Management Board’s report on the activity 2018 of the PZU Group in H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Table of Contents
CEO Letter to Shareholders 4 5.3 PZU Group’s claims paid and technical provisions 65
5.4 PZU Group’s acquisition and administrative expenses 65 PZU Group Overview 7 01 5.5 PZU Group’s asset and liability structure 65
5.6 Contribution made by the market segments to the consolidated result 67 02 External environment 15 2.1 Main trends in the Polish economy 16 06 Risk management 79 2.2 Situation on the financial markets 17 6.1 Objective of risk management 80
2.3 External environment in the Baltic States and Ukraine 20 6.2 Risk management system 80
2.4 Macroeconomic factors that can affect the operations of the Polish insurance sector and the PZU 6.3 Risk appetite 81 Group’s activities in H2 2018 21 6.4 Risk management process 83
6.5 PZU Group’s risk profile 83 03 PZU Group’s operations 23 3.1 Structure of the PZU Group 24 6.6 Reinsurance operations 89
3.2 Non-life insurance (PZU, LINK4 and TUW PZUW) 25 6.7 Capital management 90
3.3 Life insurance (PZU Życie) 30 07 PZU on the capital and debt markets 93 3.4 Banking (Bank Pekao, Alior Bank) 35 7.1 PZU’s share price 94 3.5 Mutual funds (TFI PZU) 39 7.2 Banking sector 97 3.6 International operations 40 7.3 Debt financing 97 3.7 Medical services (Health) 42 7.4 Distribution of the 2017 profit 98 3.8 Pension funds (PTE PZU) 45 7.5 Rating 99 3.9 Other operating areas 46 7.6 Calendar of major corporate events in 2018 103
04 PZU 2020 - more than insurance 49 08 Corporate governance 105 4.1. New operating model 50 8.1 Audit firm auditing the financial statements 106
4.2 Strategy operationalization 55 8.2 PZU’s share capital and its shareholders; shares held by members of its governing bodies 106
4.3 Selected measures of the strategy 57 09 Other 109 05 Financial Results 59 5.1 Major factors contributing to the consolidated financial result 60 10 Attachment: Glossary of terms 113
5.2 PZU Group’s income 62 Photos are used in the report - „PZU Półmaraton Krakowski 2018”
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 2 3 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e CEO Letter to Shareholders
well as across the board synergies driven by our technological As a result, the PZU Group wrapped up H1 2018 with a net transformation. profit of PLN 2.4 billion (up 38.3% y/y). This outstanding result is also related to the rising contribution made by the Having regard for the global trends transpiring in the bank segment, which was supported operationally by growth development of Big Data, artificial intelligence and mobile in the sales of loans coupled with the persistently low costs of solutions, we want to be certain that we become an funding. organization that actively creates and participates in forward- looking technological changes. This will allow us to retain our In subsequent quarters, the Group’s primary objective will be competitive edge in the medium and long-term as we compete to attain its ambitious strategic targets related to developing with other large players on the market as well as with young, the key areas of its business operations underpinned by dynamic companies operating at the crossroads of technology, new technologies. In H1 2018 highly-advanced work was finance and insurance. in progress on PZU GO, a tool whose underlying concept stemmed from the need to rescue drivers’ lives. For in our The execution of the initiatives set forth in the New PZU day-to-day work we are deeply committed to ensuring that the strategy will make us one of the most innovative institutions measures we take serve the purpose of building the Group’s in the financial industry in Europe while continuing to be long-term value while making a genuine contribution to our one of the most sound and profitable financial groups in the communities in accordance with the principles of corporate world. The new operating model will combine all of the PZU social responsibility. Group’s activities. This on-going transformation in the direction of becoming a service and advisory company will make it I would like to extend my thanks to our employees and agents possible to satisfy client needs comprehensively, spanning the as well as our business partners for their efforts to build PZU’s protection of life, health, non-life, savings and finance. At the value. same time, these measures will act as a catalyst to release the overall group’s potential, which over the period until 2020 Respectfully, will translate, among other things, into generating an above average return on equity (ROE) in comparison to the industry in general.
In H1 2018, ROE topped 20%, double the average generated Paweł Surówka by insurers in Europe. This result was possible thanks to CEO of PZU pursuing an effective tariff and cost policy. We generated a record-breaking gross written premium when measured on Paweł Surówka a quarterly basis (PLN 6.1 billion) and for the first six months of the year (PLN 11.9 billion). Moreover, we are maintaining CEO of PZU rigorous cost discipline while growing sales. The administrative Dear Shareholders, expense ratio in PZU and PZU Życie in H1 2018 was 6.5% (posting improvement of 0.3 p.p. y/y). On behalf of the management boards of the PZU Group companies, I hereby convey to you our activity report for H1 The robust margin in group and individually continued 2018. insurance has also contributed to the high level of our ROE. Following a seasonally soft Q1, our operating profit margin We kicked off this year by announcing the New PZU strategy. reached its strategic level at the end of H1 2018 by surpassing Our ambitious targets through 2020 are focused on modifying the 20% watermark. We are also continuing to deliver robust the PZU Group’s operating model while harnessing the profitability in non-life insurance in Poland. Despite having potential we possess in insurance, banking, investments and established a provision for claims for general damages health care. The initiatives under execution in these areas (PLN 148 million) in Q1, our combined ratio (COR) was 86.8% will enable us to generate cost and revenue-side synergies as at the end of H1 2018.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 4 5 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e 1. PZU Group Overview
The PZU Group’s ambition is to accompany clients, to make it easier for them to make the right choices to help them protect their future and what they consider to be the most valuable. WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group Overview
PZU Group It is the Group’s strategic ambition to pursue a new approach Mission Powszechny Zakład Ubezpieczeń Group (PZU Group, Group) to building client relations, thereby leading to the integration is the largest financial institution in Poland and Central and of all operating areas with the client at the focal point. This will We help clients care for their future Eastern Europe. PZU heads up the group and its traditions make it possible to deliver products that are well-matched to date back to 1803 when the first insurance company was clients at the appropriate time and place and respond to other established in Poland. Since 2010, PZU has been listed on the client needs on a comprehensive basis. This process will be Warsaw Stock Exchange where it has been one of the large supported by harnessing tools rooted in artificial intelligence, What we do cap blue chips offering the highest amount of liquidity from its big data and mobile solutions that will contribute to building an floatation. entrenched technological advantage in integrated client service.
PZU Group has over PLN 300 billion of assets and it renders PZU is an organization operating at a large scale. It is also Business Model services in five countries. According to spontaneous brand cognizant of the expectations various entities have of it, We deliver an unparalleled We uild lon -lastin offer relations recognition surveys, PZU comes in at 88%, while aided brand including investors, clients, employees, partners, industry Po e i o e r e i i o er p r er ip roup i Ce r E er Co pre e ive o er e o Europe recognition is 100%, making PZU the best recognized brand in experts and the social environment from which PZU’s Health Invest ents ie ow e e eir re U er e pro u ui e ee Poland. employees and clients come. That is also why managing o ie ee e uri eir He re o eri Fi i e uri U p r e e ri e e i i e uri e i ur e pro e io rowi vi e or ie E e ive u ip e e e i re ervi e vi pi u u relations with stakeholders and their impact on the business i ri u io e wor prop i preve io io pro r pro o i E o e o r e i p r er e i e e Group companies are active not only in life and non-life community is accomplished in a deliberate and sustainable ip ui e i ie ervi e insurance but also in investment, pension, health care and manner. PZU is a company that is open to social expectations. i ivi u ppro o ie Insurance Ban in Pro e io i e Co u i i banking products. They cooperate with various industry leaders In the actions it takes it strives to set trends and construe e e o e er e ie ivi ie i u i ri v u io ep i epo i pre iu u io re i o ru i in the framework of strategic partnerships by creating tailor- business solutions responsibly. It also gets involved in actions i ve e ou i p e o i e e e re eri p e made products for their clients. For instance, by collaborating to benefit the local communities in which the Group’s clients ervi e with companies in the telecommunications industry and the function. For the PZU Group, sustainable management is
power sector, PZU offers insurance of electronic equipment and a deliberate choice of how it conducts its business, thereby Artificial intelli ence Mo ile solutions U erwri i A e i e pro u assistance services to individuals and businesses. In addition, making it possible to build the company’s long-term value in an ri e i e o ervi e o ie r e i preve w e ever w erever io i p i i io o e w e the Group has kicked off collaboration with LOT and Allegro in ethical and transparent manner while giving consideration to pro e e the framework of strategic partnerships in 2018. stakeholder needs and expectations.
We ana e our alance We iti ate ris sheet responsi ly M i e eve o E e ive e i i i i i oper io PZU’s activity o io Bi data re u or e uri A e u o e i provi io Pro e e u i e row i e PZU Group’ Pro uri i ui i A e o e or ou POLAND ESTONIA i e e i i o e v ue Pro uri pi e uri u i i e e wi Pro e e PZU Group’ i i pee v ue repu io E ure e i e #1 r o o u re #4 o erve i oper i re #1 LATVIA #1 Our values #2 #2 Common business philosophy based on the code of Best Practices #8 LITHUANIA #1 TFI PZU #3 OFE PZU #3 #6 Pekao TFI #4 UKRAINE Pekao OFE #11 #5 We play fair We are effective We are innovative Health Area #3 #5 Our offer is transparent and satisfies We offer friendly and efficient service We constantly adapt to our clients’ Market position by assets under Market position by assets our customers’ genuine expectations; Non-life insurance management and competitive prices; we control our evolving needs; we actively endeavor we apply clearly-defined rules to our costs and ensure that we have efficient to streamline how our company Insurance sold in direct sales channels Market position by revenues Life insurance via internet / telephone organization’s operation processes functions
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 8 9 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group Overview
INSURANCE INVESTMENTS
Non-life insurance in Poland
Third Party Assets of TFI and OFE PZU Net result on asset management Gross written premium (PLN billion) Profitability (combined ratio - COR) clients (PLN billion) (PLN million)
06.2018 86.8% 29.8 27.4 06.2018 6.87 23.8 06.2018 106 06.2017 86.5% 06.2017 6.60 06.2017 80 06.2016 93.1% 06.2016 5.34 06.2016 93
06.2016 06.2017 06.2018
Life insurance in Poland Assets of PKO and OFE TFI clients Net result on asset management (Pekao) (PLN million) Gross written premium (PLN billion) Profitability (operating margin)
06.2018 20.2% 06.2018 43 20.0 21.5 06.2018 4.13 18.1 06.2017 19.2% 06.2017 40 06.2017 4.22 06.2016 20.9% 06.2016 39 06.2016 3.93
06.2016 06.2017 06.2018
HEALTH BANKING
Banking assets in the PZU Group Net result attributed to the PZU Group PZU Zdrowie’s revenues (PLN million) EBITDA margin (PLN billion) (PLN million)
06.2018 99 164 263 06.2018 7.2% 06.2018 292
06.2017 89 131 220 06.2017 7.9% 255 254 06.2017 89
06.2016 57 99 157 06.2016 8.0% 06.2016 54 61 Health care companies Health insurance and subscriptions 2016 2017 06.2018
Number of agreements (milion) Partnership branches Contribution of the banks to the PZU Group’s operating result (PLN million)
1.9 2,055 06.2018 1,458 524 1,164 3,146 1,878 1,688 1.5 1.2 06.2017 1,685 253 219 2,157
06.2016 804 246 1,050 06.2016 06.2017 06.2018 06.2016 06.2017 06.2018 PZU Group (excluding banks) Alior Bank Pekao
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 10 11 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group Overview
MARKET MULTIPLES PZU Group’s consolidated highlights for H1 2016-2018 (PLN million)
P/E (price to earnings per share) P/BV (price to book value) 1 January - 1 January - 1 January - 30 June 2018 30 June 2017 30 June 2016
15x Gross written premiums 11,881 11,606 9,862 4.0 14x Revenue from commissions and fees 1,320 510 273
13x Net investment income 5,256 3,027 1,405 3.0
12x Net insurance claims and benefits (7,345) (7,214) (6,165)
2.0 11x Acquisition costs (1,519) (1,412) (1,252) P/E P/E average Administrative expenses (3,342) (2,036) (1,283) 10x P/BV P/BV average 2014 2015 2016 2017 06.2018* 1.0 2014 2015 2016 2017 06.2018 Interest expenses (992) (420) (346) * trailing 12 months Operating profit (loss) 3,146 2,157 1,050 EPS (earnings per share) PLN DPS (dividend per share) PLN Net profit 2,358 1,705 790 5.0 2.50* Net profit attributable to the equity holders 1,425 1,438 660 2.08 of the parent company 4.0
1.40 Assets in total 321,811 295,967 112,945 3.0 Investment financial assets 105,910 92,894 93,856
2.0 Receivables from clients due to loans 173,651 160,680 33,526
Consolidated equity 34,612 35,097 15,601 1.0 2016 2017 06.2018 2014 2015 2016 2017 06.2018* * trailing 12 months * the dividend will be disbursed on October 3, 2018 Equity attributable to the equity holders of 13,280 13,137 11,772 the parent company Solvency II* ROE (Return on equity)* Technical provisions 45,583 43,785 41,702
227% 22.0% Financial liabilities 225,470 204,380 47,198 250% 208% 20.8%
Restated data for 2016-2017.
21.0 21.6 22.9 10.7% The PZU Group is characterized by a high level of security of 8.4 10.4 10.1 its operations. This is confirmed by both high capital adequacy 12.2016 12.2017 03.2018 ratios and the rating of the American rating agency S&P Global
Own funds (PLN bn) Solvency margin (PLN bn) Ratings at the level of A-. 06.2016 06.2017 06.2018 * unaudited data * ROE attributed for the parent company A- On 27 October 2017, the S&P agency upgraded PZU’s rating PZU, WIG20 PZU TSR, WIG20 TR outlook from negative to stable. At the same time, PZU’s /STABLE/ financial strength rating remained at A-. This is one of +20% +20% the highest possible ratings for a Polish company. In their Financial strength WIG20 WIG20 TR PZU PZU TSR report, S&P analysts emphasized that: „Group stability and rating and credit rating +10% +10% transparency of investments in the banking sector supports awarded to PZU by S&P the current creditworthiness of the PZU Group in the medium 0% 0% (6.0)% term.” Chapter 7.5 RATING (7.1)% -10% -10% (9.4)% (12.6)%
-20% -20% Q3-Q4 2017 Q1-Q2 2018 Q3-Q4 2017 Q1-Q2 2018
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 12 13 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e 2.
External environment
Higher than expected GDP growth, accompanied by a very good situation on the labor market and robust real income growth created favorable conditions for PZU’s business growth.
In this section: 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 H2 2018
15 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e External environment
2.1 Main trends in the Polish economy Labor market and consumption mitigated by the globalization of production and moderate fall. The uptick in yields in the USA lasted until mid-May when In H1 2018, in the midst of excellent conditions for doing inflation recorded by Poland’s main trading partners. they broke through the 3.10% threshold. After that, they Gross Domestic Product business, high demand for work persisted and companies started to trend down slowly, driven by the heightened global GDP growth in Poland accelerated in Q1 2018 to 5.2% y/y, voiced more problems related to job vacancies. In Q1, the In the period from January to July 2018, the National Bank aversion to risk related to the escalation of trade conflicts. compared to 4.9% y/y in Q4 2017. The largest contribution to growth of average monthly employment in the national of Poland’s interest rates did not change. The reference GDP growth included: private consumption (it contributed economy was 2.8% y/y, meaning it was down from previous interest rate remained steady at the 1.5% level set in Global stock market indices continued their strong growth in 3.0 p.p. to GDP growth), higher inventories (+1.9 p.p.) and, quarters. The average monthly headcount in the enterprise March 2015. According to the Monetary Policy Council’s early 2018. During that time, markets were discounting the to a smaller extent, investments (+0.9 p.p.). Net exports had sector in H1 2018 rose 3.8% y/y, but the incremental growth members, the current level of interest rates fosters persistent positive impact of the US tax reform on the future earnings a negative contribution to GDP growth (-1.2 p.p.). in headcount in this period was lower than last year. Adverse sustainable growth in Poland and makes it possible to preserve of US companies. However, early February saw the first demographic trends exerted an ever larger effect on the macroeconomic equilibrium. significant adjustment in global markets in a long time, driven Economic activity data indicates that GDP growth could supply of labor and in Q1 2018 lower economic activity was mainly by investors’ fears of accelerated normalization of have exceeded 5% y/y in Q2, with slightly lower growth in also recorded. The registered unemployment rate in June 2018 Public finance the FED’s monetary policy. In the following months, growth consumption and higher investment growth, compared to the was 5.9% compared to 7.0% last year. The pace at which the After June this year, the state budget had a surplus of returned to global stock markets, but it was slower and more previous quarter. The increase in industrial production sold unemployment rate is falling has been slowing down recently PLN 9.5 billion, the best historical result at this stage of the volatile than before. As a result, the American stock exchange in H1 2018 (6.2% y/y) was only slightly lower than in 2017, as it approaches its natural level. year. The annual growth of tax revenue accelerated slightly index S&P500 ended the first half of the year up slightly while it accelerated in Q2 of this year to 7.0% y/y from 5.5% in June and was about 7.9% y/y, cumulatively, driven mainly (+1.15%), but the German DAX index declined significantly y/y in the previous quarter. Between January and June of In these conditions, salary growth gradually accelerated. In by the very high growth of direct tax revenues (PIT 16% y/y, (-4.92%). this year, construction and assembly production grew faster Q1 2018, the gross average monthly salary in the national CIT 18.1% y/y). The budget’s excellent results also benefited than in full year 2017 and was 23.7% higher than last year. economy rose 6.2% y/y thereby outpacing growth in 2017. from a lower subsidy transferred to the FUS [Social Insurance In mid-April, the economic situation on the financial markets The increase in construction production was driven by the The gross average monthly salary in the enterprise sector Fund]. of “emerging economies” deteriorated. The strengthening execution of infrastructural investments and the rapid growth grew faster in H1 2018, up to 7.3% y/y (5.7% in real terms), of the US dollar and the rising yields offered by US bonds of production in companies that erect buildings. At the same compared to 5.9% in full year 2017. The Finance Ministry reported that at the end of the first half contributed to the tightening of financial conditions around time, the growth in the volume of retail sales in H1 2018 was of the year, about 60% of the annual borrowing needs had the world. This coincided with elevated concerns about Iranian slightly lower than in full year 2017 at 6.8% y/y. In the second The greater security of employment felt by employees and been financed. The level of liquid funds in PLN and foreign oil exports and greater tensions in the Middle East. These quarter of this year, the growth of retail sales decelerated robust real income growth were conducive to maintaining currencies was also high, at roughly PLN 55.7 billion at the factors drove down the currency, bond and equity markets slightly vs. the previous quarter; this, however, resulted from a high growth rate of household consumption. In Q1 2018 it end of June. of the “emerging economies”. The departure of capital was the timing of this year’s Easter Holidays. climbed 4.8% y/y in real terms while in Q2 its growth could be felt in particular in countries with large balance of payment just slightly lower. Since May, consumer economic indicators imbalances, such as Turkey and Argentina. have started to dip slightly, but not enough to depart the 2.2 Situation on the financial markets Decomposition of GDP growth in 2016 - 2018 Q2 historically record-breaking high levels. Uncertainty in the financial markets was also exacerbated by The main central banks continued the policy of careful the formation of a Euro-sceptic government coalition in Italy,
7.0% Inflation, monetary policy and interest rates withdrawal from an ultra- loose monetary policy. This applied which promised relaxed budgetary discipline. As a result, the 6.0% In H1 2018, the average increase in prices of consumer goods mainly to the Fed, which administered two interest rate hikes yield of Italian 10-year bonds exceeded the 3% threshold for 5.3% 5.0% and services (CPI) was 1.6% y/y compared to 2.1% y/y in in H1 2018 while indicating that this process would continue. a while, while the spread in relation to German bonds was the 4.0% H2 2017. The decline in the annual inflation rate in early 2018 In early June, ECB decided to end the quantitative easing highest in five years, amounting to 280 bps. The rising cost of 3.0% was driven by the attenuating impact exerted by the strong program at the end of 2018, but balanced the market effect servicing Italy’s debt raised concerns about the refinancing of 2.0% hikes in fuel and food prices at the turn of 2016 and 2017. In of this decision by announcing a relatively distant date for the public debt, totaling nearly 132% of GDP. 1.0% Q2 of this year, inflation rose to 1.7% y/y from 1.5% y/y in first interest rate hike (through summer 2019). 0.0% Q1, supported, among other things, by a strong increase in At the end of January, the yield on Polish 10-year Treasury -1.0% Q116 Q216 Q316 Q117 Q217 Q317 Q417 Q118 Q218 Q416 fuel prices. In early 2018, treasury bond yields on the underlying markets bonds temporarily shot up to 3.60%, following the underlying -2.0% continued to post dynamic growth. Higher yields resulted from markets. The robust data from the Polish economy, that Total consumption Gross accumulation Core inflation (CPI after excluding food and energy prices) excellent economic activity data, loosening of fiscal policy in increased the likelihood of inflation growth in the future, could Foreign trade balance GDP growth remained very low in H1 2018, at 0.7% y/y on average, the USA, stronger expectations of interest rate hikes by the also have contributed to this. In February, however, the yield compared to 0.9% y/y in H2 2017. This was caused, among Fed and the earlier wrapping up of the quantitative easing on Polish 10-year Treasury bonds started to fall (in mid- Sources: Central Statistical Office (GUS) data, forecast of the PZU Macroeconomic Analysis Department for Q2 2018. other things, by the prices for certain services being slashed (QE) program by ECB. However, from mid-February, driven by April it even dipped below 3%). This was caused by several (promotional offers for telecommunications and satellite TV concerns about the escalation of the trade conflict between factors. First, the yields of German bond, with which Polish services, lower insurance prices). Core inflation growth is also the USA and China and the possible slowdown in economic bonds are strongly correlated, fell. Additionally, the expected growth in the Eurozone, the yields of German bonds started to magnitude of interest rate growth fell in light of much lower
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 16 17 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e External environment
than expected inflation readings and the consistently dovish interest rates. The Polish zloty also strengthened until mid- The registered unemployment rate in rhetoric of the Monetary Policy Council. At the same time, April but then, following the financial market downturn in Poland’s GDP growth in Q1 2018 accelerated to June 2018 was the credit risk of the Polish economy remained relatively low, emerging economies, it began to weaken. When risk aversion among others due to the persistently very good fiscal and grows, investors reduce the share of risky assets in their 5.9% payment situation. As a result, the difference between the portfolios without assessing in detail the fundamentals of yields on Polish and German 10-year Treasury bonds in mid- individual economies, and the Polish currency market is also 5.2% y/y compared to April even dropped below 250 basis points (from 288 basis more liquid in comparison to other economies of the region. 7.0% points at the end of 2017). Despite that, after the downturn At the end of June, the EUR/PLN exchange rate was 4.36, due to the high rate of on the financial markets of emerging economies, we have indicating a weakening of the Polish zloty against the EUR by growth in consumption last year, drawing nearer and inventories observed an outflow of capital also from Poland in Q2. The 4.6% in the first half of the year. On the other hand, the USD/ to its natural level heightened aversion to risk also resulted from the uncertainty PLN exchange rate was PLN 3.74 at the end of June – the related to US trade policy. As a result, at the end of June Polish zloty weakened by 7.5% in relation to the USD in that Polish 10-year bond yields rose to 3.21% and the spread to period. German bonds increased to 290 bps. In H1 2018, the consumer price index The wage growth in the national (CPI) was up economy Between the end of December 2017 and the end of June PLN exchange rate in 2017 and H1 2018 +6.2% y/y 1.6% y/y this year, WIG and WIG20 indices fell 12.22% and 13.23%, and the good state of the respectively. This was caused mainly by the negative labor market fostered the PLN4,5 4.5 zł compared to sentiment towards emerging economies. The rising cost continued high pace of pressure, including salary pressure, additionally contributed to 2.1% y/y household consumption deterioration in corporate financial results in the first quarter growth of PLN4,0 4.0 zł last year of the year. +4.8% y/y in Q1 2018
PLN3,5 3.5 zł In the first two months of 2018, the US dollar weakened versus the euro, while already in mid-April the US currency Lithuania’s GDP in Q1 2018 climbed started to strengthen visibly. Concerns were starting to grow PLN3,0 3.0 zł Latvia’s annual GDP growth was 2017 H1 2018 about economic growth and the sustainability of low inflation in the euro area and the US economy was showing signs of EUR/PLN CHF/PLN 3.7% a stronger recovery, justifying the continuing increases in 4.9% USD/PLN on an annual basis Source: National Bank of Poland, Thomson Reuters, PZU’s Department of Macroeconomic Analyses Q1 2018
Treasury bond yields in 2017 and H1 2018
4.0%
3.0% Ukraine’s GDP growth in Q1 2018 rose Estonia’s GDP growth was
2.0% 3.1% 3.6% y/y 1.0% 2017 H1 2018 in Q1 2018 on an annual basis Yield 10Y Yield 5Y Yield 2Y
Source: Thomson Reuters, PZU’s Department of Macroeconomic Analyses
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 18 19 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e External environment
2.3 External environment in the Baltic In June 2018, the increase in consumer prices (CPI) resulted In June 2018, the inflation rate was 9.9% per annum, which 2.4 Macroeconomic factors that can affect States and Ukraine mainly from higher energy prices. Consumer prices increased was less than expected by the market (10.1%) and also the the operations of the Polish insurance 2.8% y/y and 0.6% month over month, respectively. lowest inflation level since September 2016. The inflation rate sector and the PZU Group’s activities in Lithuania was driven largely by the following factors: lower prices of H2 2018 Lithuania’s GDP rose in Q1 2018 by 0.9% as compared to Q4 Estonia food, alcohol and tobacco prices and a drop in government- 2017. In annual terms, GDP growth was 3.7%. In the first According to data published by the Bank of Estonia2, GDP regulated prices (of gas, electricity and water). The GDP growth rate in Poland in H1 2018 – which probably quarter of the year, economic activity in the euro area was growth in the first quarter was 3.6% in annual terms, while exceeded 5% y/y – proved to exceed the forecasts. In weaker than expected, although stable. The growth of export quarter over quarter the Estonian economy decreased by H2 2018, we expect a gradual slowdown of GDP growth, of Lithuanian goods, mainly to Western countries, decreased -0.1% (data adjusted for seasonality). Even though the however even then it will remain very high and may approach significantly in many groups. This suggests that the slowdown growth was slower than in the last quarter, the economy as much as 5% for the whole year. Consumption growth may in exports had been affected by foreign demand. An additional remains strong and actual GDP growth is higher than the be slightly lower than last year, with much higher investment factor that slowed down the growth of Lithuania’s GDP in Q1 potential growth rate. growth. At the same time, inflation will remain relatively low. 2018 was the deceleration in private consumption growth caused by the declining workforce. Estonia’s economic growth is supported by the accommodating Currently, the risk posed to economic growth and to the monetary policy and a positive foreign environment as well financial market is mainly related to the possibility of In June 2018, the Consumer Price Index (CPI) was 2.6% on as the government’s fiscal policy, which led to an increase in a significant rise in protectionism in global trade. There are an annual basis. Lithuania is similar to many other countries expenditures. Despite that, the sentiments among Estonian also many uncertainties related to the Brexit process and to in that inflation is strongly correlated with price changes on companies are less optimistic than 6 months earlier, which the activities of the new government in Italy. The risk of commodity markets. During the first five months of 2018, fuel indicates that GDP growth will be continued more slowly than a financial crisis in China, albeit inconsequential in the short prices showed a moderate increase. The situation changed last year. term, remains, as well as geopolitical risks. in May, when high uncertainty began to affect the prospects for oil supply due to the situation with Iran. This led to an The consumer price index (CPI) moved up 4.0% in June 2018 increase in global oil prices, which in turn influenced the compared to the corresponding period last year and 0.9% general level of consumer prices. The index of service prices in monthly terms. The increase in the consumer price index Polish economy highlights 2018* 2017 2016 2015 2014 2013 (i.e. the prices that are related to Lithuania’s economic was driven mainly by fuel prices and increases in real estate Real GDP growth in % (y/y) 4.7 4.6 3.0 3.8 3.3 1.4 progress) is relatively more stable. maintenance costs, due to higher energy prices and higher rents. Individual consumption growth in % (y/y) 4.5 4.8 3.9 3.0 2.6 0.3
Latvia Gross fixed capital formation growth % 8.0 3.4 (8.2) 6.1 10.0 (1.1) In Q1 2018 Latvia’s GDP increased by 4.9% y/y (adjusted Ukraine (y/y)
1 for seasonality) and 1.5% quarter over quarter . Despite the Ukraine’s economy has maintained stable growth since Consumer price index in % 1.7 2.0 (0.6) (0.9) 0.0 0.9 positive trend of GDP growth, the growth drivers are not the beginning of 2018. According to data published by the (y/y, annual average)
capable of keeping this pace. Statistics Office of Ukraine, in Q1 2018, GDP grew by 3.1% Nominal wages and salaries growth in the 7.0 5.4 3.7 3.5 3.2 3.7 y/y and by 0.9% q/q. national economy in % (y/y) Investment activities were the main contributor to GDP growth Registered unemployment rate in % (end 5.8 6.6 8.2 9.7 11.4 13.4 in Latvia, due to the growth of the construction sector in the Solid domestic demand has been the main driver of Ukraine’s of period) first months of 2018. Construction growth was driven mainly growth since the year began. Consumer spending has NBP’s reference rate in % (end of period) 1.50 1.50 1.50 1.50 2.00 2.50 by the previously-planned infrastructure improvement projects increased, driven by improving labor market conditions, easing using EU co-funding and construction projects in the private of inflationary pressures and improvements in private sector * Forecast of 3 July 2018 Source: PZU’s Department of Macroeconomic Analyses sector. Benefiting from the stable foreign demand, the value of conditions. goods exported by Latvian companies continued to grow and in May it was 8.5% higher than the year before. In the first This effect was also supported by the increase in capital 5 months of 2018, the exports of goods increased by 9.3% expenditures carried over from the previous quarter. On the y/y by value. Re-exports and non-recurring transactions other hand, data from the external sector were less optimistic. strongly contributed to the exports increases in Q1 and in In the first quarter exports were negative, though the April, which suggests taking careful approach regarding a solid deterioration of imports was much more pronounced. growth trend.
1 Latvijas Banka Monthly Newsletter, July 2018, Bank of Latvia 2 Estonian Economy and Monetary Policy, 2/2018, Bank of Estonia
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 20 21 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e 3.
PZU Group’s operations
We are strengthening our position as a financial services leader. The PZU Group’s brand spans insurance, banking products, mutual funds and pension funds and medical services.
In this section: 1. Structure of the PZU Group 2. Non-life insurance (PZU, LINK4 and TUW PZUW) 3. Life insurance (PZU Życie) 4. Banking (Alior Bank, Bank Pekao) 5. Mutual funds (TFI PZU) 6. International operations 7. Medical services (Health Area) 8. Pension funds (PTE PZU) 9. Other operating areas
23 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
3.1 Structure of the PZU Group and they manage client assets within its open-ended pension PZU – as the parent company – through its representatives Gross written premium of non-life insurance fund and mutual funds, and thanks to its investment in Bank in supervisory bodies of subsidiaries and voting at their undertakings in Poland (in PLN million)
The PZU Group conducts various activities in insurance and Pekao and Alior Bank they also offer banking services. shareholder meetings, exerts an impact on the selection of 10,580 9,820 finance. In particular, the PZU Group companies provide strategic directions regarding both the scope of business and services in life insurance, non-life insurance, health insurance the finances of Group members. As selected companies focus 7,729 7,037 7,191 6,581 on their specialization and utilize their membership in the Tax 6,087
Structure of the PZU Group (as at 30 June 2018) Group, these companies render services to one another on 3,356 3,377 4,221 chosen markets pursuant to an internal cost allocation model PZU Warsaw - Poland (under the Tax Group). 3,681 3,814 3,508 3,734 3,999
PZU Zdrowie 4 PZU Życie Lietuvos Draudimas Warsaw - Poland Warsaw - Poland Vilnus - Lithuania * LIN 4 A The following changes transpired in the structure of the 03.2014 03.2015 03.2016 03.2017 03.2018 PZU – 100.00% PZU – 100.00% PZU – 100.00% Warsaw - Poland PZU – 100.00% PZU Group in H1 2018 up to the date of publication of these motor Centrum Medyczne PT PZU financial statements: non-motor Medica 2 Warsaw - Poland TU PZU PZU Estonia Płock - Poland PZU Życie – 100.00% Warsaw - Poland branch Lietuvos Draudimas • an Organized Part of the Business (OPB) was spun off PZU Zdrowie – 100.00% PZU – 100.00% Tallin - Estonia from PZU CO and contributed to Pekao Financial Services Prof-med TFI PZU * including growth in written premium in the AXA Group, partly as a result of the Włocławek - Poland Warsaw - Poland transfer, in October 2016, of the business of Liberty Seguros Compania de Seguros AAS Balta (PFS) held by Bank Pekao in June 2018. As a result of this PZU Zdrowie – 100.00% PZU – 100.00% PZU Centrum Operacji Warsaw - Poland Riga - Latvia y Reaseguros S.A. Poland Branch and the insurance portfolio of Avanssur S.A. PZU – 100.00% PZU – 99.9949% transaction PZU subscribed for a 33.5% equity stake in PFS Poland Branch to AXA Ubezpieczenia TUiR S.A. Centrum Medyczne Gamma Alior Bank 3 CHAPTER 3.9 OTHER OPERATING AREAS; Source: KNF’s Quarterly Bulletin. Insurance market 1/2018, Insurance market Warsaw - Poland Warsaw - Poland PZU Ukraine 1/2017, Insurance market 1/2016, Insurance market 1/2015, Insurance market PZU Zdrowie – 60.4619% PZU – 31.8931% PZU Pomoc Kiev - Ukraine • PZU PTE and Pekao PTE entered into a business transfer PZU Życie – 0.0373% Warsaw - Poland 1/2014 PZU – 83.2292% Investments Funds menaged by PZU – 100.00% PZU Życie – 0.00397% PZU TFI – 0.0253% agreement on 18 May 2018 encompassing i.a. the Artimed PZU Ukraine Life – 16.7668% Kielce - Poland Pekao Investment Banking – 0.0003% operations of Pekao OFE and Pekao DFE, involving the In addition, markedly higher sales of accident and sickness PZU Zdrowie – 100.00% GSU Pomoc Górniczy 5 management of Pekao OFE and the management of Pekao insurance (up PLN 78 million, +15.2%), TPL insurance (up Bank Pekao Klub Ubezpieczonych LLC SOS Services Ukraine Warsaw - Poland Tychy - Poland Kiev - Ukraine Polmedic PZU – 20.00% PZU Pomoc – 30.00% PZU Ukraine – 100.00% DFE CHAPTER 3.8 PENSION FUNDS (PTE PZU); PLN 67 million, +11.0%) and assistance (up PLN 55 million, Radom - Poland Investments Funds menaged by PZU Zdrowie – 100.00% PZU TFI – 0.0304% • PZU Zdrowie acquired an equity stake in Centrum Św. +24.0%) made a positive contribution to the overall non- PZU Finanse Warsaw - Poland PZU Ukraine Life PZU – 100.00% Kiev - Ukraine Łukasza CHAPTER 3.7 MEDICAL SERVICES (HEALTH AREA). life insurance market’s growth. A decline in premium was Revimed Pekao Financial Services PZU – 53.4723% Gdańsk - Poland Warsaw - Poland PZU Życie – 0.0053% observable only in legal protection insurance (down PZU Zdrowie – 100.00% Bank Pekao – 66.4992% PZU Ukraine Ipsilon – 46.5224% PZU – 33.5008% PLN 6 million, -17.2%) and various financial risks (down Warsaw - Poland PZU – 100.00% PZU Lithuania Life PLN 27 million, -12.2%), chiefly as an outcome of the evolving Centrum Medyczne EMC Instytut Medyczny Vilnus - Lithuania 3.2 Non-life insurance (PZU, LINK4 and św. Łukasza Wrocław - Poland PZU – 99.3379% Częstochowa - Poland Investments Funds menaged by TUW PZUW) conditions on the financial insurance market. PZU LAB PZU Zdrowie – 100.00% PZU TFI – 28.3076% Warsaw - Poland PZU – 100.00% PZU Finance AB Tower Inwestycje Stockholm - Sweden Elvita Warsaw - Poland PZU – 100.00% Market situation Non-life insurance undertakings – percentage of gross aworzno - Poland PZU – 27.4696% PZU Zdrowie – 100.00% PZU Życie – 72.5304% Omicron BIS Measured by gross written premium in Q1 2018, the non-life written premium in Q1 2018 (in %) Warsaw - Poland PZU – 100.00% PZU Corporate Member insurance market in Poland grew by a total of Ogrodowa Inwestycje Limited Warsaw - Poland London - England Others Proelmed PZU – 100.00% PZU – 100.00% PLN 760 million (+7.7%) in comparison to the corresponding Łaziska Górne - Poland Sigma BIS 14.7% PZU Group* Elvita – 57.00% Warsaw - Poland period of the previous year, posting growth in nearly every 38.5% Battersby Investments PZU – 100.00% (34.8%**) Armatura Group 1 Warsaw - Poland group of insurance (except for groups 16 and 17). UNIQA Cracow - Poland PZU – 100.00% 3.3% NZOZ Trzebinia Investments Funds menaged by Generali Trzebinia - Poland PZU TFI – 100.00% 3.4% Elvita – 100.00% Tulare Investments The sales growth in motor TPL insurance (up PLN 238 million, Warsaw - Poland Arm Property Allianz Polska Group PZU – 100.00% Cracow - Poland +6.8% on direct activity) and motor own damage insurance 5.7% Investments Funds menaged by PZU TFI – 100.00% (up PLN 236 million, +12.5% on direct activity) made the VIG Group 6.0% Consolidated companies largest contribution to the higher level of premium, as the outcome of the significantly higher average premium (the Affiliates Ergo Hestia Group consequence of the price hikes rolled out starting in 2016) and 13.9% Talanx Group 14.5% 1 Armatura Group included the following entities: Armatura Kraków SA, Aquaform SA, Aquaform Ukraine TOW, Aquaform Romania SRL the climbing level of premium originating from indirect activity 2 Centrum Medyczne Medica Group includes the following entities: Centrum Medyczne Medica Sp. z o.o., Sanatorium Uzdrowiskowe „Krystynka” Sp. z o.o. 3 Alior Bank Group includes the following entities i.a.: Alior Bank SA, Alior Services sp. z o.o., Centrum Obrotu Wierzytelnościami sp. z o.o., Alior Leasing sp. z o.o., Meritum (motor TPL insurance up PLN 24 million year on year). * PZU Group - PZU, LINK4, TUW PZUW Services ICB SA , Alior TFI SA, New Commerce Services sp. z o.o., Absource Sp. z o.o. ** PZU Group’s market share in non-life insurance on direct business 4 within PZU Zdrowie 3 branches are operating: CM Nasze Zdrowie, CM Cordis, CM Medicus Groups: Allianz – Allianz, Euler Hermes; Ergo Hestia – Ergo Hestia, MTU; Talanx – 5 w within Pekao Bank Group includes the following entities i.a: Bank Pekao SA, Pekao Bank Hipoteczny SA, Centalny Dom Maklerski Pekao SA, Pekao Leasing sp. z o.o., Warta, Europa, HDI; VIG – Compensa, Benefia, Inter-Risk Pekao Investment Banking SA, Pekao Faktoring sp. z o.o., Centrum Kart SA, Pekao Financial Services sp. z o.o., Centrum Bankowości Bezpośredniej sp. z o.o., Pekao Source: KNF’s Quarterly Bulletin. Insurance market 1/2018 Property SA, Dom Inwestycyjny Xelion Sp. z o.o., Pekao Investment Management SA, Pekao TFI SA, CPF Management The structure does not cover investment funds and entities in liquidation.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 24 25 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
In Q1 2018 the overall non-life insurance market generated In Q1 2018, the PZU Group had a 38.5% share in the non-life a net result of PLN 588 million, signifying incremental growth insurance market, compared to 41.1% in Q1 2017 (34.8% and PZU Group’s share in the non-life insurance market PZU Group’s share in the motor at the end of Q1 2018 is of PLN 34 million in comparison with the corresponding period 37.1% on direct activity, respectively), thereby recording insurance market (direct business) is of 2017. a slight dip. 34.8% The technical result of the non-life insurance market grown of In Q1 2018 the PZU Group’s technical result (PZU together 37.5% PLN 91 million to PLN 691 million. with LINK4 and TUW PZUW) stated as a percentage of the (direct business),
overall market’s technical result was 58.4% (the PZU Group’s at the end of Q1 2018 of which LINK4 has The growth in the technical result in motor own damage technical result was PLN 404 million while the overall market’s insurance of PLN 111 million and in motor TPL insurance of technical result was PLN 691 million), illustrating its insurance 2.6% PLN 44 million made the largest contribution to this change. portfolio’s high level of profitability. The increase in the technical result in motor insurance chiefly ensues from the higher earned premium (up PLN 764 million, The total value of the investments made by non-life insurance +18.5%) following the price hikes made in recent years that undertakings at the end of Q1 2018 (net of the investments PZU Życie’s share in periodic gross PZU Życie’s technical result margin on its gross written premium was outpaced the growth in claims incurred (up PLN 481 million, made by related parties) was PLN 55,359 million, up 3.4% written premium was +15.6%) despite incorporating the additional provision compared to the end of 2017. estimate to cover the claims regarding pain and suffering by 45.9% 17.0% the vegetative state. The non-life insurance undertakings in total estimated their at the end of Q1 net technical provisions at PLN 50,625 million, signifying 3.8% at the end of Q1 2018 2018 The largest decline in the technical result was posted in TPL growth compared to the end of 2017. insurance (down PLN 43 million, of which PLN 31 million on direct activity), assistance (down PLN 11 million), credit and PZU’s activity guarantee insurance (down PLN 8 million) and marine, aviation As the PZU Group’s parent company, PZU offers an extensive and transport insurance (down PLN 4 million). array of non-life insurance products, including motor insurance, property insurance, casualty insurance, agricultural The following entities in the PZU Group operate on the non- insurance and TPL insurance. At the end of H1 2018, motor TFI PZU managed net assets worth nearly OFE PZU Złota Jesień held life insurance market in Poland: the Group’s parent company, insurance was the most important group of products, both in i.e. PZU and LINK4; the Polish Mutual Insurance Undertaking terms of the number of insurance agreements and its premium PLN 20 billion, 12.9% (TUW PZUW) joined them in November 2015. stated as a percentage of total gross written premium.
signifying a of the total net asset To respond to client expectations in recent years, the PZU value of the open-end Group has extended its offering for retail and corporate clients 7.1% pension funds operating (by forming a mutual insurer), thereby sustaining its high in Poland market share market share.
Non-life insurance market - gross written premium and technical result (m PLN)
Lietuvos Draudimas has retained its In terms of accumulated assets Pekao was 1 January – 31 March 2018 1 January – 31 March 2017 leadership position on the Lithuanian number Gross written non-life insurance market with a premium vs. Market net Market net 2 technical result PZU* Market of PZU PZU* Market of PZU 29.4% on the market, Gross written premium 4,074 10,580 6,506 4,037 9,820 5,783 while Alior Bank was number Technical result 404 691 288 404 600 196 share at the end of 8 * it contains Link4 and TUW PZUW H1 2018
Source: KNF’s Quarterly Bulletin. Insurance market 1/2018, Insurance market 1/2017, PZU’s data
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 26 27 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
Faced with changing market conditions, PZU realigned its the product offering. The new insurance offers protection In H1 2018 the main emphasis was placed on constantly TUW PZUW’s activity offering in H1 2018 to clients’ evolving interests and needs against the adverse effects of hacking attacks, including by improving its product offer, client service and the development 2018 marks the third year of TUW PZUW’s active operations. by rolling out new products and innovative solutions. In mass taking actions aimed at destroying the attack and restoring of innovative technologies that involved efforts to cooperate It offers its clients a flexible insurance program to optimize insurance, PZU did the following: the company’s normal operations. This offering is targeted with young insurtech firms, among others. As it focuses on the costs and scope of cover. Since 2016, it has been selling • it devised an offering containing more health insurance especially at those clients who are at risk of data leakage or innovative solutions in client relations, LINK4 is constantly and handling insurance products targeting clients from various products branded as PZU Plan na Zdrowie [PZU’s Plan for operational paralysis caused by a cyber-attack. adding new functionalities whereby client touchpoints become industries, focusing predominantly on cooperation with large Health] forming a flexible medical care proposal offered to even more intuitive and straight-forward. businesses, medical centers (hospitals and clinics) and local private individuals (also to those engaged in running sole In financial insurance, PZU was unswerving in its support for government units. Such entities, within the framework of proprietorships), companies and institutions. Depending on the Polish economy by providing insurance guarantees and The most important activities associated with modifying its cooperation exercised under TUW’s model, are provided with the option selected clients receive on top of the underlying securing the performance of contracts in such key areas as product offering in H1 2018 were as follows: the opportunity to dissipate their risks within the boundaries of insurance a package of health benefits enabling them to the power sector, the shipbuilding industry, the construction • launching a line of products unlike any other on the Polish mutual benefit societies adjusted to the specific nature of the customize the scope of medical care to their own needs. industry and the science and innovation sector. At the same market dedicated to current and future parents. In this pertinent group of entities and thereby reducing the costs of This proposal stands out among the ones available on the time, to respond to client expectations in financial insurance, new offer current and future parents alike can choose from their insurance premiums. It has 209 members and 36 mutual market as it provides extensive support if health problems PZU in collaboration with TFI PZU designed a new product two types of packages they can utilize in full or they can benefit societies. arise following an accident – Plan na Zdrowie and (deployment in Q3 2018) combining investments in mutual adapt them to their own needs. In the LINK4 Mama (Mom) W Ciężkiej Chorobie (Critical Illness), W Leczeniu funds with financial loss insurance to give clients an indemnity package clients can take accident insurance for Moms and In H1 2018, the primary emphasis was placed on Nowotworu (Cancer Treatment) and in the course of in the event of softer investment performance to cover the TPL in their private life that applies to losses caused to organizational development, expansion of the team of everyday care – W Trosce o Ciebie (Caring for You); loss they sustain. This program addresses private individuals third parties by moms or their children. If they elect to take professionals offering better insurance service to the mutual’s • it launched the sales of the Pewnie na Rower (Feeling and companies that would like to combine their first out one or both of these products at the same time, clients members and aligning its offering to its clients’ needs. Secure on My Bicycle) insurance product in the web that investment in mutual funds with free-of-charge insurance to can enrich their insurance bundle with a medical package The most important activities associated with modifying its was designed to afford the most extensive protection to cover any possible financial loss. for mom. Under this bundle LINK4 will organize and cover product offering in H1 2018 were as follows: cyclists. For the first time ever clients have the possibility of half the costs of visits to physicians in various specialities, • launching in the offer: taking out insurance for the cycling season. In practice that PZU cooperated with 10 banks and 10 strategic partners legal assistance and a Rapid Assistance Package with an ◦◦ as the first insurer in Poland – a product called means that the cover lasts for 7 months regardless of when in H1 2018. PZU’s business partners are leaders in their unlimited 24/7 concierge. The other package called LINK4 Third Party Liability Insurance for the Members of they submit their proposal. Clients can insure a new bicycle industries and they have client bases with enormous potential Dziecko (Child) can be construed anyway a client likes, by the Governing Bodies of a Medical Treatment Entity. or a used bicycle up to four years. The insurance is based offering an opportunity to extend the offering to include picking any number of products from the offer, including Extending this offer is part of the mutual’s expansion on bicycle accident insurance. We can add a rider in the more products, often based on innovative solutions. Starting accident insurance Child, a medical package for children onto the market made up by medical entities, especially form of a cyclist’s TPL policy, a bicycle own damage policy, in 2017, PZU established cooperation with the PZU Group’s and Rapid Assistance Package; hospitals that are one of the major axes on TUW i.e. cover in the event of theft or damage and baggage member banks, namely Alior Bank and Pekao, launching • extending the offer to include a new health product called PZUW’s strategy for the upcoming years. This insurance insurance. The insurance protects the person named in the the roll-out of a comprehensive offering via its distribution Wracaj do Zdrowia (Return to Health) offered to clients addresses the overall management of medical treatment policy meaning the bicycle user and owner alike, while the network. Cooperation with Pekao and Alior Bank enable PZU who hold an accident motor insurance policy in LINK4. entities – including hospitals and clinics – public and TPL and accident insurance cover is effective regardless of to offer its clients an extensive array of financial and insurance Under this insurance clients have access to specialist private, alike. This product addressed to TUW PZUW’s whether the bicycle is owned or the insured is using services at each stage of their lives. In strategic partnerships, physicians, ambulatory rehabilitation, selected tests and clients who already hold compulsory TPL insurance for a borrowed bicycle; cooperation applied mostly to companies operating in the procedures and specialist diagnostics offered in more than a medical treatment entity protects the representatives • it implemented “fast-track sales” for the PZU Dom [PZU telecom and power sectors through which insurance for 2 thousand PZU Zdrowie medical centers in more than of the management of medical treatment entities Home] product. This new front-end makes it possible electronic equipment and assistance services were offered, 500 cities located across the country. Clients who buy this against the financial consequences of erroneous simultaneously to prepare at lightning speed an offer e.g. the assistance of an electrician or a plumber. Cooperation medical package can utilize these health benefits for a year managerial decisions, omissions and procedural aligned to a client’s profile with three different options that with Allegro was kicked off to offer insurance on the from the day when LINK4 makes its decision; violations; have various types of cover. This system is similar to Direct e-commerce market. • enriching the current product offer by aligning it to evolving ◦◦ comprehensive insurance of cyber risks linked among insurance in terms of its simplicity and intuitiveness. client expectations (e.g. TPL in private life, extending the other things to insuring losses related to the operation LINK4’s operations territorial range to include Europe, raising the sums insured of a computer network and computer network safety Most of the changes in the corporate insurance segment LINK4, which entered the Polish market 15 years ago as the in travel insurance – the possibility of insuring treatment breaches, also as a result of cyber terrorism; called for enhancing the effectiveness of collaboration with first undertaking offering direct insurance products, continues costs up to PLN 800 thousand) and deploying unrivalled • obtaining KNF’s consent to extend the offer to include intermediaries and making the dedicated offer for the clients to be one of the leaders on the direct insurance market. It solutions on the market to make LINK4 products more statutory class 2, giving the ability to extend PZUW’s offer of leasing companies more attractive. Popularizing the offers an extensive range of non-life insurance products, attractive (new functionalities involving weather alerts). to include another pillar, namely health insurance. insurance against cyber risks launched in the last quarter including motor insurance, property insurance, personal of 2017 involved the most important activities related to insurance and TPL insurance.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 28 29 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
Factors, including threats and risks that will affect the Gross written premium reported by life insurance PZU Życie’s competitive advantage on the market. Even though In this same period, life insurance undertakings generated operations of the non-life insurance sector in the latter undertakings in Poland (in PLN million) the periodic premium was 0.2% lower for the overall market a net result of PLN 470 million, representing a decline of half of 2018 during Q1 2018 compared to the same period in 2017, the PLN 15 million y/y, i.e. 3.1%. This deterioration of the result Besides chance events (such as floods, droughts and spring compound average growth rate since 2013 was 0.6%. The was the effect of softer investment performance recorded by ground frost), the following should be treated as the main cause of the decline in periodic premium was the limited insurers than in the corresponding period of 2017, both in 6,930 7,188 6,930 7,188 factors that may affect the standing of the non-life insurance 6,124 sales of unit-linked life insurance (class III, PLN -115 million) terms of investments used to cover liabilities under technical 5,749 6,124 5,672 sector in H2 2018: 5,749 5,672 coupled with the simultaneous growth in gross written periodic provisions and the insurance undertakings’ free funds. 2,962 24,824107 4,226 1,667 1,998 1,557 • possible slowdown in economic growth in Poland. A poorer 4,126 premium in classes I and V. 4,083 4,116 financial standing of companies may result in elevated The total value of the investments made by life insurance credit risk and a higher loss ratio on the financial insurance The total technical result generated by life insurance undertakings at the end of Q1 2018 was PLN 41,351 million, 42,107824 42,226962 4,083 4,126 4,116 1,998 portfolio; 1,667 1,557 undertakings in Q1 2018 was up PLN 40 million (16.3%) signifying 1.7% growth compared to the end of 2017. In
• case law concerning the amounts of general damages paid 03.2014 03.2015 03.2016 03.2017 03.2018 in comparison with the corresponding period of 2017 and turn, the payments of claims exceeding the premium level 03.2014 03.2015 03.2016 03.2017 03.2018 in cash for the pain and suffering sustained (Article 446 of Single came in at PLN 679 million. Better life insurance results were and the negative investment results in this period contributed Periodical the Polish Civil Code) under the TPL insurance held by the Periodical generated when sold in combination with unit-linked business to a lower net asset value of life insurance in which the Single owners of motor vehicles to the closest family members of Source: KNF’s Quarterly Bulletin. Insurance market 1/2018, Insurance market (class III) and accident and illness insurance (class V) – the policyholder bears the investment risk (down 3.8% to 1/2017, Insurance market 1/2016, Insurance market 1/2015, Insurance market persons who have died; result grew y/y by PLN 35 million (31.6%) and PLN 21 million PLN 56,898 million). 1/2014 • increase in claims handling expenses due to the (4.8%), respectively. In the first instance, as a result of the implementation of VAT on motor claims handling services falling level of expenses, chiefly acquisition expenses as the rendered in favor of insurance companies and their The changes in the level and growth rate of the life insurance level of revenue slackened. In turn, in the latter instance, the intermediaries; market premium in recent years have been prompted mostly cause was linked to the growing level of business accompanied • increase in the prices of spare parts affecting claims by single premiums in investment products. Attention should be by sustaining the profitability of the result as a percentage of handling expenses due to the depreciation of the Polish drawn to the fact that the premium contraction for the overall revenue. zloty against the euro; market year on year in Q1 2018 pertained to single premiums • entry into force of regulatory requirements in the context of to a greater extent (down PLN 441 million, i.e. 22.1% y/y). At Life insurance market – gross written premium (in PLN million) the 4th AML Directive (counteracting money laundering and the same time, the growth rate for the corresponding period terrorism financing); of 2017 was positive at 19.9%. The single premium compound 1 January - 31 March 2018 1 January – 31 March 2017 • emergence of more regulations or financial burdens on average growth rate since Q1 2013 was -17.5%. The changes insurance undertakings – among others, the possible in circumstances on the capital market and in the legal gross written Market Market premium net of PZU net of PZU reinstatement of the “Religa tax” (mandatory fee paid to environment should be considered to be the underlying causes PZU Życie Market Życie PZU Życie Market Życie the National Health Service on every motor TPL insurance for the gross written premium on single premium business to Periodic premium 1,890 4,116 2,226 1,881 4,126 2,244 policy). fall in recent years. The record low interest rates contributed to the decline in the yields offered by term deposits packaged as Single premium 190 1,557 1,367 254 1,998 1,744 insurance products, thereby leading to heightened interest in TOTAL 2,079 5,672 3,593 2,135 6,124 3,988 3.3 Life insurance (PZU Życie) other investment products. Additionally, a tax was introduced as of 1 January 2015 on short-term endowment insurance Source: KNF (www.knf.gov.pl). Quarterly Bulletin. Insurance market 1/2018, Insurance market 1/2017, PZU Życie’s data Market situation offering a fixed rate of return or a return based on indexes; this Poland’s life insurance market measured by gross written also contributed to reducing client interest in these types of Life insurance market – gross written premium vs. technical result (in PLN million) premium was worth PLN 5,672 million in Q1 2018 meaning products and ultimately to their retraction, especially the first that over the most recent 5 years it shrank on average by ones, from the offer of insurance undertakings. In subsequent 1 January - 31 March 2018 1 January – 31 March 2017 6.8% per annum. At the same time, the premium collected years the regulatory authority’s guidelines, including guidelines gross written Market Market in Q1 2018 was 7.4% lower than in the corresponding period regarding the level of fees incurred by clients of unit-linked premium vs. net of PZU net of PZU of the previous year, which denotes a continuation of the products and EU directives regulating the market for these technical result PZU Życie Market Życie PZU Życie Market Życie downward trend in the size of the life insurance market, types of products led to insurance undertakings constricting Gross written premium 2,079 5,672 3,593 2,135 6,124 3,988 ensuing chiefly from the changes in single premium business their offering of these types of products. in investment products. Technical result 353 679 326 295 639 344 The outcome of this market evolution over several years was Profitability 17.0% 12.0% 9.2% 13.8% 10.4% 8.5% the expanding significance of periodic premium that constitutes Source: KNF (www.knf.gov.pl). Quarterly Bulletin. Insurance market 1/2018, Insurance market 1/2017, PZU Życie’s data
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 30 31 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
PZU Życie’s activity Life insurance undertakings – percentage of periodic the insurance offer combining protection products and health CORPORATE clients PZU Życie SA (PZU Życie, Company) within the PZU Group written premium in Q1 2018 (in%) products underwent further development. Two new riders to the group protection insurance offer were does business on the Polish life insurance market. The launched in the corporate client segment in H1 2018:
company offers an extensive range of life insurance products, Others Product offer development covered more than just how the • medical care in the event of an accident on the way to which for management purposes are reported and analyzed 15.8% product is construed, such as aspects related to customer work or on the job – PZU Regaining Physical Capability PZU Życie broken down into the following three segments: group and 45.9% experience in client interactions with PZU. The launch of – insurance providing access to private medical care, individually continued insurance, individual insurance and Generali the direct ability to book doctor’s visits is one example of a including specialist consultations, diagnostic tests 4.4% investment contracts. Metlife product service solution. and rehabilitation procedures if the insurable events 4.7% contemplated by the general terms and conditions of VIG Group In Q1 2018 PZU Życie wrote 36.7% of the gross written 5.0% SOHO clients insurance. This product is intended to help insureds regain Talanx Group premium of all life insurance undertakings, signifying further 5.7% Work to offer a comprehensive protection and health proposal their physical capabilities after an accident;
growth on top of last year’s market share (+1.8 p.p.). The Nationale-Nederlanden was conducted in insurance dedicated to the SOHO segment • medical care in a critical illness – PZU W Trosce o Zdrowie 7.9% cause of the growth in the share held by PZU Życie was the Aviva (small office home office consisting of micro businesses run by [PZU Caring for You] – a product providing access to 10.6% year on year upward movement in the periodic premium while 1 or 2-person business entities). The price benefit slated for private medical care in the event of a critical illness of the other market players saw it dwindle. At the same time, the deployment incoroporating the purchase of two products aims the circulatory system, nervous system or malignant rate of decline of its single premium business was comparable to drive up the number of products per client in the Group’s neoplasms and meningiomas, especially during the initial Groups: Talanx – Warta, Europa, Open Life; VIG –Compensa Życie, Polisa Życie, to what the competition experienced, while its portion of the Vienna Life; Aviva – Aviva, BZ WBK – Aviva database of clients. Processes enabling clients to enroll in days following diagnosis. The insurance scope also includes Source: KNF’s Quarterly Bulletin. Insurance market 1/2018 Company’s portfolio is substantially smaller. insurance easily and pay protection premiums will be designed a guardian to support patients and their families during under this combined offer. the entire course of treatment along with the support of PZU Życie continued to be the clear leader in the periodic PZU Życie, as a popular and the largest insurer on the Polish a psychologist, making it possible to monitor treatment premium segment. In Q1 2018, it generated 45.9% of these market, continuously expands its product offering by adding The products for the SOHO segment are to be offered through progress and counter the return of an illness at an early types of premiums written by life insurance undertakings, new products or modifying existing ones. Changes in the extended distribution channels. PZU plans to facilitate the stage while helping people regain their full mental and signifying ongoing growth of 0.3 p.p. in the this segment’s product offering are intended to attract new clients and purchase of these types of insurance products also in the PZU physical capabilities. market share compared to last year and the highest market expand the insurance cover for those already in the portfolio, branches and through prospective business partners. share level once again. The year on year growth rate of gross along with strengthening their loyalty and increasing their Work will continue to make this protection product even more written premium at PZU Życie in this segment was 0.4%, while satisfaction level. Concurrently, the changes in the offering SME clients attractive to the corporate client segment in H2 2018: the other market players taken together posted a negative take into account the changing requirements of the regulatory PZU has enlarged its pilot program of offering a protection • modifying current insurance riders and updating medical growth rate of -0.8%. One of the major factors in this respect authority and the growing extent of statutory consumer and health package in the product offer addressing the definitions and procedures in conjunction with the was the rapid growth in the health insurance portfolio. PZU protection. It should also be pointed out that in many cases SME segment to include more locations, possible price development of medical technologies and modern methods Życie now has more than 1.6 million policies of this type in such changes are made not only to the product itself but modifications and new insurance cover options. Work is of specialist treatment; its portfolio. From the outset of 2016, KNF has also been also entail the modernization and simplification of the way in currently underway to roll-out the complete final offer and • devising dedicated protection and medical scopes of cover publishing data making it possible to depict as a matrix PZU’s which insurance is offered and sold (processes and front-ends) process-related functionalities for these types of agreements in focusing on employees’ specific needs. There are plans to share in just the life insurance segment (class I) for periodic and enable the client to take advantage of various contact the entire sales network by the end of 2018. The conclusions enrich the offer by adding comprehensive support in tough premiums. In Q1 2018, this share was 64.4% when measured channels to reach the insurance undertaking (e.g. in a branch, following from the pilot program’s distribution will chiefly circumstances by tapping into the PZU Group’s synergies, by gross written premium and 72.2% when measured by the by phone, e-mail, client account, person providing technical be addressed in the target product. A price benefit in the not only by paying a benefit but also through medical number of agreements in force. For this same group of risks, insurance services in the workplace or through an insurance form of buying comprehensive life and health cover is to be riders, assistance and medical consultations focused on the market share in terms of the method of entering into intermediary, whether tied or external). introduced, which according to expectations should ratchet specific needs. an agreement in the period under analysis was 66.4% for up the number of products per client achieved through the agreements executed in group form and 42.0% for individual In the process of developing its product proposal for business PZU offer. The company is also betting on simpler, system- Individual continuation clients agreements (measured by gross written premium). clients PZU focused chiefly on satisfying their individual needs supported processes to enter into and administer insurance. The pilot program to sell the Continuation for You offer was while simultaneously cultivating long-term relations. Work extended to cover Poland in its entirety in the individual PZU Życie’s technical result represented more than half the was continued to segment the insurance offer dedicated to Customer Journey research was conducted in the last quarter continuation segment consisting of clients who continue their result earned by all life insurance companies. This evidences various client groups. Marketing research has confirmed the on a micro business purchasing a group protection policy insurance after leaving their jobs. This insurance aims to give the high profitability these products enjoy. PZU Życie’s existence of the varied needs of individual segments. This and on an employee enrolling in that type of insurance. a package of benefits close to a group offer, which an insured technical result margin on gross written premium was nearly research makes it possible to monitor the insurance market. The recommendations flowing from this research will be would like to continue having, and it is our response to the two times higher than the overall margin generated by the Observing the strong interest clients take in health products, implemented in the upcoming six month period. They refer needs clients in the younger age category have. other companies offering life insurance (17.0% versus 9.2%). to the product offer, marketing materials and processes for buying insurance.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 32 33 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
In addition, PZU launched the sales of another insurance rider of the Bank’s Private Banking Division and Retail Banking morbidity levels, especially diseases of civilization, i.e. Banks’ operating expenses (net of depreciation and provisions) within the framework of individual continuation – orthopedic Division with a planned deployment date in the latter half lifestyle diseases; in the period under analysis climbed 5.1% to PLN 14.7 billion injury providing for private medical care in the event of an of 2018; • constant price pressure in group insurance and the battle year-on-year. This increase was caused by higher employee orthopedic injury caused by an accident. • bancassurance unit-linked products (Multi Capital, World for client ownership (and their data), thereby cutting the expenses (up 5.9%) and higher general and administrative Investment Program) were migrated from the previous insurer’s margins and fostering entry and exit obstacles for expenses (up 4.3%). Next year there are plans to launch the sales of an insurance transfer agent’s systems to Pekao Financial Services’ clients to overcome with independent intermediaries; rider for individual continuation addressing the risk of critical systems to enhance the effectiveness of cooperation in the • changes in trends and client behavior toward customization The banking sector’s own funds for capital ratios, calculated illnesses linked to the consequenes of a heart attack and group and optimize service processes; of proposals and an electronic, swift and paperless method in accordance with the regulations laid down in the CRR stroke. • 5 subscriptions of the structured insurance product known of purchasing and handling insurance, forcing insurance Regulation, totaled PLN 200.3 billion at the end of March 2018 as World of Profits (Świat Zysków) that has enjoyed undertakings to adapt to these expectations rapidly; (most recent available data), up 12.5% versus the end of Furthermore, in connection with the natural product lifecycle, tremendous client interest were sold. Various investment • the emergence of new competitors and solutions, including March 2017. the necessary changes to the current product offer in strategies that adapt to volatile market conditions were the operators of large client bases or insurtech companies; various client segments were planned. Work was launched offered in the individual subscription tranches, based on • entry into force of the Insurance Distribution Directive (IDD) The banking sector’s overall capital multiple at the end of in Q2 to modify the medicine insurance offer. New product various models of calculating the investment bonus. as of 1 October 2018; March 2018 was 18.9% (up 1.0 p.p. compared to the end of communication will facilitate greater client appreciation for • entry into force of regulatory requirements in the context of March 2017), while the Tier I capital ratio at the end of this the scope of insurance cover and the health circumstances in In its other initiatives PZU constantly opts for understanding the 4th AML Directive (counteracting money laundering and period was 17.0% (up 0.6 p.p. in comparison with the end of which it will be possible to co-finance the prices of prescription client needs better and better and building long-term client terrorism financing); March 2017). drugs. relations. PZU wants to respond swiftly to changes in the • the final shape of the new pension security system environment through a sophisticated offer accompanied by (Employee Capital Schemes). Significant agreements The following individual protection insurance product was clear and communicative messages by doing the following: Cooperation between Bank Pekao and Alior Bank rolled out in H1 2018: • creating predictive client attrition models and responding On October 23, 2017, Bank Pekao and Alior Bank signed • accident insurance to be purchased exclusively by Internet swiftly and effectively to symptoms of client dissatisfaction; 3.4 Banking (Bank Pekao, Alior Bank) a letter of intent regarding the will to conduct preliminary talks - PZU Ja Plus. This new insurance provides for a payout • developing a loyalty program; on potential cooperation strategies that could be developed in case of being in a hospital, having a broken bone, • using a simple and transparent arrangement and Market situation to increase value for shareholders and customers. As a result permanent disability and accidental death or death in description of its products on new website www.pzu.pl. The standing of the banking sector in H1 2018 continued of the analysis of both banks, an option was chosen to merge a motor accident. The insurance cover may apply to the to be stable underpinned by the persisting vibrance of the Alior Bank with Pekao (under which Alior Bank shareholders insured or to the insured and his/her child or children (the In addition, having regard for the legal and regulatory economy and the functioning of banks in a low interest rate would receive shares of the merged bank) for giving the premium is contant regardless of the number of insured environment and the requirements placed on PZU, its products environment. From January to May 2018 the banking sector opportunity to generate potentially the greatest additional children). At the same time, policyholders who have were adapted to the EU General Data Protection Regulation generated a net profit of PLN 6.4 billion versus PLN 5.2 billion value for shareholders and negotiations were started in the the Large Family Card can count on receiving additional (GDPR) GLOSSARY. These changes affected the process of in the corresponding period of the previous year (up 24.5%). selection of the optimal combination of Alior Bank with Pekao. discounts; selling, implementing and servicing products. Concurrently, On August 7, 2018, the banks reported that they failed to • discounts in individual endowment insurance were work is still in progress to align products to meet the IDD The sector’s net result was shaped predominantly by the strike an agreement on the conditions for their potential introduced. Depending on the amount of the regular requirements GLOSSARY. improved result on banking operations (to PLN 8 billion, i.e. up merger and thereby they ended their negotiations. premium, a discount of several percent can be obtained 12.9% in comparison with the corresponding period in 2017), and it will be in force for the entire term of insurance; Factors, including threats and risks, that may affect caused by significantly higher net interest income growing Cooperation between banks and PZU and PZU Życie • implementation work continued on individual life insurance the operations of the life insurance sector in H2 2018 interest income related to the increase of the credit base, Within the framework of the cooperation between Pekao and for borrowers of cash loans extended by Alior Bank (sales The following constitute the major risk factors on the life while the level of net fee and commission income decreased. Alior Bank with the PZU Group, current activities are divided were kicked off in July 2018); insurance market in H2 2018: into 4 areas: • work was under way on deploying an offer consisting of • the prospect of a higher inflation rate and economic growth The net asset value of the banking sector at the end of May • Bancassurance: real estate insurance for borrowers has products sold by Bank Pekao (insurance for the PEX cash driving an increase in T-bond yields, which in the long term 2018 stood at PLN 1,841 billion, up 5.9% (i.e. PLN 91.9 been introduced in Pekao and Alior Bank, and insurance loan and for the mortgage loan) with the planned date for will be beneficial to the PZU Group, although in the short billion) from the end of May 2017. for a Pekao cash loan is also being sold in online channels. commencing sales slated for the latter half of 2018. term may adversely affect investment income; Moreover, the PZU Wojażer travel insurance is being offered • softer conditions on the capital markets deteriorating the Gross receivables from the non-financial sector increased by both banks in the remote channel offer; The following changes were made to the product offering in attractiveness of products, especially unit-linked products; 7.0% to PLN 1,121 billion as at the end of May 2018 • Assurbanking: PZU supports the sales of a Pekao account investment insurance in H1 2018: • demographic changes and the aging society and the versus last year. Growth in this area was driven mainly by in tens of its branches, while it launched a pilot project in • intense work was under way to develop an offer containing ensuing changes in the current mortality, fertility and receivables from enterprises (+6.1% y/y) and receivables from 3 branches on 5 March 2018 where PZU employees are products sold jointly with Bank Pekao. The project work households (+1.7% y/y). actively offering the Bank’s Przekorzystne Konto (Mega spanned two unit-linked products dedicated to the clients Beneficial Account). The disbursement of benefits to PZU
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 34 35 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
clients in Pekao’s Branches (auto-disbursement) was also Client segmentation New products and services Strategy deployed; The bank’s business model is based on client segmentation From the outset of 2018 Bank Pekao has been pursuing its PZU PTE’s acquisition of the management of Pekao OFE and • Cooperation: insurance programs were launched for the into the following groups: new growth strategy for 2018-2020 entitled “Strength of the DFE Pekao is one of the outcomes of the PZU Group acquiring banks’ employees and special offers on bank products for • Retail Banking – full scope of banking activity pertaining to Polish Bison”. The basis for the Bank’s growth among retail Bank Pekao in 2017. The winding up of Pekao OFE will the employees of PZU Group companies; retail client service (except for Private Banking clients) and clients is the significant acceleration in the pace of growth in commence on 1 August 2018 and end on 12 October 2018, • Operational synergies: cost synergies were achieved in the micro firms with annual sales of up to PLN 5 million and the the number of accounts, i.a. thanks to its new offer and its and on that day Pekao OFE’s assets will be transferred to OFE IT, administration and security areas that translated into results of the Group companies consolidated using the full outstanding quality. PZU. In turn, the winding up of DFE Pekao kicked off on 19 a real impact on the costs of PZU and Bank Pekao. method and the shares of profits in companies consolidated May 2018 and is slated to end on 28 September 2018.Pekao using the equity method attributed to retail business; In January 2018 the bank launched its new Mega Beneficial Financial Services is rendering Transfer Agent Services for the Operations of the Pekao Group • Small and Medium Enterprise Banking – full scope of Account offer to replace the previous line of Euroaccounts. funds managed by PTE PZU. The Pekao Group is led by Bank Pekao S.A., a universal banking activity concerning the service of companies The Mega Beneficial Account is the bank’s main account commercial bank offering a full range of banking services with annual sales ranging from PLN 5 to 50 million, and through which it offers a full array of banking products and Operations of the Alior Bank Group rendered to individual and institutional clients operating under PLN 5 million in companies that keep full accounting services. Moreover, in January 2018 the bank launched Alior Bank heads up the group. Alior is a universal deposit chiefly in Poland. The Pekao Group consists of financial records; a new Savings Account in its offer for retail clients offering and credit bank, providing services to natural persons, legal institutions operating on the following markets: banking, asset • Private Banking – full scope of banking activity concerning an attractive interest rate for their funds and no fees for persons and other domestic and foreign entities. The bank’s management, pension funds, brokerage services, transaction the service of the most affluent retail clients; withdrawals from this account provided that they use the core business comprises maintaining bank accounts, granting advisory, leasing and factoring. • Corporate and Investment Banking - full scope of banking Peopay mobile application. cash loans, issuing bank securities and purchase and sale of activity concerning the service of medium and large foreign currencies. The bank also conducts brokerage activity, From 2017 Bank Pekao has been part of the PZU Group, one corporates, the Bank’s exposure on the interbank market The bank developed its cooperation with PZU in insurance provides financial advisory and intermediation services, of the largest financial institutions in Central and Eastern to debt securities and other instruments as well as the in H1 2018. Training was delivered to 6.7 thousand branch arranges corporate bond issues and provides other financial Europe. The bank’s strategic objectives announced in the new results of the Group’s companies consolidated using the full employees who obtained a license from KNF to sell PZU services. strategy for 2018-2020 “Strength of the Polish Bison” include method attributed to corporate and investment activity; insurance. It introduced a group insurance product called becoming the leader of profitability in the Polish banking • Asset and Liability Management and others – spans the “PZU-TRAVEL PACKAGE-BUSINESS” for the users of business Alior Bank is one of the most modern and innovative financial sector through embarking on the path of intelligent growth supervision and monitoring of cash flow, other areas payment cards issued by Bank Pekao and a general insurance institutions in Poland. It is a place for people who have in a business model based on high efficiency and quality managed centrally, results of companies consolidated by agreement was executed with PZU concerning the risk of ideas and business courage to set new banking standards. of processes. Business development is based on a strong the full method and shares in the profits of companies mortgage loan amortization. The bank also made available The bank’s offering includes products and services both for capital and liquidity position, while maintaining the highest measured by the equity method that are not attributed to an option to buy voluntary PZU CPI insurance offered in individual and business clients, including small and medium risk management standards and further improvement of cost other segments. conjunction with a loan application during the “one click” enterprises and institutional clients. The bank’s offer combines effectiveness. process in the Pekao24 system. Bank clients may avail the principles of traditional banking with innovative solutions. Pekao TFI themselves of the new insurance for buildings and residential As a result, Alior Bank systematically strengthens its market In addition, the Bank will realize the available synergies The Pekao Mutual Fund Company (Pekao TFI) is another units prepared by PZU. In addition to the standard insurance position and for years has been consistently setting new following from the cooperation in the PZU Group, which it member of the Pekao Group. Pekao TFI (formerly Pioneer for real estate that can form collateral for the debts of the directions of development of the Polish banking. announced in 2017. The bank’s innovation direction may also Pekao TFI) is the oldest mutual fund management company Bank’s borrowers, clients can choose from additional bundles be an area for partnerships with technology leaders, other in Poland providing clients modern financial products, offering spanning insurance for their household personal property, As at 30 June 2018, Alior Bank catered to 4.1 million retail financial institutions and consumer companies. opportunities to invest in the largest global capital markets. assistance and third person liability. clients. The higher client number in 2018 resulted from Alior For many years it has been devising savings programs, Bank’s organic growth. Products and services including programs affording an opportunity to put aside more In mobile banking the bank launched a 24/7 money exchange The Bank offers competitive products and services on the money for retirement under the third voluntary retirement counter in its mobile banking platform, the ability to manage Products and services Polish market. It features high-level customer service and pillar. Pekao TFI also offers a managed account service. cards and BLIK codes in H1 2018. Additionally, in June 2018 The Bank’s operations are conducted by various divisions that a developed network of branches and ATMs, as well as At the end of June 2018, the company had assets under the bank was one of the first banks in Poland to deploy Apple offer specific products and services earmarked for specific a professional call center and a competitive Internet and management totaling PLN 19.2 billion, signifying an upswing Pay and it is the only bank in Poland that enables clients to market segments. At present, the Bank does business in the mobile banking platform for retail and corporate clients, and of PLN 1.8 billion, i.e. 10.2% in comparison to the end of June link following segments: small and micro businesses. 2017. • Individual client (retail segment); Apple Pay to their personal account through Peopay mobile • Business client (business segment); banking without even having to have a card. • Treasury activity.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 36 37 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
Due to the uniqueness of the activity conducted in the retail funds, namely free-of-charge wire transfers by Internet to 3.5 Mutual funds (TFI PZU) Investment Plans (CIPs) and Group Pension Plans (GPPs) segment, the bank distinguishes three additional retail areas one’s own checking and saving account in Alior Bank; which additionally offer Individual Retirement Security that have a dedicated offer for a separate groups of clients: • cooperating with BANCOVO to launch the first, fully digital Market situation Accounts (IRSAs). • mass clients (persons whose assets in the Bank do not financial intermediation platform; As at the end of June 2018, the assets managed by domestic exceed PLN 100 thousand and whose monthly proceeds to • PAPERLESS - deploying a solution making it possible to mutual funds slightly exceeded PLN 280 billion compared to At the end of June 2018, TFI PZU had 30 funds and sub-funds their personal account are under PLN 10 thousand); abandon the traditional form of signing contracts. PLN 279 billion at the end of December of the year before, in its offer, of which 23 were also offered to clients outside the • affluent clients (persons with monthly proceeds credited representing an increase of 0.4%. Group. to their personal accounts exceeding PLN 10 thousand or Alior Bank also cooperates with PZU Group entities to realize holding assets worth more than PLN 100 thousand); cost and revenue synergies. This cooperation may pertain, In H1 2018, according to the estimates of the Analizy Online TFI PZU managed net assets worth nearly PLN 20 billion • Private Banking clients (persons with assets worth more among others, to innovations, digital channels, IT, real estate, service, the balance of payments to and withdrawals from at the end of June 2018, signifying a 7.1% market share. than PLN 1 million or investment assets over marketing, development projects, procurement and financial retail funds offered by TFIs in the domestic market exceeded Accordingly, TFI PZU is among the largest mutual fund PLN 0.5 million). products. PLN 1 billion. Chiefly cash and money funds whose assets companies in Poland – as at 30 June 2018 it was ranked third are the only ones to have recorded a positive net balance in Poland according to reports published by IZFiA (Chamber Alior TFI Factors, including threats and risks that will affect the of nearly PLN 12 billion enjoyed interest among clients. of Fund and Asset Management). TFI PZU is also the market Alior TFI (formerly Money Makers) operates in the Alior banks’ operations in H2 2018 Other asset classes posted a negative balance. Equity funds leader in the employee pension plan segment among the Bank Group. It was established in 2010 and its operations The following will primarily affect the standing of the banking sustained the greatest decline (down PLN 4 billion), followed institutions operating on this market with net assets of nearly originally focused on asset management services. Alior Bank’s sector in H2 2018: by private equity funds (down nearly PLN 4 billion) and mixed PLN 4 billion. cooperation with its subsidiary Alior TFI pertains to three • operation in a stable environment of low interest rates, funds (down by more than PLN 1 billion). areas: asset management (portfolio management for retail which puts pressure on the level of the net interest margin clients/private banking), unit-linked funds, and Alior SFIO sub- generated and Monetary Policy Board’s policy going Within the PZU Group, there are 3 Mutual Fund Companies TFI PZU’S net assets (PLN billion) fund management. From 5 January 2017, Alior TFI has been forward; operating on the market: TFI PZU, Pekao TFI and Alior TFI. listed on the alternative market of the Warsaw Stock Exchange • high requirements regarding equity and solutions with (NewConnect). regard to the latest accounting standards (IFRS9), which are likely to have negative impact on the level of capital Mutual fund companies – share in assets as at 30 June In H1 2018 the key new products and services in the Alior accumulated in banks and may lead to increased risk cost 2018 (in %) Bank Group’s offering included: volatility;
• deployment of Apple Pay in June enabling iPhone owners to • possible changes of the legal environment, including mainly Ipopema TFI 28.3 Pozostałe 20,6% 25.5 make contactless payments for products and services using the legislative solution of the issue of foreign currency 30,0% 22.2 20.0 19.8 their handset. On top of the payment solutions already residential loans and potentially an obligation to make available, i.e. Android Pay, HCE and BLIK, this heralds additional contributions to BFG, may adversely affect the another innovative payment solution forming a component banking sector’s profitability; PKO TFI 11,9% of the Digital Disruptor Strategy; • a lower growth rate of the Polish economy and changes Forum TFI 3,4% 2014 2015 2016 2017 06.2018 • holding 20 issues with a total nominal value of PLN 621 in the legal framework for the operation of enterprises Union Investment TFI 4,6% PZU TFI 7,1% Source: Chamber of Fund and Asset Management million within the framework of the first program to issue may have an adverse impact on the financial standing of Aviva Investors TFI 4,8% Pekao TFI banking securities; selected clients. NN Inv. Partners TFI 5,0% BZ WBK TFI 6,9% • preparing a new investment certificate offer for selected • changes in the external environment and international 5,8% Private Banking clients entailing a limited capital guarantee events affecting the domestic economy. Assets under management edged up slightly in H1 2018. The Source: Chamber of Fund and Asset Management and a conditional early call option known by the name of new money flowing into mutual funds in the debt asset class “autocall”. In H1 2018 seven issues of this type were held and the money flowing away from funds containing a major for a total nominal value of PLN 126 million; TFI PZU’s operations equity component were the major factors contributing to this • continuing the agency training program to offer individual Towarzystwo Funduszy Inwestycyjnych PZU (TFI PZU) state of affairs. insurance policies; operates on the mutual fund market in the PZU Group. It • implementing property insurance in cooperation with PZU offers products and services for both retail and institutional The most important events in TFI PZU in H1 2018 were as to be available to mortgage loan borrowers in Alior Bank; clients – including additional investment and savings programs follows: • rolling out Konto Mocno Oszczędnościowego (Mega Savings forming part of the third pillar of the social security system: • introduction of new Employee Pension Plans and Group Account) that offers more than attractive interest for new Individual Retirement Accounts (IRAs), Employee Savings Pension Plans as well as attracting incomers to the existing Plans (ESPs), Employee Pension Plans (EPPs), Company ones;
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 38 39 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
• active sales of subfunds using short-term debt paper: PZU 3.6 International operations Latvian market life insurance market in Lithuania holding a market share of Cash and PZU Safe+; The Latvian non-life insurance market recorded a gross written 29.4%. In H1 2018 it posted a 15.9% upswing in gross written • launch of 6 new funds under the new PZU SFIO Impulse Lithuanian market premium of EUR 100 million in Q1 2018. This is nearly premium compared to the previous year thereby hitting the umbrella fund; According to the Bank of Lithuania, the gross written premium EUR 19 million more than in the same period of the year EUR 95 million. The biggest increase was recorded in motor • kick-off of work jointly with the PZU Group’s branches on on the non-life insurance market was EUR 322 million in before, i.e. 23.6%. insurance (19.7% y/y) in connection with the hike of insurance introducing a new PZU Safe+ fund offer including capital H1 2018, having shot up by 15.9% compared with the rates in the region. protection. corresponding period of 2017. The biggest market share in the non-life insurance market measured by gross written premium, was held by motor Life insurance operations in Lithuania are conducted through Factors, including threats and risks, that will affect the Market growth continued to be driven by motor insurance insurance whose market position was further strengthened UAB PZU Lietuva Gyvybës Draudimas – “PZU Lithuania mutual funds’ operations in H2 2018 (accounting for 62.7% of the market) whose sales climbed by the price hike on the market. Motor TPL insurance Life”. Collected gross written premium was EUR 7 million, The condition and performance of the mutual fund market will 20.4%. In turn, motor TPL insurance rose 24.8% while MOD accounted for 25.2% of the market while MOD accounted for representing a 13.1% increase compared to the corresponding depend mainly on the following: insurance grew 13.8%. Higher gross written premium in motor 21.5%. Health insurance (24.8% market share) and property period of the previous year. The highest sales growth was • condition of the global economy – risks to economic growth insurance is attributable predominantly to increased average insurance (15.1% market share) also had an important recorded in unit-linked business, which was up 26.9% and the prospects of higher inflation; premiums in the market. The gradual deceleration of the position in the product mix. compared to H1 2017. The share held by PZU Lithuania Life in • development of events in trade relations – their impact on growth in this insurance segment is nonetheless visible on the life insurance market was 6.3% (compared to 6.0% at the the activity of the US economy and their trade partners as a monthly basis. In Q1 2018, there were 10 insurance companies operating on end of June 2017). well as the FED’s decisions; the domestic non-life insurance market, the top 4 insurance • monetary policy – the continuation of the tightening of At the end of H1 2018, there were 12 companies operating groups held 79.6% of the market. In Latvia the PZU Group conducts operations through AAS monetary policy by the US and several smaller developed in the non-life insurance sector (including 8 branches of Balta, which became part of the Group in June 2014. At the economies, the continuation of quantitative easing in insurance companies established in other EU member states). Estonian market end of Q1 2018, the total share of the non-life insurance the euro area coupled with the plans to wrap it up at the In H1 2018, non-life insurance undertakings operating in market hit 26.8%. In H1 2018, the gross written premium was end of this year and the interest rate hikes in European Lietuvos Draudimas is the largest insurance undertaking in Estonia posted 20.3% growth in gross written premium1 EUR 53 million (EUR 44 million in H1 2017). monetary union; Lithuania measured by total gross written premium in non-life versus 10.3% in the corresponding period of 2017. In total, • sovereign risk – the government’s actions in Italy, the insurance. The company’s share in the market at the end of gross written premium was EUR 198 million, of which EUR Since May 2015 the entity conducting operations in Estonia problems encountered by the governing coalition in H1 2018 was 29.4%. Considering recent acquisitions, the total 52 million, i.e. 26.4% was collected by foreign insurance is a branch of Lietuvos Draudimas. The share in the Estonian Germany and the negotiations on the terms for Brexit; combined market share held by the top four players (PZU, undertakings operating in Estonia. non-life insurance market in H1 2018 was 20.3%2. The • economic growth in Poland boosted by progress in the VIG, ERGO, Gjensidige) on the non-life insurance market was collected gross written premium was EUR 30 million (EUR 26 execution of investments co-financed with EU funds, 82.5%. The composition of non-life insurance in H1 2018 was million at the end of June of the previous year). coupled with the possible limitation on the pace of growth dominated by motor insurance. They accounted for 59.9%, among its main trading partners; The gross written premium collected by Lithuanian life while MOD accounted 33.2%. Property insurance collected Ukrainian market • evolution of the Monetary Policy Council’s views as core insurance undertakings in H1 2018 was EUR 117 million, 26.2% of the gross written premium on the market. The Ukrainian insurance market in Q1 2018 posted 7.1% inflation gradually grows coupled with the pace of economic signifying 7.1% growth in comparison with H1 of last year. The growth in gross written premium coming close to UAH 12 growth outstripping its potential and as the monetary policy growing regular premium (9.0%) made a material contribution At the end of June 2018, there were 13 companies operating billion. The premium written for non-life insurance was UAH in the environment becomes more progressively tightened. to the market’s positive growth rate. Single premiums (6.1% in the non-life insurance sector (including 4 branches of 11 billion, signifying 5.2% growth compared to Q1 2017. market share) posted a decline of 16.3% in this same foreign insurance companies) among which the top 4 held This growth was the outcome of the positive growth rate in time frame. Unit-linked business GLOSSARY dominated life a combined 71.3% market share. the sales of new cars, raising tariffs in motor insurance and insurance accounting for 59.8% of the portfolio’s value. incorporating inflation in sums insured. Motor TPL and MOD Traditional life insurance accounted for 18.2% of the gross Activity of PZU companies in the Baltic states insurance (21.4% of the market) recorded a 19.4% increase written premium. As of November 2014, the PZU Group has been operating in in gross written premium. In the corresponding period, life the Lithuanian non-life insurance market through Lietuvos insurance undertakings collected gross written premium of At the end of H1 2018, there were 8 companies operating in Draudimas, which, as of May 2015, is the owner of the PZU UAH 1 billion, signifying 40.2% growth compared to Q1 2017. the life insurance sector. The Lithuanian life insurance market Estonia branch. Lietuvos Draudimas is the leader on the non- is highly concentrated. The share held by the three largest life 1 As of 1 January 2018, IF P&C Insurance AC (the leader on the Estonian non-life 2 As of 1 January 2018, IF P&C Insurance AC (the leader on the Estonian non-life insurance undertakings in total gross written premium was insurance market) started to report total gross written premium, altering the insurance market) started to report total gross written premium, altering the 59.6%. approach taken to-date, based on installments and in that manner it significantly approach taken to-date, based on installments and in that manner it significantly distorted market data. Other market players continue to report in installments, distorted market data. Other market players continue to report in installments, which means that market data are not comparable. At the same time, the which means that market data are not comparable. At the same time, the Estonian insurance regulatory (EKsL) consented to implementing reporting based Estonian insurance regulatory (EKsL) consented to implementing reporting based on gross written premium as of January 2019. on gross written premium as of January 2019.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 40 41 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
The Ukrainian insurance market is highly fragmented – as at 3.7 Medical services (Health) Corporate client segment (life and health) To satisfy the most demanding requirements of retail clients the end of March 2018, there were 292 insurance undertakings The sales of group life and health insurance constitutes the belonging to the VIP segment, there is a non-standard offer operating in the country (32 of them offered life insurance). Market situation basis for the business operations of the PZU Group’s Health based on the PZU Group’s synergies in force. This single Despite the number of insurers that continues to be enormous, The health market is a business area that is dynamically Area. The offering is addressed to corporate clients and the offer blends outpatient, hospital, medicine, travel and ADD the top 100 non-life insurance undertakings generated 98.3% developing and prospective. The current trends are as follows: SME and micro business segments. Employers may purchase insurance and a loyalty program. of gross written premium, while the top 20 life insurance • continuation of the double digit pace of growth in the insurance in the sponsored or co-financed model, or negotiate undertakings generated 99.9% of written premium. private health insurance market; a group offer for their employees. • development of telemedicine and service opportunities On the Ukrainian market, the PZU Group operates insurance through remote channels; Product Coverage business via two companies: PrJSC IC PZU Ukraine (a non-life • greater need to provide care to senior citizens; insurance company), referred to as “PZU Ukraine”, and PrJSC • increasing awareness of prevention and periodic access to medical services comprising among others: doctor consultations with as many as 35 specialties, up to 400 types of PZU u Lekarza [PZU diagnostic tests and outpatient procedures, rehabilitation, dentistry, pregnancy care, with the possibility to expand the offer to IC PZU Ukraine Life (a life insurance company), referred to examinations. At the Doctor’s] include non-standard services to fit the client’s needs (e.g. medical transport, spa treatment, assistance of a nurse at home) as “PZU Ukraine Life”. In addition, LLC SOS Services Ukraine PZU w Aptece [PZU co-funding for covered medications on prescription purchased in any pharmacyin Poland (including in over 7,000 partner 5 performs assistance functions. In accordance with PMR data : at the end of 2017, private at the Pharmacy] pharmacies providing cash-free Pharmaceutical Card service) health care offered under fee-for-service products was worth PZU w Szpitalu [PZU 180 hospital procedures in 7 specializations (surgery, urology, ophthalmology, laryngology, gynecology, cardiology, orthopedics) In H1 2018, the gross written premium collected by PZU PLN 16.90 billion. In turn, the value of medical subscriptions in the Hospital] Ukraine was UAH 670 million, i.e. it was 1.5% higher than was PLN 3.99 billion, while the value of private health PZU W Trosce o Zdrowie rider to group life insurance; access to rehabilitation services in the event of a critical illness in the corresponding period of the previous year. The gross insurance climbed to PLN 0.69 billion. [PZU Care for Your Health] written premium collected by PZU Ukraine Life was nearly PZU Powrót do Sprawności rider to group life insurance; access to rehabilitation services following an accident on the way to work or an accident on the job UAH 194 million, up 47.3% from H1 2017. This growth was Operations in the Health Area [PZU Return to Ability] mainly achieved in the bancassurance and broker channel, in The Health Area deals with the following: particular as a result of sales of endowment insurance policies. • sales of health products in the form of insurance (life and health insurance and non-life health insurance) and Mass insurance segment (health, non-life insurance) In Q1 2018, PZU Ukraine obtained 3.0% (up 0.2 pp compared non-insurance products (occupational medicine, medical Mass clients buying non-life policies are offered additional to Q1 2017) of the gross written premium on the Ukrainian subscriptions, partnerships and prevention programs); health insurance of assistance nature, ensuring access to non-life insurance sector, which gave it fifth3 place on the • development of the medical infrastructure for the specific medical services if an event under the basic policy market. On the life insurance market, in turn, PZU Ukraine population in Poland to ensure the best accessibility of occurs. From mid July 2018 the non-life insurance product Life ranked fifth4 with a market share of 11.2% (up 0.4 pp provided services and execution of revenue targets. offer also includes insurance providing access to medical care compared to the corresponding period of last year) in Q1 in the event of an accident, critical illness, malignant neoplasm 2018. and for everyday matters.
3 Insurance TOP, Ukrainian insurance quarterly, #2(62)2018 5 PMR Report entitled „Private Health Care Market in Poland 2018” dated July 4 Insurance TOP, Ukrainian insurance quarterly, #2(62)2018 2018 Rider Coverage
PZU Auto Asystent Zdrowotny [PZU Car access to outpatient medical care for the driver and passengers in the event of a road accident Health Assistant] In the Health Area the company offers a broad range of health products adapted to the segment and clients’ PZU Dom Asystent needs: Zdrowotny [PZU Home arranging for and covering the costs of treatment after an accident or sudden illness Health Assistant]
Continuation of access to comprehensive medical care in the event of an accident or sudden illness during travel abroad (among others Treatment after Travel outpatient care, rehabilitation, surgical procedures, medical transport, support of a medical assistant) Insurance
LINK4Mama – Assistance Zdrowie [LINK4Mother – access to medical care for women and children in the event of a sudden illness or an accident outpatient care hospital care rehabilitation prevention co-funding for occupational Health Assistance] programs medications medicine LINK4 Wracaj do Zdrowia [LINK4 Come back to Insurance riders to ADD in Link4. Access to specialist physicians, ambulatory rehabilitation, selected tests and outpatient Health] procedures, X-ray, ultrasound, CT and MRI diagnostics following an unfortunate accident.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 42 43 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
PZU Plan na Zdrowie [PZU Plan for Health] access to medical care (diagnostic tests and doctor consultations) in the event of an unfortunate accident, critical illness, Non-insurance products malignant neoplasm and for everyday matters. PZU Zdrowie as a medical operator offers health services both
PZU Plan na Zdrowie consists of the main insurance and 3 insurance riders: Critical Illness, Cancer Treatment, to individual clients using proprietary clinics and to corporate Caring for You. clients seeking an alternative to group insurance.
The main insurance in the Plan for Health provides medical care in the event of an accident (including the most frequently occurring broken bones, electrocutions and damages to organs). In the event of encountering health issues following an accident, this insurance affords clients the opportunity to utilize doctor consultations and diagnostic tests Product Coverage for a year.
outpatient care available in the form of a group offer, with the possibility of using medical services in a partner and proprietary The Critical Illness rider provides health care – doctor consultations and diagnostic tests – following a critical illness, Medical network in over 500 Polish cities and as part of individual services and packages in specific proprietary PZU Zdrowie clinics including, a stroke, brain abscess, myocarditis and muscular dystrophy. Subscription
The Cancer Treatment insurance rider involves medical assistance – doctor consultations, diagnostic tests, second preliminary, periodic, check-up and final examinations, review of workstations, participation of an occupational medicine Occupational opinion and doctors’ council – after diagnosis of a malignant neoplasm, including: a malignant melanoma, malignant physician in company occupational safety and health commissions, supplemented by training on first aid and prevention Medicine neoplasm of the breast, malignant neoplasm of the uterus and a malignant neoplasm of the lungs. Clients also receive programs aimed at prevention and diagnostic of occupational diseases financial support under this insurance. combination of the PZU Zdrowie medical subscription and a sports pass for the Calypso Fitness chain, with an extra PZU Pomoc Fit Plus Card The Caring for You insurance rider involves medical care for everyday matters whereby clients can start using it from concierge service the first day of insurance cover – for the duration of its term of validity. Clients can choose from 3 scopes of insurance enabling them to select the number and type of medical services they consider to be right for them (roughly 70, 200 or the offer for clients ensuring access to medical services in PZU Zdrowie: doctors appointments, outpatients research and Medical Help 450 services). This insurance provides among other things for visits to specialists (without a referral), diagnostic tests rehabilitation, in case of accident or health breakdown and rehabilitation procedures.
Achievements in the Health Area 3.8 Pension funds (PTE PZU) • the service provider network has been extended to include Retail client segment (life and health) more medical centers, which means that PZU already has Market situation Retail clients are provided with health care in the form of over 2,000 centers; At the end of June 2018, the net asset value of open-end individual continuation or rider to life insurance. The following • a new hotline operation model has been rolled out to pension funds was PLN 158 billion, down 11.9% versus the is offered as a rider to life insurance continued individually: service clients holding health products, including life end of 2017. insurance and non-life insurance with a health rider. The hotline structures operate in PZU Zdrowie as the PTE PZU activity Rider Coverage Medical Service Management Center (CZUM), which The PZU Złota Jesień Open-End Pension Fund managed
PZU Antybiotyk IK [PZU allows for integrated management of client experience by PTE PZU (PTE PZU) is one of the largest players on the co-funding for covered medications on prescription purchased in any pharmacy in Poland (including in over 7,000 Antibiotic IK], PZU Cztery Pory partner pharmacies providing cash-free Pharmaceutical Card service) and improvement of the service quality, while also testing pension fund market in Poland. At the end of June 2018, OFE Roku IK [PZU Four Seasons IK] innovative solutions; PZU was the third largest pension fund, both in terms of the PZU Uraz Ortopedyczny arranging for and covering the costs of medical services in the event of accidental orthopedic injury • a tool has been developed further for booking on-line number of members, as well as in terms of net asset value: [PZU Orthopedic Injury] appointments through a direct connection with the • the fund had 2,114 thousand members, i.e. 13.2% of all calendars of cooperating medical centers. During a single participants in open-end pension funds; Under individual protection insurance the following rider is telephone call the client obtains complete information • net assets stood at over PLN 20 billion, thereby offered: about the appointment made: time, place, clinic. In 2018, representing 12.9% of the total asset value of the open- PZU Zdrowie was connected to 62 medical centers located end pension funds operating in Poland. across Poland; Rider Coverage • the insurance offer was extended to include the non-life In H1 2018, the Social Insurance Institution (ZUS) transferred insurance product called PZU Plan for Health providing contributions worth PLN 162 million to OFE PZU, i.e. 1.4% less PZU z Miłości do medical care, rehabilitation, psychological support and assistance in the event of critical illness (infarction, stroke, malignant Zdrowia [PZU out of access to medical care (diagnostic tests and doctor than in the corresponding period of the previous year. neoplasm and non-malignant brain tumor). Love for Health] consultations) in the event of an accident, critical illness, malignant neoplasm and for everyday matters; At the end of June 2018, PZU’s Voluntary Pension Fund ran • the operationalization of this new greenfield medical center more than 66 thousand individual pension security accounts built in Warsaw, as well as work on launching further (IKZEs) in which assets worth more than PLN 100 million were locations. accumulated. Consequently, it retained its position as one of the leaders in the segment of voluntary pension funds. The rate of return generated in H1 2018 was -7.4%.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 44 45 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU Group’s operations
Open-end Pension Funds – percentage of net asset 3.9 Other operating areas PZU Finance AB Ogrodowa-Inwestycje value as at 30 June 2018 (in %) PZU Group’s activity on the debt market is realized through Ogrodowa-Inwestycje Sp. z o.o. (Ogrodowa-Inwestycje) is the PZU Pomoc PZU Finance AB with its registered office in Stockholm owner of the City-Gate office building (located at 58 Ogrodowa PZU Pomoc provides auxiliary services to PZU Group (Sweden). The company’s core business is to raise loan funds Street in Warsaw) and leases office space to external clients
Others 22.2% Nationale-Nederlanden OFE companies, including: through the issue of bonds or other debt instruments and and PZU Group companies. 25.0% • managing the PZU repair network – at the end of H1 2018 provide financing to PZU Group companies. the company cooperated with 910 repair shops; PZU Corporate Member Lmited • organizing motor assistance services for LINK4; PZU Finance AB issued five year Eurobonds worth EUR PZU Corporate Member Limited is a member of Lloyd’s. This Pekao OFE 1.5% • conducting salvage auctions after total losses; 350 million on 16 October 2015. These bonds have been company is handled by Argenta Holdings Limited. This agency Metlife OFE 7.9% • supporting technical claims handling processes in motor assimilated and now form a single series with the tap bonds deals with the ongoing activities of syndicates, invests their Aviva OFE Aviva BZ WBK claims; with a nominal value of EUR 500 million issued by PZU Finance funds and employs underwriters. Aegon OFE 8.6% 21.9% • handling assistance products for PZU and PZU Życie AB (publ) on 3 July 2014. CHAPTER 7.3 DEBT FINANCING
OFE PZU "Złota Jesień" (among others, legal consulting, organization of assistance Grupa Armatura 12.9% services etc.); PZU LAB The PZU Group has held an equity stake in Armatura Kraków Source: KNF, monthly data on the OFE market, data for June 2018 • managing the PZU Assistance in Life Club loyalty program PZU LAB is a company dealing with advisory services S.A. (Armatura Kraków) since October 1999. At present, the – at the end of H1 2018 approx. 1.8 million club members and assistance in implementation of all kinds of solutions mutual fund PZU FIZ AN BIS 2 is the sole owner of Armatura could take advantage of insurance discounts and products improving the security of the strategic corporate clients of PZU Kraków. On 24 April 2018 KNF consented for PTE PZU to take over offered by cooperating companies (rebate programs from and TUW PZUW. the management of Pekao OFE and DFE Pekao. According to partners). Armatura Kraków SA (Armatura Kraków) is the parent KNF’s decision the date for commencing the winding up of The company cooperates with numerous academic centers company of the Armatura Group. The business of the Pekao OFE is 1 August 2018, while this process will end and PZU CO and experienced experts (local and foreign). The company Armatura Group lies outside the domain of financial and the assets of Pekao OFE will be merged with the assets of OFE PZU CO is an auxiliary company for PZU Group companies, constantly seeks new and effective technological solutions insurance services. The group is a leading manufacturer in PZU “Złota Jesień” on 12 October 2018. The winding up of established to provide the following services: printing, IT, Data allowing to mitigate the risks which particularly impact the the sanitary and heating industry in Poland. The companies DFE Pekao has been in progress since 19 May 2018 is slated Center, Contact Center, auxiliary services related to insurance insurance activity. making up the Armatura Group specialize in the manufacture to be completed on 28 September 2018. As a result of this and pension funds, constant intermediation in the conclusion of bathroom and kitchen taps, aluminum central heating operation, OFE PZU will strengthen its position on the market of insurance contracts, financial and investment agreements, The PZU LAB team has developed methods for cooperation radiators, a wide range of valves, ceramic sanitaryware, and its assets under management will grow by more than assistance agreements and HR and payroll-related services. with the existing and prospective clients. First, the engineers showers, shower trays and portable room dividers. 10%. identify critical installation sites, simulate critical events PZU CO is concentrating on developing its operations involving such as fire, flooding or explosion, and determine their Factors, including threats and risks, that will affect the the rendering of intermediation services in the rendering consequences. Then the possible scenarios and the methods pension funds’ operations in H2 2018 of insurance services, information services, contact center of minimizing them are discussed. This approach signifies an The main challenges facing the pension fund market in H2 and mass printing services for PZU Group entities. It also evolution in client relations. PZU ceases to be only a seller of 2018 are the following: participates in projects related to the centralization of the insurance and becomes a risk management advisor. • the economic climate on the capital market and, in operations conducted by the Group. particular on the Warsaw Stock Exchange, affecting the Tower Inwestycje value of assets of the funds and the level of fees collected An Organized Part of the Business (OPB) was spun off from Tower Inwestycje conducts work associated with the office by pension fund companies for management; PZU CO and contributed to PFS held by Bank Pekao in June and commercial investment project located in a prestigious • opportunities arising from the achievement of the 2018 in the framework of the cooperation between PZU and location in Wrocław at 35 Oławska Street (Plac Dominikański) objectives specified in the Capital Accumulation Scheme Bank Pekao. These efforts aim to optimize the transfer agent in a venue occupied for the past several decades by an office and the Responsible Development Strategy the pursuit of services provided to the mutual funds in the PZU Group. As building owned by PZU. This investment is partially intended which will depend on the development of detailed solutions a result of this transaction PZU subscribed for a 33.5% equity for the PZU Group’s needs and partially for lease. and the entry into force of necessary legislative changes; stake in PFS. • active participation in work on the adoption of solutions PZU Finanse enhancing the performance of the third pillar and making PZU Finanse Sp. z o.o. is a service company established for it more attractive, and influencing the need in public the purpose of keeping accounting ledgers for subsidiaries of awareness for accumulating additional savings for future the PZU Group (excluding PZU and PZU Życie). retirement.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 46 47 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e 4. PZU 2020 - more than insurance
Client relationships and knowledge is our main value as defined in the new PZU Strategy, whilst our principal product is expertise in addressing client needs to build a stable future.
In this section: 1. New operating model 2. Strategy operationalization 3. Selected measures of the strategy
49 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU 2020 - more than insurance
On 9 January 2018 the PZU SA Management Board and most innovative institution in the financial industry. This Development of cooperation with banks Supervisory Board adopted PZU’s updated strategy until 2020. approach has defined its operating philosophy under its new The New PZU – More Than Insurance Strategy is altering the strategy. As a result, greater potential than posited to date has operating model of the overall PZU Group, placing emphasis been identified in the utilization of new technology to analyze on new aspects and establishing new initiatives to make PZU and use data. A high capacity for integrated client service one of the most innovative and profitable institutions in the and new opportunities and threats related to regulatory and financial industry in Europe. demographic changes were also identified.
The acquisition of a significant equity stake in Bank Pekao 4.1. New operating model has opened up new opportunities for collaboration. This transaction announced in December 2016 was finalized on The new operating model brings together all of the PZU 7 June 2017. PZU and the Polish Development Fund (PFR) Group’s activities and integrates them in a client-focused acquired a 32.8% equity stake in Bank Pekao. This strategic manner: life insurance, non-life insurance, health insurance, investment has enabled PZU to become the largest financial investments, pensions, health care, banking and assistance group in Poland and Central and Eastern Europe, with two services (SECTION 1 BRIEF DESCRIPTION OF THE PZU banks playing an important role on the domestic financial GROUP). The main vector of change is our new approach to market in its structure. Consequently, PZU has new growth building client relations. The transformation in the direction of opportunities, especially in terms of integrating services an advisory and service company will make it possible to care and focusing on clients at every stage of their personal and for the clients’ future and satisfy their needs comprehensively professional development. Source: PZU data when it comes to life, health and property insurance and savings and finance. This will also contribute to achieving PZU’s philosophy of thinking about clients constitutes a in all venues available to clients. Accurately anticipating the ambitious financial targets and building its position as the departure from the classic model of an insurer’s client relations future, understanding client needs and building ever better rooted solely in sales and after-sales service. PZU’s goal is methods of becoming part of their daily lives are the logical to establish and maintain relations by delivering products grounds underpinning other initiatives in PZU’s new strategy. We are changing PZU – we are becoming a lifetime partner well-matched to clients at the appropriate time and place so Among others, these initiatives include radically simplifying as to ensure at the same time that the product’s attributes our product offering and poising our sales network to offer all (including its price) are aligned to client needs. our products and services, investing in database integration to procure a full picture of our clients, cross selling, offering a loyalty program and reducing the age of our client base.
The new approach will drive the gradual change in the insurer’s model (chiefly involved in the valuation and transfer of risk) toward the model of an advisory and service company (operating on the basis of technological know-how). This will enable clients to optimize their decisions at all stages of their lives. It will ultimately translate into growing trust and loyalty placed in the brand of first choice which PZU will become when it comes to insurance, finance and health services.
The philosophy of how sales networks operate will also change. The PZU Group calls for abandoning “product centricity” in favor of an ecosystem whose overriding objective is to manage client relations skillfully by offering solutions
Source: PZU data
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 50 51 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU 2020 - more than insurance
We are a long-term partner for our clients. The new approach relies on the technological transformation the skill of building long-term relations. Special emphasis will that will affect almost all the Group’s functional areas. At the be placed on analyzing the information the PZU Group has same time, it will form the basis for integrating all the services to grasp and use it better. Accordingly, areas in which tools offered by Group companies. Achieving a high degree of rooted in artificial intelligence, big data and mobile solutions Loan to buy a home quality and number of client interactions calls for creating a will be used have been defined. Education: “How to save”? Home insurance Group life insurance Individual endowment Payment of a childbirth ADD insurance for school Assistance insurance new model in which the core consists of client knowledge and benefit Health products Travel insurance (school trips) Term deposit Riders dedicated to senior Employee Capital Scheme Education: „Diagnostics of citizens Bank account (access via Mutual funds the stage of a child’s Car insurance a mobile application) Remote monitoring of the development” Dowry insurance for children Loyalty program New technologies are changing the insurance industry Payment cards state of health Health product for the entire family STRATEGY OF INNOVATION
UTI IZATION OF BIG DATA DIGITIZATION NE C IENT INTERACTIONS
So histicate pricin metho s Im ementation o ne technolo y Im ementation o ser ices ali ned to client needs More e ecti e insurance fraud etection Auto ation o rocesses Birth Starting Starting Starting Retirement Reachin ne ar et se ents education a job a family Su ort or cross-sellin initiati es Im ementation o self-service Gro th in the e e o client loyalty De e o ment o distri ution channels Insurance Health Investments Retirement Enhance usiness mana ement an prediction Sim i ie sales process
ENHANCING THE We help companies grow by offering them a wide array of products supporting their growth ORGANIZATION’S EFFECTIVENESS
CREATING SCA AB E BUSINESS MODE S
Source: PZU data Package of services Group life insurance supporting operations (e.g. Health products Handling the IPO process accounting services, security When it comes to international expansion PZU is betting on attractive dividend stream. That is why the PZU Management Car fleet insurance Debt financing Company account audits, OSH training) organic growth. The Group’s ambition is to generate 8% of Board has undertaken to uphold the dividend policy adopted Leasing Company property Conducting mergers and Loans and borrowings Export loans insurance acquisitions its total gross written premium on international markets by in 2016 calling for a dividend payout ratio of no less than 50% to startups Private TPL insurance and Financial guarantees FX risk hedge Investments made by the legal protection Mutual insurance 2020 and to be the leader on every market where it operates. of net profit. The ambitious growth targets that have been Witelo fund Motor insurance Lines of credit Asset management services Its approach to acquisitions will be opportunistic. PZU will defined focus on ramping up cost effectiveness and harnessing Trade credit Direct equity investments monitor the market with an eye to attractive acquisition the potential of all operating areas and will lead to rapid (private equity, mezzanine) Commercial credit insurance targets. Insurance companies will be its main targets under growth in net profit demonstrated by its ROE surpassing 22% the condition of satisfying the following criteria: the company (up to 2020). should be in the TOP3 on a given market, it should operate in Central and Eastern Europe and it should generate satisfactory PZU is planning its current and future actions based on targets concerning the level of profitability. PZU also allows responsible management in financial, employee, social, for the acquisition of entities from outside the insurance environmental, human rights and anti-corruption areas. sector (e.g. asset management companies, banks, health care That is why operating processes in every stage of preparing, entities and intermediaries in financial services). distributing and handling products are conducted while taking into account the principles of sustainable development and the Startup Small company Medium-sized Large company International company corporation Unleashing the PZU Group’s full potential aims to use the best practices adopted by the Group. capital entrusted by shareholders as best as possible, in
Insurance Health Investments Retirement a manner that will ensure value growth and sustaining an
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 52 53 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU 2020 - more than insurance
Its responsible approach to business is one of the key pillars 4.2 Strategy operationalization for building long-term and partnership contacts that will be conducive to building mutual understanding and trust. PZU’s ambitions will be achieved through 12 key initiatives underpinning the New PZU. The catalyzers for these activities will be better data utilization, higher cross-selling, digitization Values by which we are guided in our actions of processes and additional interactions with clients.
Strate ic initiati es Ambitions in 2020
Data base merger and creation of a single joint CRM system o the c ients in PZU SA an o the 1 in the PZU Group / full client picture (360 degree view) clients in PZU Życie SA will give marketing consent
Better Better matched price to risk and pricing optimisation utilization of 92% combined ratio 2 (Taryfikacja 3.0) data
6 innovative solutions which at least 100 thousand Implementation of solutions employing artificial intelligence clients of the PZU Group will use
1 m clients acquired for the banks in the PZU Group 1 bn PLN of incremental premium obtained from the bank Development of cooperation with banks channe Cut costs by 100 m PLN
Source: PZU data Simplifying the product offering, and simple language 10 core products in broad distribution
The New PZU entails 4 key business areas whose development ross sellin ro th Conversion of the sales network into multi-product sales network 50% of salespersons sell multiple products in has been defined on the basis of the most forward-looking proprietary networks economic, technological, regulatory and demographic trends.
PZU’s long-term ambitious is to gain a leadership position on 1 bn in revenues of PZU Health Development of sales in PZU Health every one of the markets enumerated below. 12% EBITDA margin
65 bn PLN of third party assets under management 200 m PLN of net profit on third party asset management Development of sales and consolidation in PZU Investments 8 15% share of assets on the Employee Capital Schemes market1
Mar et ro th corre ate to GDP ro th an the increasin a uence o the enera u ic Insurance Ne insurance ro ucts e inno ati e so utions ase on te ematics an rotection a ainst c erris Implementation of a new „moje.pzu.pl” portal 5 m accounts established by clients Ne ro th ossi i ities re ate to the etter usa e o ata in actuaria an tari -re ate rocesses an in Di italization coo eration ith c ients
of processes 10 products available in the direct channel 10 Development of the direct offering 50% market share held by PZU SA and Link4 of Further antici ate conso i ation o the Po ish an in sector non-life insurance sold in the direct channel Ban s Forecaste ro th rate o e osits near t ice as hi h as the ace o GDP ro th Ra i e e o ment o e ectronic an mo i e an in Additional 11 Implementation of a loyalty program at the PZU Group level 3 m participants
Im act e erte Em o ee Ca ita Schemes on Po es’ e e s o sa in s interactions 70% growth of new sales in group insurance to SME Re u ator chan es ro i in c ients a hi her e e o securit an reater trans arenc ith clients clients in PZU Życie In estments Integrated service model for SMEs E ecte conso i ation o the Po ish asset mana ement mar et 12 20% growth in the gross written premium generated by non-life insurance dedicated to the SME segment Risin ercenta e o in estment ro ucts in the mi o Po es’ sa in s as the accumu ate ea th
1 Objective to be confirmed after the enactment of the Act on Employee Capital Schemes Continuation o the ou e i it ace o ro th in the ri ate hea th insurance mar et Source: PZU data Hea th De e o ment o te eme icine an customer ser ice o ortunities throu h remote channe s Greater nee to ro i e care to senior citi ens
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 54 55 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU 2020 - more than insurance
We implement the New PZU Strategy 4.3 Selected measures of the strategy
ROE1
r o u o o r u r r r or o u - o o pr 5 u Modern solution monitoring driver and passenger 06.2018 2020 when driving I p . Clients provide the data PZU does not have. A small device cooperating with a o p o We download the rest of the data from the Everest system pp o - r or r p r o o o . We put some clients on a track for them to calculate the 20.8% >22% Registers the route taken and events r amount on their own If an accident transpires – it automatically transmits Fully mobile solution information o PZU r r while stating the car s location NON-LIFE LIFE INVESTMENTS HEALTH BANKING u .p u.p It evaluates drivers r and how they travel INSURANCE INSURANCE various routes Modern design, intuitive navigation r or o o p u.p PZU Group’s market Number of clients in PZU Assets under Revenues (m PLN)7, 9 Assets (bn PLN) 2, 3, We are migrating 22 million PESEL numbers into share Życie (m) management for third a single database party clients (bn PLN)
03.2018 2020 06.2018 2020 06.2018 2020 06.2018 2020 06.2018 2020 BUSINESS SIZE BUSINESS
34.8% 38.0% 10.9 11.0 30 65 499 1,000 254 >300
r u o o o o pro
Combined ratio 3 Operating margin in Net result on third party EBITDA margin 8 Net financial result group and individually asset management attributed to the PZU continued insurance (m PLN)6, 9 Group (m PLN) 9
06.2018 2020 06.2018 2020 06.2018 2020 06.2018 2020 06.2018 2020
86.8% 92.0% 20.2% >20% 106 200 7.2% 12.0% 597 >900
ro ro A o r o Administrative expense Surplus rate of return on ratio 4 main portfolio above the RFR 10 BUSINESS PROFITABILITY BUSINESS r r o r our pro u o r I r po o our r o r o r - or r o u o P u o u o 06.2018 2020 06.2018 2020 online life insurance policy two insurance options We have trained 198 employees in effective communication 94% of these participants say that this training is useful in 6.5% 6.5% 1.0 p.p. 2.0 p.p. fixed premium and cover for 5 years their day-to-day work We have simplified all communication in the recruiting process option to discontinue at any + o time We have modified our payment summons – 1 o clients Solvency II solvency Number of products per receive the new form of this letter every year no questions about your health 5 The PZU Client Account service has received its first certificate ratio client PZU P Z ro for using Simple Polish
flexible medical care in the ur po case of an accident, illness and for everyday needs 03.2018 2020 06.2018 2020 + I ur r r main insurance policy + at least 1 insurance rider W Ciężkiej Chorobie 227% >200% 1.5 2.0 nearly 2,100 private medical centers in 500 cities GROUP OBJECTIVES L u No o oru
1 Tro o ROE attributable to the parent company 8 2 Net of non-recurring costs; profitability computed using the sum of revenues Direct business 3 generated by branches and earned premium PZU jointly with TUW PZUW and LINK4 9 4 12 month moving average Administrative expenses in PZU and PZU Życie 10 5 The difference between the annual rate of return calculated on the IFRS result Source: PZU data Own funds after subtracting anticipated dividends and asset taxes within 12 months 6 on main portfolio taking into account FX from the own debt issue and the average Consolidated net result of PZU Investments 7 annual WIBOR6M level Annualized revenues of proprietary centers and branches including revenues from PZU Zdrowie and PZU CG
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 56 57 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e 5.
Financial Results
Return on equity (ROE) attributed to the parent company at 20.8%. Banks deliver higher contribution to the PZU Group’s results. Gross written premium up 2.4% y/y.
In this section: 1. Major factors contributing to the consolidated financial result 2. PZU Group’s income 3. PZU Group’s claims paid and technical provisions 4. PZU Group’s acquisition and administrative expenses 5. PZU Group’s asset and liability structure 6. Contribution made by industry segments to the consolidated result
59 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Financial Results
5.1 Major factors contributing to the The inclusion of Pekao into the PZU Group’s structures in Administrative expenses of the banking segment rose by consolidated financial result June 2017 materially affected the comparability of the results. PLN 1,304 million y/y. At the same time, administrative Pekao contributed PLN 1,277 million to the banking segment’s expenses in the insurance activity segments in Poland were In H1 2018, the PZU Group generated a result before tax of operating result in H1 2018, compared to PLN 227 million in PLN 20 million higher than in the corresponding period of PLN 3,147 million compared with PLN 2,156 million in the H1 2017. the previous year, driven mainly by higher personnel costs previous year (up 46.0%). Net profit reached pressured by the clear and continuously increasing signs of PLN 2,358 million, i.e. PLN 653 million more than the result In the individual operating result items, the PZU Group posted: salary pressures on the market; in H1 2017. The net profit attributable to parent company • increase in gross written premium by 2.4% to • higher negative balance of other operating income and shareholders was PLN 1,425 million, compared to PLN 11,881 million following higher sales in motor expenses of PLN 1,286 million. The change resulted among PLN 1,438 million in 2017 (down 0.9%). insurance (result of the upswing in average premium), others from a higher levy on financial institutions and an the execution of several contracts with high unit values increase in Bank Guarantee Fund charges. The PZU Group’s The net result rose 46.6% compared to last year, net of non- and higher sales in foreign companies. After considering liabilities on account of the levy on financial institutions (on recurring events1 The operating profit in H1 2018 was the reinsurers’ share and movement in the provision both the insurance and banking business) in H1 2018 was PLN 3,146, up by PLN 989 million compared to the result in for unearned premiums, the net earned premium was PLN 542 million vs. PLN 293 million in the corresponding H1 2017. PLN 11,054 million and was 6.8% higher than in the period of 2017, while the BFG charges rose from corresponding period of 2017; PLN 53 million to PLN 277 million (in both cases due to the Operating profit was driven in particular by the following • higher net result on investing activity, including an increase consolidation of Pekao). factors: in investment income earned on the banking activity • higher gross written premium in motor insurance (result of following the commencement of consolidation of Pekao SA the upswing in average premium), the execution of several in June 2017 and a lower net result on investing activity 1 January - 30 June 1 January - 30 June 1 January - 30 June contracts with high unit values and higher sales in foreign excluding banking activity. The net result on investing 2018 2017 2016 companies, in particular in the motor insurance group; activity was PLN 5,256 million, up 73.6% compared to Key data from the consolidated profit • higher profitability in the corporate insurance segment, due H1 2017. Income on investing activity, excluding banking and loss account PLN million PLN million PLN million to an increasing earned premium and an increasing loss business, fell mainly due to the worse performance Gross written premiums 11,881 11,606 9,862 ratio in motor insurance, while administrative expenses achieved in listed equities, driven in particular by the remained flat and the acquisition expense ratio improved; deterioration of market conditions on the WSE – the WIG Net earned premium 11,054 10,347 8,986
• increased profitability in group and individually continued index fell by 12.2% in H1 2018 compared to an increase of Net revenues from commissions and fees 1,320 510 273 insurance as a result of an improvement in the loss ratio in 17.9% in the corresponding period of the previous year; Net investment result 5,256 3,027 1,405 protection products compared to last year and a changed • increase in interest expenses to PLN 992 million vs. in the mix of individually continued products with different PLN 420 million in the corresponding period of the previous Net insurance claims and benefits paid (7,345) (7,214) (6,165)
individual provisioning expenses; year, associated in particular with the commencement of Acquisition expenses (1,519) (1,412) (1,252) • higher profitability in the mass insurance segment, mainly consolidation of Pekao and PZU’s PLN 2,250 million issue of Administrative expenses (3,342) (2,036) (1,283) as a result of a higher profitability of the motor insurance subordinated bonds in June 2017; portfolio due to a much better loss ratio in motor own • higher level of claims and benefits paid. They amounted to Interest expenses (992) (420) (346) damage insurance and deterioration in TPL insurance – PLN 7,345 million, up 1.8% compared to the corresponding Other operating income and expenses (1,286) (645) (568) as a result of remeasurement of the provision for claims period of 2017. The increase was associated in particular Operating profit (loss) 3,146 2,157 1,050 regarding pain and suffering caused by the vegetative state with the motor insurance group in the corporate and mass of a relative injured in an accident (Supreme Court ruling); client segments in connection with remeasurement of Share in net profit (loss) of entities 1 (1) (1) • better performance in the banking segment at Alior Bank the provision for claims for general damages for the pain measured by the equity method in connection with the high sales level of credit products caused by the vegetative state of a relative injured in an Profit (loss) before tax 3,147 2,156 1,049 supported by the good business climate and a low interest accident; Income tax (789) (451) (259) rate environment; • increase in acquisition expenses by PLN 107 million driven • lower result on listed equities, in particular due to softer mainly by an increase in direct acquisition expenses in the Net profit (loss) 2,358 1,705 790 conditions on the Warsaw Stock Exchange. mass and corporate client segments, which followed from Net profit (loss) attributable to equity 1,425 1,438 660 the growing portfolio and the change in the product mix; holders of the parent company
1 Non-recurring events include the effect of converting long-term policies into • increase in administrative expenses to PLN 3,342 million yearly renewable term business in type P group insurance, and the result on the from PLN 2,036 million in H1 2017 was associated with sale of PZU Lithuania, non-recurring effect of remeasurement of provisions in non-life insurance for claims for general damages due to vegetative state. the commencement of consolidating Pekao in June 2017.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 60 61 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Financial Results
Operating result of the PZU Group in H1 2018 (PLN million) Gross written premium (external) Insurance segments (PLN millions), local GAAP 1 January - 30 June 1 January - 30 June 1 January - 30 June 2018 2017 2016 2,229 (131) (641) (107) (1,306) TOTAL 11,881 11,606 9,862 810 (572) 707 Total non-life insurance – Poland 6,847 6,596 5,243 3,146 (external gross written premium) 2,157
Mass insurance – Poland 5,327 5,217 4,277
Motor TPL 2,352 2,350 1,691 expenses H12017 H12018 Administrative commission Operatingresult Operatingresult and fee and income Net from Net revenue Interestexpenses andexpenses Motor own damage 1,278 1,240 1,043 Netearned premium Acquisitionexpenses Net result Net investment Net claims and benefit and claims Net Other operating income operating Other
Other products 1,697 1,627 1,543
5.2 PZU Group’s income Net revenues from commissions and fees Corporate insurance – Poland 1,520 1,379 966 Net revenues from commissions and fees in H1 2018 Premiums contributed PLN 1,320 million to the PZU Group’s result, or Motor TPL 385 342 222 In H1 2018, the PZU Group collected gross premiums of were PLN 810 million higher than in the previous year, mainly PLN 11,881 million or 2.4% more than in the corresponding caused by the commencement of Pekao’s consolidation. Motor own damage 422 419 334 period of 2017. The individual segments recorded the Other products 713 618 410 following figures: They included mainly: • sales in the mass client segment higher by PLN 110 million • net revenues from commissions and fees in the banking Total life insurance – Poland 4,133 4,221 3,928 (net of intersegment gross written premium) compared segment of PLN 1,181 million, including mainly: brokers’
to H1 2017, chiefly including motor insurance due to an commissions, revenues and expenses related to the service Group and individually continued insurance – 3,444 3,429 3,390 increase in average premium and agricultural insurance of bank accounts, payment and credit cards, fees charged Poland (mainly of subsidized crops); for intermediation in insurance sales; Individual insurance – Poland 689 792 538 • premium increase in the corporate client segment by • income on OFE Złota Jesień asset management. It was PLN 141 million from the corresponding period of 2017 PLN 64 million (up 14.3% compared to the previous half Total non-life insurance 844 742 650 (net of intersegment gross written premium), mainly in of 2017, because of the higher average net assets of OFE – Ukraine and Baltic States motor insurance due to the higher average premium and PZU); insurance against fire and other damage to property; • revenues and fees received from funds and mutual fund Ukraine non-life insurance 88 96 89 • increase in sales in the group and individually continued companies in the amount of PLN 273 million, or Baltic States non-life insurance 756 646 561 insurance segment – acquisition of more contracts in group PLN 197 million more than in H1 2017, mainly caused by or continued health insurance products; the commencement of Bank Pekao’s consolidation. Total life insurance 57 47 41 • a PLN 103 million drop in premiums in the individual – Ukraine and Baltic States insurance segment compared to the year before, driven mainly by lower payments to accounts in unit-linked Ukraine life insurance 26 19 17 products in the bancassurance channel; Baltic States life insurance 31 28 24 • gross premium written by foreign companies also increased as compared to H1 2017 by PLN 113 million, chiefly in motor insurance in the Baltic States segment.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 62 63 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Financial Results
Investment activity premiums due to business growth and the growing balance in H1 2018 was PLN 542 million compared to 5.4 PZU Group’s acquisition and In 2018, the PZU Group’s investment activity focused on the of reverse repo transactions and term deposits with credit PLN 293 million in the corresponding period of the previous administrative expenses continuation of strategic assumptions, in particular on the institutions executed on the interbank market to enhance year. The increase in the liability was caused by the optimization of profitability of investment operations through the return on investing activity and to adjust the investment commencement of Pekao’s consolidation in June 2017; In H1 2018, acquisition expenses went up PLN 107 million greater diversification of the investment portfolio. portfolios to their benchmarks. The increase in the balance of • costs of amortization of intangible assets identified as compared to the corresponding period of the previous year. the above transactions is partially offset by growing balance a result of the acquisition transaction up by PLN 126 million This increase was driven in particular by an increase in In H1 2018 the net investment result2, including interest of funds presented in liabilities due under transactions (effect of the acquisition of the equity stake in Pekao); direct acquisition expenses in the mass and corporate client expenses, was PLN 4,264 million, compared to on financial instruments that are recognized outside the • increase in the BFG charges from PLN 53 million in H1 2017 segments, which followed from the growing portfolio and the PLN 2,607 million in the corresponding period of 2017 (up investment portfolio. to PLN 277 million in H1 2018 (as a result of the acquisition change in the product mix. by 63.6%). This higher result was driven largely by the of shares in Pekao). commencement of Bank Pekao’s consolidation in June 2017. The Group runs its investment operations in compliance with The Group’s administrative expenses in H1 2018 amounted statutory requirements while maintaining appropriate levels to PLN 3,342 million compared to PLN 2,036 million in the Excluding the contribution of banking activity, the net of safety, liquidity and profitability therefore debt treasury 5.3 PZU Group’s claims paid and technical corresponding period of 2017, i.e. went up 64.1% from investment result after factoring in interest expenses in securities accounted for over 60% of the investment portfolio. provisions the previous year. The increase resulted mainly from the H1 2018 was PLN 468 million and was PLN 619 million lower consolidation of Pekao. Administrative expenses of the than in the previous year. The following factors contributed the The increase in non-treasury debt instruments resulted from Net claims and benefits (including the movement in technical banking segment rose by PLN 1,304 million. At the same time, most to the income: the consistently implemented investment policy aimed at provisions) reached PLN 7,345 million and were 1.8% more administrative expenses in the insurance activity segments in • softer performance on listed equities, driven in particular ensuring greater diversification of the investment portfolio. than in the corresponding period of the previous year. The Poland were PLN 20 million higher than in the previous year, by the deterioration of market conditions on the WSE – the following factors contributed to the increase in the net claims driven mainly by higher personnel costs pressured by the clear WIG index fell by 12.2% in H1 2018 compared to 17.9% and benefits category: and increasing signs of salary pressures on the market. This growth in the corresponding period of the previous year; Structure of the investment portfolio (%) • increase in the value of claims and benefits in the motor effect was partially offset by the continuing cost discipline in • investment income in the portfolio of assets to cover insurance group in the corporate and mass client segments the remaining areas of current and project activity.
investment products down PLN 327 million y/y, even 5.6 5.5 5.4 in connection with remeasurement of the provision though it does not affect the PZU Group’s overall net result; 7.4 9.6 8.8 for claims regarding pain and suffering caused by the 3.6 7.3 5.4 • negative impact exerted by the foreign exchange 6.3 3.0 7.9 vegetative state of a relative injured in an accident; 5.5 PZU Group’s asset and liability 11.6 differences on own debt securities in conjunction with the 9.6 11.7 • larger number of claims in agricultural insurance in the structure depreciation of the PLN versus EUR following appreciation mass client segment due to the numerous losses caused by in the comparable period, partially offset by stronger negative effects of ground frost and torrential rain and hail As at 30 June 2018, the PZU Group’s total assets were performance of investments denominated in EUR; in H1 2018. PLN 321,811 million, up PLN 4,353 million compared to the
• worse performance on interest-bearing financial 63.8 64.9 62.6 end of 2017. instruments driven chiefly by the following: On the other hand, in life insurance this category of net claims ◦◦ losses incurred in the foreign bonds portfolio after yields and benefits fell due to a negative investment result in unit- Assets rose on their base markets; linked products, compared with positive results achieved last As at 30 June 2018, the largest category of the Group’s assets ◦◦ lower results of the HTM bond portfolio, driven by 12.2016 12.2017 06.2018 year and lower client deposits to accounts in individual unit- were loan receivables from clients. They represented 54.0% of maturities of the portion of the portfolio with higher Treasury debt market securities linked products in the bancassurance channel. total assets and amounted to PLN 173,651 million, increasing yields than can currently be achieved on the market. Non-treasury debt market securities by PLN 4,194 million from the end of 2017. Monetary market instruments
Equity instruments – quoted As at the end of June 2018, the value of the PZU Group’s Equity instruments – unquoted The second largest asset category were investments Investment property investment portfolio3 was PLN 50,068 million compared to (investment financial assets, investment property and PLN 46,164 million as at the end of 2017. Growth of the derivatives), which represented 34.2% of the Group’s total investment portfolio was caused by increasing receipts from Result on other operating income and expenses assets and amounted to PLN 110,045 million. The decline in In H1 2018, the balance of other operating income and the balance in H1 2018 as compared to the end of 2017 by 2 Net investment result includes: net investment income, net result on realization of financial instruments and investments, movement in allowances for expected expenses was negative and stood at PLN 1,286 million, 4,707 was related in particular to the banking activity, among credit losses and impairment losses on financial instruments and net movement in compared to the balance in the corresponding period of 2017, others in connection with the PLN 2,074 million dividend fair value of assets and liabilities measured at fair value. 3 The investment portfolio is presented excluding the banking activity and which was also negative at PLN 645 million. The following distribution by Pekao on 20 July 2018. includes financial assets (including investment products net of loan receivables contributed to this result: from clients), investment properties (including the portion presented in the class of assets held for sale), the negative measurement of derivatives and liabilities • levy on financial institutions – the PZU Group’s liability on under repurchase transactions. account of this levy (in both insurance and banking activity)
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 64 65 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Financial Results
The PZU Group’s receivables, including receivables under Equity and liabilities • lower provisions in unit-linked life insurance products due 5.6 Contribution made by the market insurance contracts and current income tax were At the end of H1 2018, consolidated equity hit to the negative result on investment activity; segments to the consolidated result PLN 9,832 million, which represented 3.1% of its assets. For PLN 34,612 million, down from the end of 2017 (7.8% drop). • higher mathematical reserves in continued business the sake of comparison, at the end of 2017 they amounted The decline in consolidated equity affected in particular non- associated with the indexation of sums insured and the The following industry segments were identified in order to to PLN 9,096 million (2.9% of the Group’s assets) and their controlling interests, which fell by PLN 1,629 million reaching higher average age of the insured. facilitate management of the PZU Group: increase was caused mainly by the outstanding transactions PLN 21,332 million driven by the designation of • corporate insurance (non-life insurance) – this segment on financial instruments and security deposits. PLN 2,074 million for a dividend payment by Pekao, of which The balance of other liabilities as at 30 June 2018 was covers a broad scope of property insurance products, PLN 1,659 million was dividend attributable to minority PLN 14,305 million compared to PLN 9,096 million at the liability and motor insurance customized to a client’s needs Non-current assets – in the form of intangible assets, goodwill shareholders, and effects of the application of IFRS 9. Equity end of 2017. The increase was recorded in particular in entailing individual underwriting offered by PZU and TUW and property, plant and equipment – were presented in the attributable to the parent company’s shareholders fell by liabilities on account of outstanding transactions on financial PZUW to large businesses; statement of financial position at PLN 10,240 million. They PLN 1,319 million compared to the previous year – as an instruments and dividend liabilities to shareholders. • mass insurance (non-life insurance) – this segment accounted for 3.2% of the assets. The decline from the end effect of the distribution of the 2017 profit by PZU, including consists of property, accident, liability and motor insurance of 2017 by PLN 320 million resulted from, among others, the allocation of PLN 2,159 million as a dividend and effects of Composition of PZU Group’s equity and liabilities products. PZU and Link4 provide insurance to individuals amortization of intangible assets identified as a result of the the application of IFRS 9. These factors were partially offset (in %) and entities from the SME sector; acquisition of shares in Bank Pekao by PZU and depreciation by the net result attributed to the parent company earned in • life insurance: group and individually insurance – PZU of tangible non-current assets. H1 2018. Życie offers it to employee groups and other formal
13.6 11.8 10.8 groups. Persons under a legal relationship with the 2.9 4.4 As at 30 June 2018, the PZU Group held PLN 11,505 million of The largest item of equity and liabilities at the end of H1 2018 4.0 policyholder (e.g. employer, trade union) enroll in the cash and cash equivalents (3.6% of assets). At yearend 2017, were financial liabilities, at 70.1%. The value of this item insurance agreement and individually continued insurance this value was PLN 8,239 million and the movement occurred reached PLN 225,470 million and included in particular: in which the policyholder acquired the right to individual 38.3 mainly in the cash accumulated by Bank Pekao in connection • liabilities to clients of PLN 197,771 million (predominantly continuation during the group phase. It includes the 62.2 61.2 with payment of the 2017 dividend on 20 July 2018. by virtue of deposits held by Pekao SA and Alior Bank); following insurance types: protection, investment (which
• liabilities under repurchase transactions of 9.7 however are not investment contracts) and health 0.8 PLN 1,552 million in H1 2018 compared to insurance; PZU Group’s asset composition (in %) PLN 1,167 million in 2017; • individual life insurance – PZU Życie provides those 8.5 8.9 33.7 • liabilities on the issue of own debt securities amounting to 0.5 0.6 products to retail clients. The insurance agreement 14.0 14.2 PLN 10,949 million, including: applies to a specific insured who is subject to individual 1.7 2.0 4.1 2.6 2.4 2.9 3.6 4.5 3.1 ◦◦ PLN 5,282 million on bonds, of which EUR 850 million 2016 2017 06.2018 underwriting. These products include protection, are Eurobonds issued via the wholly-owned subsidiary Equity investment (which are not investment contracts) and health PZU Finance AB; Other liabilities insurance; 35.9 53.4 Liabilities to customers - overnight and fixed-term deposits 54.0 ◦◦ PLN 4,452 million on deposit certificates issued by Bank • investments – reporting according to Polish GAAP – the Pekao and Alior Bank; Financial liabilities excluding liability to customers - deposits revenues of the investments segment comprise the ◦◦ PLN 1,215 million on covered bonds issued by Bank Other provisions investments of the PZU Group’s own funds, understood as Pekao. Technical provisions the surplus of investments over technical provisions in the
49.5 • subordinated debt of PLN 5,316 million, including PZU’s PZU Group insurance companies based in Poland (PZU, 36.1 34.2 subordinated bonds issued on 30 June 2017 for the total Cash flow statement Link4 and PZU Życie) plus the surplus of income earned amount of PLN 2.25 billion. At the end of H1 2018, net cash flows totaled PLN 3,213 over the risk-free rate on investments reflecting the value 3.6 3.3 3.2 million, PLN 5,544 million less than in the previous year. This of technical provisions of PZU, LINK4 and PZU Życie in 2016 2017 06.2018 As at 30 June 2018, the amount of technical provisions was decline was recorded in particular in net cash flows from insurance products, i.e. the surplus of investment income Other assets PLN 45,583 million, which accounted for 14.2% of equity and operating activities. of PZU, LINK4 and PZU Życie over the income allocated Cash and cash equivalents liabilities (+ PLN 1,025 million compared to the end of 2017). at transfer prices to insurance segments. Additionally, the Receivables Receivables from customers' loan The movement in this item resulted in particular from: investment segment includes income from other free funds Investments • an increase in the provision for unearned premiums in non- in the PZU Group (including consolidated mutual funds). Non-current assets (intangibles, goodwill, property, plant and equipment) life insurance resulting from expanding insurance sales; • banking segment – a broad range of banking products • remeasurement of provisions, mainly in motor insurance, offered both to corporate and retail clients by Pekao and for claims regarding pain and suffering by the vegetative Alior Bank; state;
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 66 67 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Financial Results
• Baltic States – includes non-life insurance and life insurance • income from investments allocated to this segment with a simultaneous decline in the number of insurance Insurance result in the mass insurance segment products provided in the territories of Lithuania, Latvia and according to transfer prices was up 57.5% to policies; (PLN million) Estonia; PLN 63 million, which was caused in particular by the 4.6% ◦◦ higher sales of insurance against fire and other damage • investment contracts – include PZU Życie products that increase of the EUR exchange rate vs. PLN, compared to to property (+3.8% of gross written premium y/y), do not transfer material insurance risk and do not satisfy a 4.5% depreciation in the corresponding period last year; including PZU DOM household insurance and agricultural the definition of insurance contract. They include some • acquisition expenses in the corporate insurance segment insurance (chiefly subsidized crop insurance) despite the 55 (345) products with a guaranteed rate of return and some (without reinsurance commissions) increased by extensive competition on the market, 468 (58) (8) (18) products in the form of a unit-linked policy; PLN 29 million, or 14.2% as compared to H1 2017, mainly ◦◦ higher gross written premium in the accident and other
• other – include consolidated companies that are not due to higher direct acquisition expenses. This was driven insurance, in particular assistance and illness insurance. 724 818 classified in any of the above segments. mainly by portfolio growth and a change in the sales • higher net insurance claims and benefits by 12.4%, which channel mix (increased percentage of premiums originating coupled with a net earned premium increase of 10.4%, Others Corporate insurance from insurance offered by leasing companies in the translated resulted in the loss ratio increasing by 1.1 p.p. The corporate insurance segment (consisting of PZU and TUW portfolio); compared to H1 2017. This change resulted mainly from: H12017 H12018 Insuranceresult Insuranceresult
PZUW) generated an insurance result of PLN 217 million in H1 • administrative expenses remained at the same level as ◦◦ increase of the loss ratio in the non-motor insurance income Investment Acquisitionexpenses Netearned premium Net claims and benefits and claims Net 2018, i.e. 29.9% more than in the corresponding period of the in H1 last year, which combined with a higher growth group, driven mainly by the declining profitability of the Administrativeexpenses previous year. of net earned premium caused an improvement in the portfolio of insurance against fire and other damage to administrative expense ratio by 1.1 p.p. to 5.5%. property – due to a higher number of losses caused by The following factors had a key impact on this segment’s adverse consequences of ground frost, torrential rain Group and individually continued insurance performance in H1 2018: and hail in comparison to H1 2017; Insurance result in the group and individually continued • a 19.9% increase in net earned premium combined with Insurance result in the corporate insurance segment ◦◦ lower loss ratio of the motor insurance portfolio due to insurance amounted to PLN 704 million and was a 10.1% increase in gross written premium, both in (PLN million) a much better loss ratio in Motor Own Damage PLN 22 million, or 3.2%, higher than in the previous year. comparison to H1 2017. The following movements were insurance and deterioration in motor TPL insurance – as Individual elements of the insurance result were as follows: observed in sales: a result of remeasurement of the provision for claims • gross written premium was PLN 15 million (0.4%) higher ◦◦ higher premiums in motor insurance (+6.3% y/y), both regarding pain and suffering caused by the vegetative than in the corresponding period last year, which resulted 23 (149) fleet insurance and insurance offered through leasing 192 state of a relative injured in an accident (Supreme Court primarily from:
companies, as a consequence of the higher average (29) 13 ruling); ◦◦ acquiring further contracts in group health insurance - premium with a simultaneous decline in the number of • income from investments allocated to the mass insurance products or individually continued products (new clients 217 insurance policies; 167 segment according to transfer prices amounted to in outpatient insurance and sales of different options ◦◦ premium growth in insurance against fire and other PLN 283 million, up 24.1% year on year, which was caused of the medicine product). At the end of June 2018,
damage to property as the offshoot of signing several Others in particular by appreciation of the EUR to PLN exchange PZU Życie had more than 1.6 million in force contracts
high-value agreements; H12017 H12018 rate by 4.6%, compared to depreciation of 4.5% in the of this type. A new rider to continued insurance was
◦◦ higher sales of TPL insurance as a result of signing of Insuranceresult Insuranceresult corresponding period last year; launched under the name “PZU Uraz ortopedyczny Investment income Investment Acquisitionexpenses several high-value contracts and the higher premium Netearned premium • acquisition expenses (without reinsurance commissions) [PZU orthopedic injury]”. In case of an accidental Net claims and benefits and claims Net Administrativeexpenses from the insurance of medical entities in TUW PZUW; reached PLN 905 million, up by 6.8% as compared to orthopedic injury, e.g. fracture, dislocation or sprain, • net claims and benefits surged 26.0% compared to H1 H1 2017, mainly due to the higher direct acquisition insured will have the assistance of a physiotherapist 2017, which, together with a 19.9% increase in net earned Mass insurance expense (the changed in the products and sales channels and an orthopedist. The insured will also be able to premium, means that the loss ratio increase by 3.1 p.p. The mass insurance segment (consisting of PZU, LINK4 and mix and the still growing insurance portfolio); use rehabilitation procedures in private medical centers to 62.2%. The increase was recorded mainly in the motor TUW PZUW) generated an insurance result of PLN 818 million • administrative expenses in this segment totaled across Poland; The insurance garnered excellent TPL insurance group as a result of increasing annuity in H1 2018, i.e. 13.0% more than in the corresponding period PLN 288 million, up PLN 8 million, or 2.9%, from the year response from the clients – three out of four clients benefits, observed increase in the average payment and of the previous year. The following factors primarily had a key before, driven primarily by an increase in personnel costs enrolling in individual continuation selected this rider as remeasurement of the provision for claims regarding pain impact on this segment result in H1 2018: as a response to the clear and increasing signs of salary well; and suffering caused by the vegetative state of a relative • a 10.4% increase in net earned premium combined pressures on the market. This effect was partially offset ◦◦ active up-selling of other riders in individually continued injured in an accident. This effect was partially offset by an with a 2.5% increase in gross written premium, both in by the continuing cost discipline in the remaining areas of insurance products, in particular together with the improved profitability of the portfolio of insurance against comparison to H1 2017. The following movements were current and project activity. offering of the basic agreement in PZU branches and fire and other damage to property, due to a much lower observed in sales: in the same time increase of sums insured during the level of large claims; ◦◦ an increase in gross written premium in motor insurance terms of the agreements; (+1.5%) as an outcome of the higher average premium
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 68 69 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Financial Results
◦◦ at the same time, revenues from group protection • acquisition expenses in the group and individually Individual insurance bancassurance channel (due to lower sales) were offset by products still remained under pressure of increased continued insurance segment in H1 2018 were In 2018, the insurance result in the individual life insurance the increasing costs of sales support and remuneration to departures from groups (work establishments) due to PLN 172 million and increased moderately from the segment was PLN 98 million, or 3.2% more than last year. intermediaries for selling protection products, in the latter the legal reduction of the retirement age in Q4 2017. corresponding period of last year (PLN 5 million, or 3.0%). The main factors affecting the segment’s insurance result are case also in the bancassurance channel. • the investment result consists of income allocated using The factor driving these expenses was the increasing described below: • administrative expenses in H1 2018 rose to PLN 37 million, transfer prices and income on investment products. In remuneration for insurance intermediaries, especially for • decline y/y in gross written premium by PLN 103 million or PLN 7 million compared to last year. This was influenced the group and individually continued insurance segment, selling health products as the portfolio increased, and also (13.0%) down to PLN 689 million as compared to H1 2017 by the strategic investments in the exclusive sales network investment income fell PLN 132 million mainly due to the the cost of communication mailed to clients (mainly offers resulted chiefly from lower contributions to unit-linked aimed at increasing sales in this segment and, to a smaller lower income on unit-linked products as a result of worse of individual continuation riders); accounts in unit-linked products offered jointly with Bank extent, an increasing level of remuneration for the handling conditions on the equity market – the WIG index fell by • after H1 2018 administrative expenses amounted to Millennium. At the same time, positive factors were also at of unit-linked products in the bancassurance channel 12.2% compared to a 17.9% increase in the corresponding PLN 297 million, stabilizing compared to the last year’s play, such as: (growing assets of such products). period of last year. Income allocated according to transfer level. Such a low year-over-year growth (1.7%) was caused ◦◦ constantly rising level of premiums on protection prices is subject to slight fluctuation and its level depends mainly by expenditures related to organizational changes products in endowments and term insurance offered in Another factor contributing to the improvement in the profit largely on the level of technical provisions in protection in sales divisions and an increase in personnel costs caused own channels – the level of sales exceeds the value of margin on the gross written premium was an increased share insurance products. by salary pressures on the market. instances of reaching the endowment age, surrenders, of protection products in revenues, since they generate much • insurance claims and benefits and the movement in other lapses and deaths in the existing portfolio; higher margins. net technical provisions totaled PLN 2,510 million, which After excluding the one-off effect related to conversion of ◦◦ growth of the insured portfolio in protection products in signifies a y/y decline of PLN 138 million, or 5.2%. This long-term contracts into renewable contracts in type P group the bancassurance channel. change was driven by the following factor in particular: insurance, the segment’s insurance result amounted to • the investment result consists of income allocated using Insurance result of the individual insurance segment ◦◦ a decrease in technical provisions in Employee Pension PLN 694 million in H1 2018, compared to PLN 657 million in transfer prices and income on investment products. In the (PLN million) Plans (EPP, a third pillar retirement security product) H1 2017 (up 5.6%). This was driven mainly by the lower than individual insurance segment, it fell PLN 168 million y/y compared to an increase in the previous year, due to last year increase in mathematical provisions in continued mainly due to the lower income on unit-linked products much lower investment results this year, coupled with products as a result of the previous changes in indexation as a result of worse conditions on the equity market –
a stable level of client contributions to and withdrawals principles and the share of “old” and “new” continuation the WIG index fell by 12.2% compared to 17.9% in the (102) 279 2 (7) (1)
from unit-linked insurance accounts; both among the persons joining and remaining in the insured corresponding period of last year. At the same time, the 95 (168) 98 ◦◦ lower than last year increase in mathematical provisions portfolio and also by the lower level of benefits in the segment’s income from the management fee charged on in individually continued products as a result of the protection products portfolio this year. assets accumulated in unit-linked products increased by previous changes in indexation principles and the PLN 4.1 million y/y (following an increase in the assets).
share of “old” and “new” continuation both among the Insurance result of the group and individually Income allocated according to transfer prices is subject to Others
persons joining and remaining in the insured portfolio: continued insurance segment (PLN million) slight fluctuation and its level depends largely on the level H12017 H12018 Insuranceresult Insuranceresult
in the “new” continuation, the unit cost of recognizing of technical provisions in protection insurance products. income Investment Acquisitionexpenses Netearned premium
mathematical provisions for future benefit payments is • net insurance claims and benefits together with the Administrativeexpenses in technical provisions technical in
lower. movement in other net technical provisions were and benefits Claims, change ◦◦ lower level of benefits this year in the protection PLN 571 million, reflecting an decrease in costs by 17 (132) 138 (5) (5) 9 products portfolio; PLN 279 million compared to the corresponding period of ◦◦ these effects have been partially offset by the slower 2017. This was driven mainly by the negative investment Investments 682 704 pace of converting long-term insurance policies into result on most unit-linked product portfolios in this period, The revenues of the Investments segment comprise the yearly-renewable term business in type P group compared with high, positive results achieved last year. investments of the PZU Group’s own funds, understood as insurance exerted an influence on the size of the In the product offered in the Bank Millennium network, it the surplus of investments over technical provisions in the
provisions. As a result of the conversion, provisions were Others additionally resulted from lower client contributions to the Group insurance companies seated in Poland (PZU, LINK4 released for PLN 10 million, some PLN 15 million less H1 2017 H1 2018 accounts. From the operational result point of view, these and PZU Życie) plus the surplus of income earned over the Insurance result Insurance result Investment income
than in the corresponding period of 2017; Acquisition expenses factors are not significant – they are balanced by other risk-free rate on investments reflecting the value of technical Net earned premium Administrative expenses Administrative ◦◦ additionally, the level of medical benefits under health in technical provisions relevant items of the profit and loss account. provisions of PZU, LINK4 and PZU Życie in insurance products, Claims, benefits and change products is increasing following the dynamic growth of • in H1 2018, acquisition expenses in the individual insurance i.e. surplus of investment income of PZU, LINK4 and PZU this portfolio and a unusually severe influenza season at segment stabilized at PLN 65 million. They are just Życie over the income allocated at transfer prices to insurance the end of 2017 and the beginning of 2018; PLN 2 million lower than the year before. Lower segments. commissions on the sale of unit-linked products in the
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 70 71 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Financial Results
Additionally, the investment segment includes income from client loan portfolio in Alior Bank grew 8.3% y/y and deposits ◦◦ management fee up by nearly PLN 3 million as a result • reduced investment income. In H1, the result was other free funds in the PZU Group (including consolidated from non-financial clients rose 15.1%. of the higher average net asset value in OFE. PLN 5 million and was 44.4% lower than in the previous mutual funds). • acquisition and administrative expenses were more than year, primarily as a result of a decline in the value of Profitability of the banks in the PZU Group measured by the PLN 1 million, increasing by 32% from H1 of the previous mutual funds; Income on operating activities in the investments segment net interest margin amounted to 2.8% for Pekao (for the year. This was caused mainly by the costs incurred in • increase in net claims and benefits. They amounted to (external operations only) amounted to PLN -317 million and whole year) and 4.6% for Alior Bank (down 0.2 p.p. y/y). The connection with the acquisition of Pekao funds in 2018 and PLN 434 million and were PLN 68 million higher compared was lower than in the previous year, in particular as a result difference in the level of the indicators results in particular expansion of the IKZE sales network; H1 of the previous year. At the same time, the loss ratio in of worse conditions on the Polish equity market and losses from the structure of the loan receivables portfolio. • administrative expenses hit PLN 17 million, i.e. they were non-life insurance reached 61.0%, 1.3 p.p. lower from the incurred on the Global Macro strategy. down 29.2% from the previous year. The change was previous year. In life insurance, the value of benefits stood The net fee and commission income in the banking activity caused mainly by the costs incurred on the payment of at PLN 20 million, remaining flat from the corresponding Banking segment / Banking activity segment amounted to PLN 1,181 million and was contributions to the Indemnity Fund in the amount of period last year; The banking activity segment consists of the following groups: PLN 775 million higher y/y. The improvement in these PLN 7 million in H1 2017. • higher acquisition expenses. The segment’s expenditures Pekao, from June 2017 (effect of settling the transaction and revenues was driven, in addition to the consolidation of Pekao, for this purpose amounted to PLN 153 million, up by start of consolidation) and Alior Bank. by an increase in commissions for services and, as in the case PLN 23 million (or 17.7%) compared to H1 2017. The of net interest income, increased sales of loans. Operating profit in the pension insurance segment acquisition expense ratio calculated on the basis of net In H1 2018, the banking activity segment generated (PLN million) earned premium dropped by 0.7 p.p. and stood at 21.5%; PLN 1,773 million in operating profit (without amortization The segment’s administrative expenses amounted to • increase in administrative expenses. They amounted to of intangible assets acquired as part of the acquisition PLN 2,540 million and comprised Pekao’s expenses in the PLN 60 million rising by 9.1% from the corresponding transactions of the banks), which represented an increase amount of PLN 1,720 million and Alior Bank’s expenses of period last year. Despite an increase in incurred expenses, of PLN 1,321 million compared to H1 2017. Taking into PLN 820 million. In 2017, Alior Bank recorded an increase a decrease of the administrative expense ratio was 7 (2) consideration the commencement of consolidation of Pekao, in personnel costs, which resulted among others from the 16 recorded, which dropped by 1.0 p.p. and stood at 8.5%.
one of the largest banks in Central and Eastern Europe, all pay pressure and the bank’s strategy focusing on innovative 60 items of the statement of profit or loss and items of the solutions requiring qualified IT staff. 39 statement of financial position for H1 2018 are significantly Insurance result Baltic States (PLN million) Others
higher compared to the previous year. In addition, other contributors to the operating result included Income
other operating income and expenses, where the main H12017 H12018
In H1 2018, Pekao contributed PLN 1,277 million to operating components are the BFG fees (PLN 277 million) and tax from Operatingresult Operatingresult 126 (4) (68) Investment income Investment profit (without amortization of intangible assets acquired other financial institutions (PLN 380 million).
as part of the Pekao acquisition transaction) in the banking (23) activity segment and Alior Bank contributed PLN 496 million. As a result, the Cost/Income ratio DICTIONARY stood at 44% (5) 2 in both banks. On a separate basis, the ratio was 46% for Baltic States 70 The key element of the segment’s income is investment Pekao and 41% for Alior Bank. In H1 2018, the PZU Group’s business in the Baltic states 42 income, which in H1 2018 increased to PLN 4,693 million y/y generated a positive insurance result of PLN 70 million
(up 153.4% y/y). Pension insurance compared to PLN 42 million in the corresponding period of the Others
In H1 2018, the operating profit in the pension insurance previous year. This result was shaped mainly by the following H12017 H12018
Interest income comprises the following components: segment amounted to PLN 60 million, i.e. it increased by factors: Insuranceresult Insuranceresult Investment income Investment Netearned premium interest income, dividend income, trading result and result of 53.8% in comparison to the corresponding period of the • increase in gross written premium. It amounted to Acquisitionexpenses Net claims and benefits and claims Net Administrativeexpenses impairment losses. previous year. The major drivers of the operating result PLN 787 million compared to 673 in the year before. The included the following: premium in non-life insurance increased by In H1 2018, high sales of credit products were recorded in • revenue from commissions and fees, which amounted PLN 111 million y/y (or 17.2%). Such a dynamic growth both Pekao and Alior Bank, among others as a result of good to more than PLN 70 million, i.e. increased by 25.3% was possible among others due to the maintenance of the business conditions and a low interest rate environment. compared with H1 of the previous year. This change was upward movement of motor insurance premiums in the the result of: region, increased sales of property insurance mainly in Alior Bank recorded an increase in net interest income ◦◦ revenues on reimbursements from the Indemnity Fund Lithuania following the intensification of sales efforts, and (interest income minus interest expenses) by 11.7% as in the amount of nearly PLN 10 million; a significant increase in gross written premium in health a consequence of organic growth in the volume of loans ◦◦ an increase in income from the reserve account by insurance in both Latvia and Lithuania. Premiums in life granted to clients coupled with the accompanying increase in PLN 2.6 million; insurance increased by PLN 3 million (or 10.7%); client deposits. As at the end of H1 2018, the size of the net
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 72 73 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Financial Results
Ukraine Insurance result Ukraine (PLN million) • the cost of insurance claims and benefits together with Profitability ratios The Ukraine Segment closed H1 2018 with a positive the movement in other net technical provisions decreased In H1 2018, the return on equity attributable to the parent insurance result of PLN 9 million, compared to PLN 7 million in PLN 31 million y/y to PLN 7 million due to the negative company (PZU) was 20.8%. ROE was 1.2 p.p. lower than in the corresponding period of the previous year. investment income in unit-linked products in this segment the previous year. The profitability ratios achieved in H1 2018 10 (1) 1 (8) in the current period, as compared to the high positive by the PZU Group exceed the levels achieved by the whole The change in the result generated by the segment was performance in the previous year; market. 1 (1) caused by the following factors: • no active contract acquisition was carried out in this
• decline in gross written premium. It amounted to 9 segment and therefore no such costs were incurred; Operational efficiency ratios 7 PLN 114 million, falling by PLN 1 million (or 0.9%) in • administrative expenses were PLN 3 million, remaining flat One of the fundamental measures of operational efficiency comparison to the previous year. The decline in the year on year. and performance of an insurance company is COR – Combined Others premium amount was caused by a 9.3% depreciation of the Ratio – calculated, due to its specific nature, for the non-life H12017 H12018
Ukrainian hryvnia compared to H1 2017. In the functional Insuranceresult Insuranceresult insurance sector (Section II). Investment income Investment Netearned premium currency, the gross written premium increased by 9.1%, Acquisitionexpenses Operating result of the investment contracts segment Net claims and benefits and claims Net including by 1.5% in non-life insurance and by 47.3% in life Administrativeexpenses (PLN million) The PZU Group’s combined ratio (for non-life insurance) has insurance; been maintained in recent years at a level ensuring a high 1 3 • lower income from investing activities. The segment (1) (28) 31 - - profitability of business. In H1 2018, this ratio remained at generated PLN 6 million, which was 14.3% less than in H1 Investment contracts - a low level of 87.2% despite the remeasurement of provisions 2017. This resulted among others from negative foreign In the consolidated financial statements investment contracts for claims for general damages due to vegetative state. exchange differences in the portfolio of USD-denominated are recognized in accordance with the requirements of IFRS 9. investments; • decrease in net claims and benefits. These reached The results of the investment contracts segment are presented PLN 25 million and were 3.8% lower than in the first half according to Polish Accounting Standards, which means that Others of the previous year. In life insurance, the value of benefits they include, among other things, gross written premium, H12017 paid out stood at PLN 8 million, which was the same level claims paid and movement in technical provisions. The above H12018 Operatingresult Operatingresult Investment income Investment Netearned premium
as that in the corresponding period of the previous year. categories are eliminated at the consolidated level. Acquisitionexpenses
The loss ratio calculated on the basis of the net earned Administrativeexpenses
premium in non-life insurance was 38.6%, down 6.4 p.p. In H1 2018, the PZU Group earned PLN 3 million of operating provisions technical other in Net and benefits Net claims, change compared to the first half of the previous year; profit compared to PLN 0 in the previous year on investment • increase in acquisition expenses. These stood at contracts, i.e. PZU Życie’s products which do not generate PLN 40 million compared to PLN 32 million as at the a material insurance risk and which do not meet the definition end of H1 2017. Due to the higher commissions burden, of an insurance contract (such as some products with expenditures for this purpose in life insurance increased a guaranteed rate of return and certain unit-linked products). by PLN 5 million (or 45.5%). The segment’s acquisition This result was driven by the following factors: expense ratio went up compared to the corresponding • gross written premium generated on investment contracts period of the previous year by 3.7 p.p. to 58.0%; after the first two quarters of 2018 decreased by • decrease in administrative expenses. They reached PLN 1 million to PLN 20 million (-4.8%) compared to PLN 11 million, down PLN 1 million compared to the first the corresponding period in 2017. The changes in gross half of the previous year. The administrative expense written premium were caused mainly by modification of the ratio calculated on the basis of the net earned premium IKZE product at the end of 2017, which allowed newly- decreased by 4.4 p.p. and stood at 15.9%. signed contracts to be signed as insurance contracts and transferred to the individual insurance segment; • the result on investing activity in the investment contracts segment fell PLN 28 million vis-à-vis the previous year, mainly as a result of a worse rate of return on equity funds offered as part of individual pension security accounts (IKZEs) and unit-linked funds in the bancassurance channel;
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1 January - 30 1 January - 30 1 January - 30 Operational efficiency ratios June 2018 June 2017 June 2016
Gross claims and benefits ratio (simple) 1. (gross claims and benefits/gross written premium) 63.2% 63.6% 63.2% x 100%
Net claims and benefits ratio (net claims and 2. 66.4% 69.7% 68.6% benefits/net earned premium) x 100%
Operating expense ratio in the insurance 3. segments (insurance activity expenses/net 21.0% 21.1% 22.3% earned premium) x 100%
Acquisition expense ratio in the insurance segments (acquisition expenses/net earned 4. 14.2% 14.0% 14.1% premium) x 100%
Administrative expense ratio in the 5. insurance segments (administrative expenses/ 6.8% 7.1% 8.2% net earned premium) x 100%
Combined ratio in non-life insurance 6. (net claims and benefits + insurance activity 87.2% 87.2% 93.4% expenses) / net earned premium x 100%
Operating profit margin in life insurance 7. 19.2% 18.3% 21.2% (operating profit/gross written premium) x 100%
8. Cost/Income ratio - banking operations 44.2% 52.5% 44.7%
1 January - 30 1 January - 30 1 January - 30 Basic performance ratios of the PZU Group June 2018 June 2017 June 2016
Return on equity (ROE) – attributable to the parent company (annualized net profit/average 20.8% 22.0% 10.7% equity) x 100%
Return on equity (ROE) – consolidated 13.3% 13.1% 10.3% (annualized net profit/average equity) x 100%
Return on assets (ROA) 1.5% 1.6% 1.4% (annualized net profit/average assets) x 100%
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 76 77 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e 6.
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 this section: 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 regarding the organization of the risk management system in The fourth decision-making level pertains to operational that is coherent for the entire PZU Group. The operational insurance sector and banking sector subsidiaries. measures and is divided into three lines of defense: objective of the PZU Group Risk Committee is to coordinate Risk management in the PZU Group aims to do the following: • the first line of defense – entails ongoing risk management and supervise activities related to the PZU Group’s risk • enhance the PZU Group’s value through active and The management boards of PZU Group entities are responsible at the business unit and organizational unit level and management system and processes. deliberate 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 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, 6.3 Risk appetite adequate and effective risk management system. monitoring and reporting and controlling the limits; Risk management in the PZU Group is based on analyzing • the third line of defense – entails internal audit that The risk appetite in the PZU Group has been defined as the risk 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 magnitude of risk undertaken to attain its business objectives, management process. regulated entity is exercised by supervisory boards. PZU management system as well as control activities embedded where its measure is the level of potential financial losses, the designates its representatives to the Supervisory Boards of its in operations. decline in asset value or the growth in the amount of liabilities The main elements of the integrated risk management system subsidiaries, including in particular Alior Bank and Bank Pekao. within one year. are aligned to one another in all of the PZU Group’s insurance The role of the PZU Group Risk Committee is to provide companies. They have been implemented to ensure the support to subsidiaries’ supervisory boards and management Risk appetite defines the maximum level of permissible risk execution of the various companies’ strategic plans and the 6.2 Risk management system boards in implementing an effective risk management system while setting limits and restrictions for the various partial risks overall PZU Group’s business objectives. They 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: Chart of the organizational structure for the risk management system risk, including the level of risk appetite; • organizational structure – comprising a split of duties • processes involving the identification, measurement and and tasks performed by statutory bodies, committees T e S e is B a i assessment, monitoring and controlling, reporting and and individual organizational units and cells in the risk s e ises t e isk management SUPE VISO ess an assesses its a e a BOA D management measures pertaining to various risks; management process; an e e ti eness as a t its e isi n making e s e ine AUDIT • risk management organizational structure in which the • risk management process, including risk identification, in t e C m an ’s B a s an t e OMMITTEE S e is B a es an management boards and supervisory boards of the measurement and assessment, monitoring and control eg ati ns companies and dedicated committees play a crucial role. methods, risk reporting and undertaking management actions. T e Management B a i MANAGEMENT Entities from the other financial market sectors are obligated gani es t e isk management s stem BOA D an ens es its n ti na it t g to apply the appropriate standards for a given sector. The The organizational structure of the risk management system a ing t e St ateg an i ies an s e i ing isk a etite e ining t e isk adopted internal regulations specify among others: that is identical across the PZU Group and the PZU Group’s i e an t e an e in i i a ateg ies isk T e C mmittees i make e isi ns • processes, methods and procedures facilitating risk various insurance entities has four decision-making levels. t e e in i i a isks t t e e e s OMMITTEES e ine t e a etite isk T e measurement and management; C mmittees im ement t e e es an met gies mitigating t e The Asset- • split of duties in the risk management process; The first three entail the following: The is in i i a isks an a e t in i i a Invest ent Invest ent is Lia ility is o ittee of isk imits • scope and conditions and the frequency of risk • the Supervisory Board that supervises the risk management o ittee* o ittee* o ittee PZU Group AL O management reporting. process and assesses its adequacy and effectiveness as part of its decision-making powers defined in a given PZU exercises supervision over the PZU Group’s risk company’s articles of association and the Supervisory Board The second line The first line of defence The third line of defence management system on the basis of cooperation agreements bylaws and through the appointed Audit Committee; of defence entered into with other Group entities and the information • the Management Board that organizes the risk provided thereunder. It manages risk at the PZU Group level management system and ensures that it operates by is ana e ent on an aggregate basis, especially with respect to capital adopting strategies and policies and defining the appetite Or anizational units o pliance Internal audit Safety requirements. for risk, the risk profile and tolerance for individual categories of risk; Specialized units ris Independent audits On- oin ris In addition, the PZU Group has processes to ensure the • Committees, which make decisions to mitigate individual identification easure ent of the ris ana e ent ana e ent and assess ent onitorin syste ele ents effectiveness of risk management at the Group level. The risk risks to a level determined by the risk appetite. The and reportin management rules applicable to the PZU Group’s subsidiaries committees adopt the procedures and methodologies for include recommendations issued by PZU (the parent company) mitigating various risks and they accept limits to mitigate the various types of risk. * At the end of June 2017 the powers of the Credit Risk Committee were split among the Investment Risk Committee and the Investment Committee. The Investment Risk Committee took over the powers to set market risk limits.
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and the level above which remedial actions are taken to curtail responsible for risk, with all actions being coordinated at the 6.4 Risk management process Actuarial risk further risk expansion. PZU Group level. This is the likelihood of a loss or an adverse change in the Two levels are distinguished in the risk management process: value of liabilities under the existing insurance contracts The process of determining the risk appetite and risk limits Risk appetite is determined on an annual basis also in the PZU • PZU Group level – ensuring that the PZU Group attains and insurance guarantee agreements, due to inadequate for each risk category consistent with the Group’s process has Group’s banking sector entities. This process is carried out its business objectives in a safe manner aligned to the assumptions regarding premium pricing and creating technical been implemented in all the insurance companies in the PZU based on the applicable regulatory requirements (including magnitude of the risk incurred. Monitored at this level are provisions. Group. The management board of each company determines those arising from remedial plans) and good practices. This the limits and risks specific to the PZU Group such as: the risk appetite, risk profile and tolerance limits reflecting its process is tailored for both banks, taking into consideration catastrophic risk, financial risk, counterparty risk and risk Risk identification commences with a proposal to start strategic plans and the objectives of the entire PZU Group. the nature and the business and capital structures of both concentration. The PZU Group provides support for the developing an insurance product, buying a financial This approach ensures the adequacy and effectiveness of the these entities. Risk appetite in banking entities is a topic for implementation of an integrated risk management system, instrument, modifying an operating process and also with the risk management system in the PZU Group and prevents the consultation with the PZU Group’s parent company and the including the introduction of compatible mechanisms, moment when some other event occurs that may potentially acceptance of risk levels that could jeopardize the financial subject matter of opinions issued by the PZU Group Risk standards and organization of an efficient operation of lead to the emergence of risk in the Company and it is in stability of individual companies or the entire PZU Group. The Committee with a view to ensuring consistency between the the internal control system (with particular emphasis on play until the time when the related liabilities expire. The determination of the appropriate level of risk in each company activities carried out by the banks and the strategic plans and the compliance function), the risk management system identification of actuarial risk is performed, among others, as is the Management Board’s responsibility, whereas a review of objectives of the PZU Group as a whole as well as ensuring (in particular in the reinsurance area) and the security follows: the risk appetite values is conducted once a year by the unit the effectiveness of the risk management system at the Group management system in the PZU Group, and also monitors • analyzing the general terms and conditions of insurance level. Once agreed, the level of risk appetite is then approved their ongoing application. The PZU Group dedicated with respect to the risk being undertaken and compliance by the banking entities’ supervisory boards. personnel cooperates with the Management Boards of with the generally binding legal regulations; companies and managers of such areas as finance, risk, • analyzing the general / specific terms and conditions of The risk management process consists of the following stages: actuarial services, reinsurance, investments and compliance insurance or other model agreements with respect to the on the basis of pertinent cooperation agreements; actuarial risk accepted on their basis; Identification • the entity level – ensuring that the PZU Group entity attains • recognizing the potential risks related to a given product to Begins with the proposal to commence the creation of an insurance product, acquire a financial instrument, change the operating its business objectives in a safe manner appropriate to fit measure and monitor them at a later time; process, as well upon the occurrence of any other event which potentially results in a risk. The identification process takes the extent of the risk incurred by that entity. Monitored • analyzing the impact exerted by the introduction of new place until the expiry of the liabilities, receivables or activities related to the given risk. The identification of market risk involves at this level are the limits and risk categories specific insurance products on the Company’s capital requirements recognising the actual and potential sources of such risk which are then identified as to their relevance. to the company and also, as part of the integrated risk and risk margin computed using the standard formula; management system, implemented are the mechanisms, • verifying and validating modifications to insurance standards and organization of an efficient operation of products; the internal control system (with particular emphasis on • assessing actuarial risk through the prism of similar existing Risk measurement and assessment the compliance function), the risk management system insurance products; Risk measurement and assessment are performed depending on the characteristics of the given risk type and the level o its (in particular in the reinsurance area) and the security • monitoring current insurance products in the Company’s relevance. The risk assessment is performed by specialised units. In every company, the risk unit is responsible for development of management system. portfolio; risk assessment tools and risk assessment process to the extent which specifies risk appetite, risk profile and risk tolerance levels. • analyzing the policy of underwriting, tariffs, technical provisions and reinsurance and the claims and benefits 6.5 PZU Group’s risk profile handling process. Risk monitoring and control This involves ongoing reviews of any variances from the assumed parameters, namely limits, thresholds, plans, values from the The major risks to which the PZU Group is exposed include the Assessing actuarial risk entails recognizing the degree of the previous period, recommendations and guidelines issued. following: actuarial risk, market risk, credit risk, concentration threat or the group of threats determining the possibility of risk, operational risk and compliance risk. The major risks a loss emerging and analyzing the elements of that risk in associated with the operation of Alior Bank and Bank Pekao a manner enabling one to make a decision to accept that Reporting include the following risks: credit risk, operational risk and risk to be insured and for the Company to incur liability. The Allows efficient risk communication and supports risk management at various decision-making levels. market risk (involving interest rate risk, FX risk and commodity purpose of underwriting is to assess the future loss ratio and price risk). The overall risk of the banking sector entities curtail adverse selection. Assessing actuarial risk also involves (incorporating the share held by the PZU Group) accounts for measures to reinsure the largest risks posing the greatest Management actions approximately 32% of the PZU Group’s overall risk, where the threat. These activities encompass among others risk mitigation, risk transfer, risk avoidance, specifying risk appetite, acceptance of risk largest contribution is in credit risk. tolerance levels, as well as tools which facilitate such activities, i.e. thresholds, reinsurance plans and reviews of underwriting policy.
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The measurement of actuarial risk is performed in particular • adequate tariff policy; The process of market risk identification associated with • diversification of the asset portfolio, in particular having using: • application of the appropriate methodology for computing insurance liabilities commences with the process of developing regard for the category of market risk, the maturities of • analyzing selected ratios; provisions; an insurance product and involves identification of the instruments, the concentration of exposure in a single • scenario method – analyzing the loss of value caused by • relevant underwriting procedure; relationship between the cash flows generated by that entity, geographic concentration; the implemented change in risk factors; • relevant benefits handling procedure; product and the relevant market risk factors. The identified • application of market risk limitations and limits. • factor method – simplified version of the scenario method • decisions and sales plans; market risks are subject to assessment using the criterion of reduced to a single scenario for a single risk factor; • prevention. materiality, i.e. does the materialization of risk entail a loss The application of limits is the primary management tool to • statistical data; capable of affecting its financial condition. maintain a risk position within the acceptable level of risk • exposure and sensitivity measures; Market risk tolerance. The structure of limits for the various categories • expert knowledge of the company’s employees. JThis is the risk of a loss or an adverse change in the financial Market risk is measured using the following risk measures: of market risk and also for the various organizational units is situation resulting, directly or indirectly, from fluctuations in • VaR, value at risk: a measure of risk quantifying the established by dedicated committees in such a manner that Monitoring and controlling actuarial risk involves the regular the level and in the volatility of market prices of assets, credit potential economic loss that will not be exceeded within the limits are consistent with risk tolerance. analysis of the level of risk and determining the degree of spread, as well as value of liabilities and financial instruments. a period of one year under normal conditions, with a utilization of the established borderline values of risk tolerance probability of 99.5%; Credit and concentration risk and the limits set forth in the Risk Management Strategy in The process of managing the credit spread risk and • Solvency capital requirement standard formula; Credit risk is the risk of a loss or an unfavorable change the PZU Group. concentration risk has a different set of traits from the • exposure and sensitivity measures; in the financial standing resulting from fluctuations in the process of managing the other sub-categories of market • cumulative monthly loss. trustworthiness and creditworthiness of the issuers of Reporting aims to engage in effective communication risk and has been described in a subsequent section (Credit securities, counterparties and all debtors, materializing by the regarding actuarial risk and supports management of actuarial and concentration risk) along with the process for managing In the case of banking entities suitable measures are counterparty’s default on a liability or an increase in credit risk at various decision-making levels from an employee to counterparty insolvency risk. employed in accordance with the regulations applicable to this spread. The following risk categories are distinguished in the supervisory board. The frequency of each report and the sector and best market practices. terms of credit risk: scope of information provided are tailored to the information The market risk in the PZU Group originates from three major • credit spread risk; needs of each decision-making level. sources: When measuring market risk, the following stages, in • counterparty default risk; • operations associated with asset and liability matching particular, are distinguished: • credit risk in financial insurance. The management actions contemplated in the actuarial risk (ALM portfolio); • collecting information regarding assets and liabilities management process are performed in particular by doing the • operations associated with active allocation, i.e. designating generating market risk; Concentration risk is the possibility of incurring a loss following: the optimum medium-term asset structure (AA portfolios); • calculating the value of risk. stemming from the failure to diversify an asset portfolio or • defining the level of tolerance for actuarial risk and • banking operations – in conjunction with them the PZU from large exposure to the risk of default by a single issuer of monitoring it; Group has materially increased its exposure to credit risk The measurement of risk quantified with the VaR measure is securities or a group of related issuers. • business decisions and sales plans; and interest rate risk. accomplished by using a partial internal model. • calculating and monitoring the adequacy of technical The credit risk and concentration risk management process provisions; A number of documents approved by supervisory boards, Monitoring and control of market risk involves an analysis of consists of the following stages: • tariff strategy and monitoring current estimates and management boards and dedicated committees govern the level of risk and of the utilization of the designated limits. • identification; assessing the adequacy of the premium; investment activity in the PZU Group’s companies. • measurement and assessment; • process of assessment, valuation and acceptance of Reporting involves communicating to the various decision- • monitoring and control; actuarial risk; Market risk identification involves recognizing the actual and making levels information concerning the level of market risk • reporting; • application of tools to mitigate actuarial risk, including in potential sources of this risk. The process of identifying market and the results of monitoring and controlling it. The frequency • management actions. particular reinsurance and prevention. risk associated with assets commences at the time of making of each report and the scope of information provided therein a decision to start entering into transactions on a given type of are tailored to the information needs at each decision-making Credit risk and concentration risk are identified at the stage Moreover, to mitigate the actuarial risk inherent in current financial instruments. Units that make a decision to start level. of making a decision on an investment in a new type of operations the following actions in particular are undertaken: entering into transactions on a given type of financial financial instrument or on accepting credit exposure to a new • the scopes of liability are defined in the general / specific instruments draw up a description of the instrument Management actions in respect of market risk involve in entity. Such identification involves an analysis of whether the terms and conditions of insurance or other model containing, in particular, a description of the risk factors. They particular: contemplated investment entails credit risk or concentration agreements in financial insurance; convey this description to the unit responsible for risk that • execution of transactions serving the purpose of mitigation risk, what its level depends on and what its volatility over • the exclusions of liability are defined in the general / identifies and assesses market risk on that basis. of market risk, i.e. selling a financial instrument, closing time is. Both actual and potential sources of credit risk and specific terms and conditions of insurance or other model a position on a derivative, purchasing a derivative to hedge concentration risk should be identified. agreements in financial insurance; a position; • reinsurance actions;
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Risk assessment consists of estimating the probability of • execution of transactions serving the purpose of mitigation • scenario analyses. risk management activities which are the responsibility of realization of a specific risk and estimating the potential of credit risk, i.e. selling a financial instrument, closing Operational risk is assessed and measured by: the heads of organizational units or cells in the foregoing impact of its realization on the Company’s financial standing. a derivative, purchasing a hedging derivative, restructuring • calculating the effects of the occurrence of operational risk companies. Compliance risk is identified and assessed for a debt; incidents; each internal process at PZU and PZU Życie, in line with Credit risk is measured using: • reinsurance of the financial insurance portfolio. • estimating the effects of potential operational risk incidents the demarcation of reporting responsibilities. Moreover, the • measures of exposure (gross and net credit exposure and that may occur in the business. Compliance Department identifies compliance risk on the basis maturity-weighted net credit exposure); The structure of credit risk limits and concentration risk limits of information obtained from the legislative process, from • standard formula. for each issuer is established by a dedicated committee Monitoring and control of operational risk is performed mainly notifications to the register of conflicts of interest, gifts and in such a manner that the limits are consistent with the through an established system of operational risk indicators irregularities, and from inquiries received by the Department. Concentration risk for a single entity is calculated using the adopted risk tolerance and in such a manner that they enable enabling assessment of changes in the level of operational risk standard formula. to minimize the risk of ‘infection’ between concentrated over time and assessment of factors that affect the level of The systemic activities include, in particular: exposures. this risk in the business. • development and implementation of systemic assumptions In the case of banking entities suitable measures are and internal regulations consistent with those assumptions; employed in accordance with the regulations applicable to this In banking activity the provision of credit products is Reporting involves communicating the level of operational risk • recommending to other PZU Group entities (save for the sector and best market practices. accomplished in accordance with loan granting methodologies and the effects of monitoring and control to various decision- banking entities) solutions for the application of appropriate for a given client segment and type of product. making levels. The frequency of each report and the scope of a consistent compliance function and a systemic approach A measure of total concentration risk is the sum of The assessment of a client’s creditworthiness preceding information provided therein are tailored to the information to compliance risk management; concentration risks for all entities treated separately. In the a decision on granting a credit product to the client is needs at each decision-making level. • monitoring of the compliance risk management process, case of related parties, concentration risk is calculated for all performed using a system devised to support the credit including in particular: performing compliance risk analyses, related parties jointly. process: a scoring or rating system, external information Management actions involving reactions to any identified and reviewing the degree of implementation of guidelines (for instance, CBD DZ, CBD BR, BIK and BIG databases) and assessed operational risks involve, in particular: provided by external entities in respect of compliance risk Monitoring and control of credit risk and concentration risk banks’ internal databases. The granting of credit products • risk mitigation by taking actions aimed at minimizing risks, management; involves an analysis of the current risk level, assessment of is performed in accordance with the binding operating for instance by strengthening the internal control system; • consulting on and issuing interpretations and guidelines for creditworthiness and calculation of the degree of utilization procedures whose purpose is to indicate the proper activities • risk transfer – in particular by entering into insurance the application of the adopted standards of conduct and of existing limits. Such monitoring is performed, without to be carried out in the credit process, the units responsible agreements; compliance risk management; limitation, on a daily and monthly basis. for those activities and the tools to be applied. Credit scoring • risk avoidance by refraining from undertaking or • planning and delivery of training and internal is a tool to support the decision making process regarding withdrawing from a particular type of business in cases communication in the field of compliance; The following are subject to monitoring: loans for retail clients and micro-enterprises, while credit where too high a level of operational risk is ascertained • preparation of compliance risk reports and information. • exposures to financial insurance; rating has the same role in the segment of small, medium- and where the costs involved in risk mitigation are • exposures to reinsurance; sized and large enterprises. unreasonable; In turn, activities related to ongoing risk management, include • exposure limits and VaR limits. • risk acceptance – approval of consequences of a possible in particular: To minimize credit risk, security interests are established in realization of operational risk unless they threaten to • identification and evaluation of compliance risk in the Reporting involves communicating the levels of credit risk and line with the level of exposure to credit risk and in accordance exceed the operational risk tolerance level. supervised area; concentration risk and the effects of monitoring and control to with the client’s ability to provide the required collateral. • measurement of compliance risk; various decision-making levels. The frequency of each report The establishment of a security interest does not waive the Compliance risk • determining the instruments to provide protection and limit and the scope of information provided therein are tailored to requirement to examine the client’s creditworthiness. Compliance risk is the risk that PZU Group entities or persons the number and scale of irregularities; the information needs at each decision-making level. related to PZU Group entities may fail to adhere to or violate • reporting any threats and events in the compliance risk Operational risk the applicable provisions of law, internal regulations or area to the Compliance Department; Management actions in respect of credit risk and concentration Operational risk is the risk of suffering a loss resulting from standards of conduct, including ethical standards, adopted • taking mitigation activities; risk involve in particular: improper or erroneous internal processes, human activities, by PZU Group entities, which will or may result in the PZU • ongoing monitoring of compliance risk. • establishment of limits on exposure to a single entity, system failures or external events. Group or persons acting on its behalf suffering legal sanctions, a group of entities, sectors or states; financial losses or a loss of reputation or trustworthiness. Moreover, the Compliance Department at the PZU level makes • diversification of the portfolio of assets and financial Operational risk is identified in particular by: efforts aimed at ensuring consistent and uniform standards insurance, especially with regard to state, sector; • accumulation and analysis of information on operational The compliance risk management process at the PZU and of compliance solutions in all PZU Group entities (save for the • acceptance of collateral; risk incidents; PZU Życie level covers both systemic activities carried out banking entities) and monitors compliance risk throughout • self-assessment of operational risk; by the Compliance Department and ongoing compliance the PZU Group. PZU Group entities have compliance systems aligned to the standards established by PZU.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 86 87 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Risk management
The provision of full information on compliance risk in Group Compliance risk is assessed and measured by calculating the As part of efforts aimed at reducing compliance risk at system 6.6 Reinsurance operations entities is the responsibility of their compliance units. These effects of risk materialization of the following types: level and day-to-day level, the following risk mitigation actions units are required to assess and measure compliance risk and • financial, resulting, without limitation, from administrative are undertaken: Reinsurance protection in the PZU Group secures insurance take appropriate remedial actions aimed at mitigating the penalties, court judgments, decisions issued by UOKiK, • continuous implementation of an effective compliance activity, limiting the consequences of the occurrence of likelihood of realization of this risk. contractual penalties and damages; function as a key function in the management system of catastrophic phenomena that could adversely affect the • intangible, pertaining to a loss of reputation, including PZU Group entities; financial standing of insurance undertakings. This task was On an ongoing basis, PZU Group entities provide information damage to the PZU Group’s image and brand. • participation in consultations with legislative and regulatory accomplished through obligatory reinsurance treaties in on compliance risk to the Compliance Department at PZU and authorities (supervised entities within the PZU Group) conjunction with facultative reinsurance. PZU Życie. In turn, the tasks of the Compliance Department Compliance risk is monitored, in particular, through: at the stage of development of the regulations (social include the following: • analysis of reports obtained from the heads of consultations); Reinsurance treaties in PZU • analysis of monthly and quarterly reports received from organizational units and cells; • delegating representatives of the PZU Group’s supervised On the base of the reinsurance treaties it has entered compliance units of each member of the Group; • monitoring of regulatory requirements and adaptation of entities to participate in the work of various commissions of into PZU limits its risk related to catastrophic losses (e.g. • assessment of the impact of compliance risk on the PZU the business to the changing legal environment of PZU regulatory authorities; floods, cyclones) among others through a catastrophic Group as a whole; Group entities; • execution of implementation projects for new regulations; non-proportional excess of loss treaty and related to the • analysis of the implementation of recommendations issued • participation in legislative work aimed at amending the • training of staff in PZU Group entities in new regulations, consequences of large single losses under non-proportional to PZU Group entities (save for the banking entities) existing laws of general application; standards of conduct and recommended management reinsurance treaties to protect its portfolios of property, pertaining to the fulfillment of the compliance function; • performing diverse activities in industry organizations; actions; technical, marine, air, third party liability and third party • provision of support to compliance units in various PZU • coordination of external control processes; • issuing opinions on internal regulations of PZU Group liability motor insurance. PZU’s risk is also limited by reinsuring Group entities in assessing their own compliance risk; • coordination of the fulfillment of reporting duties imposed entities and recommending possible amendments to the financial insurance portfolio. • preparation of reports for the PZU Management Board and by the stock exchange (in respect of PZU) and by statute; ensure compliance with the applicable laws and accepted Supervisory Board. • increasing the level of knowledge among PZU Group staff standards of conduct; in the field of competition law and consumer protection, • verifying procedures and processes in the context of Reinsurance premium under obligatory treaties in PZU Compliance risk includes, in particular, the risk that the tailored to the specific business areas; their compliance with the applicable laws and accepted according to the Standard & Poor’s / AM Best rating operations performed by PZU Group entities will be out of line • monitoring of anti-monopoly jurisprudence and proceedings standards of conduct; with the changing legal environment. This risk may materialize conducted by the President of UOKiK; • anticipating adjustment of documentation to upcoming
as a result of the absence of clear and unambiguous laws • analysis of the complaints KNF forwards to PZU and PZU changes in legal requirements; 48% AA or their non-existence manifesting itself in the form of ‘legal Życie in matters related to the protection of clients; • systemic supervision exercised by PZU over the execution loopholes’. This may cause irregularities in the PZU Group’s • reviews of the implementation of recommendations issued of the compliance function in PZU Group entities. business, which may then lead to an increase in costs (for by the PZU Group’s compliance unit; instance, due to the imposition of financial penalties) and an • ensuring a consistent implementation of the compliance In H1 2018, partly in response to a significant ongoing increase in the level of reputation risk, thus in a drop of the function within the PZU Group. increase in the volume of regulatory requirements, including Group’s trustworthiness on the market (resulting in a possible supervisory recommendations concerning insurance products, financial loss). Management actions in the area of response to compliance the development of the product compliance function was 52% A risk include in particular: continued to support business operations to manage Due to the broad spectrum of the PZU Group’s business, • acceptance of risks arising, without limitation, from legal compliance risk in insurance products effectively. reputation risk is also affected by the risk of litigation whose and regulatory changes; Source: PZU own work value varies, which is predominantly inherent in the Group’s • mitigation of risks, including by: adjustment of procedures insurance entities. and processes to changing regulatory requirements, evaluation and design of internal regulations to suit The identification and assessment of compliance risk in the compliance needs, participation in the process of agreeing Munich Re, Hannover Re, VIG Re, Scor and Gen Re are among Group’s entities is performed for each internal process of these on marketing activities; the major partners extending obligatory reinsurance cover entities by the heads of organizational units, in accordance • avoidance of risks by preventing any involvement in to PZU in 2018. PZU’s reinsurance partners have high S&P with the allocation of responsibility for reporting. Moreover, activities that are out of compliance with the applicable ratings. That evidences the reinsurer’s robust financial position compliance units in PZU Group entities identify compliance regulatory requirements or good market practices or and affords the Company security. risk on the basis of information obtained from notifications to activities that may have an unfavorable impact on the the register of conflicts of interest, gifts and irregularities, and entity’s image. from inquiries sent to them.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 88 89 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Risk management
PZU’s operations in inward reinsurance involves the PZU appropriate obligatory treaty. Reinsurance cover is provided Council of 26 June 2013 on prudential requirements for credit Group’s other insurance companies. The greater exposure to for the most part by PZU, which transfers a portion of the institutions and investment firms (CRR Regulation) and also protection of the Baltic companies, Link4 and TUW PZUW is accepted risk outside the Group. the various types of risk identified in the Internal Capital causing the gross written premium by virtue thereof to rise. Adequacy Assessment Process (ICAAP).
In addition, PZU generates gross written premium on inward 6.7 Capital management reinsurance under its operations on the domestic and international market, mostly through facultative reinsurance. The PZU Group endeavors to manage capital effectively Capital adequacy and maximize the rate of return on equity for the parent ratio Q1 2018 2017 Reinsurance treaties in PZU Życie company’s shareholders, in particular by maintaining the level Solvency II Under the outward reinsurance treaty entered into by PZU of security and retaining capital resources for strategic growth Życie, the PZU Życie portfolio is protected against the objectives through acquisitions. PZU Group* 227.2% 207.5%
accumulation of risk and it has protection for individual policies PZU* 295.2% 280.3% with higher sums insured. On 3 October 2016 the PZU Supervisory Board adopted PZU Życie* 467.0% 436.9% a resolution to approve the PZU Group’s Capital and Dividend QBE, Mapfre and Nacional De Reaseguros are the major Policy for 2016 - 2020. The introduction of this Policy stems CRR
partners that extend reinsurance protection to PZU Życie. Its from the implementation, as of 1 January 2016, of Directive Pekao Group – total 17.1% 17.1% reinsurance partners have high S&P ratings. That evidences 2009/138/EC of the European Parliament and of the Council capital adequacy ratio the reinsurer’s robust financial position and affords the of 25 November 2009 on the taking-up and pursuit of the Tier 1 16.0% 16.1% Company security. business of insurance and reinsurance (Solvency II), as Alior Bank Group – amended, the Insurance and Reinsurance Activity Act of total Tier 1 capital 15.4% 15.2% 11 September 2015 and the expiration of the PZU Group’s adequacy ratio Reinsurance premium under obligatory treaties in PZU Capital and Dividend Policy for 2013 - 2015 updated in May Tier 1 12.1% 12.1% Życie according to the Standard & Poor’s rating 2014.
*unaudited data
The capital management policy rests on the following Source: PZU, Pekao CG and Alior CG Bank financial statements principles: 100% A • 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
Source: PZU own work Policy.
As at the end of Q1 2018, the estimated solvency ratio Reinsurance treaties in the PZU Group’s international (calculated according to the standard Solvency II equation) companies, LINK4 and TUW PZUW was 227.2% and remained above the average solvency ratio The PZU Group’s other insurance companies, i.e. Lietuvos for European insurance groups. Draudimas, Lietuvos Draudimas Branch in Estonia, AAS Balta, PZU Ukraine, LINK4 and TUW PZUW have reinsurance cover In Bank Pekao and Alior Bank, the capital adequacy ratio and aligned to the profile of their operations and their financial the Tier 1 ratio were computed on the basis of Regulation standing. Every material insurance portfolio is secured with the (EU) No 575/2013 of the European Parliament and of the
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 90 91 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e 7.
PZU on the capital and debt markets
PZU was one of the 5 most liquid companies on WSE’s main market in H1 2018 representing 8.1% of trading volume. High liquidity also translates into a low spread between the buy and sell price of 7 basis points compared with a mean of 15 basis points for the twenty most heavily traded companies.
In this section: 1. PZU’s share price 2. Banking sector 3. Debt financing 4. Distribution of the 2017 profit 5. Rating 6. Calendar of major corporate events in 2018
93 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU on the capital and debt markets
7.1 PZU’s share price The divergence between the central bank policies pursued PZU’s growth rate (%) and trading volume versus WIG and WIG20 by the FED and ECB was a material factor underpinning the 120,00%+20% 55,000,000 000 000 PZU made its debut on the Warsaw Stock Exchange (WSE) strengthening of the US dollar and the upswing in the yields 44,500,000 500 000 on 12 May 2010. Since its floatation it has been included in of US bonds. Concerns related to economic growth and the 110,00%+10% 44,000,000 000 000 WSE’s most important index, namely WIG20 (calculated on entrenchment of low inflation in the euro area magnified this 33,500,000 500 000 the basis of the portfolio value of the 20 largest and most trend. Against this background, the US economy showed signs 100,00%0% 33,000,000 000 000 1 heavily traded companies on WSE’s Main Market) . PZU also of a stronger recovery, justifying the continuing interest rate 22,500,000 500 000 PLN 44.59 belongs to the following indices: WIG, WIG30, WIG-Poland, hikes. -90,00%10% 22,000,000 000 000
WIGdiv, WIG20TR and MSCI Poland as well as the sustainable 11,500,000 500 000 development RESPECT Index (since 2012). The strong appreciation of the US dollar translated into -80,00%20% 11,000,000 000 000 rising US indices at the expense of capital evaporating from PLN 38.98 500500,000 000 The Polish market and many other emerging markets were emerging markets, among others. The escalation of the 70,00% 00 Q3 2017 Q4 2017 Q1 2018 Q2 2018 under pressure from global factors in H1 2018. The conduct trade conflicts between the US and China and the US and Turnover exhibited by the central banks of key importance to the global the European Union and the disquieting news related to the Turnover (PZU) PZU WIG WIG20 economy continued to be at the forefront. The US Federal political crisis in Italy and Spain also contributed to the falling Source: www.infostrefa.com Reserve (FED) raised interest rates by 25 basis points to 1.75- sentiment toward higher risk assets. 2.0% on 13 June 2018, while announcing another four rate hikes (versus the three previously announced). This was the The WIG20 index (denominated in PLN) behaved much worse TFIs on the domestic market exceeded PLN 1 billion. Cash and PZU’s shares traded in a price range of PLN 36.3 – PLN 47.3 in second rate hike in 2018 and the seventh one since the end in H1 2018 compared to emerging markets and developing money funds were the only ones to post a positive net balance H1 2018 (according to closing prices). The standard deviation of 2015 (i.e. the beginning of the process of raising interest markets alike. On top of the significant weakening of the of nearly PLN 12 billion. The other asset classes posted for PZU’s shares in H1 2018 was 19.2%, i.e. 1.5 percentage rates after the financial crisis). At the same time, the FED took Polish zloty against the US dollar, one of the factors that a negative balance. Equity funds sustained the greatest points more than in the corresponding period of 2017. measures to reduce its balance sheet, thereby compelling adversely affected the Polish equity market was the shift decline (down PLN 4 billion), followed by private equity funds Compared to the broad WIG market, PZU’s systematic risk investors to lower their exposure to riskier assets. The announced by the FTSE index agency concerning Poland’s (down nearly PLN 4 billion) and mixed funds (down by more expressed by the beta coefficient (PZU’s share price versus the European Central Bank (ECB) left interest rates unchanged, classification as a developed market. than PLN 1 billion) (more in SECTION 3.5 MUTUAL FUNDS WIG index for daily changes) was 1.28 or 0.17 higher in H1 while merely announcing that it would start to limit its asset (TFI PZU)). 2018 than recorded in H1 2017. purchases. The high level of volatility that emerged on the financial markets in early February 2018 contributed to deteriorating As at the end of H1 2018, the large cap WIG20 index had Market multiples sentiment on the Polish market, too. In H1 2018, according retreated by 7.1% y/y, while the broad WIG index fell by 8.3% At the end of June 2018 PZU’s P/BV ratio was 2.5x. In the to the estimates of the Analizy Online service, the balance y/y, while they had fallen by 13.2% and 12.2%, respectfully corresponding period the P/BV ratio for the banking industry
1 WIG20 is a price index, i.e. it is calculated only by using the prices of the of payments to and withdrawals from retail funds offered by since the outset of 2018. Against this backdrop, PZU behaved (the most suitable peer group on the WSE for PZU) was transactions related to it, without incorporating dividend income. relatively better than the market in H1 2018 as it lost 7.5% 0.84x. Its above average ROE of 20.8% justifies such a large (+5.7 percentage points better than the WIG20 benchmark disproporation. index). WIG20 versus the MSCI EM and DM and S&P500 market indices
Capital market ratios 06.2018 06.2017 06.2016 06.2015 06.2014 +30% P/BV 2.5x 2.9x 2.1x 3.2x 3.2x Share price / book value per share +20%
BVPS (PLN) 15.4 15.2 13.6 13.7 13.8 + 12% Book value per share +10% + 9% P/E* + 5% 11.7x 14.2x 14.7x 14.5x 11.5x Share price / net earnings per share 0% EPS (PLN)
-7% Net profit (loss) / number of shares 1.7 1.7 0.8 1.5 2.0 -10% outstanding Q3 2017 Q4 2017 Q1 2018 Q2 2018
WIG20 MSCI EM ($) S&P500 ($) MSCI DM ($) *annualized Source: www.infostrefa.com, www.msci.com Source: www.infostrefa.com, PZU data
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 94 95 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU on the capital and debt markets
Trading liquidity for the twenty most heavily traded companies was 15 basis 7.2 Banking sector The banks forming part of the PZU Group (Alior Bank and PZU’s shares were highly liquid in H1 2018. PZU accounted for points). PZU’s market value at the end of June 2018 was Pekao) were responsible for more than 12.5% of the trading 8.1% of WSE’s overall trading volume, while its average buy/ PLN 33.7 billion (down 12.6% y/y). WSE-listed banks volume on WSE’s main market in H1 2018. Alior Bank’s share sell spread for shares was a mere 7 basis points (the mean In H1 2018 the WIG Banks index was in a downward price at the end of June 2018 was PLN 66.9, i.e. it climbed trend, following the downturn in investment sentiment on 8.3% y/y. Similarly, Bank Pekao posted a loss of 9.4%, falling Number of PZU transactions* / PZU’s PLN volume liquidity* / PZU’s Capitalization of the Warsaw Stock global markets (SECTION 7.1 PZU’S SHARE PRICE) and the to PLN 113.0. PZU’s Trading volume* capitalization Exchange appearance of adverse local factors. At the end of June 2018, the WIG Banks index was 7,129 points, signifying a decline of The correlation between the WIG Banks index and the WIG20 0.6% y/y. The P/BV and P/E ratios for the WIG-Banks index index at the end of June 2018 was 90% (without changes were 0.84 and 10.0, respectfully. y/y). Beta (versus WIG20) was 0.93, i.e. a decline of 0.22 y/y. 1,2001 200 600,000600 000 50 50 1,380 1,0001 000 500,000500 000 1,253 1,229 40 40 Despite Poland’s continued, highly robust economic standing 1,083 1,116 800 400,000400 000 in H1 2018, investors discounted the reports published on 7.3 Debt financing 30 30 NBP’s ever more distant interest rate hikes, i.e. that there 600 300,000300 000 Volume (PLN thous.)Volume(PLN Market cap (PLN bn) (PLN cap Market
Turover value (PLN bn) (PLN value Turover 20 20 will not be any hikes until mid 2019 or even 2020 if the PZU 400 200,000200 000 low inflation scenario prevails. H1 2018 was also a period PZU bonds: PLPZU0000037 for PLN 2.25 billion 200 10 10 Number of transactions (thous.) transactions of Number 200 100,000100 000 marked by a plethora of regulatory changes for banks,
0 0 including, among others, GDPR, MIFID2, PSD2, IFRS9. The On 30 June 2017, PZU effected the largest issue of 0 0 0 0 2014 2015 2016 2017 Q2 2014 2015 2016 2017 Q2 2014 2015 2016 2017 Q2 amendments to IFRS9 proved to be of particular significance subordinated bonds (in Polish zloty) in the history of the Polish 2018 2018 2018 as it accelerated the moment when provisions are recognized financial sector, while at the same time being the first issue in * annualized data (moving) and when loans are classified as being at risk. Despite Poland complying with Solvency II requirements. The bonds Source: www.infostrefa.com, www.gpw.pl the possibilities of spreading this impact over 5 years, this worth PLN 2.25 billion bear interest at WIBOR6M + 180 bps. contributed to deteriorating the balance sheets of banks and They mature on 29 July 2027, or 10 years after their issuance, less predictability of their results, especially in periods of with an early redemption option 5 years after the issue date. greater volatility in business conditions. The threat of rising The bonds are listed on the Catalyst ASO WSE/Bondspot. H1 2018 Q2 2018 regulatory pressure in connection with CHF-denominated loans Stock-related statistics H1 2017 H1 2018 / H1 2017 Q1 2018 Q2 2018 / Q1 2018 also continued to persist. Maximum price [PLN] 46.78 47.34 1.2% 47.34 44.00 (7%)
Minimum price [PLN] 32.82 36.31 10.6% 41.55 36.31 (13%)
Closing price on the last 44.59 38.98 (12.6%) 41.75 38.98 (7%) trading session [PLN] WSE-listed banks Average trading session price 39.34 41.95 6.6% 43.98 39.87 (9%) [PLN]
PLN volume liquidity [000s 10,377,514 8,267,241 (20.3%) 4,369,959 3,897,282 (11%) 140,00% of PLN] 40%
Average PLN volume liquidity 83,690 67,213 (19.7%) 70,483 63,890 (9%) per session [000s of PLN] 120,00%20% Number of transactions 527,016 467,930 (11.2%) 248,521 219,409 (12%) [units] PLN 66.9 100,00%0% 7,219.4 pts Average number of trades 4,250 3,804 (10.5%) 4,008 3,597 (10%) 2,135.5 pts per session 55,954.4 pts PLN 113.0 Trading volume 261,725,393 197,917,506 (24.4%) 99,432,359 98,485,147 (1%) -80,00%20% Q3 2017 Q4 2017 Q1 2018 Q2 2018 Average trading volume per 2,110,689 1,609,085 (23.8%) 1,603,748 1,614,511 1% WIG BANKI WIG20 WIG Alior Pekao session (shares)
Capitalization at the end of Źródło: www.infostrefa.com 38,504,491 33,660,127 (12.6%) 36,052,085 33,660,127 (7%) the period [000s of PLN]
Source: www.infostrefa.com
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 96 97 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU on the capital and debt markets
The issue was conducted with a view to supplementing PZU’s Pekao • PLN 7 million as an allowance to the Company Social 7.5 Rating equity, following the acquisition of a 20% stake in Bank Under the covered bonds program established in 2010, Benefit Fund; Pekao, in order to maintain the Solvency II ratio at a level not Pekao, acting through its subsidiary Pekao Bank Hipoteczny, • PLN 20 million to cover retained losses resulting from the PZU rating lower than 200%, as defined in the PZU Group’s Capital and issues long-term debt securities secured on its loan portfolio. final purchase price allocation of the acquisition of the Since 2004, PZU and PZU Życie have undergone regular Dividend Policy. The issue program is limited to PLN 2 billion. Pekao Bank organized part of Bank BPH by Alior Bank; reviews by the S&P Global Ratings (S&P) rating agency. The Hipoteczny’s covered bonds have been rated by Fitch at A • PLN 249 million as supplementary capital. rating assigned to PZU and PZU Życie results from an analysis PZU bonds: XS1082661551 for EUR 850 million with a negative outlook. In addition, the Pekao Group has of the financial information, competitive position, management subordinated liabilities by virtue of Pekao Leasing’s bonds. The record date for the financial year ended 31 December and corporate strategy as well as country financial situation. The PZU Group (through its wholly-owned subsidiary, PZU In October 2017, Pekao placed its first issue of subordinated 2017 was set for 12 September 2018 and the dividend payout It also includes a rating perspective (an outlook), namely, Finance AB) issued Eurobonds totaling EUR 850 million, listed bonds with a value of PLN 1.25 billion in order to improve date was set for 3 October 2018. an assessment of the future position of the company in the on the Official List, Main Securities Market of the Irish Stock its capital ratios. The bonds have a 10-year maturity with an event specific circumstances occur. As of 25 March 2014, PZU’s Exchange and on the Catalyst ASO WSE/Bondspot market. early redemption option five years after the date of issue. The rating is one notch above Poland’s rating for foreign currency- The listed series of the bonds (PZU0719) consists of two bonds bear interest at a floating rate based on WIBOR6M plus denominated debt. assimilated series (under a single ISIN code: XS1082661551) a margin of 1.52%. with a nominal value of EUR 500 million and EUR 350 million On 27 October 2017, the S&P Global Ratings agency issued on 3 July 2014 and 16 October 2015, respectively. upgraded the rating outlook for PZU and its main subsidiaries 7.4 Distribution of the 2017 profit from negative to stable. PZU’s financial strength and The liabilities arising from the bonds are secured by creditworthiness rating stayed at A-. a guarantee extended by PZU. The bonds bear interest at On 3 October 2016 the PZU Supervisory Board adopted a fixed rate of 1.375% per annum. The coupon is paid once a resolution (Current Report 61/2016 of 4 October 2016) to On 4 July 2017, S&P Global Ratings affirmed the financial a year. The date of maturity is 3 July 2019. approve the PZU Group’s Capital and Dividend Policy for 2016- strength and creditworthiness ratings for PZU and its main 2020. subsidiaries at “A-”. The outlook remained unchanged The Eurobond issue implemented PZU Group’s investment (negative). The rating was affirmed in connection with PZU’s strategy to manage the matching of assets and liabilities in On 5 December 2017 the Polish Financial Supervisory announcement of a PLN 2.25 billion subordinated debt issue EUR. The funds obtained from the bond issue were to increase Authority took a stance on the dividend policy of banks, on 30 June 2017. the exposure in the investment portfolio to investments insurance and reinsurance undertakings, universal pension denominated in Euro, manage the FX position and harness fund management companies, brokerage houses and mutual debt financing that is less expensive than equity. fund management companies in 2018. As recommended by Dividend paid by PZU from its earnings in the 2014 – H1 2018 financial years the regulatory authority, dividends should be paid only by Alior Bank insurance undertakings meeting certain financial criteria. H1 2018 2017 2016 2015 2014 In order to secure a safe level of capital adequacy ratios, Alior At the same time, the dividend payout should be limited to Consolidated profit attributable to the 1,425 2,895 1,935 2,343 2,968 Bank regularly issues debt instruments. In 2018 Alior Bank no more than 75% of the profit earned in 2017, while the parent company (in PLN m) had a debt capital acquisition program in operation called coverage of the capital requirement for the quarter in which PZU SA’s standalone profit (in PLN m) 1,728 2,459 1,573 2,249 2,637 “Second Public Subordinated Bonds Issue Program”. Under the dividend was distributed should be maintained at no less this program the Alior Bank Supervisory Board, in accordance than 110%. At the same time, KNF permitted a dividend Dividend paid for the year (in PLN m) n.a. 2,159 1,209 1,796 2,591 with a motion submitted by the Bank’s Management Board, payout equal to the entire profit earned in 2017 provided that Dividend per share for the year (PLN) n.a. 2.50 1.40 2.08 3.00 authorized the Bank’s Management Board to draw down the capital requirement coverage (after expected dividends are Dividend per share on the date of record 2.50 1.40 2.08 3.00 3.40 financial liabilities repeatedly by issuing unsecured, ordinary deducted from own funds) at the end of 31 December 2017 (PLN) or subordinated bonds. The total nominal value of the bonds and for the quarter when the dividend is paid, is at least 175% Ratio of dividend payout to consolidated issued under the Second Public Bond Issue Program may not for insurance undertakings operating in section I and at least profit attributable to the parent n.a. 88.7% 62.1% 76.7% 87.3% exceed PLN 1.2 billion. 150% for insurance undertakings operating in section II. company
Dividend yield in the year * 6.4% 3.3% 6.3% 8.8% 7.0% Alior Bank did not hold any new issues under this program in On 28 June 2018, PZU’s Ordinary Shareholder Meeting TSR (Total Shareholders Return) ** (1.6)% 31.2% 3.7% (23.8)% 15.8% 2018. adopted a resolution to distribute PZU’s net profit for the financial year ended 31 December 2017 in which it resolved to * ratio calculated as dividend as at the record date to the share price at the end of a given year (to the share price on 29 June 2018 in H1 2018) distribute profit of PLN 2,434 million in the following manner: ** ratio calculated as the sum of the change in the share price per share and the dividend on the record date in the period divided by the share price at the beginning of the period; in H1 2018 the change of the share price calculated in the period from 1 January to 29 June 2018 • PLN 2,159 million as a dividend payout, i.e. PLN 2.50 per Source: PZU data share;
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 98 99 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU on the capital and debt markets
On 28 March 2017, S&P Global Ratings affirmed the financial Sovereign rating Eurobond rating the rating for the new issue also at A-. On 21 January 2016, strength and creditworthiness ratings for PZU and its main On 13 April 2018, S&P Global Ratings affirmed Poland’s rating On 20 June 2014, Standard & Poor’s awarded a rating of A- for in connection with the reduction of PZU’s rating (following subsidiaries at “A-”. The outlook remained unchanged at BBB+/A-2 for long- and short-term liabilities in foreign unsecured debt for Eurobonds issued by PZU Finance AB. In the reduction of Poland’s rating), the rating for the Eurobonds (negative). currencies and at A-/A-2 for long- and short-term liabilities in October 2015, PZU issued bonds in the amount of issued by PZU Finance AB (publ.) was also downgraded to local currency, respectively. The ratings outlook was raised to EUR 350 million. These bonds have been assimilated and now BBB+. That is still an “investment-grade rating”. positive from stable. form a single series with the “tap” bonds with the nominal value of EUR 500 m issued by PZU Finance AB (publ) on 3 July 2014. On 12 October 2015, the analysts from S&P set Poland’s rating Rating of the Eurobonds issued by PZU Finance AB (publ.)
Currently Previously Currently Previously Rating and Rating and Country outlook Updated on outlook Updated on Rating and Rating and outlook Updated on outlook Updated on Republic of Poland
Credit rating (long-term in A- /Positive/ 13 April 2018 A- /Stable/ 2 December 2016 local currency) EUR 350 million BBB+ 21 January 2016 A- 12 October 2015
Credit rating (long-term in EUR 500 million BBB+ 21 January 2016 A- 20 June 2014 BBB+ / Positive/ 13 April 2018 BBB+ /Stable/ 2 December 2016 foreign currency) Źródło: S&P Global Ratings Credit rating (short-term in A-2 13 April 2018 A-2 2 December 2016 local currency) Alior Bank’s rating Pekao’s rating Credit rating (short-term in A-2 13 April 2018 A-2 2 December 2016 On 5 September 2013, Fitch Ratings Ltd. awarded an entity Bank Pekao cooperates with three leading rating agencies: foreign currency) rating to Alior Bank at BB with a stable outlook. On 5 February Fitch Ratings, S&P Global Ratings and Moody’s Investors
Source: S&P Global Ratings 2018, Fitch Ratings Ltd. affirmed the entity rating for Alior Service. In the case of the first two agencies, the ratings are Bank S.A. at BB, while it changed the outlook from stable to prepared upon the Bank’s commission based on contracts. positive. The Bank however has signed no agreement with Moody’s PZU rating Investors Service and the rating process is conducted on the
Rating (Fitch) basis of publicly available information and review meetings. Currently Previously Alior Bank On 30 June 2018 Bank Pekao’s financial creditworthiness Rating and Rating and Company name outlook Updated on outlook Updated on BB, positive ratings were as follows: Long-Term Foreign Currency IDR: outlook PZU Short-Term Foreign Currency IDR B Financial strength rating A- /Stable/ 27 October 2017 A- /Negative/ 31 October 2016 BANK Viability Rating (VR) BB Rating (Fitch) PEKAO POLAND Credit rating A- /Stable/ 27 October 2017 A- /Negative/ 31 October 2016 Support Rating 5 Long-term rating (IDR) A- A- PZU Życie Support Rating Floor 'No Floor' Short-term rating F2 F2 Financial strength rating A- /Stable/ 27 October 2017 A- /Negative/ 31 October 2016 Viability Rating (VR) a- - Credit rating A- /Stable/ 27 October 2017 A- /Negative/ 31 October 2016 Source: Fitch Support Rating 5 - TUW PZUW Outlook negative stable Financial strength rating A- /Stable/ 25 June 2018 Source: Fitch
Source: S&P Global Ratings
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 100 101 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e PZU on the capital and debt markets
Rating (S&P Global BANK 7.6 Calendar of major corporate events in 2018 Ratings) PEKAO POLAND
Long-Term Foreign Currency BBB+ BBB+ Rating
Long-Term Domestic BBB+ A- Currency Rating
Short-Term Foreign Currency A-2 A-2 09 Rating JANUARY
Short-Term Domestic The New PZU – More Than Insurance Strategy A-2 A-2 Currency Rating 15 Standalone rating bbb - MARCH
Outlook stable positive PZU Group’s financial statements (2017)
Source: S&P Global Ratings 16 MAY
Rating (Moody’s BANK PZU Group’s financial statements (Q1 2018) Investors Service Ltd.) PEKAO POLAND 25 MAY 27 Long-term deposit rating A2 A2 22nd WallStreet Conference for individual Short-term deposit rating Prime-1 Prime-1 investors Baseline Credit Assessment baa1 - 28 JUNE Long-term Counterparty A1(cr) - Credit Risk Rating PZU SA’s Ordinary Shareholder Meeting Short-term Counterparty Prime- - Credit Risk Rating 1(cr) 30 AUGUST Outlook stable stable PZU Group’s financial statements (Q2 2018) Source: Moody’s Investors Service Ltd. 12 SEPTEMBER
Record date for dividends from 2017 earnings Bank Pekao has the highest Baseline Credit Assessment rating and short- and long-term counterparty credit risk ratings 03 OCTOBER awarded by Moody’s Investors Service among the banks rated by this rating agency in Poland. Dividend payout date of 2017 earnings (PLN 2.50 per share) 15 NOVEMBER
PZU Group’s financial statements (Q3 2018)
Investor Relations Contact: Piotr Wiśniewski Head of Investor Relations Team email: [email protected] tel.: +48 (22) 582 26 23
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 102 103 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e 8.
Corporate governance
We appreciate that the leader’s role is to set the highest standards for the entire industry. We discharge this function not only by observing a number of codes but also by working continuously on their improvement. We believe that this is how we can make sagacious changes to contribute to the world that surrounds us.
In this section: 1. Audit firm auditing the financial statements 2. PZU’s share capital and its shareholders; shares held by members of its governing bodies
105 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Corporate governance
8.1 Audit firm auditing the financial PLN 1 each into 863,482,890 PZU shares with a par value of the obligations of the buyers of significant equity stakes PZU’s shareholder structure as at 30 June 2018 statements PLN 0.10 each. contemplated by the Act on Public Offerings and the Insurance Activity Act, such limitation of voting rights shall be deemed NN OFE and NN DFE On 18 February 2014, the PZU Supervisory Board selected Accordingly, PZU’s share capital is divided into 863,523,000 not to exist. The limitation on voting rights 5.1%
KPMG Audyt Spółka z ograniczoną odpowiedzialnością Sp.k. ordinary shares with a par value of PLN 0.10 each, giving the does not apply to the following: State Treasury 34.2% with its registered office in Warsaw, ul. Inflancka 4A, 00- right to 863,523,000 votes at the Shareholder Meeting. • shareholders who on the date of adopting the Shareholder 189 Warsaw, entered by the National Chamber of Statutory Meeting resolution implementing this limitation were Auditors on the list of audit firms under no. 3546 as the entity The following PZU shareholders hold significant stakes in PZU: entitled to shares representing more than 10% of the total to audit the financial statements for the years 2014 – 2016, • the State Treasury that holds 295,217,300 shares number of votes; and on 27 April 2017 the PZU Supervisory Board exercised the constituting 34.19% of PZU’s share capital and giving it the • shareholders acting with the shareholders specified in the
option of extending this cooperation to include 2017 – 2018. right to 295,217,300 votes at the Shareholder Meeting; item above pursuant to executed agreements pertaining to Others • funds managed by Nationale-Nederlanden PTE: Nationale- jointly exercising the voting rights attached to shares. 60.7% The scope of the concluded agreement encompasses the Nederlanden Otwarty Fundusz Emerytalny (Open-end
following in particular: Pension Fund, „OFE”) and Nationale-Nederlanden For the purpose of limiting voting rights, the votes of Source: Current Report 21/2018 • auditing PZU’s annual standalone financial statements and Dobrowolny Fundusz Emerytalny (Voluntary Pension Fund, shareholders among whom there is a parent or subsidiary the PZU Group’s annual consolidated financial statements; „DFE”) that had 43,825,000 shares at PZU’s Ordinary relationship are totaled in accordance with the rules described • reviewing PZU’s interim standalone financial statements Shareholder Meeting held on 28 June 2018, constituting in the Articles of Association. Shares or rights to shares held by members of and the PZU Group’s interim consolidated financial 5.0751% of PZU’s share capital and giving it 43,825,000 management or supervisory bodies and PZU Group statements. votes. In the event of doubt, the provisions regarding the restriction Directors of voting rights are subject to interpretation according to In recent years, PZU’s additional cooperation with KPMG The notification pertaining to the movement in the equity Article 65 § 2 of the Civil Code. Neither as at the date of this Activity Report nor as at the date Audyt has covered, without limitation, audits of solvency stake held in PZU by the open-end pension fund and of the consolidated financial statement for Q1 2018 and financial standing reports required by the Solvency II the voluntary pension fund was transmitted to PZU by In line with PZU’s Articles of Association, these voting (i.e. 16 May 2018) did any of the members of the Directive. Nationale-Nederlanden PTE on 12 June 2018. According restrictions will expire starting from the moment when the Management Board or the Supervisory Board or the Directors to this notification, as a result of a transaction to buy PZU equity stake held by the shareholder who held shares giving of the Group hold any PZU shares, shares or interests in PZU’s shares settled on 6 June 2018, OFE and DFE increased the right to more than 10% of the total number of votes in related parties or rights to these shares or interests. 8.2 PZU’s share capital and its their shareholding in PZU to 5.03% of PZU’s share capital, PZU when the Shareholder Meeting adopted the resolution shareholders; shares held by members of constituting 5.03% of the total number of votes at PZU’s drops below 5% of the share capital. its governing bodies Shareholder Meeting.
On 30 June 2015, PZU’s Ordinary Shareholder Meeting The PZU Management Board does not have any information adopted a resolution to split all PZU shares by decreasing about executed agreements as a result of which changes PZU’s shareholder structure as at 30 June 2017 the par value of each share from PLN 1 to PLN 0.10 and may transpire in the future in the equity stakes held by its increasing the number of shares making up the share capital shareholders to date. from 86,352,300 to 863,523,000. The split was effected by exchanging all the shares at a ratio of 1:10. The share split did PZU did not issue, redeem or repay any debt or equity not affect the amount of PZU’s share capital. securities that would provide its shareholders with special State Treasury 34.2% control rights. On 3 November 2015 the District Court for the capital city of Warsaw, 12th Commercial Division of the National Court In 2013 – 2017, PZU did not have any employee share Register registered the pertinent amendment to PZU’s Articles programs in place. of Association. Others According to the Articles of Association, the shareholders’ 65.8% On 24 November 2015, at PZU’s request, the Management voting rights have been limited in such a manner that Board of the National Depository for Securities (Krajowy no shareholder may exercise more than 10% of the total Depozyt Papierów Wartościowych, “KDPW”) adopted number of votes in existence in PZU at its Shareholder Source: Current Report 42/2017 resolution no. 789/15 on setting 30 November 2015 as the Meeting on the date of holding a Shareholder Meeting subject date of splitting 86,348,289 PZU shares with a par value of to the reservation that for the purposes of determining
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 106 107 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e 9.
Other
109 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Other
Truthfulness and accuracy of the presented financial According to the agreement, the new tax group does not whose unit value is at least 10% of PZU’s equity. A description This Management Board’s report on the activity of the PZU statements include TFI PZU or Ardea Alba in liquidation, which previously of litigation and proceedings before the President of the Office Group in H1 2018 has 111 consecutively-numbered pages. To the best knowledge of the PZU Management Board, the belonged to the Tax Group established for the period of 2015 of Competition and Consumer Protection (UOKiK) has been set PZU Group’s consolidated financial statements and comparative to 2017. forth in the PZU Group’s consolidated financial statements and data have been prepared in line with the prevailing accounting PZU’s financial statements for H1 2018. principles, and honestly, accurately and clearly reflect the PZU Purchase of treasury shares in the financial year Group’s and the Issuer’s assets and financial position as well as Within its trading activity Bank Pekao enters into transactions As at 30 June 2018, the total value of all the 226,053 their financial result, and that the Management Board’s report on PZU shares and futures. As at 30 June 2018 Bank Pekao cases pending before courts, competent bodies for arbitral on the PZU Group’s activity shows a true picture of the PZU held 9,769 PZU shares. proceedings or public administration authorities to which PZU Group’s and the Issuer’s development, results and position, Group entities are a party was PLN 6,866. PLN 3,794 million including a description of the major threats and risks. As at 30 June 2018 the consolidated funds had 233,000 PZU of this amount pertains to liabilities while PLN 3,072 million shares. pertains to the accounts receivable of PZU Group companies. Information about significant agreements between shareholders Granted and received guarantees and sureties The PZU Management Board does not have any information On 8 November 2017, PZU executed a mandate contract about agreements executed until the date of publication of this with Alior Bank on periodic granting of insurance guarantees Report on the activity of the PZU Group among shareholders constituting unfunded credit protection and a framework as a result of which changes may transpire in the future in the mandate agreement on the periodic granting of counter- percentages of shares held by its shareholders to date. guarantees (Current Report No. 64/2017). The maximum exposure limit for guarantees is PLN 5.0 billion (say: five billion Information about significant executed agreements Polish zloty) and is in force for a period of 3 years. Signatures of PZU Management Board Members On 30 June 2017, PZU issued subordinated bonds with a nominal value of PLN 2.25 billion. The bond redemption date Business seasonality or cyclicity is 29 July 2027 with an early repayment option on 29 July PZU’s business is not seasonal or cyclical to an extent that 2022. CHAPTER 7.3 DEBT FINANCING would justify application of the suggestions set forth in the International Financial Reporting Standards. Paweł Surówka – President of the Management Board Related party transactions on terms other than on an arm’s length basis Assessment of the management of financial resources, Within the framework of equity and business links, PZU Group including the capacity to satisfy the assumed liabilities member companies provide services to one another. With the and specification of possible threats and actions taken Roger Hodgkiss – Management Board Member exception of companies from the Tax Group, the transactions or to be taken by the Issuer to counter these threats are executed according to the arm’s length principle. PZU is in very good financial standing and satisfies all the security criteria imposed on it by the Insurance and Tax Group Reinsurance Activity Act and the Polish Financial Supervision Tomasz Kulik – Management Board Member The tax group agreement for fiscal years 2018 – 2020 was Authority. The Issuer’s stable rating outlook confirms that PZU signed on 20 September 2017. According to the agreement, has a strong business position, has a high level of equity and the tax group consists of PZU, PZU Życie, LINK4, PZU CO, PZU continues to be a competitive player on the insurance market. Pomoc, Ogrodowa-Inwestycje, PZU Zdrowie, PZU Finanse, PZU Maciej Rapkiewicz – Management Board Member LAB, Ipsilon, Omicron Bis, Tulare Investments and Battersby Financial forecasts Investments. The PZU Group has not published any forecasts of its financial results. Under the tax group agreement, PZU is the parent company Małgorzata Sadurska – Management Board Member representing the tax group. Pursuant to art. 25 section 1 of Disputes the CIT Act, the Tax Group performs settlements with the In H1 2018 and up to the date of preparation of this report on Tax Office on a monthly basis. PZU makes advance payments the PZU Group’s activity, there were no pending proceedings to the Tax Office for the CIT tax due from PZU’s overall Tax before court, a body competent to hear arbitration Warsaw, 29 August 2018 Group, while the member companies transfer the amount they proceedings or a public authority body concerning liabilities owe in advance payments to PZU’s specified bank account. or receivables of PZU or a direct or indirect subsidiary thereof
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 110 111 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e 10. Attachment: Glossary of terms
113 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Attachment: Glossary of terms
cedent – person who cedes an account receivable to a buyer IDD – Directive (EU) 2016/97 of the European Parliament and NPS (Net Promoter Score) – method for assessing the Regulation on Current and Periodic Information – of the Council of 20 January 2016 on insurance distribution loyalty of a given company’s customers, ratio computed as the Finance Minister’s Regulation of 29 March 2018 on Current and COR – Combined Ratio – calculated for the non-life insurance (Insurance Distribution Directive) difference between a brand’s promoters and critics Periodic Information Transmitted by Securities Issuers and the sector (section II). This is the ratio of insurance expenses Conditions for Recognizing the Information Required by the related to insurance administration and the payment of claims IPO (Initial Public Offering) – public offering of specific Payout ratio – dividend payout ratio, in other words the Regulations of a Non-Member State as Equivalent (Journal of (e.g. claims, acquisition and administrative expenses) to the securities performed for the first time. One of the most quotient of the dividend paid and the company’s net result Laws of 2018, item 757, as amended) net earned premium for a given period important elements of an initial public offering is the preparation of a prospectus and the proceeding before the PRIIP – Commission Delegated Regulation (EU) 2017/653 of credit scoring – method for assessing the credibility of an cross-selling – a sales strategy for selling a given insurance institution supervising admission to be traded publicly 8 March 2017 supplementing Regulation (EU) No. 1286/2014 entity (usually a natural person or a business) applying for product in combination with a complementary insurance of the European Parliament and of the Council on key a bank loan. The result of credit scoring is ordinarily presented product or an insurer’s partner’s product, e.g. a bank’s Solvency Capital Requirement (SCR) – capital information documents for packaged retail and insurance- in the form of a score – the higher the number of points, the product. Bancassurance products such as credit insurance may requirement computed in accordance with the Solvency II based investment products greater the credibility of a prospective borrower serve as an example regulations. The calculation of the capital requirement is based on calculating market, actuarial (insurance), counterparty reinsurance – transfer to some other insurance undertaking sell side – part of the financial sector involved in creating, CSR – Corporate Social Responsibility – a concept insolvency, catastrophic and operational risks and is – the reinsurer – of all or part of the insured risk or class of promoting and selling equities, bonds, foreign currencies and according to which companies voluntarily take into account subsequently subject to diversification analysis. This ratio may risks along with the pertinent portion of the premiums. As a other financial instruments; it includes investment bankers social interests and environmental protection as well as be computed using the standard formula or, after obtaining result of reinsurance, a secondary split of risks transpires to who act as intermediaries between securities issuers and relations with diverse groups of stakeholders at the stage of the pertinent consent from the regulatory authority, using an minimize the risks to the insurance market investors as well as market makers who provide liquidity on building their strategy insurance undertaking’s partial or full internal model the market. Sell-side analysts release research reports with outward reinsurance – reinsurance activity whereby the investment recommendations and daily comments for the P/BV (Price to Book Value) – wskaźnik określający KNF – Polish Financial Supervision Authority [Polish: Komisja insurer (cedent) transfers a portion of the concluded insurance buy side, i.e. for asset managers. Research reports pertain to stosunek ceny rynkowej do wartości księgowej przypadającej Nadzoru Finansowego] supervises the banking sector and to a reinsurer or reinsurers in the form of a reinsurance companies that are already public and to companies that are na jedną akcję the capital, insurance and pension markets; it also supervises agreement being floated on an exchange or that are conducting additional payment institutions and the offices of payment services, rights offerings P/E (Price to Earnings) – multiple specifying the ratio of electronic money institutions and the savings and loans sector, inward reinsurance – reinsurance activity whereby the company’s market price (per share) to earnings per share www.knf.gov.pl a reinsurer or reinsurers accept a portion of insurance or gross written premium – the amounts of gross written a class of insurance transferred by a cedent premiums (net of the reinsurer’s share) due by virtue of DPS (Dividend Per Share) – market multiple specifying the profit margin in group and individually continued the insurance contracts executed in the reporting period, dividend per share insurance (in PZU Życie) – indicator computed as the technical provisions –provisions that should ensure full notwithstanding the term of liability stemming from these ratio of operating profit to the gross written premium of the coverage of current and future liabilities that may result from agreements DY (Dividend Yield) – market multiple specifying the ratio of group and individually continued insurance segment, net of executed insurance contracts. The following, in particular, are the dividend per share to the market share price non-recurring effects such as, for instance, the conversion for accounting purposes part of technical provisions: provision net earned premium – the gross written premium in a given effect, i.e. the conversion of long-term agreements into yearly for unearned premiums, provision for outstanding claims and period giving consideration to the settlement of revenues EPS (Earnings Per Share) – market multiple specifying renewable term agreements and the change of technical rates, benefits, provision for unexpired risks, provision for investment (premiums) over time through movement in the provisions for earnings per share i.e. the discount rate for technical provisions for accounting risk borne by policyholders and provision for bonuses and unearned premiums and the reinsurer’s share purposes discounts for insureds Everest – system to managing non-life insurance in PZU Solvency II – a solvency system for European insurance Surplus rate of return on main portfolio above the RFR GDPR – Regulation (EU) 2016/679 of the European undertakings taking the risk profile into account. These free float – public company’s shares freely available to the – the difference between the annual rate of return calculated Parliament and of the Council of 27 April 2016 on the requirements have been in force since 1 January 2016 investing public. This is the ratio of the number of shares on the IFRS result on the main portfolio (investments of protection of natural persons with regard to the processing of not held by large investors to the total number of shares – in PZU SA and PZU Życie, excluding shares of subordinated personal data and on the free movement of such data, and risk-free rate – rate of return on financial instruments with other words, all the freely-available shares that are publicly companies and investment products) and taking into account repealing Directive 95/46/EC zero risk. In PZU the risk-free rate is based on the yield curves traded FX from the own debt issue (impact of EUR exchange rate for treasuries and it is the basis for determining transfer prices change from own debt securities issued within the PZU Group CRR Regulation – Regulation (EU) No. 575/2013 of the in settlements between operating segments FUS – Social Insurance Fund established 1 January 1999 by with the exception of the banking segment) and the average European Parliament and of the Council of 26 June 2013 on the power of the Act on the Social Insurance System annual WIBOR6M level. prudential requirements for credit institutions and investment sum insured – amount in cash for which an insured object firms is insured. In non-life insurance the sum insured ordinarily constitutes the upper limit of the insurer’s liability
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 114 115 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Attachment: Glossary of terms
TSR (Total Shareholder Return) – measure specifying this index goes, the greater the fear on the market and the the total rate of return obtained by shareholders by virtue of greater the opportunities are to buy discounted equities holding shares in a given company during an annual period. This measure expresses the sum total of profit stemming from WIBOR6M – reference interest rate for a loan for 6 months the movement in the share price of a given company and on the Polish interbank market the dividends paid during the time when an investor holds its shares in relation to its share value at the beginning of a given Cost/Income ratio (C/I; banking sector) – quotient of year. It is expressed as a percentage on an annualized basis administrative expenses and the sum of operating income, excluding: the BFG charge, the levy on other financial Unit-linked – Unit-linked insurance fund, a separate fund institutions and the net result on realization and impairment consisting of assets constituting a provision consisting of losses on investments insurance premiums invested in the manner specified in the insurance agreement, a constituent part of unit-linked life solvency ratio – statutory multiple (under Solvency II) insurance also referred to as an investment policy specifying the level of capital security for the operations conducted by an insurer. By law this multiple should be higher Statutory Auditor Act – Act of 11 May 2017 on Statutory than 100% Auditors and their Self Regulation, Entities Authorized to Audit Financial Statements and Public Supervision (Journal of Laws prudent person principle – principle expressed in article 129 of 2017, Item 1089 as amended) of the Solvency II Directive of the European Parliament and of the Council on the Taking-up and Pursuit of the Business These Financial Statements contain forward-looking statements concerning the strategic operations. Such forward-looking UOKiK – Office of Competition and Consumer Protection. of Insurance and Reinsurance that imposes on insurance statements are exposed to both known and unknown types of risks, involve uncertainties and are subject to other significant The shaping of anti-monopoly policy and consumer protection undertakings and reinsurance undertakings the requirement factors which may cause that the actual results, operations, or achievements of PZU Group considerably differ from future results, policy is one of the powers of the President of the Office of investing assets in the policyholders’ best interest, properly operations, or achievements expressed or implied in the forwards-looking statements. The statements are based on a number of Competition and Consumer Protection, inter alia, by matching investments to liabilities and duly incorporating of assumptions concerning the current and future business strategy of PZU Group and the external environment in which the conducting anti-monopoly proceedings in cases of practices the various types of financial risk, such as liquidity risk and Group will operate in the future. PZU expressly waives any and all obligations or commitments concerning distribution of any limiting competition and in cases of practices violating the concentration risk updates or adjustments to any of the assumptions contained in these Management Board’s report on the activity of the PZU collective interests of consumers, www.uokik.gov.pl 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 Insurance Activity Act – Act of 11 September 2015 on statements do not constitute a guarantee as to the future results, and the company’s actual financial standing, business strategy, Insurance and Reinsurance Activity (Journal of Laws of 2015, management plans and objectives concerning the future operations may considerably differ from those presented or implied Item 1844, as amended), with most regulations in force as of in such statements contained in these Management Board’s report on the activity of the PZU Group. Moreover, even if the PZU 1 January 2016. This actintroduced Solvency II requirements Group’s financial standing, business strategy, management plans and objectives concerning the future operations comply with in the Polish legal system the forward-looking statements contained in these Management Board’s report on the activity of the 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 up-selling – commercial technique involving the offering and any updates, changes, or adjustments to information, data or statements contained in these Management Board’s report on the selling of additional higher-priced and higher standard services activity of the PZU Group if the strategic operations or plans of PZU shall change, or in the case of facts or events that shall affect to a current client such operations or plans of PZU, unless such an obligation to inform resulted from applicable provisions of the law.
venture capital – medium and long-term investments in PZU Group is not liable for the effects of decisions made following the reading of the Management Board’s report on the activity privately-held businesses in their early stage of development of the PZU Group. combined with managerial support, conducted by specialized entities (venture capital funds). The purpose of venture At the same time, these Management Board’s report on the activity of the PZU Group may not be treated as a part of a call or an capital investments is to generate a profit ensuing from the offer to purchase securities or make an investment. The Management Board’s report on the activity of the PZU Group does not incremental growth in the value of a business by selling its constitute also an offer or a call to effect any other transactions concerning securities. stock after the elapse of a specific period
VIX – index of the volatility of stock market prices expected by Wall Street investors based on option prices. The higher
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 116 117 OF THE PZU GROUP IN H1 2018 WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e
Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group
Condensed interim consolidated financial statements for the 6 months ended 30 June 2018
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018
Table of contents
Introduction ...... 3 Interim consolidated financial statements ...... 6 1. Interim consolidated profit and loss account ...... 6 2. Interim consolidated statement of comprehensive income ...... 8 3. Interim consolidated statement of financial position ...... 9 4. Interim consolidated statement of changes in equity Consolidated statement of changes ...... 10 5. Interim consolidated cash flow statement ...... 13 Supplementary notes to the condensed interim consolidated financial statements ...... 15 1. Information on PZU and the PZU Group ...... 15 2. Composition of the Management Board, Supervisory Board and PZU Group Directors ...... 31 3. Key accounting policies, key estimates and judgments ...... 32 4. Information about major events that materially influence the structure of financial statement items .....49 5. Material events after the end of the reporting period ...... 49 6. Supplementary notes to the condensed interim consolidated financial statements ...... 50 7. Financial assets securing liabilities ...... 84 8. Contingent assets and liabilities ...... 84 9. Equity management ...... 84 10. Segment reporting ...... 85 11. Issues, redemptions and repayments of debt securities and equity securities...... 95 12. Default or breach of material provisions of loan agreements ...... 95 13. Granting of sureties or guarantees for loans or borrowings by PZU or its subsidiaries ...... 95 14. Dividends ...... 95 15. Disputes ...... 96 16. Other information ...... 99
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (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 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 2017.
Period covered by the condensed interim consolidated financial statements
These condensed interim consolidated financial statements cover the period of 6 months from 1 January to 30 June 2018. The financial statements of the subsidiaries are prepared for the same reporting period as the financial statements of the parent company.
Functional and presentation currency
PZU’s functional and presentation currency is the Polish zloty. Unless noted otherwise, all amounts presented in these consolidated financial statements are stated in millions of Polish zloty. The functional currency of the companies domiciled in Lithuania, Latvia and Sweden is the euro, while for the companies domiciled in Ukraine it is the Ukrainian hryvnia, and for the company domiciled in the United Kingdom it is the British pound.
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 profit and loss account 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 2018 31 December 2017 30 June 2018 30 June 2017 Euro 4.2395 4.2474 4.3616 4.1709 British pound 4.8179 n/a 4.9270 4.7001 Ukrainian hryvnia 0.1324 0.1459 0.1423 0.1236
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 - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (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 6-month period ended 30 June 2018, the PZU Group companies did not discontinue any significant type of activity.
Business seasonality or cyclicity
The PZU Group’s business is neither seasonal nor subject to business cycles to a significant extent.
Glossary
The most important terms, abbreviations and acronyms used in the condensed interim consolidated financial statements are explained below.
Names of companies
AAS Balta – Apdrošināšanas Akciju Sabiedrība Balta. Alior Bank – Alior Bank SA. EMC – EMC Instytut Medyczny SA. Alior Bank Group – Alior Bank with its subsidiaries: Alior Services sp. z o.o., Centrum Obrotu Wierzytelnościami sp. z o.o. in liquidation, Alior Leasing sp. z o.o., Meritum Services ICB SA, Alior 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. Pekao Group – Pekao with its subsidiaries: Pekao Bank Hipoteczny SA, Centralny Dom Maklerski Pekao SA, Pekao Leasing sp. z o.o., Pekao Investment Banking SA, Pekao Faktoring sp. z o.o., Pekao PTE in liquidation, Pekao TFI, Centrum Kart SA, Pekao Financial Services sp. z o.o., Centrum Bankowości Bezpośredniej sp. z o.o., Pekao Property SA, FPB – Media sp. z o.o., Pekao Fundusz Kapitałowy sp. z o.o. in liquidation, PIM, Xelion. Link4 – Link4 Towarzystwo Ubezpieczeń SA. NZOZ Trzebinia – Niepubliczny Zakład Opieki Zdrowotnej Trzebinia sp. z o.o. Pekao – Bank Pekao SA. Pekao DFE – Pekao Dobrowolny Fundusz Emerytalny. Pekao OFE – Pekao Otwarty Fundusz Emerytalny. Pekao PTE – Pekao Powszechne Towarzystwo Emerytalne SA in liquidation (formerly Pekao Pioneer Powszechne Towarzystwo Emerytalne SA). Pekao TFI – Pekao Towarzystwo Funduszy Inwestycyjnych SA (formerly Pioneer Pekao Towarzystwo Funduszy Inwestycyjnych SA). PFR – Polski Fundusz Rozwoju SA. PFS – Pekao Financial Services sp. z o.o. PIM – Pekao Investment Management SA (formerly Pioneer Pekao Investment Management SA). PTE PZU – Powszechne Towarzystwo Emerytalne PZU SA. PZU, parent company – Powszechny Zakład Ubezpieczeń Spółka Akcyjna. PZU CO – PZU Centrum Operacji SA.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (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. 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]. CODM – chief operating decision maker within the meaning of IFRS 8 – Operating segments. IBNR – Incurred But Not Reported or 2nd provision – provision for losses and accidents incurred but not reported. PZU’s 2017 standalone financial statements – annual standalone financial statements of Powszechny Zakład Ubezpieczeń Spółka Akcyjna for 2017 prepared in accordance with PAS, signed by the PZU Management Board on 14 March 2018. KNF – Polish Financial Supervision Authority. IFRS – International Financial Reporting Standards, as endorsed by the European Commission, published and in force as at 30 June 2018. NBP – National Bank of Poland; TG – Tax Group [Polish: Podatkowa Grupa Kapitałowa] established under an agreement signed on 20 September 2017 by and between 13 PZU Group companies: PZU, PZU Życie, Link4, PZU CO, PZU Pomoc SA, Ogrodowa-Inwestycje, PZU Zdrowie SA, Tulare Investments sp. z o.o., Battersby Investments SA, Ipsilon sp. z o.o., PZU Finanse sp. z o.o., PZU LAB SA (formerly: Omicron SA), Omicron Bis SA. The Tax Group has been established for a period of 3 years – from 1 January 2018 to 31 December 2020. PZU is the parent company representing the Tax Group. PAS – Accounting Act and regulations issued thereunder. IASB – International Accounting Standards Board. Regulation on Current and Periodic Information – Finance Minister’s Regulation of 29 March 2018 on Current and Periodic Information Transmitted by Securities Issuers and the Conditions for Recognizing the Information Required by the Regulations of a Non-Member State as Equivalent (Journal of Laws of 2018, item 757). Consolidated financial statements – consolidated financial statements of the PZU Group prepared in accordance with IFRS for the year ended 31 December 2017, signed by the PZU Management Board on 14 March 2018. KNF Office – Office of the Polish Financial Supervision Authority. BGF Act – Act of 10 June 2016 on the Bank Guarantee Fund, Guaranteed Deposits System and Forced Restructuring (consolidated text: Journal of Laws of 2017, item 1937, as amended). Insurance Activity Act – Act of 11 September 2015 on Insurance and Reinsurance Activity (consolidated text: Journal of Laws of 2018, item 999, as amended). Accounting Act – Accounting Act of 29 September 1994 (consolidated text: Journal of Laws of 2018, item 395, as amended). ZUS – Social Insurance Institution.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN) Interim consolidated financial statements
1. Interim consolidated profit and loss account
1 April – 1 January – 1 April – 1 January – Consolidated profit and loss account Note 30 June 2017 30 June 2017 30 June 2018 30 June 2018 (restated)1) (restated) 1) Gross written premiums 6.1 6,050 11,881 5,838 11,606 Reinsurers’ share in gross written premium (285) (336) (214) (307) Net written premiums 5,765 11,545 5,624 11,299 Movement in net provision for unearned premiums (169) (491) (349) (952) Net earned premium 5,596 11,054 5,275 10,347
Revenue from commissions and fees 6.2 848 1,673 453 699 Net investment income 6.3 2,663 5,594 1,916 3,282 Net result on realization of financial instruments 6.4 33 99 228 238 and investments Movement in allowances for expected credit losses 6.5 (403) (838) (316) (539) and impairment losses on financial instruments Net movement in fair value of assets and liabilities 6.6 476 401 (473) 46 measured at fair value Other operating income 6.7 310 800 251 530
Claims, benefits and movement in technical (3,773) (7,504) (3,587) (7,379) provisions Reinsurers’ share in claims, benefits and movement 54 159 83 165 in technical provisions Net insurance claims and benefits paid 6.8 (3,719) (7,345) (3,504) (7,214)
Fee and commission expenses 6.9 (182) (353) (112) (189) Interest expenses 6.10 (499) (992) (250) (420) Acquisition expenses 6.11 (768) (1,519) (718) (1,412) Administrative expenses 6.11 (1,727) (3,342) (1,174) (2,036) Other operating expenses 6.12 (895) (2,086) (657) (1,175) Operating profit 1,733 3,146 919 2,157 Share of the net financial results of entities 1 1 (1) (1) measured by the equity method Profit before tax 1,734 3,147 918 2,156
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Interim consolidated profit and loss account (continuation)
1 April – 1 January – 1 April – 1 January – Consolidated profit and loss account Note 30 June 2017 30 June 2017 30 June 2018 30 June 2018 (restated)1) (restated) 1) Income tax 6.14 (430) (789) (200) (451) Net profit, including: 1,304 2,358 718 1,705 - profit attributable to the equity holders of the 782 1,425 504 1,438 Parent Company - profit (loss) attributed to holders of non- 522 933 214 267 controlling interest
Weighted average basic and diluted number of 6.13 863,374,918 863,442,942 863,521,269 863,516,697 common shares Basic and diluted profit (loss) per common share (in 6.13 0.91 1.65 0.58 1.67 PLN) 1) Information on restatement of data for the period from 1 January to 30 June 2017 is presented in section 3.2.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (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 2017 30 June 2017 income 30 June 2018 30 June 2018 (restated)1) (restated) 1) Net profit 1,304 2,358 718 1,705 Other comprehensive income 6.14 (105) (40) (3) 4 Subject to subsequent transfer to profit or loss 35 192 (4) 3 Debt instruments measured at fair value (4) 134 n/a n/a through other comprehensive income Measurement of financial instruments n/a n/a (13) 43 available for sale Foreign exchange translation differences 45 56 1 (53) Cash flow hedging (6) 2 8 13 Not to be reclassified to profit or loss in the (140) (232) 1 1 future Equity instruments measured at fair value (139) (234) n/a n/a through other comprehensive income Reclassification of real property from property, plant and equipment to investment (1) 2 1 1 property Total net comprehensive income 1,199 2,318 715 1,709 - comprehensive income attributable to equity 491 1,324 490 1,411 holders of the Parent Company - comprehensive income attributed to holders of 708 994 225 298 non-controlling interest 1) Information on restatement of data for the period from 1 January to 30 June 2017 is presented in section 3.2.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN) 3. Interim consolidated statement of financial position
31 December 1 January 30 June Assets Note 2017 2017 2018 (restated) 1) (restated) 1) Goodwill 6.15 3,864 3,830 1,583 Intangible assets 6.16 3,239 3,443 1,463 Other assets 6.17 613 692 866 Deferred acquisition expenses 1,541 1,485 1,407 Reinsurers’ share in technical provisions 6.26 1,354 1,250 990 Property, plant and equipment 6.18 3,137 3,287 1,467 Investment property 1,856 2,355 1,738 Entities measured by the equity method 17 20 37 Loan receivables from clients 6.19 173,651 169,457 44,998 Financial derivatives 6.20 2,279 2,351 953 Investment financial assets 6.21 105,910 110,046 59,335 Measured at amortized cost 43,512 n/a n/a Measured at fair value through other comprehensive 42,089 n/a n/a income Measured at fair value through profit or loss 20,309 n/a n/a Held to maturity n/a 21,237 17,346 Available for sale n/a 48,519 11,652 Measured at fair value through profit or loss n/a 20,243 21,001 Loans n/a 20,047 9,336 Deferred tax assets 2,049 1,590 641 Receivables 6.23 9,832 9,096 5,664 Cash and cash equivalents 11,505 8,239 2,973 Assets held for sale 6.25 964 317 1,189 Total assets 321,811 317,458 125,304 1) Information on restatement of data as at 31 December 2017 and 1 January 2017 is presented in section 3.2.
31 December 1 January 30 June Equity and liabilities Note 2017 2017 2018 (restated) 1) (restated) 1) Equity Equity attributable to equity holders of the parent 13,280 14,599 12,990 Share capital 86 86 86 Other capital 12,610 11,917 10,869 Retained earnings 584 2,596 2,035 Retained earnings (841) (299) 100 Net profit 1,425 2,895 1,935 Non-controlling interest 21,332 22,961 4,067 Total equity 34,612 37,560 17,057
Liabilities Technical provisions 6.26 45,583 44,558 42,194 Provisions for employee benefits 573 556 128 Other provisions 6.27 644 497 367 Deferred tax liability 622 638 469 Financial liabilities 6.28 225,470 224,550 60,045 Other liabilities 6.29 14,305 9,096 5,011 Liabilities related directly to assets classified as held for 6.25 2 3 33 sale Total liabilities 287,199 279,898 108,247 Total equity and liabilities 321,811 317,458 125,304 1) Information on restatement of data as at 31 December 2017 and 1 January 2017 is presented in section 3.2.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
4. Interim consolidated statement of changes in equity
Equity attributable to equity holders of the parent Retained Other capital earnings Non- Consolidated statement of changes Total Share controlling in equity Actuarial gains Foreign Total equity capital Treasury Supplementary Revaluation Other reserve and losses related exchange Retained Net interest stock capital reserve capital to provisions for translation earnings profit employee benefits differences
As at 1 January 2018 86 - 11,824 157 5 4 (73) 2,596 - 14,599 22,961 37,560 Effect of the application of IFRS 9 and - - - 7 - - - (461) - (454) (1,042) (1,496) other changes As at 1 January 2018 after the 86 - 11,824 164 5 4 (73) 2,135 - 14,145 21,919 36,064 changes in accounting policies Equity instruments measured at fair value through other comprehensive - - - (189) - - - - - (189) (45) (234) income Debt instruments measured at fair value - - - 26 - - - - - 26 108 134 through other comprehensive income Cash flow hedging - - - 3 - - - - - 3 (1) 2 Foreign exchange translation differences ------57 - - 57 (1) 56 Reclassification of property from property, plant and equipment to - - - 2 - - - - - 2 - 2 investment property Total net other comprehensive - - - (158) - - 57 - - (101) 61 (40) income Net profit (loss) ------1,425 1,425 933 2,358 Total comprehensive income - - - (158) - - 57 - 1,425 1,324 994 2,318 Other changes, including: - (10) 789 (6) 14 - - (2,976) - (2,189) (1,581) (3,770) Distribution of financial result - - 804 - 14 - - (2,976) - (2,158) (1,659) (3,817) Transactions on treasury shares - (10) ------(10) - (10) Transactions with holders of non- - - (19) ------(19) 78 59 controlling interests Sale of revalued property and other - - 4 (6) - - - - - (2) - (2) As at 30 June 2018 86 (10) 12,613 - 19 4 (16) (841) 1,425 13,280 21,332 34,612
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Consolidated statement of changes in equity (continued)
Equity attributable to equity holders of the parent Other capital Retained earnings Consolidated statement of changes Non- Total in equity Share Actuarial gains and Foreign controlling 1) Total equity (restated) capital Treasury Supplementary Revaluation Other reserve losses related to exchange Retained Net interest stock capital reserve capital provisions for translation earnings profit employee benefits differences
As at 1 January 2017 86 (1) 10,758 106 5 3 (2) 2,043 - 12,998 4,086 17,084 Adjustment to the opening balance ------(8) - (8) (19) (27) Balance as at 1 January 2017 after 86 (1) 10,758 106 5 3 (2) 2,035 - 12,990 4,067 17,057 adjustment Measurement of financial instruments - - - 53 - - - - - 53 64 117 available for sale Cash flow hedging - - - 2 - - - - - 2 9 11 Foreign exchange translation differences ------(71) - - (71) - (71) Actuarial gains and losses related to - - - - - 1 - - - 1 6 7 provisions for employee benefits Reclassification of property from property, plant and equipment to - - - 2 - - - - - 2 - 2 investment property Total net other comprehensive - - - 57 - 1 (71) - - (13) 79 66 income Net profit (loss) ------2,895 2,895 1,290 4,185 Total comprehensive income - - - 57 - 1 (71) - 2,895 2,882 1,369 4,251 Other changes, including: - 1 1,066 (6) - - - (2,334) - (1,273) 17,525 16,252 Distribution of financial result - - 1,125 - - - - (2,334) - (1,209) - (1,209) Acquisition of shares in Pekao ------17,711 17,711 Transactions on treasury shares - 1 ------1 - 1 Changes in the composition of the PZU Group and transactions with holders of - - (65) ------(65) (186) (251) non-controlling interests Sale of revalued real estate - - 6 (6) ------As at 31 December 2017 86 - 11,824 157 5 4 (73) (299) 2,895 14,599 22,961 37,560
1) Information on restatement of data for the period from 1 January to 31 December 2017 is presented in section 3.2.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Consolidated statement of changes in equity (continued)
Equity attributable to equity holders of the parent Other capital Retained earnings Consolidated statement of changes Non- Share Total in equity Actuarial gains Foreign controlling capital Other equity 1) Treasury Supplementary Revaluation and losses related exchange Retained Total (restated) reserve Net profit interest stock capital reserve to provisions for translation earnings capital employee benefits differences
As at 1 January 2017 86 (1) 10,758 106 5 3 (2) 2,043 - 12,998 4,086 17,084 Adjustment to the opening balance ------(8) - (8) (19) (27) Balance as at 1 January 2017 after 86 (1) 10,758 106 5 3 (2) 2,035 - 12,990 4,067 17,057 adjustment Measurement of financial instruments available - - - 22 - - - - - 22 21 43 for sale Cash flow hedging - - - 3 - - - - - 3 10 13 Foreign exchange translation differences ------(53) - - (53) - (53) Reclassification of property from property, plant - - - 1 - - - - - 1 - 1 and equipment to investment property Total net other comprehensive income - - - 26 - - (53) - - (27) 31 4 Net profit (loss) ------1,438 1,438 267 1,705 Total comprehensive income - - - 26 - - (53) - 1,438 1,411 298 1,709 Other changes, including: - 1 1,069 (4) - - - (2,330) - (1,264) 17,595 16,331 Distribution of financial result - - 1,122 - - - - (2,330) - (1,208) - (1,208) Transactions on treasury shares - 1 ------1 - 1 Acquisition of shares in Pekao ------17,711 17,711 Transactions with holders of non-controlling - - (57) ------(57) (116) (173) interests Sale of revalued real estate - - 4 (4) ------As at 30 June 2017 86 - 11,827 128 5 3 (55) (295) 1,438 13,137 21,960 35,097
1) Information on restatement of data for the period from 1 January to 30 June 2017 is presented in section 3.2.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
5. Interim consolidated cash flow statement
1 January – 1 January – Consolidated cash flow statement 30 June 2017 30 June 2018 (restated) 1) Profit before tax 3,147 2,156 Adjustments (7,983) 815 Movement in loan receivables from clients (6,872) (1,012) Movement in liabilities under deposits (753) 2,377 Movement in the valuation of assets measured at fair value (401) (66) Interest income and expenses (1,133) (722) Realized gains/losses from investing activities and impairment losses 715 301 Net foreign exchange differences 44 (358) Movement in deferred acquisition expenses (56) (66) Amortization of intangible assets and depreciation of property, plant and 538 294 equipment Movement in the reinsurers’ share in technical provisions (104) (136) Movement in technical provisions 1,025 1,591 Movement in receivables (210) (2,143) Movement in liabilities (586) 1,415 Cash flow on investment contracts (9) (55) Acquisitions and redemptions of participation units and investment certificates (116) (150) of mutual funds Income tax paid (957) (553) Other adjustments 892 98 Net cash flows from operating activities (4,836) 2,971 Cash flow from investing activities Proceeds 452,855 488,251 - sale of investment property 17 43 - proceeds from investment property 155 150 - sale of intangible assets and property, plant and equipment 24 5 - sale of ownership interests and shares 1,822 1,739 - realization of debt securities 103,815 111,652 - closing of buy-sell-back transactions 223,228 175,743 - closing of term deposits with credit institutions 109,155 114,140 - realization of other investments 13,779 78,937 - interest received 809 816 - dividends received 28 15 - increase in cash due to purchase of entities and change in the scope of 4 4,998 consolidation - other investment proceeds 19 13
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Consolidated cash flow statement (continued)
1 January – 1 January – Consolidated cash flow statement 30 June 2017 30 June 2018 (restated) 1) Expenses (445,904) (483,411) - purchase of investment properties (42) (24) - expenditures for the maintenance of investment property (51) (90) - purchase of intangible assets and property, plant and equipment (260) (194) - purchase of ownership interests and shares (1,754) (932) - purchase of ownership interests and shares in subsidiaries (12) (6,200) - decrease in cash due to the sale of entities and change in the scope of - (54) consolidation - purchase of debt securities (96,626) (106,503) - opening of buy-sell-back transactions (223,316) (174,595) - purchase of term deposits with credit institutions (109,375) (113,701) - purchase of other investments (14,455) (81,113) - other expenditures for investments (13) (5) Net cash flows from investing activities 6,951 4,840 Cash flows from financing activities Proceeds 117,941 130,016 - proceeds from the issue of shares by subsidiaries (in the part paid up by 12 - holders of non-controlling interests) - proceeds from loans and borrowings 1,266 1,611 - proceeds on the issue of own debt securities 1,834 2,250 - opening of repurchase transactions 114,829 126,155 Expenses (116,843) (129,070) - repayment of loans and borrowings (1,180) (1,618) - redemption of own debt securities (741) - - closing of repurchase transactions (114,808) (127,415) - interest on loans and borrowings (51) (3) - interest on outstanding debt securities (63) (34) Net cash flows from financing activities 1,098 946 Total net cash flows 3,213 8,757 Cash and cash equivalents at the beginning of the period 8,239 2,973 Movement in cash due to foreign exchange differences 53 (84) Cash and cash equivalents at the end of the period, including: 11,505 11,646 - restricted cash 67 55
1) Information on restatement of data for the period from 1 January to 30 June 2017 is presented in section 3.2.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (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 has been 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, in the register of businesses under 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 Statistical Classification of Economic Activities in Europe – non-life insurance (NACE 6603).
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
1.2 PZU Group entities and associates
Date of % of the share capital and % of votes obtaining held directly or indirectly by PZU No. Name of the entity Registered office control / Line of business and website significant 30 June 2018 31 December 2017 influence Consolidated insurance undertakings Non-life insurance. 1 Powszechny Zakład Ubezpieczeń SA Warsaw n/a n/a n/a https://www.pzu.pl/grupa-pzu/spolki/pzu-sa Life insurance. 2 Powszechny Zakład Ubezpieczeń na Życie SA Warsaw 18.12.1991 100.00% 100.00% https://www.pzu.pl/pl/grupa-pzu/spolki/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% Property insurance. http://www.balta.lv/ 7 PrJSC IC PZU Ukraine Kiev (Ukraine) 01.07.2005 100.00% 100.00% Property 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 companies – Pekao Group 10 Bank Pekao SA Warsaw 07.06.2017 20.03% 20.02% Banking services. https://www.pekao.com.pl/ 11 Pekao Bank Hipoteczny SA Warsaw 07.06.2017 20.03% 20.02% Banking services. http://www.pekaobh.pl/ 12 Centralny Dom Maklerski Pekao SA Warsaw 07.06.2017 20.03% 20.02% Brokerage services. https://www.cdmpekao.com.pl/ 13 Pekao Leasing sp. z o.o. Warsaw 07.06.2017 20.03% 20.02% Leasing services. http://www.pekaoleasing.com.pl/ 14 Pekao Investment Banking SA Warsaw 07.06.2017 20.03% 20.02% Brokerage services. http://pekaoib.pl/ 15 Pekao Faktoring sp. z o.o. Lublin 07.06.2017 20.03% 20.02% Factoring services. https://www.pekaofaktoring.pl/ Pekao Powszechne Towarzystwo Emerytalne SA in Management of pension funds. 16 liquidation (formerly Pekao Pioneer Powszechne Warsaw 07.06.2017 20.03% 20.02% https://www.pekaopte.pl/ Towarzystwo Emerytalne SA) 1) 07.06.2017 Creation, representing and management of mutual 17 Pekao TFI SA (formerly Pioneer Pekao TFI SA) Warsaw 20.03% 20.02% 11.12.20172) funds. https://www.pekaotfi.pl/tfi/welcome 18 Centrum Kart SA Warsaw 07.06.2017 20.03% 20.02% Auxiliary financial services. http://www.centrumkart.pl/
16
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Date of % of the share capital and % of votes obtaining held directly or indirectly by PZU No. Name of the entity Registered office control / Line of business and website significant 30 June 2018 31 December 2017 influence Consolidated companies – Pekao Group – continued 19 Pekao Financial Services sp. z o.o. Warsaw 07.06.2017 46.82% 3) 20.02% Transfer agent. http://www.pekao-fs.com.pl/pl/ 20 Centrum Bankowości Bezpośredniej sp. z o.o. Krakow 07.06.2017 20.03% 20.02% Call-center services. http://www.cbb.pl/ 21 Pekao Property SA Warsaw 07.06.2017 20.03% 20.02% Development activity. 22 FPB – Media sp. z o.o. Warsaw 07.06.2017 20.03% 20.02% Development activity. 23 Pekao Fundusz Kapitałowy sp. z o.o. in liquidation Warsaw 07.06.2017 20.03% 20.02% Business consulting Pekao Investment Management SA (formerly 07.06.2017 Asset management. 24 Warsaw 20.03% 20.02% Pioneer Pekao Investment Management SA) 11.12.2017 2) https://www.pekaotfi.pl/tfi/welcome 07.06.2017 25 Dom Inwestycyjny Xelion sp. z o.o. Warsaw 20.03% 20.02% Financial intermediation. https://www.xelion.pl/ 11.12.2017 4) Consolidated companies – Alior Bank Group 26 Alior Bank SA Warsaw 18.12.2015 31.96% 32.23% Banking services. https://www.aliorbank.pl/ Other activity supporting financial services, excluding 27 Alior Services sp. z o.o. Warsaw 18.12.2015 31.96% 32.23% insurance and pension funds. Centrum Obrotu Wierzytelnościami sp. z o.o. in 28 Krakow 18.12.2015 31.96% 32.23% Trading in receivables. liquidation Leasing services. 29 Alior Leasing sp. z o.o. Wroclaw 18.12.2015 31.96% 32.23% https://www.aliorbank.pl/wlasna-dzialalnosc/alior- leasing.html 30 Meritum Services ICB SA Gdańsk 18.12.2015 31.96% 32.23% IT services. Asset management services and management of Alior 31 Alior TFI SA (formerly Money Makers TFI SA) 5) Warsaw 18.12.2015 31.96% 19.39% SFIO subfunds. https://www.aliortfi.com/ 32 New Commerce Services sp. z o.o. Warsaw 18.12.2015 31.96% 32.23% The company does not conduct any activity 33 Absource sp. z o.o. Krakow 04.05.2016 31.96% 32.23% Service activity in the area of IT. 34 Serwis Ubezpieczeniowy sp. z o.o. Katowice 30.01.2017 31.96% 32.23% Brokerage activity.
17
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Date of % of the share capital and % of votes obtaining held directly or indirectly by PZU No. Name of the entity Registered office control / Line of business and website significant 30 June 2018 31 December 2017 influence Consolidated companies – PZU Zdrowie Group Medical services 35 PZU Zdrowie SA Warsaw 02.09.2011 100.00% 100.00% https://www.pzu.pl/pl/grupa-pzu/spolki/pzu-zdrowie 36 Centrum Medyczne Medica sp. z o.o. Płock 09.05.2014 100.00% 100.00% Medical services. http://cmmedica.pl/ Specjalistyczna Przychodnia Przemysłowa Prof- 37 Włocławek 12.05.2014 100.00% 100.00% Medical services. http://cmprofmed.pl/ Med sp. z o.o. Hospital, physical therapy and spa services. 38 Sanatorium Uzdrowiskowe “Krystynka” sp. z o.o. Ciechocinek 09.05.2014 99.09% 99.09% http://www.sanatoriumkrystynka.pl/ Przedsiębiorstwo Świadczeń Zdrowotnych 39 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 40 Łaziska Górne 01.12.2014 57.00% 57.00% Medical services. http://www.proelmed.pl/ sp. z o.o. 41 Centrum Medyczne Gamma sp. z o.o. Warsaw 08.09.2015 60.46% 60.46% Medical services. http://www.cmgamma.pl/ 42 Polmedic sp. z o.o. Radom 30.11.2016 100.00% 100.00% Medical services. http://www.polmedic.com.pl/ Artimed Niepubliczny Zakład Opieki Zdrowotnej 43 Kielce 21.12.2016 100.00% 100.00% Medical services. http://artimed.pl/ sp. z o.o. 44 Revimed sp. z o.o. Gdańsk 31.05.2017 100.00% 100.00% Medical services. http://www.revimed.pl/ Niepubliczny Zakład Opieki Zdrowotnej Trzebinia 45 Trzebinia 30.06.2017 100.00% 99.75% Medical services. http://www.nzoz.trzebinia.com/ sp. z o.o. 46 Centrum Medyczne św. Łukasza sp. z o.o. Częstochowa 09.01.2018 100.00% n/a Medical services. http://www.cmlukasza.pl/ Consolidated companies – other companies Management of pension funds. 47 Powszechne Towarzystwo Emerytalne PZU SA Warsaw 08.12.1998 100.00% 100.00% https://www.pzu.pl/pl/grupa-pzu/spolki/pte-pzu Auxiliary activity associated with insurance and pension 48 PZU Centrum Operacji SA Warsaw 30.11.2001 100.00% 100.00% funds. Creation, representing and management of mutual 49 Towarzystwo Funduszy Inwestycyjnych PZU SA Warsaw 30.04.1999 100.00% 100.00% funds. https://www.pzu.pl/pl/grupa-pzu/spolki/tfi-pzu Provision of assistance services. 50 PZU Pomoc SA Warsaw 18.03.2009 100.00% 100.00% https://www.pzu.pl/grupa-pzu/spolki/pzu-pomoc Financial services. 51 PZU Finance AB (publ.) Stockholm (Sweden) 02.06.2014 100.00% 100.00% https://www.pzu.pl/pl/grupa-pzu/spolki/pzu-finance
18
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Date of % of the share capital and % of votes obtaining held directly or indirectly by PZU No. Name of the entity Registered office control / Line of business and website significant 30 June 2018 31 December 2017 influence Consolidated companies – other companies – continued 52 PZU Finanse Sp. z o.o. Warsaw 08.11.2013 100.00% 100.00% Financial and accounting services. Development activity, operation and lease of properties. 53 Tower Inwestycje Sp. z o.o. Warsaw 27.08.1998 100.00% 100.00% https://www.pzu.pl/pl/grupa-pzu/spolki/tower- inwestycje Buying, operating, renting and selling real estate. 54 Ogrodowa-Inwestycje sp. z o.o. Warsaw 15.09.2004 100.00% 100.00% http://www.ogrodowainwestycje.pl/ 55 Arm Property sp. z o.o. Krakow 26.11.2014 100.00% 100.00% Purchase and sale of real estate. 56 Ipsilon sp. z o.o. Warsaw 02.04.2009 100.00% 100.00% Provision of assistance services and medical services. London 57 PZU Corporate Member Limited 28.09.2017 100.00% 100.00% Investment activity. (United Kingdom) Ardea Alba SA in liquidation 58 Warsaw 12.07.2001 100.00% 100.00% No business conducted. (formerly PZU Asset Management SA) Consulting and training services, development of technology innovation to support technical and 59 PZU LAB SA (formerly Omicron SA) Warsaw 13.09.2011 100.00% 100.00% procedural security processes and risk management. https://www.pzu.pl/pl/grupa-pzu/spolki/pzu-lab 60 Omicron BIS SA Warsaw 28.08.2014 100.00% 100.00% No business conducted. 61 Sigma BIS SA Warsaw 12.12.2014 100.00% 100.00% No business conducted. 62 LLC SOS Services Ukraine Kiev (Ukraine) 01.07.2005 100.00% 100.00% Assistance services. 63 Battersby Investments SA Warsaw 15.09.2017 100.00% 100.00% No business conducted. 64 Tulare Investments sp. z o.o. Warsaw 15.09.2017 100.00% 100.00% No business conducted. Consolidated companies – Armatura Group Production and sale of radiators and sanitary fittings 65 Armatura Kraków SA Krakow 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 66 Aquaform SA Środa Wlkp. 15.01.2015 100.00% 100.00% fittings. http://www.aquaform.com.pl/ Anhausen 67 Aquaform Badprodukte GmbH 15.01.2015 100.00% 100.00% Wholesale trade. (Germany) 68 Aquaform Ukraine ТОW Zhytomyr (Ukraine) 15.01.2015 100.00% 100.00% Wholesale trade. http://aquaform.org.ua/ 69 Aquaform Romania SRL Prejmer (Romania) 15.01.2015 100.00% 100.00% Wholesale trade. 70 Morehome.pl sp. z o.o. Środa Wlkp. 15.01.2015 100.00% 100.00% No business conducted.
19
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Date of % of the share capital and % of votes obtaining held directly or indirectly by PZU No. Name of the entity Registered office control / Line of business and website significant 30 June 2018 31 December 2017 influence Consolidated companies – mutual funds 71 PZU SFIO Universum Warsaw 15.12.2009 n/a n/a Investment of funds collected from fund members. 72 PZU FIZ Dynamiczny Warsaw 27.01.2010 n/a n/a as above 73 PZU FIZ Sektora Nieruchomości 6) Warsaw 01.07.2008 n/a n/a as above 74 PZU FIZ Sektora Nieruchomości 2 6) Warsaw 21.11.2011 n/a n/a as above 75 PZU FIZ Aktywów Niepublicznych BIS 1 Warsaw 12.12.2012 n/a n/a as above 76 PZU FIZ Aktywów Niepublicznych BIS 2 Warsaw 19.11.2012 n/a n/a as above 77 PZU FIZ Surowcowy Warsaw 03.09.2015 n/a n/a as above 78 PZU FIO Globalny Obligacji Korporacyjnych Warsaw 30.05.2016 n/a n/a as above 79 PZU FIZ Forte Warsaw 01.07.2016 n/a n/a as above 80 PZU Telekomunikacja Media Technologia Warsaw 07.09.2016 n/a n/a as above 81 PZU Dłużny Aktywny Warsaw 26.10.2016 n/a n/a as above 82 PZU FIZ Aktywów Niepublicznych Witelo Fund Warsaw 30.11.2016 n/a n/a as above 83 PZU FIZ Akcji Combo Warsaw 09.03.2017 n/a n/a as above 84 PZU Akcji Spółek Dywidendowych Warsaw 31.12.2017 n/a n/a as above 85 PZU FIZ Akcji Focus Warsaw 01.04.2018 n/a n/a as above 86 PZU iPuls Gotówka Warsaw 10.04.2018 n/a n/a as above 87 PZU iPuls Obligacje Polskie Warsaw 10.04.2018 n/a n/a as above 88 PZU iPuls Akcje Polskie Warsaw 10.05.2018 n/a n/a as above 89 PZU iPlus Akcji Rynków Rozwiniętych Warsaw 10.05.2018 n/a n/a as above 90 PZU iPuls Obligacji Rynków Rozwiniętych Warsaw 10.05.2018 n/a n/a as above 91 PZU iPuls Obligacji Rynków Wschodzących Warsaw 10.05.2018 n/a n/a as above
20
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Date of % of the share capital and % of votes obtaining held directly or indirectly by PZU No. Name of the entity Registered office control / Line of business and website significant 30 June 2018 31 December 2017 influence Associates 92 GSU Pomoc Górniczy Klub Ubezpieczonych SA Tychy 08.06.1999 30.00% 30.00% Insurance administration. http://gsupomoc.pl/ Human health activities, research and development in the area of medical sciences and pharmaceutical 93 EMC Instytut Medyczny SA Wroclaw 18.06.2013 28.31% 7) 28.31% 7) practice. http://www.emc-sa.pl/ Tortola, British Consulting and business activity – no business 94 CPF Management 07.06.2017 8.01% 8) 8.01% 8) Virgin Islands conducted. 1) On 1 June 2018, the shareholder meeting adopted a resolution to dissolve the company and open its liquidation process. 2) on 7 June 2017, upon the acquisition of Pekao shares by PZU, PZU obtained significant influence on PIM, in which Pekao held a 49% stake. After Pekao acquired 51% of PIM’s shares on 11 December 2017, PZU obtained indirect control over PIM and consequently over its Pekao TFI subsidiary. 3) As a result of the transaction described in section 1.4.4 as of 4 June 2018 PZU directly holds a 33.5% equity stake in PFS while Pekao’s stake fell to 66.5%. 4) On 7 June 2017, upon the acquisition of Pekao shares by PZU, PZU obtained significant influence on Xelion, in which Pekao held a 50% stake. After Pekao acquired 50% of Xelion’s shares on 11 December 2017, PZU obtained indirect control over Xelion. 5) Direct subsidiary of Alior Bank, in which Alior Bank holds a 100% stake (as at 31 December 2017: 60.16%). As a consequence, the PZU Management Board considers the PZU Group to be in control of the company. 6) As at 30 June 2018, 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 2017: 15 and 20, respectively). 7) The percentage of votes held by PZU is different from the stake held in the share capital, and both as at 30 June 2018 and as at 31 December 2017 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. 8) Pekao’s associate, in which it holds a 40.00% stake respectively. Consequently, the PZU Management Board recognizes that the PZU Group has significant influence over this company.
21
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
As at 30 June 2018, 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.
1.3 Non-controlling interest
The table below presents subsidiaries with certain non-controlling interest (at present or in the past):
Name of the entity 30 June 2018 31 December 2017
Pekao 1) 79.97% 79.98% Alior Bank 2) 68.04% 67.77% Centrum Medyczne Gamma sp. z o.o. 39.54% 39.54% Przedsiębiorstwo Usług Medycznych PROELMED sp. z o.o. 43.00% 43.00% Sanatorium Uzdrowiskowe “Krystynka” sp. z o.o. 0.91% 0.91% UAB PZU Lietuva Gyvybes Draudimas 0.66% 0.66% AAS Balta 0.01% 0.01% NZOZ Trzebinia 0.00% 0.25% 1) As a result, PZU also holds non-controlling interests in Pekao’s subsidiaries listed in the table in section 1.2. 2) As a result, PZU also holds non-controlling interests in Alior Bank’s subsidiaries listed in the table in section 1.2.
31 December 2017 Carrying amount of non-controlling interests 30 June 2018 (restated) 1) Pekao Group 17,214 18,636 Alior Bank Group 4,113 4,319 Other 5 6 Total 21,332 22,961 1) Information on restatement of data as at 31 December 2017 is presented in section 3.2.
22
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Presented below is condensed financial information for the Pekao Group and the Alior Bank Group included in the condensed interim consolidated financial statements.
Pekao Group Alior Bank Group 31 December 31 December Assets 30 June 30 June 2017 2017 2018 2018 (restated) 1) (restated) 1) Goodwill 692 692 - - Intangible assets 1,869 2,032 650 662 Other assets 82 95 46 36 Property, plant and equipment 1,661 1,731 441 476 Investment property 13 24 - - Loan receivables from clients 121,409 118,660 52,244 50,797 Financial derivatives 1,381 1,608 731 454 Investment financial assets 45,366 52,555 12,726 14,020 Measured at amortized cost 12,973 n/a 4,557 n/a Measured at fair value through other 31,000 n/a 8,124 n/a comprehensive income Measured at fair value through profit or loss 1,393 n/a 45 n/a Held to maturity n/a 3,500 n/a 1,339 Available for sale n/a 33,593 n/a 12,259 Measured at fair value through profit or loss n/a 1,731 n/a 87 Loans n/a 13,731 n/a 335 Deferred tax assets 1,095 915 904 641 Receivables 2,054 2,017 647 785 Cash and cash equivalents 8,031 5,282 1,863 1,338 Assets held for sale 46 64 - - Total assets 183,699 185,675 70,252 69,209
Pekao Group Alior Bank Group 31 December 31 December Equity and liabilities 30 June 30 June 2017 2017 2018 2018 (restated) 1) (restated) 1) Equity Equity attributable to equity holders of the parent 21,527 23,304 6,044 6,374 Share capital 262 262 1,305 1,293 Other capital 20,677 20,562 5,622 5,019 Retained earnings 588 2,480 (883) 62 Non-controlling interest 11 - - 1 Total equity 21,538 23,304 6,044 6,375
Liabilities Provisions for employee benefits 424 425 42 43 Other provisions 359 305 177 77 Deferred tax liability 33 38 1 - Financial liabilities 155,726 157,903 62,717 60,905 Other liabilities 5,619 3,700 1,271 1,809 Total liabilities 162,161 162,371 64,208 62,834 Total equity and liabilities 183,699 185,675 70,252 69,209 1) Information on restatement of data as at 31 December 2017 is presented in section 3.2.
23
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
The table below presents consolidated data of the PZU Group with separated data of the Pekao Group and Alior Bank Group incorporating the effect of adjustments resulting from the measurement of assets and liabilities to fair value as at the date control was acquired and their subsequent amortization over time. PZU Group Elimination Elimination Elimination of Consolidated profit and loss account without PZU Group of Pekao’s of Alior consolidation for the period from 1 January to 30 June 2018 Pekao and data Bank’s data adjustments Alior Bank Gross written premiums 11,881 - - 6 11,887 Reinsurers’ share in gross written premium (336) - - - (336) Net written premiums 11,545 - - 6 11,551 Movement in net provision for unearned premiums (491) - - - (491) Net earned premium 11,054 - - 6 11,060
Revenue from commissions and fees 1,673 (1,161) (404) 12 120 Net investment income 5,594 (3,264) (1,720) 7 617 Net result on realization of financial instruments and 99 (67) (61) - (29) investments Movement in allowances for expected credit losses and (838) 285 514 - (39) impairment losses on financial instruments Net movement in fair value of assets and liabilities 401 (27) (377) - (3) measured at fair value Other operating income 800 (180) (227) - 393
Claims, benefits and movement in technical provisions (7,504) - - - (7,504) Reinsurers’ share in claims, benefits and movement in 159 - - - 159 technical provisions Net insurance claims and benefits paid (7,345) - - - (7,345) Fee and commission expenses (353) 183 168 - (2) Interest expenses (992) 547 374 (7) (78) Acquisition expenses (1,519) - - (12) (1,531) Administrative expenses (3,342) 1,724 806 (6) (818) Other operating expenses (2,086) 796 403 - (887) Operating profit (loss) 3,146 (1,164) (524) - 1,458 Share of the net financial results of entities measured by 1 - - - 1 the equity method Profit (loss) before tax 3,147 (1,164) (524) - 1,459 Income tax (789) 322 141 - (326) Net profit (loss) 2,358 (842) (383) - 1,133
24
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
PZU Group Consolidated profit and loss account Elimination Elimination Elimination of without for the period from 1 January to 30 June 2017 1) PZU Group of Pekao’s of Alior consolidation Pekao and (restated) data Bank’s data adjustments Alior Bank Gross written premiums 11,606 - - - 11,606 Reinsurers’ share in gross written premium (307) - - - (307) Net written premiums 11,299 - - - 11,299 Movement in net provision for unearned premiums (952) - - - (952) Net earned premium 10,347 - - - 10,347
Revenue from commissions and fees 699 (194) (400) 6 111 Net investment income 3,282 (510) (2,051) 6 727 Net result on realization of financial instruments and 238 45 (1) - 282 investments Movement in allowances for expected credit losses and (539) - 450 - (89) impairment losses on financial instruments Net movement in fair value of assets and liabilities 46 (4) 166 - 208 measured at fair value Other operating income 530 (16) (82) - 432
Claims, benefits and movement in technical provisions (7,379) - - - (7,379) Reinsurers’ share in claims, benefits and movement in 165 - - - 165 technical provisions Net insurance claims and benefits paid (7,214) - - - (7,214)
Fee and commission expenses (189) 25 154 - (10) Interest expenses (420) 82 303 (6) (41) Acquisition expenses (1,412) - - (6) (1,418) Administrative expenses (2,036) 268 966 (8) (810) Other operating expenses (1,175) 85 242 8 (840) Operating profit (loss) 2,157 (219) (253) - 1,685 Share of the net financial results of entities measured by (1) (3) - - (4) the equity method Profit (loss) before tax 2,156 (222) (253) - 1,681 Income tax (451) 51 68 - (332) Net profit (loss) 1,705 (171) (185) - 1,349 1) Information on restatement of data for the period from 1 January to 30 June 2017 is presented in section 3.2.
Alior Bank Pekao Group Group Statement of comprehensive income 1 January – 1 June - 1 January – 1 January – 30 June 2018 30 June 2017 1) 30 June 2018 30 June 2017 Net profit 842 171 383 185 Other comprehensive income 44 4 39 40 Debt instruments measured at fair value through 117 n/a 21 n/a other comprehensive income Equity instruments measured at fair value through (56) n/a - n/a other comprehensive income Measurement of financial instruments available for - (4) - 34 sale Net cash flow hedges (17) 8 19 6 Foreign exchange differences - - (1) - Total net comprehensive income 886 175 422 225 1) Information on restatement of data for the period from 1 June to 30 June 2017 is presented in section 3.2.
25
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Pekao Group Alior Bank Group Cash flow statement 1 January – 1 June - 1 January – 1 January – 30 June 2018 30 June 2017 1) 30 June 2018 30 June 2017 Net cash flows from operating activities (5,854) 3,596 (290) (1,979) Net cash flows from investing activities 7,422 (396) 896 3,639 Net cash flows from financing activities 1,133 (1,244) (117) 14 Total net cash flows 2,701 1,956 489 1,674 1) Information on restatement of data for the period from 1 June to 30 June 2017 is presented in section 3.2.
Pekao Group Alior Bank Group Dividend-related information 1 January – 1 June - 1 January – 1 January – 30 June 2018 30 June 2017 30 June 2018 30 June 2017 Date of ratifying the dividend 21 June 2018 19 April 2017 - - Record date 6 July 2018 21 June 2017 - - Dividend payout date 20 July 2018 6 July 2017 - - Dividend per share (PLN) 7.90 8.68 - - Dividend due to the PZU Group 415 456 - - Dividend due to non-controlling shareholders 1,659 1,822 - -
1.4 Changes in the scope of consolidation and structure of the PZU Group
1.4.1. Acquisition of shares in Pekao
On 8 December 2016 PZU, acting in a consortium with PFR signed the Pekao share purchase agreement (“SPA”) with UniCredit S.p.A. („Seller”, „UniCredit”). On the closing date, i.e. on 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. As a result of this transaction PZU recognized that it acquired control over Pekao on 7 June 2017. The price agreed by the Parties is PLN 123 per share, which entailed 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 was PLN 6,457 million. The price also included payment for the acquired right to the dividend adopted by the Pekao Ordinary Shareholder Meeting held on 19 April 2017 in the amount of PLN 8.68 per share, i.e. PLN 456 million in total. The SPA does not contemplate the implementation of an adjustment to the purchase price.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Final settlement of the Pekao acquisition
The settlement for the acquisition of the stake in Pekao on the date of obtaining control was made on the basis of the data prepared on 31 May 2017. No material differences in accounting data transpired between 31 May and 7 June 2017. The condensed interim consolidated financial statements contain the final fair value of the assets and liabilities acquired (in particular, of the loan portfolio). In the process of calculating goodwill: the goodwill carried in Pekao’s financial statements was written down; intangible assets not carried thus far in Pekao’s financial statements were recognized; the assets and liabilities in Pekao’s financial statements were measured at fair value – the loan portfolio, the property portfolio (owner-occupied property, investment property and property for sale), financial assets held to maturity (measured by Pekao at amortized cost) and available for sale (measured by Pekao at historical cost); no contingent liabilities requiring recognition were identified; no potential indemnification assets requiring recognition were identified.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
The final settlement of the transaction is presented below on the basis of the fair value of the acquired assets and liabilities. Adjustment to fair value Adjustment – Assets Carrying amount Fair value Notes (preliminary final settlement settlement) The goodwill recognized in Pekao’s balance sheet was eliminated and it was Goodwill 56 (56) - - recognized as part of the goodwill coming from the acquisition of shares in Pekao. New assets were identified: trade mark – PLN 340 million; Intangible assets 544 1,450 - 1,994 core deposit intangibles (CDI) – PLN 1,000 million; relations with clients holding a PEX cash loan – PLN 110 million. Other assets 192 - - 192 The property measured by Pekao at historical cost minus accumulated Property, plant and equipment 1,403 253 51 1,707 depreciation and impairment losses was measured at fair value. Investment property 25 - 2 27 Entities measured by the equity The stakes in associates (PIM and Xelion) Pekao measured using the equity 154 400 - 554 method method were measured at fair value. Financial assets 157,634 (1,199) - 156,435 Held to maturity 4,507 22 - 4,529 The assets measured by Pekao at amortized cost wer measured at fair value. The equity instruments presented by Pekao at historical cost were measured Available for sale 22,168 151 - 22,319 at fair value and the measurement of some assets was done in a consistent manner in accordance with the models in operation in the PZU Group. Measured at fair value through profit 2,886 - - 2,886 or loss Hedge derivatives 325 - - 325 Loans 127,748 (1,372) - 126,376 The loan portfolio was measured at fair value. Deferred tax assets 867 (67) (10) 790 The deferred tax on the adjustments made to fair value was assessed. Receivables 2,542 (16) - 2,526 Receivables were measured at fair value. Cash and cash equivalents 4,981 - - 4,981 Assets held for sale 48 (2) - 46 Property held for sale was measured at fair value. Total assets 168,446 763 43 169,252
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Adjustment to fair value Adjustment – Liabilities Carrying amount Fair value Notes (preliminary final settlement settlement) Provisions for employee benefits 381 40 - 421 The provision for employee holidays was measured at fair value. Other provisions 249 46 - 295 A fair value measurement of provisions was made. Deferred tax liability 5 - - 5 Financial liabilities 141,297 43 - 141,340 Liabilities measured at amortized cost were measured at fair value. Other liabilities 4,990 66 - 5,056 Total liabilities 146,922 195 - 147,117
Adjustment to fair value Adjustment – Net assets Carrying amount Fair value Notes (preliminary final settlement settlement) Net assets attributable to the holders Impact exerted by the foregoing revaluations on the net asset value 21,509 568 43 22,120 of the parent company attributable to the holders of the parent company. Non-controlling interest 15 - - 15 Total net assets 21,524 568 43 22,135
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
In the settlement of the acquisition, the PZU Group reduced the consideration transferred 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 obtaining control; on the date of PZU’s acquisition of control that amount was presented as a receivable, and it was received on 6 July 2017. Adjustment – Preliminary Final Goodwill calculation final settlement settlement settlement Consideration transferred 6,001 - 6,001 Cash transferred 6,457 - 6,457 Adjustment by an amount forming the price for the right to receive the (456) - (456) dividend Value of non-controlling interests (80.00% of the fair value of Pekao’s net 17,662 34 17,696 assets) Fair value of the Pekao’s identifiable net assets (22,077) (43) (22,120) Goodwill 1,586 (9) 1,577 Goodwill will not reduce taxable income.
1.4.2. Acquisition of Centrum Medyczne św. Łukasza sp. z o.o.
On 9 January 2018, PZU Zdrowie SA acquired 360 shares in Centrum Medyczne św. Łukasza sp. z o.o. representing 100% of the share capital and 100% of the votes at the shareholder meeting with a par value of PLN 600 each. Since the date of obtaining control, i.e. 9 January 2018, Centrum Medyczne św. Łukasza sp. z o.o has been consolidated.
1.4.3. Changes to the consolidated mutual funds
Since control was gained over the PZU FIZ Akcji Focus fund, it is consolidated as of 1 April 2018. In addition, the following newly-created funds are consolidated as of 10 May 2018: PZU iPuls Gotówka, PZU iPuls Obligacje Polskie, PZU iPuls Akcje Polskie, PZU iPlus Akcji Rynków Rozwiniętych, PZU iPuls Obligacji Rynków Rozwiniętych, PZU iPuls Obligacji Rynków Wschodzących.
1.4.4. Transactions under joint control
On 24 April 2018 PTE PZU received the KNF’s decisions consenting to the acquisition of management of Pekao OFE and Pekao DFE. PZU PTE and Pekao PTE entered into a business transfer agreement on 18 May 2018 encompassing i.a. the operations of Pekao OFE and Pekao DFE, involving the management of Pekao OFE and Pekao DFE. The business was acquired effectively on 19 May 2018. According to KNF’s decision the date for commencing the winding up of Pekao OFE is 1 August 2018, while this process will end and the assets of Pekao OFE will be merged with the assets of OFE PZU “Złota Jesień” on 12 October 2018. The winding up of DFE Pekao has been in progress since 19 May 2018 is slated to be completed on 28 September 2018. On 4 June 2018 the National Court Register registered PFS’s share capital increase in connection with the spin off (organizational, functional and financial) and the transfer of the branch of the PZU CO transfer agent (forming an organization part of a business) to PFS within the meaning of Article 530 § 2 of the Commercial Company Code. The transaction was executed on the basis of the agreement concluded on 16 March 2018 by and between PZU, Pekao, PFS and PZU CO and the spin off plan executed on 27 February 2018 by and between PZU CO (company being spun off) and PFS (acquiring company). PZU CO’s net asset value transferred to PFS on the date of the spin off was PLN 7 million. From the spin off date the transfer agent services rendered thus far by PZU CO are rendered by PFS. The transactions did not affect the condensed interim consolidated financial statements.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN) 2. Composition of the Management Board, Supervisory Board and PZU Group Directors
2.1 Composition of the parent company’s Management Board
From 1 January 2018, 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. No changes in the composition of the PZU Management Board have occurred by the date of conveying this periodic report.
2.2 Composition of the parent company’s Supervisory Board
From 1 January 2018, the PZU Supervisory Board consisted of the following persons: Katarzyna Lewandowska – Chairwoman of the Supervisory Board; Aneta Fałek – Deputy Chairwoman of the Supervisory Board; Alojzy Nowak – Supervisory Board Secretary; Bogusław Banaszak – Supervisory Board Member; Marcin Chludziński – Supervisory Board Member; Paweł Górecki – Supervisory Board Member; Agata Górnicka – Supervisory Board Member; Robert Śnitko – Supervisory Board Member; Maciej Zaborowski – Supervisory Board Member. On 8 January 2018, Aneta Fałek tendered her resignation from being a PZU Supervisory Board Member as of 8 February 2018. On 8 January 2018, the Prime Minister, acting on behalf of the State Treasury of the Republic of Poland, appointed Mr. Maciej Łopiński to be a PZU SA Supervisory Board Member. On 9 January 2018, Bogusław Banaszak, who was a PZU SA Supervisory Board Member, died. On 9 January 2018, Maciej Łopiński took over the function of Chairman of the PZU Supervisory Board and Paweł Górecki – Deputy Chairman of the PZU Supervisory Board. On 9 March 2018 the Extraordinary Shareholder Meeting of PZU appointed Robert Jastrzębski to the PZU Supervisory Board. From 9 March 2018 to the date of conveying this periodic report, the PZU Supervisory Board consisted of the following persons: Maciej Łopiński – Supervisory Board Chairman; Paweł Górecki – Supervisory Board Deputy Chairman; Alojzy Nowak – Supervisory Board Secretary; Marcin Chludziński – Supervisory Board Member; Agata Górnicka – Supervisory Board Member; Robert Jastrzębski – Supervisory Board Member;
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Katarzyna Lewandowska – Supervisory Board Member; Robert Śnitko – Supervisory Board Member; Maciej Zaborowski – Supervisory Board Member.
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 2018, the following persons were PZU Group Directors: Aleksandra Agatowska; Tomasz Karusewicz; Bartłomiej Litwińczuk; Dorota Macieja; Roman Pałac. No changes in the composition of the PZU Group Directors have occurred by the date of conveying this periodic report.
3. Key accounting policies, key estimates and judgments
Detailed accounting policies and critical estimates and judgments are presented in the consolidated financial statements.
3.1 Changes in accounting policies and estimates, errors from previous years
3.1.1. Amendments to the applied IFRS
3.1.1.1. Standards, interpretations and amended standards effective from 1 January 2018
The following changes in standards were applied to the condensed interim consolidated financial statements.
Date of entry into Regulation effect for annual approving the Standard/interpretation Notes periods beginning standard or on interpretation
IFRS 9 – Financial The effect of the application of IFRS 9 is described in 1 January 2018 2067/2016 Instruments section 3.1.2.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Date of entry into Regulation effect for annual approving the Standard/interpretation Notes periods beginning standard or on interpretation
In accordance with the amendment to IFRS 4 issued by the International Accounting Standards Board on 12 September 2016, insurance undertakings may defer the implementation of IFRS 9 until the entry into force of IFRS 4 Phase II concerning insurance contracts, but by no later than 1 January 2021, however the PZU Group may not take advantage of this exemption due to the significant share of Amendment to IFRS 4 – banking activity. Application of IFRS 9 The Commission of the European Union has also allowed ‘Financial Instruments’ 1 January 2018 1988/2017 financial conglomerates to defer application of IFRS 9 by together with IFRS 4 insurance undertakings in the conglomerates, provided that ‘Insurance Contracts’ no financial instruments are transferred between insurance and banking entities within the conglomerates. The report includes information on insurance undertakings that continue to apply IAS 39 and the disclosures required under IFRS 7 are provided separately for the insurance entities applying IAS 39 and for other entities applying IFRS 9. The PZU Group has decided not to take advantage of the possibility referred to in the regulation. 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 reflects the value of consideration (i.e. the payment) which the company expects to obtain a right to in exchange for the 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 IFRS 15 – Revenue from 1 January 2018 1905/2016 more comprehensive explanations on the recognition of Contracts with Customers agreements with multiple deliverables. The standard does not apply to insurance contracts, financing arrangements and secondary activity (e.g. sale of fixed assets).
The PZU Group applied IFRS 15 in accordance with the approach described in section C3 b) – retrospectively, with joint effect for contracts in force as at 1 January 2018 (date of initial application) recognized once as at that date.
The PZU Group has analyzed the impact the new standard will have on agreements signed by PZU Group entities and has not identified any agreements, for which application of IFRS 15 would have a material effect on the consolidated financial statements. This is because revenues covered by IFRS 15 are of secondary importance to the financial reporting of the PZU Group.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Date of entry into Regulation effect for annual approving the Standard/interpretation Notes periods beginning standard or on interpretation
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), accounting for intellectual property licenses (determining in which situations revenues from Clarifications to IFRS 15 – intellectual property licenses should be settled “over a revenue from contracts 1 January 2018 1987/2017 certain period” and in which situations “at a given point in with customers time”) and the distinctions between 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. 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 Classification and valuation 1 January 2018 289/2018 situations where share-based payments settled in cash are of share-based payment changed to share-based payments settled in equity instruments due to changes in contractual provisions.
The change did not affect the consolidated financial statements. The amendment clarifies when the entity should transfer properties under construction to or from the investment property category in the event of change of the nature of Amendment to IAS 40 – the use of such property in situations other than specifically Transfers of Investment 1 January 2018 800/2018 listed in IAS 40. Property
The change did 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. IAS 28 – as regards the election by specified entities to Amendments to IFRS measure at fair value through profit or loss interests in 1 January 2018 182/2018 2014-2016 associates and joint ventures in accordance with IFRS 9.
The amendments did not affect the PZU Group’s consolidated financial statements. The interpretation clarifies that the exchange rate should be applied in recognizing a transaction denominated in a IFRIC interpretation 22 – foreign currency in accordance with IAS 21 if the client Foreign Currency 1 January 2018 519/2018 makes a non-refundable payment of an advance Transactions and Advance consideration for delivery of goods or services. Consideration The interpretation had no effect on the PZU Group’s consolidated financial statements.
3.1.2. IFRS 9 – Financial Instruments
IFRS 9 Financial Instruments, published by the IASB in July 2014 and approved by the European Commission in November 2016, replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted. The PZU Group started applying IFRS 9 on 1 January 2018 in the version published in July 2014.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
IFRS 9 sets out new requirements for the classification and measurement of financial instruments, impairment of financial assets and hedge accounting.
Effect of the application of the new standard
Impact of Carrying Impact of impairment Carrying amount under changes in due to amount under Classification under IAS Classification under IAS 39 as at measurement expected IFRS 9 as at 39 IFRS 9 31 December caused by losses 1 January 2017 reclassification resulting from 2018 credit risk Financial assets at 167,497 (83) (1,524) 165,890 amortized cost Financial assets at fair Loan receivables from value through other 1,597 (73) 33 1,557 clients comprehensive income Financial assets at fair 363 (6) 8 365 value through profit or loss Financial derivatives Financial derivatives 2,351 - - 2,351 Financial assets at 18,985 - (11) 18,974 amortized cost Financial assets at fair Held to maturity value through other 2,204 66 - 2,270 comprehensive income Financial assets at fair 48 1 - 49 value through profit or loss Financial assets at 4,874 (1) (2) 4,871 amortized cost Financial assets at fair Available for sale value through other 43,385 - - 43,385 comprehensive income Financial assets at fair 260 - - 260 value through profit or loss Financial assets at 25 (2) - 23 amortized cost Financial assets at fair Measured at fair value value through other 491 - - 491 through profit or loss comprehensive income Financial assets at fair 19,727 - - 19,727 value through profit or loss Financial assets at 8,515 (2) (19) 8,494 amortized cost Loans – debt securities Financial assets at fair value through other 5,108 (2) (9) 5,097 comprehensive income Financial assets at Loans - other 6,424 - (45) 6,379 amortized cost Cash and cash equivalents 8,239 - - 8,239 Other assets 25,775 - 3 25,778 Deferred tax assets 1,590 19 306 1,915 Total assets 317,458 (83) (1,260) 316,115
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Impact of Carrying Impact of impairment Carrying amount under changes in due to amount under Classification under IAS Classification under IAS 39 as at measurement expected IFRS 9 as at 39 IFRS 9 31 December caused by losses 1 January 2017 reclassification resulting from 2018 credit risk Equity attributable to equity holders of the 14,599 (223) (231) 14,145 parent Share capital 86 - - 86 Revaluation reserve 157 (34) 41 164 Other capital 11,760 - - 11,760 Retained earnings 2,596 (189) (272) 2,135 Non-controlling interest 22,961 140 (1,182) 21,919 Total equity 37,560 (83) (1,413) 36,064 Financial liabilities held for Financial liabilities at fair 4,955 - - 4,955 trading value through profit or loss Financial liabilities at Financial liabilities at 219,595 - - 219,595 amortized cost amortized cost Provisions 45,611 - 153 45,764 Deferred tax liability 638 - - 638 Other liabilities 9,099 - - 9,099 Total liabilities 279,898 - 153 280,051 Total equity and 317,458 (83) (1,260) 316,115 liabilities The PZU Group reduced the allowances for expected credit losses recognized by banks in the condensed interim financial statements for Q1 2018 by subtracting from them the amounts pertaining to the changes in credit risk recognized in the fair value measurement of the loan receivables portfolios as at the date of acquiring the banks and that were outstanding up to 1 January 2018. As a result of the analyses conducted, also by engaging external advisors, the decision was ultimately made to recognize the consequence of credit risk in the condensed interim financial statements for H1 2018, similarly to the approach taken by banks, as follows from the principal assumption made by IFRS 9 in respect of the immediate recognition of credit losses directly following the acquisition of financial assets. The only difference in comparison with the amounts recognized by the banks ensued from the divergent classification to baskets at the PZU Group’s consolidated level. Condensed interim Condensed interim Effect of the application of IFRS 9 consolidated financial Difference consolidated financial statements for Q1 2018 statements for H1 2018 Revaluation reserve 7 - 7 Retained earnings (349) (112) (461) Total equity attributable to equity (342) (112) (454) holders of the parent Non-controlling interest (739) (303) (1,042) Total equity (1,081) (415) (1,496)
Classification and measurement of financial assets
This standard introduces a new approach to the classification of financial assets, which depends on: the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. 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.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
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. The classification may only be changed in very rare cases when the business model changes. Business models The components of financial assets are managed according to business models used to convey information for management purposes. The analysis of models done by the PZU Group covered the following, among others: how the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity's key management personnel; the risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way in which those risks are managed. Financial assets held for trading and those that are managed and whose results are evaluated at fair value have been classified as measured at fair value through profit or loss.
SPPI test In order to evaluate whether contractual cash flows consist of solely payments of principal and interest (SPPI test), a special test is performed. The principal amount is the fair value of a financial asset at initial recognition. Interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin. The SPPI test examines whether a financial asset contains contractual terms that could change the timing or amounts of contractual cash flows so that the condition of obtaining solely payments of principal and interest would not be met. In making its evaluation, the PZU Group takes the following into account: conditional events that could change the amounts and timing of cash flows; factors increasing interest; terms of prepayment and extension; terms limiting the right to obtain cash flows; factors that modify the time value of money, e.g. periodic resets of the interest rate. Financial assets measured at amortized cost A financial asset is classified as financial asset measured at amortized cost if both of the following conditions are met: the financial asset is held within a business model whose objective is achieved by holding financial assets in order to collect contractual cash flows, it passes the SPPI test – the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. These conditions are met by the financial assets classified according to IAS 39 as loans and receivables (of which most credit receivables from clients) and as financial assets held to maturity, except for the financial assets, for which it was determined after analysis that their terms may result in cash flows that are not solely payments of principal and interest on the principal amount outstanding. Financial assets measured at amortized cost also include purchased financial assets impaired due to credit risk. Such financial assets were acquired in connection with the merger with a spun-off portion of Bank BPH in 2016 and Bank Meritum in 2015. As a result, loans and debt securities (treasury bonds) of an investment nature were classified as measured at amortized cost. Under IAS 39 provisions, which were applied until 31 December 2017, the items were classified respectively as loans and receivables, financial assets available for sale and financial assets held to maturity. At the time of initial application of IFRS9, an assessment was also made of the business model for investment securities, which are mostly held to obtain cash flows and for sale, as a result of which it was concluded that it was common practice in some of these securities to hold them to obtain cash flows and the intentions with respect to them had not changed. Therefore, it was concluded that the appropriate business model for these securities is a model whose objective is achieved by holding financial assets to collect contractual cash flows and accordingly they were reclassified to assets measured at amortized cost. Previously, these securities were classified as available for sale and measured at fair value through equity.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Financial assets measured at fair value through other comprehensive income Financial assets are measured at fair value through other comprehensive income if both of the following conditions are met: the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; it passes the SPPI test – the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. These conditions are satisfied in particular by the debt instruments, which under IAS 39 were classified as financial assets available for sale. Since some receivables from clients on account of loans and corporate and municipal securities were classified into a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, these loans are measured at fair value through equity. Before applying IFRS 9, these items were measured at amortized cost in accordance with IAS 39. In connection with the possible sale of some assets from the portfolio of securities previously held to maturity, they were reclassified to fair value through equity, because the relevant business model for these securities is a model whose objective is achieved by both collecting cash flows and selling financial assets. Before applying IFRS 9, these items were measured at amortized cost in accordance with IAS 39. This category of financial assets also includes equity instruments, for which an irrevocable designation has been made to be measured at fair value, with subsequent changes in fair value recognized in other comprehensive income. Financial assets at fair value through profit or loss This category includes other financial instruments that do not meet the conditions for being classified as financial assets measured at amortized cost or fair value through other comprehensive income. This pertains in particular to the following financial assets: financial assets designated for measurement at fair value through profit or loss; financial assets classified under IAS 39 as held for trading; derivative transactions; participation units that are not equity instruments and to which the SPPI condition does not apply, which solely payment of principal and interest, classified under IAS 39 as financial assets available for sale; financial assets that have not passed the SPPI test - for which contractual terms result in cash flows not being solely payments of principal and interest; financial assets held within a business model other than the one whose objective is to hold financial assets in order to collect contractual cash flows or both to collect contractual cash flows and to sell financial assets; equity instruments that, in accordance with IAS 39, were classified as available for sale and measured at fair value through equity but not irrevocably designated as at fair value through equity; loan receivables from customers for loans under which contractual cash flows are not solely payments of principal and interest due to financial leverage increasing the variability of contractual cash flows. This applies mainly to student loans, loans with subsidies from the Agency for Restructuring and Modernization of Agriculture and some corporate exposures. Before applying IFRS 9, these items were measured at amortized cost in accordance with IAS 39.
Classification and measurement of financial liabilities
Financial liabilities measured at fair value through profit or loss Financial liabilities measured at fair value through profit or loss include those instruments that were classified in the same category under IAS 39, in particular:
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
derivative transactions; liabilities on borrowed securities (short sale); investment contracts for the client’s account and risk (unit-linked); liabilities to members of consolidated mutual funds. Financial liabilities measured at amortized cost Financial liabilities measured at amortized cost include those instruments that were classified in the same category under IAS 39, in particular: deposits obtained by the PZU Group’s banks; securities issued by banks; loans received; liabilities on the issue of own debt securities; subordinated liabilities; liabilities under repurchase transactions.
Impairment
IFRS 9 introduces an obligation to recognize not only incurred losses, as in the case of IAS 39, but also expected credit loss (ECL). This means a significant increase in the probability weighted estimates of expected credit loss. The new impairment model is applied to the following financial assets that are not measured at fair value through profit or loss: loan receivables from clients; debt securities; lease receivables; lending commitments and issued financial guarantees (previously impairment losses were recognized in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets). For debt assets measured at amortized cost and at fair value through other comprehensive income, impairment is measured as: Lifetime ECL – the expected credit losses that result from all possible default events over the expected life of a financial instrument; 12-month ECL – the portion of lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date. The Group measures allowances for expected credit losses at an amount equal to lifetime ECL, except for the following instruments, for which 12-month ECL is recognized instead: financial instruments for which credit risk has not increased significantly since initial recognition; debt securities featuring low credit risk at the reporting date. Low-risk debt securities are those securities that have been assigned an external investment-grade rating; Change of the approach to calculation of impairment losses has 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 impariment are no longer used. The impairment is designated in three categories: basket 1 – basket with low credit risk – a 12-month ECL is recognized; basket 2 – the portfolio in which a significant increase of credit risk occurs – a lifetime ECL is recognized; basket 3 – impaired loans – a lifetime ECL is recognized. The impairment loss calculation method also affects the method of recognizing interest income – for baskets 1 and 2 interest income is determined on the basis of gross exposures, and in basket 3 on a net basis. If credit risk increases
39
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN) significantly (basket 2) then the expected credit losses are recognized earlier, which contributes to higher impairment losses and consequently affects the financial result. The PZU Group recognizes the cumulative changes in lifetime ECL since initial recognition as allowances for expected credit losses for ECL from purchased or originated credit-impaired financial assets (POCI). Calculation of PD and LGD parameters PZU Group uses the following parameters to estimate allowances for expected credit losses: Probability of Default (PD) – probability of default of a counterparty over a specified time horizon; Loss Given Default (LGD) – loss given default, expressed as a percentage of the total exposure in case of a counterparty’s insolvency. For issuers and exposures that are externally rated, PDs is assigned on the basis of the average market default rate for the rating classes concerned. First, the internal rating of an entity/issue is determined in accordance with the internal rating methodology. The tables published by external rating agencies are used to estimate average PD. The Moody’s RiskCalc model is used for issuers of corporate bonds and corporate loans, for which no external rating is available. The EDF parameter (expected default frequency) is used to estimate PD. When estimating lifetime PD for exposures with maturity above 5 years (in the RiskCalc model, the forward EDF curve refers to a 5-year period), it is assumed that in subsequent years PD is constant and corresponds to the value determined by the model for the 5th year. For issuers of corporate bonds and corporate loans, 12-month LGD is determined based on the Moody’s RiskCalc model (LGD module). When estimating lifetime LGD for exposures with maturity above 5 years, it is assumed that in subsequent years LGD is constant and corresponds to the value determined by the module for the 5th year. If a credit rating agency has allocated a separate recovery rate to the instrument concerned then this parameter is used. For a given RR parameter the formula: LGD = 1-RR is applicable. Where the RiskCalc model cannot be used to estimate LGD levels and where the instrument does not have LGD awarded by an external rating agency then the average RR should be used, based on market data (properly differentiating the corporate and sovereign debt classes) from external rating agencies, i.e. Moody’s, Standard & Poor’s or Fitch, using the following formula: LGD = 1-RR. When lifetime LGD must be estimated, the value of this parameter is assumed to be constant. The degree of subordination of debt is taken into account when selecting data for LGD. Change in credit risk since initial recognition At each reporting date, the PZU Group shall assesses whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the PZU Group should use the change in the risk of a default occurring over the expected life of the financial instrument instead of the change in the amount of expected credit losses. To make that assessment, the Group compares the PD for the financial instrument as at the reporting date with the PD as at the date of initial recognition and consider reasonable and supportable information, that is available without undue cost or effort. It is recognized that the credit risk on a financial instrument has not increased significantly at initial recognition and on the reporting date if the financial instrument features low credit risk (that is, it has an external investment-grade rating). The PZU Group assesses whether the credit risk of financial instruments has increased significantly by comparing the PD parameter for the rest of its lifetime on the reporting date with the PD parameter for the rest of its lifetime estimated at the time of initial recognition. The PZU Group regularly monitors the effectiveness of the criteria used to identify a significant increase in credit risk, in order to confirm that: the criteria allow for identification of a significant increase in credit risk before the impairment of the exposure occurs; the criteria do not coincide with the 30-day past due period; the average time between identifying a significant increase in credit risk and impairment is reasonable; exposures are generally not transferred directly from basket 1 (12-month ECL) to basket 3 (impairment);
40
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
there is no unreasonable volatility of allowances for expected credit losses resulting from transfers between 12- month ECL and lifetime ECL. The financial assets acquired in the transactions to acquire Pekao and Alior Bank were classified as of the date of acquisition to basket 1 or as POCI, respectively (assets that were covered by impairment losses). The financial assets that were classified as POCI as of the date of acquisition did not change their classification on the day of implementing IFRS 9, or on subsequent balance sheet dates. The following standards have been endorsed for the other exposures: The PZU Group maintains the banks’ classification in respect of exposures that were in basket 1 in the bank on the date of acquisition; a check is done of the exposures that were in basket 2 in the banks on the date of acquisition to see whether the loan quality deteriorated after the date of acquisition. If not – these assets are classified as basket 2, also at the PZU Group level; otherwise – the PZU Group upholds the classification to basket 1 (no modifications versus the acquisition date); The assignment of all the assets acquired by banks after the date of acquisition to baskets at the PZU Group level is consistent with the classification used at the level of the bank’s financial statements.
Hedge accounting
Upon first application of IFRS 9 it is possible to opt to continue application of the hedge accounting requirements in accordance with IAS 39 instead of section 6 of IFRS 9. The PZU Group has made a decision to continue to apply IAS 39 to hedge accounting. However, in respect to hedge accounting disclosures, IFRS 7 Financial Instruments: Disclosures amended by IFRS 9 is applied because the option to choose an accounting policy does not exempt from the application of the new disclosure requirements.
Disclosures
The implementation of IFRS 9 resulted in a significant change in the presentation disclosures pertaining to financial instruments. The PZU Group took 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 are recognized in the line item “Retained earnings”.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
3.1.3. Standards, interpretations and amended standards not yet effective
Approved by the regulation of the European Commission
Effective date Regulation for annual periods approving the Standard/interpretation Notes starting standard or from interpretation
IFRS 16 replaces IAS 17 Leases and any interpretations related to this 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, even if the parties have agreed on fixed annual payments. IFRS 16 – Leases 1 January 2019 1986/2017 Recognition of leases on the lessor’s side will in most cases remain unchanged due to the maintenance of the breakdown between operating leases and financial leases.
The PZU Group is currently in the process of assessing these contracts in terms of their fulfilment of the definition of lease and estimating the lease period and the impact on the consolidated financial statements. The PZU Group will take advantage of a waiver of the requirement to apply this standard to short-term leases and leases of low-value assets. According to the current version of IFRS 9, certain options, which force a lender to accept reduced compensation for granting financing (in the case of a negative compensation payment) do not pass the SPPI test; accordingly any instruments containing such options cannot be classified as measured at amortized cost or at fair value through other comprehensive income. According to the amendment, the positive or negative sign of the prepayment amount will not be Amendment to IFRS 9 1 January 2019 498/2018 important; this means that, depending on the interest rate in effect when the agreement is terminated, payment can be made to a party resulting in prepayment. This compensation must be calculated in the same manner for both a penalty for prepayment and also for a gain earned on prepayment.
The change will not affect to a material extent the PZU Group’s consolidated financial statements.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Not approved by the European Commission: Date of entry into effect for annual Date of issue by the periods starting Name of standard/ International (according to the Notes interpretation Accounting International Standards 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 contracts held by the insurer. Introduction of this unified standard will ensure comparability of financial IFRS 17 – Insurance 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 interpretation is to be applied to the determination of taxable profit, tax loss, tax bases, outstanding 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. Amendment to IAS 28 – According to the amended IAS 28, long-term shares in associates and joint ventures for which the company does not apply Long-term shares in the equity method, the applicable standard is IFRS 9, also with regard to impairment. 12 October 2017 1 January 2019 associates and joint ventures The change will not affect to a material extent the PZU Group’s consolidated financial statements. The amendment contains clarifications for the guidelines in case of a plan amendment, curtailment or settlement during the reporting period. The amendments require entities, after such an event, to use updated actuarial assumptions to calculate current service cost and net interest for the remaining part of the reporting period. The amendments also clarify how the Amendments to IAS 19 7 February 2018 1 January 2019 plan amendment, curtailment or settlement affects the requirements related to the limit on the defined benefit asset. The Employee Benefits IASB has decided that the scope of these amendments does not cover the settlement of “significant market fluctuation” (in euro). The amendments apply to plan amendments, curtailments or settlements that will take place on or after 1 January 2019, with the possibility of earlier application.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Date of entry into effect for annual Date of issue by the periods starting Name of standard/ International (according to the Notes interpretation Accounting International Standards Board Accounting Standards Board) The amendments pertain to: 1. IFRS 3 - the amendments clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business; 2. IFRS 11 - the amendments clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business. Annual improvements to 12 December 2017 1 January 2019 3. IAS 12 - the amendments specify that any income tax consequences of dividends (i.e. profit distribution) should be IFRS 2015-2017 recognized in the profit and loss account, regardless of how the tax arises; 4. IAS 23 - the amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalization rate on general borrowings The amendments will have no significant influence on the PZU Group’s consolidated financial statements. The amended conceptual assumptions contain several new concepts pertaining to measurement, they incorporate the updated definitions and criteria for recognizing assets and liabilities and the guidelines for reporting financial results. Amendments to the Additionally, they contain explanations pertaining to important areas such as the role of management, prudence and the 29 March 2018 1 January 2020 framework uncertainty of measurement in financial statements.
The amendments will have no significant influence on the PZU Group’s consolidated financial statements.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
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 applied by the PZU Group, except for IFRS 17.
3.2 Explanation of differences between the previously published financial data and these condensed interim consolidated financial statements
The change described in section 3.2.3 was already recognized in the consolidated financial statements for 2017.
3.2.1. Settlement of the Pekao acquisition
In connection with the final settlement of the acquisition of the shares in Pekao, a retroactive restatement of data as at 31 December 2017 has been performed. More information on this matter is presented in section 1.4.1.
3.2.2. Change in presentation of the consolidated statement of financial position and the consolidated profit and loss account
In order to propose a better presentation of the PZU Group’s financial standing and financial results, the following presentation changes have been made: in the consolidated statement of financial position: “Loan receivables from clients” have been spun off to a different line item; financial derivatives have been spun off to a different line item and merged with derivatives for hedging purposes, presenting their breakdown in the pertinent note; in the consolidated profit and loss account, the line item “Net result on realization and impairment losses on investments” has been broken down into the following two separate line items: “Net result on realization of financial instruments and investments” and “Movement in allowances for expected credit losses and impairment losses on financial instruments”. Comparative data have been restated accordingly.
3.2.3. Change to presentation of costs of services provided to banks
To reflect better the economic character of the costs incurred, some costs of services purchased by banks have been transferred from fee and commission expenses to administrative expenses.
3.2.4. Amendments to comparative data in Alior Bank
3.2.4.1. Correction of errors pertaining to Corporate Income Tax for 2012-2017
Alior Bank made a correction to the income tax settlement for 2012-2017 due to eliminating from tax accounts for those years the accrued interest that was not received on the date of writing off the uncollectible receivables, thereby causing an understatement of taxable income. At the same time, some of the interest on the receivables written down in the off- balance sheet records was incorrectly recognized as a taxable temporary difference and included in the basis of the deferred tax liability. This adjustment lowered equity as at 31 December 2017 by PLN 17 million (PLN 5 million on the PZU Group’s interest and PLN 12 million on non-controlling interests) and raised net profit for H1 2017 by PLN 9 million (PLN 3 million on the PZU Group’s interest and PLN 6 million on non-controlling interests).
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
3.2.4.2. Correction of the recognition of the result on structured products
Alior Bank altered the method of measuring the fair value of the option embedded in the structured products (certificates of deposit) issued by the bank. Previously, the embedded options were measured using parameters not coming from an active market. Presently, parameters from the interbank market are used where the bank enters into oppposite transactions, hedging the options embedded in structured products. Alior Bank also altered its method of settling costs and income related to the issue of certificates of deposit. Under its previous methodology, marginal costs were approximately close to the amount of the distribution fee and therefore the costs and the fee were recognized all at once at the time of entering into the transaction. Alior Bank reviewed its marginal costs as a result of which their level was reduced. Accordingly, Alior Bank presently settles the income from the distribution fee and the marginal costs spread over time until the date of maturity of the certificates of deposit. This adjustment lowered equity as at 31 December 2017 by PLN 35 million (PLN 11 million on the PZU Group’s interest and PLN 24 million on non-controlling interests, respectively) and lowered net profit for H1 2017 by PLN 13 million (PLN 4 million on the PZU Group’s interest and PLN 9 million on non-controlling interests, respectively).
3.2.4.3. Correction to the recognition of the cost for the Bank Guarantee Fund fee in respect to a portion of the contribution in the form of freezing securities in the last period
In conjunction with the amendment as of 2017 to the BFG Act and the regulation of 10 March 2017 issued by the Minister of Development and Finance on transferring in the form of payment obligations the contributions paid to BFG, availing itself of § 4 of this regulation Alior Bank makes the settlement (30% of the contribution due) with BFG in the form of a payment obligation in the form of a freeze on securities. After receipt on 2 March 2017 and 20 April 2017 of letters from BFG specifying the amounts of the contributions to the Deposit Guarantee Fund and the Forced Restructuring Fund, Alior Bank applied an incorrect method of keeping records by recognizing this portion of the contribution similarly as in the case of freezing securities for the Guaranteed Funds Protection Fund and accordingly it failed to recognize the cost of the payment obligation in its profit and loss account. According to IAS 37 and IFRIC 21 a payment obligation in the form of freezing securities, just as the remaining portion of the contribution to BFG should be recognized as a cost in the current period. Accordingly, Alior Bank made a retrospective adjustment by recognizing the payment obligation in the form of freezing securities for 2017 as a cost in 2017 and restating the comparative data. This adjustment lowered equity as at 31 December 2017 by PLN 19 million (PLN 6 million on the PZU Group’s interest and PLN 13 million on non-controlling interests, respectively) and lowered net profit for H1 2017 by PLN 16 million (PLN 5 million on the PZU Group’s interest and PLN 11 million on non-controlling interests, respectively).
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
3.2.5. Impact exerted by the differences on the consolidated financial statements
The following tables present the impact of the aforementioned changes on the individual items of the consolidated financial statements. 31 December 31 December 1 January 1 January Assets 2017 Adjustment 2017 2017 Adjustment 2017 (historical) (restated) (historical) (restated) Goodwill 3,839 (9) 1) 3,830 1,583 - 1,583 Property, plant and equipment 3,239 48 1) 3,287 1,467 - 1,467 Investment property 2,354 1 1) 2,355 1,738 - 1,738 Loan receivables from clients n/a 169,457 2) 169,457 n/a 44,998 2) 44,998 Financial derivatives n/a 2,351 2) 2,351 n/a 953 2) 953 Investment financial assets 281,854 (171,808) 2) 110,046 105,286 (45,951) 2) 59,335 Measured at fair value 22,247 (2,004) 2) 20,243 21,882 (881) 2) 21,001 through profit or loss Hedge derivatives 347 (347) 2) n/a 72 (72) 2) n/a Loans 189,504 (169,457) 2) 20,047 54,334 (44,998) 2) 9,336 (10) 1) Deferred tax assets 1,577 1,590 633 8 3) 641 23 3) Total assets 317,405 53 317,458 125,296 8 125,304
31 December 31 December 1 January 1 January Equity and liabilities 2017 Adjustment 2017 2017 Adjustment 2017 (historical) (restated) (historical) (restated) Equity Equity attributable to equity 14,622 (23) 14,599 12,998 (8) 12,990 holders of the parent (1) 1) Retained earnings 2,619 2,596 2,043 (8) 3) 2,035 (22) 3) 31 1) Non-controlling interest 22,979 22,961 4,086 (19) 3) 4,067 (49) 3) Total equity 37,601 (41) 37,560 17,084 (27) 17,057 Financial liabilities 224,507 43 3) 224,550 60,030 15 3) 60,045 Other liabilities 9,045 51 3) 9,096 4,991 20 3) 5,011 Total liabilities 279,804 94 279,898 108,212 35 108,247 Total equity and liabilities 317,405 53 317,458 125,296 8 125,304 1) Change described in section 3.2.1. 2) Change described in section 3.2.2. 3) Change described in section 3.2.4.
47
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
1 January – 1 January – Consolidated profit and loss account 30 June 2017 Adjustment 30 June 2017 (historical) (restated) 9 1) Revenue from commissions and fees 702 699 (12) 4) Net investment income 3,267 15 1) 3,282 Net result on realization and impairment losses on (301) 301 2) n/a investments Net result on realization of financial instruments and n/a 238 2) 238 investments Movement in allowances for expected credit losses and n/a (539) 2) (539) impairment losses on financial instruments Net movement in fair value of assets and liabilities (4) 1) 66 46 measured at fair value (16) 4) Fee and commission expenses (204) 15 3) (189) 1 1) Interest expenses (426) (420) 5 4) (2) 1) Administrative expenses (2,025) (15) 3) (2,036) 6 4) (28) 1) Other operating expenses (1,131) (1,175) (16) 4) Profit before tax 2,198 (42) 2,156 2 1) Income tax (465) (451) 12 4) Net profit 1,733 (28) 1,705
1 January – 1 January – Consolidated statement of comprehensive income 30 June 2017 Adjustment 30 June 2017 (historical) (restated) Net profit 1,733 (28) 1,705 Other comprehensive income 8 (4) 4 Subject to subsequent transfer to profit or loss 7 (4) 3 Measurement of financial instruments available for 42 1 1) 43 sale Cash flow hedging 18 (5) 1) 13 Total net comprehensive income 1,741 (32) 1,709 - comprehensive income attributable to equity holders of 1,419 (8) 1,411 the Parent Company - comprehensive income attributed to holders of non- 322 (24) 298 controlling interest 1) Change described in section 3.2.1. 2) Change described in section 3.2.2. 3) Change described in section 3.2.3. 4) Change described in section 3.2.4.
48
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
1 January – 1 January – Consolidated cash flow statement 30 June 2017 Adjustment 30 June 2017 (historical) (restated) Profit before tax 2,198 (42) 1) 2,156 Adjustments 773 42 815 Movement in loan receivables from clients (2,368) 1,356 1) (1,012) Interest income and expenses (707) (15) 1) (722) Amortization of intangible assets and depreciation of 271 23 1) 294 property, plant and equipment Movement in liabilities 1,382 33 2) 1,415 Other adjustments 1,453 (1,355) 1) 98 Net cash flows from operating activities 2,971 - 2,971 1) Change described in section 3.2.1. 2) Change described in section 3.2.4.
4. Information about major events that materially influence the structure of financial statement items
4.1 Distribution of the PZU Group’s 2017 financial result
On 28 June 2018 the PZU Ordinary Shareholder Meeting adopted a resolution to distribute net profit for 2017. This matter is described in section 14.
4.2 The most important dividends distributed between the PZU Group companies
On 21 June 2018, Pekao’s Ordinary Shareholder Meeting adopted a resolution on the distribution of 2017 net profit, earmarking PLN 2,074 million, i.e. PLN 7.90 per share to be paid in dividends. The record date fell on 6 July 2018 and the dividend payout date on 20 July 2018. PZU received a dividend of PLN 415 million.
5. Material events after the end of the reporting period
On 7 August 2018 Pekao and Alior Bank retracted from further negotiations pertaining to a merger of the two banks. The banks failed to strike an agreement on the conditions for their merger to make it possible to achieve the potentially highest added value for shareholders.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN) 6. Supplementary notes to the condensed interim consolidated financial statements
6.1 Gross written premiums
1 April – 1 January – 1 April – 1 January – Gross written premiums 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Gross written premiums in non-life insurance 3,955 7,692 3,716 7,338 In direct insurance 3,979 7,703 3,734 7,349 In indirect insurance (24) (11) (18) (11) Gross written premiums in life insurance 2,095 4,189 2,122 4,268 Individual insurance premiums 373 745 407 838 Individually continued insurance premiums 502 1,001 494 985 Group insurance premiums 1,220 2,443 1,221 2,445 Total gross written premiums 6,050 11,881 5,838 11,606
Gross written premiums in direct non-life insurance 1 April – 1 January – 1 April – 1 January – (by accounting classes prescribed by section II of the 30 June 2018 30 June 2018 30 June 2017 30 June 2017 attachment to the Insurance Activity Act) Accident and sickness insurance (group 1 and 2) 149 310 141 295 Motor third party liability insurance (group 10) 1,547 3,001 1,517 2,891 Other motor insurance (group 3) 966 1,942 931 1,880 Marine, aviation and transport insurance (classes 4, 5, 6, 7) 28 45 21 39 Insurance against fire and other property damage (groups 8 916 1,638 763 1,519 and 9) TPL insurance (groups 11, 12, 13) 189 420 192 411 Credit and suretyship (classes 14, 15) 24 47 28 46 Assistance (group 18) 121 235 104 209 Legal protection (group 17) 2 5 2 5 Other (group 16) 37 60 35 54 Total 3,979 7,703 3,734 7,349
6.2 Revenue from commissions and fees
1 April – 1 January – 1 April – 1 January – Revenue from commissions and fees 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Banking activity 666 1,314 366 557 Brokerage fees 38 87 28 51 Fiduciary activity 18 34 8 10 Payment card and credit card services 208 400 103 149 Fees on account of insurance intermediacy activities 28 60 24 42 Credits and loans 119 219 68 89 Bank account-related services 104 211 60 98 Transfers 78 153 35 51 Cash operations 26 50 17 26 Receivables purchased 10 19 5 9 Suretyship, letters of credit, collections, promises 18 36 8 11 Other commission 19 45 10 21 Revenue and payments received from funds and mutual fund 137 273 50 76 companies Pension insurance 44 84 35 63 Other 1 2 2 3 Total revenue from commissions and fees 848 1,673 453 699
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.3 Net investment income
1 April – 1 January – 1 April – 1 January – Net investment income 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Interest income, including: 2,747 5,508 1,696 2,828 Loan receivables from clients 2,092 4,125 1,215 1,983 Debt securities measured at fair value through other 189 437 n/a n/a comprehensive income Debt securities measured at amortized cost 301 615 n/a n/a Buy-sell-back transactions 20 37 (8) - Term deposits with credit institutions 32 63 14 20 Financial assets available for sale n/a n/a 90 138 Financial assets held to maturity n/a n/a 231 445 Debt securities classified in the loans portfolio n/a n/a 19 44 Loans 43 84 85 118 Receivables purchased 20 55 16 21 Hedge derivatives 40 70 18 29 Receivables - 1 9 15 Cash and cash equivalents 10 21 7 15 Dividend income, including: 45 46 15 16 Investment financial assets measured at fair value through 25 26 n/a n/a profit or loss Investment financial assets measured at fair value through 20 20 n/a n/a other comprehensive income Financial assets measured at fair value through profit or loss n/a n/a 11 11 – classified as such upon first recognition Financial assets held for trading n/a n/a 2 2 Financial assets available for sale n/a n/a 2 3 Income on investment property 64 128 64 125 Foreign exchange differences (176) (44) 165 367 Other, including: (17) (44) (24) (54) Investment activity expenses (4) (11) (5) (16) Investment property maintenance expenses (22) (49) (26) (50) Other 9 16 7 12 Total net investment income 2,663 5,594 1,916 3,282
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.4 Net result on realization of financial instruments and investments
Net result on realization of financial instruments and 1 April – 1 January – 1 April – 1 January – investments 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Investment financial assets 84 118 67 1 Debt instruments measured at fair value through other 59 92 n/a n/a comprehensive income Financial instruments measured at fair value through profit or 23 22 n/a n/a loss Equity instruments (5) 6 n/a n/a Participation units and investment certificates (6) (4) n/a n/a Debt instruments 34 20 n/a n/a Instruments measured at amortized cost 2 4 n/a n/a Financial assets available for sale, including: n/a n/a 13 (10) Equity instruments n/a n/a 13 (9) Debt securities n/a n/a - (1) Financial assets measured at fair value through profit or loss n/a n/a 91 50 – classified as such upon first recognition, including: Equity instruments n/a n/a 47 14 Debt securities n/a n/a 44 36 Financial assets held for trading, including: n/a n/a (37) (39) Equity instruments n/a n/a 7 40 Debt securities n/a n/a (44) (79) Loan receivables from clients measured at amortized cost 25 29 - - Derivatives (58) (18) 148 236 Short sale 1 3 - - Loans - - 21 22 Receivables (13) (27) (16) (29) Investment property (6) (6) 7 7 Other - - 1 1 Net result on realization of financial instruments and 33 99 228 238 investments
6.5 Movement in allowances for expected credit losses and impairment losses on financial instruments
Movement in allowances for expected credit losses and 1 April – 1 January – 1 April – 1 January – impairment losses on financial instruments 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Investment financial assets (13) 3 7 7 Debt instruments measured at fair value through other (5) (2) n/a n/a comprehensive income Instruments measured at amortized cost (8) 5 n/a n/a - debt instruments - 8 n/a n/a - term deposits with credit institutions (1) (1) - - - loans (7) (2) 7 7 Loan receivables from clients (382) (795) (296) (505) Measured at amortized cost (381) (799) (296) (505) Measured at fair value through other comprehensive income (1) 4 n/a n/a Receivables (3) (41) (27) (41) Associates (5) (5) - - Movement in allowances for expected credit losses and (403) (838) (316) (539) impairment losses on financial instruments, total
52
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.6 Net movement in fair value of assets and liabilities measured at fair value
Net movement in fair value of assets and liabilities 1 April – 1 January – 1 April – 1 January – measured at fair value 30 June 2018 30 June 2018 30 June 2017 30 June 2017
Investment financial instruments measured at fair value 89 (9) n/a n/a through profit or loss Equity instruments (57) (211) n/a n/a Debt securities 128 246 n/a n/a Participation units and investment certificates 18 (44) n/a n/a Investment financial instruments measured at fair value through profit or loss – classified in that category upon first n/a n/a (190) 221 recognition, including: Equity instruments n/a n/a (190) 222 Debt securities n/a n/a - (1) Investment financial instruments held for trading, including: n/a n/a 71 216 Equity instruments n/a n/a (33) 139 Debt securities n/a n/a 104 77 Derivatives 259 275 (191) (168) Measurement of liabilities to members of consolidated mutual 9 15 7 (34) funds Investment contracts for the client’s account and risk (unit- - 10 (2) (19) linked) Investment property 117 110 (168) (170) Loan receivables from clients 2 - - - Net movement in fair value of assets and liabilities 476 401 (473) 46 measured at fair value, total
6.7 Other operating income
1 April – 1 January – 1 April – 1 January – Other operating income 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Revenues on the sales of products, merchandise and services 133 297 122 217 by non-insurance companies Revenues from direct claims handling on behalf of other 47 100 51 107 insurance undertakings Reversal of provisions 54 239 1) 30 36 Reimbursement of the costs of pursuit of claims 8 14 11 20 Reinsurance commissions and profit participation 13 22 9 18 Reversal of impairment losses for non-financial assets 8 8 - 17 Indemnity received 4 9 2 4 Interest for late payment of amounts due under direct 5 14 6 8 insurance and outward reinsurance Gain from sale of property, plant and equipment 4 10 - - Commissions for acting as an emergency adjuster 1 3 1 3 Written off liabilities on account of premium refunds and - 4 (9) 48 payment surpluses Other 33 80 28 52 Other operating income, total 310 800 251 530 1) including a reversal of 233 million by the banks of a provision for guarantees and sureties given
53
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.8 Claims, benefits and movement in technical provisions
Claims, benefits and movement in technical 1 April – 1 January – 1 April – 1 January – provisions 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Claims, benefits and movement in technical 3,773 7,504 3,587 7,379 provisions In non-life insurance 2,262 4,415 2,029 3,868 - claims and benefits 1,786 3,565 1,597 3,259 - movement in technical provisions 283 462 245 235 - claims handling expenses 193 388 187 374 In life insurance 1,511 3,089 1,558 3,511 - claims and benefits 1,485 3,077 1,431 3,059 - movement in technical provisions (6) (54) 95 387 - claims handling expenses 32 66 32 65 Reinsurers’ share in claims, benefits and movement (54) (159) (83) (165) in technical provisions In non-life insurance (54) (159) (83) (165) Total net insurance claims and benefits 3,719 7,345 3,504 7,214
6.9 Fee and commission expenses
1 April – 1 January – 1 April – 1 January – Fee and commission expenses 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Costs of card and ATM transactions, including card issue 114 202 47 79 costs Commissions on acquisition of banking clients 19 35 12 19 Fees for the provision of ATMs (1) 21 8 13 Costs of awards to banking clients 4 7 5 12 Costs of bank transfers and remittances 10 19 6 11 Additional services attached to banking products 7 14 6 11 Brokerage fees 3 8 3 4 Costs of administration of bank accounts 1 2 - - Costs of banknote operations 4 7 - 1 Fiduciary activity expenses 5 9 1 1 Other commission 16 29 24 38 Total fee and commission expenses 182 353 112 189
6.10 Interest expenses
1 April – 1 January – 1 April – 1 January – Interest expenses 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Term deposits 268 541 138 222 Current deposits 103 201 40 64 Outstanding own debt securities 94 190 42 85 Hedge derivatives 2 3 8 16 Loans 3 5 - - Repurchase transactions 16 30 14 20 Bank loans contracted by PZU Group companies 3 5 2 3 Other 10 17 6 10 Total interest expenses 499 992 250 420
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.11 Administrative, acquisition and claims handling expenses, by type
Administrative, acquisition and claims handling 1 April – 1 January – 1 April – 1 January – expenses, by type 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Consumption of materials and energy 70 144 43 114 Third party services 426 828 325 579 Taxes and charges 23 49 21 41 Employee expenses 1,256 2,425 870 1,552 Depreciation of property, plant and equipment 95 189 59 109 Amortization of intangible assets 82 170 62 112 Other, including: 775 1,558 747 1,452 - commissions in insurance activities 604 1,199 576 1,137 - advertising 72 130 48 75 - remuneration of group insurance administrators in work 51 103 52 105 establishments - other 48 126 71 135 Movement in deferred acquisition expenses (7) (48) (16) (72) Administrative, acquisition and claims handling 2,720 5,315 2,111 3,887 expenses, total
6.12 Other operating expenses
1 April – 1 January – 1 April – 1 January – Other operating expenses 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Levy on financial institutions 273 542 169 293 Expenses of the core business of non-insurance and non- 178 356 151 273 banking companies Direct claims handling expenses on behalf of other insurance 50 103 54 110 undertakings Compulsory payments to insurance market institutions and 20 53 18 38 banking market institutions Bank Guarantee Fund 47 277 18 53 Insurance Indemnity Fund 18 35 18 35 Fee to the National Fire Brigade Headquarters and 1 21 1 21 Association of Voluntary Fire Brigades Expenditures for prevention activity 22 31 4 21 Establishment of provisions 90 249 1) 89 96 Amortization of intangible assets purchased in company 87 167 21 41 acquisition transactions Recognition of impairment losses for non-financial assets - 10 8 33 Donations - 24 12 13 Other 109 218 94 148 Other operating expenses, total 895 2,086 657 1,175 1) including the establishment of a provision by the banks worth 216 million for guarantees and sureties given.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.13 Earnings per share
1 April – 1 January – 1 April – 1 January – Earnings per share 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Net profit attributable to the equity holders of the parent 782 1,425 504 1,438 company Weighted average basic and diluted number of common 863,374,918 863,442,942 863,521,269 863,516,697 shares Number of outstanding shares 863,523,000 863,523,000 863,523,000 863,523,000 Average weighted number of treasury shares (held by (148,082) (80,058) (1,731) (6,303) consolidated entities) Basic and diluted earnings (losses) per common share (in 0.91 1.65 0.58 1.67 PLN) In the 6-month period ended 30 June 2018, there were no transactions or events resulting in the dilution of earnings per share.
6.14 Income tax
1 April – 1 January – 1 April – 1 January – Total amount of current and deferred tax 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Recognized through profit or loss (430) (789) (200) (451) - current tax (582) (915) (413) (442) - deferred tax 152 126 213 (9) Recognized in other comprehensive income (deferred tax) 37 23 (2) (16) Total amount of current and deferred tax (393) (766) (202) (467)
1 April – 1 January – 1 April – 1 January – Income tax on other comprehensive income items 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Gross other comprehensive income (142) (63) (1) 20 Income tax 37 23 (2) (16) Investment financial instruments measured at fair value 35 31 n/a n/a through other comprehensive income Measurment of loan receivables from clients - (9) n/a n/a Measurement of financial instruments available for sale n/a n/a (2) (16) and cash flow hedging transactions Other 2 1 - - Net other comprehensive income (105) (40) (3) 4
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.15 Goodwill
31 December 30 June Goodwill 2017 2018 (restated) Pekao 1,577 1,577 Alior Bank 746 746 PIM 692 692 Lietuvos Draudimas AB 1) 483 462 Mass insurance segment in non-life insurance (Link4) 221 221 AAS Balta 39 37 Medical companies 101 90 Other 5 5 Total goodwill 3,864 3,830 1) Includes goodwill on acquisition of the Lietuvos Draudimas branch in Estonia. As a result of the analyses conducted, no impairment losses of goodwill were made in the 6 months ended 30 June 2018, just as in 2017.
6.16 Intangible assets
30 June 31 December Intangible assets by type groups 2018 2017 Software, licenses and similar assets 1,239 1,282 Trademarks 612 607 Client relations 1,117 1,282 Intangible assets under development 252 251 Other intangible assets 19 21 Total intangible assets 3,239 3,443
6.17 Other assets
30 June 31 December Other assets 2018 2017 Reinsurance settlements 105 157 Estimated salvage and subrogation 181 192 Deferred IT expenses 61 63 Accrued direct claims handling receivables 55 60 Inventories 61 73 Accruals under insurance contracts (outside of the PZU Group) 3 58 Prepayments and accruals for taxes on property, means of transport and land 22 - Accruals for the costs of allowances to the Company Social Benefit Fund 25 - Other assets 100 89 Total other assets 613 692
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.18 Property, plant and equipment
31 December 30 June Property, plant and equipment by groups by type 2017 2018 (restated) Plant and machinery 505 555 Means of transport 121 127 Property, plant and equipment under construction 113 176 Real property 2,161 2,215 Other property, plant and equipment 237 214 Total property, plant and equipment 3,137 3,287
6.19 Loan receivables from clients
30 June 31 December Loan receivables from clients 2018 2017 Measured at amortized cost 172,113 169,457 Measured at fair value through other comprehensive income 1,203 n/a Measured at fair value through profit or loss 335 n/a Total receivables from clients on account of loans 173,651 169,457 The amount of allowances for expected credit losses as at 30 June 2018 was PLN 9,075 million (impairment losses as at 31 December 2017 were PLN 8,839 million). The allowance for expected credit losses pertains to loan receivables from clients measured at fair value through other comprehensive income is recognized in the line item “Revaluation reserve” and it does not lower the carrying amount of assets. The carrying amount of this allowance as at 30 June 2018 is PLN 14 million.
30 June 31 December Loan receivables from clients 2018 2017 Retail segment 93,159 89,407 Operating loans 260 278 Consumer finance 26,343 26,185 Consumer finance loans 2,283 2,129 Loan to purchase securities 71 109 Overdrafts in credit card accounts 1,127 1,297 Loans for residential real estate 62,006 58,456 Other mortgage loans 831 832 Other receivables 238 121 Business segment 80,491 80,050 Operating loans 34,567 33,879 Car financing loans 54 80 Investment loans 26,327 26,108 Receivables purchased (factoring) 5,722 4,576 Overdrafts in credit card accounts 134 179 Loans for residential real estate 26 24 Other mortgage loans 7,070 8,465 Financial leases 5,889 5,086 Other receivables 702 1,653 Total receivables from clients on account of loans 173,651 169,457
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.20 Financial derivatives
30 June 31 December Derivatives – assets 2018 2017 Interest rate derivatives 1,552 1,699 Instruments designated as fair value hedges – unquoted instruments, including: 33 16 - SWAP transactions 33 16 Instruments designated as cash flow hedges – unquoted instruments, including: 183 289 - SWAP transactions 183 289 Instruments carried as held for trading, including: 1,336 1,394 Unquoted instruments, including: 1,336 1,394 - FRA transactions 2 1 - SWAP transactions 1,324 1,381 - call options (purchase) 8 10 - put options (sale) 2 2 Total foreign exchange derivatives 542 444 Instruments designated as cash flow hedges – unquoted instruments, including: - 42 - SWAP transactions - 42 Instruments carried as held for trading, including: 542 402 Instruments quoted on a regulated market, including: 11 19 - forward contracts 7 19 - put options (sale) 4 - Unquoted instruments, including: 531 383 - forward contracts 170 175 - SWAP transactions 283 164 - call options (purchase) 66 27 - put options (sale) 12 17 Derivatives related to equity prices – carried as held for trading, total 94 104 Unquoted instruments, including: 94 104 - call options (purchase) 92 102 - put options (sale) 2 2 Derivatives related to commodity prices – carried as held for trading, total 91 104 Instruments quoted on a regulated market, including: 15 10 - forward contracts 15 10 Unquoted instruments, including: 76 94 - forward contracts 10 19 - SWAP transactions 35 59 - call options (purchase) 26 15 - put options (sale) 5 1 Derivatives – assets, total 2,279 2,351
59
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
30 June 31 December Derivatives – liabilities 2018 2017 Interest rate derivatives 2,477 2,797 Instruments designated as fair value hedges – unquoted instruments, including: 148 186 - SWAP transactions 148 186 Instruments designated as cash flow hedges – unquoted instruments, including: 800 682 - SWAP transactions 800 682 Instruments carried as held for trading, including: 1,529 1,929 Unquoted instruments, including: 1,529 1,929 - FRA transactions 1 - - SWAP transactions 1,521 1,921 - call options (purchase) 3 2 - put options (sale) 4 6 Total foreign exchange derivatives 512 517 Instruments designated as cash flow hedges – unquoted instruments, including: 73 - - SWAP transactions 73 - Instruments carried as held for trading, including: 439 517 Instruments quoted on a regulated market, including: 19 1 - forward contracts 19 1 Unquoted instruments, including: 420 516 - forward contracts 215 221 - SWAP transactions 135 256 - call options (purchase) 30 8 - put options (sale) 40 31 Derivatives related to equity prices – carried as held for trading, total 55 57 Unquoted instruments, including: 55 57 - call options (purchase) - 10 - put options (sale) 55 47 Derivatives related to commodity prices – carried as held for trading, total 80 103 Instruments quoted on a regulated market, including: 8 21 - forward contracts 8 21 Unquoted instruments, including: 72 82 - forward contracts 8 7 - SWAP transactions 35 59 - call options (purchase) 15 8 - put options (sale) 14 8 Derivatives – liabilities, total 3,124 3,474
60
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.21 Investment financial assets
30 June 2018 at fair value Investment financial assets at fair value at amortized cost through other - IFRS 9 through profit comprehensive or loss income Equity instruments n/a 632 1,435 Quoted on a regulated market n/a 412 1,385 Not quoted on a regulated market n/a 220 50 Participation units and investment certificates n/a n/a 4,490 Quoted on a regulated market n/a n/a 133 Not quoted on a regulated market n/a n/a 4,357 Debt securities 32,191 41,457 14,384 Government securities 24,472 32,008 13,929 Domestic 24,350 30,288 11,860 Fixed rate 23,010 17,346 9,308 Floating rate 1,340 12,942 2,552 Foreign 122 1,720 2,069 Fixed rate 122 1,720 2,055 Floating rate - - 14 Other 7,719 9,449 455 Quoted on a regulated market 529 963 227 Fixed rate 220 578 220 Floating rate 309 385 7 Not quoted on a regulated market 7,190 8,486 228 Fixed rate 850 3,900 2 Floating rate 6,340 4,586 226 Other, including: 11,321 - - Buy-sell-back transactions 3,339 - - Term deposits with credit institutions 3,784 - - Loans 4,198 - - Investment financial assets, total 43,512 42,089 20,309
The allowance for expected credit losses on financial assets measured at amortized cost as at 30 June 2018 is PLN 140 million (including PLN 82 million pertaining to debt securities, PLN 49 million for loans and PLN 9 million for term deposits with credit institutions). The allowance for expected credit losses pertaining to debt securities measured at fair value through other comprehensive income is recognized in the line item “Revaluation reserve” and it does not lower the carrying amount of assets. The carrying amount of this allowance as at 30 June 2018 is PLN 34 million. 30 June 31 December Equity instruments measured at fair value through other comprehensive income 2018 2017 Quoted on a regulated market 412 n/a Grupa Azoty SA 355 n/a Polimex-Mostostal SA 43 n/a Other 14 n/a Not quoted on a regulated market 220 n/a Biuro Informacji Kredytowej SA 181 n/a PSP sp. z o.o. 21 n/a Krajowa Izba Rozliczeniowa SA 13 n/a Other 5 n/a Equity instruments measured at fair value through other comprehensive income, total 632 n/a
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
31 December 2017
Investment financial assets at fair value – held to available for classified upon held for - IAS 39 loans maturity sale first trading recognition Equity instruments n/a 664 1,947 4,617 n/a Quoted on a regulated market n/a 262 1,781 562 n/a Not quoted on a regulated market n/a 402 166 4,055 n/a Debt securities 21,237 47,855 4,703 8,976 13,623 Government securities 21,006 33,649 4,664 8,699 1 Domestic 20,641 32,547 4,351 6,702 - Fixed rate 19,277 20,753 4,054 4,834 - Floating rate 1,364 11,794 297 1,868 - Foreign 365 1,102 313 1,997 1 Fixed rate 365 1,102 313 1,964 1 Floating rate - - - 33 - Other 231 14,206 39 277 13,622 Quoted on a regulated market 102 694 39 175 977 Fixed rate 102 694 39 175 281 Floating rate - - - - 696 Not quoted on a regulated 129 13,512 - 102 12,645 market Fixed rate 31 13,077 1) - - 1,181 Floating rate 98 435 - 102 11,464 Other, including: - - - - 6,424 Buy-sell-back transactions - - - - 885 Term deposits with credit - - - - 1,841 institutions Loans - - - - 3,698 Investment financial assets, total 21,237 48,519 6,650 13,593 20,047 1) including NBP money bills in the amount of PLN 13,066 million.
The impairment loss on financial assets held to maturity on 31 December 2017 was PLN 1 million. The impairment loss on financial assets available for sale on 31 December 2017 was PLN 34 million. The impairment loss on financial assets classified as belonging to the loan portfolio on 31 December 2017 was PLN 116 million.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Exposure to debt securities issued by governments other than the Polish government
30 June 31 December Country 2018 2017 United States 987 833 Lithuania 526 431 Germany 332 449 Romania 270 106 Hungary 152 195 Croatia 138 98 Indonesia 132 199 Turkey 115 150 South Africa 108 133 Russia 82 44 Bulgaria 76 55 Peru 74 84 Latvia 68 64 Argentina 63 101 Columbia 63 110 Ukraine 62 62 Philippines 51 38 Brazil 49 105 Other 563 1) 521 2) Total 3,911 3,778 1) The Other line item states the countries with respect to which the balance sheet exposure does not exceed the equivalent of PLN 50 million: Australia, Azerbaijan, Belgium, Chile, Montenegro, Denmark, Dominican Republic, Egypt, Ecuador, France, Greece, Guatemala, Spain, the Netherlands, Ireland, Jamaica, Jordan, Kazakhstan, Kenya, Costa Rica, Morocco, Mexico, Nigeria, Oman, Pakistan, Panama, Paraguay, Senegal, Serbia, Slovenia, Sri Lanka, Sweden, Trinidad and Tobago, Uruguay, United Kingdom, Vietnam, Italy, Ivory Coast, Zambia 2) The Other line item shows: Azerbaijan, Chile, Dominican Republic, Ecuador, Philippines, Guatemala, Spain, Ireland, Jamaica, Jordan, Kazakhstan, Kenya, Costa Rica, Morocco, Nigeria, Oman, Pakistan, Panama, Paraguay, Russia, Senegal, Serbia, Slovenia, Sri Lanka, Sweden, Trinidad and Tobago, Uruguay, United Kingdom, Italy, Ivory Coast, Zambia
Exposure to debt securities issued by corporations, local government units and central banks
30 June 31 December Issuer 2018 2017 Companies from the WIG-Banks Index 483 563 Companies from the WIG-Chemicals Index 9 9 Companies from the WIG-Energy Index 1,335 1,886 Companies from the WIG-Fuels Index 295 666 Mining and quarrying (including companies included in the WIG-Mining index) 192 644 Manufacturing 1,195 1,159 Transportation and storage 1,613 1,904 Public utility services 629 611 Privately-held domestic banks - 20 Foreign banks 55 61 Domestic local governments 6,116 6,092 National Bank of Poland 3,900 13,097 Other 1,801 1,663 Total 17,623 28,375
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.21.1. Information on the changes in the economic situation and business conditions exerting a material effect on the fair value of financial assets and liabilities
6.21.1.1. Capital market
Global stock indices continued their strong growth in early 2018. During that time, markets were discounting the positive impact of the US tax reform on the future earnings of US companies. However, early February saw the first significant adjustment in global markets in a long time, driven mainly by investors’ fears of accelerated normalization of the FED’s monetary policy. In the following months, growth returned to global stock markets, but it was slower and more volatile than before. As a result, the American stock exchange index S&P500 ended the first half of the year up slightly (+1.15%), but the German DAX index declined significantly (-4.92%). Between the end of December 2017 and the end of June this year, the WIG and WIG20 indices fell 12.22% and 13.23%, respectively. This was caused mainly by the negative sentiment towards emerging economies. The rising cost pressure, including salary pressure, additionally contributed to deterioration in corporate financial results in Q1.
6.21.1.2. Interest rate risk and inflation
In early 2018, treasury bond yields on the underlying markets continued to post dynamic growth. Higher yields resulted from excellent economic activity data, loosening of fiscal policy in the USA, stronger expectations of interest rate hikes by the Fed and the earlier wrapping up of the quantitative easing (QE) program by ECB. However from mid-February, driven by concerns about the escalation of the trade conflict between the USA and China and the possible slowdown in economic growth in the Eurozone, the yields of German bonds started to fall. The uptick in yields in the USA lasted until mid-May until they broke through the 3.10% threshold. After that, they started to trend down slowly, driven by the heightened global aversion to risk related to the escalation of trade conflicts. At the end of January, the yield on Polish 10-year Treasury bonds temporarily shot up to 3.60%, following the underlying markets. The robust data from the Polish economy, that increased the likelihood of inflation growth in the future, could also have contributed to this. In February, however, the yield on Polish 10-year Treasury bonds started to fall (in mid-April it even dipped below 3%). This was caused by several factors. First, the yields of German bond, with which Polish bonds are strongly correlated, fell. Additionally, the expected magnitude of interest rate growth fell in light of much lower than expected inflation readings and the consistently dovish rhetoric of the Monetary Policy Council. In turn, the credit risk of the Polish economy continued to be relatively low, inter alia, having regard for the very strong fiscal and payment position. As a result, the difference between the yields on Polish and German 10-year Treasury bonds in mid-April even dropped below 250 basis points (from 288 basis points at the end of 2017). Despite that, after the downturn on the financial markets of emerging economies, we have observed an outflow of capital also from Poland in the latter months of the first half of the year. The heightened aversion to risk also resulted from the uncertainty related to US trade policy. As a result, at the end of June Polish 10-year bond yields rose to 3.21% and the spread to German bonds increased to 290 bps.
6.21.1.3. FX rates
In the first two months of 2018, the US dollar weakened versus the euro, while already in mid-April the US currency started to strengthen visibly. Concerns were starting to grow about economic growth and the sustainability of low inflation in the euro area and the US economy was showing signs of a stronger recovery, justifying the continuing increases in interest rates. The Polish zloty also strengthened until mid-April but then, following the financial market downturn in emerging economies, it began to weaken. When risk aversion grows, investors reduce the share of risky assets in their portfolios without assessing in detail the foundations of individual economies, and the Polish currency market is also more liquid in comparison to other economies of the region. At the end of June, the EUR/PLN exchange rate was 4.36, indicating a weakening of the Polish zloty against the EUR by 4.6% in the first half of the year. On the
64
WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN) other hand, the USD/PLN exchange rate was PLN 3.74 at the end of June – the Polish zloty weakened by 7.5% in relation to the USD in that period.
6.21.2. Changes in classification of financial assets resulting from the change of purpose or use of such assets
In the 6-month period ended 30 June 2018, no changes were made to the classification of financial assets resulting from a change in the purpose or use of such assets.
6.22 Fair value
6.22.1. Description of valuation techniques
6.22.1.1. Debt securities and loans
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 debt securities for which an active market does not exist and the fair value of borrowings 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 quoted 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.
6.22.1.2. 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.
6.22.1.3. Derivatives
For derivatives quoted 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 quoted on an active market, including forward contracts and interest rate swaps is measured using the discounted future cash flow method. The rates from OIS curves (overnight indexed swaps), taking into account the currency of the security deposit provided for the instrument, are used to discount cash flows.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
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, based on its own valuation models.
6.22.1.4. 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. Receivables from clients on account of loans are classified in full to level 3 of the fair value hierarchy due to the use of a valuation model with significant non-observable input data, i.e. current margins generated on newly granted loans.
6.22.1.5. Properties measured at fair value
Depending on the nature of the real property, its fair value is measured using the comparative method, the income method or the residual method. The comparative method is used for measuring free land for development and certain smaller and less valuable buildings (such as residential units, garages, etc.). The comparative method assumes the determination of the fair value by reference to observable market prices, taking into account weighting coefficients. Weighting coefficients include, for instance, factors such as the passage of time and the trend of changes in market prices, the location, exposure, intended use in the zoning plan, accessibility for transportation purposes and access roads, surface, neighborhood (including the proximity to attractive objects), investment opportunities, physical conditions, form of exercising control, etc. The income method assumes estimation of the fair value of the real property based on the discounted value of cash flows. The calculation takes into account such variables as the capitalization rate, the level of rents, the level of operating expenses, the provision for vacancy, losses resulting from rent free periods, rent arrears, etc. The values of the variables described above vary depending on the nature and the intended use of the measured real property (office space, retail space, logistics and warehousing space), its modernity and location (access roads, distance from an urban center, accessibility, exposure, etc.) as well as parameters specific to the relevant local market (such as capitalization rates, the level of rents, operating expenses, etc.). The residual method is used to measure the market value if the real property is to be subjected to construction works. The fair value of such a real property is calculated as the difference in the value of the property after the construction works and the average value of the cost of these works, taking into account any gains earned in the market on similar properties. Property measured at fair value is valuated by licensed appraisers. The acceptance of each such measurement is additionally preceded by a review conducted by PZU Group entities’ employees in order to eliminate any potential errors or inconsistencies. Any emerging doubts are clarified on an ongoing basis. Investment property is measured in accordance with the following rules: real properties held by mutual funds controlled by PZU – measured every 6 months – on days ending each financial half-year and financial year; investment properties held by PZU Group companies – the most valuable items are measured in the event of ascertainment of a possible significant change in the value (usually on an annual basis). Regardless of the value, each investment property is measured not less frequently than once every 5 years; real properties held for sale – measured before the commencement of their active exposure to the market in accordance with the requirements of IFRS 5.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.22.1.6. 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 liabilities
The fair value of liabilities on the issue of own debt securities, including subordinated liabilities, is calculated as the present value of expected payments based on the current interest rate curves and the current 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.
6.22.2. 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 quoted prices (unadjusted) from active markets for identical assets and liabilities. This level includes: liquid quoted debt securities; shares and investment certificates quoted on exchanges; derivatives quoted on exchanges; Level II – assets and liabilities whose measurement is based on input data other than quoted prices included within level I, which can be observed on the market, either directly (as prices) or indirectly (derived from prices). This level includes: quoted debt securities carried on the basis of the valuations published by an authorized information service; derivatives – among others FX Swap, FX Forward, IRS, CIRS, FRA; participation units in mutual fund; investment properties or properties held for sale measured using the comparative method, including free land free land for development and certain smaller and less valuable buildings (such as residential units, garages, etc.);
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
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: unquoted debt securities and non-liquid quoted debt securities (including non-treasury debt securities issued by other financial entities, local government and non-financial entities), measured using models based on discounted cash flows; investment properties or properties held for sale measured using the income method or the residual method; loan receivables from clients and liabilities to clients under deposits; options embedded in certificates of deposit issued by PZU Group companies 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. Unobservable Impact on Measured assets Description data measurement Fair values are estimated using valuation techniques, with an assumption that when the loan is granted, the fair value is equal to the carrying amount. The fair value of loans without recognized impairment is equal to the sum of future expected cash flows discounted at the balance sheet date less expected credit loss. The cash flow discounting rate is the appropriate risk-free market rate plus the liquidity margin Liquidity margin and current sales margin for the loan’s product group. The margin is Loan receivables from and current margin determined by product group and by maturity. For the purpose of Negative clients from the sale of the estimating the fair value of foreign currency loans, the liquidity margin correlation. product group for PLN loans is used, adjusted by quotations of FX swap and basis- swap transactions. The fair value of loans with recognized impairment is equal to the sum of future expected salvage discounted using the effective interest rate, since the average expected recoveries fully reflect the credit risk component. For loans that do not have a repayment schedule (current account loans, overdrafts and credit cards), the fair value is assumed to be equal to the carrying amount. Fair values are estimated using valuation techniques, with an assumption that when the deposit is accepted, the fair value is equal to the carrying amount. The fair value of term deposits is equal to the sum of future expected cash flows discounted at the balance sheet Liabilities to clients Negative Sales margin date. The cash flow discounting rate is the appropriate risk-free market under deposits correlation. rate plus the current sales margin. The margin is determined on the basis of deposits accepted in the last quarter, by product group and by maturity. For short-term deposits (current deposits, overnight deposits and savings accounts), the carrying amount is taken as fair value. Embedded instruments are plain vanilla options and exotic options for individual shares, indices, commodities and other market indicators, Options embedded in including interest rate indices and exchange rates and their baskets. All certificates of deposit separated options are offset on an ongoing basis on the interbank issued by PZU Group market. companies and Model parameters Currency options are measured based on the Garman-Kohlhagen option options concluded in pricing model (and in the case of barrier and Asian options based on the interbank market the so-called extended Garman-Kohlhagen model). to hedge embedded Exotic options embedded in deposit agreements and their offsets are option positions. measured using the Monte-Carlo technique, assuming a geometric Brownian motion model for risk factors. Spreads are observed on all bonds (their series) or loans of the same issuer or a similar issuer. These spreads are observed on the dates of Non-liquid bonds and Negative Credit spreads issue of new bond series, dates of conclusion of new loan agreements loans correlation. and dates of market transactions on the receivables following from such bonds and loans.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Unobservable Impact on Measured assets Description data measurement Investment property Capitalization rate is determined through analysis of rates of return Negative and property available Capitalization rate obtained in transactions for similar properties. correlation. for sale Construction costs are determined based on market construction costs Positive Construction costs less costs incurred as at the date of measurement. correlation. Monthly rental rate per m2 of relevant Rental rates are observed for similar properties of similar quality, in Positive
space or per similar locations and with a similar size of leased space. correlation. parking space Currency options are measured based on the Garman-Kohlhagen option pricing model (and in the case of barrier and Asian options based on the so-called extended Garman-Kohlhagen model). Derivatives Model parameters Exotic options embedded in deposit agreements and their offsets are measured using the Monte-Carlo technique, assuming a geometric Brownian motion model for risk factors. Own issues and Issue spread above If historical issue spread above the market curve is used, these issues Negative subordinated loans the market curve are classified at level III of the fair value hierarchy. correlation. Equity instruments not quoted on an Quotations of financial services active market
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.22.2.1. Assets and liabilities measured at fair value
30 June 2018 31 December 2017 Assets and liabilities measured at fair value Level I Level II Level III Total Level I Level II Level III Total Assets
Investment financial assets measured at fair value through other 28,637 8,425 5,027 42,089 n/a n/a n/a n/a comprehensive income Equity instruments 412 - 220 632 n/a n/a n/a n/a Debt securities 28,225 8,425 4,807 41,457 n/a n/a n/a n/a Investment financial assets measured at fair value through profit or loss 13,074 6,942 293 20,309 n/a n/a n/a n/a Equity instruments 1,316 4 115 1,435 n/a n/a n/a n/a Participation units and investment certificates 133 4,357 - 4,490 n/a n/a n/a n/a Debt securities 11,625 2,581 178 14,384 n/a n/a n/a n/a Loan receivables from clients - - 1,538 1,538 n/a n/a n/a n/a Measured at fair value through other comprehensive income - - 1,203 1,203 n/a n/a n/a n/a Measured at fair value through profit or loss - - 335 335 n/a n/a n/a n/a Financial derivatives 26 2,156 97 2,279 29 2,222 100 2,351 Financial assets available for sale n/a n/a n/a n/a 30,027 17,081 1,411 48,519 Equity instruments n/a n/a n/a n/a 210 156 298 664 Debt securities n/a n/a n/a n/a 29,817 16,925 1,113 47,855 Financial instruments measured at fair value through profit or loss – classified n/a n/a n/a n/a 6,143 464 43 6,650 as such upon first recognition Equity instruments n/a n/a n/a n/a 1,802 127 18 1,947 Debt securities n/a n/a n/a n/a 4,341 337 25 4,703 Financial instruments measured at fair value through profit or loss – held for n/a n/a n/a n/a 7,363 6,133 97 13,593 trading Equity instruments n/a n/a n/a n/a 526 4,091 - 4,617 Debt securities n/a n/a n/a n/a 6,837 2,042 97 8,976 Investment property - 157 1,699 1,856 - 151 2,204 2,355 Liabilities Derivatives 20 3,046 58 3,124 22 3,400 52 3,474 Liabilities to members of consolidated mutual funds - 316 - 316 - 420 - 420 Investment contracts for the client’s account and risk (unit-linked) - 291 - 291 - 312 - 312 Liabilities on borrowed securities (short sale) 432 - - 432 737 13 - 750
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Investment financial assets measured Derivatives – Movement in assets and liabilities classified as Level Investment financial assets measured at fair value through other Financial Investment liabilities III of the fair value hierarchy, in the period from at fair value through profit or loss comprehensive income derivatives properties measured at 1 January to 30 June 2018 Equity Debt Equity Debt fair value Balance at the beginning of the period – classification at the 221 4,855 95 163 100 2,204 52 time of applying IFRS9 Purchase/opening of the position - 38 - 196 11 31 11 Reclassification from own properties - - - - - 9 - Profit or loss recognized in the profit and loss account as: - 17 9 3 (12) 65 (2) - net investment income - 17 5 - - - - - net movement in fair value of assets and liabilities measured - - 4 3 (12) 65 (2) at fair value Profits or losses recognized in other comprehensive income (3) 8 - - - - Sale and settlements (290) - (184) (2) (9) (3) Reclassification to assets held for sale - - - - - (601) - Reclassification from Level I 7 - - - - Reclassification from Level II - 189 - - - - - Reclassification to Level II (10) - - - - - Foreign exchange differences 2 - 4 - - - - Balance at the end of the period 220 4,807 115 178 97 1,699 58
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Financial assets measured at fair value Financial assets measured Movement in assets and liabilities classified as Level Financial assets Financial through profit or loss – classified as at fair value through profit Investment III of the fair value hierarchy, in the year ended available for sale liabilities – such upon first recognition or loss – held for trading properties 31 December 2017 Derivatives Equity Debt Equity Debt Debt Derivatives Balance at the beginning of the period 38 614 17 25 135 53 1,589 26 Purchase/opening of the position 6 - 21 - 290 32 63 23 Reclassification from Level II - 662 1) - - 4 - - - Reclassification from own properties and properties held for ------830 - sale Profit or loss recognized in the profit and loss account as: - 31 2 2 3 37 (102) 19 - net investment income - 31 5 - - (1) - - - net result on realization and impairment losses on ------investments - net movement in fair value of assets and liabilities measured - - (3) 2 3 38 (102) 19 at fair value Net movement in fair value of assets and liabilities measured (10) (26) ------at fair value, recognized in other comprehensive income Reclassification to own properties and properties held for sale ------(196) - Change in the composition of the Group 267 252 - - 45 - 24 - Foreign exchange translation differences (3) ------Sale and settlements - (437) (22) (2) (380) (22) (4) (16) Other - 17 ------Balance at the end of the period 298 1,113 18 25 97 100 2,204 52 1) Municipal bonds were reclassified to level III; for those bonds, a parameter implied from historical data (credit spread) used in the valuation model exerts a significant influence on measurement.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Financial assets measured at fair value Financial assets measured Movement in assets and liabilities classified as Level Financial assets Financial through profit or loss – classified as at fair value through profit Investment III of the fair value hierarchy, in the period from available for sale liabilities – such upon first recognition or loss – held for trading properties 1 January to 30 June 2017 Derivatives Equity Debt Equity Debt Debt Derivatives Balance at the beginning of the period 38 614 17 25 135 53 1,589 26 Purchase/opening of the position 1 - 21 - 141 14 19 12 Profit or loss recognized in the profit and loss account as: - 3 1 1 2 31 (77) 16 - net investment income - - 5 ------net movement in fair value of assets and liabilities measured - - (4) 1 2 31 (77) 16 at fair value Net movement in fair value of assets and liabilities measured - (1) ------at fair value, recognized in other comprehensive income Reclassification to own properties and properties held for sale ------(5) - Change in the composition of the Group 246 252 - - 45 - 24 (16) Sale and settlements - (371) (21) - (71) (21) - - Balance at the end of the period 285 497 18 26 252 77 1,550 38
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.22.2.2. Assets and liabilities not measured at fair value
30 June 2018 31 December 2017 Fair value of assets and liabilities for which it is only disclosed Level I Level II Level III Total Level I Level II Level III Total
Assets Loan receivables from clients measured at amortized cost - - 171,150 171,150 - - 169,393 169,393 Debt securities measured at amortized cost 20,888 667 12,779 34,334 n/a n/a n/a n/a Entities measured by the equity method – EMC - 16 - 16 - 20 - 20 Financial assets held to maturity n/a n/a n/a n/a 17,631 305 5,582 23,518 Debt securities classified in the loans portfolio n/a n/a n/a n/a 1 8,153 5,500 13,654 Buy-sell-back transactions - 465 2,874 3,339 - 553 333 886 Term deposits with credit institutions - 1,683 2,101 3,784 - 838 1,005 1,843 Loans - - 4,311 4,311 - - 3,744 3,744 Liabilities Liabilities to banks - 1,374 4,260 5,634 - 1,161 4,092 5,253 Liabilities to clients - - 198,027 198,027 - - 201,605 201,605 Liabilities on the issue of own debt securities - 3,951 7,089 11,040 - 2,808 6,627 9,435 Subordinated liabilities - 1,257 4,061 5,318 - 1,257 4,108 5,365
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.22.2.3. Change in the fair value measurement methodology for financial instruments measured at fair value
In the 6-month period ended 30 June 2018, 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.
6.22.2.4. Reclassification between fair value hierarchy levels
If the method of measurement of assets or liabilities changes because of e.g. losing (or obtaining) access to quotations observed on an active market, such assets or liabilities are reclassified between Levels I and II. Assets or liabilities are reclassified between Levels II and III (or accordingly between Levels III and II) when: there is a change in the measurement model resulting from the application of new unobservable factors (or accordingly observable ones); or previously used factors that had a significant impact on the measurement are no longer observable (or accordingly become observable) on the active market. Reclassifications 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 the 6-month period ended 30 June 2018, the following reclassifications of assets between fair value levels were made: treasury bonds for which active market quotations were available were reclassified from Level II to Level I; municipal bonds measured using market information about prices of comparable financial instruments and a derivative equity market transaction were reclassified from Level III to Level II because the unobservable factor (correlation) had no significant impact on measurement; corporate and municipal bonds were reclassified from Level II to Level III for which the impact exerted by the estimated credit parameters on the measurement was material and capital market derivatives for which the impact of the estimated parameter (correlation) exerted a significant impact on the measurement. In 2017, PLN-denominated treasury bonds, for which active market quotations were available, were reclassified from Level II to Level I.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.23 Receivables
30 June 31 December Receivables – carrying amount 2018 2017 Receivables on direct insurance, including: 2,745 2,482 - receivables from policyholders 2,483 2,320 - receivables from insurance intermediaries 111 134 - other receivables 151 28 Reinsurance receivables 81 68 Other receivables 7,006 6,546 - receivables from disposal of securities and security deposits 1) 5,293 4,658 - receivables on account of payment card settlements 585 716 - trade receivables 319 295 Receivables from the state budget, other than corporate income tax receivables 169 100 - receivables from debt factoring 6 68 - prevention settlements 46 58 - receivables from direct claims handling on behalf of other insurance undertakings 25 29 - disputed settlements 8 7 - receivables for acting as an emergency adjuster 14 12 - receivables on account of Corporate Income Tax 26 57 - receivables from purchase price allocation of the acquisition of Bank BPH’s Core Business - 94 - receivables from security and bid deposits 94 91 - other 421 361 Total receivables 9,832 9,096 1) this line item presents receivables associated with executed but outstanding transactions on financial instruments. As at 30 June 2018 and 31 December 2017, 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 losses. The amount of allowances for expected credit losses as at 30 June 2018 was PLN 788 million (impairment losses as at 31 December 2017 totaled PLN 649 million).
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.24 Extent of exposure to credit risk
6.24.1. Investment activity
The subsequent tables present the exposure to credit risk for assets bearing credit risk in the various categories of Fitch ratings (if there is no Fitch rating then a Standard&Poor’s or Moody’s rating is used instead). The credit risk exposure arising from repo transactions is presented as an exposure to the issuer of the securities taken as collateral. The table does not include loan receivables from clients and receivables due under insurance contracts. This ensues from the considerable distribution of these asset portfolios meaning, among others, that a significant portion of the receivables comes from entities and private individuals that do not have ratings. Assets at Assets exposed to credit risk No the AAA AA A BBB BB Total at 30 June 2018 rating client’s risk Debt securities 1,314 17 67,328 1,789 439 15,929 1,216 88,033 - at amortized cost - - 24,829 440 14 6,908 - 32,191 - at fair value through profit or loss 378 6 10,929 960 372 524 1,216 14,384 - at fair value through other 936 11 31,570 389 53 8,498 - 41,457 comprehensive income Term deposits with credit institutions - 75 1,730 3,920 116 1,206 75 7,123 and buy-sell-back transactions Loans - - - 204 639 3,355 - 4,198 Derivatives 1) - 108 821 312 1 1,000 36 2,279 Reinsurers’ share in claims provisions 5 175 502 - - 138 - 820 Reinsurance receivables - 11 50 - - 20 - 81 Total 1,319 386 70,431 6,226 1,195 21,649 1,327 102,534
Assets at Assets exposed to credit risk No the AAA AA A BBB BB Total at 31 December 2017 rating client’s risk Debt securities 560 725 65,897 2,712 598 24,612 1,290 96,394 - held to maturity - - 20,941 59 58 179 - 21,237 - available for sale - 725 34,865 289 41 11,935 - 47,855 - measured at fair value through 560 - 9,964 962 499 404 1,290 13,679 profit or loss - loans - - 127 1,402 - 12,094 - 13,623 Term deposits with credit institutions - 8 960 903 8 759 88 2,726 and buy-sell-back transactions Other loans - - - - 282 3,416 - 3,698 Derivatives - 127 952 212 - 1,020 40 2,351 Reinsurers’ share in claims provisions - 156 452 - - 167 - 775 Reinsurance receivables - 9 25 8 - 26 - 68 Total 560 1,025 68,286 3,835 888 30,000 1,418 106,012
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
The table below presents the credit risk ratios used by the PZU Group to measure credit risk. Standard&Poor’s ratings AAA AA A BBB BB No rating Ratio 30 June 2018 0.71% 0.75% 1.34% 3.58% 12.77% 24.95% Ratio 31 December 2017 0.72% 0.77% 1.41% 3.76% 13.33% 25.43%
The quantity of credit risk for assets for which the PZU Group incurs risk on 30 June 2018 was PLN 6,837 million (at 31 December 2017: PLN 8,866 million; while if the ratios on 30 June 2018 are applied this figure would be PLN 8,806 million).
6.25 Assets held for sale
30 June 31 December Assets held for sale by classification before transfer 2018 2017 Groups held for sale 127 113 Assets 129 116 Investment property 99 90 Receivables 1 1 Deferred tax assets 5 6 Cash and cash equivalents 22 17 Other assets 2 2 Liabilities related directly to assets classified as held for sale 2 3 Other assets held for sale 835 201 Property, plant and equipment 84 104 Investment property 751 97 Assets and groups of assets held for sale 964 317 Liabilities related directly to assets classified as held for sale 2 3 The “Investment property” line item and the “Groups held for sale” section presented mainly the properties held by real estate sector mutual funds as held for sale, since the expected investment horizon has been reached.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.26 Technical provisions
30 June 2018 31 December 2017 Technical provisions gross reinsurers’ share net gross reinsurers’ share net Technical provisions in non-life insurance 23,062 (1,354) 21,708 22,000 (1,250) 20,750 Provision for unearned premiums 8,486 (528) 7,958 7,877 (466) 7,411 Provision for unexpired risk 14 - 14 37 (3) 34 Provisions for outstanding claims and benefits 8,748 (626) 8,122 8,301 (585) 7,716 - for reported claims 3,226 (566) 2,660 3,187 (533) 2,654 - for claims not reported (IBNR) 3,658 (50) 3,608 3,348 (41) 3,307 - for claims handling expenses 1,864 (10) 1,854 1,766 (11) 1,755 Provision for the capitalized value of annuities 5,805 (194) 5,611 5,776 (190) 5,586 Provisions for bonuses and discounts for insureds 9 (6) 3 9 (6) 3 Technical provisions in life insurance 22,521 - 22,521 22,558 - 22,558 Provision for unearned premiums 95 - 95 94 - 94 Life insurance provision 16,165 - 16,165 16,060 - 16,060 Provisions for outstanding claims and benefits 564 - 564 597 - 597 - for reported claims 138 - 138 153 - 153 - for claims not reported (IBNR) 419 - 419 437 - 437 - for claims handling expenses 7 - 7 7 - 7 Provisions for bonuses and discounts for insureds 2 - 2 5 - 5 Other technical provisions 268 - 268 287 - 287 Life insurance technical provisions if the policyholder bears the investment 5,427 - 5,427 5,515 - 5,515 risk Total technical provisions 45,583 (1,354) 44,229 44,558 (1,250) 43,308
The amount of impairment losses on reinsurers’ share in technical provisions as at 30 June 2018 was PLN 12 million (as at 31 December 2017: PLN 12 million).
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.27 Other provisions
Movement in other As at 31 Balance at the Balance at Application Other provisions in the period December beginning of Increase Utilization Reversal the end of of IFRS9 changes 1 January - 30 June 2018 2017 the period the period Provision for restructuring expenses 63 - 63 - (25) (3) - 35 Provision for disputed claims and 82 - 82 24 (7) (3) - 96 potential liabilities Provision for penalties imposed by the Office of Competition and 57 - 57 - - - 17 74 Consumer Protection 1) Provision for the costs of closing the 6 - 6 - - - - 6 Graphtalk project Provisions for guarantees and 260 153 413 216 - (233) 1 397 sureties given Provision for PTE PZU’s reimbursement of undue fees to the 9 - 9 - - - - 9 Social Insurance Institution Other 20 - 20 9 (2) - - 27 Total other provisions 497 153 650 249 (34) (239) 18 644
Movement in other provisions Balance at the Change in the Balance at Other in the year ended beginning of Increase Utilization Reversal composition the end of changes 31 December 2017 the period of the Group the period Provision for restructuring expenses 252 61 (222) (28) - - 63 Provision for disputed claims and potential 11 16 (7) (1) 56 7 82 liabilities Provision for penalties imposed by the Office 58 - - (1) - - 57 of Competition and Consumer Protection 1) Provision for the costs of closing the 6 - - - - - 6 Graphtalk project Provisions for guarantees and sureties given 18 76 - (48) 214 - 260 Provision for PTE PZU’s reimbursement of 9 - - - - - 9 undue fees to the Social Insurance Institution Other 13 26 (4) (3) 24 (36) 20 Total other provisions 367 179 (233) (81) 294 (29) 497
Movement in other provisions Balance at the Balance at Business Other in the period beginning of Increase Utilization Reversal the end of combinations changes 1 January - 30 June 2017 the period the period Provision for restructuring expenses 252 61 (102) (9) - - 202 Provision for disputed claims and potential 11 1 - (2) 55 2 67 liabilities Provision for penalties imposed by the Office 58 - - (1) - - 57 of Competition and Consumer Protection 1) Provisions for guarantees and sureties given 18 26 - (21) 215 - 238 Provision for the costs of closing the 6 - - - - - 6 Graphtalk project Provision for PTE PZU’s reimbursement of 9 - - - - - 9 undue fees to the Social Insurance Institution Other 13 8 (1) (3) 24 - 41 Total other provisions 367 96 (103) (36) 294 2 620 1) The main component of the line item entitled “Provision for penalties imposed by the Office of Competition and Consumer Protection” is explained in section 15.2.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Provisions for guarantees and sureties given This item includes provisions recognized by banks for the potential loss of economic benefits resulting from off-balance sheet exposures (e.g. granted guarantees or credit exposures).
6.28 Financial liabilities
31 December 30 June Financial liabilities 2017 2018 (restated) Financial liabilities measured at fair value 4,163 4,956 Derivatives held for trading 2,103 2,606 Cash flow hedge derivatives 873 682 Fair value hedge derivatives 148 186 Liabilities on borrowed securities (short sale) 432 750 Investment contracts for the client’s account and risk (unit-linked) 291 312 Liabilities to members of consolidated mutual funds 316 420 Financial liabilities measured at amortized cost 221,307 219,594 Liabilities to banks 5,675 5,323 Current deposits 877 996 One-day deposits 658 372 Term deposits - 311 Loans received 3,616 3,380 Other liabilities 524 264 Liabilities to clients 197,771 198,163 Current deposits 120,855 122,956 Term deposits 75,945 74,453 Other liabilities 971 754 Liabilities on the issue of own debt securities 10,949 9,610 Subordinated liabilities 5,316 5,319 Liabilities on account of repurchase transactions 1,552 1,167 Investment contracts with guaranteed and fixed terms and conditions - 1 Finance lease liabilities 44 11 Total financial liabilities 225,470 224,550
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
6.28.1. Subordinated liabilities
Carrying Carrying Issue (receipt) amount amount Par value Currency Interest rate date / 30 June 31 December (in millions) Maturity date 2018 2017 (in PLN m) (in PLN m) Liabilities classified as PZU’s own funds 30 June 2017 Subordinated bonds – PZU 2,250 PLN WIBOR 6M + margin 2,278 2,285 29 July 2027 Liabilities classified as Pekao’s own funds 30 October 2017 Subordinated bonds – Pekao 1,250 PLN WIBOR 6M + margin 1,257 1,257 29 October 2027 Liabilities classified as Alior Bank’s own funds EURIBOR 3M + 12 October 2011 Subordinated loan 10 EUR 44 42 margin 12 October 2019 26 September 2014 F series bonds 322 PLN WIBOR 6M + margin 225 225 26 September 2024 31 March 2015 G series bonds 193 PLN WIBOR 6M + margin 196 196 31 March 2021 6 December 2015 I and I1 series bonds 183 PLN WIBOR 6M + margin 147 147 6 December 2021 20 October 2017 K and K1 series bonds 600 PLN WIBOR 6M + margin 605 605 20 October 2025 29 April 2013 Meritum Bank B series bonds 67 PLN WIBOR 6M + margin 68 68 29 April 2021 21 October 2014 Meritum Bank C series bonds 80 PLN WIBOR 6M + margin 81 80 21 October 2022 4 February 2016 EUR001 series bonds 10 EUR LIBOR 6M + margin 45 43 4 February 2022 27 April 2016 P1A series bonds 150 PLN WIBOR 6M + margin 150 150 16 May 2022 29 April 2016 P1B series bonds 70 PLN WIBOR 6M + margin 70 70 16 May 2024 14 December 2017 P2A series bonds 150 PLN WIBOR 6M + margin 150 151 29 December 2025 Subordinated liabilities 5,316 5,319 The lower carrying amount of subordinated liabilities compared to the nominal value ensues from some of the bonds issued by Alior Bank were subscribed for by consolidated mutual funds.
6.28.2. Liabilities on the issue of own debt securities
31 December 30 June Liabilities on the issue of own debt securities 2017 2018 (restated) Bonds of PZU Finance AB (publ.) 3,750 3,478 Alior Bank series J bonds 253 253 Pekao bonds 1,279 90 Certificates of deposit 4,452 4,541 Covered bonds 1,215 1,248 Liabilities on the issue of own debt securities 10,949 9,610
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Par value Interest rate Issue dates Maturity date
3 July 2014 Bonds of PZU Finance AB (publ.) EUR 850 million 1.375% 3 July 2019 16 October 2015 Alior Bank series J bonds PLN 250 million WIBOR 6M + margin 11 August 2017 11 August 2020 Bonds classified as measured at amortized cost 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 amount of the guarantee in effect until the expiration of the bondholders’ claims against PZU Finance AB (publ.), has not been specified.
6.29 Other liabilities
31 December 30 June Other liabilities 2017 2018 (restated) Accrued expenses 1,512 1,462 Accrued expenses of agency commissions 346 336 Accrued sales commission expenses in group insurance 5 8 Accrued payroll expenses 150 160 Accrued reinsurance expenses 356 367 Accrued employee bonuses 308 320 Other 347 271 Deferred revenue 335 354 Other liabilities 12,458 7,280 Liabilities due under transactions on financial instruments 3,864 1,772 Liabilities to banks for payment documents cleared in interbank clearing systems 1,423 2,125 Liabilities on direct insurance 869 840 Liabilities on account of payment card settlements 465 437 Regulatory settlements 221 151 Liabilities for contributions to the Bank Guarantee Fund 243 80 Reinsurance liabilities 187 140 Estimated non-insurance liabilities 72 126 Liabilities to employees 130 163 Estimated refunds of compensation in connection with banks’ clients lapsing or withdrawing from 107 121 insurance purchased during the sale of credit products Trade liabilities 203 320 Current income tax liabilities 348 421 Liabilities to the state budget other than for income tax 114 110 Liabilities on account of donations 25 28 Liabilities on account of non-market lease contracts 9 14 Alior Bank’s liabilities for insurance of bank products offered to the bank’s clients 16 17 Insurance Indemnity Fund 17 16 Liabilities for direct claims handling 12 14 Subsidiaries’ dividend-related liabilities to minority shareholders 1,659 - Liabilities to PZU shareholders for dividends 2,161 3 Other 313 382 Other liabilities, total 14,305 9,096
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN) 7. Financial assets securing liabilities
30 June 31 December Financial assets pledged as collateral for liabilities and contingent liabilities 2018 2017 Carrying amount of financial assets pledged as collateral for liabilities 10,082 10,421 Repurchase transactions 1,551 1,166 Coverage of the Guaranteed Funds Protection Fund for the Bank Guarantee Fund 1,099 1,348 Coverage of liabilities to be paid to the guarantee fund at the Bank Guarantee Fund 70 44 Coverage of liabilities to be paid to the mandatory restructuring fund (BFG) 118 73 Lombard and technical credit 4,582 4,697 Other loans 595 652 Issue of covered bonds 1,514 1,577 Coverage of the Settlement Guarantee Fund for the National Depository for Securities 47 52 Derivative transactions 506 812 Carrying amount of financial assets pledged as collateral for contingent liabilities - - Financial assets pledged as collateral for liabilities and contingent liabilities, total 10,082 10,421
8. Contingent assets and liabilities
30 June 31 December Contingent assets and liabilities 2018 2017 Contingent assets, including: 5 6 - guarantees and sureties received 5 6 Contingent liabilities 59,604 58,978 - for renewable limits in settlement accounts and credit cards 13,763 14,536 - for loans in tranches 29,470 29,766 - guarantees and sureties given 9,049 7,574 - disputed insurance claims 537 711 - other disputed claims 212 212 - other, including: 6,573 6,179 - guaranteeing securities issues 3,867 3,492 - factoring 853 899 - intra-day limit 827 844 - letters of credit and commitment letters 871 818 - potential liabilities under loan agreements concluded by the Armatura Group 33 30
9. Equity 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”). 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;
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
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; 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, 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. The capital requirement is calculated in accordance with the standard formula at the level of the entire PZU Group. 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 2017 report published on 14 June 2018 is available online at https://www.pzu.pl/relacje-inwestorskie/raporty. Pursuant to art. 290 section 1 of the Insurance Activity Act, a solvency and financial condition report of an insurance undertaking was subject to audit by an audit firm. Irrespective of the above, some PZU Group entities are obligated to comply with their own capital requirements imposed by the relevant legal regulations.
10. Segment reporting
10.1 Reportable segments
10.1.1. Key classification criterion
Operating segments are components of an entity for which separate financial information is available and is subject to regular assessment by CODM (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.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
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 and Link4. 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 The aggregation was effected Investments PAS rate on investments reflecting the value of technical because of the similar surplus- provisions in insurance products, i.e. surplus of based nature of the revenues 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 Broad range of banking products offered both to due to similarity of products and Banking activity IFRS corporate and retail clients by the Pekao Group and services offered by the companies the Alior Bank Group. and the identical regulatory environment of their operations. Pension insurance PAS 2nd pillar pension insurance No aggregation The aggregation was carried out Non-life and life insurance products offered by due to similarity of products and Baltic States IFRS Lietuvos Draudimas AB and its branch in Estonia, AAS services offered by the companies 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 - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
10.1.2. 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.
10.2 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.
10.3 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 financial costs), 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.
10.4 Accounting policies applied according to PAS
10.4.1. PZU
PAS and the differences between PAS and IFRS in respect of PZU’s standalone financial reporting are presented in detail in the PZU’s standalone financial statements for 2017. PZU’s 2017 standalone financial statements are available on the PZU website at www.pzu.pl in the “Investor Relations” tab.
10.4.2. PZU Życie
The accounting standards according to PAS applicable to PZU Życie are convergent with the PAS applicable to PZU.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
What is unique to PZU Życie is the rules of accounting for insurance agreements and investment contracts according to IFRS. 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.
10.5 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.
10.6 Quantitative data
1 April – 1 January – 1 April – 1 January – Corporate insurance (non-life insurance) 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Gross written premium – external 893 1,520 753 1,379 Gross written premium – cross-segment 2 1 (2) 2 Gross written premiums 895 1,521 751 1,381 Movement in provision for unearned premiums and gross (216) (166) (158) (247) provision for unexpired risks Gross earned premium 679 1,355 593 1,134 Reinsurers’ share in gross written premium (251) (290) (171) (250) Reinsurer’s share in the movement in provision for unearned 153 94 84 83 premiums and the gross provision for unexpired risk Net earned premium 581 1,159 506 967 Investment income, including: 34 63 26 40 external operations 34 63 26 40 intersegment operations - - - - Other net technical income 9 29 12 36 Income 624 1,251 544 1,043
Net insurance claims and benefits (392) (721) (275) (572) Acquisition expenses (120) (233) (104) (204) Administrative expenses (34) (64) (32) (64) Reinsurance commissions and profit participation 8 17 7 13
Other (9) (33) (24) (49) Insurance result 77 217 116 167
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
1 April – 1 January – 1 April – 1 January – Mass insurance (non-life insurance) 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Gross written premium – external 2,616 5,327 2,564 5,217 Gross written premium – cross-segment 5 23 1 1 Gross written premiums 2,621 5,350 2,565 5,218 Movement in provision for unearned premiums and gross (44) (304) (204) (656) provision for unexpired risks Gross earned premium 2,577 5,046 2,361 4,562 Reinsurers’ share in gross written premium (23) (26) (23) (24) Reinsurer’s share in the movement in provision for unearned (15) (36) - (22) premiums and the gross provision for unexpired risk Net earned premium 2,539 4,984 2,338 4,516 Investment income, including: 149 283 134 228 external operations 149 283 134 228 intersegment operations - - - - Other net technical income 25 60 18 88 Income 2,713 5,327 2,490 4,832
Net insurance claims and benefits (1,603) (3,135) (1,498) (2,790) Acquisition expenses (454) (905) (432) (847) Administrative expenses (158) (288) (138) (280) Reinsurance commissions and profit participation 2 (1) 1 -
Other (67) (180) (94) (191) Insurance result 433 818 329 724
Group and individually continued insurance 1 April – 1 January – 1 April – 1 January – (life insurance) 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Gross written premium – external 1,722 3,444 1,715 3,429 Gross written premium – cross-segment - - - - Gross written premiums 1,722 3,444 1,715 3,429 Movement in the provision for unearned premiums - (1) (3) (3) Gross earned premium 1,722 3,443 1,712 3,426 Reinsurers’ share in gross written premium - - - - Reinsurer’s share in the movement in provision for unearned - - - - premiums and the gross provision for unexpired risk Net earned premium 1,722 3,443 1,712 3,426 Investment income, including: 139 261 163 393 external operations 139 261 163 393 intersegment operations - - - - Other net technical income 1 1 1 1 Income 1,862 3,705 1,876 3,820
Net insurance claims and benefits and movement in other net (1,196) (2,510) (1,196) (2,648) technical provisions Acquisition expenses (88) (172) (85) (167) Administrative expenses (154) (297) (143) (292)
Other (10) (22) (25) (31) Insurance result 414 704 427 682
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
1 April – 1 January – 1 April – 1 January – Individual insurance (life insurance) 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Gross written premium – external 343 689 384 792 Gross written premium – cross-segment - - - - Gross written premiums 343 689 384 792 Movement in the provision for unearned premiums - 2 (1) 1 Gross earned premium 343 691 383 793 Reinsurers’ share in gross written premium - - - - Reinsurer’s share in the movement in provision for unearned - - - - premiums and the gross provision for unexpired risk Net earned premium 343 691 383 793 Investment income, including: 68 83 71 251 external operations 68 83 71 251 intersegment operations - - - - Income 411 774 454 1,044
Net insurance claims and benefits and movement in other net (311) (571) (358) (850) technical provisions Acquisition expenses (32) (65) (33) (67) Administrative expenses (19) (37) (15) (30)
Other (2) (3) (2) (2) Insurance result 47 98 46 95
1 April – 1 January – 1 April – 1 January – Investments 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Investment income, including: 1,145 1,089 1,352 1,684 - external operations (239) (317) (200) 126 - intersegment operations 1,384 1,406 1,552 1,558 Operating result 1,145 1,089 1,352 1,684
1 April – 1 January – 1 April – 1 January – Banking activity 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Revenue from commissions and fees 772 1,532 386 585 Investment income, including: 2,418 4,693 1,172 1,852 - external operations 2,418 4,693 1,172 1,852 - intersegment operations - - - - Income 3,190 6,225 1,558 2,437
Fee and commission expenses (181) (351) (105) (179) Interest expenses (462) (927) (230) (386) Administrative expenses (1,300) (2,540) (765) (1,236)
Other 1) (268) (634) (124) (184) Operating result 979 1,773 334 452
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
1 April – 1 January – 1 April – 1 January – Pension insurance 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Investment income, including: 1 3 2 3 external operations 1 3 2 3 intersegment operations - - - - Other income 41 77 33 61 Income 42 80 35 64
Administrative expenses (9) (17) (11) (24)
Other (1) (3) - (1) Operating result 32 60 24 39
1 April – 1 January – 1 April – 1 January – Insurance - Baltic States 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Gross written premium – external 412 787 358 673 Gross written premium – cross-segment - - - - Gross written premiums 412 787 358 673 Movement in provision for unearned premiums and gross (30) (54) (51) (72) provision for unexpired risks Gross earned premium 382 733 307 601 Reinsurers’ share in gross written premium (9) (29) (6) (22) Reinsurer’s share in the movement in provision for unearned (3) 6 (2) 5 premiums and the gross provision for unexpired risk Net earned premium 370 710 299 584 Investment income, including: 2 5 1 9 external operations 2 5 1 9 intersegment operations - - - - Income 372 715 300 593
Net insurance claims and benefits paid (223) (434) (181) (366) Acquisition expenses (78) (153) (66) (130) Administrative expenses (31) (60) (28) (55)
Other 1 2 - - Insurance result 41 70 25 42
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
1 April – 1 January – 1 April – 1 January – Insurance - Ukraine 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Gross written premium – external 62 114 63 115 Gross written premium – cross-segment - - - - Gross written premiums 62 114 63 115 Movement in provision for unearned premiums and gross (3) (4) (11) (14) provision for unexpired risks Gross earned premium 59 110 52 101 Reinsurers’ share in gross written premium (24) (42) (30) (51) Reinsurer’s share in the movement in provision for unearned 2 1 9 9 premiums and the gross provision for unexpired risk Net earned premium 37 69 31 59 Investment income, including: 4 6 3 7 external operations 4 6 3 7 intersegment operations - - - - Income 41 75 34 66
Net insurance claims and benefits paid (12) (25) (16) (26) Acquisition expenses (21) (40) (16) (32) Administrative expenses (6) (11) (6) (12)
Other 4 10 5 11 Insurance result 6 9 1 7
1 April – 1 January – 1 April – 1 January – Investment contracts 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Gross written premium 8 20 8 21 Movement in the provision for unearned premiums - - - - Gross earned premium 8 20 8 21 Reinsurers’ share in gross written premium - - - - Reinsurer’s share in the movement in the provision for - - - - unearned premiums Net earned premium 8 20 8 21 Investment income, including: - (7) 2 21 external operations - (7) 2 21 intersegment operations - - - - Other income - - - - Income 8 13 10 42
Net insurance claims and benefits and movement in other net (5) (7) (9) (38) technical provisions Acquisition expenses - - (1) (1) Administrative expenses (1) (3) (1) (3)
Operating result 2 3 (1) -
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
1 April – 1 January – 1 April – 1 January – Other segments 30 June 2018 30 June 2018 30 June 2017 30 June 2017 Investment income, including: 12 12 4 4 - external operations 12 12 4 4 - intersegment operations - - - - Other income 247 492 241 454 Income 259 504 245 458
Expenses (277) (539) (248) (484)
Other 7 13 6 23 Operating result (11) (22) 3 (3)
Net Net insurance Reconciliations Investment Acquisition Administrative Operating earned claims and 1 January 2018 - 30 June 2018 income expenses expenses result premium benefits Corporate insurance 1,159 63 (721) (233) (64) 217 Mass insurance 4,984 283 (3,135) (905) (288) 818 Group and individually continued 3,443 261 (2,510) (172) (297) 704 insurance Individual insurance 691 83 (571) (65) (37) 98 Investments - 1,089 - - - 1,089 Banking activity - 4,693 - - (2,540) 1,773 Pension insurance - 3 - (3) (17) 60 Insurance - Baltic States 710 5 (434) (153) (60) 70 Insurance - Ukraine 69 6 (25) (40) (11) 9 Investment contracts 20 (7) (7) - (3) 3 Other segments - 12 - - - (22) Total segments 11,076 6,491 (7,403) (1,571) (3,317) 4,819 Presentation of investment (20) 10 7 - - - contracts Estimated salvage and subrogation - - (4) - - (4) Valuation of equity instruments - (225) - - - (225) Measurement of properties - (4) - - - (7) Elimination of the equalization - - - - (7) provision and prevention fund Allowances to the Company Social - - - - (10) (10) Benefit Fund and actuarial costs Consolidation adjustments 1) (2) (1,016) 55 52 (15) (1,420) Consolidated data 11,054 5,256 (7,345) (1,519) (3,342) 3,146
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Reconciliations Net Net insurance Investment Acquisition Administrative Operating 1 January 2017 - 30 June 2017 earned claims and income 2) expenses expenses result (restated) 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 - 1,852 - - (1,236) 452 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 4,492 (7,290) (1,449) (1,996) 3,889 Presentation of investment (21) (19) 38 - - - contracts Estimated salvage and subrogation - - 6 - - 6 Valuation of equity instruments - 36 - - - 36 Elimination of the equalization - - - - (2) provision and prevention fund Allowances to the Company Social - - - - (20) (20) Benefits Fund and actuarial costs Consolidation adjustments 1) 2 (1,482) 32 37 (20) (1,752) Consolidated data 10,347 3,027 (7,214) (1,412) (2,036) 2,157 1) Consolidation adjustments ensue chiefly from the dividends paid between the various segments and the various accounting standards in which the specific reporting segments are reported (PAS and IFRS) and consolidated data (IFRS). 2) The sum of the following line items in the consolidated profit and loss account: “Net investment income”, “Net result on realization of financial instruments and investments”, “Movement in allowances for expected credit losses and impairment losses on financial instruments” and “Net movement in fair value of assets and liabilities measured at fair value”.
Not allocated Geographic breakdown Baltic (consolidation Consolidated 1 January - 30 June 2018 Poland Ukraine States eliminations value and on 30 June 2018 and other) Gross written premium – external 10,980 787 114 - 11,881 Gross written premium – cross-segment 20 - - (20) - Revenue from commissions and fees 1,673 - - - 1,673 Investment income 1) 5,245 5 6 - 5,256
Non-current assets, other than financial assets 2) 6,127 245 4 - 6,376 Deferred tax assets 2,047 - 2 - 2,049 Assets 320,406 2,416 336 (1,347) 321,811 1) The sum of the following line items in the consolidated profit and loss account: “Net investment income”, “Net result on realization of financial instruments and investments”, “Movement in allowances for expected credit losses and impairment losses on financial instruments” and “Net movement in fair value of assets and liabilities measured at fair value”. 2) applies to intangible assets and property, plant and equipment
Not allocated Geographic breakdown Baltic (consolidation Consolidated 31 December 2017 Poland Ukraine States eliminations value (restated) and other) Non-current assets, other than financial assets 1) 6,486 240 4 - 6,730 Deferred tax assets 1,588 - 2 - 1,590 Assets 316,388 2,190 267 (1,387) 317,458 1) applies to intangible assets and property, plant and equipment
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
Geographic breakdown Not allocated 1 January - 30 June 2017 Baltic (consolidation Consolidated Poland Ukraine and on 30 June 2017 States eliminations value (restated) and other) Gross written premium – external 10,818 673 115 - 11,606 Gross written premium – cross-segment - - - - - Revenue from commissions and fees 699 - - - 699 Investment income 1) 3,011 9 7 - 3,027 1) The sum of the following line items in the consolidated profit and loss account: “Net investment income”, “Net result on realization of financial instruments and investments”, “Movement in allowances for expected credit losses and impairment losses on financial instruments” and “Net movement in fair value of assets and liabilities measured at fair value”.
10.7 Information on key customers
Due to the nature of operations undertaken by PZU Group companies, there are no customers that would provide 10% or more of total revenues of the PZU Group (defined as gross written premium).
11. Issues, redemptions and repayments of debt securities and equity securities
In the 6-month period ended 30 June 2018, neither PZU nor its subsidiaries materially issued, redeemed or repaid any debt securities or equity securities.
12. Default or breach of material provisions of loan agreements
During the 6-month period ended 30 June 2018, in PZU and in its subsidiaries there were no instances of default on loans and borrowings or breaches of any material provisions of agreements on loans and borrowings in respect of which no corrective measures were taken until the end of the reporting period.
13. Granting of sureties or guarantees for loans or borrowings by PZU or its subsidiaries
In the 6-month period ended 30 June 2018, neither PZU nor its subsidiaries granted any sureties for a loan or borrowing or guarantees to any single entity or any subsidiary of such an entity where the total amount of outstanding sureties or guarantees would be significant.
14. Dividends
Only the profit captured in the standalone financial statements of the parent company prepared in accordance with PAS is subject to distribution. On 28 June 2018, PZU’s Ordinary Shareholder Meeting distributed PZU's net profit for the year ended 31 December 2017 totaling PLN 2,434 million by earmarking: PLN 2,159 million as a dividend payout to shareholders, i.e. PLN 2.50 per share; PLN 19 million to cover retained losses resulting from the final purchase price allocation of the acquisition of the organized part of Bank BPH by Alior Bank SA; PLN 249 million as supplementary capital; PLN 7 million to the Company Social Benefit Fund. The record date was set at 12 September 2018 and the dividend payout date was set for 3 October 2018.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN) 15. Disputes
The PZU Group entities participate in a number of litigations, arbitration disputes and administrative proceedings. Typical litigations 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 litigation are of a typical and repetitive nature and usually no particular case 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 establishing 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-month period ended 30 June 2018 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 would be material, save for the issues described below. As at 30 June 2018, the total value of the subject matter of the litigation in all 226,053 cases pending before courts, arbitration bodies or public administration authorities in which PZU Group entities take part, was PLN 6,866 million. PLN 3,794 million of that amount pertains to liabilities and PLN 3,072 million to the accounts receivable of PZU Group companies. 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.
15.1 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 2006 net profit of PLN 3,281 million 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 appeal to the Supreme Court which, on 27 March 2013, dismissed the cassation appeal. The judgment is final and non- appealable. PZU believes that repealing the aforementioned resolution of the PZU’s Ordinary Shareholder Meeting will not give rise to shareholders’ claim for a dividend payout by PZU. As the judgment repealing resolution no. 8/2007 became final, on 30 May 2012, Ordinary Shareholder Meeting of PZU adopted a resolution to distribute the profit for the financial year 2006 in a manner that reflects the distribution of profit in 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.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
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 then submitted a statement of defense 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. On 11 February 2015, the Appellate Court in Warsaw handed down a judgment that 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 and non-appealable. MSC challenged the Appellate Court’s judgment in its entirety in a cassation appeal of 9 June 2015. PZU filed its reply to the cassation appeal. By 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 non-appealable and ends the proceedings in the 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 attachments 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 the 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’s attorney replied to the statement of claim, requesting to dismiss it 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 its 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 2018, 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.
15.1.1. Other demands for payment pertaining to 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 deprivation of the right to participate in PZU’s profit. Additionally, shareholders or their legal successors sent to PZU demands for payment based on the facts presented above. Some of them did not indicate any specific amounts but the number of shares or demanded a payment only. PZU gave its replies in writing, stating that their claims are not existent and that they will not be accepted.
15.2 Proceedings conducted by the President of the Office of Competition and Consumer Protection against PZU
On 30 December 2011, the President of the Office of Competition and Consumer Protection (“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
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN) 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 undertakings 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 27 March 2015, the Regional Court issued a judgment in which it repealed the decision of the UOKiK President of 30 December 2011. By judgment of 6 December 2016, following an appeal of the UOKiK President, 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 decision of the UOKiK President of 30 December 2011. The judgment is not final and on 4 October 2017, the UOKiK President filed an appeal with the Appellate Court in Warsaw. On 2 November 2017, PZU filed a reply to the appeal of the UOKiK President. PZU had a provision for this penalty, which amounted to PLN 57 million as at 30 June 2018 and 31 December 2017 alike.
15.3 Proceedings conducted by the President of the Office of Competition and Consumer Protection 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 antimonopoly 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 the Office of Competition and Consumer Protection 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 and with the legal arguments set out in the decision. It filed an appeal with SOKiK, raising 38 formal and substantial objections against the decision made by the UOKiK President. The Management Board of PZU Życie is of the opinion that, in its decision, UOKiK failed to consider all the evidence, made an incorrect legal qualification, and, as a consequence, groundlessly assumed that PZU Życie has a dominating position on the market. After many 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. During the hearing of 26 September 2017, the Supreme Court decided to refer the case for resolution to the Court of Justice of the European Union in Luxembourg. Since the fine has already been paid by PZU Życie in 2015, no additional provision for this purpose had to be maintained.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
15.4 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 companies 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 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 a nominal value of PLN 21 million and 24,241,560 PBG shares with a nominal value of PLN 24 million. The carrying amount of PBG’s shares as at 30 June 2018 was PLN 2 million (PLN 4 million as at 31 December 2017). Bonds – on 30 June 2018 and 31 December 2017, they were recognized in off-balance sheet records only and the carrying amount of the bonds was zero. The first list of claims presented by Hydrobudowa’s trustee in bankruptcy to the judge commissioner contained PZU SA’s claims in the amount of PLN 16 million. The final list of claims submitted against the bankruptcy estate of Hydrobudowa has not been determined yet. Bankruptcy proceedings against Hydrobudowa are pending and 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. Other information
16.1 Related party transactions
16.1.1. Related party transactions concluded by PZU or subsidiaries on terms other than based on the arm’s length principle
In the 6-month period ended 30 June 2018, neither PZU nor its subsidiaries executed any single or multiple transactions with their related parties that were of material significance individually or collectively and were executed on terms other than based on an arm’s length principle.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018 (in millions of PLN)
16.1.2. Other related party transactions
1 January - 30 June 2018 1 January – 31 December 2017 1 January - 30 June 2017 Account balances and and on 30 June 2018 and as at 31 December 2017 and on 30 June 2017 activities resulting from Key Key commercial transactions Other Key management Other Other management management between the PZU Group related staff of the main related related staff of the staff of the and related parties parties 2) entities 1) parties 2) parties 2) main entities 1) main entities 1) Gross written premium - 3 - 4 - 2 in non-life insurance - 3 - 4 - 2 in life insurance (including the volumes from ------investment contracts) Other income - - - 100 3) - 17 Expenses - - - 2 - - Receivables - - - 2 Liabilities - - - - - 16 Contingent assets - - - - - 315 Contingent liabilities ------1) Members of the PZU Management Board and PZU Group Directors, data based on declarations. 2) Unconsolidated companies in liquidation and associates measured by the equity method. 3) Revenues from Pekao TFI, PIM, Xelion for the period when they were associates.
16.2 KNF Office inspections in PZU and PZU Życie
In the period from 7 August to 6 October 2017, the Polish Financial Supervision Authority (KNF) carried out another audit of PZU’s operations and assets in the claims handling area. On 13 December 2017 PZU submitted its clarifications to the KNF inspection report of 30 November 2017. KNF did not consider PZU’s clarifications. On 13 March 2018, KNF released a recommendation to pay claims in the settlement process in consideration of mutual concessions. The time limit for implementing the recommendation was set at 31 May 2018. The PZU Management Board believes that the results of the audit will not affect the consolidated financial statements. From 5 April to 4 May 2018, KNF paid a supervisory visit to PZU and PZU Życie focusing on the system to manage operational risk related to the distribution of insurance products, in particular on fraud prevention measures. On 19 June 2018 a KNF inspection began in PZU pertaining to claims handling and entering into insurance contracts. This inspection formally ended on 17 August 2018. Up to the date of signing the condensed interim financial statements PZU has not received the inspection report.
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WorldReginfo - f55f3774-6ff0-45ba-8f1a-119dd9aa789e Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements according to IFRS for the 6 months ended 30 June 2018
Signatures of the PZU Management Board Members:
Name Position
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 consolidated financial statements:
Director Katarzyna Łubkowska Accounting Department ...... (signature)
Warsaw, 29 August 2018
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