 62.7% chiefly due to in its portfolio. From the outset of 2016 KNF has also been existing agreements. The scope of insurance covers an result according to Polish Accounting Standards totaling the uptick in the frequency of mortality and the decline in publishing data making it possible to depict as a matrix PZU’s extensive range of accidents making it an attractive proposal PLN 759 million and net profit according to Polish Accounting investment income and unit-linked insurance (Class III) - share in just the life insurance segment (class I) for periodic for young and active people. This product’s sales launch will Standards totaling PLN 587 million. technical result down PLN 30 million, i.e. 21.3% due to higher premiums. In Q1 2017 it was 66.0% when measured by gross take place on 1 October 2017. acquisition expenses as an offshoot of higher sales. written premium and it was 75.3% when measured by the Factors, including threats and risks that may affect the number of agreements in force. For this same group of risks, In terms of health products work has been conducted with an operations of the life insurance sector in 2017 In this same period life insurance undertakings generated the market share split by the method of execution in the eye to market a new type of rider in H2 2017 giving clients a net result of PLN 485 million, meaning a 16.2% decline y/y period under analysis was 68.6% for group agreements and rapid access to medical procedures that are indispensable The following constitute the major risk factors on the life (PLN 93 million). The downturn in the net result was chiefly 42.2% for individual agreements (when measured by gross during treatment or convalescence following an orthopedic insurance market in 2017: the outcome of the technical results of the insurers described written premium). injury or a number of severe disorders. • bill on insurance distribution – insurance undertakings above being lower than in the corresponding period of 2016. adapting to the new regulations following the necessity In investment insurance, a new unit-linked insurance product to implement into the domestic legal order Directive (EU) The total value of the investments made by life insurance Life insurance undertaking - percentage of periodic with a single premium called Multi Kapitał was launched in 2016/97 of the European Parliament and of the Council of undertakings at the end of Q1 2017 was PLN 40,998 million, gross written premium in Q1 2017 (in %) collaboration with Alior Bank in H1 2017 with a sales launch 20 January 2016 on insurance distribution (Journal of Laws, signifying 0.4% growth compared to the end of 2016. In turn, date of 2 January 2017. In addition, 4 subscriptions of the UE L 26 of 2 February 2016, page 19), referred to as IDD. the gross written premium that outpaced the level of benefits Others structured insurance product known as World of Profits (Świat • EU General Data Protection Regulation, i.e. GDPR – paid and the positive result on investment activity contributed 12.5% Zysków) that has enjoyed tremendous client interest were insurance undertakings adapting to the Regulation (EU) to a higher net asset value of life insurance in which the AXA PZU Życie sold through PZU’s branches. Various investment strategies 2016/679 of the European Parliament and of the Council 4.0% 45.6% policyholders bear the investment risk (up 2.4% to Generali that adapt to volatile market conditions were offered in the of 27 April 2016 on the protection of natural persons with 4.4% PLN 58,345 million). individual subscription tranches. regard to the processing of personal data and on the free VIG 5.1% movement of such data, and repealing Directive 95/46/EC. Metlife Amplico PZU Życie’s activity 5.2% • final shape of the new pension security system (Capital
PZU Życie SA (PZU Życie) does business on the Polish life Talanx Group PZU Życie’s gross written premium (PLN million) Accumulation Scheme) that may affect insurers’ policy 5.2% insurance market on behalf of the PZU Group. It offers a wide regarding pension products and revenues in this line of Nationale-Nederlanden range of life insurance products, including group, individual 7.8% business. Aviva 4,801 protection and health insurance, investment insurance and 10.2% 4,242 4,187 4,092 pension products. 3,989 1,332 494 676 473 313 3.4 Banking (Pekao, Alior Bank) Groups: Talanx – Warta, Europa, Open Life; VIG – Compensa, Polisa-Życie, Vienna During Q1 2017 PZU Życie wrote 34.9% of the gross written Life; Aviva – Aviva, BZ WBK-Aviva premium of all life insurance undertakings signifying further Source: KNF’s Quarterly Bulletin. Insurance market 1/2017 Market situation 3,620 3,675 3,748 growth on top of last year’s market share (+0.4 p.p.). The 3,470 3,511 The Polish banking sector is the largest one in Central and underlying reason for market share expansion was the above- Eastern Europe with assets worth more than PLN 1,750 billion. average growth rate among other market players in terms PZU Życie’s technical result in Q1 2017 accounted for 46.2% 35 domestic commercial banks, 556 cooperative banks and of periodic premium (2.8% versus -0.4%, respectively) and of the result generated by all life insurance companies. This 06.2013 06.2014 06.2015 06.2016 06.2017 27 branches of credit institutions operated at the end of June single premium (66.3% versus 15.2%). evidences the high profitability these products enjoy. PZU Periodical Single Serie7 2017 in Poland. Życie’s technical result margin on gross written premium At the same time, PZU Życie continued to be the clear leader substantially exceeded the overall margin generated by the The banking sector’s situation in H1 2017 was stable and in the periodic premium segment. In Q1 2017 it generated other companies offering life insurance (13.8% versus 8.5%). During H1 2017 PZU Życie generated gross written premium boosted by the persistently vibrant economy and the operation 45.6% of these types of premiums written by insurance according to Polish Accounting Standards totaling PLN 4,242 of banks in a low interest rate environment. companies, signifying growth of 0.8 p.p. in the market share PZU Życie is consistently expanding its offering of protection million, i.e. 6.4% more than last year. Insurance with periodic in this segment and the highest market share level since 2010. insurance sold as group insurance and individual insurance. payments accounted for the bulk of the company’s premium In ther period from January to June 2017 the banking sector The annual growth rate of gross written premium at PZU Życie income. It represented 88.3% of gross written premium generated a net profit of PLN 6.87 billion (down in comparison was 2.8% in this segment, compared to the negative growth (compared to 92.1% in the previous year). Above all, this with the corresponding period of the previous year).
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 34 35 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 PZU Group’s operations
During the first six months of 2017, the result on banking standards in the bank. The essence of the agreement is thousand current accounts in PLN, 343.6 thousand mortgage by the equity method that are not attributed to other activity continued to be stable (decline of 1.9% y/y). This was to define the rules of cooperation between PZU and PFR loan accounts and 601.5 thousand Express Loan accounts. segments. caused by the following: robust growth (up 11.1% y/y) in the following the acquisition of the equity stake in Bank Pekao interest result, growth in the result on commissions and fees from UniCredit and the rights and duties of the parties as Loans and borrowings measured at their nominal value jointly Pioneer TFI (up 9.0% y/y) and the decline in other income (down 51.2% bank shareholders, in particular pertaining to agreeing on with securities issued by non-monetary entities totaled Pioneer Pekao Towarzystwo Funduszy Inwestycyjnych is y/y). Banks’ operating expenses rose in the first six months the manner of jointly exercising voting rights on the shares PLN 131 billion at the end of June 2017 and were up the oldest mutual fund management company in Poland of the year by 6.0% y/y. In turn, the costs of risk (provisions in Bank Pekao and the implementation of a common long- PLN 5.2 billion, i.e. 4.1% over the end of June 2016 coupled providing clients modern financial products, thereby offering and impairment losses) that fell by 14.0% y/y made a positive term policy for the bank’s business to attain the objectives with considerable growth in key strategic areas. opportunities to invest in the largest capital markets on the contribution to the banking sector’s result. stated above. In particular, PZU and PFR have undertaken to globe. For many years it has been devising savings programs, each other to vote in favor of resolutions on the distribution Thanks to the Group’s efficient commercial activity in H1 2017 including programs affording an opportunity to put aside more At the end of June 2017, the net asset value of the banking of profit and the disbursement of dividends, in accordance it posted significant growth in loan volumes in loans to retail money for retirement under the third voluntary retirement sector was PLN 1,750 billion, up 5.3% with respect to June with the rules and within the boundaries set by the applicable clients (up 9.7% y/y) and 1.6% y/y growth in corporate loans. pillar. Pioneer Pekao TFI also offers a managed account 2016. provisions of law and KNF’s recommendations and in service. At the end of H1 2017 the company had assets under accordance with the bank’s existing practice; The expansion of its lending activity was almost fully funded management totaling PLN 17.4 billion, thereby giving it a At the end of March 2017, the banking sector’s own funds for with larger volumes of retail deposits that moved up by 8.6% market share of 6.4%. capital multiples was PLN 178.1 billion, up 1.5% from yearend As a result of the settlement on 7 June 2017 of the transaction y/y. The ratio of net loans to deposits equal to 92.7% at 2016. This growth was associated with KNF’s recommendation for PZU SA and PFR S.A. to buy 86,090,172 shares in the the end of June 2017 reflects the Bank Pekao S.A. Group’s Alior Bank’s activity of maintaining higher capital multiples than in Q1 2016. bank from UniCredit S.p.A. representing 32.8% of the bank’s robust liquidity structure. Coupled with its high level of capital Alior Bank is a universal bank with innovative solutions and share capital and entitling them to exercise 86,090,172 votes reflected by its total capital ratio of 18.0% (Basil III), this an opulent product offering. In H1 2017 the Alior Bank Group The banking sector’s total capital multiple at the end of March representing 32.8% of the total number of votes, PZU SA enables it to pursue further robust and stable business growth generated a net profit of PLN 182 million with a return on 2017 was 17.9% (up 0.2 p.p. compared to yearend 2016), and PFR S.A. jointly exceeded the 25% threshold of the total in the operations of the Bank Pekao S.A. Group. equity (ROE) of 5.8%. while the Tier I capital ratio at the end of this period was number of votes in the Bank. 16.5% (up 0.3 p.p. in comparison with the end of December Bank Pekao S.A.’s operations are conducted by various Alior Bank, which belongs to the PZU Group, is one of the 2016). PZU SA and PFR S.A. jointly exceeded the threshold of 25% of divisions that offer specific products and services earmarked fastest growing banks in Poland. As at the end of 2016 Alior the total number of votes in the Bank as a result of the direct for specific market segments. At present, the bank does Bank was in 9th place measured by its balance sheet size Signing of the agreement to acquire shares in Bank acquisition from UniCredit S.p.A. as follows: business in the following segments: among the largest banks in Poland. Pekao • PZU SA acquired 52,494,007 shares in the Bank • Corporate and Investment Banking - full scope of banking On 8 December 2016, PZU and PFR signed an agreement with representing 20% of the Bank’s share capital and entitling activity catering to medium and large-sized companies, the Approximately 9.5 thousand employees and its distribution UniCredit to acquire a 32.8% equity stake in Bank Pekao S.A. it to exercise 52,494,007 votes representing 20% of the Bank’s exposure to the interbank market, debt securities network consisting of 960 branches are engaged in efficiently for a total amount of PLN 10.6 billion. The price also included total number of votes and and other instruments as well as the Pekao S.A. Group’s serving 3.7 million individual clients and 182 thousand payment for the rights to receive per-share dividend for 2016, • PFR S.A. acquired 33,596,165 shares in the Bank results consolidated using the full method and attributed to companies. In addition, selected Alior Bank products and totaling PLN 456 million.The price per share was PLN 123. representing 12.8% of the Bank’s share capital and entitling corporate and investment banking. This segment’s income services are offered in 571 T-Mobile outlets under the It is one of the largest transactions in the European banking it to exercise 33,596,165 votes representing 12.8% of the accounts for approximately 35% of Pekao S.A.’s income and framework of their strategic partnership and in 71 Tesco sector in recent years. The acquisition of shares in Bank total number of votes. forms a strong pillar in Pekao’s business; stores. Since 2014 Alior Bank’s shares have been in the WIG20 Pekao was linked to PZU’s aspirations set forth in the Group’s • Retail Banking - full scope of banking activity catering to index consisting of the largest and most liquid companies strategy to 2020 in which the goal is to amass banking sector Pekao’s activity individual clients (except for Private Banking clients), small listed on the Warsaw Stock Exchange. assets totaling at least PLN 140 billion and third party assets Bank Pekao S.A. is a universal commercial bank offering and micro companies with annual revenues up to under management totaling PLN 50 billion. PZU and PFR will a full range of banking services rendered to individual and PLN 20 million and the Pekao S.A. Group’s results Alior Bank’s business activity in H1 2017 enjoyed rapid growth collaborate to procure the effective execution of the Bank institutional clients operating chiefly in Poland. The Bank consolidated using the full method and profit sharing in measured by the size of its balance sheet, i.e. 31.5% year Pekao’s growth strategy while retaining the bank’s current low Pekao S.A. Group consists of financial institutions operating on the companies consolidated using the equity method and on year. This was chiefly driven by the acquisition of assets risk profile, robust level of profitability and stable long-term the following markets: banking, asset management, pension attributed to retail activity; from the spun-off portion of Bank BPH and organic growth dividend payout policy. funds, brokerage services, transaction advisory, leasing and • Private Banking - full array of banking activity catering to underpinned by sales focusing on cash loans, housing loans factoring. the most affluent individual clients; and business loans through its proprietary distribution PZU and PFR entered into a memorandum of agreement • Asset and Liability Management and others – involves network. Consequently, the total net value of client loans in H1 for the following purposes: (i) building Bank Pekao’s long- For many years Bank Pekao has been the second largest bank supervision and monitoring of cash flow, other centrally- 2017 rose by nearly PLN 15 billion compared to the end of H1 term value, (ii) implementing a policy to ensure the bank’s in Poland when measured by the total balance sheet value. managed areas, results of companies consolidated using 2016, i.e. by 43.8% (and by PLN 0.6 billion, i.e. 1% compared development, financial stability and prudent management and At the end of June 2017, the Bank administered 5,533.1 the full method and profit sharing in companies measured to yearend 2016). (iii) ensuring the application of proper corporate governance
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 36 37 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 PZU Group’s operations
The net interest result was the major source of the Alior Bank the Bank offers a full array of bank products and services, Significant new measures exposure to over a dozen projects executed by companies Group’s revenues in the first six months of 2017. Despite especially loan products, deposit products, current and Since 2016 Alior Bank does business in Romania through its operating on the renewable energy markets; the pressure exerted by low interest rates, it climbed to PLN auxiliary accounts, transaction services and treasury branch called Alior Bank S.A. Varsovia – Sucursala Bucuresti. • changes in the external environment and international 1,380.3 million, i.e. by 61.1% y/y by rapidly expanding its products; events affecting the domestic economy. lending activity as a result of the merger with the spun-off • Treasury operations – involving operations on interbank This branch does its business under a model similar to portion of Bank BPH and organic growth in combination with markets and exposure to debt securities. This segment Alior Bank’s collaboration with T-Mobile Polska S.A. Alior effectively managing the Bank’s pricing policy. reflects the results of global position management (liquidity, Bank also intends to launch additional lines of business and 3.5 Mutual funds (TFI PZU) interest rates and FX position resulting from banking acquisition channels in Romania on top of its main area of The Alior Bank Group can also treat the result on fees and operations). cooperation with this telecom, inter alia: Currency Exchange Market situation commissions as one of its main sources of revenue in 2017. In Bureau, cooperation with brokers, on-line sales and possible As at the end of June 2017, the overall domestic mutual fund H1 2017 it was PLN 235.0 million and it accounted for 12.9% New products and services cooperation with other partners. market’s assets were PLN 272.2 billion compared to 258.9 of its revenues. Moreover, the trading result exerted In April 2017 Bank offered a COSME guarantee to clients billion at the end of 2016, representing an increase by more a material impact on the Group’s revenues in 2017. It interested in a loan package. This guarantee secures 80% of On 13 March 2017 Alior Bank published its strategy for 2017- than 5%. accounted for 9.4% of its revenues, especially the result the loan principal. From December 2014 the Bank has been 2020 entitled “Digital Disruptor”. It calls for further growth generated in connection with the transactions executed for developing its services transcending its core scope of services in the significance of innovation in the bank’s development, In H1 2017, according to data provided by Analizy Online, the clients on the FX market and interest rate transactions. by developing offers with third party products and services. among others, by implementing the most sophisticated largest increase in assets was recorded by equity funds: the These bundles consist among others of fiscal cash registers technological solutions to support clients and employees. value of assets accumulated by them increased by nearly In H1 2017 the cost-to-income ratio was 54.6% compared to and fixed and mobile payment terminals (mPos). Moreover, Alior Bank intends to tap into the digital revolution PLN 4.3 billion, mainly as a result of management 47.7% in H1 2016. broadly across all other domains of its business, setting trends performance. Large increases in assets were also recorded The Banks is also developing its offer to support commercial in modern banking. by mixed funds (more than PLN +3.2 billion net), cash and The following should be treated as the most important drivers undertakings in harnessing European Union funds under the money funds (PLN +2.3 billion net) and debt funds (almost of the Alior Bank Group’s financial results in H1 2017: 2014-2020 development perspective. By implementing this strategy, the Bank will be able to PLN +2 billion net). An inflow of new funds was behind a large • acquisition of the spun-off portion of Bank BPH and the maintain the highest net interest margin on the market portion of the growth in the value of assets in these segments. related growth in income resulting from augmenting the Another new product in the Bank’s offering for business clients (4.5%), reduce its C/I ratio to 39% and provide its The worst performers were real estate funds whose movement Bank’s magnitude of business, the level of cost synergies is: shareholders with a return on equity ranging from 8% in 2016 in assets for the first half-year was slightly negative (PLN -44 and the amount of integration costs incurred, • Safe Account – unique combination consisting of a current to 14% in 2020. million net). • high level of sales of loan products supported by a good account for commercial undertakings conducting a sole business climate and the low interest rate environment, proprietorship and insurance. Factors, including threats and risks, which will affect Within the PZU Group, the companies running the operation • impairment losses related to the Bank’s exposure to • Combining the iKonto Biznes account application with the banks’ operations in 2017 of mutual funds on the market are Towarzystwo Funduszy companies operating in the renewable energy sources the Central Records of Business Activity – this makes the The situation of the banking sector in 2017 will primarily be Inwestycyjnych PZU (TFI PZU) and Pioneer PEKAO TFI (for sector. process of opening this account simpler and faster. All the affected by: more information about the latter company, see the section commercial undertaking has to do is provide its personal • operation in a stable environment of low interest rates, dealing with the banking segment). Products and services data while its data are automatically downloaded from the which puts pressure on the level of net interest margin; The Bank’s operations are conducted by various divisions that Central Records of Business Activity. • macroeconomic situation in the Polish economy – a rise in Mutual fund companies – share in net assets as at 30 offer specific products and services earmarked for specific gross domestic product, employment and salaries, coupled June 2017 (in %) market segments. At present, the Bank does business in the In H1 2017 Alior Bank continued its participation i the with a historically low level of interest rates and low prices following segments: governmental Family 500+ program to provide regular support of energy fuels have a favorable impact on the sales of Others Ipopema TFI • Individual clients (retail segment) – focused on a market to Polish families by enabling the Bank’s clients to fill out and loans and the quality of the credit portfolio; 33.1% 18.5% consisting of mass clients, affluent and highly affluent submit their Family 500+ application through Alior Bank’s • possible changes of the legal environment, including mainly clients to whom the Bank offers a full array of bank internet banking system. Furthermore, the Bank retained its the legislative solution of the issue of foreign currency PKO TFI products and services and brokerage products offered dedicated offer for persons submitting applications for residential loans and potentially an obligation to make 8.1% by the Alior Bank S.A. Brokerage House, especially loan a savings account offering an attractive rate of interest on additional contributions to BFG, may adversely affect the PZU TFI products, deposit products and mutual funds, personal PLN 6 thousand during the first 12 months after the date of Bank’s profitability in 2017; 7.4% Forum TFI 4.0% accounts, bancassurance products, transaction services and opening this account. • a lower growth rate of the Polish economy and changes in Skarbiec TFI NN Inv. Partners TFI 5.1% FX products; the legal framework for the operation of enterprises may 6.8% Aviva Investors Poland 5.2% Pioneer Pekao TFI • Business clients (business segment) – for small and have an adverse impact on the financial standing of the BZ WBK TFI 5.5% 6.4% medium enterprises and large corporate clients to whom Bank’s selected clients. Alior Bank’s credit portfolio includes
Source: Analizy Online
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TFI PZU activity TFI PZU’s net assets (PLN million) premium was recorded. As a result of increases in insurance an increase in premiums by EUR 3 million, and property TFI PZU offers products and services for both retail and premium rates throughout the region, growth in written insurance, which recorded an increase in premiums by institutional clients – including additional investment and premium in MTPL insurance accelerated significantly to 33.4%, EUR 1 million. A significant impact on the value growth of the savings programs forming part of the third pillar of the social while written premium in MOD insurance increased by 20.9%. whole insurance market (that is, non-life and life insurance security system: Individual Retirement Accounts (IRAs), combined) was exerted by health insurance in which written Specialized Investment Plans, Employee Pension Plans (EPPs) As at the end of June 2017, there were 12 companies premium increased by EUR 2 million y/y. and Company Investment Plans (CIPs). operating in the country’s non-life insurance sector (including 28.3 8 branches of insurance companies established in other EU In this period, there were 12 insurance undertakings operating 22.2 As at the end of June, TFI PZU offered its clients 30 funds and 20.0 member states). Lietuvos Draudimas, according to data for on the Latvian non-life insurance market, including one group subfunds, including 23 funds dedicated to clients from outside the first half of 2017, solidified its leading position in total operating under three independent brand names. the Group. gross written premium on non-life insurance. Its market share stood at 29.4%, having increased by 0.7 p.p. compared to the Estonian market At mid-year 2017, TFI PZU managed net assets worth over 2015 2016 06.2017 corresponding period of 2016. According to data published by the Estonian statistical office2, PLN 20 billion, representing a 7.4% market share. Accordingly, in H1 2017 insurance undertakings operating in the non-life Source: IZFA TFI PZU is among the largest mutual fund companies in In the life insurance sector, the value of gross written premium insurance market and branches of international companies Poland – as at 30 June 2017 it was ranked third in Poland was EUR 110 million in H1 2017, representing an increase operating in this market sector in Estonia accumulated according to reports published by IZFiA (Chamber of Fund Factors, including threats and risks, which will affect by 9.6% over the premium collected in the corresponding a combined written premium of EUR 165 million (in the and Asset Managers). TFI PZU is also a market leader in the the mutual funds’ operations in H2 2017 period of the previous year. The increase in sales resulted corresponding period of 2016: EUR 149 million), of which employee pension plan segment with net assets of nearly The condition and performance of the mutual fund market will predominantly from a steady upward trend in regular EUR 44 million, or 26.4% (in the first half of the previous PLN 3.7 billion. depend mainly on: premiums (by 11.2%). On the other hand, single premiums year: EUR 36 million, or 24.2%) was acquired by branches • political situation – including, primarily, the outcome of declined by 7.2% – the lower written premium on one-offs of foreign insurance undertakings. In 2017, the Estonian The decline in the total value of TFI PZU’s net assets as at the the election in Germany and concerns about a pre-term resulted mainly from changes in legislation: at the beginning non-life insurance market recorded further growth: total gross end of June 2017 was mainly caused by write-offs effected by election in Italy, of 2017 the taxable base exempt from income tax was written premium increased 10.3% in H1 2017 compared to the the PZU Group in various funds, mainly FIZ Dynamiczny (PLN • actions taken by central banks – the departure from the reduced to EUR 2,000 per year. corresponding period of the previous year. -0.9 billion) and PZU Dłużny Rynków Wschodzących (PLN -0.8 quantitative easing programs as signaled by the Fed, ECB billion). and BoE. The ECB is inclined to phase out this program In the life insurance structure, unit-linked insurance Within the product structure, MOD insurance (32.6%, in 2016: gradually, while the Bank of England keeps mentioning represented the largest share at 57.5% of written premium. 33.4%) and MTPL (27.3%, in 2016: 26.1%) represented the However, without accounting for this effect, in the first half of interest rate hikes more and more often, Traditional life insurance accounted for 20.4% of the total largest market shares. 2017 TFI PZU recorded an increase in the value of external • upward trend in the global capital market, premium. clients’ assets which resulted predominantly from: • factors of local significance – the future of open-end As at the end of June 2017, there were 13 companies • active sales of funds and subfunds – with a particular focus pension funds or the rate of inflation (affecting, without As at the end of June 2017, there were 8 companies operating operating in Estonia’s non-life insurance sector (including on strategies containing an equity component, limitation, the attractiveness of bank deposits and the in the country’s life insurance market (including 3 branches of 4 branches of insurance companies established in other EU • more effective cooperation with distributors, yields of treasuries), insurance undertakings registered in other EU member states). member states). • introduction of new Employee Pension Plans and Group • preparations for the implementation of MIFID II regulations The Lithuanian life insurance market is highly concentrated Pension Plans, and related limitations. – the combined share of the largest three players in the total Activity of PZU companies in the Baltic states • investment results generated by fund managers. gross written premium is 59.5%. In H1 2017, Lietuvos Draudimas acquired EUR 82 million worth of gross written premium, that is 23.8% more than 3.6 International insurance operations Latvian market in the same period last year. Due to the increased insurance According to data published by the Latvian Financial and premium rates throughout the region, growth in written Lithuanian market Capital Market Commission1, the non-life insurance market premium was driven mainly by an increase in sales of MTPL According to data published by the Bank of Lithuania, the total recorded a gross written premium of EUR 81 million as at the and MOD insurance in both the mass segment and the gross written premium of non-life insurance undertakings after end of Q1 2017. This represented an increase by EUR 5 million corporate segment. the first six months of 2017 was EUR 278 million or 20.8% (or 6.3%) compared to Q1 2016. higher than in the corresponding period of the previous year. After the first 6 months of 2017, Lietuvos Draudimas was The main factors contributing to the increase in accumulated the leader on the Lithuanian non-life insurance market with As in the previous year, the rate of growth in the market was gross written premium were motor insurance, which recorded a market share of 29.4% (28.7% the year before). In turn, driven predominantly by motor insurance (accounting for 1 Financial and Capital Market Commission – the Latvian financial and capital 2 Estonia Statistics – the Estonian statistical office affiliated with the Ministry of 60.3% of the market) where a 28.2% increase in gross written market regulator Finance
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the share of PZU Lithuania Life in the life insurance market On the Ukrainian market, the PZU Group operates its insurance • occupational medicine services in in-company clinics for 3.8 Pension funds (PTE PZU) was 6.0% (compared to 5.5% after the first 6 months of the business via two companies: PrJSC IC PZU Ukraine (a non-life employees of the Tauron Group and the PKN Orlen Group previous year). insurance company), referred to as “PZU Ukraine”, and PrJSC (mainly chemical plants, power plants, combined heat and Market situation IC PZU Ukraine Life (a life insurance company), referred to power plants and mines); At the end of June 2017, the net asset value of open-end In Latvia, the PZU Group operates through AAS Balta, as “PZU Ukraine Life”. Additionally, LLC SOS Services Ukraine • services provided within the framework of additional pension funds was PLN 175 billion, up 18.8% with respect to a company formed by way of a merger of AAS Balta, acquired provides assistance services to its clients. medical packages for employees of the PKN Orlen Group the end of the previous year. in 2014, and PZU Lithuania. Total gross written premium was and the Tauron Group as well as corporate and individual EUR 44 million, representing an increase by 13.5% compared In H1 2017, the value of gross written premium in PZU clients in Płock, Włocławek and cities and towns in Upper The PZU Group is active on the pension fund market through to the corresponding period of the previous year. After Q1 Ukraine’s non-life insurance was UAH 660 million, up 13.5% Silesia; Powszechne Towarzystwo Emerytalne PZU (PTE PZU) and 2017, the company was ranked second on the market with from the corresponding period of the previous year. This • nursing home and rehabilitation care services in PEKAO Pioneer PTE. a 26.6% share in total gross written premium on the non-life growth resulted predominantly from an increase in sales of Ciechocinek and Ustroń; insurance market (compared to 25.9% after the first 3 months motor insurance and health insurance. • commercial services offered to individual and institutional Open-end pension funds – share in net assets as at of 2016). clients by CM Gamma Sp. z o.o. (a specialist orthopedic 30 June 2017 (in %) In Q1 2017, PZU Ukraine acquired a 2.8% share in total gross hospital) and CM Cordis Sp. z o.o. (mainly in the field of In Estonia, the PZU Group runs its business through the written premium of the Ukrainian non-life insurance market cardiology). Estonian branch of Lietuvos Draudimas, a combination of (down 1.5 p.p. compared to Q1 2016), ranking fifth in the Others 14.9% Nationale-Nederlanden OFE the Estonian branch of PZU Lithuania acquired in 2015 and a market3. PZU Zdrowie is a center for the provision of healthcare 24.8% local company operating under the Codan brand acquired in products addressing client needs by developing a Pekao OFE 1.5% 2014. The premium written in H1 2017 was EUR 26 million, In H1 2017, gross written premium collected by PZU Ukraine comprehensive product offering based on the PZU Group’s Nordea OFE 4.7% representing a 14.2% increase over the first half of the Life was UAH 131 million, up 20.0% from the corresponding current and future sales channels. As an integrated medical Generali OFE 4.9% previous year. In the same period, the Estonian branch’s share period of 2016. This increase was driven mainly by sales operator, PZU Zdrowie operates by relying on its foundation AXA OFE 6.4% in the non-life insurance market was 15.4%. in bancassurance and brokerage channels, in particular of of standards, quality and specialist tools. By creating an Aviva OFE Aviva BZ WBK endowment insurance. integrated network of outlets, the company is gradually Metlife OFE 8.0% 22.0% Ukrainian market implementing a cost-effective and competitive model of OFE PZU "Złota Jesień" In H1 2017, gross premium written in the country’s non-life On the life insurance market, after H1 2017 PZU Ukraine Life patient traffic management. Promoting a healthy lifestyle and 12.9% insurance market was UAH 10 billion, up 34.9% from the ranked fourth with a market share of 10.0% healthy behaviours is another key element of the operation of corresponding period of the previous year. Motor insurance (up 1.1 percentage points from the previous period)4. the PZU Zdrowie Group’s companies. Source: KNF, Monthly data on the open-end pension fund market, Data for June 2017 represented 21.7% of gross written premium, or 5.3 percentage points less than in the same period of the Merger of PZU Group companies in the domain of previous year. 3.7 Medical services (PZU Zdrowie) medical services PTE PZU activity In order to implement its strategy aimed at creating a network The PZU Złota Jesień Open-End Pension Fund managed In Q1 2017, life insurance undertakings collected Medical services market of medical centers and health insurance outlets, the following by PTE PZU (PTE PZU) is one of the largest players on the UAH 633 million in gross written premium, or 4.3% less According to GUS data published in 2017, the value of the changes were made to the PZU Group’s capital structure in pension fund market in Poland. At the end of June 2017, OFE than in the corresponding period of 2016. Unit-linked medical services market (including sales of medicines) in 2017 and the period leading up to the date of this report: PZU was the third largest pension fund, both in terms of the insurance represented 65.4% of gross written premium, or 2014 surpassed PLN 109 billion, of which public expenditures • on 31 May 2017, PZU Zdrowie acquired a 100% stake in number of members and net asset value: 8.3 percentage points more than in the first quarter of the amounted to almost PLN 77 billion and private expenditures NZOZ Centrum Medyczno-Rehabilitacyjne Revimed. • the fund had 2,176.8 thousand members, or 13.3% of all previous year. were estimated at approximately PLN 32 billion. • on 30 June 2017, Elvita Sp. z o.o. acquired a 95.25% stake participants in open-end pension funds; in NZOZ Trzebinia. • net assets stood at PLN 22.5 billion, representing 12.9% of The Ukrainian insurance market is highly fragmented – as at Operations of PZU Group companies (medical services) the total asset value of the end of March 2017, there were 307 insurance companies The PZU Group’s network of medical centers offers: • open-end pension funds operating in Poland. operating in the country (39 of which offered life insurance), • medical services for the local communities of Płock, down 45 compared to the end of March 2016. The top 100 Włocławek and cities and towns of Upper Silesia, Opole and In the first half of 2017, ZUS transferred PLN 164.21 million non-life insurance undertakings acquired 98.3% of gross Warsaw, Radom, Kielce, Pomerania under contracts with worth of contributions to OFE PZU, which was 7.4% more than written premium of the whole market, while the top 20 life the National Health Fund (NFZ) for the provision of primary in the corresponding period of the previous year. insurance undertakings acquired 99.8% of gross written and outpatient specialist care; premium. 3 Rank in the Ukrainian insurance market based on data published in the At the end of June 2017, PZU’s Voluntary Pension Fund kept Ukrainian quarterly journal “Insurance TOP 1(57)2017” 57.0 thousand individual pension security accounts (IKZEs) in 4 Rank in the Ukrainian insurance market based on data published in the Ukrainian quarterly journal “Insurance TOP 1(57)2017”
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which PLN 35 million worth of assets was accumulated. As Moreover, PZU Pomoc holds a 30% stake in GSU Pomoc Armatura Kraków SA (Armatura Kraków) is the parent a result, the fund maintained a leading position in the Górniczy Klub Ubezpieczonych. Within the framework of company of the Armatura Group The Armatura Group is voluntary pension funds segment. The rate of return this company, discount, incentive and loyalty programs are composed of the following companies: Armatura Kraków generated in the first half of 2017 was 13.8%. developed aiming at the mining industry. SA, Aquaform SA, Aquaform Badprodukte GmbH, Aquaform Ukraine TOW, Aquaform Romania SRL and Morehome.pl sp. Factors, including threats and risks, which will affect PZU CO z o.o. The business of the Armatura Group lies outside the the pension funds’ operations in H2 2017 The statutory business of PZU CO involves the provision of the domain of financial and insurance services. The group is a The main challenges facing the pension fund market in 2017 following services: leading manufacturer in the sanitary and heating industry are the following: • auxiliary services related to insurance and pension funds; in Poland. The Armatura Group companies specialize in the • the economic climate on the capital market and, in • ongoing intermediation in the execution of insurance manufacture of bathroom and kitchen faucets, central heating particular on the Warsaw Stock Exchange, affecting the agreements, financial and investment agreements and radiators made of aluminum, a range of valves, sanitary value of assets of the funds and the level of fees collected assistance agreements; ceramics, bathtubs, shower trays and bathroom furniture. by pension fund companies for management; • Contact Center; • preparation of pension fund companies for organizational • Data Center; On 16 June 2016, Armatura Kraków SA sold all the shares and legal changes arising from anticipated changes in the • printing services; it held in Armatura Tower to Pawo Borek sp. z o.o. Thus, pension system; • IT services; Armatura Tower is no longer a member of the Armatura • opportunities arising from the achievement of the • HR and payroll-related services. Group. objectives specified in the Capital Formation Plan and the Responsible Development Strategy the pursuit of which will PZU Finance AB depend on the development of detailed solutions and the ZU Group’s activity on the debt market is realized through PZU entry into force of necessary legislative changes; Finance AB with its registered office in Stockholm (Sweden). • active participation in work on the adoption of solutions The company was established in 2014 and is a wholly-owned enhancing the performance of the third pillar and making subsidiary of PZU. Its core business is to raise debt financing it more attractive, and influencing the need in public through the issue of bonds or other debt instruments and awareness for accumulating additional savings for future provide financing to PZU Group companies. retirement. On 3 July 2014 and 16 October 2015, PZU Finance AB issued Eurobonds for a total of EUR 850 million. DEBT FINANCING 3.9 Other operating areas SECTION 7.2
PZU Pomoc PZU Finanse PZU Pomoc SA (PZU Pomoc) pursues the following lines of PZU Finanse Sp. z o.o. is a service company established for business in particular: the purpose of keeping accounting ledgers for subsidiaries of • leasing and rental of motor vehicles, the PZU Group (excluding PZU SA and PZU Życie SA). • conduct of online auctions and e-commerce, • management of loyalty programs, Ogrodowa-Inwestycje • organization of assistance services involving the provision Ogrodowa-Inwestycje Sp. z o.o. (Ogrodowa-Inwestycje) is the of necessary assistance to the client, owner of the City-Gate office building (located at ul. Ogrodowa • management of post-accident property. 58 in Warsaw) and leases office space to external clients and PZU Group companies. As at the end of H1 2017, the company acquired new vendors from outside the PZU Group, observed more intense activity of Armatura Group vendors and held a leading position on the market for sales of The PZU Group has held an equity stake in Armatura Kraków damaged vehicles using an online auction platform. S.A. (Armatura Kraków) since October 1999. Since 2014, PZU FIZAN BIS 2 has been the direct owner of a 100% stake in the PZU Pomoc owns 282 hybrid Toyota Auris cars which it leases company. to its network of partners providing assistance services.
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Development strategy
The PZU Group is developing and evolving with its surroundings, while invariably placing its customers’ needs and expectations at the center of its value creation process. Strategic measures respond to existing and anticipated market challenges, reflecting its drive to strengthen its strong competitive position.
In chapter: 1. Fundamental values 2. Key strategic objectives 3. Pursuit of key projects and initiatives in H1 2017 4. Selected measures of the PZU Group’s 2020 Strategy
47 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Development strategy
4.1 Fundamental values • We Are Effective – we offer friendly and efficient service 4.2 Key strategic objectives Growth and competitive prices; we control our costs and ensure In the insurance segment, the PZU Group intends to grow Business philosophy that we have efficient processes. Key strategic directions the fastest in the market areas in which PZU’s share is below • We Play Fair – our offer is transparent and satisfies our • We Are Innovative – we constantly adapt to our customers’ In August 2016, the PZU SA Management Board and its natural level of approximately 30%. In complementary customers’ genuine expectations; we apply clearly-defined evolving needs; we actively endeavor to streamline how Supervisory Board approved the updated PZU Group Strategy business pillars covered by the PZU Group’s 2020 Strategy rules to our organization’s operation. our company operates. for 2016-2020. The Management Board identified three key (health, asset management), growth will be achieved strategic directions: profitability, growth and innovation. Their organically and through acquisitions to generate an above- pursuit pertains to the main business pillar of insurance and average growth rate of revenue and profit. complementary areas offering high growth potential, namely, • We are here to provide our clients with peace of mind and safety. Our clients can always rely on us. asset management and healthcare. At the same time, the Innovation • We know our client very well and that is why we are able to meet their needs and rational Management Board declared that the implementation of the Innovation is a very important part of the PZU Group’s expectations. The scale and efficiency of our operations help us provide premium services at adopted assumptions should increase PZU’s attractiveness as strategy. It is an ambition from the vantage point of Clients competitive prices. an investment target not only for dividend-driven investors transforming PZU into one of the most innovative insurance • Due to its market position, PZU acts as a „market watchdog” – our activities are beneficial for the entire market and the clients, we actively influence the market growth and establish but also for investors seeking growth companies with a high groups in Europe and a goal accelerating the implementation standards in customer service. potential to generate capital gains on the market valuation of of the key strategic directions of growth and profitability. their stock; this is why the Group’s strategy includes an option related to the participation in the consolidation of the banking The innovation culture in the PZU Group will be built in sector. particular by: • Thanks to the scale of business ensured by our leading position in the Central European Market, we continue to provide exceptional profits to our shareholders. • using Big Data files in the process of quoting, selling and Profitability providing customer service; Shareholders The PZU Group’s overriding objective in terms of profitability is • developing electronic distribution and service channels; to maintain an above-average rate of return attributable to the • implementing an effective transfer of know-how and parent company at 18% (ROE). This objective will be achieved technological solutions within the PZU Group through • PZU creates a working environment that inspires our staff to do their best while maintaining by implementing the growth initiatives presented below. local innovation centers: LINK4, Alior Bank and selected an optimal work-life balance. international companies; Employees
PZU Group’s 2020 Strategy (business profitability) Sustainable development follows the guiding principle that PZU’s value growth should Implementing strategic assumptions is predicated on be aligned to the interests of the environment and rely on 18.0% 18.0% responsibly managing capital: financial, human, social, sustainable and responsible resource utilization.
environmental and intellectual. The Management Board Strategy 2020 ROE (attributable to the parent As of 2015 company)
120% Sustainable development 100% Combined ratio Surplus rate of return on own 80% (non-life insurance in Poland) portfolio above the RFR Customer needs are our Reliable business 60% priority partner 40% 2.2 p.p. 2.0 p.p. 94.0% 92.0% 20% 0%
Net result attributable to the PZU Operating margin in group Group in PLN mln (banking) insurance and IC Responsible employer Social commitment
0 450.0 22.4% >20.0%
Net result on third party asset PZU Zdrowie’s EBITDA margin management (PLN mln) Compliance culture Savings for the environment 3.9% 12.0% 92.4 200.0
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PZU Group Strategy 2020 (business size) Growth potential of the banking model On 8 December 2016, PZU announced the signing of an According to the agreement of 30 May 2015, the PZU Group is agreement with UniCredit to acquire a 20% shares in a shareholder of Alior Bank with a 31.36% shares at the end Bank Pekao (a 32.8% shares jointly with the PFR Polish
33.9% 35.0% of H1 2017. In 2016, Alior Bank was the consolidation platform Development Fund). This strategic transaction was finalized to acquire the spun-off part of Bank BPH. On 23 March 2017, on 7 June 2017. Following the transaction, PZU became the the operational merger of Alior Bank with the acquired part of largest group offering comprehensive financial services in Market share Strategy 2020 (non-life) Bank BPH took place. Poland and Central and Eastern Europe with total assets of PLN 295 billion (assets of PZU, Pekao and Alior Bank). As of 2015 120% 100% 80% 60% * Number of clients in PZU Życie Banking assets (PLN bn) 40% (PLN mln) 20%
40.0 140.0 0% 11.4 11.0 Number of clients ~16 millions ~ 5 millions ~ 4 millions
Number of outlets 414 918 960
Assets of third party clients under * including BPH Bank PZU Zdrowie's revenues (PLN mln) management (PLN bn)
It is the PZU Management Board’s ambition for the PZU Group the same time being the common denominator of all these 259.5 1,000.0 25.3 50.0 to become the brand of first choice in life and non-life insurance strategic initiatives. and in savings, health care and banking services. In Poland the PZU Group will offer a comprehensive array of services: According to its strategic assumptions, by 2020, the banking • supplying innovative solutions for risk management in large The comprehensive multi-channel distribution and customer • insurance services through the largest insurer, PZU, segment’s contribution to the PZU Group’s financial result is businesses (PZU Lab); service, including the upgrade of CRM (customer relationship • banking products through the second largest bank - Pekao supposed to grow to PLN 450 million while banking assets • developing a culture of innovation to support the management) tools and the use of available data on clients and Alior Bank, are to hit PLN 140 billion. In connection with the closing generation of new solutions by employees. will allow us to adjust the PZU Group’s offering to their needs • asset management through the largest entity in this sector: of the transaction to acquire a 20% shares in Bank Pekao, better. The use of efficient analytical tools and Big Data sets TFI PZU, TFI Pioneer, PTE PZU and PTE Pioneer. the second goal was achieved ahead of plan in 2017. The Nearly 16 million clients have placed their trust in the PZU will support portfolio management based on a given client’s Company will revise its strategic assumptions in order to Group. We leverage our experience of more than 200 actual risk profile and the use of advanced price management The Management Board declares that the initiatives that will harness the potential of the individual business pillars in an years and we are changing to respond better to our clients’ methods in non-life insurance. The Group has also noticed the be undertaken will be fundamental and long-term in nature. optimum manner. The PZU Group’s 2020 strategy is to be needs. We accompany our clients in all stages of their life, significant growth potential in the sales of health, pension and The number and quality of interactions with clients will form updated in Q4 2017. providing them with peace of mind and a feeling of security non-life products. the measuring stick for achieving these ambitions while at by protecting their health, life and property and growing their savings. We want to be wherever our clients are in order to be In the longer term, these activities will translate into clients able to address their needs in the way they expect us to do having more products. that. Direct / New Banks The PZU Group will actively support the formation of technologies Implementation of a fully digital operational model will allow us an ecosystem facilitating the development of Polish to shape client relations and experiences actively. We will offer entrepreneurship and innovation, ensuring among others: self-service solutions in areas in which our clients expect us to • support for Polish entrepreneurs and scientists through the do that. Our goal is to digitize client processes fully and use PZU Group’s own initiatives or cooperation within other interaction optimally to up-sell better matching products and initiatives supporting innovation (e.g. the Witelo fund) CLIENT services to allow us, among others, to position ourselves better • search for and support of external synergy-related in the Young Clients and Premium segments. initiatives or ones that are complementary to the actions conducted by the PZU Group • financial support for the initiatives of entrepreneurs on Agents / commercial terms, also via Venture Capital funds. Branches Brokers
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4.3 Pursuit of key projects and initiatives in H1 2017 1. At the end of H1 2017, PZU Zdrowie’s revenues were PLN 220.2 million, signifying growth of 40.5% from the previous year. In H1 2017, the Group pursued the following goals in the individual Business Areas: 2. 30.0% y/y increase in gross written premium for health insurance. 3. Acquisition of 2 medical entities: Revimed by PZU Zdrowie and NZOZ Trzebinia by Elvita. 4. Since the beginning of 2017, five medical centers in Poland operate under the PZU Key areas Recap of actions and achievements in H1 2017 Zdrowie brand. Health 5. Tools for cooperating with medical centers have been implemented. 1. Consolidation of PZU’s leading position on the non-life insurance market. According to the 6. Work to enable online communication with Medical Hotline consultants to book medical Q1 2017 data from the Polish Financial Supervision Authority, the PZU Group’s market services with an extensive network of medical centers has been continued. share (PZU, LINK4 and TUW PZUW) (direct business) was 37.1% (up 1.4 p.p. y/y). 7. The health offering has been extended to include the Zdrowy Biznes product targeting 2. Retention of the leading position in periodical premium life insurance. The market share self-employment company and businesses run by two persons. As a result, they and their was 45.6% in Q1 2017 (44.8% last year). PZU Życie’s life insurance market share in Q1 spouses, partners and children have access to private medical care across Poland. 2017 was 34.9% (up 0.4 p.p. y/y). 3. Consolidation of market leadership in Lithuania. The Lithuanian company’s share of the non-life insurance market was 29.4% at the end of H1 2017 (up 0.7 p.p. compared to the 1. On 7 June 2017, PZU and PFR finalized the deal to acquire a 32.8% equity shares in Bank corresponding period of the previous year). The life company also posted an increase in Pekao for a total amount of PLN 10.6 billion. The price per share was PLN 123. It is one gross written premium (market share edged up 0.4 p.p. y/y) representing 6.0% of the of the largest transactions in the European banking sector in recent years. This strategic overall life insurance market in Lithuania. In turn, in Q1 2017, the share in the Latvian decision has enabled PZU to become the largest financial group in Poland and Central and non-life insurance market was 26.6%, posting growth of 0.7 p.p. y/y. The PZU Group’s Banking Eastern Europe. share in the Estonian non-life insurance market rose 0.9 p.p to 15.4% compared to H1 of 2. On 27 March 2017, the operational business combination of Alior Bank (a PZU subsidiary) Insurance the previous year. In Q1 2017 the Ukrainian non-life company recorded a market share and the acquired part of Bank BPH took place. decline (2.8%) of 1.5 p.p. y/y in comparison to the corresponding period of the previous 3. The banking segment’s contribution to the PZU Group’s operating result was year while the life company reported a larger market share (10.0% compared to PLN 485 million at the end of H1 2017. 9.0% y/y). 4. The development work to implement a new policy system (the Everest Project) has been Supporting factors Recap of actions and achievements in H1 2017 completed and should improve PZU’s flexibility and competitiveness. 5. Work to develop a product for continuous technological protection combined with 1. 84% of the PZU Group’s clients are satisfied with the claims and benefits handling process insurance cover against the effects of cyber attacks was continued. (satisfaction survey on a sample of 8.7 thousand clients conducted in H1 2017). 6. PZU received a prestigious award as a Trusted Brand in 2017 conferred by the “My 2. Work to implement security measures against fraud risk was conducted. Company Polska” monthly. The editorial board once again asked businesses to identify 3. Implementation of an application for clients to handle claims on their own. the products and services in which they place special trust. PZU has proven to be the 4. Efforts to implement streamlining improvements in the company involving automation of unquestionable leader in the insurance industry. certain processes using robotic solutions were commenced. Efficient service, 5. Work to modernize the Data Warehouse infrastructure was continued. effective operations, 6. Work to ensure PZU’s compliance with the requirements of the General Data Protection 1. TFI PZU is third on the market in terms of net assets under management. At the end of flexible IT H1 2017, the value of assets under management by TFI PZU was PLN 20.0 billion, which Regulation was conducted. accounted for 7.4% of the assets in domestic mutual fund companies (TFIs). 7. PZU’s victory in the ranking organized by the MojeBankowanie.pl portal in the category 2. Assets under management entrusted by external clients climbed from PLN 7.0 billion at entitled “Best service in a branch (insurance)”. the end of 2016 to PLN 7.3 billion at the end of H1 2017. At the end of H1 2017, assets of 8. Efforts to develop a self-service portal including products offered by the entire PZU Group. TFI PZU’s external clients represented 4.6% of TFI market assets (excluding privately held 9. Continuation of the process to sell redundant properties from the standpoint of the assets) (4.8% at the end of 2016). statutory activity of PZU and PZU Życie. 3. Net assets managed by Pioneer TFI amounted to a level of 17.0 billion giving it a market Investments share of 6,4% (total combined market share of PZU TFI and Pioneer TFI sums up to 1. Continuation of the adopted directions of its social activities: safety, health and an active 13,8%). lifestyle. 4. The net asset value of OFE PZU Złota Jesień at the end of H1 2017 was PLN 22.5 billion. PZU supports voluntary and professional rescue services alike: Mountain Volunteer 5. The work to refine the product offering in connection with pension system reform has Search and Rescue (GOPR), Water Rescue Teams (WOPR), State Fire Brigade (PSP), already been launched. Volunteer Fire Brigade (OSP), the Police. PZU is also involved in the promotion of safety 6. Efforts to implement business initiatives to develop cooperation between Alior Bank and by supporting TV shows and educational series, such as “I am a mom” or “Life-altering PZU were taken. seconds”. PZU promotes active lifestyle and disease prevention among Poles by supporting, among Socially responsible others, the PZU Warsaw Marathon, the PZU Warsaw Half Marathon and the PZU Cracovia organization Royal Half Marathon. All the races sponsored by PZU were accompanied by a charitable campaign entitled “Share a kilometer” to encourage Poles to help others through their own physical activity. 2. PZU supports culture – it contributed to the preservation of Polish cultural heritage by providing its patronage to institutions such as the Royal Łazienki Museum in Warsaw, the Warsaw Uprising Museum, the National Museum in Kraków, the National Museum in Warsaw, the National Theater in Warsaw and the Grand Theater – National Opera in Warsaw, among others.
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1. At the end of H1 2017, the administrative expenses of insurance segments in Poland 4.4 Selected measures of the PZU Group’s 2020 Strategy increased by PLN 1 million, i.e. by 0.2% y/y 2. The administrative expense ratio in Poland improved 1.1 p.p. to 6.9% at the end of H1 2017. ROE1 Cost effectiveness 3. The administrative expense ratio in foreign companies improved by 1.8 p.p. At the end of culture H1 2017 this ratio was 10.4%. 4. The PZU and PZU Życie Management Boards decided to commence the headcount 06.2017 2020 S restructuring process. It will affect all of the company’s functional areas. The process is scheduled for completion on 17 December 2017. The downsizing process cannot apply to more than 956 PZU and PZU Życie employees. 22.1% 18%
1. The PZU Shareholder Meeting decided that a dividend of PLN 1.2 billion, or PLN 1.40 per NON-LIFE LIFE INVESTMENTS HEALTH BANKING share, will be distributed from the 2016 profit. The record date was set for 29 September INSURANCE INSURANCE and the dividend will be paid on 19 October 2017. PZU Group’s Number of clients Assets of third Revenues (PLN mln) Assets (PLN bn) 2. S&P affirmed the A- rating for PZU and PZU Życie. This is one notch above Poland’s rating. Capital and investment market share2 in PZU Życie (million) party clients under 3. Effective and adequate alignment of the risk management and compliance system to the policy and integrated management (PLN bn) risk management PZU Group’s evolving organizational structure and the legislative environment. system 4. On 30 June 2017, PZU raised PLN 2.25 billion in a private subordinated bond issue 7 denominated in Polish zloty. It was the largest issue of subordinated bonds in the history 03.2017 2020 S 06.2017 2020 S 06.2017 2020 S 06.2017 2020 S 06.2017 2020 S BUSINESS SIZE BUSINESS of the Polish financial sector, while at the same time being the first issue in Poland complying with Solvency II requirements. 37.1% 35% 11.1 11 29.8 50 427.3* 1,000 232 140
Combined ratio3 Insurance margin in Net result on third party EBITDA Margin6 Net financial result group and individual asset management attributed to the PZU continuation (PLN mln) Group (PLN mln)
06.2017 2020 S 06.2017 2020 S 06.2017 2020 S 06.2017 2020 S 06.2017 2020 S
86.5% 92% 19.2% >20% 80.4* 200 7.9% 12% 153 11 450
Cutting fixed expenses Surplus rate of return on (PLN mln) its own portfolio above the RFR BUSINESS PROFITABILITY BUSINESS
06.2017 2018 S 06.2017 2020 S4
1.6 p.p. / 100.4* 400 2.0 p.p. 2.3 p.p 12
Solvency II solvency NPS for Retail Client Number of products per Employee commitment ratio5 vs. competition Retail Client index
03.2017 2020 S 06.2017 2020 S 06.2017 2020 S 2017 2020 S
10 8 9 277% >200% +6.5 p.p. > competition 1.56 1.64 35% 55%
GROUP OBJECTIVES 8 Average from Q3 2016 to Q2 2017 9 1 ROE attributable to the parent company Annual survey 10 2 Direct business Data as at Q1 2017, unaudited 11 3 PZU jointly with PZUW TUW and Link4 Figures consistent with Pekao’s and Alior Bank’s FS’s for the 12m moving 4 Average in Strategy period average net of non-recurring events (restructuring costs and the result on the 5 Own funds after subtracting anticipated dividends and asset taxes acquisition of BPH) 12 6 Net of transaction costs, project-related parts and amortization of goodwill Including on own debt FX 7 Data on an annual basis, regardless of the time of purchase; own outlets and * 12 month moving average branches including revenues from PZU Zdrowie
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Consolidated financial results
The net profit attributable to the parent company’s shareholders more than twice as high as in H1 2016. Increase in gross written premium by 17.7% y/y and consolidation of the leading position in the Polish insurance sector. Greater exposure to the banking sector – consolidation of Pekao.
In chapter: 1. Major factors contributing to the financial result 2. Income 3. Claims paid and technical provisions 4. Administrative and acquisition expenses 5. Asset and liability structure 6. Contribution made by the operating segments to the result 7. Profitability and operational efficiency ratios
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5.1 Major factors contributing to the • higher investment income, in particular due to better in motor insurance, as a result of the growing insurance • higher negative balance of other operating income and financial result market conditions on the Warsaw Stock Exchange. portfolio; expenses of PLN 601 million. This change was caused • higher acquisition expenses (a PLN 160 million increase) in mainly by the higher level of tax on financial institutions. In H1 2017 the PZU Group generated a gross result of The key events in H1 2017 included adding bank Pekao SA to both mass and corporate client segments, driven up mainly The total burden incurred by the PZU Group on account PLN 2,198 million compared with PLN 1,049 million in the prior PZU Group’s structures. This transaction transformed the PZU by higher sales; of this tax (in insurance and banking activity) in H1 2017 year (up 109.5%). Net profit reached PLN 1,733 million and Group from being an insurance group into a financial group. • the increase in administrative expenses to PLN 2,025 million was PLN 293 million, as compared to PLN 170 million in the was PLN 943 million higher compared to the result in H1 2016. The commencement of consolidating Pekao SA in June 2017 from PLN 1,278 million in H1 2016 was associated with the corresponding period of 2016 (following the introduction Net profit attributable to the parent company’s shareholders materially affected the comparability of the results and total commencement of consolidating Pekao and Alior Bank’s of the tax since February 2016 and commencement of was PLN 1,446 million compared to PLN 660 million in 2016 assets and equity and liabilities. The total balance sheet value merger with the spun-off portion of BPH on 4 November consolidating Pekao). This effect was partially offset by (up 119.1%). jumped on this account by roughly PLN 182 billion compared 2016. Administrative expenses of the banking segment rose higher revenue on writing off liabilities on account of to the coresponding period of previous year, while non- by PLN 700 million. At the same time, the administrative premium refunds and overpayments. The net result of one-off events increased 77.5% compared to controlling interests totaled PLN 21.5 billion (as at 30 June expenses of the insurance segments in Poland were at last year1. 2017). Pekao contributed PLN 227 million to the PZU Group’s a level similar to the last year’s figures. The change resulted consolidated operating profit and banking activity operating from the higher expenses incurred in bancassurance The operating profit in H1 2017 was PLN 2,199 million, up profit in H1 2017. products following a change in the rules of settlements with by PLN 1,149 million compared to the same period in the banks under bancassurance agreements, offset by lower previous year. This movement resulted in particular from: In the individual operating result items, the PZU Group posted: expenses of project activity. • higher gross written premium in motor insurance in • increase in gross written premium to PLN 11,606 million. the mass and corporate client segments following an When compared to the previous year, premium rose by increase in average premium and in individual insurance, 17.7%, mainly in the motor insurance group in the mass in particular unit-linked products in the bancassurance and corporate client segments following an increase in 1 January - 1 January - 1 January - 30 June 2017 30 June 2016 30 June 2015 channel; average premium and in individual insurance, in particular Key data from the consolidated profit and • the increase in profitability in the mass insurance segment unit-linked products in the bancassurance channel. After loss account PLN million PLN million PLN million associated mainly with a decrease in the loss ratio in considering the reinsurers’ share and movement in the agricultural insurance – in the corresponding period of the provision for unearned premiums, the net earned premium Gross written premium 11,606 9,862 9,126 previous year, occurrence of numerous losses caused by was PLN 10,347 million and was 15.1% higher than in H1 Net earned premium 10,347 8,986 8,744 forces of nature (adverse effects of ground frost) and, to 2016; Net revenues from commissions and fees 498 268 103 a smaller extent, improvement of profitability in motor TPL • higher net result on investing activity, driven by investment insurance; income earned on the banking activity following the Net investment result 3,032 1,405 1,086 • lower profitability in the corporate insurance segment, commencement of consolidation of Pekao, but also without Net insurance claims and benefits (7,214) (6,165) (6,006) mainly in the non-motor insurance group due to several that activity. The net result on investing activity was Acquisition expenses (1,412) (1,252) (1,131) claims reported with a high unit value; PLN 3,032 million, rising by 115.8% from the corresponding • decrease in profitability in group and individually continued period of 2016. Investment income excluding banking Administrative expenses (2,025) (1,278) (822)
insurance as a result of the higher loss ratio in protection activity rose mainly because of the better performance Interest expenses (426) (346) (62) products associated with the increase in the frequency posted on listed equity instruments, in particular due to the Other operating income and expenses (601) (568) (293) of events associated with deaths in the first quarter of improved market conditions on the Warsaw Stock Exchange. this year, confirmed by GUS mortality data on the whole A positive change was also recorded in comparison to Operating profit (loss) 2,199 1,050 1,619
population. In the second quarter, the loss ratio returned the corresponding period of the previous year due to the Share of the net profit (loss) of entities (1) (1) (0) to the levels observed in the corresponding period of the improved valuation of the equity stake in Azoty Group in the measured by the equity method previous year; long-term asset portfolio; Profit (loss) before tax 2,198 1,049 1,619 • better performance in the banking activity segment for • increase in interest expenses to PLN 426 million vs. Income tax (465) (259) (297) Alior Bank in connection with the high sales level of credit PLN 346 million in the corresponding period of the previous products supported by good business climate and the low year, associated in particular with the commencement of Net profit (loss) 1,733 790 1,322 interest rate environment; consolidation of Pekao; Net profit (loss) attributable to equity holders of 1,446 660 1,322 • higher level of claims and benefits paid. They amounted to the parent
1 Non-recurring events include the conversion effect caused by converting long- PLN 7,214 million, which means a 17.0% increase compared term policies into yearly renewable term agreements in type P group insurance with 2016. The increase occurred in particular in individual and the claims in agricultural insurance that were higher than the average of the prior 3 years in 2016. unit-linked products in the bancassurance channel and
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PZU Group’s operating result in H1 2017 (PLN million) Gross written premium (external) Insurance segments (PLN millions), local GAAP 1 January – 1 January – 1 January – 1,627 (1,049) 30 June 2017 30 June 2016 30 June 2015
(33) (160) (747) 230 TOTAL 11,606 9,862 9,126 1,361 (80)
Total non-life insurance – Poland 6,596 5,243 4,426 2,199 (external gross written premium) 1,050
Mass insurance – Poland 5,217 4,277 3,624 expenses
H12016 H12017 Motor TPL 2,350 1,691 1,288 Administrative Operating result Operating result Interest expenses andexpenses andcommission Net earned premium Acquisition expenses Net investment result investment Net Motor MOD 1,240 1,043 868 Net claims and benefit and claims Net Net revenue from fees from revenue Net Other operating revenue operating Other
Other products 1,627 1,543 1,468
5.2 Income Net revenues from commissions and fees Corporate insurance – Poland 1,379 966 802 Net revenues from commissions and fees in H1 2017 Gross written premium contributed PLN 498 million to PZU Group’s result, or were Motor TPL 342 222 164 In H1 2017, the PZU Group collected gross written premiums PLN 230 million higher than in the previous year, mainly of PLN 11,606 million, up 17.7% from the corresponding because of the commencement of consolidating Pekao. Motor MOD 419 334 240 period in 2016. The individual segments recorded the Other products 618 410 399 following figures: They included mainly: • sales in the mass client segment rose by PLN 940 million • net revenues from commissions and fees for banking Total life insurance – Poland 4,221 3,928 4,018 compared to 2016 (net of intersegment gross written segments in the amount of PLN 403 million, including
premium), chiefly including motor insurance due to an mainly: brokers’ commissions, revenues and expenses Group and individually continued insurance – Poland 3,429 3,390 3,338 increase in average premium; related to the service of bank accounts, payment and credit • premium increased in the corporate client segment by cards, fees charged for intermediation in insurance sales); Individual insurance – Poland 792 538 680 PLN 413 million from 2016 (net of intersegment gross • income on asset management in OFE Złota Jesień. It Total non-life insurance written premium), mainly in motor insurance due to the was PLN 56 million (up by 21.7% compared to H1 of the 742 650 648 – Ukraine and Baltic States higher number of insurance policies and average premium, previous year, because of the higher average net assets of
insurance against fire and other property losses following OFE PZU); Ukraine non-life insurance 96 89 60 the execution of several contracts with high unit values; • revenues and payments received from funds and mutual • sales increased by PLN 39 million in the group and fund companies in the amount of PLN 76 million, or PLN 16 Baltic States non-life insurance 646 561 588 individually continued insurance segment – the additional million more than in the previous year, mainly because of a Total life insurance premium was received from health insurance concluded as change in the scope of consolidated funds as compared to 47 41 35 – Ukraine and Baltic States group insurance; the corresponding period last year. • the premium in the individual insurance segment also rose Ukraine life insurance 19 17 15 by PLN 254 million, driven mainly by higher sales of unit- Net investment result and interest expenses linked products in the bancassurance channel; In H1 2017, the PZU Group’s net investment result2 was Baltic States life insurance 28 24 20 • gross written premium by foreign companies also increased PLN 3,032 million compared to PLN 1,405 million in the as compared to 2016 by PLN 97 million following the corresponding period of 2016 (up 115,8%). The higher development of non-life insurance sales in the Baltic States result in H1 is above all the effect of the increase in the segment. result achieved on the activity conducted by the banking sector (among others, interest income, also on loans and the
2 The net investment result consists of net investment income, net realized result and impairment losses on investments and the net movement in the fair value of assets and liabilities measured at fair value.
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trading result) as a consequence of commencing Pekao SA’s As at the end of June 2017, the value of the PZU Group’s Lower level of treasury debt instruments is connected with the in the bancassurance channel and to a lesser extent the consolidation and the merger of Alior Bank with BPH’s spun-off investment portfolio3 was PLN 45,533 million compared with financing of the Peako acquisition. same type of group and individual products offered within operations on 4 November 2016. PLN 50,488 million at yearend 2016. The Group conducts PZU’s own network (mostly Employee Pension Plans and its investment activity in accordance with the statutory The increase in the level of non-treasury debt instruentns IKEs). In both cases, this resulted both from an increase After considering interest expenses and excluding the impact requirements while maintaining the adequate degree of resulted from the consistently implemented investment policy in customer deposits to accounts and significantly better of the banking activity, the result earned in H1 2017 was PLN safety, liquidity and profitability; that is why government debt aimed at ensuring greater diversification of the investment results of investment activity in the analyzed period; 742 million higher than in the corresponding period of 2016, securities constituted over 60% of the investment portfolio portfolio. • in protection insurance – an increase in the incidence of mainly because of: both as at 30 June 2017 and 31 December 2016. deaths compared to last year, especially in the beginning
• higher result earned on listed equity instruments in 3 The investment portfolio includes financial assets (including investment The high percentage of money market instruments was caused of the year, confirmed by statistics published by the Central particular due to improved market conditions on the products net of loan receivables from clients), investment property, the negative inter alia by entering into transactions on the interbank market Statistics Office for the entire population. measurement of derivatives and liabilities for sell buy backs. Warsaw Stock Exchange – the WIG index is up 17.9% to enhance the return on investing activity and to adjust the compared to the end of 2016, while a 3.7% decline was Financial asset structure (in %)* investment portfolios to their benchmarks. On the other hand, the decline in this category of net claims recorded in the corresponding period of last year; and benefits was caused by the lower level of claims in the • better performance in the portfolio of assets covering Result on other operating income and expenses group of insurance for other losses to property, mostly for 5.0% 5.6% 5.8% 6.8% investment products by PLN 294 million y/y, including in 7.4% 9.1% In H1 2017, the net balance of other operating income and subsidized crop insurance – in the corresponding period of 6.7% particular funds in the unit-linked portfolio (even though it 7.3% 6.3% expenses was negative and amounted to PLN 601 million 2016 there were many losses caused by the forces of nature. 9.8% 6.3% 5.1% does not affect the PZU Group’s result) mainly due to the compared with the also negative balance for 2016 of 61.0% 9.6% 60.7% 10.7% 63.8% 13.0% better market condition on capital market as well as higher PLN 568 million. The following contributed to this result: decline rate in yields of Polish Treasury bonds; • tax on financial institutions – the PZU Group’s liability on 5.4 Administrative and acquisition • deterioration of the result on interest-bearing financial account of this tax (in both insurance and banking activity) expenses assets mainly due to worse foreign exchange result on in H1 2017 was PLN 293 million compared to 10.7% 63.8% 61.0% 9.6% 13.0%60.7% foreign currency bonds portfolio held primarily to hedge PLN 170 million in the corresponding period of the previous The Group’s administrative expenses in H1 2017 were 9.8% 6.3% 5.1% 6.3% financial liabilities arising from the issue of own debt 6.7% 7.3% year. The increase in the liability was caused by the fact PLN 2,025 million compared to PLN 1,278 million in H1 9.1% securities; this effect was balanced by: 6.8% 7.4% that the tax was introduced in February last year and the 2016, i.e. they were up 58.5% over the previous year. The 5.0% 5.6% 5.8% ◦◦ positive effect of foreign exchange differences on own consolidation of Pekao began in June 2017; increase resulted mainly from the commencement of Pekao’s 2015.12 2016.12 2017.06 debt securities due to appreciation of the PLN against PLN 52.3 bn PLN 50.5 bn PLN 45.5 bn • higher income from written off liabilities on account of consolidation and the merger of Alior Bank with BPH’s spun-off
the EUR; InvestmentTreasury debt property market securities premium refunds and payment surpluses, operations on 4 November 2016. Administrative expenses of Non-treasury debt market securities ◦◦ higher result on the portfolio of bonds measured at Equity instruments – unquoted • expenses were down by PLN 14 million for the amortization the banking segment rose by PLN 700 million. At the same EquityMonetary instruments market instruments – quoted market value due to better situation on debt market; of intangible assets recognized as a result of PZU’s time, the administrative expenses of insurance segments MonetaryEquity instruments market instruments – quoted ◦◦ better results on corporate debt due to acquisition of Non-treasuryEquity instruments debt market– unquoted securities acquisition of a stake in Alior Bank, insurance and medical in Poland were at a level similar to last year’s figures. The Investment property high-margin exposures; Treasury debt market securities companies. change resulted from the higher expenses incurred in ◦◦ purchase of 30 year high-yield bonds on the primary * Derivatives linked to interest rates, foreign currencies and securities prices, bancassurance products following a change in the rules of respectively are presented in the categories: Debt market instruments - treasury, market for 2 bn PLN in the held to maturity bond Money market instruments and Listed and unlisted equity instruments; NBP bills settlements with banks under bancassurance agreements, portfolio. purchased by banking sector in the Debt market instruments - non-treasury 5.3 Claims and technical provisions offset by lower expenses of project activity. category.
Change of the net investment result following the recognition of interest-bearing costs (PLN million) Net claims and benefits (including the movement in technical In H1 2017 acquisition expenses rose by PLN 160 million provisions) reached PLN 7,214 million and were 17.0% more compared to the corresponding period of the previous year. 1,519 than in the corresponding period of the previous year. The This increase was caused in particular by higher sales in the following factors contributed to the increase in the category of mass client and corporate client segments. net claims and benefits: 309 (54) 776 (289) 2,606 • higher claims and benefits in motor insurance in the corporate and mass client segments as a result of the 5.5 Asset and liability structure 1,087 345 development of the insurance portfolio; • higher level of claims and benefits in catastrophic insurance As at 30 June 2017, the PZU Group’s total assets were
Other and in general TPL insurance in the corporate client segment PLN 295,262 million, up PLN 169,917 million compared to the as a result of reporting several high unit value claims; end of 2016. assets Banking activity Banking H12017 H12016 H12017
Equity instruments Equity • in life insurance – significantly higher increases in banking activity) banking interestexpense banking activity) banking provisions, predominantly for individual unit-linked products FX onown debt portfolio Interest-bearing financial Interest-bearing Net investment result and result investment Net Net investment result and result investment Net Net investment result and result investment Net interest expense expense (including interest interestexpense (excluding (excluding banking activity) banking (excluding
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 62 63 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Consolidated financial results
Assets As at 30 June 2017, the PZU Group held PLN 11,646 million and equity (PLN +1,591 million compared to the end of 2016). 5.6 Contribution made by the operating The Group’s main assets are investments (financial assets of cash and cash equivalents (3.9% of assets). At the end of The movement in this item resulted in particular from: segments to the result and commercial property). They totaled PLN 258,828 million 2016, its amount was PLN 2,973 million and the movement • higher provision for unearned premiums in non-life and were PLN 151,790 million higher than at the end of the was due to Cash and cash equivalents of Pekao. insurance resulting mainly from increased sales of motor Definition of operating segments previous year. They represented 87.7% of the Group’s balance insurance in Poland; The following industry segments were identified in order to sheet compared with 85.4% at the end of 2016. The increase The balance of the assets held for sale item, which amounted • higher provisions for unit-linked life insurance products if facilitate management of the PZU Group: in the value of investments was associated mainly with to PLN 1,239 million, referred to the portion of investment the policyholder bears the investment risk because of sales • corporate insurance (non-life). This segment covers a broad the banking activity due to the commencement of Pekao’s property that was held for sale. exceeding surrenders and a high positive investment result; scope of property insurance products, liability and motor consolidation. The balance of loan receivables from clients • higher mathematical reserves in continued business insurance customized to a client’s needs entailing individual was PLN 162,062 million, increasing by PLN 117,033 million Liabilities and equity associated with the indexation of sums insured and aging underwriting offered by PZU, LINK4 and TUW PZUW to from the end of 2016 (the share in total assets rose from At the end of H1 2017 consolidated equity hit PLN 34,628 portfolio. large businesses; 35.9% at the end of 2016 to 54.9% at the end of H1 2017). million, up from the end of 2016 (102.2% growth). The • mass insurance (non-life). It consists of property, accident, growth in consolidated equity pertained mainly to non- Structure of PZU Group’s liabilities and equity (in %) liability and motor insurance products. PZU, LINK4 and PZU Group’s asset structure (in %) controlling interests that in connection with commencement TUW PZUW provide those products to individual clients and of Pekao’s consolidation in June 2017, among others, reached to the small and medium enterprise sector; 4.7 4.1 2.2 3.9 2.3 2.4 14.3 13.7 11.7 3.2 4.5 3.5 PLN 21,474 million, increasing more than five-fold from the • life insurance – group and individually continued insurance. 3.7 end of 2016. Equity attributable to the parent company’s 3.4 4.0 PZU Życie offers it to employee groups and other formal 28.7 shareholders rose slightly compared to the year before – as an groups. Persons under a legal relationship with the 35.9 29.4 54.9 effect of the distribution of profit for 2016, including allocation 38.3 policyholder (for instance employer, trade union) enroll
of PLN 1,209 million as a dividend, offset by the net result 61.6 in the insurance and individually continued insurance in attributable to the parent company generated in H1 2017. 13.0 which the policyholder acquired the right to individual 0.7 9.6 continuation during the group phase. It includes the 0.8 57.1 49.5 The largest component of liabilities and equity as at the end of following insurance types: protection, investment (which
39.2 7.6 32.8 H1 2017 was financial liabilities, which increased significantly 33.7 however are not investment contracts) and health 0.6 compared to the end of 2016 from 47.9% to 69.2%, primarily 14.8 insurance; 4.0 3.6 2.7 due to the commencement of consolidation of Pekao. The • individual life insurance. PZU Życie provides those products 2015 2016 06.2017 2015 2016 06.2017 value of this item reached PLN 204,291 million and included in to individual clients. The insurance agreement applies to a Equity Other assets particular: specific insured who is subject to individual underwriting. Other liabilities Cash and cash equivalents • liabilities to clients of PLN 185,376 million (predominantly Those include protection, investment (which are not Liabilities to customers - overnight and fixed-term deposits Receivables by virtue of deposits held by Pekao and Alior Bank as investment contracts) and health insurance products; Receivables from customers' loan Financial liabilities excluding liability to customers - deposits members of the PZU Group; an increase in current and • investments. It is the investment of the PZU Group’s own Investments excluding receivable from customers' loan Other provisions
Non-current assets (intangibles, goodwill, property, plant and equipment) term deposits by PLN 133,941 million compared to Technical provisions funds, understood as the surplus of investments over December 2016); technical provisions in the PZU Group insurance companies PZU Group’s receivables, including receivables under insurance • liabilities under sell-buy-back transactions of The balance of other liabilities and provisions at the end of H1 seated in Poland (PZU, LINK4, TUW PZUW and PZU contracts and current income tax were PLN 10,222 million, PLN 752 million in H1 2017 compared to PLN 178 million in 2017 was PLN 12,558 million compared to PLN 5,994 million Życie) plus the surplus of income earned over the risk- which represented 3.5% of assets. At the end of 2016, they 2016; at the end of 2016. The contributors to this increase included, free rate on investments reflecting the value of technical amounted to PLN 5,703 million (4.5% of the Group’s assets) • liabilities on the issue of own debt securities of PLN 4,859 among others: liabilities to PZU shareholders on account of provisions in insurance products, i.e. surplus of investment and their increase was caused mainly by the outstanding million (including Eurobonds issued via the wholly-owned the dividend from the 2016 profit in the amount of PLN 1,209 income allocated at transfer prices to insurance segments. transactions on financial instruments. subsidiary PZU Finance AB with the total value of EUR 850 million, liabilities to Pekao SA’s minority shareholders on Additionally, the investment segment includes income from million and certificates of deposit and covered bonds issued account of the dividend from the 2016 profit in the amount other free funds in the PZU Group (including consolidated Non-current assets consisting of intangible assets, goodwill by Pekao); of PLN 1,822 million and liabilities on account of outstanding mutual funds); and property, plant and equipment were recognized in the • subordinated debt of PLN 3,267 million. The value of this transactions on financial instruments in the amount of PLN • pension insurance. Activity conducted by PTE PZU; statement of financial position in the amount of PLN 8,060 item increased compared to the end of 2016 due to the 1,926 million. • Ukraine segment. Includes both non-life insurance and life million. They constituted 2.7% of assets. The balance issue of subordinated debt by PZU on 30 June 2017 for the insurance; increased in H1 2017 by PLN 3,547 million as compared total amount of PLN 2,250 million. Cash flow statement • Baltic states segment. Includes non-life insurance and life to 2016 mainly because of the commencement of Pekao’s At the end of H1 2017, net cash flow reached PLN 8,757 insurance products provided in the territory of Lithuania, consolidation, including recognition of goodwill related to the As at the end of H1 2017, the value of technical provisions was million, PLN 9,501 million more than in H1 2016. Latvia and Estonia; bank’s acquisition in the amount of PLN 1,711 million. PLN 43,785 million, which accounted for 14.8% of liabilities
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 64 65 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Consolidated financial results
• investment contracts. They include PZU Życie products by the declining EUR exchange rate vs. PLN compared to ◦◦ lower premium in the group of accident and other Group and individually continued insurance that do not transfer material insurance risk and do not the rising exchange rate in the corresponding period of the insurance (-7.0%), in particular various financial risks; The insurance result of the group and individually continued satisfy the definition of an insurance contract. They include previous year; • income from investments allocated to the mass insurance insurance segment was in H1 2017 PLN 682 million and was some products with a guaranteed rate of return and some • the PLN 36 million, or 21.4% upswing in acquisition segment by transfer prices fell by 17.1% y/y as compared PLN 45 million (-6.2%) less than in the previous year. The products in the form of a unit-linked insurance product; expenses compared to H1 2016 stemming primarily from to H1 2016, mainly as a result of a declining EUR exchange constituent elements of the result were as follows: • banking activity– reporting according to IFRS – comprising the considerably higher sales growth rate (+34.1% y/y); rate vs. PLN vis-à-vis a strengthening exchange rate in the • the increase in gross written premium by PLN 39 million Pekao , Alior Bank and their’s subsidiaries; • administrative expenses rose PLN 9 million from the corresponding period of the previous year; (+1.2%) was mainly due to the following: • others. They include consolidated companies that are not corresponding period of 2016. Higher expenses were • net insurance claims and benefits rose 14.3%, which ◦◦ attracting more premium income in group health classified in any segment above. recorded mainly in the IT and third party services, which when coupled with net earned premium being up 24.0%, insurance products (new clients in outpatient insurance was related to implementing products dedicated to translates into the loss ratio improving by 5.3 percentage and sales of different options of the medicine product). Corporate insurance corporate clients to be administered and sold in the Everest points. This change resulted mainly from: PZU Życie at the end of Q2 has 1.4 million policies in In H1 2017, the corporate insurance segment (consisting system. This effect was partially offset by a decline in ◦◦ the lower level of claims in the group of insurance for force; of PZU, LINK4 and TUW PZUW) generated an insurance project-related expenses. other losses to property, mostly for subsidized crop ◦◦ growth in group protection insurance (higher average result of PLN 167 million, which is 17.3% less than in the insurance – in the corresponding period of 2016 there premium and average number of riders taken out by corresponding period of the previous year. The level of this were many losses caused by the forces of nature; each insured); segment’s results in H1 2017 was affected mainly by the Insurance result in the corporate segment ◦◦ the improving profitability of the motor TPL insurance ◦◦ up-selling of riders and raising sums insured in following: (PLN million) portfolio following the changes introduced in average individually continued insurance products. • a 22.1% increase in net earned premium combined with price. Effect partially offset by the observed growth in • investment income – including income allocated by transfer a 34.1% increase in gross written premium, both in claims frequency; prices and income on investment products – was PLN 175 (24) (133) comparison to H1 2016. The following movements were ◦◦ the decline in profitability of motor own damage 393 million, increasing 27.5% year on year mainly due observed in sales: insurance (higher average loss amount) and general to the higher income on unit-linked products (principally (36) ◦◦ premium increased in motor insurance offered to leasing (9) (8) liability insurance. employee pension schemes) as a result of better conditions companies and in fleet insurance (mainly motor TPL • acquisition expenses reached PLN 847 million, rising by on the equity market – the WIG index surged up by 17.9% 202 167 insurance) as a consequence of the higher average 15.1% as compared to H1 2016, mainly due to the higher compared to a 3.7% decline in the corresponding period of premium and the number of insurance policies; direct acquisition expense (also on the coattails of the last year. Income allocated by transfer prices remained at
◦◦ sales growth in fire insurance and other property Others growing insurance portfolio). The additional factor that had a stable level;
claims (+70.6% y/y) and other TPL insurance (+15.6% H12016 H12017 a positive effect on acquisition expenses was the fact that, • insurance claims and benefits and the net movement in provisions y/y) as the offshoot of signing several high unit value Insurance result Insurance result according to the requirements of the Insurance Activity Act, other technical provisions totaled PLN 2,648 million (up Investment income Investment change in technical in change Claims,benefits and Acquisition expenses agreements, including enrollment of two large entities Net earned premium the rules for paying consideration to policyholders in group 7.5%). Administrative expenses from the chemical and coal industries in TUW PZUW; contracts were altered – as of 1 April 2016, these expenses This change was driven by the following factors in ◦◦ lower sales in insurance for loans and guarantees – in are treated as administrative expenses. particular: the corresponding period of 2016, a guarantee was Mass insurance • administrative expenses in this segment amounted to ◦◦ higher number of deaths in protection insurance in Q1 extended to a PZU subsidiary, i.e. Alior Bank (the impact In H1 2017, the insurance result in the mass insurance PLN 280 million, or 4.8% less y/y, driven primarily by the compared to last year and the number of claims paid exerted by this premium has been eliminated at the segment was PLN 724 million (up 135.8% compared to the lower expenses in project activity and in current operations. for that reason. This uptick was justified by the higher consolidated level); corresponding period of 2016). The level of the segment’s number of deaths in the overall population of Poland • net claims and benefits surged by PLN 133 million results in H1 2017 was affected by the following: Insurance result in the mass segment (PLN million) at the outset of the year as the data published by the
(+30.3%), which, together with a 22.1% increase in net • a 24.0% increase in net earned premium combined with 874 (47) Central Statistical Office depict; in Q2, the loss ratios (348) earned premium, means that the loss ratio increase by a PLN 913 million (+21.2%) rise in gross written premium returned to those observed in the corresponding period
3.7 p.p. Growth was recorded mainly in the group of in comparison to H1 2016, which was driven by: (111) last year; 14 35 insurance for damage caused by forces of nature and ◦◦ higher motor insurance sales (+30.7% of gross written ◦◦ higher than one year ago growth in technical provisions general liability insurance group – several claims were premium) as an effect of the higher average premium in Employee Pension Plans (PPE, a third pillar retirement 724 reported with a high unit value, including two claims under on the coattails of the gradual price hikes (forming security product) - considerably better than one year 307 inward reinsurance of the PZU Group’s foreign companies. a response to deteriorating results in recent years); ago investment performance coupled with a stable level This effect was partly offset by the decline in claims in ◦◦ higher premium for fire and other damage to property of client contributions to unit-linked fund accounts; other property insurance and improved profitability of the insurance (+10.7% of gross written premium y/y), Others ◦◦ incremental growth in the costs of benefits in health H1 2016 H1 2017 motor insurance portfolio; including PZU DOM household insurance and agricultural insurance as an effect of the rapid expansion of this Insurance result Insurance result Investment income
• income from investments allocated to the corporate insurance despite the extensive competition on the Acquisition expenses contract portfolio; Net earned premium Administrative expenses Administrative insurance segment fell y/y, which was dictated in particular market (chiefly subsidized crop insurance) and in technical provisions Claims, benefits and change
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 66 67 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Consolidated financial results
◦◦ these effects were partially offset by the rate of Insurance result of the group and individually in provisions, predominantly for unit-linked products in ◦◦ management fee up almost PLN 9 million as a result of conversion of long-term contracts into yearly term continued insurance segment (PLN million) the bancassurance channel and to a lesser extent the the higher average net asset value in OFE PZU; agreements in type P group insurance exceeding last same type of products offered within PZU’s own network ◦◦ revenues down by more than PLN 4 million on year’s level. Provisions were released for PLN 25 million, (mostly IKEs). In both cases, this resulted both from an reimbursements from the Indemnity Fund; 102 (185) some PLN 5 million more than in the corresponding 36 increase in customer deposits in unit-linked fund accounts • acquisition and administrative expenses stood at over - (6) 8 period of 2016. and significantly better results of investment activity in the PLN 1 million, having declined by 43.4% from the previous • acquisition expenses in the group and individually reporting period; year. This resulted from OFE’s information activities in 727 continued insurance segment in H1 2017 were PLN 167 682 • acquisition expenses are growing in the segment (by 2016; million, remaining at the same level as last year. The factor PLN 18 million, or 36.7%) to PLN 67 million. This was • administrative expenses hit almost PLN 24 million, i.e. underlying the reduction in direct and indirect acquisition driven mainly by a significantly higher volume of sales of they were up 36.9% from the previous year. This change
expenses was the signing of a new agency agreement Others unit-linked products in the bancassurance channel with resulted predominantly from an increase in expenses due
in the bancassurance channel in Q2 2016 as a result of H1 2016 H1 2017 prepaid commissions and, to a lesser extent, by additional to the payment of contributions to the Indemnity Fund by Insurance result Insurance result
which the fee for performing agency activities involving Investment income expenses resulting from the growing involvement of own almost PLN 7 million; Acquisition expenses Net earned premium Administrative expenses Administrative participation in the administration of protection insurance in technical provisions network in the acquisition of individual protection products; • other operating revenues dropped by nearly PLN 2 million Claims, benefits and change agreements is treated as an administrative expense, in • administrative expenses in the segment were due to last year’s receipt of an incentive fee (PLN 2 million) contrast to the agreement previously in force that treated Individual insurance PLN 30 million, remaining at the same level as the year and the reversal of the provision for bonuses for 2016; it as an acquisition expense. At the same time, growth in In H1 2017, insurance result in the individual life insurance before. acquisition expenses was recorded in health products and segment was PLN 95 million, or 15.9% less than last year. The Result of the pension insurance segment (PLN million) group protection products stemming on one hand from key drivers of the operating result included: Insurance result of the individual insurance segment the rapid expansion of these types of products and on • the increase in gross written premium in comparison with (PLN million) the other hand from high commission brokerage channels the first 6 months of 2016 by PLN 254 million (+47.2%) 5 1 (1) (6) increasing their contribution to revenue. was a result of the following: 173 (429) (1) • administrative expenses were up by PLN 6 million (+2.1%) ◦◦ higher contributions to the unit-linked insurance 253 41 in H1 2017 compared to the corresponding period of accounts offered jointly with Bank Millennium; 39 2016 chiefly on account of the signing of a new agency ◦◦ sales launch of a new unit-linked product with Alior Bank
agreement in the bancassurance channel in Q2 2016 as at the outset of 2017; (18) 0 3 Others Income a result of which the fee for performing agency activities ◦◦ higher contributions to the unit-linked insurance 113 95 expenses H12016 H12017 Administrative
involving participation in the administration of protection accounts offered by PZU Branches, especially IKE Operating result Operating result Investment income Investment Others
insurance agreements is treated as an administrative individual retirement accounts and the Goal for the Acquisition expenses
expense, in contrast to the agreement previously in force Future products; H1 2016 H1 2017 Insurance result Insurance result
that treated it as an acquisition expense. This adverse ◦◦ constantly rising level of premiums on protection Investment income Banking activity Acquisition expenses Net earned premium Administrative expenses Administrative factor was counterbalanced by cost cutting in project- products in endowments and term insurance – sales in technical provisions The banking activity segment in the PZU Group is categorized Claims, benefits and change related activities and in current activity by constantly continue to climb, especially through PZU Branches Pekao and Alior Bank. maintaining cost discipline. • the result in investing activity consists of income allocated using transfer prices and income on investment products. Investments In the first half of 2017 in the segment of banking activity Insurance result, net of the conversion effect on long-term They rose PLN 173 million to PLN 251 million in the Operating income of the investment segment (based on operating profit (not including amortization of intangible assets contracts into renewable contracts in type P group insurance fell individual insurance segment, mostly on account of the external transactions only) stood at PLN 126 million in H1 acquired in transactions Banks takeover) amounted of PLN year on year by PLN 50 million (7.1%) – mainly as a result of the growth in the result on investment products – the effect 2017, up by PLN 527 million from the corresponding period 485 million, which means growth by PLN 268 million compared higher number of deaths compared to last year and the number of higher yields of funds in unit-linked products in the of last year mainly due to improved market conditions on the to the first half of 2016. This increase mainly comes from the of benefits paid for that reason in H1 of this year. This uptick was bancassurance channel and better performance recorded Warsaw Stock Exchange. finalization of the acquisition of Pekao and its consolidation justified by the higher number of deaths in the overall population in the IKE individual retirement account and the structure from June 2017. of Poland at the outset of the year as the data published by the product called World of Profit [Świat Zysków]. Income Pension insurance Central Statistical Office depict. In Q2, the loss ratios returned to allocated by transfer prices remained at a similar level as in In H1 2017, result of the pension insurance segment was the levels observed in the corresponding period of last year. the comparable period of last year; PLN 39 million, down 6% from H1 2016. Major drivers of the • net insurance claims and benefits and movement in operating result included: other net technical provisions were PLN 850 million, i.e. • revenues from commissions and fees, which totaled more increased 101.9% compared to the corresponding period than PLN 61 million, up 8.4% from the previous year. This of 2016. This was caused by significantly higher increases change resulted from the following:
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 68 69 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Consolidated financial results
Result of the banking activity segment (PLN million) by PLN 13.7 billion to PLN 51.7 billion) and equity (an increase increase resulted predominantly from higher commissions The rate of growth in gross written premium in the Baltic by PLN 0.6 billion to PLN 6.4 billion). charged for the handling of bank accounts, commissions on states segment stood at 15.0%; transfers, deposits and withdrawals and commissions related • maintenance of income from investments at PLN 9 million, 896893 (91) (700) In H1 2017, Alior Bank generated PLN 258 million in operating to the granting of loans and borrowings. i.e. the same level as that achieved in the comparable profit (without amortization of intangible assets acquired as period last year; part of the Alior Bank acquisition transaction), representing an In H1 2017, operating expenses were PLN 992 million, up by • increase the value of net claims and benefits. They 318 (82) (73) increase by PLN 41 million compared to H1 2016. At the same PLN 428 million, or 75.9%, from operating expenses incurred amounted to PLN 366 million and were higher by PLN 34 485 time, at the end of June 2017, the PZU Group held 31.36% of in the corresponding period of the previous year. The foremost million (or 10.2%) compared to H1 2016. The loss ratio in 217 the share capital of the bank and Alior Bank contributed reason for the increase in costs in the period under analysis non-life insurance stood at 62.2% and was slightly higher PLN 76 million to the result attributable to the parent company compared to the corresponding period of the previous year is (by 0.3 p.p.) than the ratio generated in the corresponding Others
expenses (without the amortization of intangible assets acquired in Alior the expenses associated with the process of acquisition of a period of the previous year. This year’s milder weather H12016 H12017 Administrative
Operating result Operating result Bank’s acquisition). spun-off portion of Bank BPH. conditions than the year before and a lower frequency of Investmentresult Interest expenses andcommission andcommission Revenue from fee from Revenue Expensesfrom fee losses were offset by several large losses that transpired in Net interest income is the main component of the segment, As a consequence, in H1 2017 the cost-to-income ratio was the region. In life insurance, the value of benefits was PLN representing 76.0% of its revenue. Its increase by 61.1% year 54.6% (51.0% without integration costs) compared to 47.7% 20 million, up PLN 2 million compared to H1 of last year, in Pekao on year was a consequence of both the acquisition of a spun- in H1 2016. particular due to higher benefit disbursements; As at the end of June 2017, PZU held a 20.00% equity off portion of Bank BPH and organic growth in the volume • higher acquisition expenses. They segment’s expenditures stake in Pekao SA. Since 7 June 2017, Pekao has been fully of loans granted to clients coupled with the accompanying The level of operating profit generated by Alior Bank was also for this purpose were at PLN 130 million, up 7.4% from consolidated and from that date the result of the bank increase in client deposits. As a result, the size of the net significantly affected by tax on financial assets. In H1 2017, the corresponding period of the previous year. At the same contributed to the banking activity segment. client loan portfolio grew 43.8% year on year and deposits the resulting tax burden was PLN 99 million. time, the acquisition expense ratio calculated based on from non-financial clients rose 36.1%. A favorable impact on net earned premium declined 0.5 p.p. compared to the In H1 2016, Pekao generated PLN 227 million in operating the level of generated interest income was also exerted by the Baltic States first half of the previous year as a result of an increase profit (without amortization of intangible assets acquired as Bank’s conduct of an adequate pricing policy both with respect As part of its Baltic operations, the PZU Group offers life and in the portfolio share of motor insurance entailing lower part of the Pekao acquisition transaction). At the same time, to deposit products and credit products, in an environment of non-life insurance products. Non-life insurance products are commission liabilities; taking into consideration the 20.00% equity stake held by low interest rates. offered by entities acquired in 2014: Lietuvos Draudimas in • lower administrative expenses. They amounted to PLN the PZU Group in the bank, in the same period of this year, Lithuania, AAS Balta in Latvia and the Estonian branch of 55 million. For the sake of comparison, in H1 2016 they Pekao contributed PLN 45 million to the result attributable to In H1 2017, Alior Bank’s profitability, as measured by the net Lietuvos Draudimas. Life insurance is sold by UAB PZU Lietuva reached PLN 61 million. The decline in expenses drove a the parent company (without amortization of intangible assets interest margin, remained high at 4.8% and was 62 bps higher Gyvybes Draudimas. decrease in the administrative expense ratio which stood acquired in the Pekao S.A. acquisition transaction). than the interest margin recorded in H1 2016. The increase at 9.4%, down 2.1 p.p. relative to the same period of the in margin was driven, among other factors, by shifting the As at the end of June 2017, the share in the Lithuanian previous year. The lowering of administrative expenses was Alior Bank asset composition involving a decrease in the share of assets non-life insurance market was 29.4%, the share in the life possible due to the maintenance of cost discipline, notably As at the end of June 2017, PZU along with its subsidiaries available for sale in Alior Bank’s total assets from 18.1% in insurance market was 6.0% and the share in the Estonian in the IT area. held a 31.36% equity stake in Alior Bank. H1 2016 to 10.5% in the corresponding period of 2017 and non-life insurance market was 15.4%. Meanwhile, the share the continued pursuit of an effective pricing policy. At the in the Latvian non-life insurance market was 26.6% as at the As at the end of H1 2017, Alior Bank’s total balance sheet same time, the average interest rate on loans went up 12 bps end of March 2017. Insurance result Baltic states (PLN million) value surged 31.5% year on year to PLN 61.8 billion. In the to 6.18%. In the same period, the average cost of deposits same period, net credit receivables from clients increased decreased to 1.18%, i.e. by 0.81 percentage points. In H1 2017, the PZU Group’s business in the Baltic states 53 (34) - 43.8% to PLN 49.1 billion, while liabilities to clients went up generated an insurance result of PLN 42 million compared to 36.1% to PLN 51.7 billion. Compared to yearend 2016, the Net fee and commission income grew 43.8% to PLN 235 PLN 25 million in the corresponding period of the previous (9) 6 1 total balance sheet value increased 1%, net credit receivables million. This result was generated as the difference between year. from clients rose 6.1% and liabilities to clients increased 0.6%. commission income of PLN 404 million (up 46.9% year on 42 year) and commission cost of PLN 169 million (up 51.4% y/y). This result was driven by the following factors: 25 The main items generating the increase in the total balance • increase in gross written premium. It amounted to PLN 673 sheet value were, on the assets side: receivables from clients The main component of income from fees and commissions million, up PLN 88 million compared to the first half of the Others (a y/y increase by PLN 14.9 billion to PLN 49.1 billion) and are commissions charged on loans, accounts, transfers, previous year. Non-life insurance recorded an increase by H12017 H12016 Insurance result
available for sale financial assets (down by PLN 2.0 billion y/y deposits, withdrawals, borrowings, etc. In H1 2017, they PLN 84 million, in particular in motor insurance, driven by Insurance result Investment income Investment Net earned premium to PLN 6.5 billion), while the following items generated the amounted to PLN 205 million and represented 50.8% of an upturn in insurance rates in the region. In life insurance, Acquisition expenses Net claims and benefits and claims Net Administrative expenses increase on the liabilities and equity side: client deposits (up income from fees and commissions. Their year-on-year written premium increased by PLN 4 million (or 16.7%).
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Ukraine Insurance result Ukraine (PLN million) range of products offered in own channel (the absence of 5.7 Profitability and operational efficiency As part of the Ukrainian operations, the PZU Group offers non- written premium this year does not generate any growth ratios life insurance and life insurance products through the following 9 (4) in technical provisions, while the value of benefits paid companies: PZU Ukraine and PZU Ukraine Life. (1) (5) to persons reaching the endowment age is offset by a Profitability ratios
(2) commensurate movement in technical provisions); In H1 2017, the PZU Group generated a return on equity 1 The Ukrainian non-life insurance market share at the end of • the decrease in acquisition expenses vis-à-vis the previous of 22.1%. ROE was 11.4 p.p. higher than the year before, 9 7 March 2017 was 2.8%, while the life insurance market share year was an effect of the lack of new sales and declining primarily due to better results generated on investment was 10.0%. value of assets in unit-linked products in the bancassurance activity stemming from the improved market situation on the Others channel (a portion of the bank’s fee depends on the level of Warsaw Stock Exchange. H12017 The Ukraine segment closed H1 2017 with an insurance result H12016 assets) and additionally also a declining involvement of the Insurance result Insurance result of PLN 7 million, compared to PLN 9 million in H1 2016. income Investment company’s own network in selling short-term investment Operational efficiency ratios Net earned premium Acquisition expenses Net claims and benefits and claims Net Administrative expenses endowment products following the withdrawal of products The PZU Group’s combined ratio has been maintained in The change in the result generated by the segment was of this type from the offering in June 2016; recent years at a level ensuring a high profitability of business. caused by the following factors: • administrative expenses totaled PLN 3 million, down 40.0% In H1 2017, this ratio reached 87.2% and was lower than the • increase in gross written premium. It amounted to Investment contracts from the corresponding period of 2016 as a result of a year before due to, among other factors, a lower loss ratio in PLN 115 million, up PLN 9 million (or 8.5%) compared to The results of the investment contracts segment are presented decrease in the portfolio of agreements in this segment. agricultural insurance. the first half of the previous year. In non-life insurance, according to Polish Accounting Standards, which means that the increase in written premium was PLN 7 million, they include, among other things, gross written premium, Operating result of the investment contracts segment Return on assets for H1 2017 on banking activity amounted driven mainly by growth in motor insurance sales. In life claims paid and movement in technical provisions. These (PLN million) 1.0% and 0.6% for Pekao and Alior bank respectively. insurance, written premium increased by PLN 2 million, categories are no longer applied at the consolidated level mainly in protection insurance; where investment contracts are recognized in accordance with (40) 2 • lower investment income. It reached PLN 7 million and IAS 39. 18 1 - - - was 36.4% lower than in the corresponding period of the
previous year, due predominantly to lower income from On investment contracts, i.e. PZU Życie’s products that do 19 investments at a client’s risk; not generate any significant insurance risk and do not fulfill • increase in net claims and benefits. Their value was the definition of an insurance contract (such as certain PLN 26 million, up PLN 1 million (or 4.0%) compared to guaranteed-yield products and certain unit-linked products), in last year. In non-life insurance, net claims and benefits H1 2017 the PZU Group’s operating result was PLN 0 million – Others increased by PLN 3 million as a result of the establishment the same as the year before. H12016 H12017 of provisions for large losses which transpired in 2017. In Operating result Operating result Investment income Investment Net earned premium life insurance, the value of benefits decreased due to the The segment’s performance during the first 6 months of 2017 Acquisition expenses
reversal of certain provisions for client risk; was driven by the following factors: Administrative expenses
• higher acquisition expenses. They stood at PLN 32 million • gross written premium generated on investment contracts provisions technical other in Net claims, benefits and and change benefits claims, Net compared to PLN 27 million in H1 2016. The largest during H1 2017 decreased by PLN 40 million (-65.6%) increase (by PLN 3 million) was recorded in life insurance, compared to the corresponding period in 2016 to PLN where growth in sales took place in the bancassurance 21 million. The changes in gross written premium were 1 January – 1 January – 1 January – channel which features higher commission liabilities. caused mainly by the withdrawal of short-term endowment Operational efficiency ratios 30 June 2017 30 June 2016 30 June 2015
Growth in non-life insurance was driven mainly by insurance products (term deposits in the form of insurance Return on equity (ROE) – attributable to the parent amendments to reinsurance agreements which reduced the products) from own channel offering in June 2016; company 22.1% 10.7% 21.1% (annualized net profit/average equity) x 100% reinsurer’s share in acquisition expenses; • result on investing activity in the investment contracts • increase in administrative expenses. They stood at segment improved by PLN 19 million vis-à-vis the previous Return on equity (ROE) – consolidated 13.4% 10.3% 21.1% PLN 12 million. For the sake of comparison, in H1 2016 the year, mainly as a result of a better rate of return on (annualized net profit/average equity) x 100% segment’s administrative expenses amounted to individual pension security accounts (IKZEs) and unit-linked Return on assets (ROA) 1.6% 2.8% 4.0% PLN 10 million. The increase in administrative expenses funds in the bancassurance channel. (annualized net profit/average assets) x 100% was associated with indexation of salaries and higher real • the cost of insurance claims and benefits together with estate maintenance expenses, among other contributing the movement in other net technical provisions decreased factors. The segment’s administrative expense ratio went PLN 18 million to PLN 38 million due to the withdrawal, up 0.3 p.p. to 20.3%. in mid-2016, of short-term endowment products from the
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 72 73 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Consolidated financial results
1 January - 1 January - 1 January - Operational efficiency ratios 30 June 2017 30 June 2016 30 June 2015
Gross claims and benefits ratio (simple) (gross claims 1. 63.6% 63.2% 66.7% and benefits/gross written premium) x 100%
Net claims and benefits ratio (net claims and benefits/ 2. 69.7% 68.6% 68.7% net earned premium) x 100%
Operating expense ratio in the insurance segments 3. 21.1% 22.3% 22.5% (insurance activity expenses/net earned premium) x 100%
Acquisition expense ratio in the insurance segments 4. 14.0% 14.1% 13.6% (acquisition expenses/net earned premium)x 100%
Administrative expense ratio in the insurance 5. segments (administrative expenses/net earned premium) 7.1% 8.2% 9.0% x 100%
Combined ratio in non-life insurance 6. (net claims and benefits + insurance activity expenses) / 87.2% 93.4% 91.3% net earned premium x 100%
Operating profit margin in life insurance (operating 7. 18.3% 21.2% 20.1% profit/gross written premium) x 100%
Return on assets in Pekao* 8. 1.0% - - (net profit/average total assets) x 100%
Return on assets in Alior Bank 9. 0.6% 0.7% - (net profit/average total assets) x 100%
* data for H1 2017
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Risk management
We devote considerable time to continue developing sophisticated risk management procedures. They are of fundamental importance to us as at the end of the day the goal is for our customers to have safety and peace of mind and for our results to be predictable.
In chapter: 1. Objective of risk management 2. Risk management system 3. Risk appetite 4. Risk management process 5. PZU Group’s risk profile 6. Reinsurance operations 7. Capital management
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6.1 Objective of risk management parent) regarding the organization of the risk management The fourth decision-making level pertains to operational The operational objective of the PZU Group Risk Committee system in insurance sector and banking sector subsidiaries. measures and is divided into three lines of defense: is to coordinate and supervise activities related to the Group’s Risk management in the PZU Group aims to do the following: • the first line of defense – entails ongoing risk management risk management system and processes. • enhance the Group’s value through active and deliberate The management boards of PZU Group entities are responsible at the business unit and organizational unit level and management of the extent of risk taken; for fulfilling their own duties in accordance with the generally decision-making as part of the risk management process; • prevent the acceptance of risk at a level that could pose applicable provisions of national and international law. In • the second line of defense – entails risk management 6.3 Risk appetite a threat to the PZU Group’s financial stability. particular, they are responsible for the implementation of an by specialized cells responsible for risk identification, adequate and effective risk management system. monitoring and reporting and controlling the limits; The risk appetite in the PZU Group has been defined as the Risk management in the Group is based on analyzing risk • the third line of defense – entails internal audit that magnitude of risk undertaken to attain its business objectives, in all processes and units and it is an integral part of the Supervision over the risk management systems in each conducts independent audits of the elements of the risk where its measure is the level of potential financial losses, the management process. regulated entity is exercised by supervisory boards. PZU management system as well as control activities embedded decline in asset value or the growth in the amount of liabilities designates its representatives to its subsidiaries, including in operations. within one year. The main elements of the integrated risk management Pekao and Alior Bank. system are aligned to one another in all of the PZU Group’s The PZU Group Risk Committee, established in 2016, provides Risk appetite defines the maximum level of permissible risk insurance companies. They have been implemented to ensure support (to subsidiaries’ supervisory boards and management while setting limits and restrictions for the various partial the execution of the various companies’ strategic plans and 6.2 Risk management system boards) to implement an effective risk management system risks and the level above which remedial actions are taken to the overall Group’s business objectives. Among others, they coherent for the entire PZU Group. curtail further risk expansion. include the following: The risk management system in the PZU Group is based on • systems of limits and limitations on the acceptable level of the following: risk, including the level of risk appetite; • organizational structure – comprising a split of duties The risk management process consists of the following stages: • processes involving the identification, measurement and and tasks performed by statutory bodies, committees assessment, monitoring and controlling, reporting and and individual organizational units and cells in the risk Identification management measures pertaining to various risks; management process; Begins with the proposal to commence the creation of an insurance product, acquire a financial instrument, change the • risk management organizational structure in which the • risk management process, including risk identification, operating process, as well upon the occurrence of any other event which potentially results in a risk. The identification process management boards and supervisory boards of the measurement and assessment, monitoring and control takes place until the expiry of the liabilities, receivables or activities related to the given risk. The identification of market risk companies and dedicated committees play a crucial role. methods, risk reporting and undertaking management involves recognising the actual and potential sources of such risk which are then identified as to their relevance. actions. Entities from other financial market sectors are obligated to apply the standards applicable to a given sector. The adopted The organizational structure of the risk management system Risk measurement and assessment internal regulations specify among others: that is identical across the PZU Group and the PZU Group’s Risk measurement and assessment are performed depending on the characteristics of the given risk type and the level o its • processes, methods and procedures facilitating risk various insurance entities has four decision-making levels. relevance. The risk assessment is performed by specialised units. In every company, the risk unit is responsible for development measurement and management; of risk assessment tools and risk assessment process to the extent which specifies risk appetite, risk profile and risk tolerance • split of duties in the risk management process; The first three entail the following: levels. • scope and conditions and the frequency of risk • the Supervisory Board that supervises the risk management management reporting. process and assesses its adequacy and effectiveness as part of its decision-making powers defined in a given Risk monitoring and control PZU exercises supervision over the Group’s risk management company’s articles of association and the Supervisory Board This involves ongoing reviews of any variances from the assumed parameters, namely limits, thresholds, plans, values from the system on the basis of cooperation agreements entered bylaws and through the appointed Audit Committee; previous period, recommendations and guidelines issued. into with other PZU Group entities and the information • the Management Board that organizes the risk provided thereunder. It manages risk at the Group level management system and ensures that it operates by on an aggregate basis, especially with respect to capital adopting strategies and policies and defining the appetite Reporting requirements. for risk, the risk profile and tolerance for individual Allows efficient risk communication and supports risk management at various decision-making levels. categories of risk; In addition, the PZU Group has processes to ensure the • Committees that make decisions pertaining to mitigation effectiveness of risk management at the PZU Group level. of individual risks within the frameworks outlined by the Management actions The risk management rules applicable to the PZU Group’s appetite for risk. The committees adopt the procedures and These activities encompass among others risk mitigation, risk transfer, risk avoidance, specifying risk appetite, acceptance subsidiaries include a recommendation issued by PZU (the methodologies for mitigating various risks and they accept of risk tolerance levels, as well as tools which facilitate such activities, i.e. thresholds, reinsurance plans and reviews of limits to mitigate the various types of risk. underwriting policy.
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The process of determining the risk appetite and risk limits 6.4 Risk management process ongoing application. The PZU Group dedicated personnel • analyzing the general / specific terms and conditions of for each risk category consistent with the Group’s process has cooperates with the Management Boards of companies and insurance or other model agreements with respect to the been implemented in all the insurance companies in the PZU The following two levels have been distinguished in the risk managers of such areas as finance, risk, actuarial services, actuarial risk being undertaken on their basis; Group. The management board of each company determines management process: reinsurance, investments and compliance on the basis of • recognizing the potential risks related to a given product to the risk appetite, risk profile and tolerance limits reflecting its • the PZU Group level – ensuring that the Group attains pertinent cooperation agreements; measure and monitor them at a later time; strategic plans and the objectives of the entire PZU Group. its business objectives in a safe manner appropriate to • the entity level – ensuring that the PZU Group entity attains • analyzing the impact exerted by the introduction of new This approach ensures the adequacy and effectiveness of the fit the extent of the risk incurred. Monitored at this level its business objectives in a safe manner appropriate to fit insurance products on the Company’s capital requirements risk management system in the PZU Group and prevents the are the limits and risks specific to the PZU Group such as: the extent of the risk incurred by that entity. Monitored at and risk margin computed using the standard formula; acceptance of risk levels that could jeopardize the financial catastrophic risk, financial risk, counterparty risk and risk this level are the limits and risk categories specific to the • verifying and validating modifications to insurance stability of individual companies or the entire PZU Group. The concentration. The PZU Group provides support for the company and, as part of the integrated risk management products; determination of the appropriate level of risk in each company implementation of an integrated risk management system, system, implemented are the mechanisms, standards • assessing actuarial risk through the prism of similar existing is the Management Board’s responsibility, whereas a review of including the introduction of compatible mechanisms, and organization of an efficient operation of the internal insurance products; the risk appetite values is conducted once a year by the unit standards and organization of an efficient operation of control system (with particular emphasis on the compliance • monitoring insurance products in the Company’s portfolio; responsible for risk, with all actions being coordinated at the the internal control system (with particular emphasis on function), the risk management system (in particular in the • analyzing the policy of underwriting, tariffs, technical PZU Group level. the compliance function), the risk management system reinsurance area) and the security management system. provisions and reinsurance and the claims and benefits (in particular in the reinsurance area) and the security handling process. management system in the PZU Group, and monitors their 6.5 PZU Group’s risk profile Assessing actuarial risk entails recognizing the degree of the threat or the group of threats determining the possibility of Diagram of the organizational structure for the risk management system The major risks to which the PZU Group is exposed include the a loss emerging and analyzing the elements of that risk in following: actuarial risk, market risk, credit risk, concentration a manner enabling one to make a decision to accept that The Supervisory Board, which SUPERVISORY risk, operational risk and compliance risk. The major risks risk to be insured and for the Company to incur liability. The supervises the risk management BOARD process and assesses its adequacy associated with the operation of banking sector entities purpose of underwriting is to assess the future loss ratio and and effectiveness as part of its AUDIT COMMITTEE decision-making powers defined include the following risks: credit risk, operational risk and curtail adverse selection. Assessing actuarial risk also involves in the Company’s By-laws and the Supervisory Board rules and market risk (involving interest rate risk, FX risk and commodity measures to reinsure the largest risks posing the greatest regulations. price risk). The overall risk of the banking sector accounts for threat. approximately 28% of the PZU Group’s total risk, where the The Management Board, which MANAGEMENT organizes the risk management system BOARD largest contribution is in credit risk. The measurement of actuarial risk is performed in particular and ensures its functionality through approving the Strategy and policies and using: specifying risk appetite defining the risk profile and tolerance for individual Actuarial risk • analyzing selected ratios; categories of risk. This is the possibility of incurring a loss or unfavorable • scenario method – analyzing the loss of value caused by COMMITTEES The Committees, which make decisions to reduce individual risks to the levels movement in the value of liabilities that may ensure from the implemented change in risk factors; defined by the appetite for risk. The Investment Investment Risk The Risk The Asset- Committees implement the procedures the executed insurance agreements and insurance guarantee • factor method – simplified version of the scenario method Committee* Committee* Committee of Liability Risk and methodologies for mitigating the Committee agreements in connection with improper assumptions reduced to a single scenario for a single risk factor; PZU Group individual risks and accept individual (ALCO) risk limits. regarding the measurement of premiums and establishment of • statistical data; technical provisions. • exposure and sensitivity measures; • expert knowledge of the company’s employees.
The second line Risk identification commences with a proposal to start The first line of defence The third line of defence of defence developing an insurance product, buying a financial Monitoring and controlling actuarial risk involves the regular instrument, modifying an operating process and also with the analysis of the level of risk and determining the degree of
Risk management moment when some other event occurs that may potentially utilization of the established borderline values of risk tolerance Organizational units Compliance Internal audit Safety lead to the emergence of risk in the Company and it is in and the limits set forth in the Risk Management Strategy in play until the time when the related liabilities expire. The the PZU Group. identification of actuarial risk is performed, among others, as Specialized units – risk Independent audits On-going risk identification, measurement of the risk management management follows: and assessment, monitoring system elements and reporting • analyzing the general terms and conditions of insurance with respect to the risk being undertaken and compliance * At the end of June 2017 the Credit Risk Committee’s powers were divided between the Investment Risk Committee and the Investment Committee. The powers to set with the generally binding legal regulations; the market risk limits were shifted to the Investment Risk Committee..
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Reporting aims to engage in effective communication process of managing the other sub-categories of market risk When measuring market risk, the following stages, in • credit risk in financial insurance. regarding actuarial risk and supports management of actuarial and has been described in a subsequent section (Market particular, are distinguished: risk at various decision-making levels from an employee to and concentration risk) along with the process for managing • collecting information regarding assets and liabilities Concentration risk is the risk of a loss resulting from the the supervisory board. The frequency of each report and the counterparty insolvency risk. generating market risk; absence of diversification of a portfolio of assets or from scope of information provided are tailored to the information • computing the value of the risk. a significant exposure to the risk of default on a liability by needs of each decision-making level. The market risk in the PZU Group originates from three major a single issuer of securities or a group of related issuers. sources: Risk is measured: The management actions contemplated in the actuarial risk • operations associated with asset and liability matching • for instruments’ exposure and sensitivity measures; The credit risk and concentration risk management process management process are performed in particular by doing the (ALM portfolio); • using a partial internal model. consists of the following stages: following: • operations associated with active allocation, i.e. designating • identification; • defining the level of tolerance for actuarial risk and the optimum medium-term asset structure (AA portfolios); Monitoring and control of market risk involves an analysis of • measurement and assessment; monitoring it; • banking operations (Pekao, Alior Bank) – in conjunction the level of risk and of the utilization of the designated limits. • monitoring and control; • business decisions and sales plans; with them the PZU Group has materially increased its • reporting; • calculating and monitoring the adequacy of technical exposure to interest rate and credit risk. Reporting involves communicating the level of market risk, • management actions. provisions; the effects of monitoring and control to various decision- • tariff strategy and monitoring current estimates and A number of documents approved by supervisory boards, making levels. The frequency of each report and the scope of Credit risk and concentration risk are identified at the stage assessing the adequacy of the premium; management boards and dedicated committees govern information provided are tailored to the information needs of of making a decision on an investment in a new type of • process of assessment, valuation and acceptance of investment activity in the PZU Group’s companies. each decision-making level. financial instrument or on accepting credit exposure to a new actuarial risk; entity. Such identification involves an analysis of whether the • application of tools to mitigate actuarial risk, including in Market risk identification involves recognizing the actual Management actions in respect of market risk involve in contemplated investment entails credit risk or concentration particular reinsurance and prevention. and potential sources of this risk. The process of identifying particular: risk, what its level depends on and what its volatility over market risk associated with assets commences at the time • execution of transactions serving the purpose of mitigation time is. Both actual and potential sources of credit risk and Moreover, to mitigate the actuarial risk inherent in current of making a decision to start entering into transactions on of market risk, i.e. selling a financial instrument, closing concentration risk should be identified. operations the following actions in particular are undertaken: a given type of financial instruments. Units that make a a position on a derivative, purchasing a derivative to hedge • the scopes of liability are defined in the general / specific decision to start entering into transactions on a given type of a position; Risk assessment consists of estimating the probability of terms and conditions of insurance or other model financial instruments draw up a description of the instrument • diversification of the asset portfolio, in particular having realization of a specific risk and estimating the potential agreements in financial insurance; containing, in particular, a description of the risk factors. They regard for the category of market risk, the maturities of impact of its realization on the Company’s financial standing. • the exclusions of liability are defined in the general / convey this description to the unit responsible for risk that instruments, the concentration of exposure in a single specific terms and conditions of insurance or other model identifies and assesses market risk on that basis. entity, geographic concentration; Credit risk is measured using: agreements in financial insurance; • application of market risk limitations and limits. • measures of exposure (gross and net credit exposure and • reinsurance actions; The process of identifying the market risk associated with maturity-weighted net credit exposure); • adequate tariff policy; insurance liabilities commences with the process of developing The application of limits is the primary management tool to • standard formula. • application of the appropriate methodology for computing an insurance product and involves an identification of the maintain a risk position within the acceptable level of risk provisions; interdependencies between the magnitude of that product’s tolerance. The structure of limits for the various categories Concentration risk for a single entity is calculated using the • relevant underwriting procedure; financial flows and market risk factors. The identified of market risk and also for the various organizational units is standard formula. • relevant benefits handling procedure; market risks are subject to assessment using the criterion of established by dedicated committees in such a manner that • decisions and sales plans; materiality, i.e. does the materialization of risk entail a loss the limits are consistent with risk tolerance. A measure of total concentration risk is the sum of • prevention. capable of affecting its financial condition. concentration risks for all entities treated separately. In the Credit and concentration risk case of related parties, concentration risk is calculated for all Market risk Market risk is measured using the following risk measures: Credit risk is the risk of a loss or an unfavorable change related parties jointly. This is the risk of a loss or unfavorable movement in financial • VaR, value at risk, forming a measure of risk quantifying in the financial standing resulting from fluctuations in the position stemming directly or indirectly from fluctuations in a potential economic loss that will not be exceeded within trustworthiness and creditworthiness of the issuers of Monitoring and control of credit risk and concentration risk the level and variance of the market prices for assets, credit a period of one year under normal conditions with a securities, counterparties and all debtors, materializing by the involves an analysis of the current risk level, assessment of spread, value of liabilities and financial instruments. probability of 99.5%; counterparty’s default on a liability or an increase in credit creditworthiness and calculation of the degree of utilization • standard formula; spread. The following risk categories are distinguished in of existing limits. Such monitoring is performed, without The process of managing the credit spread risk and • exposure and sensitivity measures; terms of credit risk: limitation, on a daily and monthly basis. concentration risk has a different set of traits from the • cumulative monthly loss. • credit spread risk; • counterparty default risk;
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The following are subject to monitoring: a loan or changing the terms of a loan, and in monitoring the • estimating the effects of potential operational risk incidents performed for each internal process, in accordance with • exposures to financial insurance; quality of the loan portfolio. that may occur in the business. the distribution of responsibility for the reporting process. • exposures to reinsurance; Moreover, compliance units identify compliance risk on the • exposure limits and VaR limits. Credit risk is measured using three parameters: PD, LGD Monitoring and control of operational risk is performed mainly basis of information arising, for instance, from the legislative and EAD. PD is a parameter which refers to the probability through an established system of operational risk indicators process, from notifications to the register of conflicts of Reporting involves communicating the levels of credit risk and of default, i.e. the borrower’s failure to fulfill the contractual enabling assessment of changes in the level of operational risk interest, gifts and irregularities, and from inquiries received by concentration risk and the effects of monitoring and control to terms within a one-year horizon, and may pertain to a specific over time and assessment of factors that affect the level of the compliance units. various decision-making levels. The frequency of each report entity or a specific product. LGD (loss given default) is this risk in the business. and the scope of information provided are tailored to the a parameter which indicates the estimated amount of The systemic activities include, in particular: information needs of each decision-making level. a loss that will be suffered for each transaction of a credit Reporting involves communicating the level of operational risk • development and implementation of systemic assumptions nature as at the date of such default. EAD (exposure at and the effects of monitoring and control to various decision- and internal regulations consistent with those assumptions; Management actions in respect of credit risk and concentration default) is a parameter which reflects the estimated value making levels. The frequency of each report and the scope of • implementation, in PZU Group entities, of PZU’s risk involve in particular: of credit exposure as at a specific date. The risk parameters information provided are tailored to the information needs of recommended solutions for the application of a consistent • establishment of limits on exposure to a single entity, applied in the rating models serve the purpose of calculating each decision-making level. compliance function and a systemic approach to compliance a group of entities, a sector or a state; the expected loss by virtue of credit risk. The value of the risk management; • diversification of the portfolio of assets and financial expected loss is one of the most significant assessment criteria Management actions involving reactions to any identified and • monitoring of the compliance risk management process, insurance; taken into account by decision-makers in the credit process. assessed operational risks involve, in particular: including in particular: performing compliance risk analyses, • acceptance of collateral; • risk mitigation by taking actions aimed at minimizing risks, reviewing the degree of implementation of guidelines • execution of transactions serving the purpose of mitigation Alior for instance by strengthening the internal control system; provided by external entities in respect of compliance risk of credit risk, i.e. selling a financial instrument, closing The Bank sells its credit products in accordance with loan • risk transfer – in particular by entering into insurance management; a derivative, purchasing a hedging derivative, restructuring granting methodologies appropriate for a given client agreements; • consulting on and issuing interpretations and guidelines for a debt; segment and type of product. The assessment of a client’s • risk avoidance by refraining from undertaking or the application of the adopted standards of conduct and • reinsurance of the financial insurance portfolio. creditworthiness preceding a decision on granting a credit withdrawing from a particular type of business in cases compliance risk management; product to the client is performed using a system devised to where too high a level of operational risk is ascertained • planning and delivery of training and internal The structure of credit risk limits and concentration risk limits support the credit process, scoring or rating tools, external and where the costs involved in risk mitigation are communication in the field of compliance. for each issuer is established by a dedicated committee information (for instance, CBD DZ, CBD BR, BIK and BIG unreasonable; • preparation of compliance risk reports and information. in such a manner that the limits are consistent with the databases) and the Bank’s internal databases. The granting of • risk acceptance – approval of consequences of a possible adopted risk tolerance and in such a manner that they enable credit products is performed in accordance with the operating realization of operational risk unless they threaten to In turn, activities related to ongoing risk management, carried to minimize the risk of ‘infection’ between concentrated procedures adopted by the Bank, the purpose of which is to exceed the operational risk tolerance level. out by the heads of organizational units or cells, include in exposures. indicate the proper activities to be carried out in the credit particular: process, the Bank’s units responsible for those activities and The business continuity plans in PZU Group companies are • identification and evaluation of compliance risk in the Credit risk in banks the tools to be applied. kept up to date and tested regularly. supervised area; Credit risk is one of the basic risks inherent in the banking • measurement of compliance risk; business. The share of loans and borrowings in a bank’s Operational risk Compliance risk • determining the instruments to provide protection and limit balance sheet makes it an issue of key importance for the Operational risk is the risk of suffering a loss resulting from Compliance risk is the risk that PZU Group entities or persons the number and scale of irregularities; bank’s financial performance to maintain this share at a safe improper or erroneous internal processes, human activities, related to PZU Group entities may fail to adhere to or violate • reporting any threats and incidents in the compliance risk level. The credit risk management process is centralized and is system failures or external events. the applicable provisions of law, internal regulations or area to the compliance unit; performed predominantly by Risk Management units existing standards of conduct, including ethical standards, adopted • taking mitigation activities; in the Head Office and in local structures. Operational risk is identified in particular by: by PZU Group entities, which will or may result in the PZU • ongoing monitoring of compliance risk. • accumulation and analysis of information on operational Group or persons acting on its behalf suffering legal sanctions, Pekao risk incidents; financial losses or a loss of reputation or trustworthiness. Moreover, the Compliance Department at PZU level makes For the purposes of credit risk management, the Bank makes • self-assessment of operational risk; efforts aimed at ensuring consistent and uniform standards of use of internal rating models depending on the client segment • scenario analyses. The compliance risk management process in PZU Group compliance solutions in all PZU Group entities and monitors and/or type of exposure. The rating process constitutes an entities covers both systemic activities carried out by the compliance risk throughout the PZU Group. important component of a client’s credit risk assessment and Operational risk is assessed and measured by: compliance unit and ongoing compliance risk management of the assessment of risks related to a specific transaction, • calculating the effects of the occurrence of operational risk activities which are the responsibility of the heads of The provision of full information on compliance risk in each acting as an initial step in the credit decision-making process, incidents; organizational units or cells in PZU Group entities. The member of the Group is the responsibility of compliance units. when the subject matter of the decision is either granting identification and assessment of the compliance risk are These units are required to assess and measure compliance
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risk and take appropriate remedial actions aimed at mitigating Compliance risk is assessed and measured by calculating the As part of efforts aimed at reducing compliance risk at system Reinsurance treaties in PZU the likelihood of realization of this risk. effects of risk materialization of the following types: level and day-to-day level, the following risk mitigation actions On the base of the reinsurance treaties it has entered into PZU • financial, resulting, without limitation, from administrative are undertaken: limits its risk on catastrophic losses (e.g. floods, hurricanes) On an ongoing basis, PZU Group entities provide information penalties, court judgments, decisions issued by UOKiK, • continuous implementation of an effective compliance among others through a catastrophic non-proportional excess on compliance risk to the Compliance Department at PZU and contractual penalties and indemnities; function as a key function in the management system of of loss treaty and against the consequences of large single PZU Życie. In turn, the tasks of the Compliance Department • intangible, pertaining to a loss of reputation, including PZU Group entities; losses under non-proportional reinsurance treaties to protect include the following: damage to the PZU Group’s image and brand. • participation in consultations with legislative and regulatory its portfolios of property, technical, marine, air, third party • analysis of monthly and quarterly reports received from authorities (supervised entities within the PZU Group) liability and third party liability motor insurance. PZU’s risk is compliance units of each member of the Group; Compliance risk is monitored, in particular, through: at the stage of development of the regulations (social also limited by reinsuring the financial insurance portfolio. • assessment of the impact of compliance risk on the PZU • analysis of reports obtained from the heads of consultations); Group as a whole; organizational units and cells; • delegating representatives of the PZU Group’s supervised Reinsurance premium under obligatory treaties in PZU • analysis of the implementation of recommendations issued • monitoring of regulatory requirements and adaptation of entities to participate in the work of various commissions of according to the Standard & Poor’s / AM Best rating to specific entities pertaining to the fulfillment of the the business to the changing legal environment of PZU regulatory authorities; compliance function; Group entities; • execution of implementation projects for new regulations; • provision of support to compliance units in various PZU • participation in legislative work aimed at amending the • training of staff in PZU Group entities in new regulations, 47% Group entities in assessing their own compliance risk; existing laws of general application; standards of conduct and recommended management AA • preparation of reports for the PZU Management Board and • performing diverse activities in industry organizations; actions; Supervisory Board. • coordination of external control processes; • issuing opinions on internal regulations of PZU Group • coordination of the fulfillment of reporting duties imposed entities and recommending possible amendments to Compliance risk includes, in particular, the risk that the by the stock exchange (in respect of PZU) and by statute; ensure compliance with the applicable laws and accepted operations performed by PZU Group entities will be out of line • increasing the level of knowledge among PZU Group staff standards of conduct; with the changing legal environment. This risk may materialize in the field of competition law and consumer protection, • verifying procedures and processes in the context of 53% as a result of the absence of clear and unambiguous laws tailored to the specific business areas; their compliance with the applicable laws and accepted A or their non-existence manifesting itself in the form of ‘legal • monitoring of anti-monopoly jurisprudence and proceedings standards of conduct; loopholes’. This may cause irregularities in the PZU Group’s conducted by the President of UOKiK; • anticipating adjustment of documentation to upcoming business, which may then lead to an increase in costs (for • reviews of the implementation of recommendations issued changes in legal requirements; instance, due to the imposition of financial penalties) and an by the PZU Group’s compliance unit; • systemic supervision exercised by PZU over the execution Munich Re, Hannover Re and Lloyd’s are among the major increase in the level of reputation risk, thus in a drop of the • ensuring a consistent implementation of the compliance of the compliance function in PZU Group entities. partners extending obligatory reinsurance cover to PZU in Group’s trustworthiness on the market (resulting in a possible function within the PZU Group. 2017. PZU’s reinsurance partners have high S&P/AM Best financial loss). In 2017, actions are continued in the area of product ratings. That evidences the reinsurer’s robust position and Management actions in the area of response to compliance compliance in response to a significant increase in the affords the Company security. Due to the broad spectrum of the PZU Group’s business, risk include in particular: volume of regulatory requirements, including supervisory reputation risk is also affected by the risk of litigation of • acceptance of risks arising, without limitation, from legal recommendations in the area of insurance products and aimed PZU’s operations in inward reinsurance involves the PZU varying values of the subject matter of the dispute, which is and regulatory changes; at supporting businesses to effectively manage compliance risk Group’s other insurance companies. The greater exposure to predominantly inherent in the Group’s insurance business. • mitigation of risks, including by: adjustment of procedures in insurance products. protection of the Baltic companies, Link4 and TUW PZUW has and processes to changing regulatory requirements, led to a higher gross written premium by virtue thereof. The identification and assessment of compliance risk in the evaluation and design of internal regulations to suit Group’s companies is performed for each internal process compliance needs, participation in the process of agreeing 6.6 Reinsurance operations In addition, PZU generates gross written premium on inward of these companies by the heads of organizational units, in on marketing activities; reinsurance under its operations on the domestic and accordance with the allocation of responsibility for reporting. • avoidance of risks by preventing any involvement in Reinsurance operations international market, mostly through facultative reinsurance. Moreover, compliance units in PZU Group companies identify activities that are out of compliance with the applicable Reinsurance protection in the PZU Group secures insurance compliance risk on the basis of information obtained from regulatory requirements or good market practices or activity, limiting the consequences of the occurrence of Reinsurance treaties in PZU Życie notifications to the register of conflicts of interest, gifts and activities that may have an unfavorable impact on the catastrophic phenomena that could adversely affect the Under the outward reinsurance treaty entered into by PZU irregularities, and from inquiries sent to them. entity’s image. financial standing of insurance undertakings. This task Życie, the PZU Życie portfolio is protected against the was performed through obligatory reinsurance contracts accumulation of risk and it has protection for individual policies supplemented by facultaltive reinsurance. with higher sums insured.
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QBE, Mapfre, Nacional De Reaseguros and Sava Re are the of 25 November 2009 on the taking-up and pursuit of the investment firms (CRR Regulation) and also the various types partners that extend reinsurance protection to PZU Życie. Its business of insurance and reinsurance (“Solvency II”), as of risk identified in the Internal Capital Adequacy Assessment reinsurance partners have high S&P ratings. That evidences amended, the Insurance and Reinsurance Activity Act of Process (ICAAP). the reinsurer’s robust financial position and affords the 11 September 2015 and the expiration of the PZU Group’s Company security. Capital and Dividend Policy for 2013-2015 updated in May 2014.
Solvency ratio Q1 2017 2016 Reinsurance premium under obligatory treaties in PZU The capital management policy rests on the following Życie according to the Standard & Poor’s rating principles: Solvency II • the PZU Group’s capital management (including excess PZU Group * 277.4% 249.8% capital) is conducted at the level of PZU as the parent 100% PZU* 284.4% 274.4% A company; • sustain target solvency ratios at the level of 200% for the PZU Życie* 405.8% 396.2%
PZU Group, PZU SA and PZU Życie (according to Solvency CRR II); Bank Pekao – total 18.0%** 17.6% • maintain the PZU Group’s financial leverage ratio at a level capital adequacy ratio no higher than 0.35; Tier 1 18.0%** 17.6% • ensure funds for growth and acquisitions in the coming years; Alior Bank – total 13.6%** 13.6% • PZU will not issue any new shares for the duration of this capital adequacy ratio Policy. Tier 1 11.5%** 11.3%
* unaudited data Reinsurance treaties in the PZU Group’s international As at the end of Q1 2017 the estimated solvency ratio ** as at Q1 2017 companies, LINK4 and TUW PZUW (calculated according to the standard Solvency II equation) The PZU Group’s other insurance companies, i.e. Lietuvos was 277.4%1 and remained above average solvency ratios Draudimas, Lietuvos Draudimas Branch in Estonia, AAS Balta, among the insurance groups in Europe. PZU Ukraine, LINK4 and TUW PZUW have reinsurance cover aligned to the profile of their operations and their financial As a result of the acquisition of Pekao, the PZU Group’s capital standing. Every material insurance portfolio is secured with the adequacy ratio calculated for Tier 1 capital will decrease at the appropriate obligatory treaty. Reinsurance cover is provided end of June 2017. To mitigate the decline in the PZU ratio on for the most part by PZU, which transfers a portion of the June 30, 2017, it issued subordinated bonds with a nominal accepted risk outside the Group. value of PLN 2.25 billion. 7.2 DEBT FINANCING OF PZU, BANK PEKAO AND ALIOR BANK
6.7 Capital management In Bank Pekao, the capital adequacy ratio and the Tier 1 ratio were computed on the basis of Regulation (EU) No 575/2013 The PZU Group endeavors to manage capital effectively of the European Parliament and of the Council of 26 June and maximize the rate of return on equity for the parent 2013 on prudential requirements for credit institutions and company’s shareholders, in particular by maintaining the level investment firms (CRR Regulation) and also the various types of security and retaining capital resources for strategic growth of risk identified in the Internal Capital Adequacy Assessment objectives through acquisitions. Process (ICAAP).
On 3 October 2016, the PZU Supervisory Board adopted In Alior Bank, the capital adequacy ratio and the Tier 1 ratio a resolution to approve the PZU Group’s Capital and Dividend were computed on the basis of Regulation (EU) No 575/2013 Policy for 2016-2020. The introduction of the Policy follows of the European Parliament and of the Council of 26 June from implementation, as of 1 January 2016, of Directive 2013 on prudential requirements for credit institutions and 2009/138/EC of the European Parliament and of the Council 1 Unaudited data
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PZU on the capital market and the debt market
In H1 2017, PZU remained among the 5 most liquid companies on WSE’s main market with 8.3% of the trading volume in PLN totaling PLN 10.4 billion. The high liquidity resulted in a low spread of 7 b.p., while the average for the top 20 most liquid companies was 17 b.p.
In chapter: 1. PZU share price 2. Debt financing of PZU, Pekao, Alior Bank 3. Banking sector on WSE 4. Distribution of the PZU’s 2016 net profit 5. Rating 6. Calendar of major PZU’s corporate events in 2017
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7.1 PZU share price others, contributed positively to this growth. The WIG Bank Growth (%) and trading volume of PZU shares vs. WIG and WIG20
index rose 27.7% y/y and 15.9% from +50% 150,00% 9,000,0009 000 000 PZU made its debut on the Warsaw Stock Exchange (WSE) on PLN 44.59 8,000,0008 000 000 12 May 2010. Since then, it has been in WSE’s most prominent From H2 2016 to the end of Q1 2017, the PZU share price 140,00%+40% 7,000,0007 000 000 WIG20 Index (calculated on the basis of the equity portfolio followed the WIG20 index. In Q2 2017 however, PZU 130,00%+30% 6,000,0006 000 000 in the 20 largest and most liquid companies listed on WSE’s performed much better than the benchmark index, generating 5 000 000 1 5,000,000 Main Market) . PZU is also in other indices: WIG, WIG30, WIG- more than 22.4% q/q relative growth vs. WIG20. 120,00%+20% 4 000 000 Poland, WIGdiv, WIG20TR, MSCI Poland and the sustainable 4,000,000 110,00% 3 000 000 development RESPECT Index (since 2012). In H1 2017, the PZU share price ranged from PLN 32.82 +10% 3,000,000 to PLN 46.78 (at closing prices). The share price volatility 2,000,0002 000 000 100,00% 0% 1 000 000 In H1 2017, the PZU stock price was under pressure exerted (calculated as the ratio of standard deviation to the average PLN 33.21 1,000,000 by local and global macroeconomic factors that are exerting price in intraday periods) was 11.0%, 5.0 p.p. higher than 90,00% 0 0 -10% 01.2017 02.2017 03.2017 04.2017 05.2017 06.2017 an ever greater impact on the condition of the Polish stock in the corresponding period of 2016. PZU’s share price at Turnover Turnover volume PZU WIG WIG20 market (since 2015, international investors have been the close of the session on 30 June 2017 was PLN 44.59, responsible for more than 50% of the trading volume on signifying 56.2% growth y/y and 34.3% growth since the 06.2017 06.2016 06.2015 06.2014 06.2013 WSE’s main market). beginning of 2017. P/BV (C/WK) Market share price / book value per 2.9x 2.1x 3.2x 3.2x 2.7x On one hand, investor sentiments were stimulated by the Market multiples share persisting bullish market on the global markets since the At the end of June 2017, PZU’s P/BV ratio was 2.9, i.e. up 0.8 BVPS (PLN) 15.2 13.6 13.7 13.8 15.3 2016 presidential election in the US, solid economic data y/y. In the corresponding period the P/BV ratio for the banking Book value per share from Poland and the Euro zone, improving performance of industry (PZU’s most suitable peer group on the Warsaw Stock P/E (C/Z) businesses and cautious declarations from key central banks Exchange) was 0.93x. Western European insurance groups Market share price / Earnings per 26.6x 37.4x 28.3x 22.3x 21.2x regarding the tightening of monetary policy. On the other have significantly lower multiples with their average P/BV ratio share hand, however, the market discounted two interest rate hikes oscillating around 1x. EPS (PLN) 1.7 0.8 1.5 2.0 1.9 in the US and the announced reduction of the FED balance Earnings / number of shares sheet. P/BV P/E In H1 2017, both the WIG20 large cap index and the WIG 4 overall market index performed well, climbing 31.4% and 40 36.4% y/y, respectively, and 18.1% and 17.9%, respectively, 3 from the beginning of this year. The banking sector, among 30
1 WIG20 is a price index, i.e. only the prices in executed transactions are included; however, it disregards dividend income. 2 20
Growth (%) of PZU share price vs. MSCI EM and WIG20 P/BV Average P/BV P/E Average P/E
1 10 06.2013 06.2014 06.2015 06.2016 06.2017 +80%180% 06.2013 06.2014 06.2015 06.2016 06.2017 BVPS +60% EPS 160% 56.2% 17 3
+40%140% 31.4% 16
+20%120% 21.2% 2 15
0% 100% 14 1 -20% 80% 13 H2 2016 H1 2017
PZU WIG20 MSCI EM 12 0 06.2013 06.2014 06.2015 06.2016 06.2017 06.2013 06.2014 06.2015 06.2016 06.2017
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Liquidity trading volume rose 22.7% y/y to 262 million shares. As a In H1 2017, PZU shares were highly liquid. PZU accounted for result, the heightened trading activity and the demand side’s PZU’s dividend yield was PZU’s P/E ratio (Price/Earnings) at the end of June 2017 gggggggggggggg 8.3% of WSE’s trading volume and the average share buy/sell prevalence drove PZU’s market value up PLN 13.9 billion y/y to 3.1% 26.6x spread was a mere 7 b.p. (while the average for the top 20 PLN 38.5 billion. P/BV (Price/Book Value) most liquid companies was 17 b.p.). dividend per share 2.9x The number of PZU share trades increased even further in Capitalization / PZU’s trading volume and its capitalization was H1 2017, up 12.9% (to 527 thousand transactions) and the PLN 1.40 50 PLN 38,504 mln
Trading volume / number of PZU share trades 40
30 1 200 700,000700 000 1,200 Average trading value per 20 600,000600 000 PZU’s maximum share price was 11,000 000 session
500,000500 000 10 800 PLN 84 mln PLN 46.78 400,000400 000 600 0 300,000300 000 2013 2014 2015 2016 H1 2017* its minimum share price 400 and the average number of 200,000200 000 PLN bn Market cap Turnover value was trades per session 200 * trailing data (12 m.) 100,000100 000 PLN 32.82 0 0 0 4,250 2013 2014 2015 2016 H1 2017*
PLN thous. Turnover volume Number of transactions
* trailing data (12 m.)
H1 2017/ Q2 2017 PZU share statistics H1 2017 H1 2016 H1 2016 Q2 2017 Q1 2017 /Q1 2017 PZU’s percentage of WSE’s trading activity PZU share’s average buy/sell spread Maximum price [PLN] 46.78 36.30 28.9% 46.78 38.10 22.8%
Minimum price [PLN] 32.82 28.25 16.2% 35.44 32.82 8.0% 8.3% Last session price [PLN] 44.59 28.55 56.2% 44.59 34.80 28.1% 7 bps
Average session price 39.34 33.22 18.4% 43.02 35.90 19.8% [PLN]
Trading value [PLN 000] 10,377,513.8 6,982,299.0 48.6% 5,933,195.5 4,444,318.3 33.5%
Average trading value 83,689.6 56,308.9 48.6% 98,886.6 69,442.5 42.4% per session [PLN 000]
Number of transactions S&P Financial strength and Credit rating for 527,016.0 466,812.0 12.9% 284,255.0 242,761.0 17.1% Nominal value of PZU’s subordinated bond issue [units] PZU and PZU Życie at Average number of 4,250.1 3,764.6 12.9% 4,737.6 3,793.1 24.9% trades per session PLN 2.25 bn A-
Trading volume 261,725,393.0 213,391,299.0 22.7% 138,102,334.0 123,623,059.0 11.7% Since 2014, PZU’s rating has Average trading volume interest rate equal to 2,110,688.7 1,720,897.6 22.7% 2,301,705.6 1,931,610.3 19.2% remained one notch above per session [shares] Poland’s sovereign rating for Capitalization at the end WIBOR 6M + 1.8% foreign currency-denominated 38,504,490.6 24,653,581.7 56.2% 38,504,490.6 30,050,600.4 28.1% of the period [PLN 000] debt
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7.2 Debt financing of PZU, Pekao and Alior subordinated bonds in a total amount not exceeding • Public Subordinated Bond Issue Program capped at 7.3 Banking sector on the Warsaw Stock Bank PLN 3 billion. PLN 800 million. Exchange
PZU On 30 June 2017, in a private offering, PZU SA issued On August 11, 2017, Alior Bank issued bonds of a nominal WIG Banks Index4 The PZU Group (through its wholly-owned subsidiary, PZU subordinated bonds with a nominal value of PLN 2.25 billion. value of PLN 250 million in a non-public issue of ordinary 2016 was a challenging year for the banking sector, mainly Finance AB) issued Eurobonds totaling EUR 850 million Bond redemption will take place on 29 July 2027 with an early bonds. Bonds are unsecured, have floating interest rates, because of the persistently low interest rates, bank levy, listed on the Official List, Main Securities Market of the Irish repayment option on 29 July 2022. The bonds bear interest based on WIBOR 6M plus a margin of 1.19%. The bond legislative risk relating to Swiss franc-denominated mortgage Stock Exchange and on the Catalyst ASO WSE/Bondspot at the floating interest rate being the sum of the WIBOR maturity date will be August 11, 2020. loans and the unstable geopolitical situation. These factors market. The listed bond series (PZU0719) is composed of two rate for 6M PLN deposits and a 1.8% margin. On the day contributed to the low valuation of banks listed on the Warsaw assimilated series (under a single ISIN code XS1082661551) of records, the demand books grew extremely dynamically All the subordinated bond series issued by Alior Bank under Stock Exchange. Investor sentiments started to improve at with a nominal value of EUR 500 million and EUR 350 million and significantly exceeded the original plans. Finally, the these programs are classified as Tier II capital instruments the end of 2016. The resulting inflow of capital to WSE-listed issued on 3 July 2014 and 16 October 2015, respectively. Management Board of PZU decided to issue PLN 2.25 bn. referred to in Article 63 CRR3. banks allowed the WIG Bank index to reach 6,263 points at In the bookbuilding process, approximately 40 investors, the end of 2016, compared with roughly 6 thousand at the The liabilities arising from the bonds are secured by including the European Bank for Reconstruction and On August 23rd, 2017, the Alior Bank’s Supervisory Board, as beginning of 2016. In the first half of 2017, the WIG Bank a guarantee extended by PZU. The bonds bear interest at Development. Among buyers of issued bonds 54% were requested by the Management Board, approved the opening index continued its strong upward surge, achieving 15.9% a fixed rate of 1.375% per annum. The coupon is paid once investment funds, 21% banks, 13% international institutions, of the Second Public Bond Issue Program of Alior Bank growth vs. the end of 2016 (compared to a 6.6% decline in a year. The date of maturity is 3 July 2019. 5% pension funds, 4% insurers and 3% of other entities. As S.A. and authorized the Bank’s Management to repeatedly the first half of 2016). As a result, the average P/BV for the of August 1 2017 the bonds are listed on Catalyst (PZU0727). incur financial liabilities by issuing unsecured, ordinary or WIG Bank index on the last day of June 2017 was 0.93, up by subordinated bearer bonds. The aggregate par value of the 63.2% y/y. It was one of the largest corporate issues in Catalyst history Bonds issued under the Second Public Issue Program may not Yield of PZU’s Eurobonds vs. Polish treasury bonds in terms of value and the first issue of subordinated bonds exceed PLN 1,2 billion. At the end of H1, the banks comprising the PZU Group (Alior maturing in 2019 (EUR) realized by the insurance company in Poland under the Bank and Pekao) generated more than 13.3% of the trades on Solvency II regime. WSE’s main market and their weight in the WIG Bank index 2,5%2.5% was approximately 30%. The price of Alior Bank’s shares at
2,0%2.0% The issue was aimed at mitigating the drop in the solvency the end of June 2017 was PLN 61.8, i.e. it rose 14.0% from ratio after the acquisition of Pekao and proceeds from the the end of 2016. Bank Pekao recorded an 0.8% decline to PLN 1,5%1.5% issue of bonds were included in PZU category 2 own funds. 124.8. One must have in mind, however, the adjustment for 1,0%1.0% Pekao’s dividend payment from the 2016 profit in the amount 0.5% 0,5% The PZU Group’s debt ratio was 23.6% as at 30 June 2017%2. of PLN 8.7 per share, which was disbursed on 20 June 2017. 0.0% 0,0% Because of the more stringent requirements applied by the -0.5% -0,5% Pekao Polish Financial Supervision Authority, Bank Pekao was one of 06.2014 01.2017 3 - 12.2014 2015 2016 - 06.2017 Under the mortgage bond program established in 2010, Regulation (EU) No 575/2013 of the European Parliament and of the Council of just three banks authorized to pay out a dividend in 2017. Pekao, acting through its subsidiary Pekao Bank Hipoteczny, 26 June 2013 on prudential requirements for credit institutions and investment PZU bonds (PZU0719) firms and amending Regulation (EU) No. 648/2012 – Capital Requirements 4 Income index (its calculation incorporates the prices of the shares it includes Treasury bonds (maturity 10-2019) issues long-term debt securities secured on its loan portfolio. Regulation, CRR. and the income received through dividends and subscription rights) Treasury bonds (maturity 01-2019) The issue program is limited to PLN 2 billion. In 2017, Pekao issued no debt securities under the program. WSE-listed banks
The Eurobond issue implemented PZU Group’s investment Alior Bank +80% strategy to manage the matching of assets and liabilities in In order to secure a safe level of capital adequacy ratios, Alior WIG BANKI Pekao Alior PZU EUR. The funds obtained from the bond issue were to increase Bank regularly issues debt instruments. As at 30 June 2017, +60% PLN 44.6 the exposure in the investment portfolio to investments the following debt issue programs were in place in Alior Bank: +40% denominated in Euro, manage the FX position and harness • Own bond issue program capped at PLN 2 billion; 7 262 pts debt financing that is less expensive than equity. +20% PLN 61.8
Also, on 14 March 2017, the PZU Supervisory Board issued 0% 2 PZU Group’s leverage ratio – the quotient of debt on long-term financial a positive opinion on the PZU Management Board’s motion to liabilities (net of liabilities on deductions) to the sum of the following: debt on PLN 124.8 the PZU Shareholder Meeting to adopt a resolution to issue long-term financial liabilities and the PZU Group’s equity minus intangible assets, -20% deferred acquisition expenses and deferred tax assets carried in the PZU Group’s consolidated financial statements H2 2016 H1 2017
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The correlation between the WIG Bank index and the WIG20 7.5 Rating Poland’s rating index at the end of June 2017 was 89%, down 2 p.p. y/y. In Current Past turn, the beta coefficient (for WIG20) was 1.15, up 0.05 y/y. Issuer rating Since 2004, PZU and PZU Życie have been subject to regular Rating and reviews by the S&P Global Ratings (S&P) rating agency. The Country Rating and outlook Date of update outlook Date of update 7.4 Distribution of the PZU’s 2016 net rating assigned to PZU and PZU Życie results from analysis of Republic of Poland profit their financial information, competitive position, management Credit rating (long-term, in local and corporate strategy as well as the sovereign’s financial A- /Stable/ 2 December 2016 A- /Negative/ 15 January 2016 currency) On 29 June 2017, PZU’s Ordinary Shareholder Meeting standing. It also includes an outlook, namely, an assessment Credit rating (long-term, in foreign adopted a resolution to distribute PZU’s net profit for the of the future position of the Company in the event of specific BBB+ /Stable/ 2 December 2016 BBB+ /Negative/ 15 January 2016 currency) financial year ended 31 December 2016, in which it resolved circumstances. As of 25 March 2014, PZU’s rating is one grade Credit rating (short-term, in local to allocate the profit of PLN 1,593 million as follows: above Poland’s rating for foreign currency-denominated debt. A-2 2 December 2016 A-2 15 January 2016 currency) • PLN 1,209 million to be a dividend payout, i.e. PLN 1.40 per On 22 December 2016, S&P affirmed its financial strength Credit rating (short-term, in foreign share; A-2 2 December 2016 A-2 15 January 2016 currency) • PLN 369 million to supplementary capital; and credit strength ratings for PZU and PZU Życie at “A-”. The • PLN 15 million to increase the Company Social Benefit outlook remained negative. Fund. In connection with the announcement of a PLN 2.25 billion PZU rating The record date used to determine the list of shareholders subordinated debt issue on 30 June 2017, on 4 July 2017 eligible to receive the dividend for the financial year ended S&P Global Ratings updated its evaluation of the Company’s Current Past 31 December 2016 was set for 29 September 2017. The standing. After the update PZU’s rating remained the same. Rating and Rating and dividend payment date was set for 19 October 2017. Company name outlook Date of update outlook Date of update
PZU
Financial strength rating A- /Negative/ 22 December 2016 A- /Watch Neg/ 21 January 2016
Credit rating A- /Negative/ 22 December 2016 A- /Watch Neg/ 21 January 2016 Dividend paid by PZU from profit for 2013 - H1 2017 financial years PZU Życie 30.06.2017 2016 2015 2014 2013 Financial strength rating A- /Negative/ 22 December 2016 A- /Watch Neg/ 21 January 2016 Consolidated net profit of PZU Group (PLN 1,733 2,417 2,343 2,968 3,295 mln) Credit rating A- /Negative/ 22 December 2016 A- /Watch Neg/ 21 January 2016
Standalone net profit of PZU Group (PLN mln) 2,101 1,593 2,249 2,637 5,106
Dividend paid per year (PLN mln) n/a 1,209 1,796 2,591 4,663
Dividend per share per year (PLN) n/a 1.40 2.08 3.00 5.40 Rating of the Eurobonds issued by PZU Finance AB (publ.)
Dividend as at the date of establishing 1.40 2.08 3.00 3.40 4.97 dividend right (PLN) Current Past
Dividend payout ratio from the consolidated n/a 50.0% 76.7% 87.3% 89.1%* Rating and result for the year Rating and outlook Date of update outlook Date of update
Dividend rate in the year (%) ** 3.1% 6.3% 8.8% 7.0% 11.1%
TSR (Total Shareholders Return) *** 38.5% 3.7% (23.8)% 15.8% 14.1% EUR 350 mln to 07/03/2019 BBB+ 21 January 2016 A- /Stable/ 12 October 2015
* dividend from surplus capitals paid in 2013 (PLN 2.00 per share), not included in dividend payout ratio EUR 500 mln to 07/03/2019 BBB+ 21 January 2016 A- /Stable/ 20 June 2014 ** the rate calculated as dividend as at the ex-dividend date vs. share price as at the end of the given year (in the H1 2017 to share price as at 30 June 2017) *** rate calculated as the sum of changes in the exchange 1 share and dividends by. date of establish the dividend right in a given period, divided by the share price at the beginning of the period; H1 2017 change rate calculated for the period from 1 January to 30 June 2017 year
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 98 99 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 PZU on the capital market and the debt market
Rating of Pekao Rating of Alior Bank 7.6 Calendar of major PZU’s corporate events in 2017 Pekao co-operates with three leading credit rating agencies: On 5 September 2013, Fitch Ratings Ltd. rated Alior Bank at Fitch Ratings, S&P Global Ratings, and Moody’s Investors grade „BB” with stable outlook. The rating did not change in Service. In the case of the first two agencies, the ratings accordance with the grade assigned on 16 February 2017. are provided on a solicited basis under relevant agreements, 18 and with respect to Moody’s Investors Service, the ratings JANUARY are unsolicited and they are based on publicly available Rating (Fitch) Extraordinary Shareholder Meeting information and review meetings. Long - term BB Short - term B 15 Among banks rated in Poland, Pekao has the highest viability MARCH rating assigned by Fitch Ratings, the highest StandAlone Viability Rating (VR) bb Credit Profile rating assigned by S&P Global Ratings, the 2016 Annual Report Support Rating 5 highest Baseline Credit Assessment as well as long- and short- term counterparty risk ratings assigned by Moody’s Investors Outlook stable 12 APRIL Service. Extraordinary Shareholder Meeting Rating (Fitch) 17 Long - term A- MAY
Short - term F2 Q1 2017 Report
Viability Rating (VR) a- 2-4 JUNE Support Rating 2
Outlook stable 21st WallStreet Conference for individual investors 29 Rating (S&P Global Ratings) JUNE Long – term, in foreign currency BBB+ Ordinary Shareholder Meeting Short – term, in foreign currency A-2 31 Long – term, in local currency - AUGUST Short – term, in local currency - H1 2017 Report Outlook stable
Stand - alone credit Profile bbb+ 29 SEPTEMBER
Dividend record date Rating (Moody’s Investors Service Ltd.) 19 OCTOBER Long - term deposits A2
Short - term deposits Prime-1 Dividend payment date (PLN 1.40 per share) Baseline Credit Assessment baa1
Long-term counterparty risk 15 A1(cr) assessment NOVEMBER
Short-term counterparty risk Q1-Q3 2017 Report Prime-1(cr) assessment MORE Outlook stable
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 100 101 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 08
Corporate governance
We appreciate that the market leader’s role is to set the highest standards for the entire industry. We fulfill this function by enhancing many rules and best practices employed in our organization. We believe that this is part of the sagacious changes we can contribute to the world that surrounds us.
In chapter: 1. Entity authorized to audit financial statements 2. Share capital and PZU shareholders; shares owned by members of the governing bodies
103 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Corporate governance
8.1 Entity authorized to audit financial decreasing the nominal value of each PZU share from PLN 1 to The PZU Management Board does not have any information PZU shareholding structure as at 31 December 2015 statements PLN 0.10 and increasing the number of PZU shares making up about executed agreements as a result of which changes may the share capital from 86,352,300 to 863,523,000 shares. The transpire in the percentages of shares held by its shareholders Aviva OFE On 18 February 2014 the PZU Supervisory Board selected split was effected by exchanging all the shares at a ratio of to date. 5.7%
KPMG Audyt Spółka z ograniczoną odpowiedzialnością Sp. k. 1:10. The share split did not affect the amount of PZU’s share State Treasury 34.4% with its registered office in Warsaw, ul. Inflancka 4a, capital. In 2015-2017 PZU did not have any employee share programs. 00-189 Warsaw, entered by the National Chamber of Statutory Auditors in the list of entities authorized to audit financial On 3 November 2015 the District Court for the capital city of • According to the Articles of Association, the shareholders’ statements under no. 3546 as the entity authorized to audit Warsaw in Warsaw, 12th Commercial Division of the National voting rights have been limited in such a manner that financial statements with which an agreement was executed Court Register registered the pertinent amendment to PZU’s no shareholder may exercise more than 10% of the total Others to audit and review financial statements. Articles of Association. number of votes in existence in PZU at its shareholder 59.9% meeting on the date of holding a shareholder meeting The scope of the agreement encompasses the following in The purpose of the share split is primarily to increase the subject to the reservation that for the purposes of particular: availability of shares to retail investors and diversify the determining the obligations of the buyers of significant Source: Current Report No. 3/2016 • auditing PZU’s annual standalone financial statements and shareholder structure. equity stakes contemplated by the Act on Public Offerings the PZU Group’s annual consolidated financial statements; and the Insurance Activity Act, such limitation of voting PZU shareholding structure as at 31 December 2015 • review of PZU’s interim standalone financial statements and Shareholder structure rights shall be deemed not to exist. The limitation of voting the PZU Group’s interim consolidated financial statements. In the period from 1 January 2017 until the date of preparing rights does not pertain to the following: this Report, one material change took place in the ownership • shareholders who on the date of adopting the shareholder Aviva OFE 5.1%
The work referred to above will be done for three subsequent structure of significant shareholdings in PZU. On 29 May 2017 meeting resolution implementing this limitation were State Treasury financial years ending, respectively, on 31 December 2014, PZU received a notification pertaining to a change in the entitled to shares representing more than 10% of the total 34.2% 31 December 2015 and 31 December 2016 with an option to shareholding of Aviva Otwarty Fundusz Emerytalny Aviva BZ number of votes; extend collaboration for another two financial years ending, WBK („Aviva OFE”). According to the notification, as a result • shareholders acting with the shareholders prescribed in the respectively, on 31 December 2017 and 31 December 2018. of transactions to sell PZU shares executed on 24 May 2017, item above pursuant to executed agreements concerning on 26 May 2017 Aviva OFE reduced its PZU shareholding to the joint exercise of voting rights to shares. On 17 July 2017 PZU signed an annex to the agreement to 4.89% of PZU’s share capital, representing 4.89% of the total Others extend collaboration for another two years, i.e. 2017 and number of votes at PZU’s Shareholder Meeting. For the purpose of limiting voting rights, the votes of 60.7% 2018. shareholders among whom there is a parent or subsidiary As at the date of preparing this Report, PZU’s shareholder relationship shall be totaled in accordance with the rules Source: Current Report 17/2017 structure taking into consideration shareholders holding more described in the Company’s Articles of Association. 8.2 Share capital and PZU shareholders; than 5% of the votes at the Shareholder Meeting is as follows: shares owned by members of its Neither as at the date of conveying this periodic report nor as PZU shareholding structure as at 30 June 2017 governing bodies at the date of conveying the quarterly report for Q1 2017 (i.e. 17 May 2017) did any of the members of the PZU’s share capital is divided into 863,523,000 ordinary shares Management Board, the Supervisory Board or the Directors of with a nominal value of PLN 0.10 each, giving the right to the PZU Group hold any PZU shares or rights to PZU shares. State Treasury 34.2% 863,523,000 votes at the shareholder meeting.
On 30 June 2015, PZU’s Ordinary Shareholder Meeting adopted a resolution to split all of the PZU shares by
Others Percentage of share Percentage of votes at the 65.8% Shareholders Number of shares capital Shareholder Meeting
State Treasury 295,217,300 34.19% 34.19% Source: Current Report 42/2017 Other shareholders 568,305,700 65.81% 65.81%
Total 863,523,000 100.00% 100.00%
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 104 105 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 09
Other
107 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Other
Truthfulness and accuracy of the presented financial Tax Group Disputes As at 30 June 2017, the total value of all the 188 686 statements On 25 September 2014, a new Tax Group agreement was In H1 2017 and as at the date of signing this report on the cases pending before courts, competent bodies for arbitral To the best knowledge of the PZU Management Board, the signed between 13 PZU Group companies: PZU, PZU Życie, activity of the PZU Group, there are no proceedings pending proceedings or public administration authorities to which PZU PZU Group’s consolidated financial statements and comparable Link4 Towarzystwo Ubezpieczeń SA, PZU Centrum Operacji SA, before a court, a competent body for arbitral proceedings Group entities are a party was PLN 178 070 million. data have been prepared in line with the prevailing accounting PZU Pomoc SA, Ogrodowa-Inwestycje Sp. z o.o., Ipsilon Sp. z or a public administration authority concerning any liabilities PLN 175 344 million of this amount relates to liabilities and principles, and honestly, accurately and clearly reflect the PZU o.o., PZU Asset Management SA, TFI PZU SA, Ipsilon Bis SA, or accounts receivable of PZU or any of its direct or indirect PLN 2 726 million to the accounts receivable of PZU Group Group’s assets and financial position as well as its financial PZU Finanse Sp. z o.o., Omicron SA, Omicron Bis SA. The tax subsidiaries whose unit value represents at least 10% of PZU’s companies. result, and that the Management Board’s report on the PZU group was established for a period of 3 years – from 1 January equity. A description of lawsuits and proceedings before the Group’s activity shows a true picture of the PZU Group’s 2015 to 31 December 2017. President of UOKiK (Office of Competition and Consumer This Management Board’s Report on the Activity of the PZU development, results and position, including a description of Protection) is found in the consolidated financial statements of Group in H1 2017 has 109 consecutively numbered pages. the major threats and risks. Under the tax group agreement, PZU is the parent company the PZU Group for H1 2017. representing the tax group. Pursuant to art. 25 sec. 1 of the Selection of the entity authorized to audit financial CIT Act, the tax group performs settlements with the Tax statements Office on a monthly basis. PZU makes advance payments The PZU Management Board represents that the entity to the Tax Office for the CIT tax due from PZU’s overall tax authorized to audit financial statements – KPMG Audyt Sp. z group, while the member companies transfer the amount they o.o. sp. k. – auditing the consolidated financial statements, owe in advance payments to PZU’s specified bank account. has been selected in compliance with the law and that the company as well as the statutory auditors performing the Purchase of treasury stock in the financial year audit of these statements have fulfilled the conditions for Within its commercial activity Bank Pekao SA enters into expressing an impartial and independent opinion on the transactions on PZU shares and futures. As at 30 June 2017, audited consolidated financial statements in accordance with Bank Pekao SA held 7,757 shares in PZU. Signatures of PZU Management Board Members the laws and professional standards in force. Insurance agreements exceeding 25% of the total Information about significant agreements executed amount of technical provisions and equity between shareholders In H1 2017, the PZU Group did not execute insurance The PZU Management Board does not have any information agreements for a net sum insured per risk exceeding 25% of Paweł Surówka – President of the Management Board about agreements executed until the date of this Report on the total amount of technical provisions and equity. the activity of the PZU Group among shareholders as a result of which changes may transpire in the future in the Business seasonality or cyclicity percentages of shares held by its shareholders to date. PZU’s business is not seasonal or cyclical to an extent that Roger Hodgkiss – Management Board Member would justify application of the suggestions set forth in the Information about significant executed agreements International Financial Reporting Standards. On 30 June 2017, PZU SA issued subordinated bonds with a nominal value of PLN 2.25 billion. Bond redemption will take Assessment of the management of financial resources, Tomasz Kulik – Management Board Member place on 29 July 2027 with an early repayment option on including the capacity to satisfy the assumed liabilities 29 July 2022. 7.2 DEBT FINANCING OF PZU, BANK PEKAO and specification of possible threats and actions taken AND ALIOR BANK or to be taken by the Issuer to counter these threats The Issuer is in very good financial standing and satisfies Maciej Rapkiewicz – Członek Zarządu Related party transactions on terms other than based all the security criteria imposed by the Insurance and on the arm’s length principle Reinsurance Activity Act and the Polish Financial Supervision Within the framework of equity and business links, PZU Group Authority. The Issuer’s stable rating outlook confirms that PZU member companies provide services to one another. With the has a strong business position, has a high level of equity and Małgorzata Sadurska – Management Board Member exception of companies from the Tax Group, the transactions continues to be a competitive player on the insurance market. are executed according to the arm’s length principle. Financial forecasts The PZU Group has not published any forecasts of its financial Warsaw, 30 August 2017 results.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 108 109 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 10
Appendix: PZU Group’s financial data
111 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Appendix: PZU Group’s financial data
Basic amounts of the consolidated profit and 1 January - 1 January - 1 January - Assets (PLN million) 30 June 2017 31 December 2016 31 December 2015 loss account (PLN million) 30 June 2017 30 June 2016 30 June 2015 Intangible assets 1,963 1,463 1,393 Gross written premiums 11,606 9,862 9,126 Goodwill 3,278 1,583 1,532 Net earned premiums 10,347 8,986 8,744 Property, plant and equipment 2,819 1,467 1,300 Revenue from commissions and fees 498 268 103 Investment property 1,703 1,738 1,172 Net investment income 3,032 1,405 1,086 Entities measured using the equity method 190 37 54 Net claims and benefits (7,214) (6,165) (6,006) Financial assets 257,125 105,300 89,229 Acquisition costs (1,412) (1,252) (1,131) Receivables 10,222 5,703 3,338 Administrative expenses (2,025) (1,278) (822) Reinsurers’ share in technical provisions 1,126 990 1,097 Interest expenses (426) (346) (62) Deferred tax assets 1,586 624 369 Other operational revenues and expenses (601) (568) (293) Deferred acquisition costs 1,473 1,407 1,154 Operating profit (loss) 2,199 1,050 1,619 Other assets 892 871 813 Share in net profit (loss) of entities measured (1) (1) - using the equity method Cash and cash equivalents 11,646 2,973 2,440
Gross profit (loss) 2,198 1,049 1,619 Assets held for sale 1,239 1,189 1,506
Net profit (loss), including: 1,733 790 1,322 Total assets 295,262 125,345 105,397
Shareholders’ profit (loss) 1,446 660 1,322
Minority profit (loss) 287 130 -
Basic and diluted weighted average number of 863,516,697 863,473,794 863,519,490 ordinary shares*
Number of shares issued 863,523,000 863,523,000 863,523,000
Basic and diluted PZU Group’s profit per ordinary 1.67 0.76 1.53 Issuer’s share (in PLN)
Net profit of PZU (issuer) 2,101 990 1,404
Basic and diluted issuer’s profit per ordinary 2.43 1.15 1.63 share (in PLN)
*including shares in consolidated funds Restated data for period 2015-2016
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 112 113 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Appendix: PZU Group’s financial data
Equity (PLN million) 30 June 2017 31 December 2016 31 December 2015 Liabilities (PLN million) 30 June 2017 31 December 2016 31 December 2015
Share capital 86 86 86 Technical provisions 43,785 42,194 41,280
Supplementary capital 11,827 10,758 9,947 Unearned premium and unexpired risk reserve 8,067 7,076 5,856
Revaluation reserve 128 106 241 Life insurance provisions 15,969 15,928 16,222
Actuarial profits and losses related to provisions for Outstanding claims provisions 8,471 8,272 8,264 3 3 (4) employee benefits Provision for annuities 5,680 5,673 5,808 Own shares - (1) - Provisions for bonuses and discounts for the insured 24 5 2 Other reserves 5 5 - Other technical provisions 303 323 384 Exchange differences from subsidiaries (55) (2) (42) Unit-linked technical provisions 5,271 4,917 4,744 Retained profits (losses) (286) 108 353 Provisions for employee benefits 532 128 117 Net profit (loss) 1,446 1,947 2,343 Other provisions 574 367 108 Minority interest 21,474 4,117 2,194 Deferred tax liability 623 469 509 Total equity 34,628 17,127 15,118 Financial liabilities 204,291 60,030 44,695
Other liabilities 10,797 4,997 3,570
Liabilities directly associated with assets qualified as held 32 33 - for sale
Total liabilities 260,634 108,218 90,279
Total equity and liabilities 295,262 125,345 105,397
One-off events in PZU Group - impact on gross 1 January - 1 January - 1 January - result (PLN million) 30 June 2017 30 June 2016 30 June 2015
Conversion effect (IAS) 25 20 47
Agricultural insurance claims higher than the average of - (236) - the last 3 years
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 114 115 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Appendix: PZU Group’s financial data
1 January - 1 January - 1 January - Operating efficiency ratios 30 June 2017 30 June 2016 30 June 2015 Data from the profit and loss account – corporate 1 January - 1 January - 1 January - insurance (non-life insurance) (PLN million) 30 June 2017 30 June 2016 30 June 2015 Gross claims and benefits ratio (simple) (gross 1. 63.6% 63.2% 66.7% claims and benefits/gross written premium) x 100% Gross written premiums 1,381 1,030 804 Net claims and benefits ratio (net claims and 2. 69.7% 68.6% 68.7% benefits/net earned premium) x 100% Net earned premiums 967 792 722 Operating expense ratio in the insurance 3. segments (insurance activity expenses/net earned 21.1% 22.3% 22.5% Investment income 40 64 58 premium) x 100% Insurance claims (572) (439) (452) Acquisition expense ratio in the insurance 4. segments (acquisition expenses/net earned premium) 14.0% 14.1% 13.6% x 100% Acquisition costs (204) (168) (131)
Administrative expense ratio in the insurance Administrative expenses (64) (55) (63) 5. segments (administrative expenses/net earned 7.1% 8.2% 9.0% premium) x 100% Reinsurance commission and share in profits 13 8 11 Combined ratio in non-life insurance 6. (net claims and benefits + insurance activity expenses) 87.2% 93.4% 91.3% Other (13) - (7) / net earned premium x 100% Insurance profit 167 202 138 Operating profit margin in life insurance (operating 7. 18.3% 21.2% 20.1% Acquisition costs ratio (including reinsurance profit/gross written premium) x 100% 19.8% 20.2% 16.6% commission)*
Return on assets in Pekao* Administrative expenses ratio* 6.6% 6.9% 8.7% 8. 1.0% - - (net profit/average total assets) x 100% Claims ratio* 59.2% 55.4% 62.6%
Return on assets in Alior Bank Combined ratio (COR)* 85.5% 82.6% 87.9% 9. 0.6% 0.7% - (net profit/average total assets) x 100% * ratios calculated with net premium earned
*data for H1 2017
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 116 117 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Appendix: PZU Group’s financial data
Data from the profit and loss account – mass-market 1 January - 1 January - 1 January - Data from the profit and loss account – group and 1 January - 1 January - 1 January - insurance (non-life insurance) (PLN million) 30 June 2017 30 June 2016 30 June 2015 individually continued insurance (PLN million) 30 June 2017 30 June 2016 30 June 2015
Gross written premiums 5,218 4,305 3,646 Gross written premiums 3,429 3,390 3,338
Net earned premiums 4,516 3,642 3,336 Group insurance 2,444 2,416 2,369
Investment income 228 275 255 Individually continued insurance 985 974 969
Insurance claims (2,790) (2,442) (2,049) Net earned premiums 3,426 3,390 3,338
Acquisition costs (847) (736) (659) Investment income 393 291 332
Administrative expenses (280) (294) (318) Insurance claims and change in other technical provisions net (2,648) (2,463) (2,446)
Reinsurance commission and share in profits - (3) (2) Acquisition costs (167) (167) (181)
Other (103) (135) (92) Administrative expenses (292) (286) (284)
Insurance profit 724 307 470 Other (30) (38) (31)
Acquisition costs ratio (including reinsurance Insurance profit 682 727 727 18.8% 20.3% 19.8% commission)* Insurance profit excluding one-off events 657 707 680 Administrative expenses ratio* 6.2% 8.1% 9.5% Acquisition costs ratio* 4.9% 4.9% 5.4% Claims ratio* 61.8% 67.1% 61.4% Administrative expenses ratio* 8.5% 8.4% 8.5% Combined ratio (COR)* 86.7% 95.4% 90.8% Insurance profit margin** 19.2% 20.9% 20.4% * ratios calculated with net premium earned
* ratios calculated with gross premium written ** excluding one-offs
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 118 119 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Appendix: PZU Group’s financial data
Data from the profit and loss account – individual 1 January - 1 January - 1 January - Data from the profit and loss account- banking 1 January - 1 January - 1 January - insurance (PLN million) 30 June 2017 30 June 2016 30 June 2015 activity (PLN million) 30 June 2017 30 June 2016 30 June 2015
Gross written premiums 792 538 680 Net revenue from commissions and fees 403 167 -
Net earned premiums 793 540 681 Investment income 1,868 972 -
Investment income 251 78 198 Interest costs (391) (300) -
Insurance claims and change in other technical provisions Administrative expenses (1,227) (527) - (850) (421) (695) net Other (168) (95) - Acquisition costs (67) (49) (66) Total 485 217 - Administrative expenses (30) (30) (30)
Other (2) (5) (2)
Insurance profit 95 113 86 Data from the profit and loss account – pension 1 January - 1 January - 1 January - Acquisition costs ratio* 8.5% 9.1% 9.7% segment (PLN million) 30 June 2017 30 June 2016 30 June 2015
Administrative expenses ratio* 3.8% 5.6% 4.5% Investment income 3 2 4
Insurance profit margin* 12.0% 21.0% 12.7% Other revenues 61 56 57
* ratios calculated with gross premium written Administrative expenses (24) (17) (21)
Other (1) - (1) Data from the profit and loss account – investment 1 January - 1 January - 1 January - contracts (PLN million) 30 June 2017 30 June 2016 30 June 2015 Operating profit (loss) 39 41 39
Gross written premiums 21 61 74
Group insurance 1 1 1
Individual insurance 20 60 73
Net earned premiums 21 61 74
Investment income 21 2 22
Insurance claims and change in the balance of other (38) (56) (85) technical provisions net
Acquisition costs (1) (2) (5)
Administrative expenses (3) (5) (5)
Other - - -
Insurance profit - - 2
Insurance profit margin* 0.0% 0.0% 2.4%
* ratios calculated with gross premium written
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 120 121 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Appendix: PZU Group’s financial data
Data from the profit and loss account – Ukraine segment 1 January - 1 January - 1 January - 1 January - 1 January - 1 January - Investment segment (external) (PLN million) (PLN million) 30 June 2017 30 June 2016 30 June 2015 30 June 2017 30 June 2016 30 June 2015
Gross written premiums 115 106 74 Total 126 (401) 168
Net earned premiums 59 50 50
Investment result 7 11 26
Net insurance claims (26) (25) (46)
Acquisition costs (32) (27) (21)
Administrative expenses (12) (10) (9)
Other 11 10 3
Insurance profit 7 9 3
Exchange rate UAH/PLN 0.1459 0.1535 0.1729
Acquisition costs ratio* 54.2% 54.0% 41.5%
Administrative expenses ratio* 20.3% 20.0% 18.8% * ratios calculated with net premium earned
Data from the profit and loss account – Baltic states 1 January - 1 January - 1 January - segment (PLN million) 30 June 2017 30 June 2016 30 June 2015
Gross written premiums 673 585 608
Net earned premiums 584 531 550
Investment result 9 9 17
Net insurance claims (366) (332) (343)
Acquisition costs (130) (121) (128)
Administrative expenses (55) (61) (78)
Other - (1) -
Insurance profit 42 25 17
Exchange rate EUR in PLN 4.2474 4.3805 4.1341
Acquisition costs ratio* 22.3% 22.8% 23.3%
Administrative expenses ratio* 9.4% 11.5% 14.2%
* ratios calculated with net premium earned
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 122 123 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Appendix: Glossary of terms
125 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Appendix: Glossary of terms
benefit – sum which an insurer disburses by virtue of insurance agent – commercial undertaking conducting of the shares it includes and the income received through claims, provision for unexpired risks, premium for investment insurance in the event of the occurrence of an event agency activity pursuant to an agreement executed with an dividends and subscription rights. risk borne by policyholders and premium for bonuses and contemplated by an insurance agreement insurance undertaking. The activity of agents focuses on discounts for insureds. acquiring customers, entering into insurance agreements, risk free rate – rate of return on financial instruments with BVPS (Book Value Per Share) – company’s book value per participating in the administration and performance of zero risk In PZU the risk free rate is based on the yield curves technical rate – rate used to discount technical provisions share insurance agreements and organizing and supervising agency for treasuries and it is the basis for determining transfer prices for accounting purposes in life insurance and provisions for activity in settlements between operating segments capitalized annuities in third party liability insurance cedent – person who cedes an account receivable to a buyer insurance broker – entity holding a permit to conduct S&P rating – credit risk assessment performed by the TSR (Total Shareholder Return) – measure specifying COR (Combined Ratio) – calculated for the non-life brokerage activity. Performs activities on behalf or in favor of Standard & Poor’s agency Rating A - signifies the high capacity the total rate of return obtained by shareholders by virtue of insurance sector (section II). This is the ratio of insurance an entity seeking insurance cover of the issuers of debt securities to service their liabilities giving holding shares in a given company during an annual period expenses related to insurance administration and the payment consideration to the possibility of factors occurring that may This measure expresses the sum total of profit stemming from of claims (e.g. claims, acquisition and administrative expenses) inward reinsurance – reinsurance activity whereby a contribute to reducing that capacity the movement in the share price of a given company and to the earned premium for a given period reinsurer or reinsurers accepts a portion of insurance or a the dividends paid during the time when an investor holds its class of insurance transferred by a cedent Solvency Capital Requirement (SCR) – capital shares in relation to the value of this share at the beginning of DPS (Dividend Per Share) – market multiple specifying the requirement computed in accordance with the Solvency II a given year. It is expressed as a percentage on an annualized dividend per share KNF – Polish Financial Supervision Authority regulations. The calculation of the capital requirement is based basis. on calculating market, actuarial (insurance), counterparty DY (Dividend Yield) – market multiple specifying the ratio NPS (Net Promoter Score) – method for assessing the insolvency, catastrophic and operational risks and is underwriting – process of selecting and classifying risks of the dividend per share to the market share price loyalty of a given company’s customers, ratio computed as the subsequently subject to diversification analysis. This ratio may declared for the purpose of insurance to estimate and accept difference between a brand’s promoters and critics be computed using the standard formula or, after obtaining under the appropriate conditions or reject earned premium – the gross written premium in a given the pertinent consent from the regulatory authority, using an period giving consideration to the settlement of revenues outward reinsurance – reinsurance activity whereby the insurance undertaking’s partial or full internal model. Unit-linked – Unit-linked insurance fund, a separate fund (premiums) over time through movement in the provisions for insurer (cedent) transfers a portion of the executed insurance consisting of assets constituting a provision consisting of unearned premiums to a reinsurer or reinsurers in the form of a reinsurance Solvency II Directive – Directive 2009/138/EC of the insurance premiums invested in the manner specified in the agreement European Parliament and of the Council of 25 November 2009 insurance agreement, a constituent part of unit-linked life EPS (Earnings Per Share) – market multiple specifying on the Taking-up and Pursuit of the Business of Insurance and insurance also referred to as an investment policy earnings per share P/BV (Price to Book Value) – multiple specifying the ratio Reinsurance (Solvency II) as amended. of the market price to the book value per share UOKiK – Office of Competition and Consumer Protection, Everest – system to administer non-life insurance undergoing solvency ratio – statutory multiple (under Solvency II) ww.uokik.gov.pl implementation in PZU P/E (Price to Earnings) – multiple specifying the ratio of specifying the level of capital security for the operations the company’s market price (per share) to earnings per share conducted by an insurer; by law this multiple should be higher WIBOR 3M – reference interest rate for a loan for 3 months free float – public company’s shares freely available to the than 100% on the Polish interbank market investing public. This is the ratio of the number of shares Payout ratio – dividend payout ratio, in other words the not held by large investors to the total number of shares – in quotient of the dividend paid and the company’s net result, Statutory Auditor Act – Act on Statutory Auditors and WSE – Warsaw Stock Exchange other words, all the freely-available, publicly traded shares stated as a percentage their Self Regulation, Entities Authorized to Audit Financial Statements and Public Supervision of 7 May 2009 (Journal of gross written premium – the amounts of gross written reinsurance – transfer to some other insurance undertaking Laws of 2009, Number 77, Item 649 as amended) premiums (net of the reinsurer’s share) due by virtue of – the reinsurer – all or part of the insured risk or class of risks the insurance agreements executed in the reporting period, along with the pertinent portion of the premiums As a result of sum insured – amount in cash for which an insured object notwithstanding the term of liability stemming from these reinsurance, a secondary split of risks transpires to minimize is insured In property insurance the sum insured customarily agreements the risks to the insurance market constitutes the upper limit of an insurer’s liability
Insurance Activity Act – Act of 11 September 2015 on RESPECT Index – index consisting of companies pursuing technical provisions – provisions for accounting purposes Insurance and Reinsurance Activity (Journal of Laws of 2015, corporate social responsibility listed on the WSE’s main that should ensure full coverage of all current and future Item 1844) constituting implementation of the Solvency II market. The base date for this index is 31 December 2009. liabilities that may result from executed insurance agreements. Directive The starting value of the RESPECT Index was 1,000 points. It The following, in particular, are part of technical provisions: is an income index and its calculation incorporates the prices provision for unearned premiums, provision for outstanding
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 126 127 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Appendix: Glossary of terms
These Financial Statements contain forward-looking statements concerning the strategic operations. Such forward-looking statements are exposed to both known and unknown types of risks, involve uncertainties and are subject to other significant factors which may cause that the actual results, operations, or achievements of PZU Group considerably differ from future results, operations, or achievements expressed or implied in the forwards-looking statements. The statements are based on a number of assumptions concerning the current and future business strategy of PZU Group and the external environment in which the Group will operate in the future. PZU expressly waives any and all obligations or commitments concerning distribution of any updates or adjustments to any of the assumptions contained in these Financial Statements of PZU Group, which shall aim to reflect the changes in PZU expectations or changes in events, conditions, or circumstances on which a given assumption has been made, unless provisions of the law provided otherwise. PZU stipulates that the forwardlooking statements do not constitute a guarantee as to the future results, and the company’s actual financial standing, business strategy, management plans and objectives concerning the future operations may considerably differ from those presented or implied in such statements contained in these Financial Statements of PZU Group. Moreover, even if the PZU Group’s financial standing, business strategy, management plans and objectives concerning the future operations comply with the forward-looking statements contained in these Financial Statements of PZU Group, such results or events may not be treated as a guideline as to the results or events in the subsequent periods. PZU does not undertake to publish any updates, changes, or adjustments to information, data or statements contained in these Financial Statements of PZU Group if the strategic operations or plans of
PZU shall change, or in the case of facts or events that shall affect such operations or plans of PZU, unless such an obligation to inform resulted from applicable provisions of the law.
PZU Group is not liable for the effects of decisions made following the reading of the Financial Statements of PZU Group.
At the same time, these Financial Statements of PZU Group may not be treated as a part of a call or an offer to purchase securities or make an investment. The Financial Statements of PZU Group does not constitute also an offer or a call to effect any other transactions concerning securities.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU SA GROUP IN H1 2017 128 129 WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8
Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group
Condensed interim consolidated financial statements for the 6 months ended 30 June 2017
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS
Table of contents
Introduction ...... 3 Interim consolidated financial statements ...... 6 1. Interim consolidated statement of profit or loss ...... 6 2. Interim consolidated statement of comprehensive income ...... 7 3. Interim consolidated statement of financial position ...... 8 4. Interim statement of changes in consolidated equity ...... 9 5. Interim consolidated cash flow statement ...... 12 Supplementary notes to the condensed interim consolidated financial statements ...... 14 1. Information on PZU and the PZU Group ...... 14 2. Composition of the Management Board, Supervisory Board and Directors of the PZU Group ...... 29 3. Key accounting principles (accounting policy) ...... 31 4. Key estimates and judgments ...... 41 5. Corrections of errors from previous years ...... 41 6. Significant events materially affecting the structure of line items in the financial statements ...... 41 7. Material events after the end of the reporting period ...... 42 8. Supplementary notes to the condensed interim consolidated financial statements ...... 44 9. Contingent assets and liabilities ...... 80 10. Capital management ...... 80 11. Segment reporting ...... 81 12. Issues, redemptions and repayments of debt securities and equity securities...... 93 13. Default or breach of material provisions of loan agreements ...... 93 14. Granting of loan sureties or guarantees by PZU or its subsidiaries ...... 93 15. Dividends ...... 93 16. Disputes ...... 94 17. Other information ...... 99
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) Introduction
Compliance statement
These condensed interim consolidated financial statements of the Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group (“condensed interim consolidated financial statements” and “PZU Group”, respectively) have been prepared in line with the requirements of International Accounting Standard 34 “Interim Financial Reporting”, as endorsed by the Commission of European Communities, and the requirements set forth in the Regulation on the Current and Periodic Information. These condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the PZU Group for 2016.
Period covered by these condensed interim consolidated financial statements
These condensed interim consolidated financial statements cover the period of 6 months from 1 January to 30 June 2017. The financial statements of the subsidiaries have been prepared for the same reporting period as the statements of the parent company.
Functional and presentation currency
Functional and presentation currency of PZU and other Polish registered companies is the Polish zloty. The functional currency of companies with their registered office in Lithuania, Latvia and Sweden is the euro and the functional currency of companies with their registered office in Ukraine is the Ukrainian hryvnia. Unless noted otherwise, all amounts presented in these condensed interim consolidated financial statements are stated in millions of Polish zloty.
FX rates
Financial data of foreign subsidiaries are converted into Polish zloty as follows: assets and liabilities – at the average exchange rate set by the National Bank of Poland at the end of the reporting period; items of the statement of profit or loss and other comprehensive income – at the arithmetic mean of average exchange rates set by the National Bank of Poland as at the dates ending each month of the reporting period. 1 January – 1 January – Currency 30 June 2017 30 June 2016 30 June 2017 30 June 2016 Euro 4.2474 4.3805 4.2265 4.4255 Ukrainian hryvnia 0.1459 0.1535 0.1424 0.1603
Going concern assumption
These condensed interim consolidated financial statements have been drawn up under the assumption that PZU Group entities remain a going concern in the foreseeable future, i.e. in the period of at least 12 months after the end of the reporting period. As at the date of signing these condensed interim consolidated financial statements, there are no facts or circumstances that would indicate a threat to the ability of PZU Group entities to continue their activity in the period
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) of 12 months after the end of the reporting period as a result of an intentional or an induced discontinuation or a material curtailment of their hitherto activity.
Discontinued operations
In the period of 6 months ended 30 June 2017, the PZU Group companies did not discontinue any type of activity.
Seasonal or cyclical business
The PZU Group’s business is neither seasonal nor subject to business cycles to a significant extent.
Glossary of terms
Explained below are the most important terms and abbreviations used in the condensed interim consolidated financial statements.
Names of companies
AAS Balta – Apdrošināšanas Akciju Sabiedrība Balta. Alior Bank – Alior Bank SA. Bank BPH – Bank BPH SA. Elvita – Przedsiębiorstwo Świadczeń Zdrowotnych i Promocji Zdrowia ELVITA – Jaworzno III sp. z o.o. EMC – EMC Instytut Medyczny SA. Gamma – Centrum Medyczne Gamma sp. z o.o. Alior Bank Group – Alior Bank with its subsidiaries: Alior Services sp. z o.o., Centrum Obrotu Wierzytelnościami sp. z o.o., Alior Leasing sp. z o.o., Meritum Services ICB SA, Money Makers TFI SA, New Commerce Services sp. z o.o., Absource sp. z o.o., Serwis Ubezpieczeniowy sp. z o.o. Armatura Group – Armatura Kraków SA with its subsidiaries: Aquaform SA, Aquaform Badprodukte GmbH, Aquaform Ukraine ТОW, Aquaform Romania SRL, Morehome.pl sp. z o.o. Link4 – Link4 Towarzystwo Ubezpieczeń Spółka Akcyjna. NZOZ Trzebinia – Niepubliczny Zakład Opieki Zdrowotnej Trzebinia sp. z o.o. Pekao – Bank Pekao SA. PFR – Polski Fundusz Rozwoju SA. PGAM – Pioneer Global Asset Management S.p.A. Pioneer Pekao TFI – Pioneer Pekao Towarzystwo Funduszy Inwestycyjnych SA. Pioneer PTE – Pekao Pioneer Powszechne Towarzystwo Emerytalne SA. Bank BPH’s Core Business – organized part of the business including all of Bank BPH’s assets and equity and liabilities excluding the assets and equity and liabilities that remained in Bank BPH after the demerger and which constitute Bank BPH’s mortgage business. PPIM – Pioneer Pekao Investment Management SA. Proelmed – Przedsiębiorstwo Usług Medycznych PROELMED sp. z o.o. PTE PZU – Powszechne Towarzystwo Emerytalne PZU SA. PZU, parent company – Powszechny Zakład Ubezpieczeń Spółka Akcyjna. PZU CO – PZU Centrum Operacji Spółka Akcyjna.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
PZU Ukraine – PrJSC IC PZU Ukraine. PZU Ukraine Life – PrJSC IC PZU Ukraine Life Insurance. PZU Życie – Powszechny Zakład Ubezpieczeń na Życie Spółka Akcyjna. SU Krystynka – Sanatorium Uzdrowiskowe „Krystynka” sp. z o.o. TFI PZU – Towarzystwo Funduszy Inwestycyjnych PZU SA. TUW PZUW – Towarzystwo Ubezpieczeń Wzajemnych Polski Zakład Ubezpieczeń Wzajemnych. Xelion – Dom Inwestycyjny Xelion sp. z o.o.
Other definitions
BFG – Bank Guarantee Fund [Polish: Bankowy Fundusz Gwarancyjny]. CGU – cash generating unit. MCBRMOD – main corporate body responsible for making operating decisions within the meaning of IFRS 8 – Operating segments. WSE – Warsaw Stock Exchange. IBNR – Incurred But Not Reported or 2nd provision – provision for claims and accidents that have transpired but have not yet been reported. Standalone financial statements of PZU for 2016 – annual standalone financial statements of Powszechny Zakład Ubezpieczeń Spółka Akcyjna for the year ended 31 December 2016, prepared in accordance with PAS, signed by the PZU Management Board on 14 March 2017. KNF – Polish Financial Supervision Authority [Polish: Komisja Nadzoru Finansowego]; IFRS – International Financial Reporting Standards, as endorsed by the European Commission, published and in force as at 30 June 2017. NBP – National Bank of Poland; TCG – Tax Group [Polish: Podatkowa Grupa Kapitałowa] established under an agreement signed on 25 September 2014 by and between 13 PZU Group companies: PZU, PZU Życie, Link4, PZU CO, PZU Pomoc SA, Ogrodowa-Inwestycje sp. z o.o., Ipsilon sp. z o.o., PZU Asset Management SA, TFI PZU, PZU Zdrowie SA, PZU Finanse sp. z o.o., Omicron SA, Omicron Bis SA. The Tax Group was established for a period of 3 years – from 1 January 2015 to 31 December 2017. The Tax Group is represented by PZU as its parent company. PAS – Accounting Act of 29 September 1994 (consolidated text: Journal of Laws of 2016 Item 1047, as amended) and regulations issued thereunder. Regulation on Current and Periodic Information – Finance Minister’s Regulation of 19 February 2009 on current and periodic information conveyed by securities issuers and the conditions for recognizing the information required by the legal regulations of a non-member state as equivalent (consolidated text: Journal of Laws of 2014 Item 133, as amended). Consolidated financial statements – the PZU Group’s annual consolidated financial statements for the year ended 31 December 2016 prepared in accordance with IFRS and signed by the PZU Management Board on 14 March 2017. The consolidated financial statements are available on the PZU website at www.pzu.pl in the “Investor Relations” tab. KNF Office – Office of the Polish Financial Supervision Authority. Insurance Activity Act – Act of 11 September 2015 on Insurance and Reinsurance Activity (i.e. Journal of Laws of 2017 Item 1170). ZUS – Social Insurance Institution [Polish: Zakład Ubezpieczeń Społecznych].
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) Interim consolidated financial statements
1. Interim consolidated statement of profit or loss
1 April – 1 January – 1 April – 1 January – Consolidated statement of profit or loss Note 30 June 2016 30 June 2016 30 June 2017 30 June 2017 (restated) (restated) Gross written premiums 8.1 5,838 11,606 5,061 9,862 Reinsurers’ share in gross written premium (214) (307) (88) (142) Net written premium 5,624 11,299 4,973 9,720 Movement in the net provision for unearned (349) (952) (304) (734) premiums Net earned premium 5,275 10,347 4,669 8,986
Fees and commission income 8.2 431 702 209 395 Net investment income 8.3 1,921 3,267 949 1,879 Net result on the realization of investments and 8.4 (88) (301) (379) (470) impairment charges Net movement in the fair value of assets and 8.5 (460) 66 (119) (4) liabilities measured at fair value Other operating income 8.6 251 530 209 412
Claims and movement in technical provisions (3,587) (7,379) (3,135) (6,231) Reinsurers’ share in claims and movement in 83 165 36 66 technical provisions Net insurance claims and benefits 8.7 (3,504) (7,214) (3,099) (6,165)
Fees and commission expenses 8.8 (123) (204) (75) (127) Interest expenses 8.9 (254) (426) (175) (346) Acquisition expenses 8.10 (718) (1,412) (635) (1,252) Administrative expenses 8.10 (1,164) (2,025) (648) (1,278) Other operating expenses 8.11 (627) (1,131) (572) (980) Operating profit 940 2,199 334 1,050 Share of the financial results of entities measured (1) (1) (1) (1) by the equity method Profit before tax 939 2,198 333 1,049 Income tax 8.13 (213) (465) (102) (259) Net profit, including: 726 1,733 231 790 - profit attributable to the equity holders of the 506 1,446 168 660 parent company - profit attributable to holders of non-controlling 220 287 63 130 interests
Basic and diluted weighted average number of 8.12 863,521,269 863,516,697 863,473,794 863,473,794 ordinary shares Basic and diluted earnings per ordinary share (in 8.12 0.59 1.67 0.19 0.76 PLN)
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
2. Interim consolidated statement of comprehensive income
1 April – 1 January – Consolidated statement of comprehensive 1 April – 1 January – Note 30 June 2016 30 June 2016 income 30 June 2017 30 June 2017 (restated) (restated) Net profit 726 1,733 231 790 Other comprehensive income 8.13 1 8 (19) (28) Subject to subsequent transfer to the statement - 7 (19) (28) of profit or loss Measurement of financial instruments available (14) 42 (62) (70) for sale Foreign exchange translation differences 1 (53) 41 41 Net cash flow hedging 13 18 2 1 Not to be reclassified to the statement of profit or 1 1 - - loss in the future Reclassification of real property from property, 1 1 - - plant and equipment to investment property Total net comprehensive income 727 1,741 212 762 - comprehensive income attributed to the equity 491 1,419 167 645 holders of the parent company - comprehensive income attributed to holders of 236 322 45 117 non-controlling interests
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
3. Interim consolidated statement of financial position
1 January 31 December Assets Note 30 June 2017 2016 2016 (restated) Goodwill 8.14 3,278 1,583 1,532 Intangible assets 1,963 1,463 1,393 Other assets 8.15 892 871 813 Deferred acquisition expenses 1,473 1,407 1,154 Reinsurers’ share in technical provisions 8.23 1,126 990 1,097 Property, plant and equipment 2,819 1,467 1,300 Investment properties 1,703 1,738 1,172 Entities measured by the equity method 190 37 54 Financial assets 257,125 105,300 89,229 Held to maturity 8.16.1 23,371 17,346 17,370 Available for sale 8.16.2 31,674 11,635 7,745 Measured at fair value through profit or loss 8.16.3 18,267 21,882 20,648 Hedge derivatives 298 72 140 Loans 8.16.4 183,515 54,365 43,326 Deferred tax assets 1,586 624 369 Receivables 8.18 10,222 5,703 3,338 Cash and cash equivalents 11,646 2,973 2,440 Assets held for sale 8.22 1,239 1,189 1,506 Total assets 295,262 125,345 105,397
1 January 31 December Equity and liabilities Note 30 June 2017 2016 2016 (restated) Equity Equity attributable to the equity holders of the Parent Company 13,154 13,010 12,924 Share capital 86 86 86 Other equity 11,908 10,869 10,142 Retained earnings 1,160 2,055 2,696 Retained earnings (286) 108 2,696 Net profit 1,446 1,947 - Non-controlling interests 21,474 4,117 2,194 Total equity 34,628 17,127 15,118
Liabilities Technical provisions 8.23 43,785 42,194 41,280 Provisions for employee benefits 532 128 117 Other provisions 8.24 574 367 108 Deferred tax liability 623 469 509 Financial liabilities 8.25 204,291 60,030 44,695 Other liabilities 8.26 10,797 4,997 3,570 Liabilities related directly to assets classified as held for sale 8.22 32 33 - Total liabilities 260,634 108,218 90,279 Equity and liabilities, total 295,262 125,345 105,397
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
4. Interim statement of changes in consolidated equity
Equity attributable to the equity holders of the Parent Company Other equity Retained earnings Statement of changes in consolidated Non- Total Share Actuarial gains Foreign equity equity Suppleme Other controlling capital Treasury Revaluation and losses related exchange Retained Total ntary reserve Net profit interests shares reserve to provisions for translation earnings capital capital employee benefits differences
Balance as at 1 January 2017 86 (1) 10,758 106 5 3 (2) 2,055 - 13,010 4,117 17,127 Measurement of financial instruments available - - - 21 - - - - - 21 21 42 for sale Cash flow hedging - - - 4 - - - - - 4 14 18 Foreign exchange translation differences ------(53) - - (53) - (53) Reclassification of real property from property, - - - 1 - - - - - 1 - 1 plant and equipment to investment property Total other net comprehensive income - - - 26 - - (53) - - (27) 35 8 Net profit (loss) ------1,446 1,446 287 1,733 Total comprehensive income - - - 26 - - (53) - 1,446 1,419 322 1,741 Other changes, including: - 1 1,069 (4) - - - (2,341) - (1,275) 17,035 15,760 Distribution of financial result - - 1,122 - - - - (2,330) - (1,208) - (1,208) Transactions on treasury shares - 1 ------1 - 1 Acquisition of Pekao shares ------17,176 17,176 Transactions with holders of non-controlling - - (57) ------(57) (116) (173) interests Sale of revalued real estate - - 4 (4) ------Other equity changes 1) ------(11) - (11) (25) (36) As at 30 June 2017: 86 - 11,827 128 5 3 (55) (286) 1,446 13,154 21,474 34,628 1) Additional information are presented in item 1.4.1.2
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Interim statement of changes in consolidated equity (continued)
Equity attributable to the equity holders of the Parent Company
Other equity Retained earnings Non- Total Statement of changes in consolidated equity Share controllin Actuarial gains Foreign equity Suppleme Other capital Treasury Revaluation and losses related exchange Retained Net Total g ntary reserve shares reserve to provisions for translation earnings profit interests capital capital employee benefits differences
Balance as at 1 January 2016 86 - 9,947 241 - (4) (42) 2,696 - 12,924 2,194 15,118 Measurement of financial instruments available for - - - (104) - - - - - (104) (40) (144) sale Cash flow hedging - - - (9) - - - - - (9) (22) (31) Foreign exchange translation differences ------40 - - 40 - 40 Actuarial gains and losses related to provisions for - - - - - 7 - - - 7 - 7 employee benefits Reclassification of real property from property, - - - 3 - - - - - 3 - 3 plant and equipment to investment property Total other net comprehensive income - - - (110) - 7 40 - - (63) (62) (125) Net profit (loss) ------1,947 1,947 470 2,417 Total comprehensive income - - - (110) - 7 40 - 1,947 1,884 408 2,292 Other changes, including: - (1) 811 (25) 5 - - (2,588) - (1,798) 1,515 (283) Distribution of financial result - - 787 - 5 - - (2,588) - (1,796) - (1,796) Issues of Alior Bank shares ------1,528 1,528 Transactions on treasury shares (1) ------(1) - (1) Changes in the composition of the PZU Group and transactions with holders of non-controlling - - (1) ------(1) (13) (14) interests Sale of revalued real estate - - 25 (25) ------Balance as at 31 December 2016 86 (1) 10,758 106 5 3 (2) 108 1,947 13,010 4,117 17,127
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Interim statement of changes in consolidated equity (continued)
Equity attributable to the equity holders of the Parent Company
Statement of changes in consolidated Other equity Retained earnings Non- Total equity Share controlli Actuarial gains Foreign equity Suppleme Other capital Treasury Revaluation and losses related exchange Retained Total ng ntary reserve Net profit (restated) shares reserve to provisions for translation earnings interests capital capital employee benefits differences
Balance as at 1 January 2016 86 - 9,947 241 - (4) (42) 2,696 - 12,924 2,194 15,118 Measurement of financial instruments available - - - (56) - - - - (56) (14) (70) for sale Cash flow hedging ------1 1 Foreign exchange translation differences ------41 - - 41 - 41 Total other net comprehensive income - - - (56) - - 41 - - (15) (13) (28) Net profit (loss) ------660 660 130 790 Total comprehensive income - - - (56) - - 41 - 660 645 117 762 Other changes, including: - (1) 798 (11) 5 - - (2,588) - (1,797) 1,518 (279) Distribution of financial result - - 787 - 5 - - (2,588) - (1,796) - (1,796) Issues of Alior Bank’s shares ------1,518 1,518 Transactions on treasury shares - (1) ------(1) - (1) Sale of revalued real estate - - 11 (11) ------As at 30 June 2016 86 (1) 10,745 174 5 (4) (1) 108 660 11,772 3,829 15,601
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
5. Interim consolidated cash flow statement
1 January – 1 January – Consolidated cash flow statement 30 June 2017 30 June 2016 Profit before tax 2,198 1,049 Adjustments 773 1,068 Movement in loan receivables from clients (2,368) (3,271) Movement in liabilities under deposits 2,377 4,136 Movement in valuation of real properties measured at fair value (66) (23) Interest income and expenses (707) (564) Realized gains/losses on investment activity and impairment charges 301 470 Result on foreign exchange differences (358) 6 Movement in deferred acquisition expenses (66) (104) Amortization of intangible assets and depreciation of property, plant and equipment 271 218 Movement in reinsurers’ share in technical provisions (136) 85 Movement in technical provisions 1,591 421 Movement in receivables (2,143) (181) Movement in liabilities 1,382 41 Cash flow on investment contracts (55) (90) Acquisitions and redemptions of participation units and investment certificates of mutual (150) 55 funds Income tax paid (553) (233) Other adjustments 1,453 102 Net cash flow on operating activity 2,971 2,117 Cash flow on investing activity Proceeds 488,251 479,715 - sale of investment properties 43 40 - proceeds from investment properties 150 135 - sale of intangible assets and components of property, plant and equipment 5 10 - sale of ownership interests and shares 1,739 1,860 - realization of debt securities 111,652 63,801 - closing of buy-sell-back transactions 175,743 193,407 - closing of term deposits in credit institutions 114,140 171,324 - realization of other investments 78,937 48,406 - interest received 816 708 - dividends received 15 10 - cash acquired in business combinations and when changing the scope of consolidation 4,998 - - other investment proceeds 13 14
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Interim consolidated cash flow statement (continued)
1 January – 1 January – Consolidated cash flow statement 30 June 2017 30 June 2016 Expenditures (483,411) (481,845) - purchase of investment properties (24) (138) - expenditures for the maintenance of investment properties (90) (80) - purchase of intangible assets and components of property, plant and equipment (194) (153) - purchase of ownership interests and shares (932) (1,863) - purchase of ownership interests and shares in subsidiaries (6,200) (344) - decrease in cash due to a change in the scope of consolidation (54) - - purchase of debt securities (106,503) (67,410) - opening of buy-sell-back transactions (174,595) (192,254) - purchase of term deposits in credit institutions (113,701) (170,947) - purchase of other investments (81,113) (48,655) - other expenditures for investments (6) (1) Net cash flow on investing activity 4,840 (2,130) Cash flow on financing activity Proceeds 130,016 177,680 - proceeds from the issue of shares by subsidiaries (in the part paid up by holders of non- - 1,502 controlling interests) - proceeds from loans 1,611 39 - proceeds from the issue of own debt securities 2,250 264 - opening of sell-buy-back transactions 126,155 175,875 Expenditures (129,070) (178,411) - repayment of loans (1,618) (2) - closing of sell-buy-back transactions (127,415) (178,388) - interest on loans (3) (2) - interest on outstanding debt securities (34) (19) Net cash flow on financing activity 946 (731) Total net cash flow 8,757 (744) Cash and cash equivalents at the beginning of the period 2,973 2,440 Movement in cash due to foreign exchange differences (84) 12 Cash and cash equivalents at the end of the period, including: 11,646 1,708 - restricted cash 55 67
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) Supplementary notes to the condensed interim consolidated financial statements
1. Information on PZU and the PZU Group
1.1 PZU
The parent company in the PZU Group is PZU – a joint stock company with its registered office in Warsaw at Al. Jana Pawła II 24. PZU is entered in the National Court Register kept by the District Court for the Capital City of Warsaw in Warsaw, 12th Commercial Division of the National Court Register, under the file number KRS 0000009831. According to the Polish Classification of Business Activity (PKD), the core business of PZU consists of other casualty insurance and property insurance (PKD 65.12) and according to the European Classification of Business Activity – non- life insurance (EKD 6603).
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
1.2 PZU Group entities
Date of % of share capital and % of votes held obtaining directly or indirectly by PZU No. Name of the entity Registered office control / Line of business and website significant 30 June 2017 31 December 2016 influence Consolidated insurance entities 1 Powszechny Zakład Ubezpieczeń SA Warsaw n/a n/a n/a Non-life insurance. http://www.pzu.pl/ Life insurance. 2 Powszechny Zakład Ubezpieczeń na Życie SA Warsaw 18.12.1991 100.00% 100.00% http://www.pzu.pl/grupa-pzu/pzu-zycie 3 Link4 Towarzystwo Ubezpieczeń SA Warsaw 15.09.2014 100.00% 100.00% Non-life insurance. http://www.link4.pl/ Towarzystwo Ubezpieczeń Wzajemnych Polski 4 Warsaw 20.11.2015 100.00% 100.00% Non-life insurance. http://tuwpzuw.pl/ Zakład Ubezpieczeń Wzajemnych 5 Lietuvos Draudimas AB Vilnius (Lithuania) 31.10.2014 100.00% 100.00% Non-life insurance. http://www.ld.lt/ 6 Apdrošināšanas Akciju Sabiedrība Balta Riga, Latvia 30.06.2014 99.99% 99.99% Non-life insurance. http://www.balta.lv/ 7 PrJSC IC PZU Ukraine Kiev (Ukraine) 01.07.2005 100.00% 100.00% Non-life insurance. http://www.pzu.com.ua/ 8 PrJSC IC PZU Ukraine Life Insurance Kiev (Ukraine) 01.07.2005 100.00% 100.00% Life insurance. http://www.pzu.com.ua/ 9 UAB PZU Lietuva Gyvybes Draudimas Vilnius (Lithuania) 26.04.2002 99.34% 99.34% Life insurance. https://pzugd.lt/ Consolidated entities – Pekao Group 10 Bank Pekao SA Warsaw 07.06.2017 20.00% n/a Banking services. https://www.pekao.com.pl/ 11 Pekao Bank Hipoteczny SA Warsaw 07.06.2017 20.00% n/a Banking services. http://www.pekaobh.pl/ 12 Centralny Dom Maklerski Pekao SA Warsaw 07.06.2017 20.00% n/a Brokerage services. https://www.cdmpekao.com.pl/ 13 Pekao Leasing sp. z o.o. Warsaw 07.06.2017 20.00% n/a Leasing services. http://www.pekaoleasing.com.pl/ 14 Pekao Investment Banking SA Warsaw 07.06.2017 20.00% n/a Brokerage services. http://pekaoib.pl/ 15 Pekao Faktoring sp. z o.o. Lublin 07.06.2017 20.00% n/a Factoring services. https://www.pekaofaktoring.pl/ Pekao Pioneer Powszechne Towarzystwo Management of pension funds. 16 Warsaw 07.06.2017 13.00%1) n/a Emerytalne SA https://www.pekaopte.pl/ 17 Centrum Kart SA Warsaw 07.06.2017 20.00% n/a Auxiliary financial services. http://www.centrumkart.pl/ 18 Pekao Financial Services sp. z o.o. Warsaw 07.06.2017 20.00% n/a Transfer agent. http://www.pekao-fs.com.pl/pl/ 19 Centrum Bankowości Bezpośredniej sp. z o.o. Kraków 07.06.2017 20.00% n/a Call-center services. http://www.cbb.pl/ 20 Pekao Property SA Warsaw 07.06.2017 20.00% n/a Development activity. 21 FPB – Media sp. z o.o. Warsaw 07.06.2017 20.00% n/a Development activity.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Date of % of share capital and % of votes held obtaining directly or indirectly by PZU No. Name of the entity Registered office control / Line of business and website significant 30 June 2017 31 December 2016 influence Consolidated entities – Pekao Group – continued Pekao Fundusz Kapitałowy sp. z o.o. (in 22 Warsaw 07.06.2017 20.00% n/a Business consulting liquidation) Consolidated entities – Alior Bank Group 23 Alior Bank SA Warsaw 18.12.2015 31.36% 29.45% Banking services. https://www.aliorbank.pl/ Other activity supporting financial services, excluding 24 Alior Services sp. z o.o. Warsaw 18.12.2015 31.36% 29.45% insurance and pension funds. 25 Centrum Obrotu Wierzytelnościami sp. z o.o. Kraków 18.12.2015 31.36% 29.45% Debt trading. Lease services. 26 Alior Leasing sp. z o.o. Wroclaw 18.12.2015 31.36% 29.45% https://www.aliorbank.pl/wlasna-dzialalnosc/alior- leasing.html 27 Meritum Services ICB SA Gdańsk 18.12.2015 31.36% 29.45% IT services. Asset management services and management of Alior 28 Money Makers TFI SA Warsaw 18.12.2015 18.87%2) 17.33%2) SFIO subfunds. http://www.moneymakers.pl 29 New Commerce Services sp. z o.o. Warsaw 18.12.2015 31.36% 29.45% No business conducted. 30 Absource sp. z o.o. Kraków 04.05.2016 31.36% 29.45% Provision of IT services. 31 Serwis Ubezpieczeniowy sp. z o.o. Katowice 30.01.2017 31.36% n/a Brokerage activity. Consolidated entities – other companies Management of pension funds. 32 Powszechne Towarzystwo Emerytalne PZU SA Warsaw 08.12.1998 100.00% 100.00% http://www.pzu.pl/grupa-pzu/pte-pzu Auxiliary activity associated with insurance and pension 33 PZU Centrum Operacji SA Warsaw 30.11.2001 100.00% 100.00% funds. Creation, representing and management of mutual 34 Towarzystwo Funduszy Inwestycyjnych PZU SA Warsaw 30.04.1999 100.00% 100.00% funds. http://www.pzu.pl/grupa-pzu/tfi-pzu Provision of assistance services. 35 PZU Pomoc SA Warsaw 18.03.2009 100.00% 100.00% http://www.pzu.pl/grupa-pzu/pzu-pomoc 36 PZU Finance AB (publ.) Stockholm, Sweden 02.06.2014 100.00% 100.00% Financial services. 37 PZU Finanse sp. z o.o. Warsaw 08.11.2013 100.00% 100.00% Financial and bookkeeping services. 38 Tower Inwestycje sp. z o.o. Warsaw 27.08.1998 100.00% 100.00% Other service activity. Buying, operating, renting and selling real estate. 39 Ogrodowa-Inwestycje sp. z o.o. Warsaw 15.09.2004 100.00% 100.00% http://www.ogrodowainwestycje.pl/ 40 PZU Zdrowie SA Warsaw 02.09.2011 100.00% 100.00% Medical services. https://www.pzu.pl/grupa-pzu/pzu-
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Date of % of share capital and % of votes held obtaining directly or indirectly by PZU No. Name of the entity Registered office control / Line of business and website significant 30 June 2017 31 December 2016 influence zdrowie-sa
Consolidated entities– other companies 41 Centrum Medyczne Medica sp. z o.o. Płock 09.05.2014 100.00% 100.00% Medical services. http://cmmedica.pl/ Specjalistyczna Przychodnia Przemysłowa Prof- 42 Włocławek 12.05.2014 100.00% 100.00% Medical services. http://cmprofmed.pl/ Med sp. z o.o. Hospital, physical therapy and spa services. 43 Sanatorium Uzdrowiskowe “Krystynka” sp. z o.o. Ciechocinek 09.05.2014 99.09% 99.09% http://www.sanatoriumkrystynka.pl/ Przedsiębiorstwo Świadczeń Zdrowotnych 44 i Promocji Zdrowia ELVITA – Jaworzno III Jaworzno 01.12.2014 100.00% 100.00% Medical services. http://www.elvita.pl/ sp. z o.o. Przedsiębiorstwo Usług Medycznych PROELMED 45 Łaziska Górne 01.12.2014 57.00% 57.00% Medical services. http://www.proelmed.pl/ sp. z o.o. 46 Rezo-Medica sp. z o.o. Płock 23.04.2015 100.00% 100.00% Medical services. http://rezo-medica.pl/ 47 Centrum Medyczne Gamma sp. z o.o. Warsaw 08.09.2015 60.46% 60.46% Medical services. http://www.cmgamma.pl/ 48 Medicus w Opolu sp. z o.o. Opole 30.09.2015 100.00% 100.00% Medical services. http://medicus.opole.pl/ 49 Polmedic sp. z o.o. Radom 30.11.2016 100.00% 100.00% Medical services. http://www.polmedic.com.pl/ Specjalistyczna Przychodnia Medycyny Pracy 50 Radom 30.11.2016 100.00% 100.00% Medical services. http://www.medycynapracy.com.pl/ sp. z o.o. Artimed Niepubliczny Zakład Opieki Zdrowotnej 51 Kielce 21.12.2016 100.00% 100.00% Medical services. http://artimed.pl/ sp. z o.o. 52 Revimed sp. z o.o. Gdańsk 31.05.2017 100.00% n/a Medical services. http://www.revimed.pl/ Niepubliczny Zakład Opieki Zdrowotnej Trzebinia 53 Trzebinia 30.06.2017 95.25% n/a Medical services. http://www.nzoz.trzebinia.com/ sp. z o.o. 54 Arm Property sp. z o.o. Kraków 26.11.2014 100.00% 100.00% Purchase and sale of real estate. 55 Ipsilon sp. z o.o. Warsaw 02.04.2009 100.00% 100.00% Provision of assistance services and medical services. 56 PZU Asset Management SA Warsaw 12.07.2001 100.00% 100.00% No business conducted. 57 Omicron SA Warsaw 13.09.2011 100.00% 100.00% No business conducted. 58 Omicron BIS SA Warsaw 28.08.2014 100.00% 100.00% No business conducted. 59 Sigma BIS SA Warsaw 12.12.2014 100.00% 100.00% No business conducted. 60 LLC SOS Services Ukraine Kiev (Ukraine) 01.07.2005 100.00% 100.00% Assistance services. 61 L4C sp. z o.o. w likwidacji 3) Warsaw 15.09.2014 100.00% 100.00% No business conducted.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Date of % of share capital and % of votes held obtaining directly or indirectly by PZU No. Name of the entity Registered office control / Line of business and website significant 30 June 2017 31 December 2016 influence Consolidated entities – Armatura Group Production and sale of radiators and sanitary fittings 62 Armatura Kraków SA 4) Kraków 07.10.1999 100.00% 100.00% and administration and management of the group. http://www.grupa-armatura.pl/ Production and sale of bathroom accessories and 63 Aquaform SA Środa Wlkp. 15.01.2015 100.00% 100.00% fittings. 64 Aquaform Badprodukte GmbH Anhausen, Germany 15.01.2015 100.00% 100.00% Wholesale trade. 65 Aquaform Ukraine ТОW Zhytomyr, Ukraine 15.01.2015 100.00% 100.00% Wholesale trade. 66 Aquaform Romania SRL Prejmer, Romania 15.01.2015 100.00% 100.00% Wholesale trade. 67 Morehome.pl sp. z o.o. Środa Wlkp. 15.01.2015 100.00% 100.00% No business conducted. Consolidated entities – mutual funds 68 PZU SFIO Universum Warsaw 15.12.2009 n/a n/a Investment of funds collected from fund members. 69 PZU FIZ Dynamiczny Warsaw 27.01.2010 n/a n/a as above 70 PZU FIZ Sektora Nieruchomości 5) Warsaw 01.07.2008 n/a n/a as above 71 PZU FIZ Sektora Nieruchomości 2 5) Warsaw 21.11.2011 n/a n/a as above 72 PZU FIZ Aktywów Niepublicznych BIS 1 Warsaw 12.12.2012 n/a n/a as above 73 PZU FIZ Aktywów Niepublicznych BIS 2 Warsaw 19.11.2012 n/a n/a as above 74 PZU FIZ Surowcowy Warsaw 03.09.2015 n/a n/a as above 75 PZU FIO Globalny Obligacji Korporacyjnych Warsaw 30.05.2016 n/a n/a as above 76 PZU FIZ Forte Warsaw 01.07.2016 n/a n/a as above 77 PZU Telekomunikacja Media Technologia Warsaw 07.09.2016 n/a n/a as above 78 PZU Dłużny Aktywny Warsaw 26.10.2016 n/a n/a as above 79 PZU FIZ Aktywów Niepublicznych Witelo Fund Warsaw 30.11.2016 n/a n/a as above 80 PZU FIZ Akcji Combo Warsaw 09.03.2017 n/a n/a as above
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Date of % of share capital and % of votes held obtaining directly or indirectly by PZU No. Name of the entity Registered office control / Line of business and website significant 30 June 2017 31 December 2016 influence Associates 81 GSU Pomoc Górniczy Klub Ubezpieczonych SA Tychy 08.06.1999 30.00% 30.00% Insurance administration. Human health protection, research and development in 82 EMC Instytut Medyczny SA Wroclaw 18.06.2013 28.31% 6) 28.31% 6) the medical sciences and pharmaceutical practice. 83 Dom Inwestycyjny Xelion sp. z o.o. Warsaw 07.06.2017 10.00%7) n/a Financial intermediation. https://www.xelion.pl/ 84 Pioneer Pekao Investment Management SA Warsaw 07.06.2017 9.80%7) n/a Asset management. http://www.pioneer.com.pl/ Creation, representing and management of mutual 85 Pioneer Pekao TFI SA Warsaw 07.06.2017 9.80%7) n/a funds. http://www.pioneer.com.pl/ Tortola, British Consulting and business activity – no business 86 CPF Management 07.06.2017 8.00%7) n/a Virgin Islands conducted. 1) Direct subsidiary of Pekao, in which it holds a 65.00% stake. As a consequence, the PZU Management Board considers the PZU Group to be in control of the company. 2) Direct subsidiary of Alior Bank, in which Alior Bank holds a 60.16% stake. As a consequence, the PZU Management Board considers the PZU Group to be in control of the company. 3) On 16 May 2017, the shareholder meeting adopted a resolution to open the company’s liquidation process. 4) On 30 June 2017, Armatura Kraków SA merged with Armatoora SA. The merger was effected by the transfer to Armatura Kraków SA of the entire property of Armatoora SA without a simultaneous increase of the acquiring company’s share capital and without an exchange of the acquired company’s shares to the acquiring company shares and without amending the acquiring company’s articles of association. The transaction had no impact on the condensed interim consolidated financial statements. 5) As at 30 June 2017, the funds PZU FIZ Sektora Nieruchomości and PZU FIZ Sektora Nieruchomości 2 conducted their investment activity through (consolidated) subsidiary companies established under commercial law as special- purpose vehicles whose number in the respective funds was: 15 and 20 (as at 31 December 2016: 24 and 11, respectively). 6) The percentage of votes held by PZU is different from the stake held in the share capital, and both as at 30 June 2017 and as at 31 December 2016 it was 25.44%. The difference between the percentage of votes and the stake in the share capital results from the fact that holders of non-controlling interests hold certain shares preferred as to the voting rights. 7) Associates of Pekao that holds 50,00% (Xelion), 49,00% (PPIM and Pioneer Pekao TFI) and 40,00% of shares respectively. Consequently the Management Board of PZU presumes that the PZU Group imposes significant influence over these entities.
As at 30 June 2017, besides the companies listed in the table the PZU Group held a 100% stake in Syta Development sp. z o.o. in liquidation, control over which is exercised by a liquidator independent of the PZU Group and for this reason the company is not subject to consolidation. The value of these shares in the PZU Group’s consolidated statement of financial position was zero.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
1.3 Non-controlling interests
The following table presents current and past subsidiaries with non-controlling interests: 31 December Name of the company 30 June 2017 2016 Pekao 80.00% n/a Alior Bank 68.64% 70.55% Gamma 39.54% 39.54% Proelmed 43.00% 43.00% NZOZ Trzebinia sp. z o.o. 4.75% n/a SU Krystynka 0.91% 0.91% UAB PZU Lietuva Gyvybes Draudimas 0.66% 0.66% AAS Balta 0.01% 0.01%
31 December Carrying amount non-controlling interests 30 June 2017 2016 Pekao 17,326 n/a Alior Bank 4,144 4,111 Other 4 6 Total 21,474 4,117 Presented below is condensed financial information for the Pekao Group and the Alior Bank Group included in the condensed interim consolidated financial statements. Pekao Alior Bank Assets 31 December 31 December 30 June 2017 30 June 2017 2016 2016 Intangible assets 537 n/a 677 2) 666 2) Other assets 188 n/a 94 73 Property, plant and equipment 1,400 n/a 476 486 Investment properties 23 n/a - - Entities measured by the equity method 157 n/a - - Financial assets 157,697 n/a 56,152 57,092 Held to maturity 4,384 n/a 223 220 Available for sale 22,453 n/a 6,757 9,505 Measured at fair value through profit or loss 3,571 n/a 421 419 Hedge derivatives 259 n/a 46 72 Loans 127,030 n/a 48,705 2) 46,876 2) Deferred tax assets 921 n/a 608 2) 594 2) Receivables 2,560 n/a 748 815 Cash and cash equivalents 6,943 n/a 2,744 1,126 Assets held for sale 48 n/a - 1 Total assets 170,474 1) n/a 61,499 60,853
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Pekao Alior Bank Equity and liabilities 31 December 31 December 30 June 2017 30 June 2017 2016 2016 Equity Equity attributable to the equity holders of the Parent 21,638 n/a 6,036 5,827 Company Share capital 262 n/a 1,293 1,293 Other equity 20,578 n/a 4,972 4,298 Retained earnings 798 n/a (229) 2) 236 2) Non-controlling interests 15 n/a 1 1 Total equity 21,653 n/a 6,037 5,828 1)
Liabilities Provisions for employee benefits 383 n/a 46 43 Other provisions 248 n/a 174 276 Deferred tax liability 5 n/a - - Financial liabilities 142,846 n/a 54,091 53,266 Other liabilities 5,339 n/a 1,151 2) 1,440 2) Total liabilities 148,821 n/a 55,462 55,025 Equity and liabilities, total 170,474 1) n/a 61,499 60,853 1) Since the settlement of the acquisition of Pekao shares presented in these condensed interim consolidated financial statements is provisional in nature, the data presented do not include the effect of the fair value measurement of the balance sheet items and the possible intangible assets that may be identified in the purchase price allocation process. 2) Including the effect of the adjustment to the measurement of balance sheet items at fair value as at the consolidation date and their further measurement and the amortization of intangible assets identified in the acquisition of Alior Bank.
Pekao Alior Bank Statement of profit or loss 1 June – 1 January – 1 January – 1 January – 30 June 2017 30 June 2016 30 June 2017 30 June 2016 Fees and commission income 185 n/a 412 279 Net investment income 495 n/a 2,051 1) 1,319 Net result on the realization of investments and (45) n/a (449) (323) impairment charges Net movement in the fair value of assets and liabilities 8 n/a (150) 18 measured at fair value Other operating income 16 n/a 82 44
Fees and commission expenses (25) n/a (169) (112) Interest expenses (83) n/a (308) (300) Administrative expenses (266) n/a (957) 2) (520) Other operating expenses (58) n/a (226) 3) (159) Operating profit 227 n/a 286 1) 2) 3) 246 Share of the profit of entities measured by the equity 3 n/a - - method Profit before tax 230 n/a 286 1) 2) 3) 246 Income tax (52) n/a (80) (62) Net profit 178 n/a 206 1) 2) 3) 184 1) Including PLN 42 million (in H1 2016: PLN 50 million) of positive impact from the differences in interest income on the loan portfolio carried at fair value as at the date of acquisition of Alior Bank. 2) Including PLN 4 million (in H1 2016: PLN 7 million) due to the settlement of a liability arising from unfavorable (liability-generating) real property lease agreements recognized as a result of the acquisition of Alior Bank. 3) Including PLN 18 million (in H1 2016: PLN 23 million) of costs resulting from amortization of intangible assets (relations with clients holding current accounts) resulting from the acquisition of Alior Bank.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Pekao Alior Bank Statement of comprehensive income 1 June – 1 January – 1 January – 1 January – 30 June 2017 30 June 2016 30 June 2017 30 June 2016 Net profit 178 n/a 206 184 Other comprehensive income – subject to subsequent 7 n/a 40 (18) transfer to the statement of profit or loss Measurement of financial instruments available for (5) n/a 34 (19) sale Net cash flow hedging 12 n/a 6 1 Total net comprehensive income 185 n/a 246 166
Pekao Alior Bank Cash flow statement 1 June – 1 January – 1 January – 1 January – 30 June 2017 30 June 2016 30 June 2017 30 June 2016 Net cash flow on operating activity 3,596 n/a (1,979) 1,532 Net cash flow on investing activity (396) n/a 3,639 (5,141) Net cash flow on financing activity (1,244) n/a 14 2,406 Total net cash flow 1,956 n/a 1,674 (1,203) On 19 April 2017, the Ordinary Shareholder Meeting of Pekao adopted a resolution to pay out a dividend of PLN 2,278 million (PLN 8.68 per share). The table below presents additionally the PZU Group’s statement of profit or loss presenting the effect of excluding Alior Bank and Pekao as consolidated subsidiaries. Group Exclusion of Exclusion of Elimination of without Consolidated statement of profit or loss Alior Bank PZU Group Pekao data consolidation Alior for the period from 1 January to 30 June 2017 data adjustments Bank and
Pekao Gross written premiums 11,606 - - - 11,606 Reinsurers’ share in gross written premium (307) - - - (307) Net written premium 11,299 - - - 11,299 Movement in the net provision for unearned premiums (952) - - - (952) Net earned premium 10,347 - - - 10,347
Fees and commission income 702 (412) (185) 6 111 Net investment income 3,267 (2,051) (495) 6 727 Net result on the realization of investments and (301) 449 45 - 193 impairment charges Net movement in the fair value of assets and liabilities 66 150 (8) - 208 measured at fair value Other operating income 530 (82) (16) - 432
Claims and movement in technical provisions (7,379) - - - (7,379) Reinsurers’ share in claims and movement in technical 165 - - - 165 provisions Net insurance claims and benefits (7,214) - - - (7,214)
Fees and commission expenses (204) 169 25 - (10) Interest expenses (426) 308 83 (6) (41) Acquisition expenses (1,412) - - (6) (1,418) Administrative expenses (2,025) 957 266 (8) (810) Other operating expenses (1,131) 226 58 8 (839) Operating profit (loss) 2,199 (286) (227) - 1,686 Share of the financial results of entities measured by the (1) - (3) - (4) equity method Profit (loss) before tax 2,198 (286) (230) - 1,682 Income tax (465) 80 52 - (333) Net profit (loss) 1,733 (206) (178) - 1,349
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Exclusion of Group Elimination of Consolidated statement of profit or loss Alior Bank without PZU Group consolidation for the period from 1 January to 30 June 2016 data Alior adjustments Bank Gross written premiums 9,862 - 60 9,922 Reinsurers’ share in gross written premium (142) - - (142) Net written premium 9,720 - 60 9,780 Movement in the net provision for unearned premiums (734) - (40) (774) Net earned premium 8,986 - 20 9,006
Fees and commission income 395 (279) - 116 Net investment income 1,879 (1,319) 5 565 Net result on the realization of investments and impairment charges (470) 323 - (147) Net movement in the fair value of assets and liabilities measured at fair (4) (18) - (22) value Other operating income 412 (44) - 368
Claims and movement in technical provisions (6,231) - - (6,231) Reinsurers’ share in claims and movement in technical provisions 66 - - 66 Net insurance claims and benefits (6,165) - - (6,165)
Fees and commission expenses (127) 112 - (15) Interest expenses (346) 300 (5) (51) Acquisition expenses (1,252) - - (1,252) Administrative expenses (1,278) 520 (20) (778) Other operating expenses (980) 159 - (821) Operating profit (loss) 1,050 (246) - 804 Share of the financial results of entities measured by the equity method (1) - - (1) Profit (loss) before tax 1,049 (246) - 803 Income tax (259) 62 - (197) Net profit (loss) 790 (184) - 606
1.4 Changes in the scope of consolidation and structure of the PZU Group
1.4.1. Business combination transactions
Business combinations are accounted for using the acquisition method in accordance with IFRS 3 “Business combinations”. Its application requires, among others, identifying the acquiring entity, determining the acquisition date, recognizing and measuring identifiable acquired assets, acquired liabilities measured at fair value as at the acquisition date and all non-controlling interests in the acquired entity as well as recognizing and measuring goodwill. By purchasing the stake in Pekao, the PZU Group implements its strategic goal of increasing exposure to the banking sector. The goodwill recognized in the condensed interim consolidated financial statements is due to the fact that Pekao is the leading financial institution in Poland having a significant potential for paying out dividends and the ability to improve its market position even further. Integration of the PZU Group and Pekao should bring about an extension of the product offering, optimization of the sales network and a number of revenue and cost synergies, which will affect value creation for the PZU Group and for Pekao.
1.4.1.1. Acquisition of shares in Pekao
On 28 September 2016, negotiations were launched to conclude a transaction for PZU acting in a consortium with Polski Fundusz Rozwoju S.A. (“PFR”) to acquire a significant equity stake in Pekao from UniCredit S.p.A. (“Seller”, “UniCredit”; PZU, PFR and the Seller are collectively referred to as the “Parties”), which ended on 8 December 2016.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
The PZU Management Board and the PZU Supervisory Board expressed their consent for the execution of a share purchase agreement with UniCredit for a stake in Pekao (“SPA”) and other agreements necessary for the scheduled transaction. On 8 December 2016, PZU and PFR signed the SPA with UniCredit. The essence of the transaction arising from the SPA is the acquisition, by PZU acting in a consortium with PFR, of a significant (ultimately approx. 32.8% of the total number of votes) equity stake in Pekao (“Transaction”). On 29 March 2017, the PZU Management Board and the PZU Supervisory Board of agreed to enter into an annex to the SPA with UniCredit and PFR and to enter into annexes to the consortium agreement and the shareholder agreement with PFR. Then, on 29 March 2017, PZU, PFR and UniCredit signed an annex to the SPA, which was to simplify the structure of the transaction, consisting primarily of replacing an indirect acquisition of the equity stake in PZU (acquisition of a special purpose vehicle from UniCredit) with a direct acquisition. The transaction was not conducted in two stages, as was originally assumed, and will be executed by applying a structure involving a direct acquisition by PZU and PFR of all Pekao shares forming the subject matter of the Transaction in one tranche on the Transaction closing date, i.e. 7 June 2017. PZU directly acquired a stake in Pekao representing approximately 20% of the total number of votes and at the same time PFR directly acquired a stake in Pekao representing approximately 12.8% of the total number of votes. The price agreed by the parties is PLN 123 per share, which implies the total price of PLN 10,589 million for the whole stake to be acquired by PZU and PFR, of which the price for the stake to be acquired by PZU is PLN 6,457 million. The price also included payment for the acquired right to the dividend of PLN 8.68 per share, or PLN 456 million in total, in accordance with the 19 April 2017 resolution adopted by the Pekao Ordinary Shareholder Meeting. The SPA does not provide for the possibility of an adjustment of the purchase price. The execution of the Transaction was contingent on the fulfillment of the conditions precedent specified in the SPA, which included in particular: (i) obtaining the consents of anti-monopoly authorities in Poland (the consent was issued on 6 April 2017) and Ukraine (PZU was informed of the granting of consent on 27 March 2017), and (ii) obtaining by the Seller, PZU SA and PFR the relevant consents or decisions of the Polish Financial Supervision Authority (KNF) (the consent was issued on 4 May 2017). The SPA contains a full list of representations and warranties by the Seller regarding the stake to be purchased and the business standing and condition of Pekao and other members of the Pekao Group. Moreover, the SPA provides for a waiver of liability in favor of PZU and PFR for any losses resulting from regulatory changes affecting Pekao’s existing Swiss franc-denominated loan portfolio. The parties agreed that the said waiver of liability will not exceed the agreed amount and will be available to PZU and PFR in principle for a period of 3 years after the acquisition by PZU and PFR of the stake in Pekao. Under the SPA, PZU and PFR agreed with the Seller on the rules of non-competition applicable to the Seller and members of its group as well as the rules prohibiting the solicitation of key Pekao staff. Due to the need to ensure a proper spin-off of Pekao from the Seller’s group, the Parties executed a contract governing the basic rules for the spin-off (in the IT context) of Pekao from the Seller’s group. The contract in particular sets forth the rules for ensuring the continuity of provision of process support services based on the IT systems in place in Pekao and governs the rules and costs associated with securing Pekao’s self-sufficiency following the execution of the Transaction in the context of access to services and rights to software. Furthermore, the Parties agreed that their intention is for PPIM (and hence, indirectly, Pioneer Pekao TFI), Pioneer PTE and Xelion to be full members of the Pekao Group. On 1 June 2017, Pekao signed a preliminary agreement with PGAM to sell 14,746 PPIM shares, which represented 51% of PPIM’s shares and offering 51% in PPIM’s share capital and in all the votes at the Shareholder Meeting. PPIM holds 100% of the share capital of Pioneer Pekao TFI with its registered office in Warsaw. The total amount to be paid to PGAM is EUR 140 million and constitutes also the price for 35% of Pioneer PTE’s shares. As at 30 June 2017, Pioneer PTE is a subsidiary of PZU (Pekao holds 65% shares of Pioneer PTE), while PPIM and Pioneer Pekao TFI are associates. On 1 June 2017, Pekao signed a preliminary agreement to purchase a 50% stake in Xelion from UniCredit.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Execution of the final sales agreements, whose terms and conditions were agreed in the preliminary agreement, is conditional upon the receipt of a relevant regulatory approval for each transaction. Following the purchase of the above Pekao shares, it will hold 100% of the share capital and all the votes at the Shareholder Meetings of PPIM, Pioneer PTE and Xelion.
Shareholder agreement between PZU and PFR In connection with the SPA, PZU and PFR also entered into a consortium agreement on 8 December 2016. The consortium agreement defines the mutual rights and obligations of PZU and PFR in respect of the execution and closing of the Transaction and the mutual cooperation between PZU and PFR in connection with the SPA and the Transaction (“Consortium Agreement”). On 23 January 2017, PZU and PFR signed a shareholder agreement (“Shareholder Agreement”) forming part of the documentation of the acquisition of a significant stake in Pekao, as described above. The governing law for the SPA, the Consortium Agreement and the Shareholder Agreement is Polish law. On 29 March 2017, PZU and PFR signed an annex to the Shareholder Agreement to be aimed at customizing it to the new Trasaction’s structure. The Shareholder Agreement was entered into because PZU and PFR intend to: build Pekao’s long-term value, implement a policy aimed at ensuring Pekao’s development, financial stability and effective and prudent management following the closing of the share purchase transaction and ensure the application of proper corporate governance standards by Pekao. The essence of the Shareholder Agreement is to define the rules of cooperation between PZU and PFR following the acquisition of the equity stake in Pekao and the rights and obligations of the parties as Pekao shareholders, in particular pertaining to agreeing on the manner of joint exercise of voting rights from the shares held and the implementation of a common long-term policy for Pekao’s business aimed at attaining the said objectives. In particular, the provisions of the Shareholder Agreement cover the following issues: PZU and PFR have undertaken to each other to vote in favor of resolutions on the distribution of profit and the disbursement of dividends, in accordance with the rules and within the boundaries set by the applicable provisions of law and KNF’s recommendations and in accordance with Pekao’s existing practice; subject to certain explicit exceptions, in situations where PZU and PFR are unable to reach an agreement on how to exercise their voting rights, PZU will determine the manner of voting and PFR will be required to vote in accordance with PZU’s decision; mutual undertakings of PZU and PFR aimed at curtailing each party’s ability to dispose of their Pekao shares as well as a contractual right of priority in the event that either party intends to sell all or any of its Pekao shares; the right of either party to execute the repurchase of shares held by the other party in the event of its termination of the Shareholder Agreement; the rules of cooperation and mutual relations between PZU and PFR on one side and the entity providing PFR with financing for the purpose of acquiring the stake in Pekao. PZU and PFR signed an additional trilateral agreement with the said entity in order to clarify the parties’ mutual relationships in the context of the wording of the Shareholder Agreement and the financing documentation for PFR; the manner of conduct by the parties aimed at monitoring the parties’ performance of the obligations arising from the Act of 29 July 2005 on Public Offering and the Terms and Conditions for Introducing Financial Instruments to an Organized Trading System and on Public Companies (Journal of Laws of 2016 Item 1639) and preventing the obligation to announce a tender offer to subscribe for Pekao shares in accordance with the provisions of the said Act. The Shareholder Agreement came into force on the date of execution of the Transaction to acquire Pekao shares by PZU and PFR. The Shareholder Agreement was concluded for a definite period of 5 years from its entry into force and cannot be terminated by any of the parties within 12 months from its entry into force.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Tentative settlement of the acquisition of Pekao The provisional settlement of the Pekao share purchase as at the date of the assumption of control was based on data as at 31 May 2017. There were no significant differences in accounting data between 31 May 2017 and 7 June 2017 (date of the assumption of control). In the settlement of the acquisition, the PZU Group reduced the price paid by PLN 456 million, which was the price for the right to receive a dividend payable from profits earned by Pekao before the date of the assumption of control, that was recognized as receivables. By the publication date of the condensed interim consolidated financial statements, the process of settling the acquisition of Pekao has not been completed. A credible and reliable calculation of the fair value of acquired assets and liabilities requires a large amount of data to be collected and processed in order to make appropriate calculations. Consequently, this process could not be completed between the date of assumption of control and the publication date of the condensed interim consolidated financial statements. The PZU Group decided to prepare a provisional settlement of the acquisition transaction, in which: the goodwill shown in Pekao’s financial statements was written off; the intangible assets not included in Pekao’s financial statements were not recognized; the analysis of the potential fair value measurement of assets and liabilities adjustment presented in Pekao’s financial statements has not been completed; the measurement of contingent liabilities was not taken into account; the potential indemnification assets have not been identified and measured. The final settlement will be presented after the process of identifying and calculating fair value of the acquired assets, liabilities and off-balance sheet liabilities is completed; this should take place no later than by the publication date of the PZU Group’s consolidated financial statements for the year ended 31 December 2017.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Tentative fair value of acquired assets and liabilities as at the date of the assumption of Value in PLN million control Intangible assets 544 Other assets 166 Property, plant and equipment 1,429 Investment properties 25 Entities measured by the equity method 154 Financial assets 157,634 Held to maturity 4,507 Available for sale 22,168 Measured at fair value through profit or loss 2,886 Hedge derivatives 325 Loans 127,748 Deferred tax assets 867 Receivables 2,542 Cash 4,981 Assets held for sale 48 Total assets 168,390 Financial liabilities 141,297 Other liabilities and provisions 5,625 Non-controlling interests 1) 15 Tentative fair value of net assets acquired 21,453 1) measured as the percentage of the fair value of identifiable net assets
Calculation of goodwill Value in PLN million Consideration transferred 6,001 Cash transferred 6,457 Adjustment for the amount equal to the price for the right to receive dividend (456) Value of non-controlling interests (80.00% share in the fair value of Pekao’s net assets) 17,163 Tentative fair value of Pekao’s identifiable net assets (21,453) Goodwill 1,711
1.4.1.2. Information on the settlement of the acquisition of Bank BPH’s Core Business
As at the date of conveying this periodic report, Alior Bank and GE Investment Poland sp. z o.o. (GEIP), DRB Holdings B.V. and Selective American Financial Enterprises, LLC (collectively, the “Bank BPH Sellers”) did not reach an agreement as to the determination of the final purchase price for Bank BPH’s Core Business. The difference of opinions between Alior Bank and the Bank BPH Sellers will be resolved by an expert, i.e. an auditor firm appointed in accordance with the provisions of the agreement for the purchase of Bank BPH’s Core Business. As at 30 June 2017, the amount of receivables on account of the settlement of the purchase price was revised by reducing it by PLN 30 million. The effect of the adjustment to the purchase price was recognized in retained earnings.
1.4.1.3. Purchase of shares in Revimed sp. z o.o.
On 31 May 2017, PZU Zdrowie SA acquired 100 shares in Revimed sp. z o.o. representing 100% of the share capital of Revimed sp. z o.o. and 100% of votes at the company’s shareholder meeting with a par value of PLN 50 each. Revimed sp. z o.o. has been consolidated since the date of the assumption of control, i.e. since 31 May 2017.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
1.4.1.4. Purchase of shares in NZOZ Trzebinia
On 30 June 2017, PZU Zdrowie SA acquired 381 shares in NZOZ Trzebinia representing 95.25% of the share capital and 95.25% of votes at the shareholder meeting with a par value of PLN 1,000 each. Since the date of the assumption of control, i.e. 30 June 2017, NZOZ Trzebinia has been consolidated.
1.4.1.5. Consolidated statement of profit or loss including acquired entities
The table below presents the amounts of PZU Group’s revenues and profits, including financial data of acquired subsidiaries, calculated as if the acquisition date for all the mergers conducted during the year was the beginning of the year. 1 January – Consolidated statement of profit or loss 30 June 2017 Gross written premiums 11,606 Reinsurers’ share in gross written premium (307) Net written premium 11,299 Movement in the net provision for unearned premiums (952) Net earned premium 10,347
Fees and commission income 1,602 Net investment income 5,744 Net result on the realization of investments and impairment charges (510) Net movement in the fair value of assets and liabilities measured at fair value 127 Other operating income 678
Claims and movement in technical provisions (7,379) Reinsurers’ share in claims and movement in technical provisions 165 Net insurance claims and benefits (7,214)
Fees and commission expenses (329) Interest expenses (859) Acquisition expenses (1,412) Administrative expenses (3,323) Other operating expenses (1,700) Operating profit 3,149 Share of the financial results of entities measured by the equity method 17 Profit before tax 3,166 Income tax (725) Net profit, including: 2,441 - profit attributable to the equity holders of the parent company 1,588 - profit attributable to holders of non-controlling interests 853
1.4.2. Changes to the consolidation of mutual funds
On account of assuming control over the PZU Energia Medycyna Ekologia fund, as of 1 January 2017, this fund was included under consolidation. On 9 March 2017 the newly-established PZU FIZ Akcji Combo fund was included under consolidation. Because of the loss of control over mutual funds, they were no longer consolidated: PZU Akcji Spółek Dywidendowych from 1 January 2017, PZU Energia Medycyna Ekologia from 31 May 2017, PZU Dłużny Rynków Wschodzących, PZU FIO Gotówkowy, PZU Sejf+ - from 30 June 2017.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
2. Composition of the Management Board, Supervisory Board and Directors of the PZU Group
2.1 Composition of the parent company’s Management Board
From 1 January 2017, the PZU Management Board consisted of the following persons: Michał Krupiński – President of the PZU Management Board; Roger Hodgkiss – Member of the PZU Management Board; Andrzej Jaworski – Member of the PZU Management Board; Tomasz Kulik – Member of the PZU Management Board; Maciej Rapkiewicz – Member of the PZU Management Board. On 22 March 2017 PZU’s Supervisory Board dismissed, effective as of 22 March 2017, Michał Krupiński from the function of President of the PZU Management Board. On 23 March 2017 PZU’s Supervisory Board delegated PZU Supervisory Board Member Marcin Chludziński to temporarily act as the President of the PZU Management Board until the President of the PZU Management Board is appointed. On 13 April 2017 the PZU Supervisory Board appointed Paweł Surówka, effective as of 13 April 2017, to the PZU Management Board and entrusted him with acting in the capacity of President of the PZU Management Board. This appointment is for the joint term of office that commenced on 1 July 2015 and encompasses three consecutive full financial years. 2016 was the first full financial year of this term of office. On 29 May 2017, Andrzej Jaworski tendered his resignation from the function of Member of the PZU Management Board. The mandate expired upon resignation. On 12 June 2017, the PZU Supervisory Board appointed, effective as of 13 June 2017, Ms. Małgorzata Sadurska to the PZU SA Management Board and entrusted her with acting in the capacity of a PZU Management Board Member. From 13 June 2017 to the date of conveying this periodic report, the PZU Management Board consisted of the following persons: Paweł Surówka – President of the PZU Management Board; Roger Hodgkiss – Member of the PZU Management Board; Tomasz Kulik – Member of the PZU Management Board; Maciej Rapkiewicz – Member of the PZU Management Board; Małgorzata Sadurska – Member of the PZU Management Board.
2.2 Composition of the parent company’s Supervisory Board
From 1 January 2017, the PZU Supervisory Board consisted of the following persons: Paweł Kaczmarek – Supervisory Board Chairman; Marcin Gargas – Supervisory Board Deputy Chairman; Maciej Zaborowski – Supervisory Board Secretary; Marcin Chludziński – Supervisory Board Member (in the period 23 March – 12 April 2017 delegated to temporarily act as the President of the PZU Management Board; Eligiusz Krześniak – Supervisory Board Member; Alojzy Nowak – Supervisory Board Member; Jerzy Paluchniak – Supervisory Board Member; Piotr Paszko – Supervisory Board Member;
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Radosław Potrzeszcz – Supervisory Board Member. On 8 February 2017, Eligiusz Krześniak tendered his resignation from being a PZU Supervisory Board Member as of 8 February 2017. On 8 February 2017 the PZU ESM dismissed Marcin Gargas, Piotr Paszko and Radosław Potrzeszcz from the PZU Supervisory Board. On the same day the ESM appointed Bogusław Banaszak, Paweł Górecki, Agata Górnicka and Łukasz Świerżewski to the PZU Supervisory Board. On 14 March 2017 Paweł Kaczmarek and Maciej Zaborowski tendered their resignations from the functions in the presidium of the PZU Supervisory Board and, on the same day, Paweł Górecki assumed the function of Chairman of the PZU Supervisory Board, Łukasz Świerżewski assumed the function of the Deputy Chairman of the PZU Supervisory Board, and Alojzy Nowak assumed the function of the Secretary. On 12 April 2017, Łukasz Świerżewski tendered his resignation from being a PZU Supervisory Board Member as of 12 April 2017. On 12 April 2017 the Minister of Development and Finance, acting on behalf of the State Treasury, dismissed Jerzy Paluchniak from the PZU Supervisory Board and at the same time appointed Ms. Aneta Fałek as a PZU Supervisory Board Member. On 12 April 2017 the PZU ESM dismissed Paweł Kaczmarek from the PZU Supervisory Board. On the same day the ESM appointed Katarzyna Lewandowska and Robert Śnitko to the PZU Supervisory Board. On 13 April 2017 the Supervisory Board entrusted the function of Chairperson of the PZU Supervisory Board to Katarzyna Lewandowska, and Deputy Chairperson of the PZU Supervisory Board to Aneta Fałek. From 12 April 2017 to the date of conveying this periodic report, the PZU Supervisory Board consisted of the following persons: Katarzyna Lewandowska – Chairperson of the Supervisory Board; Aneta Fałek – Deputy Chairperson of the Supervisory Board; Alojzy Nowak – Secretary of the Supervisory Board; Bogusław Banaszak – Member of the Supervisory Board; Marcin Chludziński – Supervisory Board Member; Paweł Górecki – Member of the Supervisory Board; Agata Górnicka – Member of the Supervisory Board; Robert Śnitko – Member of the Supervisory Board; Maciej Zaborowski – Member of the Supervisory Board.
2.3 PZU Group Directors
Apart from Management Board Members, key managers in the PZU Group also comprise PZU Group Directors who generally also sit on the Management Board of PZU Życie. From 1 January 2017, the following persons were PZU Group Directors: Aleksandra Agatowska; Tomasz Karusewicz; Bartłomiej Litwińczuk; Sławomir Niemierka; Roman Pałac; Paweł Surówka. On 15 March 2017 Dorota Macieja was appointed to the position of PZU Group Director.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
From the date of appointing Paweł Surówka to the position of President of the PZU Management Board to the date of conveying this periodic report, the following persons were PZU Group Directors: Aleksandra Agatowska; Tomasz Karusewicz; Bartłomiej Litwińczuk; Sławomir Niemierka; Dorota Macieja; Roman Pałac.
3. Key accounting principles (accounting policy)
Detailed accounting principles (policy) are presented in the consolidated financial statements.
3.1 Changes in accounting principles, estimates, previous years’ errors
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
3.1.1. Amendments to the applied IFRS
3.1.1.1. Standards, interpretations and amended standards effective from 1 January 2017
No new standards or interpretations were used from 1 January 2017.
3.1.1.2. Standards, interpretations and amended standards not yet effective
The following standards, interpretations and amended standards have been issued but have not come into effect: Approved by the European Commission:
Regulation Name of Date of entry into approving the standard/interpretation effect for annual Commentary standard or periods starting interpretation
IFRS 15 specifies how and when to recognize revenues and requires the presentation of more detailed disclosures. The standard replaces IAS 18 “Revenue”, IAS 11 “Construction Contracts” and a number of interpretations related to revenue recognition. The standard applies to almost all agreements with customers (the main exceptions concern lease agreements, financial instruments and insurance agreements). The fundamental principle of the new standard is to recognize revenues in a manner that reflects the transfer of goods or services to customers and in an amount that IFRS 15 – Revenue from reflects the value of consideration (i.e. the payment) which the company expects to obtain a right to in exchange for the 1 January 2018 1905/2016 Contracts with Customers goods or services. The standard also provides guidelines for recognizing transactions that were not regulated in detail in previous standards (e.g. revenues from services or modification of agreements) and contains more comprehensive explanations on the recognition of agreements with multiple deliverables.
Due to the inapplicability to the PZU Group’s insurance companies, the effect of application of the new standard on the PZU Group’s comprehensive income and equity has not been estimated.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Regulation Name of Date of entry into approving the standard/interpretation effect for annual Commentary standard or periods starting interpretation
This standard replaces IAS 39 and specifies the requirements for recognition and measurement of impairment, derecognition of financial instruments and hedge accounting. The standard introduces a new approach to the classification of financial assets, based on the nature of cash flows and the business model associated with the relevant assets. The standard also unifies the impairment model for all financial instruments. The new model of expected loss from impairment requires a quicker recognition of expected credit losses. The standard introduces a reformed hedge accounting model with enhanced requirements concerning disclosures of risk management activities.
Classification and valuation According to IFRS 9 financial assets are classified for valuation at: amortized cost; fair value through profit or loss; fair value through other comprehensive income.
The instruments are classified as at the time of application of IFRS 9 for the first time or at the time of recognition of the instrument. Changes of classification are possible only in very rare cases when the business model changes.
IFRS 9 – Financial 1 January 2018 2067/2016 Debt instruments Instruments Classification of assets follows from the business model and the description of the cash flows generated by individual assets. The business model defines the purpose of holding the given financial instrument (obtaining contractual cash flows or realizing changes of fair value). The description of the cash flows defines whether these are solely principal and interest – SPPI payments. If the instrument passes the SPPI test and the business model assumes that the instrument is held to obtain contractual cash flows, the debt instrument qualifies for valuation at amortized cost. The entity may choose measurement at fair value through profit or loss if this eliminates inconsistencies in the valuation methods. The measurement at fair value through other comprehensive income includes those instruments, where the business model assumes acquisition of contractual cash flows as well as realization of profit through the sale of the instrument. The option is available only for instruments passing the SPPI test. If this option is selected all changes to the fair value are posted in other comprehensive income and impairment charges, interest income and foreign exchange differences are presented in the statement of profit or loss.
Equity-based assets Equity-based assets are measured at fair value through profit or loss or other comprehensive income. If the latter option is selected, the fair values are posted in other comprehensive income and are never transferred to the statement of profit or loss. Dividends and impairment charges on such assets are recognized in the statement of profit or loss.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Regulation Name of Date of entry into approving the standard/interpretation effect for annual Commentary standard or periods starting interpretation
Financial liabilities Valuation of financial liabilities does change significantly, except for the necessity to recognize changes in the fair value resulting from changes of own credit risk in other comprehensive income.
Impairment IFRS 9 introduces an obligation to recognize not only incurred losses, as in the case of IAS 39, but also expected losses. Debt assets carried at amortized cost and fair value through other comprehensive income, impairment is measured as 12- month or life-long expected credit losses. Change of the approach will have significant consequences in the case of modelling of the credit risk parameters and final amount of the charges made. The loss identification period and IBNR charge will be no longer used. The charge will be calculated in 3 categories: basket 1 – basket with low credit risk – 12-month expected credit loss will be recognized; basket 2 – the portfolio in which a significant increase of credit risk occurs – a life-long expected credit loss will be recognized; basket 3 – impaired loans – a life-long expected credit loss will be recognized.
The method of calculation of the impairment charge will also impact the method of recognizing the interest income – for baskets 1 and 2 it will be determined on the basis of gross exposures, and in basket 3 on the net basis. If credit risk increases significantly (basket 2) then the expected credit losses will be recognized earlier, which will contribute to higher impairment charges and consequently affect the financial result.
Hedge accounting On the date of implementation of IFRS 9 it is possible to opt to continue application of the hedge accounting requirements in accordance with IAS 39. In such a case, consistency of the applied hedging links with the risk management strategy should be ensured. Additionally, IFRS 9 increases the range of the positions that can be defined as hedged positions, makes it possible to determine financial assets or liabilities carried at fair value through profit or loss as a hedging instrument, waives the obligation to retrospectively measure the effectiveness of the hedging, increases the scope of the required disclosures pertaining to the strategy for management of the risk of cash flows following from hedging transactions and impact of the hedge accounting on the financial statements.
The PZU Group reviews the financial assets and their allocation to the appropriate business model and estimates that: receivables from banks, loans and debt securities classified in the loans portfolio in accordance with IAS 39 will be measured primarily at amortized cost under IFRS 9, except for the assets that do not satisfy the SPPI criterion; debt securities classified as held to maturity are held in order to collect contractual cash flows and will be measured at amortized cost under IFRS 9; most debt securities classified as available for sale are held to both collect contractual cash flows and to be sold and will be measured at fair value through other comprehensive income under IFRS 9;
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Regulation Name of Date of entry into approving the standard/interpretation effect for annual Commentary standard or periods starting interpretation
financial assets and liabilities held for trading, including assets and liabilities under derivative financial instruments will continue to be measured at fair value through profit or loss; equity instruments classified as available for sale will be generally measured at fair value through profit or loss. For some exposures, the PZU Group is considering selection of the measurement option through other comprehensive income, however the final decision in this respect has not yet been made. implementation of IFRS 9 may result in changes to classification of certain financial assets (in particular the necessity to carry certain financial assets (particularly loan receivables) at fair value as they do not pas the SPPI test). Introduction of the new impairment model will impact the amount of the impairment charges in the PZU Group, particularly as regards the exposures classified as basket 2. As at the date of implementation of IFRS 9, the one-off change resulting from adoption of the new models will be recognized in equity.
The requirements of IFRS 9 will result in a significant change of presentation of financial instrument disclosures. The PZU Group intends to take advantage of the exemption not to restate the comparative data from prior periods in respect to the changes resulting from classification and measurement (including impairment). The differences in the carrying amount of financial assets and liabilities arising from the application of IFRS 9 will be recognized in the “Retained earnings” item. At this stage, it is not possible to estimate the effect of application of IFRS 9 on the PZU Group’s comprehensive income and equity. The PZU Group believes that disclosure of quantitative data that do not reflect the potential impact of all the aspects of IFRS 9 on the financial standing might adversely affect the information value of the financial statements for its readers. Accordingly, the PZU Group does not make such disclosures.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Not approved by the European Commission: Date of entry into effect for annual Date of issue by the Name of periods starting International standard/interpretation (according to the Commentary Accounting Standards International Board Accounting Standards Board) Amendment to IFRS 4 – In accordance with the amendment to IFRS 4 issued by the International Accounting Standards Board on 12 September Application of IFRS 9 2016, insurance companies may defer the implementation of IFRS 9 until the entry into force of IFRS 4 Phase II ‘Financial Instruments’ 12 September 2016 1 January 2018 concerning insurance contracts, but by no later than 1 January 2021, however the PZU Group may not take advantage of together with IFRS 4 this exemption due to the significant share of banking activity. ‘Insurance Contracts’ Enabling entities applying IFRS for the first time, which currently recognize regulatory deferral account balances in accordance with their previous, generally accepted accounting standards to continue recognizing these balances after IFRS 14 – Regulatory 30 January 2014 1 January 2016 1) switching to IFRS. Deferral Accounts
This standard does not apply to the PZU Group. The clarifications provide guidelines concerning the identification of the obligations to fulfil benefits (determining in which instances the promises set forth in a contract constitute “separate” goods or services that should be settled separately), Clarifications to IFRS 15 – accounting for intellectual property licenses (determining in which situations revenues from intellectual property licenses revenue from contracts 12 April 2016 1 January 2018 should be settled “over a certain period” and in which situations “at a given point in time”) and the distinctions between with customers a principal and an agent (stating more precisely that a principal under a given determination controls a good or service prior to turning it over to a client). Changes to the standard also include additional practical solutions facilitating the implementation of the new standard. IFRS 16 replaces IAS 17 ‘Leases’ and the interpretations related to the latter standard. In respect of lessees, the new standard eliminates the distinction between financial leases and operating leases. The recognition of current operating leases in the statement of financial position will result in the recognition of a new asset (the right to use the leased object) and a new liability (the liability of lease payments). The rights to use the leased object will be subject to amortization and interest will be charged on the liabilities. This will generate greater costs at the initial stage of the lease, IFRS 16 – Leases 13 January 2016 1 January 2019 even if the parties have agreed on fixed annual payments. The recognition of lease agreements on the lessor’s side will in most cases remain unchanged due to the continued existence of the distinction between operating lease agreements and financial lease agreements.
Due to the remote effective date of the new standard, the effect of its application on the comprehensive income and equity has not yet been estimated.
36
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Date of entry into effect for annual Date of issue by the Name of periods starting International standard/interpretation (according to the Commentary Accounting Standards International Board Accounting Standards Board) The purpose of the standard is to establish the uniform accounting principles for all types of insurance contracts, including the reinsurance treaties held by the insurer. Introduction of this unified standard will ensure comparability of IFRS 17 – Insurance financial reports between different entities, states and capital markets. 18 May 2017 1 January 2021 contracts At this stage, it is not possible to estimate the effect of application of IFRS 17 on the PZU Group’s comprehensive income and equity. The amendment results in the presentation of disclosures enabling an assessment of changes in the value of liabilities Amendment to IAS 7 – created as part of financial activity (resulting from either cash flows or changes of a non-cash flow nature). 29 January 2016 1 January 2017 Disclosure Initiative The application of these requirements will require the inclusion of additional disclosures in the PZU Group’s consolidated financial statements. The amendment clarifies, among others, that unrealized losses related to debt instruments measured at fair value for Amendment to IAS 12 – which the tax value is their initial cost may give rise to negative temporary differences. Recognition of deferred tax 19 January 2016 1 January 2017
assets for unrealized losses The change will not affect the PZU Group’s consolidated financial statements. The amendment provides guidance harmonizing accounting requirements for share-based payments settled in cash which adopt the same approach as that applied in the case of share-based payments settled in equity instruments, and Amendment to IFRS 2 – contains an exception to IFRS 2 and clarification of situations where share-based payments settled in cash are changed Classification and valuation 20 June 2016 1 January 2018 to share-based payments settled in equity instruments due to changes in contractual provisions. of share-based payment
The Group is currently analyzing the impact of these changes on its consolidated financial statements. The main consequence of the amendment is the recognition of the whole profit or loss in a situation where the Amendments to IFRS 10 transaction concerns an organized business (regardless of whether or not it is located in a subsidiary), whereas partial and IFRS 28 – Sale or profits or losses are recognized in the transaction concerns separate assets that do not form an organized business, even transfer of assets between 11 September 2014 Deferred indefinitely if they are located in a subsidiary. the investor and an
associate or a joint venture The amendments did not affect the PZU Group’s consolidated financial statements.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Date of entry into effect for annual Date of issue by the Name of periods starting International standard/interpretation (according to the Commentary Accounting Standards International Board Accounting Standards Board) The amendment clarifies when the entity should transfer properties under construction to or from the investment Amendment to IAS 40 – property category in the event of change of the nature of the use of such property in situations other than specifically Transfers of Investment 8 December 2016 1 January 2018 listed in IAS 40. Property The change will not affect the PZU Group’s consolidated financial statements. The amendments pertain to: 1. IFRS 1 – waiver of exemptions for first time adopters as regards certain disclosures; 2. IFRS 12 – disclosures pertaining to assets classified as held for sale or discontinued operations in accordance with Amendments to IFRS 1 January 2017 IFRS 5; 8 December 2016 2014-2016 1 January 2018 3. IAS 28 – as regards the election by specified entities to measure at fair value through profit or loss interests in associates and joint ventures in accordance with IFRS 9.
The amendments did not affect the PZU Group’s consolidated financial statements. IFRIC interpretation 22 – The interpretation clarifies that the exchange rate should be applied in recognising a transaction denominated in a Foreign Currency foreign currency in accordance with IAS 21 if the client makes a non-refundable payment of an advance consideration for 8 December 2016 1 January 2018 Transactions and Advance delivery of goods or services. Consideration The interpretation will not affect the PZU Group’s consolidated financial statements. The interpretation is to be applied to the determination of taxable profit, tax loss, tax bases, unused tax losses, unused IFRIC 23 interpretation – tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. Uncertainty over Income 7 June 2017 1 January 2019
Tax Treatments The interpretation will not affect the PZU Group’s consolidated financial statements. 1) The European Commission suspended the process of approval until the time of publishing the final version of the standard. In summary, in the opinion of the PZU Group, the introduction of the above standards and interpretations will have no material effect on the accounting principles followed by the PZU Group, except for IFRS 9 and IFRS 15 whose impact on the accounting principles applied by the PZU Group is yet to be assessed.
38
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
3.2 Explanation of the differences between the previously published statements and these condensed interim consolidated financial statements
3.2.1. Changes in relation to the annual consolidated financial statements introduced in 2017
3.2.1.1. Change in presentation of revenues earned by Money Makers TFI SA
In order to unify the presentation of revenues earned by mutual fund companies in the PZU Group, the revenues earned by Money Makers TFI SA (Alior Bank’s subsidiary) from other operating income to fees and commission income.
3.2.1.2. Change of presentation of interest income and expenses for derivative instruments
To ensure better reflection of the economic nature of the transactions in derivative instruments, the presentation of interest income and expenses has been changed for those instruments.
3.2.1.3. Change of presentation of Alior Bank’s IT costs in the consolidated statement of profit or loss
To unify the presentation of IT costs, the costs incurred by Alior Bank were transferred from other operating expenses to administrative expenses.
3.2.2. Changes recognised in the annual consolidated financial statements introduced in 2016
The changes described in this item were taken into consideration in the consolidated financial statements. To ensure comparability, in the interim consolidated financial the data for the 6 months ended 30 June 2016 were restated accordingly.
3.2.2.1. Change of presentation of amounts in the condensed interim consolidated financial statements
To improve the clarity of the condensed interim consolidated financial statements, all amounts were presented in millions of PLN, instead of in thousands of PLN, as has been done so far. As a consequence of conversion of thousands into millions of PLN some amounts may differ from the amounts presented in the condensed interim consolidated financial statements for the 6 months ended 30 June 2016 due to rounding.
3.2.2.2. Change of the segment reporting presentation method
To increase transparency, changes were made to the segment reporting presentation.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
3.2.2.3. Deletion of the items in the consolidated statement of financial position
Due to immateriality of the amounts, to increase the clarity of the consolidated statement of financial position in the assets the line items “Estimated salvage and subrogation” and “Current income tax receivables” were deleted. The amounts presented in them were shifted to “Other assets” and “Receivables” respectively. In liabilities, the line item “Current income tax liabilities” was deleted and the amounts presented in “Other liabilities”.
3.2.2.4. Change of presentation of interest received in the consolidated cash flow statement
In the consolidated financial statements, the presentation of interest received on debt instruments as part of investing activity of the consolidated cash flow statement was changed by moving the proceeds from such interest from the item “Realization of debt securities” to item “Interest received”.
3.2.3. Impact of differences on the condensed interim consolidated financial statements
1 January 1 January 2016 Assets Adjustment 2016 (historical) (restated) Other assets 699 114 1) 813 Estimated salvage and subrogation 114 (114) 1) item deleted Receivables 3,271 67 1) 3,338 Current income tax receivables 67 (67) 1) item deleted Total assets 105,397 - 105,397 1) Change described in item 3.2.2.3.
1 January 1 January 2016 Equity and liabilities Adjustment 2016 (historical) (restated) Other liabilities 3,501 69 1) 3,570 Current income tax liabilities 69 (69) 1) item deleted Total liabilities 90,279 - 90,279 Equity and liabilities, total 105,397 - 105,397 1) Change described in item 3.2.2.3.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
1 January – 1 January – Consolidated statement of profit or loss 30 June 2016 Adjustment 30 June 2016 (restated) (historical) Fees and commission income 391 4 1) 395 Net investment income 1,903 (24) 2) 1,879 Net movement in the fair value of assets and liabilities 23 (27) 2) (4) measured at fair value Other operating income 416 (4) 1) 412 Interest expenses (397) 51 2) (346) Administrative expenses (1,253) (25) 3) (1,278) Other operating expenses (1,005) 25 3) (980) Net profit 790 - 790 1) Change described in item 3.2.1.1. 2) Change described in item 3.2.1.2. 3) Change described in item 3.2.1.3.
1 January – 1 January – Consolidated cash flow statement 30 June 2016 Adjustment 30 June 2016 (historical) (restated) Profit before tax 1,049 - 1,049 Reinsurers’ share in gross written premium 142 (142) - Other adjustments (40) 142 102 Net cash flow on operating activity 2,117 2,117 Realization of debt securities 64,001 (200) 1) 63,801 Interest received 508 200 1) 708 Cash inflows on investing activity 479,715 - 479,715 2) Change described in item 3.2.2.4.
4. Key estimates and judgments
The critical estimates and judgments were presented in the consolidated financial statements.
5. Corrections of errors from previous years
During the 6-month period from 1 January to 30 June 2017, no corrections of errors from previous years were made.
6. Significant events materially affecting the structure of line items in the financial statements
6.1 Acquisition of Pekao
On 7 June 2017, the acquisition of a stake in Pekao was finalized, as a result of which Pekao was consolidated. More information on the transaction is presented in item 1.4.1.1.
41
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
6.2 Distribution of PZU’s 2016 financial result
On 29 June 2017, the PZU Ordinary Shareholder Meeting adopted a resolution on distribution of net profit for 2016. This matter is described in item 15,
6.3 Key dividends paid between PZU Group companies
6.3.1. Dividend from PZU Życie to PZU
On 28 June 2017, the Ordinary Shareholder Meeting of PZU Życie (“PZU Życie OSM”) adopted a resolution on distribution of PZU Życie’s net profit for the 2016 financial year in the amount of PLN 1,434 million as follows: designate PLN 1,429 million as a dividend for its sole shareholder, i.e. PZU; designate PLN 5 million for the Company Social Benefit Fund. The record date was set for the date on which the PZU Życie OSM was held and the dividend payment date was set for 17 October 2017.
6.3.2. Dividend from Pekao to PZU
On 19 April 2017, the Ordinary Shareholder Meeting of PEKAO adopted a resolution on distribution of PEKAO’s net profit for the 2016 financial year, designating the amount of PLN 2,278 million as a dividend, i.e. PLN 8.68 per share. The record date was set for 21 June 2017 and the dividend payment date was set for 6 July 2017. PZU received dividend in the amount of PLN 456 million.
6.3.3. Dividend from PTE PZU to PZU Życie
On 24 April 2017, the Ordinary Shareholder Meeting of PTE PZU adopted a resolution to pay a dividend of PLN 60 million. The dividend was paid out on 28 April 2017.
7. Material events after the end of the reporting period
7.1 Alior Bank’s bond issue
On 11 August 2017, Alior Bank issued bonds with the nominal value of PLN 250 million in a private issue of common bonds. The bonds are unsecured and bear interest at a floating interest rate based on WIBOR 6M plus a margin of 1.19%. The final maturity of the bonds will be 11 August 2020.
7.2 Second Alior Bank’s Bond Public Issue Program
On 23 August 2017 the Supervisory Board of Alior Bank approved commencement of the Second Alior Bank’s Bond Public Issue Program. Total amount of bonds issued under the Program will not exceed 12 million bonds, while total nominal value of bonds can not exceed PLN 1,200 million. The bonds will be issued and offered in series in period no longer than 12 months starting from the date of the prospectus approval by the Polish Financial Suprevision Autority. Maksimum maturity will be 10 years since an issue date of specific series. The bonds may be issued as a common or subordinated
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) and the issue conditions will provied resolution for their classification as a part of own funds according to Regulation (EU) No 575/2013 of the Europeand Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012. Alior Bank will apply for introducing the bonds to trade on the regulated market or in the alternative trading system run by Warsaw Stock Exchange or BondSpot SA within Catalyst system.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) 8. Supplementary notes to the condensed interim consolidated financial statements
8.1 Gross written premiums
1 April – 1 January – 1 April – 1 January – Gross written premiums 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Gross written premiums in non-life insurance 3,716 7,338 3,048 5,893 In direct insurance 3,734 7,349 3,037 5,876 In indirect insurance (18) (11) 11 17 Gross written premiums in life insurance 2,122 4,268 2,013 3,969 Individual insurance premiums 407 838 311 578 Individually continued insurance premiums 494 985 490 974 Group insurance premiums 1,221 2,445 1,212 2,417 Gross written premiums, total 5,838 11,606 5,061 9,862
Gross written premiums in direct non-life insurance (by 1 April – 1 January – 1 April – 1 January – accounting classes prescribed by section II of the 30 June 2017 30 June 2017 30 June 2016 30 June 2016 attachment to the Insurance Activity Act) Accident and sickness insurance (class 1 and 2) 141 295 133 273 Motor third party liability insurance (class 10) 1,517 2,891 1,134 2,059 Other motor insurance (class 3) 931 1,880 821 1,573 Marine, air and cargo insurance (classes 4, 5, 6, 7) 21 39 18 55 Insurance against fire and other property damage (classes 8 763 1,519 611 1,262 and 9) TPL insurance (classes 11, 12, 13) 192 411 175 387 Credit and guarantee insurance (classes 14, 15) 28 46 18 34 Assistance (class 18) 104 209 96 182 Legal protection (class 17) 2 5 1 3 Other (class 16) 35 54 30 48 Total 3,734 7,349 3,037 5,876
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.2 Fees and commission income
1 April – 1 January – 1 April – 1 January – Fees and commission income 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Banking activity 344 560 137 275 Brokerage commissions 38 69 12 30 Administration of payment cards and credit cards 92 147 25 49 Intermediary fees on insurance sold 20 38 29 50 Loans 57 80 14 28 Administration of bank accounts 56 99 27 52 Transfers 30 48 9 18 Cash operations 15 25 6 11 Purchased receivables 5 9 2 4 Guarantees, letters of credit, collection, commitment letters 8 11 3 7 Other commissions 23 34 10 26 Pension insurance 35 63 33 57 Commissions on distribution fees 2 3 2 3 Commissions on asset management in an open-end pension 29 56 23 46 fund Other 4 4 8 8 Revenues from fees relating to investment contracts for the 2 3 2 3 client’s account and risk Revenues and payments received from funds and mutual fund 50 76 37 60 companies Fees and commission income, total 431 702 209 395
8.3 Net investment income
1 April – 1 January – 1 April – 1 January – Net investment income 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Interest income 1,710 2,822 910 1,779 Bank loans 1,227 1,975 564 1,099 Available for sale financial assets 91 139 43 78 Financial assets held to maturity 232 446 204 404 Loans 110 182 78 157 Purchased receivables 16 21 6 12 Hedge derivatives 18 29 6 13 Receivables, including receivables due under insurance 9 15 4 6 contracts Cash and cash equivalents 7 15 5 10 Dividend income 15 16 36 37 Financial assets classified for measurement at fair value 11 11 25 25 through profit or loss upon first recognition Financial assets held for trading 2 2 10 10 Available for sale financial assets 2 3 1 2 Income on investment properties 64 125 61 117 Foreign exchange differences 156 358 (12) 21 Other (24) (54) (46) (75) Investment activity expenses (5) (16) (4) (13) Investment property maintenance expenses (26) (50) (32) (59) Other 7 12 (10) (3) Net investment income, total 1,921 3,267 949 1,879
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.4 Net result on the realization of investments and impairment charges
Net result on the realization of investments and 1 April – 1 January – 1 April – 1 January – impairment charges 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Net result on the realization of investments 228 238 (154) (66) Financial assets measured at fair value through profit or loss – 91 50 (2) (22) classified as such upon first recognition Equity instruments 47 14 37 (35) Debt securities 44 36 (39) 13 Financial assets held for trading: 111 197 (180) (118) Equity instruments 7 40 2 (39) Debt securities (44) (79) 1 32 Derivatives 148 236 (183) (111) Available for sale financial assets 13 (10) 13 63 Equity instruments 13 (9) - - Debt securities - (1) 13 63 Loans 21 22 19 20 Receivables (16) (29) (13) (19) Investment properties 7 7 8 9 Other 1 1 1 1 Impairment charges (316) (539) (225) (404) Available for sale financial assets - - - (7) Debt instruments - - - (7) Loans (289) (498) (190) (350) Debt securities 7 7 (23) (23) Loan receivables from clients (296) (505) (167) (327) Receivables (27) (41) (27) (39) Goodwill of acquired credit unions - - (8) (8) Net result on the realization of investments and (88) (301) (379) (470) impairment charges, total
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.5 Net movement in the fair value of assets and liabilities measured at fair value
Net movement in the fair value of assets and liabilities 1 April – 1 January – 1 April – 1 January – measured at fair value 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Financial instruments measured at fair value through profit or (185) 168 (177) (38) loss – classified as such upon first recognition Equity instruments (190) 222 (281) (213) Debt securities - (1) 100 178 Measurement of liabilities to members of consolidated 7 (34) (1) (7) mutual funds Investment contracts for the client’s account and risk (unit- (2) (19) 5 4 linked) Financial instruments held for trading (116) 63 (20) (40) Equity instruments (23) 149 (118) (95) Debt securities 103 76 108 135 Derivatives (186) (152) (10) (80) Financial liabilities (10) (10) - - Investment properties (168) (170) 76 72 Other 9 5 2 2 Net movement in the fair value of assets and liabilities (460) 66 (119) (4) measured at fair value, total
8.6 Other operating income
1 April – 1 January – 1 April – 1 January – Other operating income 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Revenues on the sales of products, merchandise and services 124 217 113 206 by non-insurance companies Revenues from direct claims handling on behalf of other 51 107 54 107 insurance undertakings Reversal of provisions 30 36 6 9 Reimbursement of the costs of pursuit of claims 11 20 6 11 Reinsurance commissions and profit-sharing 9 18 3 16 Reversal of impairment charges on non-financial assets - 17 - 5 Interest on late payment of amounts due under direct 6 8 5 13 insurance and outward reinsurance contracts Commissions for acting as an emergency adjuster 1 3 2 4 Revenues for managing third party assets 2 2 1 3 Written off liabilities on account of premium refunds and (9) 48 2 4 payment surpluses Other 26 54 17 34 Other operating income, total 251 530 209 412
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.7 Claims and movement in technical provisions
1 April – 1 January – 1 April – 1 January – Claims and movement in technical provisions 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Claims and movement in technical provisions 3,587 7,379 3,135 6,231 In non-life insurance 2,029 3,868 1,716 3,315 - claims in non-life insurance 1,597 3,259 1,629 3,236 - movement in technical provisions in non-life insurance 245 235 (89) (274) - claims handling expenses in non-life insurance 187 374 176 353 In life insurance 1,558 3,511 1,419 2,916 - claims in life insurance 1,431 3,059 1,426 2,949 - movement in technical provisions in life insurance 95 387 (42) (106) - claims handling expenses in life insurance 32 65 35 73 Reinsurers’ share in claims and movement in technical (83) (165) (36) (66) provisions In non-life insurance (83) (165) (36) (66) Total net insurance claims and benefits 3,504 7,214 3,099 6,165
8.8 Fees and commission expenses
1 April – 1 January – 1 April – 1 January – Fees and commission expenses 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Costs of card and ATM transactions, including costs of card 47 79 17 33 issuance Commissions paid to agents in banking activity 11 17 8 13 Commissions under agreements to perform certain actions 12 16 3 5 Commissions for the availability of ATMs 8 13 5 10 Costs of compensations and awards to banking clients 5 12 6 11 Costs of bank transfers and remittances 6 11 3 6 Insurance of banking products 5 9 6 12 Brokerage commissions 3 4 1 2 Other commissions 26 43 26 35 Fees and commission expenses, total 123 204 75 127
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.9 Interest expenses
1 April – 1 January – 1 April – 1 January – Interest expenses 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Term deposits 138 222 107 213 Current deposits 40 64 8 16 Own debt securities issued 46 91 43 85 Hedge derivatives 8 16 1 1 Sell-buy-back transactions 14 20 11 22 Bank loans contracted by PZU Group companies 2 3 1 2 Investment contracts with guaranteed and fixed terms and - - 1 2 conditions Other 6 10 3 5 Interest expenses, total 254 426 175 346
8.10 Administrative, acquisition and claims handling expenses, by type
1 April – 1 January – Administrative, acquisition and claims handling 1 April – 1 January – 30 June 2016 30 June 2016 expenses, by type 30 June 2017 30 June 2017 (restated) (restated) Consumption of materials and energy 70 141 42 96 Third party services 311 560 157 346 Taxes and fees 21 41 15 30 Employee expenses 846 1,531 587 1,151 Depreciation of property, plant and equipment 61 111 36 73 Amortization of intangible assets 62 112 36 75 Other, including: 747 1,452 647 1,290 - commissions on direct insurance business 576 1,137 480 978 - advertising 48 75 46 69 - remuneration of persons handling group insurance in 52 105 (3) 50 companies - other 71 135 124 193 Movement in capitalized acquisition expenses (16) (72) (37) (105) Administrative, acquisition and claims handling 2,102 3,876 1,483 2,956 expenses, total
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.11 Other operating expenses
1 April – 1 January – 1 April – 1 January – Other operating expenses 30 June 2016 30 June 2016 30 June 2017 30 June 2017 (restated) (restated) Tax on certain financial institutions 169 293 103 170 Expenses of the core business of non-insurance companies and 151 273 132 246 non-banking companies Direct claims handling expenses on behalf of other insurance 54 110 55 111 undertakings Compulsory payments to insurance market institutions and 18 38 19 41 banking market institutions Bank Guarantee Fund 15 37 18 37 Insurance Indemnity Fund 18 35 14 28 Fee for the National Fire Brigade Headquarters and the 1 21 1 22 Association of Voluntary Fire Brigades Expenditures for prevention activity 4 21 26 47 Recognition of provisions 89 96 3 12 Amortization of intangible assets purchased in company 21 41 22 45 acquisition transactions Establishing charges for non-financial assets 8 33 57 64 Donations 12 13 1 2 Other 67 120 121 155 Other operating expenses, total 627 1,131 572 980
8.12 Earnings per share
1 April – 1 January – 1 April – 1 January – Earnings per share 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Net profit attributable to the equity holders of the parent 506 1,446 168 660 company Basic and diluted weighted average number of ordinary shares 863,521,269 863,516,697 863,473,794 863,473,794 Number of outstanding shares 863,523,000 863,523,000 863,523,000 863,523,000 Amount of treasury shares (held by PZU’s subsidiaries) (1,731) (6,303) (49,206) (49,206) Basic and diluted earnings (losses) per ordinary share (in PLN) 0.59 1.67 0.19 0.76 In the 6-month period ended 30 June 2017, there were no transactions or events resulting in the dilution of earnings per share.
8.13 Income tax
1 April – 1 January – 1 April – 1 January – Total amount of current and deferred tax 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Recognized through profit or loss (213) (465) (102) (259) - current tax (412) (441) (210) (270) - deferred tax 199 (24) 108 11 Recognized in other comprehensive income (deferred tax) (2) (16) 14 14 Total amount of current and deferred tax (215) (481) (88) (245)
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Income tax pertaining to components of other 1 April – 1 January – 1 April – 1 January – comprehensive income 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Gross other comprehensive income 3 24 (33) (42) Income tax (2) (16) 14 14 Measurement of financial instruments available for sale and (2) (16) 14 14 cash flow hedging transactions Other net comprehensive income 1 8 (19) (28)
8.14 Goodwill
31 December Goodwill 30 June 2017 2016 Pekao 1,711 - Alior Bank 746 746 Lietuvos Draudimas AB 1) 467 489 Mass insurance segment in non-life insurance (Link4) 221 221 AAS Balta 38 40 Medical companies 90 82 Other 5 5 Goodwill, total 3,278 1,583 1) Includes goodwill on acquisition of the Lietuvos Draudimas branch in Estonia. In the 6-month period ended 30 June 2017, there were no premises justifying carrying out impairment tests. As a consequence, just like in 2016, there were no impairment charges related to goodwill.
8.15 Other assets
31 December Other assets 30 June 2017 2016 Reinsurance settlements 205 403 Estimated salvage and subrogation 172 161 Deferred IT expenses 47 41 Posted direct claims handling receivables 47 49 Inventories 169 114 Other assets 252 103 Other assets, total 892 871
8.16 Financial assets
In the 6-month period ended 30 June 2017 there was no reclassification of financial assets between the groups measured at fair value and the groups measured at cost or amortized cost. Due to a change in the purpose of use of certain assets, from 1 January 2015 some of the assets were reclassified from assets available for sale to assets held to maturity. The carrying amount of the assets at the time of reclassification was PLN 84 million. The carrying amount as at 30 June 2017 was PLN 81 million. The aforementioned transfer was the only reclassification of this type effected since 2015.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.16.1. Financial instruments held to maturity
31 December Financial instruments held to maturity 30 June 2017 2016 Debt securities 23,371 17,346 Government securities 23,151 17,117 Domestic 22,785 16,741 Fixed rate 21,176 15,793 Floating rate 1,609 948 Foreign 366 376 Fixed rate 366 376 Other 220 229 Listed on a regulated market 98 103 Fixed rate 98 103 Not listed on a regulated market 122 126 Floating rate 122 126 Financial instruments held to maturity, total 23,371 17,346
8.16.2. Financial instruments available for sale
31 December Financial instruments available for sale 30 June 2017 2016 Equity instruments 554 417 Listed on a regulated market 299 132 Not listed on a regulated market 255 285 Debt instruments 31,120 11,218 Government securities 29,938 7,981 Domestic 29,298 7,592 Fixed rate 20,146 5,144 Floating rate 9,152 2,448 Foreign 640 389 Fixed rate 640 389 Other 1,182 3,237 Listed on a regulated market 36 37 Fixed rate 36 37 Not listed on a regulated market 1,146 3,200 Fixed rate 675 2,611 1) Floating rate 471 589 Financial instruments available for sale, total 31,674 11,635 1) including NBP money bills in the amount of PLN 2,600 million.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.16.3. Financial instruments measured at fair value through profit or loss
31 December Financial instruments measured at fair value through profit or loss 30 June 2017 2016 Instruments classified into this category upon first recognition 4,865 14,479 Equity instruments 2,339 2,951 Listed on a regulated market 2,201 2,830 Not listed on a regulated market 138 121 Debt instruments 2,526 11,528 Government securities 2,488 11,437 Domestic 2,009 9,686 Fixed rate 1,976 8,257 Floating rate 33 1,429 Foreign 479 1,751 Fixed rate 479 1,674 Floating rate - 77 Other 38 91 Listed on a regulated market 38 91 Fixed rate 38 91 Instruments held for trading 13,402 7,403 Equity instruments 4,295 4,066 Listed on a regulated market 548 744 Not listed on a regulated market 3,747 3,322 Debt instruments 7,044 2,456 Government securities 6,973 2,383 Domestic 5,705 1,416 Fixed rate 4,912 1,384 Floating rate 793 32 Foreign 1,268 967 Fixed rate 1,262 967 Floating rate 6 - Other 71 73 Not listed on a regulated market 71 73 Floating rate 71 73 Derivatives 2,063 881 Financial instruments measured at fair value through profit or loss, total 18,267 21,882
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.16.4. Loans
31 December Loans 30 June 2017 2016 Debt securities 13,417 2,463 Government securities 34 2 Foreign 34 2 Fixed rate 34 2 Other 13,383 2,461 Not listed on a regulated market 13,383 2,461 Fixed rate 1,102 - Floating rate 12,281 2,461 Other 170,098 51,902 Loan receivables from clients 162,062 45,029 Buy-sell-back transactions 2,238 2,880 Term deposits in credit institutions 2,127 1) 2,285 Loans 2) 3,671 1,708 Loans, total 183,515 54,365 1) PLN deposits represent over 64% of term deposits in credit institutions. Over 87% of term deposits will mature before 30 September 2017. 2) 100% of loans are loans secured by pledges on shares, sureties, guarantees or material securities.
31 December Loan receivables from clients 30 June 2017 2016 Retail segment 85,987 25,309 Operating loans 278 294 Consumer loans 24,764 13,865 Consumer finance loans 1,426 1,222 Loans to purchase securities 108 125 Credit card account credit 1,296 970 Housing loans 56,881 7,969 Other mortgage loans 1,119 813 Other receivables 115 51 Business segment 76,075 19,720 Operating loans 33,804 10,838 Car loans 116 132 Investment loans 24,513 7,493 Purchased receivables (factoring) 3,506 794 Credit card account credit 177 - Housing loans 26 - Other mortgage loans 8,391 - Financial lease 4,774 281 Other receivables 768 182 Total loan receivables from clients 162,062 45,029
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.16.5. Exposure to debt securities issued by governments other than the Polish Government, by corporations and local government units
Debt securities issued by governments other than the Polish government
As at 30 June 2017:
Fair value Impairment Country Currency Acquisition price Carrying amount measurement charge Argentina USD 45 46 46 - Brazil USD 71 72 72 - Bulgaria EUR 195 205 207 - Chile EUR/USD 38 38 38 - Croatia EUR/USD 95 92 93 - Cyprus EUR 24 26 26 - Czechia CZK 222 221 221 - Spain EUR 93 92 92 - Indonesia EUR/USD 42 44 44 - Lithuania EUR 382 396 399 - Latvia EUR 62 65 66 - Mexico EUR/USD/MXN 35 35 35 - Germany EUR 307 299 299 - South Africa ZAR 51 49 49 - Romania EUR/RON 141 146 146 - Slovakia EUR 22 20 20 - Slovenia EUR 77 77 77 - Sri Lanka USD 17 17 17 - United States USD 464 452 452 - Turkey EUR/TRY 78 78 78 - Ukraine EUR/USD/UAH 68 1) 61 1) 62 1) - Hungary EUR/USD/HUF 217 208 210 - Italy EUR 26 26 26 - other EUR/USD/GBP 23 22 22 - Total 2,795 2,787 2,797 - 1) In the case of these bonds, every 6 months the par value of the bonds in a fixed amount of UAH 100 is repaid (i.e. 10% of the par value of one bond). The purchase price shows the actual price paid and does not take into account any repayments of the par value.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Balance as at 31 December 2016
Fair value Impairment Country Currency Acquisition price Carrying amount measurement charge Argentina USD 70 80 80 - Brazil USD 69 79 79 - Bulgaria EUR 235 259 261 - Croatia EUR/USD 53 57 58 - Cyprus EUR 24 25 25 - Czechia CZK 337 345 345 - Spain EUR 40 39 39 - Indonesia EUR/USD 40 44 44 - Lithuania EUR/USD 459 485 491 - Latvia EUR/USD 91 110 110 - Mexico EUR/USD 33 33 33 - Portugal EUR 58 60 60 - South Africa EUR/ZAR 68 73 73 - Romania EUR/USD/RON 397 422 423 - Slovakia EUR 164 162 162 - Slovenia EUR 132 138 138 - Sri Lanka USD 42 45 45 - United States USD 148 149 149 - Turkey EUR/USD/TRY 324 345 345 - Ukraine EUR/USD/UAH 69 1) 68 1) 68 1) - Hungary EUR/USD/HUF 399 423 424 - other EUR/USD/GBP 43 44 44 - Total 3,295 3,485 3,496 - 1) In the case of these bonds, every 6 months the par value of the bonds in a fixed amount of UAH 100 is repaid (i.e. 10% of the par value of one bond). The purchase price shows the actual price paid and does not take into account any repayments of the par value.
Debt securities issued by corporations and local government units
As at 30 June 2017:
Carrying Fair value Impairment Issuer Acquisition price amount measurement charge Companies from the WIG-Banks Index 1,265 1,287 1,317 - Companies from the WIG-Chemicals Index 9 9 9 - Companies from the WIG-Energy Index 1,649 1,650 1,650 5 Companies from the WIG-Fuels Index 335 338 341 - Mining and quarrying (including companies included 680 635 635 53 in the WIG-Mining index) Manufacturing 1,124 1,123 1,120
Transportation and storage 1,883 1,877 1,871
Public utility services 526 522 525
Privately held domestic banks 20 20 22 - Foreign banks 74 75 77 1 Domestic local governments 6,055 6,159 6,334 8 Other 1,263 1,199 1,198 84 Total 14,883 14,894 15,099 151
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Balance as at 31 December 2016
Fair value Issuer Acquisition price Carrying amount Impairment charge measurement Companies from the WIG-Banks - Index 1,299 1,320 1,327 Companies from the WIG-Fuels - Index 995 1,007 1,009 Companies from the WIG- - Chemicals Index 9 9 9 Companies from the WIG-Energy - Index 315 316 316 Privately held domestic banks 20 20 21 - Foreign banks 74 78 81 1 Domestic local governments 96 102 105 - Companies from the WIG-Mining Index 293 254 250 61 National Bank of Poland 2,600 2,600 2,600 - Other 425 385 385 17 Total 6,126 6,091 6,103 79
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.16.6. Derivatives
31 December Derivatives – assets 30 June 2017 2016
Interest rate derivatives 1,765 702 Instruments designated as fair value hedging transactions – unlisted instruments, including: 15 - - SWAP transactions 15 - Instruments designated as cash flow hedging transactions – unlisted instruments, including: 214 72 - SWAP transactions 214 72 Instruments recognized as held for trading, including: 1,536 630 Instruments listed on a regulated market, including: - 7 - futures contracts - 7 Unlisted (OTC) instruments, including: 1,536 623 - forward contracts 1 - - SWAP transactions 1,513 597 - call options 5 4 - put options 3 - - other 14 22 Foreign exchange derivatives 467 202 Instruments designated as cash flow hedging transactions – unlisted instruments, including: 69 - - SWAP transactions 69 - Instruments recognized as held for trading, including: 398 202 Instruments listed on a regulated market, including: 14 3 - futures contracts 14 3 Unlisted (OTC) instruments, including: 384 199 - forward contracts 157 62 - SWAP transactions 184 115 - call options 29 22 - put options 14 - Derivatives related to equity and commodity prices – recognized as held for trading 129 49 Listed instruments, including: 1 - - put options 1 - Unlisted (OTC) instruments, including: 128 49 - forward contracts 34 - - call options 91 48 - put options 3 1 Derivatives – assets, total 2,361 953
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
31 December Derivatives – liabilities 30 June 2017 2016 Interest rate derivatives 2,908 639 Instruments designated as fair value hedging transactions – unlisted instruments, including: 188 - - SWAP transactions 188 - Instruments designated as cash flow hedging transactions – unlisted instruments, including: 1,124 6 - SWAP transactions 1,124 6 Instruments recognized as held for trading, including: 1,596 633 Listed instruments, including: 7 19 - futures contracts 7 19 Unlisted (OTC) instruments, including: 1,589 614 - forward contracts 1 - - SWAP transactions 1,569 586 - call options 1 - - put options 3 6 - other 15 22 Foreign exchange derivatives 496 125 Instruments designated as cash flow hedging transactions – unlisted instruments, including: 3 - - SWAP transactions 3 - Instruments recognized as held for trading, including: 493 125 Unlisted (OTC) instruments, including: 493 125 - forward contracts 195 25 - SWAP transactions 257 77 - call options 8 - - put options 33 23 Derivatives related to equity and commodity prices – recognized as held for trading 87 23 Unlisted (OTC) instruments, including: 87 23 - forward contracts 34 - - call options 11 1 - put options 42 22 Derivatives – liabilities, total 3,491 787
8.16.7. Information on changes in the economic situation and business conditions materially affecting the fair value of financial assets and liabilities
8.16.7.1. Capital market
The rapid growth of Polish stock market indices that started at the time of the 2016 US presidential election continued in early 2017. It was accompanied by robust economic data from Poland and the Euro zone that also translated into the financial performance of the companies listed on the Warsaw Stock Exchange. The cautious declarations made by the European Central Bank and the Federal Reserve in respect to the pace of tightening monetary policy also supported the equity market. However, the interest rate hike orchestrated by the Federal Reserve in March contributed to a certain slowing down of the upward trend in stock prices. Ultimately, between the end of December 2016 and the end of June of this year, the WIG and WIG20 indices surged upward by approximately 18%.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.16.7.2. Interest rates and inflation
In H1 2017, the prices of consumer goods and services measured by CPI were up 1.9% y/y, compared to a 0.3% drop y/y in H2 2016. At the outset of the year, inflation visibly increased in connection with the hike in energy commodities on global markets and domestic fuel prices. Inflation subsequently stabilized after the impact of the global commodity price hike subsided, with increasing food prices and gradually rising base inflation associated with economic recovery. Base inflation (net of food and energy prices) in H1 2017 was 0.6% y/y compared to -0.2% y/y in H2 2016. In the period from January to August 2017, the interest rates of the National Bank of Poland did not change. The reference interest rate remains at the level of 1.5% as set in March 2015. The members of the Monetary Policy Council believe that the current level of interest rates is conducive to keeping the Polish economy on a sustainable growth path and allows it to preserve macroeconomic balance. In Q1 2017, yields on 10-year treasury bonds in Poland were temporarily at a relatively high level of 3.90% that was last recorded in 2014. However, in subsequent months, diminishing political risk in Europe following the elections in the Netherlands and France, accelerating economic growth in Poland and the ensuing conducive fiscal position contributed to a gradual decline in treasury bond yields in Poland. The Polish yield curve from the end of December 2016 to the end of June 2017 clearly shifted downward for longer maturities by about 20 bps for 5-year treasury bonds and by about 30 bps for 10-year treasury bonds (down to about 3.30%). The yield on 2-year bonds fell by roughly 10 bps, while yields of annual treasury securities rose by almost 20 basis points (to about 1.60%). Since May, the difference between yields offered by Polish and German 10-year treasury bonds has been under 300 basis points. According to our estimates, Poland’s risk premium declined in H1 2017.
8.16.7.3. FX rates
The evolution of FX rates in recent months, including PLN rates, was affected by changes in market expectations concerning the future monetary policy in the US and in the Euro zone. In H1 2017, the US dollar clearly weakened vs. the Euro, which may be attributed to disappointment with the direction of President D. Trump’s policies. The EUR/USD rate rose from about 1.05 to about 1.14, which is approximately 8%. The Polish zloty appreciated vs. the major global currencies. The Polish currency was supported by diminishing political risk in Europe, the robust pace of economic growth in Poland and the Euro zone and the good condition of the Polish state budget. The USD/PLN rate fell by as much as 11% at the end of June of this year compared to the end of 2016. The EUR/PLN and CHF/PLN rates fell in the period under analysis by about 4% and 6%, respectively. The Swiss franc exchange rate has remained under PLN 4 since the end of March.
8.16.8. Changes in classification of financial assets resulting from the change of purpose or use of such assets
Information on changes to the classification of financial assets is presented in item 8.16.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.17 Fair value
8.17.1. Description of valuation techniques
8.17.1.1. Debt securities
Fair values of debt securities are determined on the basis of quotations publicly available on an active market or valuations published by an authorized information service, and if there are no such quotations – using valuation models containing references to published price quotations of the underlying financial instruments, interest rates and stock exchange indices. The PZU Group conducts an internal review of the valuations published by the authorized information service comparing them to the valuations available from other sources based on data which can be observed on the market. The fair value of loans and debt securities for which an active market does not exist is measured using the discounted cash flow method. Discount rates are determined on the basis of the yield curve for government bonds adjusted by the credit spread. It is calculated as at the newest issue date based on the issue price and leads to parallel shifting of the yield curve for government bonds by a fixed amount along its whole length or as the difference between the yield of listed debt securities of issuers with a similar rating operating in similar industries and the yield of government bonds (German government bonds for bonds denominated in EUR) multiplied by a ratio determined as at the issue date, taking into account issuer-specific risk in the discount curve.
8.17.1.2. Equity-based financial assets
Fair values of equity-based financial assets are determined on the basis of quotations publicly available on an active market. Fair values of participation units and investment certificates of mutual funds are measured using the value of the participation units and investment certificates published by the mutual fund companies. Such valuation reflects the PZU Group's share in net assets of these funds. The PZU Group conducts reviews to ensure that there is no material difference between the net asset value determined as above and the fair value.
8.17.1.3. Derivatives
For derivatives listed on an active market, the fair value is considered to be the closing price as at the balance-sheet date. The fair value of derivatives not listed on an active market, including forward contracts and interest rate swaps is measured using the discounted future cash flow method. For the discounting of cash flows, interest rates are used from the yield curves assigned to the relevant type of financial instrument and currency, construed on the basis of available market data. The fair value of options related to structured deposits is measured based on valuations provided by the issuers of such options, taking into account a verification of these valuations performed by the PZU Group companies, based on their own valuation models.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.17.1.4. Loan receivables from clients
In order to determine a change in the fair value of receivables from clients (excluding current account overdraft), the margins earned on newly granted loans (in the month preceding the date as at which the consolidated financial statements are prepared) are compared with the margins in the whole loan portfolio. If the margins earned on newly granted loans are higher than the margins in the existing portfolio the fair value of the loan portfolio is lower than its carrying amount. Loan receivables from clients have been classified in full to level 3 of the fair value hierarchy due to the use of a valuation model with material unobserved input data, i.e. current margins earned on newly granted loans.
8.17.1.5. Financial liabilities
Liabilities under deposits
Due to the fact that deposits are accepted under current operations on a daily basis, hence their terms are similar to the current market terms for identical transactions, and the time to maturity for such loans is short, it is deemed that for liabilities to clients with maturities up to 1 year the fair value does not significantly deviate from the carrying amount.
Liabilities on the issue of own debt securities and subordinated debt
The fair value of liabilities on the issue of own debt securities, including subordinated debt, is determined as the present value of expected payments on the basis of present interest curves and the present credit spread.
Liabilities under investment contracts for the client’s account and risk
Liabilities under investment contracts for the client’s account and risk are measured at the fair value of assets covering the liabilities of the unit-linked fund associated with the relevant investment contract.
Liabilities to members of consolidated mutual funds
Liabilities to members in the consolidated mutual funds are measured at the fair value of assets of the relevant mutual fund (according to the share in the mutual fund’s net assets).
Liabilities on borrowed securities
Liabilities on securities borrowed to make a short sale are measured at the fair value of borrowed securities.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.17.2. Fair value hierarchy
On the basis of the input data for fair value measurement, the individual assets and liabilities for which fair value has been presented have been classified to the following levels: Level I – assets and liabilities measured based on listed prices (unadjusted) from active markets for identical assets and liabilities. This level includes: liquid listed debt securities; listed shares and investment certificates; listed derivatives; Level II – assets and liabilities whose measurement is based on input data other than listed prices included within level I, which can be observed on the market, either directly (as prices) or indirectly (derived from prices). This level includes: listed debt securities carried on the basis of the valuations published by an authorized information service; derivatives, including, among other things, FX Swap, FX Forward, IRS, CIRS, FRA; participation units in mutual funds; liabilities to members of consolidated mutual funds; investment contracts for the client’s account and risk. Level III – assets measured based on input data unobserved on the existing markets (unobservable input data). This level includes: unlisted debt securities and non-liquid listed debt securities (including non-treasury debt securities issued by financial entities, local government and non-financial entities), measured using models based on discounted cash flows; loan receivables from clients and liabilities to clients under deposits; options embedded in deposit certificates issued by Alior Bank and options concluded in the interbank market to hedge embedded option positions. In a situation in which the measurement of an asset or liability is based on input data classified in different levels of the fair value hierarchy, the measured asset is assigned to the lowest level from which the input data are taken, provided that they have a significant impact on the overall measurement. The value of the measurement of components of assets or liabilities qualified in level III is affected to significant extent by unobservable input data. Measured assets Unobservable data Description Impact on measurement Spreads are observed on all bonds (their series) or loans of the same issuer or a similar issuer. These Non-liquid bonds spreads are observed on the dates of issue of new Credit spreads Negative correlation. and loans bond series, dates of conclusion of new loan agreements and dates of market transactions on the receivables following from such bonds and loans.
63
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Assets and liabilities measured at fair value as at Level I Level II Level III Total 30 June 2017 Assets Financial instruments available for sale 26,044 5,016 614 31,674 Equity instruments 236 201 117 554 Debt securities 25,808 4,815 497 31,120 Financial instruments measured at fair value through profit or loss – 4,178 643 44 4,865 classified as such upon first recognition Equity instruments 2,201 120 18 2,339 Debt securities 1,977 523 26 2,526 Financial instruments measured at fair value through profit or loss – held 5,811 7,261 330 13,402 for trading Equity instruments 548 3,747 - 4,295 Debt securities 5,244 1,548 252 7,044 Derivatives 19 1,966 78 2,063 Hedge derivatives - 298 - 298 Liabilities Derivatives 17 2,121 38 2,176 Hedge derivatives - 1,315 - 1,315 Liabilities to members of consolidated mutual funds - 385 - 385 Investment contracts for the client’s account and risk (unit-linked) - 323 - 323 Liabilities on borrowed securities (short sale) 803 - - 803
Assets and liabilities measured at fair value as at Level I Level II Level III Total 31 December 2016 Assets Financial instruments available for sale 8,113 2,887 635 11,635 Equity instruments 132 264 21 417 Debt securities 7,981 2,623 614 11,218 Financial instruments measured at fair value through profit or loss – 12,555 1,882 42 14,479 classified as such upon first recognition Equity instruments 2,837 97 17 2,951 Debt securities 9,718 1,785 25 11,528 Financial instruments measured at fair value through profit or loss – held 1,882 5,333 188 7,403 for trading Equity instruments 745 3,321 - 4,066 Debt securities 1,119 1,202 135 2,456 Derivatives 18 810 53 881 Hedge derivatives - 72 - 72 Liabilities Derivatives 31 724 26 781 Hedge derivatives - 6 - 6 Liabilities to members of consolidated mutual funds - 1,544 - 1,544 Investment contracts for the client’s account and risk (unit-linked) - 329 - 329 Liabilities on borrowed securities (short sale) 654 - - 654
64
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Fair value of assets and liabilities for which it is only disclosed Level I Level II Level III Total as at 30 June 2017 Assets Financial assets held to maturity 19,881 40 5,758 25,679 Loans Debt securities - 6,048 7,568 13,616 Loan receivables from clients - - 159,486 159,486 Buy-sell-back transactions - - 2,238 2,238 Term deposits in credit institutions - - 2,131 2,131 Loans - - 3,690 3,690 Liabilities Liabilities to banks - 788 4,430 5,218 Liabilities to clients - - 185,800 185,800 Liabilities on the issue of own debt securities - 1,351 3,641 4,992 Subordinated debt - - 3,273 3,273
Fair value of assets and liabilities for which it is only disclosed Level I Level II Level III Total as at 31 December 2016 Assets Financial assets held to maturity 15,531 15 3,520 19,066 Loans Debt securities 1 1 2,467 2,469 Loan receivables from clients - - 44,897 44,897 Buy-sell-back transactions - - 2,879 2,879 Term deposits in credit institutions - - 2,281 2,281 Loans - - 1,705 1,705 Liabilities Liabilities to banks - 399 124 523 Liabilities to clients - - 51,364 51,364 Liabilities on the issue of own debt securities - - 3,761 3,761 Subordinated debt - - 1,027 1,027
8.17.3. Shifts between different levels of the fair value hierarchy
In the event of a change in the method of measurement of assets or liabilities resulting, for instance, from losing (or gaining) access to quotations observed on the active market, such assets or liabilities are shifted between Levels I and II. Assets or liabilities are shifted between Levels II and III (or, as appropriate, between Levels III and II) when: there is a change in the measurement model resulting from the application of new unobservable factors (or observable ones, respectively); or the previously used factors which had a significant impact on the measurement cease to be (or become, respectively) observable on the active market. Shifts between different levels of the fair value hierarchy are effected on the date ending each quarter according to the value as at that date. In 2017, there were no significant transfers between Levels I and II (between Levels II and I, respectively). In 2016, the following reclassifications of assets between fair value levels were made: On 30 June 2016 some financial assets were transferred from Level I to Level II; on the transfer date, their fair value was PLN 2,600 million. On 30 September 2016 one bond classified in the portfolio of assets available for sale with a carrying amount of PLN 46 million was transferred from Level III to Level I in connection with the emergence of quotations on an active market.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.17.4. Changes in the fair value measurement methodology for financial instruments measured at fair value
In the 6-month period ended 30 June 2017, there were no changes in the fair value measurement method for financial instruments measured at fair value which would be of material significance for the condensed interim consolidated financial statements.
8.18 Receivables
31 December Receivables – carrying amount 30 June 2017 2016 Receivables on direct insurance, including: 2,461 2,233 - receivables from policyholders 2,209 1,996 - receivables from insurance intermediaries 106 213 - other receivables 146 24 Reinsurance receivables 88 76 Other receivables 7,673 3,394 - receivables from transactions on securities and security deposits 1) 6,024 2,401 - receivables on account of payment card settlements 454 202 - trade receivables 212 148 Receivables from the state budget, other than corporate income tax receivables 173 55 - prevention settlements 44 47 - receivables from banks 34 12 - receivables from direct claims handling on behalf of other insurance undertakings 29 40 - disputed settlements 29 - - receivables for acting as an emergency adjuster 11 11 - receivables on account of Corporate Income Tax 36 16 - receivables from settlement of the acquisition of Bank BPH’s Core Business 115 145 - other 512 317 Total receivables 10,222 5,703 1) this line item presents receivables associated with executed but unsettled transactions on financial instruments. As at 30 June 2017 and 31 December 2016, the fair value of receivables did not differ significantly from their carrying amount, primarily due to their short-term nature and the policy of recognizing impairment charges.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.19 Impairment of financial assets and receivables
Change Balance at Balance Movement in impairment Derecogniti in the the Recognition Reversal Other at the charges for financial asset in the on (sale, composit beginning through through change end of period of write-down ion of of the profit or loss profit or loss s the 1 January – 30 June 2017 etc.) the period period Group Financial assets held to maturity 1 - - - - - 1 Debt instruments 1 - - - - - 1 Available for sale financial 54 - - - - - 54 assets Equity instruments 47 - - - - - 47 Debt securities 7 - - - - - 7 Loans 3,124 2,005 (1,507) (137) 5,788 50 9,323 Debt securities 71 - (7) (25) 104 - 143 Loan receivables from clients 3,037 2,005 (1,500) (97) 5,667 50 9,162 Term deposits in credit institutions 1 - - - 17 - 18 Loans 15 - - (15) - - - Receivables 591 89 (48) (3) - - 629 Receivables on direct insurance 562 86 (44) (2) - - 602 Reinsurance receivables 8 1 (3) (1) - - 5 Other receivables 21 2 (1) - - - 22 Reinsurers’ share in technical 9 6 (4) - - - 11 provisions Cash and cash equivalents 1 - - - - - 1 Total 3,780 2,100 (1,559) (140) 5,788 50 10,019
67
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Balance at Derecognitio Change in Movement in impairment charges Recognition Reversal Balance at the n (sale, the for financial assets in the year through through the end of beginning of write-down composition ended 31 December 2016 profit or loss profit or loss the period the period etc.) of the Group Financial assets held to maturity 1 - - - - 1 Debt instruments 1 - - - - 1 Available for sale financial assets 46 8 - - - 54 Equity instruments 46 1 - - - 47 Debt securities - 7 - - - 7 Loans 2,015 1,896 (1,095) (514) 822 3,124 Debt securities 43 33 - (5) - 71 Loan receivables from clients 1,938 1,863 (1,095) (491) 822 3,037 Term deposits in credit institutions 1 - - - - 1 Loans 33 - - (18) - 15 Receivables 588 63 (54) (6) - 591 Receivables on direct insurance 562 56 (50) (6) - 562 Reinsurance receivables 6 5 (3) - - 8 Other receivables 20 2 (1) - - 21 Reinsurers’ share in technical 11 25 (27) - - 9 provisions Cash and cash equivalents 1 - - - - 1 Total 2,662 1,992 (1,176) (520) 822 3,780
Balance at Derecognitio Change in Movement in impairment charges Recognition Reversal Balance at the n (sale, the for financial asset in the period of through through the end of beginning of write-down composition 1 January – 30 June 2016 profit or loss profit or loss the period the period etc.) of the Group Financial assets held to maturity 1 - - - - 1 Debt instruments 1 - - - - 1 Available for sale financial assets 46 7 - - - 53 Equity instruments 46 - - - - 46 Debt securities - 7 - - - 7 Loans 2,015 971 (621) (22) 32 2,375 Debt securities 43 23 - - - 66 Loan receivables from clients 1,938 948 (621) (4) 32 2,293 Term deposits in credit institutions 1 - - - - 1 Loans 33 - - (18) - 15 Receivables 588 70 (31) (1) - 626 Receivables on direct insurance 562 67 (28) (1) - 600 Reinsurance receivables 6 1 (2) - - 5 Other receivables 20 2 (1) - - 21 Reinsurers’ share in technical 11 13 (2) - - 22 provisions Cash and cash equivalents 1 - - - - 1 Total 2,662 1,061 (654) (23) 32 3,078
8.20 Degree of exposure to credit risk in investment activity
The tables below present the credit risk exposure of credit risk-based assets in the individual Fitch rating categories (if a Fitch rating was missing, it was substituted by a Standard&Poor’s or Moody’s rating). The credit risk exposure arising from conditional transactions was presented as an exposure to the issuer of the underlying securities. The tables do not include loan receivables due under insurance contracts. This was mainly because of the fact that this asset portfolio is very dispersed and contains a significant percentage of receivables from small entities and natural persons, which are not rated.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Credit risk-based assets as at Assets at AAA AA A BBB BB Unrated Total 30 June 2017 client’s risk Debt securities 453 297 60,462 2,948 224 11,847 1,247 77,478 - held to maturity - - 23,102 124 7 138 - 23,371 - available for sale - 297 29,600 302 - 921 - 31,120 - at fair value 453 - 6,901 648 217 104 1,247 9,570 - loans - - 859 1,874 - 10,684 - 13,417 Term deposits in credit institutions and buy-sell-back - 490 2,366 390 134 851 134 4,365 transactions Other loans - - 16 - 617 3,038 - 3,671 Derivatives - 49 1,178 100 - 1,002 37 2,366 1) Reinsurers’ share in claims provisions - 179 386 - - 98 - 663 Reinsurance receivables - 16 49 - - 23 - 88 Total 453 1,031 64,457 3,438 975 16,859 1,418 88,631 1) including derivatives of PLN 298 million designated as cash flow and fair value hedges and derivatives of PLN 5 million presented as assets held for sale.
Credit risk-based assets as at Assets at AAA AA A BBB BB Unrated Total 31 December 2016 client’s risk Debt securities 149 5 39,100 2,930 583 1,005 1,239 45,011 - held to maturity - - 16,991 206 49 100 - 17,346 - available for sale - 5 10,552 297 11 353 - 11,218 - at fair value 149 - 10,728 1,207 523 138 1,239 13,984 - loans - - 829 1,220 - 414 - 2,463 Term deposits in credit institutions and buy-sell-back - - 4,330 519 - 99 217 5,165 transactions Other loans - - 33 - 76 1,599 - 1,708 Derivatives - 10 505 62 - 354 22 9531) Reinsurers’ share in claims provisions - 304 231 1 - 77 - 613 Reinsurance receivables - 25 31 - - 20 - 76 Total 149 344 44,230 3,512 659 3,154 1,478 53,526 1) including derivatives of PLN 72 million designated as cash flow hedges.
69
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
The table below presents credit risk coefficients used by the PZU Group to measure credit risk: Standard&Poor’s ratings AAA AA A BBB BB Unrated 1) Coefficient (%) 30 June 2017 0.72% 0.77% 1.41% 3.76% 13.33% 25.43% Coefficient (%) 31 December 2016 0.72% 0.79% 1.48% 3.89% 13.45% 25.37% 1) In the case of exposure to unrated mortgage loans, a 2% coefficient was assumed, which corresponds to the lowest investment grade rating of BBB+. The credit risk level attributable to the assets where the risk is carried by the PZU Group as at 30 June 2017 was PLN 5,467 million (as at 31 December 2016 it was PLN 1,684 million; if the coefficients of 30 June 2017 were used, the value would be PLN 1,649 million).
8.21 Degree of exposure to credit risk in banking activity
31 December Loan receivables from clients - regular 30 June 2017 2016 Unimpaired receivables 149,402 39,961 Retail segment 80,692 22,440 Business segment 68,710 17,521 Impaired receivables 1,576 523 Total 150,978 40,484
31 December Past due receivables 30 June 2017 2016 Unimpaired receivables 7,352 2,977 Up to 30 days 5,168 2,187 30-60 days 596 227 Over 60 days 1,588 563 Impaired receivables 3,732 1,568 Up to 30 days 203 173 1 to 3 months 176 137 3 to 12 months 907 522 1 to 5 years 1,772 722 Over 5 years 674 14 Total 11,084 4,545
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.22 Assets held for sale
31 December Assets held for sale before reclassification 30 June 2017 2016 Groups held for sale 1,059 1,027 Assets 1,091 1,060 Investment properties 922 1,002 Financial assets 5 - Receivables 80 12 Deferred tax assets 7 2 Cash and cash equivalents 71 42 Other assets 6 2 Liabilities related directly to assets classified as held for sale 32 33 Deferred tax liability 6 15 Other liabilities 26 18 Other assets held for sale 148 129 Property, plant and equipment 89 39 Investment properties 59 90 Assets and groups of assets held for sale 1,239 1,189 Liabilities related directly to assets classified as held for sale 32 33 As at 30 June 2017 and 31 December 2016 the “Groups held for sale” section presented primarily real estate held for sale on account of reaching the anticipated investment horizon.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.23 Technical provisions
30 June 2017 31 December 2016 reinsurers’ Technical provisions reinsurers’ gross net gross share net share
Technical provisions in non-life insurance 21,601 (1,126) 20,475 20,388 (990) 19,398 Provision for unearned premiums 7,963 (446) 7,517 6,957 (377) 6,580 Provision for unexpired risk 10 - 10 26 - 26 Provision for outstanding claims 7,927 (480) 7,447 7,730 (421) 7,309 - for reported claims 2,940 (441) 2,499 2,992 (371) 2,621 - for claims incurred but not reported (IBNR) 3,169 (25) 3,144 2,979 (29) 2,950 - for claims handling costs 1,818 (14) 1,804 1,759 (21) 1,738 Provision for capitalized value of annuities 5,680 (183) 5,497 5,673 (192) 5,481 Provisions for bonuses and discounts for insureds 21 (17) 4 2 - 2 Technical provisions in life insurance 22,184 - 22,184 21,806 - 21,806 Provision for unearned premiums 94 - 94 93 - 93 Provision for life insurance 15,969 - 15,969 15,928 - 15,928 Provision for outstanding claims 544 - 544 542 - 542 - for reported claims 152 - 152 156 - 156 - for claims incurred but not reported (IBNR) 386 - 386 380 - 380 - for claims handling costs 6 - 6 6 - 6 Provisions for bonuses and discounts for insureds 3 - 3 3 - 3 Other technical provisions 303 - 303 323 - 323 Technical provisions for life insurance if the policyholder bears the investment risk 5,271 - 5,271 4,917 - 4,917 Technical provisions, total 43,785 (1,126) 42,659 42,194 (990) 41,204
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Movement in technical provisions in non-life insurance 1 January – 30 June 2017 1 January – 31 December 2016 1 January – 30 June 2016
Movement in provision for unearned premiums reinsurers’ reinsurers’ reinsurers’ gross net gross net gross net share share share
Balance at the beginning of the period 6,957 (377) 6,580 5,643 (339) 5,304 5,643 (339) 5,304 Increase in provisions relating to policies signed in the current 5,454 (277) 5,177 6,552 (194) 6,358 4,567 (139) 4,428 year Decrease in provisions relating to policies signed in previous (4,418) 208 (4,210) (5,255) 156 (5,099) (3,819) 165 (3,654) years Foreign exchange differences in the period (30) - (30) 17 - 17 19 - 19 Balance at the end of the period 7,963 (446) 7,517 6,957 (377) 6,580 6,410 (313) 6,097
1 January – 30 June 2017 1 January – 31 December 2016 1 January – 30 June 2016
Movement in provision for unexpired risk reinsurers’ reinsurers’ reinsurers’ Gross net gross net gross net share share share
Balance at the beginning of the period 26 - 26 119 - 119 119 - 119 Increase in provisions relating to policies signed in the current 4 - 4 23 - 23 110 - 110 year Decrease in provisions relating to policies signed in previous (20) - (20) (116) - (116) (87) - (87) years Balance at the end of the period 10 - 10 26 - 26 142 - 142
73
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
1 January – 30 June 2017 1 January – 31 December 2016 1 January – 30 June 2016 Movement in the gross provision for outstanding claims in non-life insurance reinsurers’ reinsurers’ reinsurers’ gross net gross net gross net share share share
Balance at the beginning of the period, including: 7,730 (421) 7,309 7,706 (580) 7,126 7,706 (580) 7,126 Claims paid for losses incurred in previous years, including: (1,782) 67 (1,715) (2,502) 247 (2,255) (1,680) 120 (1,560) - claims paid (1,540) 63 (1,477) (2,133) 241 (1,892) (1,456) 116 (1,340) - claims handling costs (242) 4 (238) (369) 6 (363) (224) 4 (220) Increase (decrease) in provisions, including: 1,990 (128) 1,862 2,539 (87) 2,452 1,476 (71) 1,405 - relating to losses incurred in current year 2,047 (77) 1,970 2,751 (66) 2,685 1,675 (18) 1,657 - relating to losses incurred in previous years (57) (51) (108) (212) (21) (233) (199) (53) (252) Other changes 6 2 8 (24) (1) (25) - 8 8 Foreign exchange differences in the period (17) - (17) 11 - 11 12 (1) 11 Balance at the end of the period 7,927 (480) 7,447 7,730 (421) 7,309 7,514 (524) 6,990
1 January – 30 June 2017 1 January – 31 December 2016 1 January – 30 June 2016 Movement in provision for capitalized value of annuities reinsurers’ reinsurers’ reinsurers’ in non-life insurance Gross net gross net gross net share share share
Balance at the beginning of the period 5,673 (192) 5,481 5,808 (178) 5,630 5,808 (178) 5,630 Claims paid for losses incurred in previous years (173) 7 (166) (325) 9 (316) (145) 4 (141) Increase (decrease) in provisions relating losses incurred in 72 4 76 13 (22) (9) 9 (1) 8 previous years Settlement of discount over time (7) - (7) (15) - (15) (7) - (7) Increase in provisions relating to losses incurred in current year 117 (2) 115 168 - 168 71 (2) 69 Other changes - - - 24 (1) 23 - 3 3 Foreign exchange differences in the period (2) - (2) ------Balance at the end of the period 5,680 (183) 5,497 5,673 (192) 5,481 5,736 (174) 5,562
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Movement in technical provisions in life insurance 1 January – 30 June 2017 1 January – 31 December 2016 1 January – 30 June 2016 Movement in the life insurance provision, provision for bonuses and discounts and other technical provisions - reinsurers’ reinsurers’ reinsurers’ Gross net gross net gross net insurance contracts share share share
Balance at the beginning of the period 16,254 - 16,254 16,606 - 16,606 16,606 - 16,606 Increase (decrease) in provisions relating to policies signed in 150 - 150 316 - 316 175 - 175 the current year Increase (decrease) in provisions relating to policies signed in (121) - (121) (668) - (668) (243) - (243) previous years Foreign exchange differences (8) - (8) - - - 1 - 1 Balance at the end of the period 16,275 - 16,275 16,254 - 16,254 16,539 - 16,539
1 January – 30 June 2017 1 January – 31 December 2016 1 January – 30 June 2016 Movement in gross provisions for life insurance – unit- reinsurers’ reinsurers’ reinsurers’ linked contracts gross net gross net gross net share share share
Balance at the beginning of the period 4,917 - 4,917 4,744 - 4,744 4,744 - 4,744 Increases in the fund on account of premiums 682 - 682 956 - 956 434 - 434 Fees collected (60) - (60) (91) - (91) (46) - (46) Fund’s investment income 217 - 217 131 - 131 (44) - (44) Decreases in the fund on account of claims, surrenders, etc. (556) - (556) (799) - (799) (366) - (366) Other changes 71 - 71 (24) - (24) (19) - (19) Balance at the end of the period 5,271 - 5,271 4,917 - 4,917 4,703 - 4,703
1 January – 30 June 2017 1 January – 31 December 2016 1 January – 30 June 2016
Movement in claims provisions reinsurers’ reinsurers’ reinsurers’ gross net gross net gross net share share share
Balance at the beginning of the period 542 - 542 558 - 558 558 - 558 Utilization of claims provisions during the year (485) - (485) (562) - (562) (467) - (467) Recognition of claims provisions during the year 487 - 487 546 - 546 473 - 473 Balance at the end of the period 544 - 544 542 - 542 564 - 564
75
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.24 Other provisions
Balance Balance at the Business Other at the Movement in other provisions in the period Increas beginning Utilization Reversal combinati change end of 1 January – 30 June 2017 e of the ons s the period period Provisions for restructuring expenses 252 61 (102) (9) - - 202 Provision for disputed claims and potential 11 1 - (2) 9 2 21 liabilities Provision for penalties imposed by the Office of 58 - - (1) - - 57 Competition and Consumer Protection 1) Provision for guarantees and sureties extended 18 26 - (21) 215 - 238 Provision for the costs of closing the Graphtalk 6 - - - - - 6 project Provision for PTE PZU’s reimbursement of undue commissions to the Social Insurance Institution 9 - - - - - 9 (ZUS) Other 13 8 (1) (3) 24 - 41 Other provisions, total 367 96 (103) (36) 248 2 574
Balance at the Business Balance at Movement in other provisions in the year beginning Increase Utilization Reversal combinati the end of ended 31 December 2016 of the ons the period period Provisions for restructuring expenses 3 200 (6) - 55 252 Provision for disputed claims and potential 4 3 (1) - 5 11 liabilities Provision for penalties imposed by the Office of 58 - - - - 58 Competition and Consumer Protection 1) Provision for the costs of closing the Graphtalk 6 - - - - 6 project Provision for guarantees and sureties extended 5 19 - (16) 10 18 Provision for PTE PZU’s reimbursement of undue commissions to the Social Insurance Institution 9 - - - - 9 (ZUS) Other 23 7 (8) (9) - 13 Other provisions, total 108 229 (15) (25) 70 367
Balance at Balance at Movement in other provisions in the period the Increase Utilization Reversal the end of 1 January – 30 June 2016 beginning of the period the period Provisions for restructuring expenses 3 - (2) - 1 Provision for disputed claims and potential 4 1 - - 5 liabilities Provision for penalties imposed by the Office of 58 - - - 58 Competition and Consumer Protection 1) Provision for guarantees and sureties extended 5 10 - (8) 7 Provision for the costs of closing the Graphtalk 6 - - - 6 project Provision for PTE PZU’s reimbursement of undue commissions to the Social Insurance Institution 9 - - - 9 (ZUS) Other 23 1 (3) (1) 20 Other provisions, total 108 12 (5) (9) 106 1) The most significant item of this amount is explained in item 16.2.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.25 Financial liabilities
31 December Financial liabilities 30 June 2017 2016 Financial liabilities carried at fair value 5,002 3,314 Derivatives held for trading 2,176 781 Cash flow hedge derivatives 1,127 6 Fair value hedge derivatives 188 - Liabilities on borrowed securities (short sale) 803 654 Investment contracts for the client’s account and risk (unit-linked) 323 329 Liabilities to members of consolidated mutual funds 385 1,544 Financial liabilities measured at amortized cost 199,289 56,716 Liabilities to banks 4,990 523 Current deposits 685 32 Overnight deposits 336 1 Term deposits 365 - Bank securities - 20 Loans received 3,412 305 Other liabilities 192 165 Liabilities to clients 185,376 51,241 Current deposits 105,929 25,791 Term deposits 75,963 22,160 Bank securities 2,698 2,769 Other liabilities 786 521 Liabilities on the issue of own debt securities 4,859 3,680 Subordinated debt 3,267 1,027 Liabilities under sell-buy-back transactions 752 178 Finance lease liabilities 11 - Investment contracts with guaranteed and fixed terms and conditions 34 67 Total financial liabilities 204,291 60,030
8.25.1. Subordinated debt
Issue / receipt of Maturity / loan Par value Interest rate loan date repayment date Liabilities classified as PZU’s own
funds PZU’s subordinated loan 2,250 WIBOR 6M+ margin 30 June 2017 29 July 2027 Liabilities classified as Alior Bank’s
own funds EURIBOR 3M + Subordinated loan (in EUR million) 10 12 October 2011 12 October 2019 margin Series F bonds (PLN million) 322 WIBOR 6M+ margin 26 September 2014 26 September 2024 WIBOR 6M + Series G bonds (PLN million) 193 31 March 2015 31 March 2021 margin Series I and I1 bonds (PLN million) 183 WIBOR 6M+ margin 4 December 2015 6 December 2021 Meritum Bank bonds (PLN million) 67 WIBOR 6M+ margin 29 April 2013 29 April 2021 Meritum Bank bonds (PLN million) 80 WIBOR 6M+ margin 21 October 2014 21 October 2022 Series EUR001 bonds (EUR million) 10 LIBOR 6M+ margin 4 February 2016 4 February 2022 Series P1A bonds (PLN million) 150 WIBOR 6M+ margin 27 April 2016 16 May 2022 Series P1B bonds (PLN million) 70 WIBOR 6M+ margin 29 April 2016 16 May 2024 Additional information on the PZU’s subordinated bond issue is presented in item 12.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
31 December Subordinated debt, carrying amount 30 June 2017 2016 PZU’s subordinated bonds 2,244 - Subordinated debt of Alior Bank 1,023 1,027 Subordinated loan 42 44 Series F bonds 225 225 Series G bonds 196 196 Series I bonds 114 114 Series I1 bonds 33 33 Meritum Bank bonds 148 148 Series EUR001 bonds 43 45 Series P1A bonds 151 151 Series P1B bonds 71 71 Subordinated debt 3,267 1,027 The lower carrying amount of subordinated debt in relation to the par value presented above results from the fact that some of the bonds issued by Alior Bank have been taken up by consolidated mutual funds and are subject to elimination in consolidation.
8.25.2. Liabilities on the issue of own debt securities
31 December Liabilities on the issue of own debt securities 30 June 2017 2016 PZU Finance AB (publ.) bonds 3,544 3,680 Certificates of deposit 86 - Covered bonds 1,229 - Liabilities on the issue of own debt securities 4,859 3,680
Par value Interest rate Issue dates Maturity date (EUR million) 3 July 2014 PZU Finance AB (publ.) bonds 850 1.375% 3 July 2019 16 October 2015
The liabilities of PZU Finance AB (publ.) arising from the bonds are secured by a guarantee granted by PZU which covers all issue-related liabilities of the issuer (including the obligation to pay the par value of the bonds and interest on the bonds) in favor of all bondholders. The maximum value of the guarantee prevailing until expiration of the bondholders’ claims against PZU Finance AB (publ.) has not been specified. The lower carrying amount of liabilities on account of the issue of own debt securities in relation to the par value presented above results from the fact that some of the bonds issued by PZU Finance AB (publ.) have been taken up by consolidated PZU Group entities and are eliminated in consolidation.
78
WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
8.26 Other liabilities
31 December Other liabilities 30 June 2017 2016 Accrued expenses 1,250 1,182 Accrued expenses of agency commissions 318 301 Accrued sales commission expenses in group insurance 8 10 Accrued payroll expenses 130 170 Accrued reinsurance expenses 308 432 Accrued employee bonuses 195 149 Other 291 120 Deferred revenue 274 152 Other liabilities 9,273 3,663 Liabilities for transactions on financial instruments 1,926 932 Liabilities to minority shareholders in subsidiaries for dividends 1,822 - Liabilities to PZU shareholders for dividends 1,213 3 Liabilities to banks on account of payment documents settled in interbank settlement systems 977 593 Liabilities on direct insurance 800 849 Liabilities on account of payment card settlements 568 65 Regulatory settlements: 259 67 Liabilities on account of contributions to BFG 214 10 Reinsurance liabilities 211 133 Estimated non-insurance liabilities 161 119 Liabilities to employees 157 165 Estimate fee refunds in connection with withdrawals or terminations, by banks’ clients, of 151 71 insurance policies concluded at the sale of credit products Trade payables 141 91 Current income tax liabilities 133 225 Liabilities to the state budget other than for income tax 59 56 Liabilities on account of donations 28 34 Liabilities on account of leases concluded not on an arm's length basis 28 38 Alior Bank’s liabilities on account of insurance of bank products offered to the bank’s clients 22 23 Insurance Indemnity Fund 16 16 Liabilities on account of direct claims handling 13 13 Other 374 160 Other liabilities, total 10,797 4,997
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
9. Contingent assets and liabilities
31 December Contingent assets and liabilities 30 June 2017 2016 Contingent assets 6 40 - guarantees and sureties received 6 40 Contingent liabilities 58,518 16,364 - on account of financing 44,956 12,979 - guarantees and sureties given 7,038 1,514 - disputed insurance claims 774 429 - other disputed claims 207 195 - other, including: 5,543 1,247 - underwriting of securities issues 3,458 - letters of credit and commitment letters 949 - - liabilities for tranches of loans not used by borrowers up to the balance sheet date 213 1,195 - potential liabilities under loan agreements concluded by the Armatura Group 30 27
10. Capital management
On 3 October 2016 PZU Supervisory Board adopted a resolution to approve the PZU Group's capital and dividend policy for 2016-2020 (“Policy”). Introduction of the Policy follows from implementation, as of 1 January 2016, of the Insurance and Reinsurance Activity Act implementing Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of insurance and reinsurance (“Solvency II”), as amended, Insurance and Reinsurance Activity Act, and expiry of the PZU Group’s Capital and Dividend Policy for 2013-2015 updated in May 2014. In accordance with the Policy the PZU Group endeavors to do the following: manage capital effectively by optimizing the usage of capital from the PZU Group’s perspective; maximize the rate of return on equity for the parent company’s shareholders, in particular by maintaining the level of security and retaining capital resources for strategic growth objectives through acquisitions; ensure sufficient financial means to cover the PZU Group’s liabilities to its clients. The capital management policy rests on the following principles: the PZU Group’s capital management (including excess capital) is conducted at the level of PZU as the parent company; sustain target solvency ratios at the level of 200% for the PZU Group, PZU and PZU Życie (according to Solvency II); maintain the PZU Group’s financial leverage ratio at a level no higher than 0.35; ensure funds for growth and acquisitions in the coming years; PZU will not issue any new shares for the duration of this Policy. The PZU Group and PZU dividend policy assumes that: the dividend amount proposed by the PZU Management Board for the financial year is determined on the basis of the PZU Group’s consolidated financial result attributable to the parent company, where: no more than 20% will be earmarked as retained earnings (supplementary capital) for goals associated with organic growth and innovations as well as execution of growth initiatives; no less than 50% is subject to payment as an annual dividend; the remaining part will be paid in the form of annual dividend or will increase retained earnings (supplementary capital) if in the given year significant expenditures are incurred in connection with execution of the PZU Group Strategy, including in particular, mergers and acquisitions;
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) subject to the items below; according to the PZU Management Board’s plans and risk and solvency self-assessment of the parent company, the own funds of the parent company and the PZU Group following the declaration or payment of a dividend will remain at a level that will ensure fulfillment of the conditions specified in the capital policy; when determining the dividend the regulatory authority’s recommendations concerning dividends will be taken into consideration. External capital requirements According to the Insurance Activity Act implementing Solvency II into Polish legal regime, the calculation of the capital requirement is based on market, actuarial (insurance), counterparty insolvency, catastrophic and operational risks. Assets, liabilities and as a consequence own funds covering the capital requirement are measured at fair value. Pursuant to art. 412 section 1 of the Insurance Activity Act, the PZU Group is obligated to prepare and disclose an annual solvency and financial condition report at the group level drafted in accordance with the principles of Solvency II. The 2016 report published on 30 June 2017 is available online at https://www.pzu.pl/relacje-inwestorskie/informacje- finansowe. Additionally, the PZU Group insurance companies are obligated to observe separate capital requirements defined in the Solvency II regime; other PZU Group companies providing financial services are obligated to observe their own capital requirements as defined in their sector regulations.
11. Segment reporting
11.1 Reportable segments
11.1.1. Key classification criterion
Operating segments are components of an entity for which separate financial information is available and is subject to regular assessment by MCBRMOD (in practice this is the PZU Management Board), related to allocating resources and assessing operating results. The main dividing line between segments in the PZU Group is based on the criteria of the nature of business, product groups, client groups and the regulatory environment. The characteristics of individual segments is provided in the table below. Accounting Segment Segment description Aggregation criteria standards Aggregation by similarity of Broad scope of property insurance products, TPL and products offered, similar client Corporate insurance motor insurance customized to a customer’s needs groups to which they are offered, PAS (non-life insurance) entailing individual underwriting offered to large distribution channels and economic entities by PZU, Link4, TUW PZUW. operation in the same regulatory environment. Broad scope of property, accident, TPL and motor Mass insurance insurance products offered to individual clients and PAS As above. (non-life insurance) entities in the small and medium enterprise sector by PZU, Link4, TUW PZUW.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Accounting Segment Segment description Aggregation criteria standards Group insurance addressed by PZU Życie to groups of employees and other formal groups (e.g. trade unions), under which persons under a legal relationship with the policyholder (e.g. employer, trade Group and individually union) enroll in the insurance and individually continued insurance PAS No aggregation continued insurance in which the policyholder acquired (life insurance) the right to individual continuation during the group phase. PZU Życie’s offer covers a wide range of protection, investment (not investment contracts) and health insurance. Insurance offered by PZU Życie to individual clients under which the insurance contract applies to a Individual insurance specific insured and this insured is subject to individual PAS No aggregation (life insurance) underwriting. PZU Życie’s offer covers a wide range of protection, investment (not investment contracts) and health insurance. The segment includes: 1. investments of the PZU Group’s own funds, understood as the surplus of investments over technical provisions in PZU, Link4 and PZU Życie plus the surplus of income earned over the risk-free Investments PAS rate on investments reflecting the value of technical provisions in insurance products, i.e. surplus of investment income allocated at transfer prices to insurance segments; 2. income from other free funds in the PZU Group (in particular consolidated mutual funds). The aggregation was carried out due to similarity of products and Broad range of banking products offered both to Banking activity IFRS services offered by the companies corporate and retail clients by Pekao and Alior Bank. and similarity of the regulatory environment of their operations. Pension insurance PAS 2nd pillar pension insurance No aggregation The aggregation was carried out Non-life insurance and life insurance products offered due to similarity of products and Baltic States IFRS by Lietuvos Draudimas AB and its branch in Estonia, services offered by the companies AAS Balta and UAB PZU Lietuva Gyvybes Draudimas. and similarity of the regulatory environment of their operations. The aggregation was carried out Non-life and life insurance products offered by PZU Ukraine IFRS due to similarity of the regulatory Ukraine and PZU Ukraine Life Insurance. environment of their operations. PZU Życie products that do not transfer significant insurance risk within the meaning of IFRS 4 and that Investment contracts PAS do not meet the definition of an insurance contract No aggregation (i.e. some products with a guaranteed rate of return and some unit-linked products). Other products and services not classified into any of Other PAS / IFRS the above segments.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
11.1.2. Information relating to geographical areas
The PZU Group applies additional segmentation by geographic location, according to which the following geographic areas were identified: Poland; Baltic States; Ukraine.
11.2 Inter-segment settlements
The net result of investments (the difference between realized and unrealized revenues and costs) carried in corporate insurance (non-life), mass insurance (non-life), group and individually continued insurance (life), individual insurance (life) is determined on the basis of transfer prices using interest rates from the yield curves for treasuries. For unit-linked insurance products, guaranteed rate products and structured products the net result of investments covering the technical provisions corresponding to them is carried directly.
11.3 Segment’s measure of profit
The PZU Group’s fundamental measure of a segment’s profit is as follows: in the case of corporate, mass, group, individually continued and individual insurance segments – insurance result, which is the financial result before tax and other operating income and expenses (including costs of financing), however including investment income (corresponding to the value of technical provisions) determined using the risk- free rate. The insurance result is a measure approximately equivalent to the technical result defined in PAS, taking into account the difference in the recognition of the net result on investments as described in the previous sentence; in the case of the investment segment – the investment result of PZU Group companies minus the result allocated to insurance segments; in the case of investment contracts – the operating result, calculated in the manner approximately equivalent to the technical result in accordance with PAS; in the case of banking activity and foreign insurance activity – the operating result according to local accounting standards in the country of the company’s registered offices or according to IFRS, which is the financial result before tax.
11.4 Accounting standards employed according to PAS
11.4.1. PZU
PAS and the differences between PAS and IFRS in respect of PZU’s standalone financial reporting have been portrayed in detail in PZU’s standalone financial statements for 2016. PZU's standalone financial statements for 2016 are available on the PZU website at www.pzu.pl in the "Investor Relations" tab.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
11.4.2. PZU Życie
The accounting standards according to PAS applicable to PZU Życie are convergent with the PAS applicable to PZU. What is unique to PZU Życie is the rules of accounting for insurance agreements and investment contracts according to IFRS. Detailed information on this issue is presented in the consolidated financial statements. The fundamental difference between PAS and IFRS in respect of accounting for insurance agreements and investment contracts at PZU Życie is the classification of contracts. There is no term “investment contract” in PAS, as a consequence of which all agreements are classified as insurance agreements. According to IFRS agreements are classified according to the guidelines set forth under IFRS 4 on the classification of products as insurance agreements (subject to IFRS 4) or investment contracts (measured according to IAS 39). In the case of the latter the written premium is not recognized.
11.5 Simplifications in the segmental note
The segmental note has applied certain simplifications permitted by IFRS 8. The justification for their usage is portrayed below: withdrawing from presenting data related to the allocation of all assets and liabilities to various segments – resulting from not preparing and not presenting such tables to the PZU Management Board. The main information delivered to the PZU Management Board consists of data regarding the results of given segments and managerial decisions are made on this basis, including decisions on resource allocation. The analysis of the segmental allocation of assets and liabilities is limited to a large extent to monitoring the fulfillment of the regulatory requirements; presenting the net result on investments as a single amount as the difference between the realized and unrealized revenues and the costs of investments – stemming from the internal assessment of the segmental results based on such a combined measure of investment results; not allocating other revenues and costs to the segment called „investments” besides realized and unrealized revenues and costs of investments – stemming from the method of analyzing this segment’s data and the impracticality of such an allocation.
11.6 Information on key customers
Due to the nature of the activities of PZU Group companies, there are no business partners bringing revenues which would constitute 10% or more of the PZU Group’s total revenues (understood as gross written premium).
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
11.7 Quantitative data
1 April – 1 January – 1 April – 1 January – Corporate insurance (non-life insurance) 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Gross premium written externally 753 1,379 552 966 Gross premium written between segments (2) 2 3 64 Gross written premiums 751 1,381 555 1,030 Movement in provision for unearned premiums and gross (158) (247) (76) (120) provision for unexpired risks Gross earned premium 593 1,134 479 910 Reinsurers’ share in the gross written premium (171) (250) (79) (105) Reinsurer’s share in the movement in provision for unearned 84 83 27 (13) premiums and the gross provision for unexpired risk Net earned premium 506 967 427 792 Investment income, including: 26 40 36 64 external operations 26 40 36 64 intersegment operations - - - - Other net technical income 12 36 17 27 Income 544 1,043 480 883
Net insurance claims (275) (572) (268) (439) Acquisition expenses (104) (204) (92) (168) Administrative expenses (32) (64) (29) (55) Reinsurance commissions and profit-sharing 7 13 3 8
Other (24) (49) (4) (27) Insurance result 116 167 90 202
1 April – 1 January – 1 April – 1 January – Mass insurance (non-life insurance) 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Gross premium written externally 2,564 5,217 2,158 4,277 Gross premium written between segments 1 1 - 28 Gross written premiums 2,565 5,218 2,158 4,305 Movement in provision for unearned premiums and gross (204) (656) (235) (635) provision for unexpired risks Gross earned premium 2,361 4,562 1,923 3,670 Reinsurers’ share in the gross written premium (23) (24) (4) (8) Reinsurer’s share in the movement in provision for unearned - (22) (9) (20) premiums and the gross provision for unexpired risk Net earned premium 2,338 4,516 1,910 3,642 Investment income, including: 134 228 148 275 external operations 134 228 148 275 intersegment operations - - - - Other net technical income 18 88 13 33 Income 2,490 4,832 2,071 3,950
Net insurance claims (1,498) (2,790) (1,218) (2,442) Acquisition expenses (432) (847) (377) (736) Administrative expenses (138) (280) (148) (294) Reinsurance commissions and profit-sharing 1 - (6) (3)
Other (94) (191) (83) (168) Insurance result 329 724 239 307
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Group and individually continued insurance 1 April – 1 January – 1 April – 1 January – (life insurance) 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Gross premium written externally 1,715 3,429 1,701 3,390 Gross premium written between segments - - - - Gross written premiums 1,715 3,429 1,701 3,390 Movement in the provision for unearned premiums (3) (3) - - Gross earned premium 1,712 3,426 1,701 3,390 Reinsurers’ share in the gross written premium - - - - Reinsurer’s share in the movement in provision for unearned - - - - premiums and the gross provision for unexpired risk Net earned premium 1,712 3,426 1,701 3,390 Investment income, including: 163 393 101 291 external operations 163 393 101 291 intersegment operations - - - - Other net technical income 1 1 - - Income 1,876 3,820 1,802 3,681
Net insurance claims and benefits and movement in other net (1,196) (2,648) (1,148) (2,463) technical provisions Acquisition expenses (85) (167) (79) (167) Administrative expenses (143) (292) (142) (286)
Other (25) (31) (21) (38) Insurance result 427 682 412 727
1 April – 1 January – 1 April – 1 January – Individual insurance (life insurance) 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Gross premium written externally 384 792 292 538 Gross premium written between segments - - - - Gross written premiums 384 792 292 538 Movement in the provision for unearned premiums (1) 1 (1) 2 Gross earned premium 383 793 291 540 Reinsurers’ share in the gross written premium - - - - Reinsurer’s share in the movement in provision for unearned - - - - premiums and the gross provision for unexpired risk Net earned premium 383 793 291 540 Investment income, including: 71 251 66 78 external operations 71 251 66 78 intersegment operations - - - - Income 454 1,044 357 618
Net insurance claims and benefits and movement in other net (358) (850) (257) (421) technical provisions Acquisition expenses (33) (67) (24) (49) Administrative expenses (15) (30) (15) (30)
Other (2) (2) (3) (5) Insurance result 46 95 58 113
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
1 April – 1 January – 1 April – 1 January – Investments 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Investment income, including: 1,352 1,684 433 558 - external operations (200) 126 (520) (401) - intersegment operations 1,552 1,558 953 959 Operating result 1,352 1,684 433 558
1 April – 1 January – 1 April – 1 January – Banking activity 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Fees and commission income 382 597 140 279 Investment income, including: 1,193 1,868 407 972 - external operations 1,193 1,868 407 972 - intersegment operations - - - - Income 1,575 2,465 547 1,251
Fees and commission expenses (116) (194) (61) (112) Interest expenses (220) (391) (49) (300) Administrative expenses (760) (1,227) (258) (527)
Other (112) (168) (68) (95) Operating result 367 485 111 217
1 April – 1 January – 1 April – 1 January – Pension insurance 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Investment income, including: 2 3 1 2 external operations 2 3 1 2 intersegment operations - - - - Other income 33 61 32 56 Income 35 64 33 58
Administrative expenses (11) (24) (8) (17)
Other - (1) (2) - Operating result 24 39 23 41
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
1 April – 1 January – 1 April – 1 January – Insurance - Baltic States 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Gross premium written externally 358 673 311 585 Gross premium written between segments - - - - Gross written premiums 358 673 311 585 Movement in provision for unearned premiums and gross (51) (72) (35) (40) provision for unexpired risks Gross earned premium 307 601 276 545 Reinsurers’ share in the gross written premium (6) (22) (6) (18) Reinsurer’s share in the movement in provision for unearned (2) 5 (1) 4 premiums and the gross provision for unexpired risk Net earned premium 299 584 269 531 Investment income, including: 1 9 5 9 external operations 1 9 5 9 intersegment operations - - - - Income 300 593 274 540
Net insurance claims and benefits (181) (366) (165) (332) Acquisition expenses (66) (130) (60) (121) Administrative expenses (28) (55) (31) (61)
Other - - (1) (1) Insurance result 25 42 17 25
1 April – 1 January – 1 April – 1 January – Insurance - Ukraine 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Gross premium written externally 63 115 48 106 Gross premium written between segments - - - - Gross written premiums 63 115 48 106 Movement in provision for unearned premiums and gross (11) (14) (1) (17) provision for unexpired risks Gross earned premium 52 101 47 89 Reinsurers’ share in the gross written premium (30) (51) (16) (48) Reinsurer’s share in the movement in provision for unearned 9 9 (5) 9 premiums and the gross provision for unexpired risk Net earned premium 31 59 26 50 Investment income, including: 3 7 3 11 external operations 3 7 3 11 intersegment operations - - - - Income 34 66 29 61
Net insurance claims and benefits (16) (26) (7) (25) Acquisition expenses (16) (32) (15) (27) Administrative expenses (6) (12) (6) (10)
Other 5 11 6 10 Insurance result 1 7 7 9
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
1 April – 1 January – 1 April – 1 January – Investment contracts 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Gross written premium 8 21 14 61 Movement in the provision for unearned premiums - - - - Gross earned premium 8 21 14 61 Reinsurers’ share in the gross written premium - - - - Reinsurer’s share in the movement in the provision for - - - - unearned premiums Net earned premium 8 21 14 61 Investment income, including: 2 21 (4) 2 external operations 2 21 (4) 2 intersegment operations - - - - Income 10 42 10 63
Net insurance claims and benefits and movement in other net (9) (38) (7) (56) technical provisions Acquisition expenses (1) (1) (1) (2) Administrative expenses (1) (3) (2) (5)
Operating result (1) - - -
1 April – 1 January – 1 April – 1 January – Other segments 30 June 2017 30 June 2017 30 June 2016 30 June 2016 Investment income, including: 4 4 3 2 - external operations 4 4 3 2 - intersegment operations - - - - Other income 241 454 222 366 Income 245 458 225 368
Costs (248) (484) (223) (375)
Other 6 23 3 7 Operating result 3 (3) 5 -
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Reconciliations Net Net insurance Investment Acquisition Administrative Operating 1 January 2017 – earned claims and income 2) expenses expenses result 30 June 2017 premium benefits Corporate insurance 967 40 (572) (204) (64) 167 Mass insurance 4,516 228 (2,790) (847) (280) 724 Group and individually continued 3,426 393 (2,648) (167) (292) 682 insurance Individual insurance 793 251 (850) (67) (30) 95 Investments - 1,684 - - - 1,684 Banking activity - 1,868 - - (1,227) 485 Pension insurance - 3 - (1) (24) 39 Insurance - Baltic States 584 9 (366) (130) (55) 42 Insurance - Ukraine 59 7 (26) (32) (12) 7 Investment contracts 21 21 (38) (1) (3) - Other segments - 4 - - - (3) Total segments 10,366 4,508 (7,290) (1,449) (1,987) 3,922 Presentation of investment (21) (19) 38 - - - contracts Estimated salvage and subrogation - - 6 - - 6 Valuation of equity instruments - 36 - - - 36 Elimination of the loss ratio equalization provision and - - - - - (2) prevention fund Charges to the Company Social Benefit Fund (ZFŚS) and actuarial - - - - (20) (20) costs Consolidation adjustments 1) 2 (1,493) 32 37 (18) (1,743) Consolidated data 10,347 3,032 (7,214) (1,412) (2,025) 2,199 1) Consolidated adjustments follow primarily from the dividends paid between individual segments and from different accounting standards in which individual reportable segments (PAS and IFRS) and consolidated data (IFRS) are reported. 2) The sum of the following line items in the consolidated statement of profit or loss: “Net investment income”, “Net realized result and impairment charges on investments” and “Net movement in the fair value of assets and liabilities measured at fair value”.
Reconciliations Net Net insurance Investment Acquisition Administrative Operating 1 January 2016 – earned claims and income 2) expenses expenses result 30 June 2016 premium benefits Corporate insurance 792 64 (439) (168) (55) 202 Mass insurance 3,642 275 (2,442) (736) (294) 307 Group and individually continued 3,390 291 (2,463) (167) (286) 727 insurance Individual insurance 540 78 (421) (49) (30) 113 Investments - 558 - - - 558 Banking activity - 972 - - (527) 217 Pension insurance - 2 - (2) (17) 41 Insurance - Baltic States 531 9 (332) (121) (61) 25 Insurance - Ukraine 50 11 (25) (27) (10) 9 Investment contracts 61 2 (56) (2) (5) - Other segments - 2 - - - - Total segments 9,006 2,264 (6,178) (1,272) (1,285) 2,199 Presentation of investment (61) 4 56 - - - contracts Valuation of equity instruments - 67 - - - 67 Valuation of properties - (15) - - - (15) Elimination of the loss ratio equalization provision and - - - - - (9) prevention fund Charges to the Company Social Benefit Fund (ZFŚS) and actuarial - - - - (15) (15) costs Consolidation adjustments 1) 41 (915) (43) 20 22 (1,177) Consolidated data 8,986 1,405 (6,165) (1,252) (1,278) 1,050
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
1) Consolidated adjustments follow primarily from the dividends paid between individual segments and from different accounting standards in which individual reportable segments (PAS and IFRS) and consolidated data (IFRS) are reported. 2) The sum of the following line items in the consolidated statement of profit or loss: “Net investment income”, “Net realized result and impairment charges on investments” and “Net movement in the fair value of assets and liabilities measured at fair value”.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Not allocated Geographic breakdown (consolidation Baltic 1 January – 30 June 2017 Poland Ukraine eliminations and Consolidated value States and as at 30 June 2017 other)
Gross written premium - external 10,818 673 115 - 11,606 Gross written premium - cross-segment - - - - - Fees and commission income 519 - - 183 702 Net investment income 3,252 8 7 - 3,267 Net result on the realization of investments and (300) (1) - - (301) impairment charges Net movement in the fair value of assets and 64 2 - - 66 liabilities measured at fair value
Non-current assets other than financial 4,526 252 4 - 4,782 instruments 1) Deferred tax assets 663 - 2 921 1,586 Assets 294,251 2,132 272 (1,393) 295,262 1) applies to intangible assets and property, plant and equipment
Not allocated (consolidation Geographic breakdown Baltic Poland Ukraine eliminations and Consolidated value States 31 December 2016 other)
Non-current assets other than financial 2,650 276 4 - 2,930 instruments 1) Deferred tax assets 622 - 2 - 624 Assets 124,510 2,021 262 (1,448) 125,345 1) applies to intangible assets and property, plant and equipment
Not allocated Geographic breakdown (consolidation Baltic 1 January – 30 June 2016 Poland Ukraine eliminations and Consolidated value States and as at 30 June 2016 other)
Gross written premium - external 9,171 585 106 - 9,862 Gross written premium - cross-segment 29 - - (29) - Fees and commission income 395 - - - 395 Net investment income 1,861 7 11 - 1,879 Net result on the realization of investments and (469) (1) - - (470) impairment charges Net movement in the fair value of assets and (7) 3 - - (4) liabilities measured at fair value
Non-current assets other than financial 2,258 295 4 - 2,557 instruments 1) Deferred tax assets 443 - 2 - 445 Assets 112,096 1,951 262 (1,364) 112,945 1) applies to intangible assets and property, plant and equipment
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
12. Issues, redemptions and repayments of debt securities and equity securities
On 30 June 2017, PZU issued subordinated bonds with the following parameters: Parameter Value Total nominal value of the bonds PLN 2,250 million Nominal value and issue price of one bond PLN 100,000 Date of bond maturity 29 July 2027 Interest rate WIBOR 6M + 1.80% margin 29 January and 29 July each year, Interest payment days from 29 January 2018 until 29 July 2027 Possibility of redeeming bonds before maturity 29 July 2022 Security None The bonds are not in the form of documents and are registered in the securities depository maintained by Krajowy Depozyt Papierów Wartościowych SA [National Depository of Securities] and listed in alternative trading systems run by BondSpot SA and the Warsaw Stock Exchange. As at 30 June 2017, liabilities under the bonds were classified as PZU’s category 2 own funds in accordance with art. 245 of the Insurance Activity Act and art. 72 of the Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).
13. Default or breach of material provisions of loan agreements
During the 6 months ended 30 June 2017, in PZU and in its subsidiaries there were no instances of default or a breach of any material provisions of loan agreements in respect of which no remedial actions were taken until the end of the reporting period.
14. Granting of loan sureties or guarantees by PZU or its subsidiaries
In the 6-month period ended 30 June 2017, neither PZU nor its subsidiaries granted any loan sureties or guarantees to any single entity or any subsidiary of such an entity where the total amount of such sureties or guarantees would be the equivalent to at least 10% of PZU’s equity.
15. Dividends
Only the profit captured in the standalone financial statements of the parent company prepared in accordance with PAS is subject to distribution. On 29 May 2017 the PZU Management Board decided to file a motion with the Ordinary Shareholder Meeting of PZU to distribute PZU’s net profit for the year ended 31 December 2016 in the amount of PLN 1,593 million as follows: designate PLN 1,209 million, i.e. PLN 1.40 per share, for a dividend payment; designate PLN 369 million for supplementary capital; designate PLN 15 million for the Company Social Benefit Fund. On 29 June 2017, the Ordinary Shareholder Meeting of PZU adopted a resolution on distribution of net profit for the year ended 31 December 2016, in accordance with the motion submitted by the PZU Management Board. The record date was set at 29 September 2017 and the dividend payment date was set for 19 October 2017.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) 16. Disputes
The PZU Group entities participate in a number of lawsuits, arbitration disputes and administrative proceedings. Typical lawsuits involving the PZU Group companies include disputes pertaining to concluded insurance agreements, disputes concerning labor relationships and disputes relating to contractual obligations. Typical administrative proceedings involving the PZU Group companies include proceedings related to the possession of real properties. Such proceedings and lawsuits are of a typical and repetitive nature and usually no particular one of them is of material importance to the PZU Group. The majority of disputes involving the PZU Group companies concerned four companies: PZU, PZU Życie, Pekao and Alior Bank. Additionally, PZU and PZU Życie are parties to proceedings conducted before the President of the Office of Competition and Consumer Protection. PZU and PZU Życie take disputed claims into account in the process of recognizing their technical provisions for known losses, considering the probability of an unfavorable outcome of the dispute and estimating the probable awarded amount. In the case of disputed claims pertaining to restatement of annuities in PZU Życie, the claims are carried in other technical provisions at the annual value of annuities above the corresponding amount of provision set within the framework of mathematical life provisions. During the 6 months ended 30 June 2017 and by the date of conveying this periodic report, the PZU Group companies were not involved in any proceedings conducted before a court, an arbitration body or a public administration authority which concerned any liabilities or receivables of PZU or any of its direct or indirect subsidiaries, the unit value of which was at least 10% of PZU’s equity. As at 30 June 2017, the value of the subject matter of the litigation in all the 188,686 cases pending before courts, arbitration bodies or public administration authorities in which PZU Group entities take part, was PLN 178,070 million. Out of this amount, PLN 175,344 million relates to liabilities and PLN 2,726 million to receivables of PZU Group companies. The substantial change in the value of litigation against the PZU Group in H1 2017 resulted from the fact that Pekao received a lawsuit from Pekao’s minority shareholder for annulment and possibly repealing Resolutions no. 5 and no. 21 adopted by Pekao’s Ordinary Shareholder Meeting on 19 April 2017 to approve Pekao’s financial statements for 2016 and to grant a discharge to a Member of Pekao’s Management Board on the performance of duties in 2016. The value of the dispute in those proceedings was specified by the plaintiff as PLN 170,989 million. Pekao believes that the lawsuit is groundless and the value of the dispute specified by the plaintiff is incorrect (Pekao has petitioned for a review and determination of the value of the dispute). Estimates of the provision amounts for individual cases take into account all information available on the date of publishing this periodic report; however, this figure may change in the future.
16.1 Resolutions of the Ordinary Shareholder Meeting of PZU to distribute the profit earned in the financial year 2006
On 30 July 2007, an action was brought by Manchester Securities Corporation (“MSC”) with its registered office in New York against PZU to repeal Resolution No. 8/2007 adopted by the Company’s Ordinary Shareholder Meeting on 30 June 2007 to distribute PZU’s profit for the financial year 2006 as contradicting good practices and aimed at harming the plaintiff as a shareholder of PZU. The challenged resolution of the Ordinary Shareholder Meeting of PZU distributed the net profit of PLN 3,281 million generated in 2006 as follows: PLN 3,261 million was transferred to supplementary capital; PLN 20 million was transferred to the Company Social Benefit Fund. In its judgment of 22 January 2010 the Regional Court in Warsaw repealed the aforementioned resolution adopted by PZU’s Ordinary Shareholder Meeting in its entirety. PZU has used all the available appeal measures, including a cassation
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) appeal to the Supreme Court which, on 27 March 2013, dismissed the cassation appeal. The judgment is final and not subject to further appeal. In PZU’s opinion, the rescission of the above resolution of the Ordinary Shareholder Meeting of PZU will not lead to a claim on the part of PZU’s shareholders for payment of a dividend. As the judgment repealing resolution no. 8/2007 became final, on 30 May 2012, the PZU Ordinary Shareholder Meeting adopted a resolution to distribute the profit for the financial year 2006 in a way reflecting the distribution of profit effected by virtue of the repealed resolution no. 8/2007. MSC filed an objection against the resolution of 30 May 2012 and the objection was recorded in the minutes. On 20 August 2012, a copy of a statement of claim filed by MSC with the Regional Court in Warsaw was delivered to PZU. In the statement of claim, the Manchester Securities Corporation demanded that the resolution on the distribution of profit for the financial year 2006 adopted on 30 May 2012 by the PZU Ordinary Shareholder Meeting be repealed. According to the plaintiff, the value of the litigation is PLN 5 million. PZU has submitted a rejoinder to the statement of claim requesting to dismiss the statement of claim in its entirety. On 17 December 2013, the Regional Court passed a judgment in which it accepted the claim in its entirety and awarded the costs of proceedings from PZU to MSC. On 4 March 2014, PZU filed an appeal against the above judgment, contesting it in its entirety. In its judgment of 11 February 2015, the Appellate Court in Warsaw changed the judgment of the Regional Court of 17 December 2013 in its entirety, dismissed MSC’s claim and charged MSC with the court expenses. The Appellate Court’s judgment is final. MSC challenged the Appellate Court’s judgment in its entirety in a cassation appeal of 9 June 2015. PZU filed a response to cassation appeal. With its decision of 19 April 2016, the Supreme Court refused to review MSC’s cassation appeal. According to the provisions of the Code of Civil Procedure, the Supreme Court’s ruling is final and not subject to further appeal and ends the proceedings in this case. In the meantime, on 16 December 2014, MSC summoned PZU to pay PLN 265 million as compensation in connection with repealing resolution no. 8/2007 adopted by the PZU Ordinary Shareholder Meeting on 30 June 2007 to distribute PZU’s profit for the financial year 2006. PZU refused to effect the performance, indicating the lack of grounds. On 23 September 2015, a copy of the statement of claim with enclosures was delivered to PZU in the case launched by MSC against PZU for payment of PLN 169 million with statutory interest from 2 January 2015 to the date of payment. The statement of claim includes a demand to pay compensation for depriving MSC and J.P. Morgan (MSC acquired the claim from J.P. Morgan) as minority shareholders of PZU of their share in profits for the financial year 2006 in connection with adoption of resolution no. 8/2007 on 30 June 2007 by the PZU Ordinary Shareholder Meeting. The case is pending before the Regional Court in Warsaw. On 18 December 2015, PZU replied to the statement of claim requesting to dismiss the suit in its entirety. On 1 April 2016, MSC filed a pleading in which it responded to PZU’s assertions, allegations and petitions and raised new arguments in the case. On 30 June 2016, PZU filed a response to MSC’s most recent pleading along with requests for evidence. In a decision of 21 July 2016, the Court referred the case to a mediation procedure, to which PZU did not agree. In subsequent court sessions, the hearing of evidence will take place. The Management Board of PZU believes that MSC’s claims are groundless. As a result, as at 30 June 2017, no changes were made to the presentation of PZU’s equity that could potentially stem from the repeal of resolution no. 8/2007 adopted by the PZU Ordinary Shareholder Meeting on the distribution of profit for the financial year 2006, including the line items “Supplementary capital” and “Retained earnings (losses)”, and the funds in the Company Social Benefit Fund were not adjusted.
16.1.1. Other demands for payment pertaining to the distribution of PZU’s profit for the financial year 2006
In the letters of 17 December 2014, Wspólna Reprezentacja SA summoned PZU to pay the amount of PLN 56 million and PLN 1 million as claims for damages acquired from shareholders resulting from their deprivation of the right to participate in PZU’s profit. PZU refused to effect the performance, indicating the lack of grounds. Apart from the aforementioned letters, shareholders, former shareholders or their legal successors sent to PZU demands for payment based on the facts presented above. Rather than indicating any specific amounts, some of them provided
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) only the number of shares or merely submitted a demand for payment. PZU replied them in writing, stating that their claims are not existent and that they will not be accepted.
16.1.2. Other court proceedings pertaining to distribution of PZU SA’s profit earned in the financial year 2006
On 19 January 2015, the District Court for the Capital City of Warsaw delivered a copy of a petition, together with attachments, in the case filed by the company operating under the business name of Wspólna Reprezentacja SA, calling for a settlement for the amount of PLN 56 million. At the hearing on 19 February 2015 PZU refused to conclude a settlement. PZU received copies of other calls for a settlement with demands to conclude settlements through payment of amounts on account of participation in the profits for the financial year 2006. The proceedings have already been completed. PZU refused to conclude the settlements stating that the claims are not existent and that they will not be accepted. 7 lawsuits for payment of dividend or compensation have been launched against PZU. PZU answers to such statements of claim consistently demanding their dismissal in entirety. In six cases, District Courts in Warsaw dismissed the claims in their entirety (in five cases, the rulings are final and in one case the plaintiff filed an appeal to which PZU replied by petitioning for the dismissal of the appeal in its entirety). In one case, the District Court discontinued the proceedings after the statement of claim was withdrawn (the decision is final).
16.2 Proceedings conducted by President of UOKiK against PZU
On 30 December 2011, the President of UOKiK issued a decision to impose a fine of PLN 57 million on PZU for its use of a practice restricting competition and violating the prohibition prescribed in Article 6 Section 1 Item 3 of the Act on Competition and Consumer Protection by the execution, by PZU and Maximus Broker Sp. z o.o. with its registered office in Toruń (“Maximus Broker”), of an agreement restricting competition in the domestic market for sales of group accident insurance for children, youths and staff of educational institutions consisting of dividing the sales market by entity and transferring PZU’s clients from the Kujawsko-Pomorskie voivodship to Maximus Broker for the provision of services in exchange for their recommending PZU as the insurer of choice and at the same time prohibited PZU from the use of this alleged practice. The PZU Management Board does not agree with the determination of facts and the legal argumentation in the decision, because not all the evidence was taken into account when making the decision and an erroneous legal qualification was made. On 18 January 2012 PZU submitted an appeal against the aforementioned decision (as a result of which it did not become final). In its appeal, PZU indicated the following, among other issues: no agreement (other than a brokerage agreement) was entered into between PZU and Maximus Broker; the President of the Office of Competition and Consumer Protection misunderstands the principles of execution of insurance agreements involving a broker; the majority of insurance agreements involving Maximus Broker were entered into with insurance companies other than PZU; PZU and Maximus Broker cannot and could not in the past conduct competitive activity in the markets in which they operate. On 22 October 2012, PZU received a response on its appeal from the UOKiK President, to which PZU replied on 5 November 2012. On 27 March 2015, the Regional Court issued a judgment in which it repealed the decision of the UOKiK President of 30 December 2011. On 21 May 2015, the UOKiK President filed an appeal. By judgment of 6 December 2016, the Appellate Court in Warsaw repealed the judgment issued by the Regional Court in Warsaw and referred the case for re-examination. On 31 July 2017, the Regional Court issued a judgment in which it repealed the
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) decision of the UOKiK President of 30 December 2011. The judgment is not final. The UOKiK President may appeal against the judgment to the Appellate Court in Warsaw. PZU established a provision for this fine, which amounted to PLN 57 million as at 30 June 2017 and 31 December 2016.
16.3 Proceedings conducted by UOKiK President against PZU Życie
On 1 June 2005, the President of the Office of Competition and Consumer Protection launched, at the request of several applicants, an anti-monopoly procedure in the matter of a suspicion of PZU Życie’s abuse of its dominating position in the group employee insurance market, which could constitute a breach of Article 8 of the Competition and Consumer Protection Act and Article 82 of the Treaty establishing the European Community. As a result of the procedure, on 25 October 2007 the President of UOKiK imposed a fine on PZU Życie in the amount of PLN 50 million for hindering clients from taking advantage of the offers of the company’s competitors. The PZU Życie Management Board did not concur with the findings concerning the facts or the legal argumentation set forth in the decision and filed an appeal to the Court of Competition and Consumer Protection, in which it included 38 substantive and formal pleas in respect to the decision issued by the President of UOKiK. According to the PZU Życie Management Board, not all the evidence was taken into account when making the decision and an erroneous legal qualification was made and in effect it was groundlessly assumed that PZU Życie has a dominating position on the market. After a number of years of proceedings, on 30 September 2015, PZU Życie paid the imposed fine of PLN 50 million and the awarded costs of proceedings. On 18 March 2016, PZU Życie filed a cassation appeal with the Supreme Court. By decision of 6 April 2017, the Supreme Court accepted the cassation appeal for examination at the hearing. The cassation appeal is being heard on 26 September 2017. Since the fine has already been paid PZU Życie, neither on 30 June 2017 nor 31 December 2016 was it necessary to maintain an additional provision for this purpose.
16.4 Notification of PZU’s claim to the bankruptcy estate of companies of the PBG Group
PZU is a creditor of PBG SA (“PBG”) and Hydrobudowa Polska SA (“Hydrobudowa”), both with registered offices in Wysogotowo near Poznań, on account of insurance guarantees (contractual guarantees) issued and paid out. In 2012, bankruptcy proceedings were initiated against PBG and Hydrobudowa. On 21 September 2012, PZU joined the proceedings by notifying its claims to the bankruptcy estate of the two companies. PBG and Hydrobudowa belong to the same capital group in which PBG is the parent company. The two companies provided sureties for each other’s liabilities. As a consequence, all claims submitted against the bankruptcy estate of Hydrobudowa in the amount of PLN 101 million were concurrently submitted against the bankruptcy estate of PBG. On 8 October 2015, the Bankruptcy Court announced a decision in which it approved the composition with PBG’s creditors and on 20 July 2016 it issued a decision to close the bankruptcy proceedings. The decision is final. Following the execution of the composition and reduction of claims to 20.93% of the reported figures, PZU received 206,139 PBG’s bonds with the nominal value of PLN 21 million and 24,241,560 PBG shares with the nominal value of PLN 24 million. Neither the bonds nor the shares were recognized in the consolidated financial statements since their fair value has been recognized to be zero, but they were recognized in off-balance sheet records. In the first list of claims presented by Hydrobudowa’s trustee in bankruptcy to the judge commissioner, PZU SA’s receivables amounted to PLN 16 million. The final list of claims submitted against the bankruptcy estate of Hydrobudowa has not been determined yet. While bankruptcy proceedings against Hydrobudowa are pending, the determination of the final list of claims is merely an initial step in these proceedings that precedes the drafting of the distribution plan (after the liquidation of the bankruptcy estate).
16.5 Lawsuit against Pekao and Centralny Dom Maklerski Pekao SA
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
There is a pending lawsuit against Pekao and its subsidiary Centralny Dom Maklerski Pekao SA filed by natural persons for payment of compensation for the loss incurred in connection with the purchase of shares and monetary compensation for the injustice caused by the launch of enforcement proceedings. The value of the dispute as at 30 June 2017 was PLN 206 million. In a judgment handed down in H1 2015, the lawsuit was dismissed. The plaintiffs appealed against the judgment, challenging its part referring to the amount of PLN 206 million. In Q3 2016, the appeal was dismissed. The judgment of the 2nd instance court was challenged by the plaintiffs in a cassation appeal. As at 30 June 2017, no provision has been recognized for this case, since the risk of a cash payment is deemed to be low.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) 17. Other information
17.1 Related party transactions
17.1.1. Execution, by PZU or its subsidiaries, of material related party transactions on terms other than based on an arm’s length principle
In the period of 6 months ended 30 June 2017, neither PZU nor its subsidiaries executed any transaction with their related parties which were of material significance individually or collectively and were executed on terms other than based on an arm’s length principle, except for those described below. Under the master agreement signed on 7 August 2013 by and between PZU and PZU Życie, cash loans in PLN for a definite term of no more than 12 months are extended between these companies. The sum of the loans granted by each of the parties cannot exceed PLN 1 billion. The purpose of the aforementioned agreement is to provide a liquidity management tool in the PZU Group. The loans are not granted on an arm’s length basis - no interest is accrued on the loans, and for granting the loan the lender is entitled to a commission in the amount of PLN 100 for each concluded loan agreement; however, due to participation of both companies in the Tax Group, they are neutral from a tax perspective. In the period of 6 months ended 30 June 2017, PZU Życie granted one such loan (on 2 June 2017 in the amount of PLN 500 million, which was repaid on 27 June 2017).
17.1.2. Account activity and balances of transactions executed with related parties
1 January – 31 December 1 January – 30 June 2017 2016 1 January – 30 June 2016 and as at 30 June 2017 and as at 31 December and as at 30 June 2016 Account activity and balances 2016 of commercial transactions between the PZU Group and Key Key Key related parties management Other management Other management Other staff of the related staff of the related staff of the related main entities parties 2) main entities parties 2) main entities parties 2) 1) 1) 1) Gross written premium - 2 - 3 - 1 in non-life insurance - 2 - 3 - 1 in life insurance (including the volumes from investment ------contracts) Fees and commission income - 99 - - - - Other income ------Costs - 2 - - - - Receivables - 16 - - - - Financial liabilities - 315 - - - - Other liabilities ------Contingent assets ------Contingent liabilities ------1) Senior level managers, data according to declarations. 2) Unconsolidated companies in liquidation and associates measured by the equity method.
17.2 Headcount restructuring
On 9 March 2017, the PZU and PZU Życie Management Boards decided to continue the headcount restructuring process in PZU and PZU Życie. On 22 March 2017, PZU and PZU Życie entered into an agreement with the trade unions operating in PZU and PZU Życie to lay down the terms and conditions for group layoffs, the number of persons subject
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN) to restructuring, the selection criteria for the layoffs, the financial package, the principles of protection of selected groups of employees and the timetable of group layoffs. Employment restructuring in PZU and PZU Życie was slated to take place in the period from 24 March to 18 December 2017. Restructuring is to cover up to 1944 persons; it is estimated that up to 956 PZU and PZU Życie employees from different occupational groups will be laid off. The costs associated with the payment of benefits to employees laid off in connection with headcount restructuring have been estimated in the 2017 budgets of PZU and PZU Życie and will be recognized in the PZU Group’s annual consolidated financial statements for 2017. The process is implemented in accordance with the adopted timetable. In the period of 6 months ended 30 June 2017, the costs associated with the payment of benefits to the released employees amounted to PLN 12 million. As at 30 June 2017, the remaining restructuring provision amount was PLN 61 million.
17.3 KNF Office’s audit in PZU Życie
In the period from 27 September to 25 November 2016, the KNF Office carried out an audit in PZU Życie to verify the use of services rendered by insurance agents, in particular: the exercise of supervision by the insurance company over the activity of insurance agents; the proper execution of agency agreements in terms of their compliance with the applicable laws; the conduct of training and examinations for agents; the proper notification of changes to the register of insurance agents. As at the date of this report, PZU Życie was still awaiting the receipt of the post-audit report.
17.4 Situation in Ukraine
In the period of the 6 months ended 30 June 2017, despite the increasingly noticeable signs of improvement in the economic situation and stabilization of the political situation in Ukraine, the insurance market continued to operate in challenging circumstances stemming from the country’s weak economy, low client involvement, barriers to the transfer of goods and services through the Eastern border and limitations in the liquidity of the banking system. The market continued to be characterized by a high level of expenses associated with sales of insurance products. The liquidity problems affecting a portion of the banking system and linked insurance companies resulted in the deterioration of trust among the population. The cyber-attack of a computer virus named “Pety.A”, which in June 2017 impacted numerous state institutions and private businesses, also in the insurance sector, became a great challenge for the Ukrainian economy. The effects of the attacks are still being estimated and in time may reach several billions of dollars, on top of the business and political consequences that have not been mentioned, such as loss of trust of investors following the theft of sensitive data. Despite these circumstances, PZU Ukraine and PZU Ukraine Life, by diversifying their portfolios and sales channels, were able to respond with flexibility to market changes and fulfillment of their respective sales plans was 94% and 121%. The Management Board of PZU, in cooperation with the management of PZU Ukraine and PZU Ukraine Life, monitors external risks and changes in Ukrainian legal regulations on an ongoing basis. Response scenarios have been prepared for market changes and control mechanisms. PZU does not intend to withdraw from the Ukrainian market. As at the date of signing of the condenced consolidated financial statements, the PZU Management Board assumes that further activities of PZU Ukraine and PZU Ukraine Life will be continued in accordance with the adopted assumptions. However, the economic instability in Ukraine may adversely affect the future financial standing and performance of PZU Ukraine and PZU Ukraine Life in a manner that currently cannot be reliably predicted. The consolidated financial statements reflect the current judgments of the PZU Management Board in this respect.
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WorldReginfo - 11cb83a4-4165-4ab6-8b05-b65e22291ad8 Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2017 according to IFRS (in millions of PLN)
Signatures of the PZU Management Board Members:
First and last name Position / Function
President of the PZU Paweł Surówka Management Board ...... (signature)
Member of the PZU Tomasz Kulik Management Board ...... (signature)
Member of the PZU Roger Hodgkiss Management Board ...... (signature)
Member of the PZU Maciej Rapkiewicz Management Board ...... (signature)
Member of the PZU Małgorzata Sadurska Management Board ...... (signature)
Person responsible for drawing up the condensed interim consolidated financial statements:
Director Katarzyna Łubkowska Accounting Department ...... (signature)
Warsaw, 30 August 2017
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