Management Board’s report on the activity 2019 of the PZU Group in H1 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Table of Contents
CEO Letter to Shareholders 6 05 Financial results 67 5.1 Major factors contributing to the consolidated financial result 68 01 PZU Group Overview 11 5.2 PZU Group’s income 70 02 External environment 23 5.3 PZU Group’s claims paid and technical provisions 73 2.1 Main trends in the Polish economy 24 5.4 PZU Group’s acquisition and administrative expenses 73 2.2 External environment in the Baltic States and Ukraine 25 5.5 Drivers and atypical events affecting the results 74 2.3 Situation on financial markets 26 5.6 PZU Group’s asset and liability structure 74 2.4 External factors that may affect the conditions of operations and the PZU Group’s activities 5.7 Contribution to the consolidated result made by industry segments 76 in H2 2019 28
06 Risk management 87 03 PZU Group’s operations 33 6.1 Objective of risk management 88 3.1 Structure of the PZU Group 34 6.2 Risk management system 88 3.2 Non-life insurance (PZU, LINK4 and TUW PZUW) 35 6.3 Risk appetite 90 3.3 Life insurance (PZU Życie) 40 6.4 Risk management process 90 3.4 Banking (Bank Pekao, Alior Bank) 44 6.5 PZU Group’s risk profile 92 3.5 Mutual funds (TFI PZU) 47 6.6 Reinsurance operations 99 3.6 International operations 49 6.7 Capital management 100 3.7 Medical services (Health) 51 3.8 Pension funds (PTE PZU) 52 07 PZU on the capital and debt markets 103 7.1 PZU’s share price 104 3.9 Other operating areas 53 7.2 Banking sector 107 04 PZU 2020 - more than insurance 57 7.3 Debt financing 108 4.1 #newPZU strategy 2017-2020 58 7.4 Distribution of the 2018 profit 108 4.2 Strategy operationalization 62 7.5 Rating 109 4.3 Pursuit of key projects and initiatives in H1 2019 63 7.6 Calendar of corporate events in 2019 114 4.4 Implementation of the strategy after H1 2019 65 08 Corporate governance 117 8.1 Audit firm auditing the financial statements 118
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 2 3 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Table of Contents
8.2 PZU’s share capital and its shareholders; shares held by members of its governing bodies 118
09 Other 123
10 Attachment: Glossary of terms 127
This report utilizes photos from campaign “Bezpieczne Wakacje z PZU” [Safe holiday with PZU]
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 4 5 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b CEO Letter to Shareholders
conveniently and in a single spot in line with their needs and The commercialization of new technologies on the insurance the suggestions we provide. market is translating into an ever faster pace of changes in products and services. This carries with it a number of Another equally important facet of PZU’s transformation is opportunities and challenges, something that is particularly related to the changes made to service and sales processes. important in a Group of such a large size and scope of The tests and pilot projects using artificial intelligence in operation. In subsequent periods we will work on devising our claim handling, among others, made us aware that it is an new strategy for upcoming years while simultaneously looking attainable goal to enhance the quality of client service while for new growth opportunities. At the beginning of this August simultaneously maintaining a high level of cost effectiveness. we signed an agreement with four startups to co-develop We estimate that finalizing this implementation will make solutions employing artificial intelligence and utilize them to it possible to streamline the process of checking technical digitize our business processes and operations on large data documentation by 10 times and it will reduce the time needed sets. to handle a notification. We are posting increasingly better results in smart tariff setting. In H1 2019 we rolled out Developing cooperation in Employee Capital Schemes (ECS) a system for some of our motor insurance products to offer is another important area of our business activity. In April clients custom pricing that matches, among others, their 2019 we made the decision to suspend management fees in loss ratio (measured using sophisticated risk models) and these funds for their first twelve months of operation. We have purchasing preferences. also reduced to a bare minimum the formalities handled by employers in connection with setting up and running ECSs. We We see that the latest technological solutions offer enormous have professionally prepared more than 300 corporate client potential to enhance the satisfaction of our clients. That is advisors and launched a modern e-ECS portal to support all why we are actively looking for new ideas and committing the processes associated with concluding and administering resources to more undertakings. One of these projects is an contracts. As a result, during the first hours of this program’s innovative loan platform developed jointly with Alior Bank operation, we signed tens of contracts. Since then, every few enabling employers to introduce new benefits in the form of moments more reputable companies are joining the PZU Group fast and low-interest loans offered to their employees. We plan through its Employee Capital Schemes. In addition, the process to launch this system in Q3 2019. of selling ECS is supported by Alior Bank whose clients receive Paweł Surówka access to a special bank offer if they decide to accept TFI PZU’s CEO of PZU Our core insurance activity in H1 2019 continues to be in ECS offer. This cooperation advances not just the mere idea of very good shape. The combined ratio for non-life insurance is saving money but also forms a prime example of how we as below 90%, thereby achieving a better result than targeted in a group can create added value for our clients. our strategy. Delivering such robust profitability during times of growing price pressure on the motor insurance market was I would like to thank all our employees and agents, and our chiefly possible thanks to the high level of cost effectiveness business partners for the efforts they make every day to build Dear Shareholders, The thoughts that had appeared in the form of ideas and and steady improvement in the quality of client service. Our the value of PZU; we are working together for our motto to concepts at the outset of 2018 are coming to form a part of position in group insurance with a periodic premium is equally continue to ring true and for that to remain so in contacts with on behalf of the management boards of the PZU Group the PZU Group’s technological stream of innovation to an ever strong as it generated a margin of 20%. In addition, we are our clients and shareholders whom I would also like to thank companies, I hereby convey to you our activity report for greater degree. Some of these solutions are now recognizable successively developing our network of health centers. In early for their trust: you can count on us! H1 2019. symbols of the PZU brand. In April 2019 we launched PZU June, 32 medical centers acquired as part of Falck outpatient GO as part of our standing offer. This is a product that care joined the PZU Zdrowie network. In total, the overall PZU Respectfully, The start of 2019 primarily marked the continuation of the saves the lives of drivers and is offered as a rider to motor Zdrowie network consists of more than 2,300 centers. PZU Group’s digital transformation under the #newPZU insurance. We have also observed the growing popularity of strategy. The first year of its execution proved to be a highly the moje.pzu.pl portal. This is our first comprehensive and In H1 2019 the PZU Group generated a net profit of PLN 1.5 creative period in which we not only attained our intended technologically integrated sales and information platform billion for the parent company, on sales of PLN 11.8 billion. objectives but we also developed and tested more innovative to serve our clients. At any time of their choosing they can Return on equity (ROE) was 20.3%, forming a good prediction solutions. check the specifics of the products they have purchased of maintaining the growing stream of dividends. In September Paweł Surówka, from the PZU Group. Moreover, they can buy more products 2019 we will pay a dividend per share of PLN 2.8. In 2017 and CEO of PZU 2018 we distributed PLN 1.4 and PLN 2.5, respectively.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 6 7 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s profile
22 million #1 99% STRONG Recap of H1 2019 results BALANCE SHEET clients in five largest insurance and most recognizable 1 Gross written premium Net insurance claims and Net profit countries banking group in CEE brand in Poland stability and safety benefits (parent company) – Solvency II ratio is above average for PLN 11.8 bn PLN 7.9 bn PLN 1.5 bn insurance groups in Europe (0.4)% +8.0% +5.0%
78.1% PLN 11.8 bn 06.2019 PLN 7.9 bn 06.2019 PLN 1.5 bn 06.2019
INSURANCE PLN 11.9 bn 06.2018 PLN 7.3 bn 06.2018 PLN 1.4 bn 06.2018 investment and pension products PLN 11.6 bn 06.2017 PLN 7.2 bn 06.2017 PLN 1.4 bn 06.2017 4.8% INSURANCE Ambitions for 2020
We would like to do something different from the classical client relation model insurers follow in which the only contact clients have with their insurer after buying a policy is when a claim occurs. We want to help our clients make wise choices to protect their lives, health, Baltic assets, savings and finances. Gradually, we will modify the company’s operating model from an insurer model (pricing and transferring States 16.1% 1.0% risk) to the model of a service company specializing in utilizing data (risk management consulting and services as well as caring for the BANKING INSURANCE future of clients, retail and business alike).
We place special emphasis on our code of ethics and corporate social responsibility in how we conduct business. The PZU Group’s value growth should be aligned to the needs of the environment and rely on sustainable resource utilization. Poland
Ukraine ROE Solvency II Dividend Green PZU
Dividend 20.3% 225% Payout Ratio 75% 06.2019 Q1 2019 DPS PLN 2.80 (0.4) p.p. vs. 06.2018 + 3.0 p.p. vs. 2018 2018 +12.0% vs. 2017
Dividend Payout Ratio Implementation of Percentage share in the operating result (adjusted for PZU’s shares in banks) after H1 2019 >22% >200% 50% - 80% “Green PZU” Standard
1 Assisted recognition of the PZU / PZU Życie brand, study by the Gfk Polonia institute, Q2 2019 2020 target 2020 target 2020 target 2020 target
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 8 9 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b 1. PZU Group Overview
We would like to do something different from the classical client relation model insurers follow in which the only contact clients have with their insurer after buying a policy is when a claim occurs. We bring together all of the PZU Group’s activities and integrate them in a client-focused manner: life insurance, non-life insurance, health insurance, investments, pensions, health care, banking and assistance services. Our client relationships and our knowledge of our clients are becoming our main value, while our chief product is our acumen in addressing client needs to build a stable future.
11 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group Overview
The New PZU – More Than Insurance PZU’s philosophy of thinking is driving the gradual We manage our business responsibly a deliberate choice of how it conducts its business, thereby The Powszechny Zakład Ubezpieczeń Group is the largest transformation of the company’s operating model from an PZU is an organization operating at a large scale. It is also making it possible to build the company’s long-term value in financial group in Poland and Central and Eastern Europe. insurer model (pricing and transferring risk) to the model of cognizant of the expectations various stakeholder have of an ethical and transparent manner while giving consideration PZU heads up the group with its traditions dating back to a service company specializing in utilizing data (risk it, including clients, employees, investors, partners, industry to stakeholder needs and expectations. The full scope of 1803 when the first insurance company was established on management consulting and services as well as caring for the experts, social environment and a number of institutions information pertaining to the PZU Group’s implementation of Polish soil. PZU is a public company. PZU’s stock has been future of clients, retail and business alike). The new model and organizations. That is also why managing relations with corporate social responsibility principles that also incorporates listed on the Warsaw Stock Exchange (WSE) since 2010. brings together all of the PZU Group’s activities and integrates stakeholders and their impact on the business community is all the legally-required non-financial information can be found Since its floatation PZU has been in the WIG20 index. It is them in a client-focused manner: life insurance, non-life accomplished in a deliberate and sustainable manner. PZU is in the 2018 Non-Financial Information Report of the PZU one of the most highly valued companies and heavily traded insurance, health insurance, investments, pensions, health a company that is open to social expectations. In the actions Group and PZU. stocks on the Polish stock exchange. PZU has also been one care, banking and assistance services. it takes it strives to set trends and construe business solutions of the companies belonging to the Respect Index, without responsibly. It also gets involved in actions to benefit the interruption since 2012. (This index consists of the companies Its robust brand underpins strategy execution. According to local communities in which the Group’s clients and employees that exhibit the greatest corporate social responsibility on the brand awareness surveys, PZU is the most recognizable brand function. For the PZU Group, sustainable management is Warsaw Stock Exchange). in Poland (spontaneous recognition of the PZU brand stands at 87% while assisted recognition is 99%). Responsible business management in the PZU Group The State Treasury with a 34.19% equity stake is PZU’s largest shareholder. Among all the Polish insurers PZU offers its clients the largest sales and service network. It has 411 branches with We respond to the needs of We are devising new standards our clients in relations with supplier The PZU Group’s consolidated assets amount to PLN 340 convenient access across the country, 9.1 thousand tied agents billion. The Group enjoys the trust of 22 million clients in five and agencies, 3 thousand multiagencies, nearly 1 thousand countries by offering products and rendering services to retail insurance brokers and electronic distribution channels. When We are a leader in social clients, small and medium enterprises and business entities. it comes to bancassurance and strategic partnerships, the PZU We create an inspiring place activities focusing on security of work The Polish market is the PZU Group’s core market measured Group collaborates with 13 banks and 21 strategic partners. by its magnitude and client numbers. Nevertheless, its PZU also has a claim handling system that operates efficiently. subsidiaries play an important role on the markets in Lithuania, Latvia, Estonia and Ukraine. The PZU Group’s clients in Poland have access to Bank We cultivate a culture of ethics We manage our environmental and compliance impact in a deliberate manner Pekao’s distribution network (812 branches) and Alior Bank’s Its companies are active not only in life, non-life and health distribution network (198 traditional branches, 8 Private insurance but also in investment, pension, health care and Banking branches, 8 Regional Business Centers and 644 The Group’s value growth should be aligned to the needs of the environment and rely on sustainable and responsible resource utilization banking products. Moreover, they render assistance services partner centers). Both banks have professional call centers and to retail clients and businesses through strategic partnerships. mobile and internet banking platforms. The magnitude and variety of operations paint the larger Values by which we are guided in our actions picture of what PZU is. It is a powerful financial institution, but In the Baltic States in which the PZU Group is in the insurance above all it is a group of service companies whose operating business, its distribution network consists of approximately foundation is the trust of its clients. 1 thousand agents, 33 multiagencies and 380 brokers. PZU also cooperates with 4 banks and 14 strategic partners. In It is the Group’s strategic ambition to pursue a new approach Ukraine insurance products are distributed through more than to building client relations, thereby leading to the integration 700 agents and in cooperation with 15 multiagencies, of all operating areas with the client at the focal point. This 35 brokers, 7 banks and 3 strategic partners. will make it possible to deliver products and services that are well-matched to client needs at the appropriate time and place and respond to other client needs on a comprehensive basis. A crucial element in this process involves the usage of tools rooted in artificial intelligence, Big Data and mobile solutions that will contribute to building an entrenched technological advantage in integrated client service.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 12 13 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group Overview
INNOVATIONS create NEW value for PZU Group’s clients Major business areas
The enormous potential of the largest financial group in Central and Eastern Europe, more than 200 years of trust, experience, effectiveness and innovation. Insurance – for many years the PZU Group has provided insurance Health – in its efforts to ensure greater and more complete satisfaction cover in all of the most important areas of private, public and business of its client needs, the PZU Group has been actively developing the life, thereby safeguarding its clients’ lives, assets and health. PZU (non- health insurance market with accompanying health care services under life insurance, including motor, residential and buildings, agricultural the PZU Zdrowie brand. The health business includes two types of and third party liability insurance) and PZU Życie (life insurance) are activity: the leaders on Poland’s insurance market. Since 2014, following the (i) sales of health products in the form of insurance and sales of S r ie ee i acquisition of LINK4, insurance is offered by the Group in Poland non-insurance products (occupational medicine, medical subscriptions, under two brands: PZU, a brand with more than 200 years of tradition partnerships and prevention programs), (ii) construction and standing behind it and LINK4, a much younger brand associated with development of medical infrastructure in Poland to give clients the best Insurance direct sales channels. TUW PZUW, a mutual insurer, was founded in accessibility to the medical services rendered. Pro e io i e 2015 to sell and handle insurance products for companies in various e e o eve o e industries, focusing on cooperation with large corporates, medical The PZU Group delivers its clients value that is difficult to replicate: U i i io o Bi D ri v u io pre iu entities (hospitals and clinics) and local government units. quick doctor appointments (in basic medical care a visit is offered u io i ve e within a maximum of 2 business days, and in the case of specialists p e o i The PZU Group is also the leader in the Baltic States, and it does within a maximum of 5 business days), respecting referrals for tests business in Ukraine. prepared by physicians from outside the PZU Zdrowie network, So u io e o r i i i remote medical consultation enabling a patient check-up, discussion of i e i e e Poland is the Group’s core market. 91,5% of its revenue (measured by symptoms, test results, receipt of a prescription for medicines taken on gross written premium). a long-term basis or referral to examination, cooperation with nearly The PZU Group generates in Poland. The insurance activity in the 2,200 partner centers in Poland and a proprietary network of nearly Baltic States (Lithuania, Latvia, Estonia) and in Ukraine generates 100 branches and an offer enriched with preventive activities. Co pre e ive o er e approximately 8,5% of its revenue. Health o ie ow e e eir He re o eri re ee e i ur e e i re ervi e Ro o i prop i preve io pro o i e o er p r er ip i e e
Pro u ervi e e i e o ie w e ever w erever e w e CLIENT
Investments – The PZU Banking – The PZU Group’s Investments Group is one of the largest banking business consists of Fi i e uri asset managers on the the following groups: Pekao pro e io rowi Ri i i io Polish market. PZU is the (a member since 2017) and vi pi A v e uncontested market leader in Alior Bank (a member since u u io pro r u erwri i employee pension schemes. 2015). ri e i e o S e u r i i i e uri An extensive range of Bank Pekao was established ee investment products is offered in 1929. It is a universal commercial bank offering a full range of banking under the PZU Investments brand, namely open and closed-end services provided to individual and institutional clients operating in mutual funds and pension products: an open-end pension fund, Poland. individual retirement accounts, individual retirement security accounts with a voluntary pension fund, employee pension plans and, as of Alior Bank is a univeral deposit and loan bank that was established in F e i e u i e 1 July 2019, employee capital schemes (ECS). PZU TFI also invests 2008 as a start-up. In its operations Alior Bank combines the principles i ri u io e wor Banking the PZU Group’s own funds. of traditional banking with innovative solutions and consequently it sets Co u i i new trends in financial services and consistently strengthens its market ivi ie i u i i The PZU Group has three mutual fund management companies: position. epo i e e i re i PZU TFI, Pekao TFI and Alior TFI. It also has PTE PZU – a company o ru i managing the PZU Złota Jesień Open-end Pension Fund. Tightening cooperation with banks has opened up enormous growth I ov ive o i e ou i opportunities for the PZU Group, especially in terms of integrating and o u io e e e re eri focusing its services on clients at every stage of their personal and p e ervi e professional development. Cooperation with the banking segment forms an additional plane for PZU to build lasting client relations.
F e i ie ervi e The PZU Group’s operations in the banking segment are conducted chiefly in the following areas: bancassurance, assurbanking, cooperation and operational synergies.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 14 15 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b 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)
30.7 29.4 30.8
2019.06 6.68 2019.06 89.2% 2019.06* 87
2018.06 6.87 2018.06 86.8% 2018 97
2017.06 6.60 2017 95 2017.06 86.5%
2017 2018 2019.06 * trailing 12 months
Life insurance in Poland Assets of Pekao TFI (PLN billion) Net result on asset management (PLN million) Gross written premium (PLN billion) Profitability (operating margin)
20.4 18.4 19.4 2019.06 4.17 2019.06 20.0% 2019.06* 110
2018 90 2018.06 4.13 2018.06 20.2%
2017.06 4.22 2017 81 2017.06 19.2% 2017 2018 2019.06 * trailing 12 months
HEALTH BANKING
Banking assets in the PZU Group Contribution of banking activity to the PZU Zdrowie’s revenues (PLN million) EBITDA margin (PLN billion) net profit of the PZU Group (PLN million)
2019.06 157 207 364 2019.06* 569 2019.06 10.1% 2018.06 99 164 264 2018.06 7.2% 2018 654 274 2017.06 89 131 220 255 264 2017.06 7.9% 2017 393 Health care companies He alth insura nce and sub scriptio ns
2017 2018 2019.06 * trailing 12 months
Number of agreements (million) Partnership branches Contribution of the banks to the PZU Group’s operating result (PLN million)
2.5 2,167 2,055 1.9 06.2019 1,663 258 1,182 3,103 1.5 1,878
06.2018 1,458 519 1,078 3,055
06.2017 1,685 253 219 2,157 2017.06 2018.06 2019.06 2017.06 2018.06 2019.06 PZU Group (excluding banks) Alio r B an k Pe kao
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 16 17 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group Overview
MARKET MULTIPLES PZU Group consolidated financial highlights for H1 2017-2019 (in PLN m)
P/E (price to earnings per share) P/BV (price to book value) 1 January - 1 January - 1 January - 30 June 2019 30 June 2018 30 June 2017
4x 15x A) PZU GROUP NET OF ALIOR BANK AND PEKAO
Gross written premium 11,839 11,881 11,606 14x 3x Net ivestment result incl. interest expenses 1,032 468 1,087 13x Net insurance claims and benefits paid (7,929) (7,345) (7,214) 12x 2x Acquisition expenses (1,616) (1,519) (1,412) 11x P/E P/E a verage P/BV P/BV a verage Administrative expenses (832) (812) (802) 1x 10x 2015 2016 2017 2018 06.2019* 2015 2016 2017 2018 06.2019* Operating profit 1,663 1,458 1,685 * trailing 12 months Net profit attributable to equity holders of the parent 1,288 1,133 1,349 EPS (earnings per share) PLN DPS (dividend per share) PLN company
5.0 2.80 B) BANKS: ALIOR AND PEKAO 2.50 Net profit attributable to equity holders of the parent 4.0 193 277 89 company
3.0 1.40 NET RESULT ATTRIBUTABLE TO THE PARENT 1,481 1,410 1,438 COMPANY (A+B)
2.0 Total assets 340,079 321,575 295,967
1.0 Equity attributable to the owners of the parent company 14,311 13,207 13,137 2015 2016 2017 2018 06.2019* 2016 2017 2018 * trailing 12 months * Restated data for H1 2017 and H1 2018 Solvency II ROE (return on equity)*
222% 225% 208% 21.0% 22.1% The financial results generated by the PZU Group in recent is one of the highest possible ratings for a Polish company to 20.3% years place it among the most profitable financial institutions receive. in the country. At the same time, they translate into high asset 21.6 22.8 23.5 utilization ratios. In H1 2019 the return on equity was 20.3%, The promise of sharing profits with shareholders also
10.4 10.2 10.4 much higher than the average posted by insurance companies evidences PZU’s attractiveness as an investment, where these in Europe. Rapid growth is achieved while preserving a high profits are not needed to underwrite its rapid growth. 2017 2018 2019.03* level of business safety. This is corroborated Own funds (PLN bn) Solvency margin (PLN bn) both by its high solvency ratios and by the A- The dividend per share paid from 2018 earnings, 2017 2018 2019.06* investment grade rating /positive/ awarded by which will be paid on 5 September 2019, is * unaudited data * ROE attributed for the parent company A- the US rating agency S&P Global Ratings. /POSITIVE/ PLN 2.80 per shares, which represents 12.0% y/y PZU, WIG20 PZU TSR, WIG20 TR growth. Financial strength rating As at the end of Q1 2019, the solvency ratio and credit rating awarded +20% (calculated according to the standard Solvency to PZU by S&P At the end of June 2019, PZU’s market +20% 12.0% 18.4% II equation) was 225%, a level above the capitalization rose PLN 4 billion, or 12.0% +10% 9.0% +10% 12.0% average solvency ratio reported by insurance groups in comparing to the end of June 2018.
0% Europe. 0%
-10% -10% On 14 June 2019, S&P Global Ratings, a US-based rating P ZU P ZU TSR agency raised PZU’s rating outlook from stable to positive. -20% WI G20 WI G2 0 TR -20% PZU’s financial strength and credit rating remained at A-. This Q3-Q4 2018 Q1-Q2 2019 Q3-Q4 2018 Q1-Q2 2019
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 18 19 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group Overview
PZU Group development
1803 1927 1991 1998 1999 2002
Establishment of the first insurance Creation of the PZU brand - Transformation of PZU into a joint Establishment of PTE PZU – pension Formation of TFI PZU – mutual fund Acquisition of a stake in UAB DK company on Polish soil – Fire transformation of the Polish Mutual stock company wholly-owned by the insurance management company management company „Lindra” (PZU Lietuva), business Insurance Company for Cities in Insurance Directorate into a public State Treasury launch on the Lithuanian insurance Southern Prussia company – Powszechny Zakład market Ubezpieczeń Wzajemnych
Establishment of PZU Życie by Polski Bank Rozwoju and Bank Handlowy w Warszawie
1950 1960 1970
2017 2015 2014 2012 2010 2005
Finalization of the acquisition of Agreement to acquire Alior Bank Acquisition of insurance companies Rebranding PZU’s Initial Public Offering (IPO) Acquisition of a stake in OJSC Bank Pekao in the Baltic States (Latvia, „Skide-West” (PZU Ukraine), Lithuania, Estonia) business launch on the Ukrainian insurance market
Formation of TUW PZUW – a mutual insurance company and a direct insurer in Poland - LINK4
Launch of the PZU Zdrowie brand
2018 The New PZU - More Than Insurance
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 20 21 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b 2.
External environment
A high growth rate of the Polish economy, an increase in real household income and an excellent situation on the labor market created favorable conditions for PZU’s business growth.
In this chapter: 1. Main trends in the Polish economy 2. External environment in the Baltic States and Ukraine 3. Situation on financial markets 4. External factors that may affect the conditions of operations and the PZU Group’s activities in H2 2019
23 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b External environment
2.1 Main trends in the Polish economy Domestic demand remains strong and the current monthly energy prices) to 1.8% y/y in Q2 of this year, compared to 2.2 External environment in the Baltic data show no signs of a slowdown in export growth. However, 1.1% y/y one quarter earlier. The main factor contributing to States and Ukraine Pace of economic growth the most important source of risk for businesses in Poland CPI growth was an increase in prices of services (3.9% y/y In Q1 2019, GDP growth in real terms slowed down to 4.7% remains the weakening of the global business conditions and in June). Prices of goods, which competed with imports, rose Lithuania y/y compared to 4.9% y/y in the previous quarter. This was a further escalation of trade conflicts. Moreover, the more slowly (2.2% y/y in June). Despite the global weakening of the economic conditions, due to domestic demand dynamics, which was lower than uncertainty related to the possibility of the “no-deal Brexit” is economic growth in Lithuania remains strong, while Q1 2019 it was in seven previous quarters. Consumption growth slowly growing in Europe again. The NBP interest rates remained stable in H1 2019. The data showed GDP growth at 4.0% y/y and 1.0% q/q. decreased compared to the previous quarter (down to 3.9% reference interest rate has remained at 1.5% since March y/y vs. 4.2 y/y) due to the fact that Easter Holidays were Labor market and consumption 2015. According to the Monetary Policy Board, the current The Lithuanian economy was driven by the accelerating later than last year. At the same time, the rate of growth The lower supply of labor has contributed to a slower level of interest rates supports the maintenance of the Polish growth of exports and internal demand, especially private of investments improved (up to 12.6% y/y, versus 8.2% employment growth rate this year. According to data for the economy on a sustainable growth path and enables it to consumption. y/y in Q4 last year), boosted by investments undertaken business sector, which becomes available the earliest, in Q2 maintain the macroeconomic equilibrium. by businesses. A change in inventories had a negative 2019 the average employment rose 2.7% y/y, at a pace slower The Lithuanian unemployment ratio has remained similar contribution on economic growth in Q1, which reduced GDP to the one posted in Q1 (3.1% y/y) and one year ago (3.9% Public finance for several months, reaching 8.0% at the end of June 2019. growth by 1.1 pp. Net exports contributed 0.7 pp to GDP y/y in Q2 2018). In the first half of 2019, the result of the state budget The shortage of qualified employees remains a considerable growth. Export growth weakened in Q1, but import growth fell declined. After June 2018, there was a PLN 9.5 billion surplus problem, significantly affecting salary growth. Nevertheless, even more. The registered unemployment rate at the end of June 2019 in the budget, while the first half of 2019 closed with a deficit businesses have already gathered considerable financial was 5.3%, meaning it was below last year’s level (5.8%) and of PLN 5.0 billion. Budget’s expenditures rose PLN 24.7 billion reserves, which means that they have the freedom of selecting Based on the quick estimate, real GDP growth in Q2 2019 the level from the previous quarter (5.9% in March of this compared to H1 last year, while income increased merely by the manner of expanding their activity – through salary stood at 4.4% y/y. The slight slowdown in economic growth year). PLN 10.2 billion. increases or investments in efficiency-improving technologies. is consistent with lower dynamics of industrial production sold and construction – assembly production compared to The growth of average monthly salary in the business sector The annual growth of tax revenue after June was about 5.6% The annual inflation rate was 2.5% in June 2019. The largest previous quarter. On the other hand, the growth of retail sales fell only slightly in H1 2019 and remains relatively high (6.8% y/y, cumulatively, driven mainly by the very high growth of contributor to inflation was an increase in the prices of food as accelerated in connection with the Easter shopping, which y/y). In Q2 of this year, average monthly salary in the business direct tax revenues (PIT 11.4% y/y, CIT 18.8% y/y). The well as vacation travel and health care. came in the second quarter this year. sector was 6.9% higher, in nominal terms, than in the annual growth of expenditures was higher, reaching 14.3% corresponding period of the previous year (compared to 6.7% y/y. The main contributors included mainly: a higher subsidy Latvia In H1 2019, the Polish economy was quite resilient to the y/y in Q1). The increase in the average salary in businesses provided to the Social Insurance Fund (up 81.3% y/y), among In Q1 2019, Latvia’s economy slowed down, recording GDP impact of slower GDP growth in the Eurozone, particularly on on an annual basis adjusted for inflation slowed down more others in connection with the payment of the “13th pension”, growth at 3.2% y/y (annual data, seasonally-adjusted). The the economic downturn in the German processing industry. clearly: it was 4.4% y/y in Q2 2019, compared to 5.3% y/y in higher expenditures on account of settlements with the EU slower rate of growth resulted mainly from an uncertain Q1 2019. budget (54.3% y/y) and a higher general subsidy for local situation in the external economic environment, while internal GDP growth dynamics from Q1 2017 to Q2 2019 government units (7.5% y/y). factors, such as investments and private consumption, The conditions for consumption growth should remain very maintained a constant upward trend. good over the several coming quarters. Unemployment has The Finance Ministry reported that after the first half of the reached record low levels, salary growth is relatively high and year about 75% of the annual borrowing needs have been The Latvian labor market experiences decreasing 5.5% consumer trust ratios are at record high levels. It will also be financed. The level of liquid funds in Polish zloty and foreign unemployment (the registered unemployment rate was 6.9% 5.1% 5.2% 5.3% 5.2% 4.9% 4.8% 4.7% supported by an increase in social transfers and tax breaks for currencies proved to be high at about PLN 67.0 billion at the in April 2019) and high demand for labor, meaning that wage 4.3% 4.4% the young. end of June. growth remains solid. In Q1 2019, gross wages increased 7.8% y/y in nominal terms. Monetary policy, interest rates and inflation Over the entire first half of 2019, inflation (measured by CPI) In the first half of the year, inflation was similar to the was on average only slightly higher than in H2 2018 (1.8% projected level. In June 2019, the annual inflation rate was y/y vs. 1.7% y/y). However the increase in prices of consumer 3.0%, driven largely by higher prices of energy reflecting the
Q1 1 7 Q2 1 7 Q3 1 7 Q4 1 7 Q1 1 8 Q2 1 8 Q3 1 8 Q4 1 8 Q1 1 9 Q2 1 9 goods and services visibly picked up the pace during the first upward trend of oil prices. half of the year. In Q2 of this year, CPI reached on average 2.4% y/y, compared to 1.2% y/y in Q1. CPI growth in H1 was Source: Central Statistical Office promoted not only by the clear increase in prices of food and fuels – net core inflation rose as well (CPI net of food and
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 24 25 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b External environment
Estonia 2.3 Situation on financial markets points at the end of June. At the same time, the yield curve On the global equity markets, following the declines at the end According to data published by the Bank of Estonia1 the flattened. The yield on one-year treasury bonds grew from of last year, the first half of 2019 saw a sudden recovery which country’s GDP increased 4.5% in Q1 2019 (on a year-on-year In H1 2019, the yields of 10-year treasury bonds of the US 0.90% to 1.40% at the end of June. halted only for a moment in May after the aggravation of the basis), whereas the quarter-on-quarter growth was 0.5%. and Germany continued to decrease. In the US yields slid from US-China trade conflict. The change in the policy pursued Production was the main driving factor of the economy, even 2.69% at the outset of the year to 2.00% at the end of June. by the major central banks was conducive to rapid growth in though other sectors of the economy also contributed. In Germany, yields fell to record low levels; at the end of June Treasury bond yields in 2018 and H1 2019 equity prices. In the first half of 2019 the American S&P500 they were -0.33%, compared to 0.25% in the beginning of stock index shot up 17.35% while the German DAX index In Q1 2019, employment in Estonian businesses and the year. In both cases, the yield curve flattened. In the USA, climbed 17.42%.
institutions rose 1.9%, while unemployment remained low. the yield curve temporarily reversed at the end of March and 4.0% The unemployment rate was 4.7% (Q1 2019 data). At the since 23 May the interest rate on 3-month treasury bills has Polish equities also moved up in the first half of the year. In
same time, demand for labor increased, driving up wages. continuously exceeded the yield on 10-year bonds. In the 3.0% that period, the WIG index rose 4.3%, much slower than the Average monthly gross wages increased 7.9% in Q1 2019. past that type of situation ordinarily preceded a recession. corresponding indices on the core markets. The WIG20 index
Responding to the risk of economic slowdown and lower prices 2.0% climbed just 2.2%, while the prices of smaller cap companies The consumer price index (CPI) moved up 2.4% in June 20192 on the financial markets, the US Central Bank (Fed) at the grew relatively faster. The mWIG40 rose by 4.4% while the
compared to the previous year. Inflation was affected mainly beginning of the quarter did an about-face in monetary policy, 1.0% sWIG80 surged 11.8%. Looking at the sector structure, the by an increase in the prices of food as well as vacation travel signaling the suspension of further interest rate hikes and later 2018 H1 2019 WIG Telecommunications index noted a particularly strong
and apartment maintenance costs. it also allowed the possibility of reducing the rates, which in Y ie ld 10 Y performance, while the WIG Energy index fell sharply.
fact happened on 31 July. It also made the decision to bring Y ie ld 5 Y Ukraine to an early conclusion the process of shrinking its balance Y ie ld 2 Y In 2019, the Ukrainian economy is showing signs of sheet. The European Central Bank (ECB) also reacted to the stabilization after years of political and economic tensions. soft data concerning economic growth and declining long- WIG and WIG20 indices in 2018 and H1 2019 In Q1 2019, Ukraine’s GDP increased 2.5% compared to the term inflation expectations by announcing the extension of its The EUR to USD exchange rate reached 1.1388 at the end corresponding period of the previous year. In June 2019, the policy of stable or lower interest rates until at least the end of H1 2019, which was only 0.4% less than at the end of
country’s annual inflation rate was 9.0%, the lowest in the of 2020. It also decided to introduce a new TLTRO program last year. However starting from the end of April until the 22,750 750 70,00070 000 last 5 years. The inflation rate was affected predominantly by as of September 2019. The ECB is also giving consideration beginning of June, the common European currency clearly the following main factors: an increase of the discount rate by to the possibility of differentiating interest rates depending by weakened vs. the US dollar, with the exchange rate mostly 22,500 500 65,00065 000 the National Bank of Ukraine (from 13.5% to 18%; this is the the liquidity surpluses deposited by banks (this solution should staying below 1.12. In the first half of the year, the PLN sixth increase since October 2017) reflecting the strengthening serve to counteract the adverse consequences of negative appreciated slightly versus the two main global currencies. 22,250 250 60,00060 000 of the country’s domestic currency. interest rates on banks’ profitability) and restore the asset The EUR to PLN exchange rate fell by 1.1% from 4.30 at the purchase program. end of 2018 to 4.252 at the end of June 2019, while the USD 22,000 000 55,00055 000 After 5 months of 2019, a negative balance of foreign trade to PLN exchange rate decreased by 0.7% from 3.76 to 3.73. in goods and services was recorded (USD -3.2 billion) caused The yields of 10-year Polish treasury bonds fell significantly in The CHF to PLN exchange rate was 3.83 at the end of June 11,750 750 50,00050 000 mainly by the unresolved conflict in eastern Ukraine. The loss H1 2019. At the beginning of the year it was 2.85%, but fell 2019, compared to 3.82 at the end of 2018. 2018 H1 2019 of control over the resources in the East curtailed Ukraine’s to only 2.39% at the end of June. The yields started to decline WIG20 WIG export capacity (due to disruptions in mining production and in May, which was later than on the core markets, since the PLN exchange rate in 2018 and H1 2019 electricity generation). announced budget expenditures drove 10-year treasury bond
yields close to 3% at the end of February. In the beginning PLN4,5 4.5 zł of May they shortly crossed the 3% threshold and it was only after the increase in customs duties on Chinese goods by PLN4,0 4.0 zł the US President was announced (which increased concerns about the state of the global economic situation) that they
started to decline in line with the trend on the core markets. PLN3,5 3.5 zł At that time, market expectations for future NBP interest rates decreased along with the market assessments of Poland’s PLN3,0 3.0 zł credit risk. The spread versus 10-year German bonds that at 2018 H1 2019
the beginning of the quarter was 260 basis points increased EU R/PLN to 302 basis points early in May, only to drop to 272 basis CHF/PLN 1 Estonian Economy and Monetary Policy, 4/2018, Bank of Estonia. 2 Data published by the Estonian Statistical Office. USD/PLN
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2.4 External factors that may affect the The main risks for Poland’s economic growth forecast are Polish economy highlights 2019* 2018 2017 2016 conditions of operations and the PZU related to the external situation. Protectionism in the global Real GDP growth in % (y/y) 4.5 5.1 4.9 3.1 Group’s activities in H2 2019 economy has intensified, which may speed up and deepen the global economic slowdown. Uncertainty related to Brexit Individual consumption growth in % (y/y) 4.3 4.5 4.5 3.9
Due to the scope of PZU Group’s business (insurance sector also persists, while the risk of the United Kingdom leaving Growth of gross expenditures for fixed assets in % 7.7 8.7 4.0 (8.2) in Poland, Baltic states and Ukraine, mutual and pension the EU without a deal has increased. Despite the agreement (y/y)
funds sector, banking), the main factors that will shape the between Italy and the EU on fiscal tightening in 2019, the risk Consumer price index in % 2.2 1.6 2.0 (0.6) environment in which the Group will operate and may have of fiscal drift and negative reactions of financial markets in the (y/y, annual average) direct influence on the development and results of the Group context of Italy’s 2020 budget persists. On the other hand, the Nominal salary growth in the national economy in % 7.0 7.0 5.7 3.7 in the medium term, in particular in H2 2019, can be divided possible conflict in the Persian Gulf creates a risk of stagflation (y/y) into three categories: macroeconomic and geopolitical, legal in the global economy. Therefore, the situation in world trade Unemployment rate in % (end of period) 5.4 5.8 6.6 8.2 and regulatory, and market factors, specific to individual has deteriorated, instead of improving as expected, and sectors / businesses in which the Group is involved. uncertainty has increased. As a result, the global economic NBP’s prime rate in % (end of period) 1.50 1.50 1.50 1.50
climate indicators, rather than improving, were at best * Forecast of 2 July 2019 Macroeconomic and geopolitical factors stabilized at a relatively low level. At the same time, global Source: PZU’s Department of Macroeconomic Analyses The growth rate, level and structure of the key trade volumes are falling. macroeconomic factors in Poland and abroad (GDP, inflation, commercial undertakings active in the business of pursuing data subject is not required for the processing of data in the interest rates, employment and salary growth) translate into As a result, the policies of the central banks in the USA compensatory claims to conduct their business, which may above extent. the growth rate of business in all sectors in which the PZU and the eurozone took a very significant turn, which was affect the claims paid by the Group. Group operates and the profitability of individual sectors. also motivated, especially in the case of the ECB, by the In January 2019, new insurance activity regulations (MDRs) On the one hand, they determine, directly or indirectly, intention to counteract the consolidation of very low inflation. Also, all resolutions regarding insurance rates (e.g. suspension came into force, which introduced the obligation to report and with a certain time lag, the gross written premium Expectations for inflation are clearly falling. In July, the of the decision to free TPL motor insurance rates in Ukraine) tax schemes. These regulations are aimed at increasing growth rate in non-life insurance, changes in demand for FED reduced interest rates while the ECB also signaled its will have impact on the Group’s activity. The legal acts which effectiveness in combating dishonest taxpayers and at credit and accumulation of deposits and flows of assets willingness to reduce interest rates and, if necessary, to resort have influenced insurance activity but will also affect the eliminating aggressive tax optimization schemes. They impose under management. On the other hand, they impact the to non-standard monetary policy measures. Central banks fear situation in H2 2019 include IDD and MIFID II. Introduction additional obligations on tax advisors, financial institution loss ratios in non-life insurance, the level and changes in the negative impact of protectionism on economic growth and of the Employee Capital Accumulation Schemes Act (as of employees as well as on clients of these entities. administrative expenses, investment results, determine the long-term inflation. July 2019) is an important legal change which may influence fund management results and the key measures affecting the the shape and functioning of life insurance and the third pillar Pursuant to the amendment to the Act on exchange of tax performance of the banking sector (interest margin and costs The above macroeconomic factors and the political situation pension products available so far. It is also expected that information, starting on 1 September 2019, clients of financial of risk). in Poland (national parliamentary elections in the autumn of the final wording of the Act on transformation of open-end institutions will have to submit a tax residency declaration 2019) may affect the economic conditions in the global and pension funds will be agreed by the end of 2019. for the period of 1 January 2016 to 30 April 2017. A criminal In H2 2019, the PZU Group expects a gradual slowdown national financial market. The climate and direction of the liability clause for tax residence declarations also comes into of economic growth in Poland, while GDP will continue to changes in the financial markets is also important for the Out of the regulations adopted in H1 2019, the amendment effect on 1 September. This clause replaces the warning about increase dynamically and may approach as much as 4.4% attractiveness of the products offered by the PZU Group, in of the Insurance and Reinsurance Activity Act, which came criminal liability for making factually incorrect declarations. for the whole year. The conditions for consumption growth particular unit-linked funds and mutual funds, and affects the into effect on 4 May 2019, seems to be the most important will remain very good over the next several quarters. The level of assets and management fees charged by the Group for insurance activity. The amendment resulted from the On 1 November 2019, the split payment procedure, which unemployment rate remains at a record low, nominal salary companies for asset management. coming into force of Regulation (EU) 2016/679 of the has been voluntary since July 2018, will become mandatory growth in recent months has been close to 7% y/y and the European Parliament and of the Council of 27 April 2016 for deliveries of selected groups of goods and services, for increase in social transfers and tax benefits for young people Legal and regulatory factors on the protection of natural persons with regard to the the payment of invoices documenting transactions concluded should further strengthen household income. On the other The PZU Group’s activity is subject to the impact of local processing of personal data and on the free movement of such between taxpayers, whose one-time value, regardless of hand, the growth of investments in subsequent quarters regulations and European legal acts. From the perspective of data, and repealing Directive 95/46/EC (“GDPR”). It allows the number of resulting payments, exceeds PLN 15,000 or should gradually slow down. Gross expenditures for fixed the insurance business, the Group’s activity will be affected by insurance companies to process data concerning health of the equivalent. assets rose dynamically in the first quarter of 2019, supported any legal changes that may contribute to an increase in the insureds or beneficiaries contained in insurance agreements mainly by investments of large businesses. However, the insurance companies’ burden, e.g. court verdicts on payout or declarations submitted before an insurance agreement is Factors specific to the sectors in which the PZU Group growth of public investments slightly weakened in this of pain and suffering under TPL insurance. Legislative work concluded, for underwriting purposes or in order to perform operates period and the latest weaker performance of construction- is still underway on the act on rendering services to pursue the insurance agreement, to the extent required given the In addition to the above factors which influence the conditions assemblyproduction indicates that this trend is continuing. compensatory claims. The bill aims to regulate the rules for purpose and type of insurance. Importantly, consent of the of operation and the Group’s results, the situation in individual
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 28 29 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b External environment
areas of activity is influenced by sector-specific factors and their changes.
The most important one is the level of competition in individual product groups constituting the core of PZU Group’s business. Due to the high technical result recorded in the non-life insurance market (mainly in Poland but also in Baltic states), intensification of active pricing policy and increased fight for clients is possible. Also in life insurance and health products it is expected that price competition will continue in H2 2019.
The situation in the insurance and banking sector may also change in connection with new entrants and trends associated with development of new technologies, among others operators of big databases / clients and the so-called insurtechs / fintechs3. Additionally, client expectations change – they largely shift in the direction of personalized offers, both in the insurance and in the health segment.
PZU Group’s activity and results in the short and longer time horizon will be shaped by demographic trends, mortality and fertility rates (life insurance segment) and fortuitous factors – occurrence of catastrophic phenomena, such as floods, cyclones etc. (non-life insurance segment).
A detailed description of the factors that may influence the Group’s activity in 2019 broken down into individual operating segments is presented in SECTION 3 OPERATION OF THE PZU GROUP.
PZU Group grasps how new technologies are changing the insurance and banking industry, carefully keeps track of the dynamic social and demographic changes and constantly analyzes the threats and opportunities affecting the development of the markets in which it operates. The PZU strategy for 2017-2020 published on 9 January 2018 and entitled “The New PZU – More Than Insurance” is also the Group’s response to the ongoing changes. PZU’s goal is to take advantage of the opportunities ensuing from the transformation of the insurance market, address the current clients’ needs better and enhance their satisfaction as well as reach those segments that value digital solutions SECTION 4 PZU 2020 - MORE THAN INSURANCE
3 Fintech - sector of economy encompassing companies operating in the financial and technological industry. Fintech companies most often provide financial services using the Internet. It is also a term for all types of technological or financial innovations. Insurtech is one of the areas of the fintech industry encompassing new technological solutions in insurance.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 30 31 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b 3.
PZU Group’s operations
We are strengthening our position as the financial services leader. We have a unique value proposal for the client in the area of insurance, banking products, mutual and pension funds and medical services.
In this chapter: 1. Structure of the PZU Group 2. Non-life insurance (PZU, LINK4 and TUW PZUW) 3. Life insurance (PZU Życie) 4. Banking (Bank Pekao, Alior Bank) 5. Mutual funds (TFI PZU) 6. International operations 7. Medical services (Health Area) 8. Pension funds (PTE PZU) 9. Other operating areas
33 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s operations
3.1 Structure of the PZU Group and they manage client assets within its open-end pension PZU – as the parent company – through its representatives 3.2 Non-life insurance (PZU, LINK4 and fund and mutual funds, and thanks to its investment in Bank in supervisory bodies of subsidiaries and voting at their TUW PZUW) 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 finance. In particular, the PZU Group’s companies provide strategic directions regarding both the scope of business and Market situation services in life insurance, non-life insurance, health insurance the finances of the Group members. As selected companies Measured by gross written premium in Q1 2019, the non- focus on their specialization and utilize their membership life insurance market in Poland grew by a total of PLN 539 Structure of the PZU Group (as at 30 June 2019) in the Tax Group, these companies render services to one million (+5.1%) in comparison to the corresponding period another on chosen markets pursuant to an internal cost of the previous year, posting growth in nearly every group of PZU arsa Po an allocation model (under the Tax Group). insurance.
PZU Zdrowie 1 PZU Życie Lietuvos Draudimas arsa Po an arsa Po an Vi nus it uania LINK4 SA PZU 100 00 PZU 100 00 PZU 100 00 arsa Po an The following changes transpired in the structure of the The higher level of premium was affected primarily by sales PZU 100 00 PZU Group in H1 2019 up to the date of publication of these growth in insurance against fire and other damage to property Centrum Medyczne PTE PZU Medica 2 arsa Po an TUW PZUW PZU Estonia financial statements: (up PLN 138 million, +7.3%, of which PLN 46 million was for Płock - Poland PZU Życie – 100.00% arsa Po an branch Lietuvos Draudimas PZU Zdrowie – 100.00% PZU 100 00 Ta in Estonia • On 3 June 2019, PZU Zdrowie SA purchased shares in Falck indirect activity), motor own damage insurance (up PLN 96 Prof-med TFI PZU Centra Medyczne Sp. z o.o. and Starówka Sp. z o.o. million, +4.5%) and various financial risks (up PLN 81 million, Włocławek - Poland arsa Po an AAS Balta PZU Zdrowie – 100.00% PZU 100 00 PZU Centrum Operacji arsa Po an Riga - Latvia • On 31 January 2019, the final share sale agreement was +41.4%). At the same time, for the first time since 2015, PZU 100 00 PZU – 99.9949% signed between PZU Zdrowie SA and the shareholders of a negative growth rate was recorded in gross written premium Centrum Medyczne Gamma Alior Bank 4 arsa Po an arsa Po an PZU Ukraine Alergo-Med Tarnów Sp. z o.o., under which PZU Zdrowie in motor TPL in direct activity (down PLN 11 million, -0.3%), PZU Zdrowie – 60.4619% PZU 1 90 1 PZU Pomoc Kiev - Ukraine Investments Funds menaged by arsa Po an PZU – 83.22922% TFI PZU – 0.0260% PZU 100 00 SA purchased shares in Alergo-Med Tarnów Sp. z o.o. After offset by higher premiums from indirect activity (up PLN 74 PZU Życie – 0.00397% Pe ao Investment Banking PZU Ukraina Life Artimed 0 0009 – 16.7668% this transaction, PZU Zdrowie SA is the sole shareholder of million, +10.5%), which resulted from increased competitors’ Kielce - Poland PZU Zdrowie – 100.00% GSU Pomoc Górniczy Alergo-Med Tarnów Sp. z o.o. price movements after a period of persistently high profitability 5 Bank Pekao Klub Ubezpieczonych LLC SOS Services Ukraine arsa Po an Tychy - Poland Kiev - Ukraine of the portfolio. Polmedic PZU – 20.00% PZU Pomoc – 30.00% PZU Ukraine – 100.00% Radom - Poland Investments Funds menaged by PZU Zdrowie – 100.00% TFI PZU – 0.0213% PZU Finanse arsa Po an PZU Ukraine Life PZU 100 00 Kiev - Ukraine Revimed Pekao Financial Services PZU – 53.4723% Gdańsk - Poland arsa Po an PZU Życie – 0.0053% PZU Zdrowie – 100.00% Bank Pekao – 66.4992% PZU Ukraine Ipsilon – 46.5224% PZU – 33.5008% arsa Po an PZU 100 00 PZU Lithuania Life PZU’s activity Centrum Medyczne EMC Instytut Medyczny Vi nus it uania św. Łukasza Wrocław - Poland PZU 99 9 POLAND Częstochowa - Poland Investments Funds menaged by ESTONIA PZU Zdrowie – 100.00% TFI PZU – 28.3076% PZU LAB arsa Po an PZU 100 00 PZU Finance AB #1 Tower Inwestycje Stockholm - Sweden 3 #4 Elvita arsa Po an PZU 100 00 Jaworzno - Poland PZU – 27.4696% PZU Zdrowie – 100.00% PZU Życie – 72.5304% Omicron BIS #1 arsa Po an PZU 100 00 PZU Corporate Member LATVIA Ogrodowa Inwestycje Limited #1 Falck Centra Medyczne arsa Po an London - England arsa Po an PZU 100 00 PZU 100 00 Sigma BIS PZU Zdrowie – 100.00% arsa Po an #2 PZU 100 00 Battersby Investments #2 Armatura Group 6 arsa Po an Cracow - Poland PZU 100 00 Starówka Investments Funds menaged by LITHUANIA arsa Po an TFI PZU – 100.00% #8 Falck Centra Medyczne – Tulare Investments 100 00 Arm Property arsa Po an #1 Cracow - Poland PZU 100 00 TFI PZU #3 ALERGO-MED Tarnów Investments Funds menaged by Tarn Po an TFI PZU – 100.00% OFE PZU #3 #6 PZU Zdrowie – 100.00% Pekao TFI #4 Consolidated companies UKRAINE
Affiliates PZU Zdrowie #3 #5 1 there are 6 branches in operation within PZU Zdrowie: CM Nasze Zdrowie, CM Medicus, CM Cordis, CM Warszawa, CM Kraków and CM Poznań 2 the Centrum Medyczne Medica Group consists of the following companies: Centrum Medyczne Medica Sp. z o.o., Sanatorium Uzdrowiskowe „Krystynka” Sp. z o.o. #5 3 the Elvita Group consists of the following companies: Przedsiębiorstwo Świadczeń Zdrowotnych i Promocji Zdrowia ELVITA – Jaworzno III sp. z o.o., Specjalistyczny Zakład Non-life insurance Market position by assets under Market position by assets Opieki Zdrowotnej „Multimed” Sp. z o.o. in Oświęcim, Przedsiębiorstwo Usług Medycznych PROELMED sp. z o.o. in Łaziska Górne management 4 The Alior Bank Group is composed of the following companies: Alior Bank SA, Alior Services sp. z o.o., Alior Leasing sp. z o.o., Meritum Services ICB SA, Alior TFI SA, New Insurance sold in direct sales channels Market position by revenues Commerce Services sp. z o.o., Absource Sp. z o.o., PayPo sp. z o.o., CORSHAM Sp. z o.o. Life insurance via internet / telephone 5 The Bank Pekao Group is composed of the following companies: Bank Pekao SA, 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., Centrum Kart SA, Centrum Bankowości Bezpośredniej sp. z o.o., Dom Inwestycyjny Xelion Sp. z o.o., Pekao Investment Management SA (which holds a 100% stake in Pekao TFI SA), CPF Management 6 The Armatura Group is composed of the following companies: Armatura Kraków SA, Aquaform SA, Aquaform Ukraine TOW, Aquaform Romania SRL Its structure does not include mutual funds or companies in liquidation.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 34 35 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s operations
Gross written premium of non-life insurance Non-life insurance undertakings – percentage of gross The following entities in the PZU Group operate on the non-life professional legal expenses insurance for physiotherapists undertakings in Poland (in PLN million) written premium in Q1 2019 (in %) insurance market in Poland: the Group’s parent company, i.e. performing their work in a professional practice (a change PZU and LINK4 and the Polish Mutual Insurance Undertaking in the offering resulting from a change in legal regulations 11,119 10,580 (TUW PZUW). as of 1 June 2019); 9,820 Others 8.9% • in April 2019 it launched sales of a new option of the 7,729 UNIQA 2.9% 7,191 PZU Group* To respond to client expectations in recent years, the PZU PZU Pomoc w Drodze product – PZU GO. PZU GO is an 6,739 Generali 6,581 36.6% 6,087 4.1% (33.5%**) Group has been consistently extending its offering for retail innovative product using telematic technology, thereby AXA Group 3,377 4,221 4.3% and corporate clients, thereby sustaining its high market confirming PZU’s focus on developing innovative solutions
Allianz Group share. as it cares for the life and health of its clients. If a 5.5% 4,380 road accident is identified using the mobile application 3,814 3,508 3,734 3,999 VIG Group After Q1 2019, the PZU Group had a 36.6% share in the connected to the sensor mounted in the vehicle, PZU 9.2% 03.2015 03.2016 03.2017 03.2018 03.2019 non-life insurance market, compared to 38.5% in the attempts to help or rescue life by establishing contact with motor corresponding period of 2018 (33.5% and 34.8% on direct the insured or the Rescue Notification Center. Additionally, no n-motor Talanx Group Ergo Hestia Group activity, respectively), while profitability significantly above the the PZU GO application includes the so-called driver’s 14.0% 14.5% market average. assistant, which provides the user with data on the driving Source: KNF (www.knf.gov.pl). Quarterly Bulletin. Rynek ubezpieczeń [Insurance style and behavior on a specific route and identifies market] 1/2019, Rynek ubezpieczeń 1/2018, Rynek ubezpieczeń 1/2017, Rynek * PZU Group - PZU, LINK4, TUW PZUW ubezpieczeń 1/2016, Rynek ubezpieczeń 1/2015 ** PZU Group’s market share in non-life insurance on direct business After Q1 2019, the PZU Group’s technical result (PZU together hazardous behavior; with LINK4 and TUW PZUW) stated as a percentage of the • implemented the offering of cyber risk insurance for Groups: Allianz – Allianz, Euler Hermes; Ergo Hestia – Ergo Hestia, MTU; Talanx – Warta, Europa, HDI; VIG – Compensa, Benefia, Inter-Risk, Gothaer; Generali overall market’s technical result was 53.2% (the PZU Group’s SME clients. The insurance protects businesses against In addition, markedly higher sales of accident and sickness Group - Generali, Concordia technical result was PLN 371 million while the overall market’s consequences of cyber incidents (e.g. data leak, installation Source: KNF Quarterly Bulletin. Rynek ubezpieczeń [Insurance market] 1/2019 insurance (up PLN 78 million, +13.3%), other liability technical result was PLN 698 million). of malicious software, locking of IT systems). The offer insurance (up PLN 56 million, +8.2%) and assistance (up PLN distinguishes itself on the non-life insurance market by 27 million, +9.6%) made a positive contribution to the overall PLN 79 million, in third party liability insurance of The total value of the investments made by non-life insurance providing broad insurance cover at a competitive price. non-life insurance market’s growth. A decline in premium was PLN 47 million and assistance of PLN 23 million made the undertakings at the end of Q1 2019 (net of the investments observable only in legal protection insurance (down largest contribution to this change. made by related parties) was PLN 61,017 million, up 3.0% Most of the changes in the corporate insurance segment PLN 9 million, -29.7%) and in marine, aviation and transport compared to the end of 2018. called for enhancing the effectiveness of collaboration with insurance group (down PLN 0.3 million, -0.3%). The increase in the technical result in motor TPL insurance intermediaries and making the dedicated offer for car fleet was caused by an increase in earned premium (up The non-life insurance undertakings in total estimated their clients and leasing companies more attractive. The most In Q1 2019 the overall non-life insurance market generated PLN 133 million, +4.2%) and a higher level of insurance net technical provisions at PLN 54,675 million, signifying 3.1% important activities related to the product offering were as a net result of PLN 627 million, signifying incremental growth activites expences (up PLN 40 million, +6,5%). growth compared to the end of 2018. follows: of PLN 52 million in comparison with the corresponding period • started submitting offers to leasing clients in quotation of 2018. The largest decrease in technical result was recorded in the PZU’s activity services by matching PZU’s offering to the client’s class of insurance against fire and other damage to property As the PZU Group’s parent company, PZU offers an extensive expectations and risk; After Q1 2019, the technical result of the non-life insurance (down PLN 124 million) and motor own damage (down array of non-life insurance products, including motor • implemented efficient and cost-optimal solutions for the market rose PLN 5 million to PLN 698 million. The growth in PLN 23 million). insurance, property insurance, casualty insurance, agricultural robotization of business processes in five areas, including the technical result in motor TPL insurance of insurance and third party liability insurance. At the end of back-office and front-office, which additionally supports H1 2019, motor insurance was the most important group the development of internal competence to maintain and Non-life insurance market - gross written premium vs. technical result (in PLN million). of products offered by PZU, both in terms of the number of develop robotized solutions in the future. Thanks to the insurance agreements and its premium stated as a percentage use of robotization, we have managed, among others, to of total gross written premium. shorten the time to handle client notifications (including 1 January - 31 March 2019 1 January - 31 March 2018 confirmations of loss for corporate clients) and speed up Gross written premium vs. Market w/o Market w/o Faced with changing market conditions, PZU realigned its the performance of repetitive tasks. A comprehensive technical result PZU* Market PZU PZU* Market PZU offering in H1 2019 to clients’ evolving interests and needs by approach to implementing robotization has been recognized rolling out new products and innovative solutions. by the Efma organization, which gave PZU the main Gross written premium 4,071 11,119 7,048 4,074 10,580 6,506 In mass insurance, PZU did the following: award in the Efma & Accenture Insurance Awards 2019 Technical result 371 698 327 404 693 289 • prepared a new offering of mandatory liability insurance competition;
* it contains LINK4 and TUW PZUW for entities engaged in medical treatment activities and • popularized three innovative solutions supporting Polish Source: KNF (www.knf.gov.pl). Quarterly Bulletin. Rynek ubezpieczeń 1/2019, PZU’s data fleet companies in Poland and abroad, which were
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 36 37 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s operations
deployed in the last quarter of the previous year: legal robots, among others in the claims, sales and documentation of theft with burglary to a family house, auxiliary building, Factors, including threats and risks that will affect the assistance abroad, advisory and telematic service. circulation areas. In the first half of 2019, the Company apartment or accompanying premises. The benefit will also operations of the non-life insurance sector in the latter focused on expanding further its current product offering, be paid out in case of a robbery as well as common theft, half of 2019 In financial insurance, PZU was unswerving in its support for by adapting it to the changing expectations of clients and provided that the bicycle was properly secured; Besides chance events (such as floods, droughts and spring the Polish economy by providing insurance guarantees and business partners. • development of sales of the unique LINK4 Mama ground frost), the following should be treated as the main securing the performance of contracts in such key areas as the insurance brand supported with innovative calculators on factors that may affect the standing of the non-life insurance power sector, the shipbuilding, manufacturing and construction The most important activities associated with modifying its the LINK4mama.pl website, for which in April 2019 the sector in H2 2019: industry and the science and innovation sector. In the portfolio product offering in H1 2019 were as follows: company was named the Leader of 2018 in the Techno • possible slowdown in economic growth in Poland. The insurance area, sales of the financial loss insurance (GAP) • launch of cooperation with Lumi (a PGE Group brand), Business contest organized by “Gazeta Bankowa” and poorer financial standing of companies may result in was extended to include cooperation with business partners a supplier of electricity on the Warsaw market, offering previously received a bronze statue in the reputable MIXX elevated credit risk, a higher loss ratio on the financial (including leasing companies). clients value in the form of an exceptionally attractive Awards competition, for accessibility and practicality of the insurance portfolio and deceleration in the pace of gross combination of the insurance and energy offering along solution in the User Experience category. written premium growth; PZU cooperated with 9 banks and 11 strategic partners with a gift card of PLN 250, which can be used for • possible slowdown in the growth rate of gross written in H1 2019. PZU’s business partners are leaders in their purchases in Warsaw’s largest shopping galleries or to buy TUW PZUW’s activity premium, mostly as a consequence of the motor insurance industries and they have client bases with enormous potential gas at Orlen and Lotos stations; TUW PZUW continued its active operations in 2019. portfolio’s profitability generated in recent years, and offering an opportunity to extend the offering to include • launch of an additional form of payment for insurance using thereby the return to an active pricing policy from more innovative products. PZU has been cooperating actively BLIK, offering, as the first insurance company in Poland, The company offers its clients a flexible insurance program to competitors and rivalry to attract clients; with the PZU Group’s member banks, namely Alior Bank and split of payments into up to four installments in all sales optimize the costs and scope of cover. • case law concerning the amounts of pain and suffering Pekao, continuing the roll-out of a comprehensive offering channels; paid in cash under the TPL insurance held by the owners of using the banks’ distribution networks. The cooperation with • extending the offer to clients holding a motor policy with Since 2016, it has been selling and handling insurance motor vehicles for suffering sustained to the closest family Pekao and Alior Bank allows PZU to gradually expand the LINK4 to include: products targeted at clients from various industries, focusing members of persons who have died (Article 446 of the offering and scale of sales of insurance products linked to ◦◦ Post-theft Assistance offered to clients holding a motor predominantly on cooperation with large enterprises, medical Polish Civil Code) and reimbursement of the costs of care bank products. In strategic partnerships, cooperation applied TPL insurance policy or bundle. This is a benefit up to centers (hospitals and clinics) and local government units. provided by related persons; mostly to companies operating in the telecom and power PLN 2 thousand, which the client may use for various TUW has 313 members for whom 44 mutual benefit societies • increase in the prices of spare parts affecting claims sectors through which insurance for electronic equipment and expenditures related to the theft, such as: purchase have been established. handling expenses due to the depreciation of the Polish assistance services were offered, e.g. the assistance of an of things that were in the stolen vehicle but are not zloty against the euro; electrician or a plumber. The PZU’s insurance offering is also covered by motor own damage insurance, rental of The dynamic growth and performance in 2017 resulted in • changes in trends and client behavior toward customization present on the e-commerce market through cooperation with a replacement car, taxi rides or registration of another TUW Polish Mutual Insurance Undertaking being noticed on of proposals and an electronic, swift and paperless method Allegro and PLL LOT. vehicle. Additionally, the insured may use a hotline that the international market when it was added to the list of of purchasing and handling insurance, forcing insurance is available 24 hours a day and 7 days a week, largest mutual insurance companies in the world. According undertakings to adapt to these expectations rapidly; LINK4’s activity ◦◦ Weather alerts sent to drivers as a text message with to the Global 500 report prepared by the International • coming into force of further regulations or financial burdens LINK4 entered the Polish insurance market 16 years ago information on the pending atmospheric event, allowing Cooperative and Mutual Insurance Federation (ICMIF), TUW on insurance undertakings. as the first undertaking offering products by phone, it still the clients to protect their cars against deteriorating Polish Mutual Insurance Undertaking is the second fastest continues to be one of the leaders on the direct insurance weather conditions, growing mutual insurance company in the world, ranking market. It is extending its cooperation with multi-agencies, ◦◦ Bad Weather Insurance – insurance offered to clients 471st in the ranking of 500 largest cooperative and mutual banks and strategic partners. The Company offers an holding a TPL motor insurance concluded through an insurance companies in the world. extensive array of non-life insurance products, including motor agent in the period from 17 June 2019 to 31 July 2019. insurance, property insurance, casualty insurance and third The product is an insurance cover for losses involving In H1 2019, the company continued to improve the product party liability insurance. damage to or destruction of a vehicle as a result of, offering, expanding the team of professionals offering among others, fire, hail or strong wind; comprehensive insurance service to the mutual’s members and The Company has put the main emphasis on the development • extension of the travel insurance cover, including aligning its offering to its clients’ needs. of innovative solutions providing added value to clients as well supplementation of the standard cover to include chronic as business partners. By using new technologies in internal illness with the treatment costs limit of 20% of the sum processes and in relations with clients, the company continues insured; to challenge the thinking of insurance. This was recognized by • introduction of a joint offer of LINK4 and Credit Agricole, the jury of the Leaders of the Banking and Insurance World which provides one year of insurance on a bicycle, whose contest, which awarded LINK4 the title of the Best Digital purchase is financed by an installment loan from Credit Insurer of 2018. In 2018, the company was supported by 10 Agricole. The insurance covers loss of a bicycle as a result
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 38 39 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s operations
3.3 Life insurance (PZU Życie) Attention should be drawn to the fact that the premium premium in classes I and V continues to trend upward (in total PZU Życie’s activity contraction for the overall market year on year in Q1 2019 by 4.6%). Within the PZU Group, PZU Życie operates on the Polish life Market situation pertained to single premiums (down PLN 457 million, i.e. insurance market. PZU Życie offers an extensive range of Poland’s life insurance market measured by gross written 29.4% y/y, compared to 22.1% in the previous year). The At the same time, market concentration measured by the life insurance products, which for management purposes premium was worth PLN 5,233 million in Q1 2019 meaning single premium compound average growth rate since 2014 periodic gross written premium is maintained. The sequence are reported and analyzed broken down into the following that over the most recent 5 years it shrank on average by was -17.2%. The changes in circumstances on the capital of the largest market players also has not changed. three segments: group and individually continued insurance, 5.5% per annum. At the same time, the premium collected market and in the legal environment should be considered individual insurance and investment contracts. in the first quarter of 2019 was 7.7% lower than in the to be the underlying causes for the gross written premium The total technical result generated by the life insurance corresponding period of the previous year; this resulted on single premium business to fall in a trend over several undertakings in Q1 2019 was up PLN 55 million (8.0%) from During Q1 2019 PZU Życie wrote 39.6% of the gross written principally from the evolution in the single premium business years. Initially, the record low interest rates contributed to the corresponding period of 2018 to PLN 734 million. The life premium of all life insurance undertakings signifying further in investment products while the gross written premium in the decline in the yields offered by term deposits packaged as insurance segment result (class I) improved by growth on top of last year’s market share (+2.9 p.p.). The periodic products has persisted at a similar level. insurance products, thereby leading to heightened interest in PLN 27 million (42.7%), while accident and illness insurance expansion of PZU Życie’s market share was driven by a other investment products. Additionally, a tax was introduced (class V) increased by PLN 25 million (5.4%). In both cases, positive rate of growth in periodic gross written premium on The changes in the level and the growth rate of the life as of 1 January 2015 on short-term endowment insurance this was caused by portfolio growth, supported by loss ratio a y/y basis than that of all its competitors combined and the insurance market premium in recent years has been offering a fixed rate of return or a return based on indices; remaining stable or even declining y/y in class I and in class lower decline on average than for the other market players in stimulated mostly by single premiums in investment products. this also contributed to reducing client interest in these types V additionally helped by lower operating expenses and the form of a single premium, accompanied by the Company of products and ultimately to their retraction, especially improved investment performance. holding a lower percentage of that business in its portfolio. the first ones, from the offer of insurance undertakings. Gross written premium reported by life insurance In subsequent years the regulatory authority’s guidelines, In this same period, life insurance undertakings generated PZU Życie continued to be the clear leader in the periodic undertakings in Poland (in PLN million) including guidelines regarding the level of fees incurred by a net result of PLN 508 million, representing a PLN 39 million premium segment. In Q1 2019 it generated 45.9% of these clients of unit-linked products and EU directives regulating the (8.2%) increase y/y. This improved result was the effect of types of premiums written by insurance companies, which market for these types of products and their distribution led better technical results than in the corresponding period of means that it retained the last year’s market share in this
7,188 to insurance undertakings constricting their offering of these 2018. segment. The year on year increase in gross written premium 7,1886,930 6,124 types of products, especially in cooperation with banks. The at PZU Życie in this segment was 0.5%, while the other 6,1245,749 5,672 5,749 5,672 2,962 5,233 successive quarters of 2018 and the first quarter in 2019 were The total value of the investments made by life insurance market players taken together posted a 0.4% growth rate. 4,107 4,226 1,998 1,667 1,557 1,100 4,126 characterized by a dip in the level of single premium to the undertakings at the end of Q1 2019 was PLN 40,682 million, One of the major factors was the rapid growth in the health 4,083 4,116 lowest figures in many years. signifying 2.3% growth compared to the end of 2018. In turn, insurance portfolio. PZU Życie now has more than 2.0 million
4,226 4,083 4,126 4,116 4,133 the high level of surrenders, which exceeded the y/y declining policies of this type in its portfolio. PZU’s share in just the 2,824 2,962 1,667 1,998 1,557 The outcome of this market evolution was the expanding level of client contributions to funds led to a lower net asset life insurance segment (class I) for periodic premiums in Q1
03.2014 03.2015 03.2016 03.2017 03.2018 03.2015 03.2016 03.2017 03.2018 03.2019 significance of periodic premium that constitutes PZU Życie’s value of life insurance in which the policyholder bears the 2019 was 62.2% when measured by gross written premium
s in gle competitive edge on the market. In Q1 2019, periodic investment risk (down 0.3% to PLN 50,631 million). and 69.0% when measured by the number of agreements in Pe rio dic al pe rio dical premium was 0.4% higher compared to the same period in force. In turn, PZU’s market share in terms of the method of Single 2018, with a compound average growth rate of only 0.1% for entering into an agreement just in the life insurance segment Source: KNF’s Quarterly Bulletin. Rynek ubezpieczeń 1/2019, Rynek ubezpieczeń 1/2018, Rynek ubezpieczeń 1/2017, Rynek ubezpieczeń 1/2016, Rynek the last 5 years. Despite the decline in periodic premium in (class I) was 66.9% for agreements executed in group form ubezpieczeń 1/2015 unit-linked life insurance (by nearly 10% y/y), the protective and 38.8% for individual agreements (measured by gross written premium).
Life insurance market – gross written premium (in PLN m) Life insurance market – gross written premium vs. technical result (in PLN m)
1 January - 31 March 2019 1 January - 31 March 2018 Life insurance 1 January - 31 March 2019 1 January - 31 March 2018 market – gross Gross written Market w/o Market w/o written premium vs. Market w/o Market w/o premium PZU Życie Market PZU Życie PZU Życie Market PZU Życie technical result PZU Życie Market PZU Życie PZU Życie Market PZU Życie
Periodic premium 1,899 4,133 2,234 1,890 4,116 2,226 Gross written premium 2,070 5,233 3,162 2,079 5,672 3,593
Single premium 171 1,100 928 190 1,557 1,367 Technical result 342 734 392 353 679 326
TOTAL 2,070 5,233 3,162 2,079 5,672 3,593 Profitability 16.5% 14.0% 12.7% 17.0% 12.0% 9.2%
Source: KNF (www.knf.gov.pl). Quarterly Bulletin. Rynek ubezpieczeń 1/2019, Rynek ubezpieczeń 1/2018, PZU Życie’s data Source: KNF (www.knf.gov.pl). Quarterly Bulletin. Rynek ubezpieczeń 1/2019, Rynek ubezpieczeń 1/2018, PZU Życie’s data
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 40 41 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s operations
Life insurance undertakings - percentage of periodic and satisfied. It should also be emphasized that the changes implementation, a seller may prepare an offer for the strategies that adapt to volatile market conditions were gross written premium in Q1 2019 (in %) are made not only to the product itself but also entail the client, prepare the proposal and collect data of the offered in the individual subscription tranches, based on modernization and simplification of the way in which insurance insureds (enrollment declarations). The vast majority of various models of calculating the investment bonus. is offered and sold and enable the client to take advantage of the process is already carried out electronically and is not various contact channels to reach the insurance undertaking limited by the working time of the support teams. Thanks In its other initiatives PZU constantly opts for understanding Others PZU Życie 16.2% 45.9% (e.g. in a branch, by phone, e-mail, client account, person to the implementation, the seller can complete the whole client needs better and better and building long-term client providing technical insurance services in the workplace or process in a single meeting with the client and can provide relations. PZU wants to respond swiftly to changes in the Metlife 4.1% through an insurance intermediary, whether tied or external). administration electronically, printing only the final versions environment through a sophisticated offer accompanied by Generali of the documents; clear and communicative messages by doing the following: 4.2% VIG Group Most significant product changes in 2019 • commencement of pilot sales of two new ranges of the • creating predictive client attrition models and responding 4.6% Under group and health insurance, PZU Życie made the Opieka Medyczna S health insurance for corporate clients swiftly and effectively to symptoms of client dissatisfaction; Talanx Group 6.0% following major changes in H1 2019: (June 2019) – the first range is profiled to enable a detailed • developing a loyalty program;
Nationale-Nederlanden • launch of pilot sales of PZU Thinking about Life and Health checkup of the health condition of the thyroid gland, liver, • using a simple and transparent arrangement and 8.2% Aviva product (May 2019) directed to companies employing up heart, arteries and kidneys. The second range enables tests description of its products on its new website www.pzu.pl. 10.8% to 4 people. This is the innovation that agents and clients profiled for malignant neoplasms occurring most frequently have been waiting for – each employee may select in women and men. Factors, including threats and risks, that may affect Groups: Talanx - Warta, Europa, Open Life; VIG - Compensa, Vienna Life; Aviva - Aviva, Santander-Aviva a different insurance option and the insurance agreement During the development of the new ranges, particular the operations of the life insurance sector in 2019 Source: KNF’s Quarterly Bulletin. Rynek ubezpieczeń [Insurance Market] 1/2019 is concluded remotely. PZU Życie can insure even a single emphasis was put on: The following constitute the major risk factors on the life employee – also when an employer itself does not take ◦◦ analyzing results of marketing surveys: to support insurance market in 2019: PZU Życie’s technical result represented nearly half the result out a cover. At present, a pilot is carried out in two regions prevention of the illnesses that Poles fear most, • the prospect of a higher inflation rate and economic growth earned by all life insurance companies. This evidences the in Poland (pomorskie and dolnośląskie) in which more ◦◦ expanding the range of benefits with those that are driving an increase in T-bond yields, which in the long term high profitability these products enjoy. In spite of the fact that than 400 sales personnel from Agency Sales Department, most frequently concluded in non-standard offers, will be beneficial to the PZU Group, although in the short the first quarter traditionally generates the lowest results for Network Management Department and the Tied Sales ◦◦ increasing market advantage by adding new medical term may adversely affect investment income; the company, PZU Życie’s technical result margin on gross Department take part. The product is very flexible. It services, • softer conditions on the capital markets deteriorating the written premium substantially exceeded the overall margin supports enrollment for people from 18 to 65 years of age. ◦◦ keeping prices at attractive levels. attractiveness of products, especially unit-linked products; generated by the other companies offering life insurance A client may select up to 6 insurance options with different • demographic changes and the aging society and the (16.5% versus 12.7%). covers and benefit amounts. Additionally, each option may In individual protection insurance products, in H1 2019 PZU ensuing changes in the current mortality, fertility and be extended by private medical care. The insurance ranges Życie implemented PZU Support for Relatives, a new life morbidity levels, especially diseases of civilization, i.e. Product offer have been prepared to address different needs, depending insurance product offered in PZU Branches and the Agency lifestyle diseases; PZU Życie, as a popular and the largest insurer on the on the client’s stage in life. As a result, for example a client Network. 5 riders were implemented together with the basic • constant price pressure in group insurance and the battle Polish market, continuously expands its product offering by who does not plan to establish a family, will not pay for risk agreement: for client ownership (and their data), thereby cutting the adding new products or modifying existing ones to protect such as childbirth or spouse’s illness, contrary to a typical • tumors and other critical illnesses rider; insurer’s margins, reducing the quality of the product and its clients at each stage of their lives. Changes in the product group insurance policy. The insured is not obligated to fill • consequences of critical illnesses rider; fostering entry and exit obstacles for clients to overcome offering are intended to attract new clients and expand the out a medical questionnaire and the premium begins from • surgical operations rider; with independent intermediaries; insurance cover for those already in the portfolio, along with just PLN 45 per month. The product can be offered using • accidental dismemberment rider; • changes in trends and client behavior toward customization strengthening their loyalty and increasing their satisfaction two paths: standard and remote (using the iPresso tool). • accidental bone fracture rider. of proposals and an electronic, swift and paperless method level. Taking advantage of the unique synergy of competences Thanks to iPresso, for the first time in PZU Życie’s history, of purchasing and handling insurance, forcing insurance within the PZU Group (insurer, medical operator, investment a seller may sign a remote agreement without the need Further individual protection insurance products will be undertakings to adapt to these expectations rapidly; manager), the company is able to comprehensively take care to hold a meeting. This is not only very convenient for the implemented in H2 2019. • availability of medical personnel in public health care; of life, health and savings of its clients, providing them with client, but also saves time for the seller – the client receives • the emergence of new competitors and solutions, including the broadest possible support. an offer and a set of documents by e-mail and is guided by The following changes were made by PZU Życie to the product the operators of large client bases or insurtech companies; the system step-by-step to enter into the policy himself/ offering in investment insurance: • entry into force of the new pension security system Concurrently, the changes in the offering take into account herself; • implementation of sales of the Platinum Investment Plan (Employee Capital Schemes) and its impact on the products the changing requirements of the regulatory authority and the • implementation of functionalities supporting automatic insurance (a single premium unit-linked product) by Dom existing in the 3rd pillar of the pension system. growing extent of statutory consumer protection. PZU Życie process of signing an insurance agreement in PZU Inwestycyjny Xelion sp. z o.o.; takes a customer-oriented approach by designing its offer and Protection and Health, which is a protection and • additional subscriptions of the structured insurance product client service process so that the client feels fully cared for health insurance product (March 2019). Thanks to the known as World of Profits (Świat Zysków) that has enjoyed tremendous client interest were sold. Various investment
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 42 43 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s operations
3.4 Banking (Bank Pekao, Alior Bank) pension funds, Employee Capital Schemes, brokerage services, users and offers full information about active products and Bank Pekao is steadfastly pursuing its growth strategy in the transaction advisory, leasing and factoring. allows users to submit orders; Small and Medium Enterprise segment. Thanks to numerous Market situation • loan offering for clients in the “one click” process in the improvements in processes, the share of deposits through As at the end of May 2019, there were 31 domestic In H1 2019, the Bank continued initiatives initiated as part PeoPay mobile application, under which a loan may be remote channels increased in the first half of the year. commercial banks, 545 cooperative banks and 32 branches of of its strategy for 2018-2020 “Strength of the Polish Bison”. taken out without leaving home – 30 seconds after an Deposit margin groups corresponding to the existing deposit credit institutions operating in Poland. The strategic objectives announced in the document include agreement is accepted. quotations negotiated in branches have been assigned (in becoming the leader of profitability in the Polish banking PB24 electronic banking); a dealing module has been made The standing of the banking sector continued to be stable sector through embarking on the path of intelligent growth In this period, the bank also launched a special safe API available centrally and access to the telephonic channels underpinned by the persisting high economic growth. in a business model based on high efficiency and quality developed in accordance with the Payment Services Directive (dealers) has been agreed. The offering of cash products of processes. Business development is based on a strong (PSD2), aimed at offering a safe and easy to use set of for SME clients has also been extended to include closed After 5 months of 2019, the banking sector generated a net capital and liquidity position while maintaining the highest financial services. The interface was launched following withdrawals with the bank’s transport sent directly to the profit of PLN 5.9 billion, i.e. PLN 0.6 billion (8.7%) less than it risk management standards and further improving cost the entry into force of the legal requirements introduced company’s location. These products have previously been did in the corresponding period of 2018. effectiveness. by the EU PSD2 directive. A portal for developers was also offered exclusively to corporate segment clients. created, through which service providers may learn about the Increases in impairment losses (by 13.7% y/y) contributed At the end of Q1 2019, Bank Pekao was the second largest interfaces offered by the bank, register and receive support In Q1 2019, Bank Pekao was the only bank to sign an the most to the change of the sector’s net profit. A negative bank in Poland (in terms of the value of its assets). in case of questions. The presented interfaces are compliant agreement with EIB on the financing of energy efficiency trend was also visible in net fees and commissions, which fell with version 2.1.1 of the PolishAPI standard developed by projects in the SME segment for companies from the by 2.1% in the period. Banks’ operating expenses (including On 4 April 2019, the Management Board of Bank Pekao the Polish Banks Association in order to implement the PSD2 kujawsko-pomorskie voivodship. The low-interest loans depreciation and amortization) rose 8.9% y/y, mainly as adopted a resolution on the intention to carry out group directive in Poland. will help companies replace machinery, equipment and a result of a considerable increase in regulatory charges layoffs. In the period from 25 April to 31 October 2019 the technologies with more energy efficient ones. settled in Q1 2019. The 8.6% growth of net interest income termination of employment contracts will apply to a maximum In H1 2019, the Bank continued to develop cooperation with did not offset the negative trends mentioned above. of 900 employees and the modification of employment the PZU Group focused on the bancassurance offering. For The bank additionally carried out educational activities aimed conditions will apply to a maximum of 620 employees. clients taking out a cash loan, the Bank extended the product at increasing awareness of FX risk and interest rate risk in the At the end of May 2019, the sum of assets of the banking offering to include a new PZU insurance product available in sector of SMEs, with particular emphasis on the mitigation sector stood at PLN 1,956 billion, up 6.3% y/y from the New products and services branches. Clients may use new life insurance and property of risk in export companies that begin their international end of May 2018. Loans and advances rose 5.2% y/y (by According to Bank Pekao’s strategy, its growth among retail insurance bundles customized to match their needs. In expansion. PLN 63.4 million). The value of deposits of the non-financial clients is driven by the significant acceleration of growth in the the first quarter of 2019, Bank Pekao’s electronic channels sector (including locked deposits) increased at the end of number of accounts, among others thanks to the application conducted an active sales campaign of PZU’s tourist insurance A new product program was also implemented for investors May 2019 to PLN 1,187.4 billion, up 10.5% compared to the of cutting-edge biometric solutions, automation of the credit offered through the www.moje.pzu.pl implementing small and mid-sized investment projects in the corresponding period in 2018. process for cash loans and closer cooperation with the PZU commercial property segment. Project financing expertise, Group in relation to the offer of insurance and investment In H1 2019, activities in the Private Banking area focused on previously used to assess large transactions, will also help The banking sector’s own funds for capital ratios, calculated products. acquiring new clients, consolidating relations with the existing effectively support SME clients. in accordance with the regulations laid down in the CRR ones and also on the implementation of initiatives aimed at Regulation, totaled PLN 206.8 billion at the end of March 2019, In the first half of 2019, the following solutions were keeping the high service level by offering product solutions In its offering for corporate clients, Bank Pekao launched the up 3.4% versus the end of March 2018. implemented in electronic banking for retail clients: addressing client needs. A new release of the investment Apple Pay service. Users of corporate MasterCard payment • clients can now open an online account themselves, using advice service was launched using a new Web application. cards (excluding prepaid cards and debit cards in EUR), who The banking sector’s overall capital multiple at the end of a computer or a smartphone. Identity is verified by using Thanks to the use of a multi-tasking optimization algorithm, use Apple brand devices may add payment cards to the Wallet March 2019 was 18.96% (up 10 bps compared to the end biometric measurements of a face and a personal ID. The the client receives investment recommendations faster, they app and make card payments using that application. of March 2018), while the Tier I capital ratio at the end of service is available online 24 hours a day, 7 days a week; are more personalized and take a larger number of investment this period was 16.99% (down 3 bps in comparison with the • implementation of recurring BLIK payments, which support criteria into account. The service was additionally extended by Additionally, PekaoBiznes24 clients were presented a new corresponding period of 2018). quick and regular making of transactions such as: payment mutual funds from new partners: Investors TFI and Schroders. login page. The development of the modernized system of invoices from a specific issuer, subscription fees; login page took inspiration from the newest global trends in Operations of the Pekao Group • Apple Pay and ability to link it to a personal account In H1 2019, Private Banking Clients using services provided by designing electronic banking systems. The new visual identity The Pekao Group is led by Bank Pekao, a universal commercial through PeoPay mobile banking without even having to CDM Pekao obtained access to the public offering of structured is consistent with the directions of future development of bank offering a full range of banking services provided to have a card; certificates with or without principal protection, issued by the bank’s electronic banking service. A new PekaoBiznes24 individual and institutional clients operating chiefly in Poland. • Clients using an Android system may use the PeoPay UniCredit Bank AG. The bank also cooperated with CDM Pekao application for tablets has been implemented. This is a new, The Pekao Group consists of financial institutions operating application and m.pekao24.pl to contact a consultant and Pekao TFI to prepare a subscription for new certificates in contemporary release of the PekaoBiznes24 developed to on the following markets: banking, asset management, through text chat. The service is available for logged-in the Pekao Samorząd Plus FIZ fund. introduce multi-channel solutions. Benefits offered by the
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 44 45 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s operations
tablet version include convenience and ease of use, time with innovative solutions. As a result, Alior Bank systematically client’s/attorney’s disk level and authorized with a single- • changes in the external environment and international savings and access regardless of the place of stay, as well strengthens its market position and for years has been use SMS code, and is now available for sole proprietorships; events, including tensions related to geopolitical factors as functionalities and analytical tools supporting quick and consistently setting new directions of development of the • functionality of signing a loan agreement with the client in (Brexit, trade wars), affecting the domestic economy; effective management of a company’s finances. Polish banking. By implementing the “Digital Disruptor” the unsecured form from the Internet banking level (new • development of banking services offered by non-regulated strategy, Alior Bank has the ambition of becoming the digital AIB or BusinessPro). Authorization is carried out through entities; In the first half of 2019, a cooperation agreement was signed bank of first choice for individual clients and for small and a single-use SMS code sent to the client’s trusted phone. • interest rate policy of the Monetary Policy Board; with the Association of Polish Chambers of Commerce Abroad medium enterprises in Poland and wants to become one of the This solution has been designed for sole proprietorships as • continuing high level of contributions to the Bank (PolChambers) associating more than 5 thousand businesses. most innovative banks in Europe. well as partnerships run with spouses; Guarantee Fund. Through the Agreement, the bank will obtain easier access to • the Alior Bank’s mobile application is now offering new companies operating across the globe and the ability to offer At the end of Q1 2019, Alior Bank was the 8th largest bank in functionalities; the Google Pay contactless payment service a broad range of services, including a special offer of financing Poland (in terms of the value of its assets). has been added for Android devices and Apple Pay for 3.5 Mutual funds (TFI PZU) exports from Poland. iPhone, Apple Watch, iPad or Mac devices with the iOS New products and services system. Additionally, mobile clients may use an alternative Market situation Pekao TFI In H1 2019 the following new products and services were payment service for Internet shopping: BLIK PayByLink, As at the end of June 2019, assets under management The Pekao Mutual Fund Company (Pekao TFI) is another introduced in the Alior Bank Group’s offering: where the whole transaction is confirmed in the mobile of domestic mutual funds were nearly PLN 257.1 billion member of the Pekao Group. Pekao TFI (formerly Pioneer • “Non-Standard Loan” cash/consolidating loan with an app. compared to 256.8 billion at the end of 2018, representing an Pekao TFI) is the oldest mutual fund management company attractive commission and interest rate, which depends on • release of the production version of API compliant with slight increase by about PLN 300 million. in Poland providing clients modern financial products, offering the amount of the liability; the PSD2 requirements. The Alior Bank’s programming opportunities to invest in the largest global capital markets. • “Micro-Cost Loan” cash/consolidating loan with a very interface has been developed based on version 2.1.1. Mutual fund companies – share in assets as at 30 June For many years it has been devising savings programs, attractive interest rate. Its cost per each PLN 1000 of the PolishAPI standard created, among others, by the Polish 2019 (in %) including programs affording an opportunity to put aside more net loan amount was no more than PLN 6 per month; Banks Association, banks and payment institutions. money for retirement under the third voluntary retirement • “Internet Loan” offering for new clients, who submitted Ipopema TFI Others 20.3% pillar. Pekao TFI also offers a managed account service. At the a dedicated web form to the Bank; they received Alior TFI 24.9% end of June 2019 the company had assets under management preferential interest terms and free commission; Alior TFI (formerly Money Makers) operates in the Alior totaling PLN 20.4 billion, signifying an upswing of • TUiTAM credit card offering, in which the Bank charges no Bank Group. It was established in 2010 and its operations
PLN 1.0 billion, i.e. 6.2% in comparison to the end of June commission for currency conversion; originally focused on asset management services. Alior Bank’s Investors TFI 3.5% PKO TFI 13.5% 2018 and was ranked fourth (in terms of assets under • automatic opening process of iKonto Biznes and “4x4 cooperation with its subsidiary Alior TFI pertains to three Union Investment TFI 4.7% management) on the market of investment companies in Account” in new Electronic Banking system, in which the areas: asset management (portfolio management for retail Aviva Investors TFI 4.9% PZU TFI Poland. CHAP. 3.5 MUTUAL FUNDS client receives documents to a specified e-mail address and clients/private banking), unit-linked funds, and Alior SFIO sub- NN Inv. Partners TFI 6.0% 8.1% the company data are obtained directly from the Central fund management. From 5 January 2017, Alior TFI has been Santander TFI 6.2% Pekao TFI 7.9% Operations of the Alior Bank Group Business Activity Registration and Information Database listed on the alternative market of the Warsaw Stock Exchange
The Alior Bank Group is headed by Alior Bank. Alior is (CEiIDG); (NewConnect). Source: Chamber of Fund and Asset Management a universal deposit and credit bank, providing services to • possibility of registering a Trusted Profile in the electronic natural persons, legal persons and other domestic and foreign banking system and signing public administration Factors, including threats and risks which will affect The first half of 2019 proved to be a difficult period for the entities. The bank’s core business comprises maintaining applications with the Trusted Profile. A Trusted Profile is the banks’ operations in H2 2019 entire mutual funds market. According to estimates by Analizy bank accounts, granting cash loans, issuing bank securities a convenient and secure tool that a business may use The situation of the banking sector in H2 2019 will primarily Online, the balance of payments to and withdrawals from and purchase and sale of foreign currencies. The bank also to handle official business online it public administration be affected by the following factors: funds offered by TFIs in the domestic market was negative, conducts brokerage activity, provides financial advisory and websites. More than 20 thousand clients have already • the scale of demand for banking services and the ability of having exceeded PLN -2.7 billion. Out of that figure, the intermediation services, arranges corporate bond issues and taken advantage of this solution; banks’ clients to timely pay their liabilities largely depends balance of the equity market funds was PLN -1.8 billion, while provides other financial services. • Feniks KB – a fully automated credit system, in which, with on the clients’ financial situation. Apart from the country’s the private market balance amounted to PLN -0.9 billion. The a single loan application, working capital and procurement macroeconomic standing, the economic situation of a largest outflows were recorded by absolute return funds – Alior Bank is one of the most modern and innovative financial financing may be granted in 5 different products: account number of client groups also depends on the national clients withdrew more than PLN 1 billion more than they paid institutions in Poland. The bank’s offering includes products overdraft, business loan credit card, factoring and leasing; economic policy being pursued. Both a lower growth rate of in. Equity funds also struggled, ending the 6-month period and services both for individual and business clients, including • a loan application under a pre-approved offering can the Polish economy and changes in the legal framework for at the level of PLN -0.9 billion. Debt funds were purchased small and medium enterprises and institutional clients. The now be submitted through Internet banking (new AIB the operation of enterprises may have an adverse impact most frequently: since the beginning of the year they acquired bank’s offer combines the principles of traditional banking or BusinessPro) also by a client’s attorney-in-fact. The on the financial standing of selected clients of banks; nearly PLN 4.0 billion in new capital. This growth was partially functionality allows documents to be attached from the offset by large outflows from short-term debt funds, from which PLN 3.6 billion was withdrawn.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 46 47 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s operations
TFI PZU’s operations it was at the end of December 2018. As regards the most 3.6 International operations three largest life insurance undertakings in total gross written Towarzystwo Funduszy Inwestycyjnych PZU (TFI PZU) popular solutions, very notable is the increase in assets premium was 60.1%. operates on the mutual fund market in the PZU Group. It managed by PZU Oszczędnościowy (former PZU Gotówkowy) Lithuanian market offers products and services for both retail and institutional by PLN 400 million, PZU Papierów Dłużnych Polonez (up PLN According to the Bank of Lithuania, after H1 2019 gross Latvian market clients – including additional investment and savings programs 490 million), inPZU Obligacje Polskie (up PLN 57 million), written premium collected by non-life insurance companies The Latvian non-life insurance market recorded a gross forming part of the third pillar of the social security system: PZU Sejf+ (up PLN 126 million), inPZU Obligacje Rynków totaled EUR 342 million, representing an increase by 6.0% written premium of EUR 108 million after Q1 2019. This is Individual Retirement Accounts (IRAs), Employee Savings Wschodzących (up PLN 112 million), inPZU Akcje Polskie (up compared the corresponding period of the previous year. EUR 8 million (i.e. 8.2%) more than in the same period of the Plans (ESPs), Employee Pension Plans (EPPs), Company about PLN 15 million) and inPZU Akcje Rynków Rozwiniętych previous year. Investment Plans (CIPs) and Group Pension Plans (GPPs) (up about PLN +8 million). The largest decreases in net assets The market growth rate was largely driven by motor which additionally offer Individual Retirement Security were recorded at yearend 2018 by the following funds: PZU insurance, which accounts for approximately 60% of the The motor insurance business had the largest share in Accounts (IRSAs). SFIO Universum, PZU Stabilnego Wzrostu MAZUREK, PZU market. However TPL insurance has had negative growth since the non-life insurance market measured by gross written Medyczny (former PZU Energia Medycyna Ekologia), PZU Akcji the beginning of 2019 (-1.2% between January and June), premium. Motor TPL insurance accounted for 23.2% of the At the end of June 2019, TFI PZU had 47 funds and sub-funds Spółek Dywidendowych, PZU Innowacyjnych Technologii, PZU while the motor own damage insurance market increased in market while motor own damage accounted for 22.2%. in its portfolio, of which 41 were also offered to clients from FIO Ochrony Majątku, PZU Akcji Rynków Wschodzących, PZU the same period by 5.3%. Other insurance in the period under Also health insurance (24.5% market share) and property outside the Group. This figure included 6 inPZU SFIO passive FIZ Medyczny, PZU FIZ Surowcowy, PZU FIZ Forte, PZU FIZ analysis grew 14.1%, driven mainly by health and agricultural insurance (16.6% market share) had an important position in sub-funds offered by TFI PZU through the inPZU.pl platform. Focus, PZU FIZ Akord and PZU Akcji Małych i Średnich Spółek. insurance. the product mix. TFI PZU also provides managed account services. Changes in the asset value of individual funds were driven As at the end of June, there were 12 companies operating in In Q1 2019, there were 10 insurance companies operating TFI PZU managed net assets worth PLN 20.7 billion at the predominantly by: the country’s non-life insurance sector (including 8 branches of on the Latvian non-life insurance market; the top 4 insurance end of June 2019, signifying a market share above 8%. • active sales of funds as part of Employee Pension Plans; insurance companies established in other EU member states). groups held 68.2% of the market. Accordingly, TFI PZU is among the largest mutual fund • active sales of PZU Oszczędnościowy and PZU Sejf+ for companies in Poland – as at 30 June 2019 it was ranked third retail clients; Lietuvos Draudimas continues to be the largest insurance Estonian market in Poland according to reports published by IZFiA (Chamber of • launch of inPZU SFIO Parasolowy, a new product line of company in Lithuania in terms of total gross written premium In H1 2019, non-life insurance undertakings operating in Fund and Asset Management). TFI PZU is also a market leader passive funds; in non-life insurance. The company’s share in the market Estonia posted 2.1% growth in gross written premium versus in the employee pension plan segment among institutions • negative situation on the equity market causing outflows at the end of June 2019 was 29.1%. The Lithuanian non- 20.3% in H1 20181. In total, gross written premium was operating in this market with net assets of nearly from this class of funds; life insurance market is highly concentrated; considering EUR 202 million, of which EUR 58 million, i.e. 28.6% was PLN 4.2 billion (nearly PLN 5.8 billion in the entire PZU Group). • unfavorable sentiment towards closed-end funds on the the recent acquisitions, the total market shares of top four collected by foreign insurance undertakings operating in domestic market. insurance groups in the non-life insurance market was 83.2%. Estonia. At the end of June 2019, the net asset value of funds managed by TFI PZU was almost PLN 1 billion higher than Factors, including threats and risks, which will affect Gross premium written by Lithuanian life insurance companies The composition of non-life insurance in H1 2019 was the mutual funds’ operations in 2019 was EUR 127 million in H1 2019, up 8.5% from the previous dominated by motor insurance, which accounted for 58.7%, The condition and performance of the mutual fund market will year. The increase in gross written premium was driven by the of which motor own damage accounted for 31.9%. 26.2% TFI PZU’s net assets (PLN billion) depend mainly on the following: continuous and stable increase in regular premium (9.9%), of the gross written premium in the market was collected on • actions taken by central bank (Fed, ECB, Bank of Japan, which outweighed the 12.3% decrease in single premium property insurance. People’s Bank of China) translating into global money income. The rate of growth of the single premium market is supply and liquidity on the financial markets; hindered by restrictions on tax credits. From the beginning At the end of June 2019, there were 13 companies operating • the pace and scale of interest rate cuts in the USA, of 2017, the tax credit was reduced to EUR 2,000. Then, in in the non-life insurance sector (including 5 branches of monetary easing in the euro area and the pace of the January 2019, the tax credit was cut again – to EUR 1,500 per foreign insurance companies) among which the top 4 held possible worsening of economic data; year. a combined market share of 69.4%. 20.0 19.8 20.7 • global inflation; • intensity of global protectionism, in particular that In the life insurance structure, unit-linked insurance surrounding the US-China trade conflict; represented the largest share at 61.3% of the portfolio value. • change on the position of the ECB president and the first Traditional life insurance accounted for 16.6% of written actions that may affect market sentiments; premium. • existing economic climate on financial markets; 2017 2018 2019.06 1 As of 1 January 2018, IF P&C Insurance AC (the leader on the Estonian non-life • regulations affecting the reduction of asset management At of end of May 2019, there were 8 companies operating insurance market) started to report total gross written premium, altering the Source: Izba Zarządzających Funduszami i Aktywami rates. in the life insurance sector. The Lithuanian life insurance approach taken to date, based on installments and in that manner it significantly distorted market data. The other market participants adopted the same approach market is also highly concentrated. The share held by the to reporting on a non-recurring basis in December 2018.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 48 49 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s operations
Activity of PZU companies in the Baltic states period of 2018. Motor TPL and motor own damage insurance in Ukraine does not allow insurance undertakings to set • development of the medical infrastructure for the public in As of November 2014, the PZU Group has been operating in (23.0% of the market) recorded a 23.0% increase in gross premiums based on actual risks. Poland to ensure the best accessibility of provided services the Lithuanian non-life insurance market through Lietuvos written premium. In the corresponding period, life insurance and execution of revenue targets. Draudimas, which, as of May 2015, is the owner of the PZU undertakings collected gross written premium of UAH 1 billion, Estonia branch. signifying 23.6% growth compared to Q1 2018. 3.7 Medical services (Health) In 2019, the PZU Group’s offering in the Health Area changed as follows: Lietuvos Draudimas is the leader of the non-life insurance The Ukrainian insurance market is highly fragmented – as at Market situation • launch of pilot sales of PZU Thinking about Life and Health market in Lithuania with a share of 29.1% after 6 months the end of March 2019, there were 265 insurance undertakings The health market is a business area that is dynamically product (May 2019) directed to companies employing up of 2019 (compared to 29.4% in the corresponding period of operating in the country (32 of them offered life insurance). developing and prospective. The current trends are as follows: to 4 people. Each option of the offer may be additionally 2018). For the first half of the year, it posted a 4.9% upswing Despite the still large number of insurers, the top 100 non- • continuation of the double digit pace of growth in the extended by private medical care. The insurance ranges in gross written premium compared to the previous year life insurance undertakings generated 98% of gross written private health insurance market (according to PMR3: CAGR have been prepared to address different needs, depending thereby hitting the EUR 99 million watermark. premium, while the top 20 life insurance undertakings of approx. 13% for supplementary health insurance in on the client’s stage in life. generated nearly 100% of written premium. 2019-2024, while for subscriptions CAGR was approx. • commencement of pilot sales of 2 new ranges of the Life insurance operations in Lithuania are conducted through 11%); Opieka Medyczna S health insurance for corporate clients UAB PZU Lietuva Gyvybës Draudimas – “PZU Lithuania On the Ukrainian market, the PZU Group operates insurance • development of telemedicine and service opportunities (June 2019) – the first range is profiled to enable a detailed Life”. Gross written premium in H1 2019 was EUR 8 million, business via two companies: PrJSC IC PZU Ukraine (a non-life through remote channels; checkup of the health condition of the thyroid gland, liver, representing a 13.1% increase compared to the previous year. insurance company), referred to as “PZU Ukraine”, and PrJSC • greater need to provide care to senior citizens; heart, arteries and kidneys. The second range enables tests The share held by PZU Lithuania Life in the life insurance IC PZU Ukraine Life (a life insurance company), referred to • increasing awareness of prevention and periodic profiled for malignant neoplasms occurring most frequently market at the end of June 2019 was 6.6% (compared to 6.3% as “PZU Ukraine Life”. In addition, LLC SOS Services Ukraine examinations. in women and men. The most notable benefits include: in the corresponding period of 2018). performs assistance functions. analysis of results of marketing surveys: prevention of the In accordance with PMR data4: at the end of 2018, private illnesses that Poles fear most, benefits requested most In Latvia the PZU Group conducts operations through AAS In H1 2019, gross written premium collected by PZU Ukraine health care offered under fee-for-service products was worth frequently by sales in non-standard offerings, increase Balta, which became part of the Group in June 2014, and then was UAH 832 million, i.e. 24.2% higher than in the previous PLN 18.9 billion (up 10.5% y/y). In turn, the value of medical of market advantages – by adding medical services and (in May 2015) the branch took over the PZU Lithuania branch year. Gross written premium collected by PZU Ukraine Life was subscriptions was PLN 4.5 billion (up 13.6%), while the value keeping prices at attractive levels. operating in the Latvian market since 2012. At the end of Q1 UAH 223 million, up 15.2% from the corresponding period of of private health insurance climbed to nearly PLN 1.0 billion 2019, the total share of the non-life insurance market reached 2018. (up 17.3% y/y). In an effort to develop the Health Area in 2019: 28.2% and gross written premium in H1 2019 was EUR 60 • The PZU Group’s service provider network was extended million (compared with EUR 53 million in H1 2018). In the first quarter of 2019, PZU Ukraine collected 3.3% of Operations in the Health Area to include more medical centers, which means that PZU total gross written premium of the whole Ukrainian non-life PZU’s operations in the Health Area include: already had nearly 2,300 centers; Since May 2015 the entity conducting operations in Estonia insurance sector (up 0.3 pp vs. Q1 2018), whereas in the life • sales of health products in the form of insurance (life • a new hotline operation model was fine-tuned to service is a branch of Lietuvos Draudimas and was established as a insurance market PZU Ukraine Life had a 10.9% market share and health insurance and non-life health insurance) and clients holding health products, including life insurance and result of merger of two entities – branch of the Lithuanian (down 0.2 pp compared to the corresponding period of 2018). non-insurance products (occupational medicine, medical non-life insurance with a health rider, online tools were PZU company registered in 2012 and the Estonian branch subscriptions, partnerships and prevention programs); developed to increase the percentage of cases handled acquired in 2014, which conducted operations under the Factors, including threats and risks, that may during first contact. The hotline structures operate in Codan brand. The share in the Estonian non-life insurance affect the insurance business in the area of foreign PZU Zdrowie as the Medical Service Management Center 3 PMR Report entitled „Private Health Care Market in Poland 2019” dated July 2 market in H1 2019 was 15.9% . The collected gross written companies in 2019 2019 (CZUM), which also allows for integrated management of 4 premium was EUR 32 million (EUR 30 million in the first half • potential slowdown of economic growth in the Baltic states; PMR Report entitled „Private Health Care Market in Poland 2019” dated July 2019 of the previous year). • resumption of price pressure in motor insurance caused by improved portfolio profitability in recent years (in the Baltic Ukrainian market states); In the Health Area the company offers a broad range of health products adapted to the segment and clients’ The Ukrainian insurance market after Q1 2019 posted 14.7% • case law concerning the amounts of pain and suffering paid needs: growth in gross written premium reaching UAH 13 billion. The in cash for the suffering sustained (legislative amendments premium written for non-life insurance was UAH 12 billion, in Lithuania) under the TPL insurance held by the owners signifying 14.1% growth compared to the corresponding of motor vehicles to the closest family members of persons who have died; 2 As of 1 January 2018, IF P&C Insurance AC (the leader on the Estonian non-life insurance market) started to report total gross written premium, altering the • suspension of the decision to release premium rates in approach taken to date, based on installments and in that manner it significantly motor TPL insurance in Ukraine, the regulation of rates outpatient hospital care rehabilitation prevention co-funding for occupational distorted market data. The other market participants adopted the same approach care programs medications medicine to reporting on a non-recurring basis in December 2018.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 50 51 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s operations
client experience and improvement of the service quality, • potential modification of the National Health Fund’s the first half of 2019, DFE PZU reached the rate of return of PZU LAB while also testing innovative solutions; contracting rules may cause significant changes in the 5.07%, one of the top performances on the market. PZU LAB is a company dealing with advisory services • a tool has been developed further for booking on-line financial results generated by medical centers. and assistance in implementation of all kinds of solutions appointments through a direct connection with the Factors, including threats and risks, which will affect improving the security of the strategic corporate clients of PZU calendars of cooperating medical centers. At the end of the pension funds’ operations in 2019 and TUW PZUW. June 2019, PZU Zdrowie was connected to 135 medical 3.8 Pension funds (PTE PZU) The main challenges facing the pension fund market in 2019 centers located across Poland, comprising the PZU Zdrowie are the following: The company cooperates with numerous academic centers network as well as from external partners. This channel Market situation • the economic climate on the capital market and, in and experienced experts (local and foreign). The company was used to handle more than 30% of cases, of which At the end of June 2019, the net asset value of open-end particular on the Warsaw Stock Exchange, affecting the constantly seeks new and effective technological solutions a considerable part was booked directly by patients, pension funds was PLN 161.8 billion, up 2.8% versus the end value of assets of the funds and the level of fees collected allowing to mitigate the risks which particularly impact the through the myPZU self-service portal; of 2018. by pension fund companies for management; insurance activity. • in the three greenfield medical centers launched in 2018 in • final wording of the Act on transformation of open-end Warsaw, Krakow and Poznań, further specializations were Operations of PTE PZU pension funds; The PZU LAB team has developed efficient methods of added to the offering. The PZU Złota Jesień Open-End Pension Fund managed • work on the adoption of solutions enhancing the cooperation with the existing and prospective clients. First, • Alergomed Tarnów and Falck Centra Medyczne and by PTE PZU (PTE PZU) is one of the largest players on the performance of the third pillar and making it more the engineers identify critical installation sites, simulate critical Starówka were added to the own network (thanks to the pension fund market in Poland. At the end of June 2019, OFE attractive, and influencing the need in public awareness for events such as fire, flooding or explosion, and determine two latter entities, the number of own outlets rose to PZU was the third largest pension fund, both in terms of the accumulating additional savings for future retirement. their consequences. Then the possible scenarios and the nearly 100); number of members, as well as in terms of net asset value: methods of minimizing its consequences are discussed. PZU • the pending projects are aimed at increasing quality of • the fund had 2,395.9 thousand members, i.e. 15.2% of all LAB engineers implement innovative technological solutions patient care in occupational health protection (efficient participants in open-end pension funds; 3.9 Other operating areas in client companies wishing to improve their safety. This management of validity of medical decision by monitoring • net assets stood at PLN 22.7 billion, representing 14.1% of approach signifies an evolution in client relations. PZU the validity dates, issuing referrals and automated updating the total asset value of open-end pension funds operating PZU Pomoc ceases to be only a seller of insurance and becomes a risk of data based on information from a medical center), in Poland. PZU Pomoc provides auxiliary services to PZU Group management advisor. improved access to medical documentation. companies, including: • managing the PZU repair network – at the end of H1 2019 Tower Inwestycje Factors, including threats and risks, that may affect Open-end Pension Funds - percentage of net asset the company cooperated with 918 repair shops; The owners of Tower Inwestycje Sp. z o.o. are PZU Życie the operations of the Health Area in 2019 value as at 30 June 2019 (in %) • organizing motor assistance services for LINK4; with a 73% stake and PZU with a 27% stake. At present, • changes in the current mortality, fertility and morbidity • conducting salvage auctions and sales after loss and the company conducts work associated with the office and levels, which may adversely affect the value of sales and damage incidents; commercial investment project located in a prestigious location in Wrocław at ul. Oławska 35 (Plac Dominikański) in a venue cause a deterioration of the loss ratio (e.g. subscriptions or Others 10.8% Nationale-Nederlanden OFE • supporting technical claims handling in motor claims; health insurance); 25.5% • handling assistance products for PZU and PZU Życie occupied for the past several decades by an office building Generali OFE 5.0% • changes in client trends and behaviors towards (among others, legal consulting, organization of assistance owned by PZU. This investment is partially intended for the AXA OFE 6.4% customization of the offering. Clients’ new expectations services etc.); PZU Group’s needs and partially for lease.
may bring about the need to change processes and Metlife OFE 7.8% • managing the loyalty program, PZU Pomoc w Życiu Club systems, which in turn may affect the achieved bottom-line – at the end of H1 2019 nearly 1.9 million club members PZU Finanse Aviva OFE results. were eligible for insurance discounts and products of PZU Finanse Sp. z o.o. is a service company established for Aegon OFE 8.6% Aviva BZ WBK 21.8% • the entry into force of the Employee Capital Scheme Act cooperating companies (rebate programs from partners). the purpose of keeping accounting ledgers for subsidiaries of
is yet another benefit for employees, which may cause a OFE PZU "Złota Jesień" the PZU Group (excluding PZU and PZU Życie). 14.1% deterioration in interest in our health care offering due to PZU CO
budgetary constraints on the part of employers. Source: KNF, monthly data on the OFE market, Data for June 2019 PZU CO is an auxiliary company for PZU Group companies, Ogrodowa-Inwestycje • continued pressure on the prices of group insurance established to provide the following services: printing, IT, Data Ogrodowa-Inwestycje Sp. z o.o. (Ogrodowa-Inwestycje) is the products. The market for health services remains very Center, Contact Center, auxiliary services related to insurance owner of the City-Gate office building (located at ul. Ogrodowa competitive both in terms of prices and the range of At the end of June 2019, PZU’s Voluntary Pension Fund (DFE and pension funds, constant intermediation in conclusion of 58 in Warsaw) and leases office space to external clients and available services. PZU) kept 24.2 thousand funded individual pension security insurance agreements, financial and investment agreements, PZU Group companies. • salary pressures exerted by doctors and other personnel accounts (IKZEs) in which PLN 206.6 million worth of assets assistance agreements and HR and payroll-related services. serving patients in medical centers, which directly affects was accumulated. Consequently, it retained its position as one our financial performance in the Health Area. of the leaders in the segment of voluntary pension funds. In
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 52 53 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU Group’s operations
PZU Corporate Member Lmited On 28 September 2017, PZU acquired shares in PZU Corporate Member Limited, entitling it to 100% of votes at the shareholder meeting.
Through PZU Corporate Member Limited, the PZU Group expanded its international activity. The company is a member of Lloyd’s.
Lloyd’s is an association of over 80 syndicates managed by over 50 agencies.
PZU Corporate Member is handled by Argenta Holdings Limited. This agency deals with the ongoing activities of syndicates, invests their funds and employs underwriters.
Armatura Group The PZU Group has held an equity stake in Armatura Kraków S.A. (Armatura Kraków) since October 1999. At present, Armatura Kraków is 100% owned by the PZU FIZ AN BIS 2 mutual fund.
Armatura Kraków SA (Armatura Kraków) is the parent company of the Armatura Group. The Armatura Group includes Armatura Kraków SA, Aquaform SA, Aquaform Bauprodukte, Aquaform Ukraine, Aquaform Romania, Morehome.pl. The business of the Armatura Group lies outside the domain of financial and insurance services. The group is a leading manufacturer in the sanitary and heating industry in Poland. The companies making up the Armatura Group specialize in the manufacture of bathroom and kitchen taps, aluminum central heating radiators, a wide range of valves and sanitaryware.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 54 55 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b 4. PZU 2020 - more than insurance
Our client relationships and our knowledge of our clients are becoming our main value as defined in the New PZU Strategy, while our chief product is our acumen in addressing client needs to build a stable future.
In this chapter: 1. #newPZU strategy 2017-2020 2. Strategy operationalization 3. Pursuit of key projects and initiatives in H1 2019 4. Implementation of the strategy after H1 2019
57 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU 2020 - more than insurance
4.1 #newPZU strategy 2017-2020 On 9 January 2018 the Management Board and Supervisory We will be a long-term partner for our clients. Board adopted PZU’s updated strategy until 2020. The PZU The PZU Group enjoys the trust of more than 22 million clients Group’s new operating model departs from the classical model
in 5 countries in Europe, of which nearly 11 million clients in of cultivating client relations based on sales and aftersales Loan to buy a home
Poland have life insurance. service in the direction of having frequent and high quality Education: “How to save”? Home insurance Group life insurance Individual endowment client interactions during every stage of life anywhere PZU Payment of a childbirth Accident insurance for school Assistance insurance benefit Health products The PZU Group’s offer is the most extensive and most can lend a helping hand. Building relations and partnerships Travel insurance (school trips) Term deposit Riders dedicated to senior Employee Capital Scheme Education: „Diagnostics of citizens Bank account (access via Mutual funds comprehensive, insurance and financial offer on the Polish in this line of thinking has been defined as delivering products the stage of a child’s Car insurance a mobile application) Remote monitoring of the development” Dowry insurance for children market. It consists of a broad array of insurance, investment and services well-matched to clients at the appropriate time Loyalty program Payment cards state of health and pension products addressed to all client segments. Group and place so as to ensure at the same time that the product’s Health product for the entire family companies are active in health care, banking and additionally attributes (including its price) are aligned to client needs. they render assistance services to retail clients and businesses through strategic partnerships.
#nowPZU
PZU YESTERDAY THE NE PZU Birth Starting Starting Starting Retirement education a job a family
Branches A ents an Bro ers Insurance Health Investments Retirement
Z
Assistance PZU SA PZU ŻYCIE
Assistance We help companies grow by offering them a wide array of products supporting their growth. i e
PZU ZDRO IE PZU POMOC Pro ert Casua t C IENT
Hea th Package of services Group life insurance Assistance supporting operations (e.g. TFI PZU BAN S Finances Health products Handling the IPO process accounting services, security Car fleet insurance audits, OSH training) Debt financing Assistance Company account Leasing Company property Conducting mergers and Export loans Loans and borrowings insurance acquisitions Private TPL insurance and to startups FX risk hedge legal protection Financial guarantees Mutual insurance Lines of credit Direct Ne techno o ies Ban s Motor insurance Asset management services Trade credit Direct equity investments (private equity, mezzanine) Source: PZU’s data Commercial credit insurance
This strategy has specified how various areas within the the overall Group operates. For this purpose, the various PZU Group will be integrated to focus on clients in order business units were placed in a single integrated system to maximize client convenience and satisfaction. Special dedicated to full dimensional client service at every stage of emphasis has been placed on analyzing the information the development. Client interactions were realigned to long-term PZU Group has to grasp and use it better. partnership based on trust and understanding where a major value driver is the quality of the solutions dedicated to clients. Startup Small company Medium-sized Large company International In order to create the appropriate business environment to company corporation attain these targets, clients interactions were redefined from PZU wants to do something different from the classical client scratch. This entailed an alteration to the philosophy of how relation model in which the only contact clients have with Insurance Health Investments Retirement
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 58 59 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b 1. How is the environment changing? 2. What do we want to achieve? 3. How are we going to achieve that? 4. How are we going to measure success? 2.2 New ambitions
1. How is the environment changing? 2. What do we want to achieve? 3. How are we going to achieve that? 4. How are we going to measure success? PZU 2020 - more than insurance ...which will translate into higher 2.2 New ambitions profitability ...which will translate into higher profitability Contribution of the various lines of business to ROE growth their insurer after buying a policy is when a claim occurs. PZU As part of the broader business strategy, PZU places Contribution of the various lines of business to ROE growth intends to do considerably more and effectively help clients considerable emphasis on activities within the accepted Approximately 0.7 p.p. attributable solve its problems in many areas and during every stage of innovation strategy. Activities in this area are directed above Contribution of the variousto lines cross of sellingbusiness to ROE growth Streamlining processes in insurance activities, including life. PZU’s philosophy of thinking about clients constitutes a all towards a better utilization of the company’s Big Data sets, better price to risk matching, and also by improving Approximately 0.7 p.p. attributable 0,4% departure from the classic model of an insurer’s client relations digitalization of processes, usage of artificial intelligence and 3,4% 0,3% the investment result (benefits from Project Alpha) to cross selling rooted solely in sales and aftersales service. PZU’s goal is new technologies associated with the development of fintechs StreamliningGrowth processes in the banking in insurance segment’s activities, contribution including as the banks 3,0% to establish and maintain relations by delivering products and insurtechs. In this manner new underwriting methods will better pricegenerate to risk a highermatching, net andresult also and by deliver improving synergy effects with 3,4% 0,3% 0,4% the investment result (benefits from Project Alpha) well-matched to clients at the appropriate time and place so emerge in the Group. 14,9% PZU Growth in the banking segment’s contribution as the banks as to ensure at the same time that the product’s attributes 3,0% Higher volume of assets under management and merger >22% generate a higher net result and deliver synergy effects with of the investment fund management companies (TFI) within (including its price) are aligned to client needs. The overarching objective of the #newPZU strategy is to 14,9% PZU the PZU Group to facilitate achievement of synergies generate a return on equity (ROE) in excess of 22%, i.e. Higher volume of assets under management and merger This approach has defined the operating philosophy under nearly twice as much as the average for insurance companies >22% High growth rate in the number of health clients stemming of the investment fund management companies (TFI) within from greater sales activity and reaching new market the PZU Group’s new business model. The new model brings in Europe. the PZU Group to facilitate achievement of synergies segments together all of the PZU Group’s activities and integrates High growth rate in the number of health clients stemming them in a client-focused manner: life insurance, non-life from greater sales activity and reaching new market 2016 Insurance1 Banks PZU Investments2 PZU Health 2020 insurance, health insurance, investments, pensions, health segments care, banking and assistance services. This will drive the gradual transformation of insurer from focusing primarily on 2016 InsuranceWe will1 developBanks all linesPZU of Investments business,2 whilePZU Health retaining our2020 ability to generate an above average level of profitability valuation and transfer of risk toward being an advisory and 1 Taking into account the investment activity in our own portfolio and net of the health insurance presented by PZU Zdrowie 27 service company (operating on the basis of technological 2 Pertains to third party asset management (giving consideration to all PZU Group entities) We will develop all lines of business, while retaining our ability to generate an above average level of profitability know-how). Achieving a high degree of quality and number 1 Taking into account the investment activity in our own portfolio and net of the health insurance presented by PZU Zdrowie 27 of client interactions calls for the creation of a new model in 2 Pertains to third party asset management (giving consideration to all PZU Group entities) which the core is client knowledge and the skill of building long-term relations. The transformation in the direction of an advisory and service company will make it possible to care for the clients’ future and satisfy their needs comprehensively when it comes to protecting their life, health, property, savings and finances.
Strategy of innovation
STRATEGY OF INNOVATION
UTI IZATION OF BIG DATA DIGITIZATION NE C IENT INTERACTIONS
So histicate pricing metho s Im ementation o new technology Im ementation o ser ices aligned to client needs More e ecti e insurance fraud etection Automation o rocesses Reachin new market segments Su ort or cross-selling initiati es Im ementation o self-service
Gro th in the e e o client loyalty De e o ment o distribution channels Enhance usiness mana ement an prediction Sim i ie sales process
Source: PZU’s data
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 60 61 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU 2020 - more than insurance
4.2 Strategy operationalization 4.3 Pursuit of key projects and initiatives II Cross selling growth in H1 2019 Cash – an innovative loan platform developed jointly with Alior 12 strategic initiatives (in 4 areas: data analysis, cross selling, Bank enabling employers to introduce a new benefit in the digitalization of processes and client interactions) define the I Better utilization of data form of fast and low-interest loans offered to their employees. path to achieving the ROE target > 22%. PZU GO – the next stage of tests has been completed and preparation has been made to roll out the PZU GO product This solution will make it possible to obtain an inexpensive in the permanent product offering (started in April 2019). loan for up to three years. The loan application and award #newPZU 2020 strategic initiatives The well-advanced work towards further development of process will be fully remote. Loan amortization will take place the device and commercialization of the solution, taking into automatically using payroll deductions. Cash platform loans account the different forms and channels of distribution in PZU will be more favorable than other types of products available Strate ic initiati es Ambitions in 2020 Group companies. on the market.
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 On 10 February 2019 PZU GO detected the first very serious In Q2 2019, advanced tests of the platform were conducted
Better road accident. It transpired in Silesia. PZU’s clients who were and its launch is planned in Q3 2019. Better matched price to risk and pricing optimisation injured in the accident were hospitalized and their vehicle was utilization of 92% combined ratio 2 (Taryfikacja 3.0) data safely towed to a workshop. Development of the PZU Zdrowie network – on 3 June 2019, PZU Zdrowie finalized the purchase of 100% of shares in 6 innovative solutions which at least 100 thousand Implementation of solutions employing artificial intelligence clients of the PZU Group will use Artificial intelligence in claims handling – completion of Falck Centra Medyczne and NZOZ Starówka. In mid-May, the the pilot phase of an innovative project employing artificial acquisition was approved by the Office for Competition and 1 m clients acquired for the banks in the PZU Group intelligence. Machine learning and computer vision were Consumer Protection. This is the largest acquisition of a health 1 bn PLN of incremental premium obtained from the bank Development of cooperation with banks channe tested in real time in the motor claims handling process. The service operator to date. Cut costs by 100 m PLN implementation of this innovation will make it possible to
Simplifying the product offering, and simple language 10 core products in broad distribution streamline the process of checking technical documentation by PZU Zdrowie added to its network 32 outlets of Falck’s 10 times and it will reduce the time needed to handle outpatient care section, without the medical rescue segment. Cross selling a notification. The acquired medical centers are located in 14 cities growth Conversion of the sales network into multi-product sales network 50% of salespersons sell multiple products in proprietary networks throughout Poland, including Warsaw, Kraków, Gdańsk, The use of artificial intelligence in claims handling requires just Katowice, Kędzierzyn-Koźle, Słupsk and Ustka. Those are
1 bn in revenues of PZU Health 30 second to analyze technical documentation. It also helps both multi-specialist medical centers located in large cities, Development of sales in PZU Health 12% EBITDA margin select 90% of the documentation that fulfills the requirements company clinics, as well as the Starówka chain in Warsaw,
65 bn PLN of third party assets under management needed to preserve high quality of claims handling in PZU. The which has family clinics also in smaller towns surrounding the 200 m PLN of net profit on third party asset management Development of sales and consolidation in PZU Investments 15% share of assets on the Employee Capital Schemes remaining 10% of the documentation is subject to in-depth capital. In total, they employ over 1,100 people, including market analysis done directly by PZU employees. physicians, nurses, midwives and administrative personnel.
Implementation of a new „moje.pzu.pl” portal 5 m accounts established by clients 9 Tariff-setting 3.0 – implementation of the Radar Live system The acquisition of this nationwide network will significantly Digitalization in motor insurance, which allows PZU to offer clients custom enlarge PZU Zdrowie’s medical infrastructure. For several years 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 pricing that matches, among others, their loss ratio (measured this company has been engaged in acquiring and building non-life insurance sold in the direct channel by advanced risk models) and purchasing preferences (defined medical centers under its own brand. PZU Zdrowie is a medical using pricing elasticity models). operator that has its own network, with 97 medical centers. Implementation of a loyalty program at the PZU Group level 3 m participants Additional 11 It also collaborates with nearly 2,200 partner centers in 570 interactions „Ok, google” – implementation of a virtual advisor (in early cities in Poland and several dozen hospitals and more than 70% growth of new sales in group insurance to SME with clients clients in PZU Życie June 2019) based on the Google system. A few months after half of the pharmacies in Poland. 12 Integrated service model for SMEs 20% growth in the gross written premium generated by non-life insurance dedicated to the SME segment the premiere of the Polish version of the Google Assistant service, PZU implemented a solution, through which users may In H1 2019, implementation work was conducted in the PZU talk about insurance during travel. The assistant interviews Zdrowie network focusing on: phone consultations, innovative clients and based on their individual parameters presents the diagnostic solutions, integration of calendars in own and most suitable travel insurance options. partner centers and further integration of the mojePZU portal with PZU Zdrowie branches to ensure that in its mojePZU account a patient receives complete information on a visit, i.e.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 62 63 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU 2020 - more than insurance
diagnosis, recommendations, prescribed medicines and their increase the scale of self-service transactions and other sales 4.4 Implementation of the strategy after H1 2019 dosage. channels (increasing the number of products per client and cross-sell). Letter of Intent with Goldman Sachs – signing of a letter ROE1 of intent with Goldman Sachs Asset Management (GSAM) concerning asset management and funds distribution. This 06.2019 2020 cooperation will make it possible to offer PZU’s financial products globally and extend PZU’s offer to include funds 20.3% >22% managed (or co-managed) by GSAM.
NON-LIFE LIFE INVESTMENTS HEALTH BANKING In Q2 2019, work was conducted on launching a strategic INSURANCE INSURANCE project concerning operationalization of the cooperation. 7 PZU Group’s market Number of clients in Assets under Revenues (m PLN) Assets (bn PLN) 2,3, 9 share PZU Życie (m) management for third III Digitalization of processes party clients (bn PLN) moje.pzu.pl – implementing more #myPZU functionalities, including among others facilities to enroll in group insurance, 03.2019 2020 06.2019 2020 06.2019 2020 06.2019 2020 06.2019 2020 expand information regarding the status of claims and SIZE BUSINESS benefits and add options to buy other products (including PZU 33.5% 38.0% 10.8 11.0 30.8/51.210 65 675.8 1,000 274 >300 Education – School ADD) and commencement of work on the
target online payment model for the whole PZU Group. At 3 8 Combined ratio Operating margin in Net result on third party EBITDA margin Net financial result the end of June, the number of user accounts exceeded 170 group and individually asset management attributed to the PZU 6 11 thousand. continued insurance (m PLN) Group (m PLN)
IV Additional interactions with clients 06.2019 2020 06.2019 2020 06.2019 2020 06.2019 2020 06.2019 2020 inPZU – granting access to the inPZU web platform to 89.2% 92.0% 20.0% >20% 87/19710 200 10.1% 12.0% 569 >900 institutional clients. Additionally, in connection with the planned launch of the ECS offering, work was carried out to adapt the inPZU site for the purposes of an employee portal Administrative expense Surplus yield on its own 4 for ECS participants. ratio portfolio above the RFR BUSINESS PROFITABILITY BUSINESS ECS (employee capital schemes) – finalization of the 06.2019 2020 06.2019 2020 development of Employee Capital Scheme offering (in effect
since 1 July 2019), including, among others, registering 6.6% 6.5% 2.4 p.p. 2.0 p.p. the ECS, deploying a portal for Employers and entering the ECS inPZU Open-end Specialized Mutual Fund (PPK inPZU Solvency II solvency Specjalistyczny Fundusz Inwestycyjny Otwarty) in the register ratio of mutual funds. PZU declared that it would not charge any fund management fee in the first year of operation of the Employee Capital Scheme. 03.2019 20205
PZU Club – the work on PZU’s loyalty program has begun (in 225% >200% GROUP OBJECTIVES the form of a mobile app and a website). The new channel will be based on frequent interactions promoting good behavioral 1 patterns (physical activity, safe driving) and entertainment ROE attributable to the parent company 8 2 Net of non-recurring costs; profitability computed using the sum of revenues Direct business (quizzes, competitions, challenges). User involvement will be 3 generated by branches and earned premium PZU jointly with TUW PZUW and LINK4 9 4 Including customers acquired through cooperation with banks rewarded by attractive gifts and prizes. This form of contact Administrative expenses in PZU and PZU Życie 10 5 Including assets managed by TFI banks of the PZU Group Own funds after subtracting anticipated dividends and asset taxes 11 6 12 month moving average will support the individual approach to communication and PZU Investments’ consolidated net result 7 Annualized revenues of proprietary centers and branches including revenues from PZU Zdrowie and PZU Group
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 64 65 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b 5.
Financial results
Return on equity attributed to the parent company (ROE) at 20.3%. Increase in profit attributable to the parent company by 5.0% year over year, despite nearly two times higher Bank Guarantee Fund costs in banks.
In this chapter: 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. Drivers and atypical events affecting the results 6. PZU Group’s asset and liability structure 7. Contribution made by industry segments to the consolidated result
67 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Financial results
5.1 Major factors contributing to the • increased profitability in the Baltics and Ukraine segments investing activity in most unit-linked portfolios compared Guarantee Fund rose from PLN 277 million in H1 2018 to consolidated financial result as a result of an increasing insurance portfolio and to the negative results produced last year (however PLN 547 million in H1 2019, while the PZU Group’s liabilities improvement of insurance activity ratios; this effect is neutral to net result of PZU Group, as the (on insurance and banking business alike) on account of In H1 2019 the PZU Group generated net profit attributable • lower results in the banking segment due to, among others, higher level of claims and benefits associated with this the levy on financial institutions in H1 2019 was PLN 569 to the parent company’s shareholders in the amount of higher contributions to the Bank Guarantee Fund. factor is counterbalanced by the changes in the net result million versus PLN 542 million in the corresponding period PLN 1,481 million compared to PLN 1,410 million in the on investing activity in the portfolio of assets to cover of 2018. corresponding period of 2018 (up 5% y/y). Net profit reached In the individual operating result items, the PZU Group posted: investment products). In addition, the higher level of PLN 2,198 million, i.e. PLN 87 million less than the result in H1 • slight decrease in gross written premium by 0.4% to PLN claims and benefits paid in insurance against fire and other 2018, and result before tax amounted to PLN 3,100 compared 11,839 million. The decrease pertained mainly to motor damage to property resulted from above-average number to PLN 3,056 last year (up 1.4%). TPL in the mass insurance segment as a result of of losses caused by atmospheric phenomena; a decrease in the number of insurance policies resulting • higher acquisition expenses (an increase of PLN 97 million) The net result declined 8.6% compared to last year, net of from, among others, increased price activity among in both mass and corporate client segments, driven up non-recurring events.1 The operating profit in H1 2019 was competitors. The sales of insurance against fire and other mainly by a change in the structure of sales channels in PLN 3,103 million, up by PLN 48 million compared to the result damage to property in the corporate insurance segment PZU and growth of sales in foreign operations; in H1 2018. was lower y/y mainly as a result of entering into a high- • decrease in administrative expenses to PLN 3,276 million value long-term agreement was signed by TUW PZUW in from PLN 3,342 million in the corresponding period of Operating profit was driven in particular by the following the corresponding period of 2018, which increased the 2018. Administrative expenses in the banking activity factors: base in H1 2018. The above decreases were partly offset segment (net of adjustments on account of valuation • higher result on listed equities, among others due to better by the record-breaking level of premium collected by of assets and liabilities to fair value) dropped by PLN conditions on the Warsaw Stock Exchange; foreign operations. Adjusted for the reinsurers’ share and 101 million thanks to maintaining cost discipline. At the • high gross written premium on the level comparable to change in the provision for unearned premiums, the net same time, the administrative expenses of the insurance the record-breaking H1 2018, including increase in sales earned premium amounted to PLN 11,334 million and was segments in Poland were PLN 23 million higher compared in foreign companies and further growth of sales of health 2.5% higher than in the corresponding period of 2018; to the previous year. This change largely resulted from insurance. These factors were balanced out by the lower • increase in investment income after deducting interest higher personnel costs in connection with the wage premium in motor TPL in the mass insurance segment and expenses. Investment income in H1 2019 and H1 2018 pressure on the market; lower sales of insurance against fire and other damage to was PLN 4,580 million and PLN 3,821 million, respectively. • higher negative balance of other operating income and property in the corporate segment; in the corresponding Growth was posted in investment income in banking expenses of PLN 1,592 million. The change resulted mostly period of 2018 a high-value long-term agreement was activity and net of banking activity. The growth in the from higher Bank Guarantee Fund charges and increase in signed by TUW PZUW; result in banking activity was driven in particular by the the levy on financial institutions. The charges to the Bank • improvement in the loss ratio in the motor TPL in the development in the sales of credit products at Pekao corporate and mass client segment – in the corresponding and Alior Bank, among others thanks to the favorable period of 2018 increase in provisions for claims for pain economic climate and the low level of interest rates. Operating result of the PZU Group in H1 2019 (in PLN m) and suffering due to vegetative state (Supreme Court Investment income excluding banking activity increased judgment); primarily thanks to a higher result earned on listed equity • the decrease in the result on other property insurance in instruments. This was helped by the improved market both segments y/y is attributable to a number of several conditions on the Warsaw Stock Exchange; in H1 2019 the 832 (584) high-value events and losses caused by atmospheric WIG index went up 4.3% compared to its 12.2% decrease (75) (301) 280 (97) 66 (73) phenomena; in the corresponding period of the previous year. The • stable profitability in the group insurance and individually favorable market conditions on the Warsaw Stock Exchange 3,055 3,103 continued segment (20.0%, -0.2 pp) – lower loss ratio in also impacted, among other things, the investment income protection agreements and further intensive growth of the on the portfolio of assets covering investment products, health business was counterbalanced by an increase in which however does not affect the PZU Group’s overall net
operating expenses; result. expenses H12018 H12019 Administrative commission Operatingresult Operatingresult • higher level of claims and benefits paid. They amounted an d feeincome Netrevenue from Interestexpenses andexpense s Neearne t dpremium 1 to PLN 7,929 million, which indicates a 8.0% increase expenses Acquisition Non-recurring events include the effect of converting long-term policies into Neclaims t and benefit Net investmentresult* Otheroperating income yearly renewable term business in type P group insurance, and in the comparable compared with 2018. The increase pertained in particular period the non-recurring effect of remeasurement of provisions in non-life insurance for claims for pain and suffering due to vegetative state. to life insurance in connection with the better result on * without factoring in interest expenses
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1 January 1 January 1 January Gross written premium (external) - 30 June 2019 - 30 June 2018 - 30 June 2017 Insurance segments (PLN million), local GAAP Key data from the consolidated profit and loss 1 January 1 January 1 January account PLN million PLN million PLN million - 30 June 2019 - 30 June 2018 - 30 June 2017
Gross written premiums 11,839 11,881 11,606 TOTAL 11,839 11,881 11,606 Net earned premiums 11,334 11,054 10,347 Total non-life insurance – Poland 6,669 6,847 6,596 Net revenues from commissions and fees 1,602 1,677 510 (external gross written premium)
Net investment result * 5,645 4,813 3,027 Mass insurance – Poland 5,264 5,327 5,217 Net insurance claims and benefits paid (7,929) (7,345) (7,214) Motor TPL 2,220 2,352 2,350 Acquisition expenses (1,616) (1,519) (1,412) Motor MOD 1,298 1,278 1,240 Administrative expenses (3,276) (3,342) (2,036)
Interest expenses (1,065) (992) (420) Other products 1,746 1,697 1,627
Other operating income and expenses (1,592) (1,291) (645) Corporate insurance – Poland 1,405 1,520 1,379
Operating profit (loss) 3,103 3,055 2,157 Motor TPL 406 385 342 Share in net profit (loss) of entities measured by the (3) 1 (1) equity method Motor MOD 423 422 419
Profit (loss) before tax 3,100 3,056 2,156 Other products 576 713 618 Income tax (902) (771) (451) Total life insurance – Poland 4,165 4,133 4,221 Net profit (loss) 2,198 2,285 1,705 Group and individually continued insurance – Net profit (loss) attributable to equity holders of the 3,471 3,444 3,429 1,481 1,410 1,438 Poland parent company
* without factoring in interest expenses Individual insurance – Poland 694 689 792
Total non-life insurance – Ukraine and Baltic States 939 845 742
5.2 PZU Group’s income premiums), mainly due to the lower premiums from insurance against fire and other damage to property Ukraine non-life insurance 118 89 96 Premiums (-36.6% y/y) – in the corresponding period of 2018 TUW Baltic States non-life insurance 821 756 646 In H1 2019, the PZU Group collected gross premiums of PZUW entered into a high-value long-term contract; PLN 11,839 million or 0.4% less than in the corresponding • higher sales in the group and individually continued Total life insurance – Ukraine and Baltic States 66 57 47 period of the previous year. The PZU Group posted the insurance segment – premium up PLN 27 million, in following results in the various segments: particular as a result of signing new contracts in health Ukraine life insurance 31 26 19 • record-breaking gross written premium collected by foreign insurance in group form and active up-selling of other companies – increase compared to H1 2018 by PLN 104 insurance riders in individually continued products; Baltic States life insurance 35 31 28 million, chiefly in motor insurance and health insurance in • a PLN 5 million increase in premiums in the individual the Baltic States; insurance segment compared to the year before, driven • sales decrease by PLN 63 million in the mass client mainly by still increasing level of premiums in protection segment (excluding the inter-segment premiums) products in endowments and the insurance portfolio of compared to 2018, due to a decrease in the number of protection products in the bancassurance channel. policies, which resulted from increased price movements among competitors; • premium decreased in the corporate client segment by PLN 115 million from 2018 (net of inter-segment
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 70 71 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Financial results
Structure of gross written premium at PZU Group (%) Net investment result and interest expenses investment policy to ensure greater diversification of the 5.3 PZU Group’s claims paid and technical In H1 2019 the net investment result2, including interest investment portfolio and curtailment of volatility in results. provisions expenses, was PLN 4,580 million, compared to PLN 3,821 6.8 7.6 8.5 million in the corresponding period of 2018. Excluding the The Group runs its investment operations in compliance with Net claims and benefits (including the movement in technical impact exerted by banking activity on the net investment statutory requirements while maintaining appropriate levels provisions) reached PLN 7,929 million and were 8.0% higher 3 32.1 31.6 32.0 result, after factoring in interest expenses in H1 2019 was of safety, liquidity and profitability, therefore debt treasury than in the corresponding period of the previous year. The PLN 1,032 million. It was higher than in the corresponding securities accounted for over 60% of the investment portfolio. following factors contributed to the increase in the net claims
4.3 3.2 3.2 period last year by PLN 564 million, which was primarily due and benefits category: 4.2 4.5 4,9 3.3 3.4 3.5 to the following drivers: • in life insurance, the higher investment result on most unit- 11.8 12.5 11.2 • higher result earned on listed equity instruments in Structure of the portfolio of investments net of the linked product portfolios compared to the negative results
14.3 particular due to improved market conditions on the impact of banking activity (in %)* produced last year; 14.3 14.5 Warsaw Stock Exchange – the WIG index went up • in insurance against fire and other damage to property – 4.3% in H1 2019 compared to the 12.2% decline in the 5.5 5.4 5.6 above-average number of losses caused by atmospheric 23.2 23.0 22.2 8.4 8.9 corresponding period of the previous year; 9.6 phenomena. 2.9 2.5 5.4 5.3 • higher investment income in the portfolio of assets covering 3.0 9.5 2017.06 2018.06 2019.06 61.0% 63.8% 60.7% 11.6 17.4 Ukraine and Baltics investment products, even though it does not affect the 11.9 On the other hand, a decrease in the net claims and benefits Life insurance – regular premium in Poland PZU Group’s overall net result because it is offset by the category was recorded in connection with remeasurement, in Life insurance – single premium in Poland Accide nt and othe r insurance in Po land higher level of net insurance claims and benefits; the corresponding period of the previous year in the motor TPL and other insurance in Poland • stabilization of income in the foreign treasury bonds insurance group in the corporate client segment and the 10.7% Fire and property loss insurance in Poland 9.6% 13.0% 64.9 portfolios (EM), chiefly by altering the management 61.9 60.3 mass client segment, of the provision for claims for pain and Mo to r Own D amage insura nce in P oland 9.8% 6.3% 5.1% TPL mo to r insurance in P oland strategy from short-term to long-term and setting up 6.3% suffering caused by a relative being in 6.7% 7.3% 9.1% FVOCI portfolios; 6.8% 7.4% a vegetative state because of being injured in an accident. 5.0% 5.6% 5.8% 2015.12 2016.12 2017.06 The foregoing growth was partially offset by the lower result PLN 52.3 bn 2017PLN 50.5 bn 2018PLN 45.5 bn 2019.06
Net revenues from commissions and fees on the Polish treasury bonds portfolio primarily due to the I nvTreasury estm e nt debt pr o pemarket rty securities 5.4 PZU Group’s acquisition and Net revenues from commissions and fees in H1 2019 stood at lower level of assets in this portfolio. EquityNon-treasury instruments debt –marketunquoted securities administrative expenses PLN 1,602 million, or were PLN 75 million lower than in the EquityMo n etainstruments ry ma rk et in– strq uote um e d nt s MoEquity n eta ry instruments ma rk et in str – umq euote nt s d previous year, mainly as a result of higher commission costs in At the end of June 2019 the value of the PZU Group’s Non-treasuryEquity instruments debt market – unquoted securities In H1 2019, acquisition expenses went up PLN 97 million banking activity. investment portfolio4, net of the impact exerted by banking TreasuryI nv estm debt e nt prmarket o pe rty securities compared to the corresponding period of the previous year. activity was PLN 49,940 million versus PLN 50,270 million at The increase was driven mainly by a change in the structure * Interest rate, foreign exchange and equity price derivatives duly presented They included mainly: the end of 2018. in the categories of debt market instruments – treasuries, money market of sales channels in PZU and growth of sales in foreign • net revenues from commissions and fees in the banking instruments and listed and unlisted equity instruments. operations. segment of PLN 1,531 million (including mainly: brokers’ The decline of the investment portfolio was attributable commissions, revenues and expenses related to the service primarily to providing of funds for the repayment of own The Group’s administrative expenses in H1 2019 amounted of bank accounts, payment and credit cards, fees charged bonds in EUR in July 2019 partly counterbalanced by Result on other operating income and expenses to PLN 3,276 million compared to PLN 3,342 million in the for intermediation in insurance sales); higher receipts from premiums due to business growth and In H1 2019, the balance of other operating income and corresponding period of the previous year, i.e. went down • income on OFE asset management. They stood at investment performance. expenses was negative and stood at PLN 1,592 million, 2.0% from the previous year. Administrative expenses in PLN 69 million (down compared to the previous year mainly compared to the balance in 2018, which was also negative at the banking activity segment (excluding adjustments for the as a result of lower revenues on refund of monies from the The increase in the percentage of non-treasury debt market a level of PLN 1,291 million. The following contributed to this valuation of assets and liabilities to the fair value) dropped OFE Guarantee Fund); instruments is the result of the consistently implemented result: by PLN 101 million thanks to maintaining cost discipline. At • revenues and fees received from funds and mutual fund • increase in the BFG charges from PLN 277 million in H1 the same time, the administrative expenses of the insurance
companies in the amount of PLN 252 million, or 2 Net investment result includes: net investment income, net result on realization 2018 to PLN 547 million in 2019 as a result of a higher segments in Poland were PLN 23 million higher compared to PLN 21 million less than in the previous year. of financial instruments and investments, movement in allowances for expected contributions to the mandatory resolution funds; the previous year. This change largely resulted from higher credit losses and impairment losses on financial instruments and net movement in fair value of assets and liabilities measured at fair value. • levy on financial institutions – the PZU Group’s charge on personnel costs resulting from the wage pressure on the 3 PZU Group net of Pekao and Alior Bank. account of this levy (in both insurance and banking activity) market. 4 The investment portfolio contains investment financial assets (including investment products), investment property (including the part presented in the in H1 2019 was PLN 569 million compared to PLN 542 category of assets held for sale) financial derivatives along with the negative million in the previous year. valuation of derivatives and liabilities arising from repurchase transactions presented in financial liabilities.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 72 73 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Financial results
5.5 Drivers and atypical events affecting Non-current assets in the form of intangible assets, goodwill Equity and liabilities • higher claims provisions in non-life insurance due to the the results and property, plant and equipment were presented in the As at 30 June 2019, consolidated equity hit PLN 36,273 notification of several high value claims; statement of financial position at PLN 11,178 million. They million, down from the end of 2018 by PLN 1,134 million. The • higher provisions in unit-linked life insurance products due In H1 2018, a non-recurring effect of remeasurement of accounted for 3.3% of the assets. The increase in the balance value of non-controlling interests fell by PLN 520 million to PLN to the high positive result on investment activity. provisions was recognized, mainly in motor insurance for compared to the end of 2018 by PLN 943 million resulted from 21,962 million versus last year, among others, in connection claims for pain and suffering due to being in a vegetative state recognition of new assets in respect of the right to use as a with Pekao earmarking PLN 1,732 million to be paid as a The balance of other liabilities as at 30 June 2019 was in the amount of PLN 148 million. result of application of IFRS 16. dividend, with PLN 1,385 million of that being the dividend PLN 12,429 million compared to PLN 7,407 million at the end attributable to non-controlling interests. The declines were of 2018. The increase pertained in particular to liabilities to The conversion effect of long-term policies into yearly As at 30 June 2019, the PZU Group held PLN 10,915 million of partly offset by the result generated by Alior Bank and Pekao PZU shareholders and minority shareholders of subsidiaries renewable term agreements in type P group insurance was cash and cash equivalents (3.2% of assets). At yearend 2018, attributed to non-controlling shareholders totaling PLN 717 on account of dividends, on account of contributions to the treated as a non-recurring event was PLN 1 million lower in this value was PLN 17,055 million and the movement occurred million. Equity attributable to parent company shareholders Bank Guarantee Fund and liabilities to banks for payment H1 2019 than in the corresponding period of the previous year mainly in the cash accumulated by Bank Pekao in the Central dropped by PLN 614 million compared to previous year. The documents cleared by the National Clearing House. (PLN 9 million in H1 2019 compared to PLN 10 million in the Bank in conjunction with the reserve requirement. distribution of profit for 2018 and allocating PLN 2,418 million corresponding period of the previous year). to dividend payment was partly compensated by the net result The balance of assets held for sale in the amount of PLN attributable to the parent company generated in H1 2019 in Structure of PZU Group’s equity and liabilities (in %) 1,139 million was similar to the level as at the end of 2018. the amount of PLN 1,481 million and increase in the valuation 5.6 PZU Group’s asset and liability of debt instruments measured at fair value through other structure comprehensive income. 11.8 11.4 10.7 PZU Group’s asset structure (in %) 2.9 2.3 3.7 As at 30 June 2019, the PZU Group’s total assets were The largest item of equity and liabilities as at 30 June 2019 PLN 340,079 million, up PLN 11,525 million compared to the were financial liabilities representing 71.4%. The value of this 1.7 2.1 2.1 end of 2018. 2.6 item reached PLN 242,863 million and included in particular: 2.9 5.2 3.2 1.9 1.8 • liabilities to clients for deposits totaling PLN 210,816 million 62.2 63.0 61.7 Assets (an increase in current and term deposits in Pekao and As at 30 June 2019, the largest category of the Group’s assets Alior Bank by PLN 2,969 million compared to December 53.4 55.9 were loan receivables from clients. They represented 55.9% 55.4 2018); of total assets and amounted to PLN 189,936 million, having • liabilities on the issue of own debt securities totaling PLN 8.5 9.0 9.7 0,8 0.5 0.6 risen by PLN 7,882 million from the end of 2018. 12,535 million, including: 14.0 14.0 13.7 ◦◦ PLN 6,616 million on bonds, of which EUR 850 million 2017 2018 2019.06 The second largest asset category were investments are Eurobonds issued by PZU Finance AB, a wholly- 36.1 Eq uity 32.2 33.8 (investment financial assets, investment properties and owned subsidiary – the bonds were repaid on 3 July Other liabilities financial derivatives). They totaled PLN 114,935 million and 2019; the balance was up by PLN 694 million over 2018, 3.3 3.1 3.3 Liabilities to customers - overnight and fixed-term deposits were up PLN 9,086 million versus the end of last year. They chiefly due to Pekao’s issue of bonds; 2017 2018 2019.06 Financial liabilities excluding liability to customers - deposits
represented 33.8% of the Group’s total assets versus 32.2% ◦◦ PLN 4,545 million on certificates of deposit issued by Other provisions Other assets at the end of 2018. The increase in the value of investments Bank Pekao and Alior Bank; Cash and cash equiva le nts Technical provisions was associated with the banking activity. Excluding banking Receivables ◦◦ PLN 1,374 million on covered bonds issued by Bank activity, the investment portfolio in H1 2019 decreased as a Receivable s from customers' loan Pekao; result of earmarking the funds for repayment of own bonds in Inve stments • subordinated liabilities of PLN 6,423 million. The balance Cash flow statement EUR which took place in July this year, partly counterbalanced No n-current assets (intangible s, goodwill, pro perty, plant and equipme nt) rose from the end of 2018 by PLN 362 million chiefly due to At the end of H1 2019, net cash flows reached PLN -6,101 by higher receipts from premiums due to business growth and the issue of subordinated bonds by Pekao in June 2019 for million, PLN 9,314 million less than in the previous year. investment performance. PLN 350 million. SECTION 7.3 DEBT FINANCING This decline was caused, in particular, by net cash flows on investing activity. The PZU Group’s receivables, including receivables under As at the end of H1 2019, technical provisions totaled PLN insurance contracts and current income tax were PLN 6,083 46,542 million, which accounted for 13.7% of equity and Material off-balance sheet line items million and represented 1.8% of its assets. Aat the end of liabilities (PLN +703 million compared to the end of 2018). The value of contingent liabilities at the end of H1 2019 2018 they were PLN 6,343 million (1.9% of the Group’s The movement in this item resulted in particular from: reached PLN 60,207 million, PLN 2,540 million more than by assets) and their decrease was caused mainly by the • an increase in the provision for unearned premiums in non- the end of the previous year, and was attributable mainly to outstanding transactions on financial instruments and margins. life insurance resulting from expanding insurance sales;
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 74 75 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Financial results
contingent liabilities granted to Alior Bank’s and Bank Pekao’s insurance companies based in Poland (PZU, LINK4 and PZU ◦◦ higher sales in the other liability insurance group as Insurance result in the corporate insurance segment clients. The balance of the PZU Group’s contingent liabilities Życie) plus the surplus of income earned over the risk- a result of signing of several high-value contracts (in PLN m) consisted in particular of PLN 12,384 million in contingent free rate on investments reflecting the value of technical (including long-term ones) and the higher premium from liabilities by virtue of overdraft limits on current accounts provisions of PZU, LINK4 and PZU Życie in insurance insurance of hospitals and strategic partnerships in TUW and credit cards, PLN 30,004 million in tranche-based credits products, i.e. the surplus of investment income of PZU, PZUW; and loans and PLN 8,974 million in awarded guarantees and LINK4 and PZU Życie over the income allocated at transfer • net claims and benefits were up 7.4% compared to the
sureties. prices to insurance segments. Additionally, the segment corresponding period of 2018, which, together with a 5.0% 58 (14) (53) (21) includes income from other free funds in the PZU Group, increase in net earned premium, means that the loss ratio 3 (4)
Moreover, the balance of contingent liabilities included including consolidated mutual funds; deteriorated by 1.4 p.p. to 63.6%. Increase of the total loss 217 186 guarantees for the issue of securities totaling PLN 3,957 • banking segment – a broad range of banking products ratio in this segment was the outcome of the following: million. offered both to corporate and retail clients by Pekao and ◦◦ higher loss ratios in insurance against fire and other Oth ers Alior Bank. damage to property, which resulted from occurrence of H12018 H12019 • Baltic States segment – includes non-life insurance and life several high-value claims, Insura ncere sult Insura ncere sult Inve stmentinco me
insurance products provided in the territories of Lithuania, ◦◦ increase in the average disbursement in motor own expenses Acquisition
5.7 Contribution to the consolidated result Neearne t dpremium Neclaims t and benefits made by industry segments Latvia and Estonia; damage insurance, Administrativeexpenses • investment contracts – include PZU Życie products that ◦◦ decrease in the loss ratio in the motor TPL portfolio The following industry segments were identified in order to do not transfer material insurance risk and do not satisfy (in the corresponding period of 2018 the provision for facilitate management of the PZU Group: the definition of insurance contract. These are some of claims for pain and suffering for pain caused by the Mass insurance • corporate insurance (non-life insurance) – this segment the products with a guaranteed rate of return and some vegetative state of a relative injured in an accident was In H1 2019, in the mass segment the PZU Group generated covers a broad scope of property insurance products, products in unit-linked form; remeasured), an insurance result of PLN 646 million, signifying a 21% liability and motor insurance customized to a client’s needs • other – include consolidated companies that are not ◦◦ lower loss ratio in general TPL insurance and assistance; decline compared to the corresponding period of the previous entailing individual underwriting offered by PZU and TUW classified in any of the above segments. • the level of investments allocated to this segment according year. The following factors had impact on this segment’s PZUW; to transfer prices at PLN 49 million, down 22.2%. This performance in H1 2019: • mass insurance (non-life insurance) – this segment Corporate insurance was caused in particular by the 1.1% decrease of the EUR • a 2.1% increase in net earned premium combined with consists of property, accident, liability and motor insurance In H1 2019, in corporate insurance segment the PZU Group exchange rate vs. PLN, compared to a 4.6% appreciation in a 1.4% decrease in gross written premium, both in products. PZU and LINK4 provide insurance to individuals generated an insurance result of PLN 186 million, signifying the corresponding period last year; comparison to H1 2018. The growth rate of the PZU and entities from the SME sector; a 14.3% decline compared to the corresponding period of the • acquisition expenses (net of reinsurance commissions) Group’s gross written premium was driven by: • life insurance: group and individually continued insurance previous year. reached PLN 254 million, signifying 9.0% y/y growth. This ◦◦ lower written premium in motor TPL insurance due to – PZU Życie offers it to employee groups and other formal resulted mainly due to higher direct acquisition expenses a decrease in the number of policies, which resulted groups (e.g. trade unions). The following factors had a key impact on this segment’s and change in the structure of sales channels; from increased price activity among competitors, Persons under a legal relationship with the policyholder performance in H1 2019: • administrative expenses decreased 4.7%, which, given ◦◦ an increase in gross written premium in motor own (e.g. employer, trade union) enroll in the insurance • a 5.0% increase in net earned premium combined with the lower growth rate compared to the earned premium, damage insurance, agreement and individually continued insurance in a 7.2% decrease in gross written premium, both in translated into an improvement in the administrative ◦◦ slight growth in the premium for insurance against fire which the policyholder acquired the right to individual comparison to H1 2018. The growth rate of the PZU expense ratio by 0.5 pp. The decline in the expense ratio and other damage to property, chiefly in household continuation during the group phase. This spans the Group’s gross written premium was driven by: was due to, among other things, lower costs of service by insurance and small and medium-sized enterprise following types of insurance: protection, investment ◦◦ the lower premiums from insurance against fire and consistently maintaining cost discipline. insurance coupled with a lower level of sales of (however, not investment contracts) and health insurance; other damage to property (-36.2% y/y) – in the agricultural insurance as a result of the maintained • individual life insurance – PZU Życie provides those corresponding period of 2018 a high-value long-term competitive market, products to retail clients. The insurance agreement contract was entered; ◦◦ higher premium from financial risk and assistance applies to a specific insured who is subject to individual ◦◦ growth in the motor insurance gross written premium insurance (mainly PZU Pomoc w Drodze); underwriting. These products include protection, (+2.7% y/y) offered to leasing companies and in fleet • higher net insurance claims and benefits in H1 2019 by investment (which are not investment contracts) and health insurance, resulting from still visible higher demand for 4.8% y/y, which coupled with net earned premium being insurance; cars at the end of 2018 as a result of changes in lease up 2.1%, translated into the loss ratio deteriorating by • investments – reporting according to PAS – the revenues taxation as of 2019; 1.7 pp compared to H1 2018. This change was driven of the investments segment comprise the investments of ◦◦ development of the insurance portfolio containing mainly by: the PZU Group’s own funds, understood as the surplus of various financial risks, in particular the insurance of GAP ◦◦ increase in the loss ratio in insurance against fire and investments over technical provisions in the PZU Group financial losses; other damage to property as a result of above-average number of losses caused by atmospheric phenomena,
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 76 77 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Financial results
◦◦ decrease in the loss ratio in the motor TPL group - in Insurance result in the mass insurance segment ◦◦ active up-selling of riders in other individually continued ◦◦ the lower pace of converting long-term insurance the corresponding period of 2018 the provision for (in PLN m) insurance products, including in particular together with policies into yearly-renewable term business in type claims for pain and suffering for pain caused by the the offering of the basic agreement in PZU branches P group insurance than last year. As a result of the vegetative state of a relative injured in an accident was and increase of sums insured during the terms of the conversion, in 2019, provisions were released for PLN remeasured. This was partly counterbalanced by an agreements. In addition to the aforementioned rider, 9 million, PLN 1 million less than in the corresponding increase in the loss ratio in MOD; in Q4 2018 PZU Życie introduced another product – period of 2018; • income from investments allocated to the mass insurance Myocardial Infarction or Stroke Rider – providing for • acquisition expenses in the group and individually 105 (45) (152) segment based on transfer prices amounted to PLN 238 (61) (17) (2) financial support in the event of occurrence of such continued insurance segment in the 6 months of 2019
million, down 15.9% year on year, which was caused in 818 events. were PLN 187 million, increasing by PLN 15 million (8.7%) 646 particular by depreciation of the EUR to PLN exchange At the same time, revenues from group protection products compared to last year. The factor driving the movement in rate by 1.1%, compared to appreciation of 4.6% in the remained under pressure posed by higher attrition of the this line item was the increasing remuneration for insurance
corresponding period last year; Oth ers insureds in groups (work establishments), and the limited intermediaries, especially for selling health and protection
• acquisition expenses (net of reinsurance commissions) H12018 H12019 pressure on the growth rate of the average premium made products, modification made to the remuneration system in Insura ncere sult Insura ncere sult
rose to PLN 966 million and were up by PLN 61 million in Inve stmentinco me it possible to control the loss ratio in group protection the agent network, and increasing sales levels; Acquisition expenses Acquisition Neearne t dpremium Neclaims t and benefits comparison with the corresponding period of the previous Administrativeexpenses products; • in H1 2019 administrative expenses totaled PLN 310 year (+6.7% y/y), which when coupled with the net earned • the investment result consists of income allocated using million. The PLN 13 million increase (by 4.4%) was caused premium being up by 2.1% signifies growth of acquisition transfer prices and income on investment products. In by organizational changes in sales divisions and higher expenses ratio by 0.8 p.p. The factor driving the evolution Group and individually continued insurance the group and individually continued insurance segment, personnel costs incurred as a result of salary pressures on in the level of acquisition expenses was the higher level of Insurance result in the group and individually continued investment income rose PLN 89 million year on year the market. direct acquisition expenses due to the change of the mix insurance after H1 2019 amounted to PLN 703 million, mainly due to improvement in the income on unit-linked of products and sales channels (high share of multiagency compared to PLN 704 million in the previous year. The result products (especially employee pension schemes (EPS)) as After excluding the one-off effect related to conversion of and dealer channel, coupled with simultaneous lower was positively affected mainly by the increasing portfolio of a result of better conditions on the equity market – the long-term contracts into renewable contracts in type P group growth rate of sales of motor TPL, characterized by lower profitable health contracts and lower level of death-related WIG index climbed 4.3% compared to the 12.2% decline insurance, the segment’s insurance result in 1 2019 amounted commission rates); and childbirth benefits paid. Increasing operating expenses, in in the corresponding period of last year. Income allocated to PLN 694 million and remained stable compared to last year. • administrative expenses in this segment totaled PLN turn, were one of the key negative factors. according to transfer prices is subject to limited fluctuation 305 million, up PLN 17 million (+5.9%) versus the year and its level depends largely on the level of technical before, driven primarily by the outcome of higher staff Individual constituent elements of the insurance result were as provisions in protection insurance products; Insurance result in the group and individually costs as a response to the salary pressure on the market follows: • insurance claims and benefits and the net movement in continued insurance segment (in PLN m) and maintaining cost discipline in other, non-staff business • gross written premium was higher than in the other net technical provisions totaled PLN 2,594 million (up areas. corresponding period of the previous year by PLN 27 million 3.3% y/y). This change was driven in particular by: (0.8%), which was mainly the result of the following: ◦◦ an increase in technical provisions in Employee Pension ◦◦ attracting further contracts in group health insurance Schemes (EPS, a third pillar retirement security product) 89 (84) 28 (15) (13) (6) products or individually continued products (new clients compared to a decrease in the previous year, where in outpatient insurance and sales of different options of this was caused by higher investment results this year, the medicine product). At the end of June 2019, PZU coupled with a stable level of client contributions to and 704 703 Życie had more than 2 million contracts of this type in withdrawals from unit-linked insurance accounts; force. A new rider to continued insurance under the ◦◦ the rising level of medical benefits under health products
name “PZU Uraz ortopedyczny [PZU orthopedic injury]” pro rata to the dynamic growth of this contract portfolio. Others
has enjoyed particular success in recent months. In The foregoing effects were partially offset by the following: H1 2018 H1 2019 case of an accidental orthopedic injury, e.g. fracture, ◦◦ lower death-related and childbirth benefits, which is Insu ranc e resu lt Insu ranc e resu lt Investment income Acquisition expenses Net premiumearned
dislocation or sprain, the insured will be provided correlated to the frequency of these events in the overall Administrative expenses in technical provisions technical in
assistance of a physiotherapist and an orthopedist. The population according to the data published by the and change benefits Claims, insured will also be able to use rehabilitation procedures Central Statistical Office (GUS), in private medical centers across Poland. The insurance ◦◦ the disbursements of benefits in the portfolio of bank garnered excellent response from the clients – three protection products is limited this year, due to the out of four clients enrolling in individual continuation shrinking of the portfolio containing high individual selected this rider as well, benefits,
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 78 79 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Financial results
Individual insurance • net insurance claims and benefits together with the Investments higher y/y. The impairment loss associated with the exposure In H1 2019, the insurance result in the individual life insurance movement in other net technical provisions were The revenues of the Investments segment comprise the of one of Alior Bank’s clients was another major event. The segment was PLN 119 million, PLN 21 million, or 21.4%, more PLN 794 million, reflecting an increase in this item by investments of the PZU Group’s own funds, understood as the total loss in the amount of PLN 161 million reduced the H1 than last year. This was mainly attributable to the increasing PLN 223 million compared to the corresponding period of surplus of investments over technical provisions in the PZU 2019 result. portfolio of high-margin protection insurance, including 2018. The change in the investment result generated on Group insurance companies seated in Poland (PZU, LINK4 bancassurance, lower acquisition expenses for unit-linked funds in investment products made the major contribution and PZU Życie) plus the surplus of income earned over the The key element of the segment’s income is investment products and lower administrative expenses in the entire to the increase, while to a lesser extent this was caused risk-free rate on investments reflecting the value of technical income, which in 2019 increased to PLN 4,436 million y/y (up segment. The improvement of the segment’s margin was also by lower client contributions to fund accounts in the bank provisions of PZU, LINK4 and PZU Życie in insurance products, 2.3% y/y). driven by a change in the revenue mix towards a higher share channel. From the operational point of view, these factors i.e. surplus of investment income of PZU, LINK4 and PZU of protection products characterized by much higher margins are not significant – they are balanced by other relevant Życie over the income allocated at transfer prices to insurance Investment income consists of: interest income, dividend than investment products. items of the profit and loss account; segments. revenue, trading result and result on impairment charges. • in H1 2019, acquisition expenses in the individual insurance The main factors affecting the segment’s insurance result are segment dropped by 1.5% to PLN 64 million. Lower Additionally, the investment segment includes income from In 2019 both Bank Pekao and Alior Bank recorded high sales described below: commissions on the sale of unit-linked products in the other free funds in the PZU Group (including consolidated of credit products, among others thanks to the favorable • the growth in gross written premium of PLN 5 million bancassurance channel, resulting from lower sales than one mutual funds). economic climate and the low level of interest rates. (0.7%) to PLN 694 million compared to 2018 was the result year ago, were partly offset by the increasing remuneration of the following positive factors: paid to intermediaries for selling protection products, Operating income of the investment segment (based The increase in their net interest income (interest income less ◦◦ constantly rising level of premiums on protection chiefly in the bank channel, while additionally there were exclusively on external transactions) was higher than in the interest expenses) was attributable mainly to the expansion in products in endowments and term insurance offered additional costs of sales support in the proprietary network; corresponding period of last year, primarily due to the better the volume of loans and deposits and higher interest margin. in own channels – the level of sales and premium • in H1 2019 administrative expenses totaled PLN 33 million. conditions on the Warsaw Stock Exchange. As at the end of H1 2019, the size of the client loan portfolio indexation under the agreements in the portfolio The year-on-year decline by PLN 4 million (-10.8%) was in total in both banks grew 4.2% compared to the end of exceeds the value of lapses, affected mainly by the higher involvement of the sales Banking segment / Banking activity 2018, and deposits from non-financial clients rose 1.6%. ◦◦ growth of the insured portfolio in protection products network in the service of group and individually continued The banking activity segment consists of the following groups: in the bancassurance channel, including particularly the products. Pekao and Alior Bank. Profitability of the banks in the PZU Group measured by the introduction of new products together with Alior Bank net interest margin amounted to 2.9% in Pekao and 4.7% and Bank Pekao in H2 2018; In H1 2019, in the banking activity segment, the PZU Group in Alior Bank. The difference in the level of the indicators At the same time negative factors were at play – lower Insurance result in the individual insurance segment recorded PLN 1,451 million in operating profit (without results in particular from the structure of the loan receivables contributions to unit-linked accounts in single-payment (in PLN m) amortization of intangible assets acquired as part of the bank portfolio. unit-linked products offered jointly with banks, which is acquisition transactions), representing a decrease by PLN 317 in line with the trends prevailing across the life insurance million compared to the corresponding period of 2018. The net fee and commission income in the banking activity 233 (223) market. segment amounted to PLN 1,531 million. This result was • the investment result consists of income allocated using In H1 2019, Bank Pekao’s contribution to the operating profit generated as the difference between commission income transfer prices and income on investment products. (without amortization of intangible assets acquired as part of of PLN 1,922 million and commission expenses of PLN 391 In the individual insurance segment, it climbed y/y by 5 1 4 1 the Pekao acquisition transaction) in the “Banking activity” million. The result, just like in the case of the net interest
PLN 233 million mainly due to the improvement in the 98 119 segment was PLN 1,212 million (down by PLN 64 million y/y), income, was influenced by an increase in loan sales, higher investment result on investment products as a result of while Alior Bank’s contribution was PLN 239 million (down by commissions on loans, cards and FX transactions with clients. better conditions on the equity market – the WIG index PLN 253 million y/y). Oth ers expanded by 4.3% compared to the 12.2% decline in Administrative expenses of the segment amounted to PLN H12018 H12019
the corresponding period of last year. At the same time, Insura ncere sult Insura ncere sult The H1 2019 result was under the strong pressure of non- 2,439 million (down by PLN 101 million y/y). This amount andchange Claims, benefits Claims, Inve stmentinco me Acquisition expenses Acquisition
the segment’s income from the management fee charged Neearne t dpremium recurring events. In both banks the result was under the comprised Pekao’s expenses in the amount of PLN 1,671 in technical provisions in technical on assets accumulated in unit-linked products fell PLN 3 Administrativeexpenses significant influence of the Bank Guarantee Fund contribution million and Alior Bank’s expenses of PLN 768 million. The million year on year due to the lower level of these assets for the mandatory resolution funds in the total amount of PLN decrease in costs resulted from maintaining cost discipline. as a result of net payouts and negative investment results 480 million. The charge for the mandatory resolution funds last year. Income allocated according to transfer prices is apply to the whole 2019, but it was charged in entirety to In addition, other contributors to the operating result included subject to slight fluctuation and its level depends largely Q1 results. In total, Bank Guarantee Fund contributions and other operating income and expenses, where the main on the level of technical provisions in protection insurance charges, including the mandatory resolution funds contribution components are the BFG fees (PLN 547 million in H1 2019) products; and the deposit guarantee contribution, were PLN 270 million and levy on other financial institutions (PLN 407 million).
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 80 81 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Financial results
BFG fees increased by PLN 270 million y/y due to a higher ◦◦ personnel costs higher by PLN 1 million, including the • increase in net claims and benefits. They amounted to (31.5% y/y) occurred primarily in accident insurance as contributions to the resolution funds. costs of Management Board and Supervisory Board, PLN 482 million and were higher by PLN 48 million a result of increasing sales of mandatory insurance for mainly due to changes in the employment structure and compared to the corresponding period of the previous year. tourist visas and higher sales of the green card insurance. As a result, the Cost/Income ratio stood at 41% in both banks. in the composition of the management and supervisory The loss ratio in non-life insurance stood at 60.1%, down Premiums in life insurance increased by PLN 5 million (or On a separate basis, this ratio was 44% for Pekao and 37% bodies, 0.9 p.p. from the loss ratio in H1 2018. In life insurance the 19.2%); for Alior Bank. ◦◦ higher amortization costs of the right to manage the value of benefits stood at PLN 34 million and was • higher investment result. In this area the segment funds in the amount of nearly PLN 1 million. PLN 14 million higher than the year before; generated PLN 14 million, i.e. PLN 8 million more than in • higher acquisition expenses. The segment’s expenditures H1 2018; Result on the activity of the banking segment in H1 for this purpose were at PLN 165 million. The acquisition • increase in net claims and benefits. These reached 2019 (in PLN m) Operating profit in the pension insurance segment expense ratio calculated on the basis of net earned PLN 33 million and were 32.0% higher than in the (in PLN m) premium improved by 0.4 p.p. and stood at 21.1%; corresponding period of the previous year. In life insurance • higher administrative expenses. They amounted to the value of benefits paid increased in relation to H1 of the 101 (441) (7) 100 (70) PLN 63 million rising by 5.0% from H1 last year. The previous year by PLN 4 million (or 50.0%). The loss ratio administrative expense ratio dropped to 8.1%, or 0.4 p.p. calculated on the basis of the net earned premium in non- Cutting the administrative expense ratio was possible due life insurance was 33.9%, down 7.0 p.p. compared to the (8) (5) 1 to maintaining cost discipline coupled with the growth in ration as at the end of June 2018; 1,768 1,451 60 the magnitude of business. • increase in acquisition expenses. They stood at 48 PLN 51 million compared to PLN 40 million after the first 6 months of the previous year. The segment’s acquisition Oth ers Income Insurance result in the Baltic States segment expense ratio went down compared to H1 of the previous Oth ers H12018 H12019
result (in PLN m) year by 2.5 p.p. to 55.4%; expenses H12018 H12019 Operatingresult Operatingresult income Administrative
Neinves t tmen t • higher administrative expenses. They amounted to Inve stmentinco me Operatingresult Operatingresult Interestexpenses Netrevenue from commissio n andfee PLN 14 million, up PLN 3 million compared to the previous
17 (48) year. The administrative expense ratio calculated on the 71 basis of the net earned premium decreased by 0.7 p.p. and (12) Pension insurance Baltic States (3) - stood at 15.2%. In H1 2019, the operating profit in the pension insurance In H1 2019, the PZU Group’s business in the Baltic States
segment amounted to PLN 48 million, i.e. it decreased by 20% generated a record-breaking insurance result of 95 70 compared with H1 2018. The major drivers of the operating PLN 95 million, 35.7% more than in the corresponding period Insurance result in the Ukraine segment (in PLN m) result included the following: of the previous year. The improvement of the result was
• revenue from commissions and fees, which amounted to attributable to increasing the scale of business, lower loss Oth ers PLN 69 million, i.e. decreased by 10.4% compared with the ratio, positive effects of the operating leverage and improved H12018 H12019
previous year. This change resulted mainly from: investment results. Insura ncere sult Insura ncere sult
Inve stmentinco me 8 (8) Neearne t dpremium ◦◦ revenues down by more than PLN 9 million on expenses Acquisition 23 (11) Neclaims t and benefits Administrativeexpenses reimbursements from the OFE Guarantee Fund; This result was shaped by the following factors: (3) 2 ◦◦ management fee up by more than PLN 1 million as • increase in gross written premium. It amounted to 20 a result of the higher average net asset value under PLN 856 million compared to PLN 787 million in H1 the year 9 management of the pension funds; before. The premium in non-life insurance increased by Ukraine
• acquisition and service expenses stood at slightly more PLN 65 million y/y ( 8.6%). This growth was possible The Ukraine Segment closed H1 2019 with the insurance Oth ers
than PLN 2 million, having increased by 39% from the among others thanks to increasing the sales of property result of PLN 20 million, compared to PLN 9 million in H1 of H12018 H12019
previous year. This resulted mainly from the increase insurance, mainly in Latvia, and increase in gross written the previous year. Insura ncere sult Insura ncere sult Inve stmentinco me Neearne t dpremium Acquisition expenses Acquisition in the sales network and commission costs incurred for premium in health insurance in both Latvia and Lithuania, Neclaims t and benefits Administrativeexpenses distribution of IRSA; coupled with maintaining the rates in motor insurance in The improvement of the segment’s result was the outcome of • administrative expenses amounted to PLN 22 million, i.e. the region. Premiums in life insurance increased by the following factors: they were PLN 5 million, or 27%, up from the previous PLN 4 million (or 12.9%); • increase in gross written premium. It amounted to year. This change resulted mainly from: • higher investment income. After the first 6 months of 2019, PLN 149 million and increased compared to the ◦◦ higher costs due to the payment of contributions to the the result was PLN 22 million, up PLN 17 million versus H1 corresponding period of the previous year by PLN 35 million OFE Guarantee Fund by PLN 2 million, of the previous year; (or 30.7%). The increase in non-life insurance premiums
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Investment contracts Operating result in the investment contracts segment 1 January 1 January 1 January In the consolidated financial statements investment contracts (in PLN m) Operational efficiency ratios - 30 June 2019 - 30 June 2018 - 30 June 2017
are recognized in accordance with the requirements of IFRS 9. Gross claims and benefits ratio (simple) 1. (gross claims and benefits/gross written premium) 68.6% 63.2% 63.6% 18 (17) x 100% The results of the investment contracts segment are presented according to Polish Accounting Standards, which means that Net claims and benefits ratio (net claims and they include, among other things, gross written premium, 2. 70.0% 66.4% 69.7% benefits/net earned premium) x 100 claims paid and movement in technical provisions. The above 3 (3) categories are eliminated at the consolidated level. 1 2 - - Operating expense ratio in the insurance 3. segments (insurance activity expenses/net 21.8% 21.0% 21.1%
In H1 2019, the PZU Group earned PLN 2 million of operating Oth ers earned premium) x 100% profit compared to PLN 3 million in the previous year on H12018 H12019
investment contracts, i.e. PZU Życie’s products which do not Operatingresult Operatingresult Acquisition expense ratio in the insurance Inve stmentinco me Acquisition expenses Acquisition generate a material insurance risk and which do not meet the Neearne t dpremium 4. segments (acquisition expenses/net earned 14.9% 14.2% 14.0% Administrativeexpenses definition of an insurance contract (such as some products provisions in technical premium) x 100% Claims,be nefitsand change with a guaranteed rate of return and certain unit-linked products). This result in 2019 was driven by the following Administrative expense ratio in the 5. insurance segments (administrative expenses/ 6.9% 6.8% 7.1% factors: Profitability ratios net earned premium) x 100% • gross written premium generated on investment contracts The return on equity attributable to the parent company (PZU) in H1 2019 decreased by PLN 3 million (-15.0%) compared for the period from 1 January 2019 to 30 June 2019 was Combined ratio in non-life insurance (net to H1 2018 to PLN 17 million. These changes resulted 20.3%. ROE was 0.4 p.p. lower than in the previous year. The 6. claims and benefits + insurance activity expenses) 89.2% 87.2% 87.2% primarily from the decrease in the level of payments made profitability ratios achieved in 2019 by the PZU Group exceed / net earned premium x 100% to IRSA accounts, after the product was withdrawn from the levels achieved by the whole market. the offering; Operating profit margin in life insurance 7. 19.6% 19.2% 18.3% • result on investing activity in the investment contracts Operational efficiency ratios (operating profit/gross written premium) x 100% segment improved by PLN 18 million vis-à-vis the previous One of the fundamental measures of operational efficiency year, mainly as a result of a better rate of return on and performance of an insurance company is COR – Combined 8. Cost/Income ratio - banking operations 41.4% 44.2% 52.5% individual pension security accounts (IKZEs) and unit-linked Ratio – calculated, due to its specific nature, for the non-life funds in the bancassurance channel; insurance sector (Section II). • the cost of insurance claims and benefits together with the movement in other net technical provisions increased The PZU Group’s combined ratio (for non-life insurance) has Basic performance ratios of the PZU 1 January 1 January 1 January PLN 17 million y/y to PLN 24 million, mostly due to the been maintained in recent years at a level ensuring a high Group - 30 June 2019 - 30 June 2018 - 30 June 2017 difference in investment income in unit-linked products profitability of business. In H1 2019, this ratio remained at Return on equity (ROE) – attributable to described above; a low level of 89.2%. the parent company (annualized net profit/ 20.3% 20.7% 22.0% • in the investment contract segment, no active acquisition of average equity) x 100% contracts was underway in the reporting period; Return on equity (ROE) – consolidated 11.9% 13.0% 13.1% • administrative expenses were PLN 2 million, down by (annualized net profit/average equity) x 100% PLN 1 million from the previous year as a consequence of Return on assets (ROA) (annualized net 1.3% 1.4% 1.6% the decreasing portfolio of contracts in this segment. profit/average assets) x 100%
Summing up, the decrease in the segment’s operating result was driven mainly by the lower size of business in this segment.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 84 85 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b 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
87 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Risk management
6.1 Objective of risk management system in insurance sector and banking sector subsidiaries. The role of the PZU Group Risk Committee is to The fourth decision-making level pertains to operational Additionally, guidelines regulating the various risk provide support to subsidiaries’ supervisory boards and measures and is divided into three lines of defense: Risk management in the PZU Group aims to build value for management processes in the PZU Group entities are also management boards in implementing an effective risk • the first line of defense – entails ongoing risk management all stakeholders by actively and deliberately managing the issued from time to time. management system that is coherent for the entire PZU at the entities’ business unit and organizational unit level quantum of risk accepted. The essence of this process also and decision-making as part of the risk management Group. The operational objective of the PZU Group Risk involves preventing the acceptance of risk at a level that could The management boards of PZU Group entities are responsible process; Committee is to coordinate and supervise activities related pose a threat to the financial stability of the PZU Group or the for fulfilling their own duties in accordance with the generally • the second line of defense – risk management by financial conglomerate. applicable provisions of national and international law. In to the PZU Group’s risk management system and individual specialized units responsible for risk identification, particular, they are responsible for the implementation of an risk management. monitoring and reporting, as well as for limits control; Risk management in the PZU Group is based on analyzing adequate and effective risk management system. • the third line of defense – internal audit which conducts risk in all processes and units and it is an integral part of the • Committees, which make decisions to mitigate individual independent audits of the individual elements of the management process. Supervision over the risk management systems in the various risks to a level determined by the risk appetite. The risk management system, as well as of control activities financial sector entities is exercised by Supervisory Boards. committees adopt the procedures and methodologies for embedded in operations. The main elements of the PZU Group’s risk management PZU designates its representatives to the Supervisory Boards mitigating various risks and they accept limits to mitigate system have been implemented to ensure sectoral consistency of its subsidiaries, including in particular Alior Bank and Bank the various types of risk. and the execution of the various entities’ strategic plans and Pekao. the overall PZU Group’s business objectives. They include the following: Chart of the organizational structure for the risk management system • systems of limits and limitations on the acceptable level of 6.2 Risk management system risk, including the level of risk appetite;
• processes involving the identification, measurement and The risk management system in the PZU Group is based on T e S e is B a i s e ises t e isk management SUPERVISORY assessment, monitoring and controlling, reporting and the following: ess an assesses its a e a BOARD an e e ti eness as a t its management measures pertaining to various risks; • split of duties and tasks performed by statutory bodies, e isi n making e s e ine AUDIT in t e C m an ’s B a s an t e COMMITTEE • allocation of powers in the risk management process, in committees and individual organizational units and cells in S e is B a es an which the Management Boards and Supervisory Boards of the risk management process; eg ati ns the entities and dedicated Committees play a crucial role. • risk management process, including risk identification, measurement and assessment, monitoring and control T e Management B a i MANAGEMENT In addition, financial sector entities are required to apply the methods, risk reporting and undertaking management gani es t e isk management s stem BOARD an ens es its n ti na it t g appropriate standards for a given sector. The adopted internal actions. The framework for this process is universal among a ing t e St ateg an i ies an s e i ing isk a etite e ining t e isk regulations specify among others: financial market entities. i e an t e an e in i i a ateg ies isk • processes, methods and procedures facilitating risk T e C mmittees i make e isi ns t e e in i i a isks t t e e e s measurement and management; The consistent split of duties and tasks in the PZU Group and COMMITTEES e ine t e a etite isk T e C mmittees im ement t e e es • split of duties in the risk management process; in individual subsidiaries of the PZU Group’s financial sector is an met gies mitigating t e The Asset- The Risk in i i a isks an a e t in i i a Investment Investment Risk Liability Risk • scope and conditions and the frequency of risk based on four decision-making levels. Committee of isk imits Committee Committee Committee management reporting. PZU Group (ALCO) The first three entail the following: PZU exercises supervision over the PZU Group’s risk • The Supervisory Board, which supervises the risk management system on the basis of cooperation agreements management process and assesses its adequacy and The second line The first line of defence The third line of defence entered into with other Group entities and the information effectiveness as part of its decision-making powers of defence provided thereunder. It manages risk at the PZU Group level defined in a given entity’s Articles of Association and the on an aggregate basis, especially with respect to capital Supervisory Board bylaws, as well as through the Audit Risk management requirements. Committee; Organizational units Compliance Internal audit Safety • The Management Board, which organizes the risk In addition, the PZU Group has processes to ensure the management system and ensures that it is operational, by Specialized units – risk Independent audits effectiveness of risk management at the PZU Group level. adopting strategies and policies, setting the level of risk On-going risk identification, measurement of the risk management management and assessment, monitoring system elements The risk management rules applicable to the PZU Group’s appetite, defining the risk profile as well as tolerance levels and reporting subsidiaries include a recommendation issued by PZU (the for the individual categories of risk; parent) regarding the organization of the risk management
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6.3 Risk appetite Risk appetite is also determined at least once a year in the management system, including the introduction of compatible II - ENTITY LEVEL – monitoring of limits and risks specific to PZU Group’s banking sector entities. This process is carried mechanisms, standards and organization of an efficient the entity The risk appetite in the PZU Group - the magnitude of risk out based on the applicable regulatory requirements (including operation of the internal control system (with particular those arising from remedial plans) and best practices. This emphasis on the compliance function), the risk management Risk management at this level aims to ensure that the PZU undertaken to attain the business objectives, where its process is tailored to both banks to reflect the business system (in particular in the reinsurance area) and the security Group entity attains its business objectives in a safe manner measure is the level of potential financial losses, the decline strategy and capital structure of each entity. Risk appetite management system in the PZU Group, and also monitors appropriate to fit the extent of the risk incurred by that in asset value or the growth in the value of liabilities within in banking entities is a topic for consultation with the PZU their ongoing application. The PZU Group dedicated personnel entity. The limits and risk categories specific to the company one year. Group’s parent company and the subject matter of opinions cooperates with the Management Boards of entities and are monitored at this level and also, as part of the risk issued by the PZU Group Risk Committee with a view to managers of such areas as finance, risk, actuarial services, management system, mechanisms, standards and organization ensuring consistency between the activities carried out by the reinsurance, investments and compliance on the basis of are implemented for the efficient operation of the internal Risk appetite defines the maximum level of permissible risk banks and the strategic plans and business objectives of the pertinent cooperation agreements; control system (with particular emphasis on the compliance while setting limits and restrictions for the various partial risks PZU Group as a whole while maintaining an acceptable level function), the risk management system (in particular in and the level above which remedial actions are taken to curtail of risk at the PZU Group level. Once agreed, the level of risk reinsurance) and the security management system. further risk expansion. appetite is then approved by the Supervisory Boards of the banking sector entities. The process of determining the risk appetite and risk limits for each risk category consistent with the Group’s process has been implemented in all the insurance entities in the PZU 6.4 Risk management process Group. The management board of each entity determines The risk management process consists of the following stages: the risk appetite, risk profile and tolerance limits reflecting Two levels are distinguished in the risk management process: its financial plans, business strategy and the objectives of the entire PZU Group. This approach ensures the adequacy I - GROUP LEVEL – monitoring the limits and risks Identification and effectiveness of the risk management system in the PZU specific to the Group Begins with the proposal to commence the creation of an insurance product, acquire a financial instrument, change the operating Group and prevents the acceptance of risk levels that could process, as well upon the occurrence of any other event which potentially results in a risk. The identification process takes jeopardize the financial stability of individual entities or the Risk management at this level is supposed to ensure that the place until the expiry of the liabilities, receivables or activities related to the given risk. The identification of market risk involves entire PZU Group. The determination of the appropriate level PZU Group attains its business objectives in a safe manner recognising the actual and potential sources of such risk which are then identified as to their relevance. of risk in each entity is the Management Board’s responsibility, appropriate to fit the scale of the risk incurred. The PZU whereas a review of the risk appetite values is conducted once Group provides support for the implementation of a risk a year by the unit responsible for risk, with all actions being coordinated at the PZU Group level. Risk measurement and assessment Risk measurement and assessment are performed depending on the characteristics of the given risk type and the level o its Process of determining the risk appetite in the PZU Group relevance. The risk assessment is performed by specialised units. In every company, the risk unit is responsible for development of risk assessment tools and risk assessment process to the extent which specifies risk appetite, risk profile and risk tolerance levels.
Risk monitoring and control O e sig t CONSU TATIONS eg ati ns PZU A i Bank This involves ongoing reviews of any variances from the assumed parameters, namely limits, thresholds, plans, values from the previous period, recommendations and guidelines issued.
A ignment t e anks’ a ti ities it t e PZU G ’s st ategi ans an siness Reporting e ti es Allows efficient risk communication and supports risk management at various decision-making levels.
Best PZU G ’s a ti es Risk C mmittee CONSU TATIONS Bank Peka Management actions These activities encompass among others risk mitigation, risk transfer, risk avoidance, specifying risk appetite, acceptance of 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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6.5 PZU Group’s risk profile • an analysis of the general/specific terms and conditions of The management actions contemplated in the actuarial risk • operations associated with active allocation, i.e. designating insurance or other model agreements with respect to the management process are performed in particular by doing the the optimum medium-term asset structure (AA portfolios); Major risks in the PZU Group relevant actuarial risk being undertaken; following: • banking operations – in conjunction with them the PZU • identification of potential risks related to a given product, • defining the level of tolerance for actuarial risk and Group has a material exposure to credit risk and interest for the purposes of subsequent measurement and monitoring it; rate risk. m ian e monitoring; • business decisions and sales plans; isk • analyzing the impact exerted by the introduction of new • calculation and monitoring of technical provision adequacy; Numerous documents approved by supervisory boards, insurance products on capital requirements and risk margin • tariff strategy, monitoring of current estimates and management boards and dedicated committees govern m e isk e ati na isk computed using the standard formula; assessment of the premium adequacy; investment activity in the PZU Group entities. • verifying and validating modifications to insurance • the process of assessment, valuation and acceptance of products; actuarial risk; Market risk identification involves recognizing the actual and • an assessment of actuarial risk with reference to similar • application of tools designed to mitigate actuarial risk, potential sources of this risk. The process of identifying market a t a ia PZU ma ket isk G isk existing insurance products; including in particular reinsurance and prevention.. risk associated with assets commences at the time of making • monitoring of existing product; a decision to start entering into transactions on a given type of • analyzing the policy of underwriting, tariffs, technical Moreover, to mitigate the actuarial risk inherent in current financial instruments. Units that make a decision to start n ent ati n provisions and reinsurance and the claims and benefits operations the following actions in particular are undertaken: entering into transactions on a given type of financial isk i i it isk handling process. • defining the scopes of liability in the general / specific instruments draw up a description of the instrument terms and conditions of insurance or other model containing, in particular, a description of the risk factors. They e it isk The assessment of actuarial risk consists in the identification agreements; convey this description to the unit responsible for risk that of the degree of the risk or a group of risks that may lead to • co-insurance and reinsurance; identifies and assesses market risk on that basis. a loss, and in an analysis of risk elements in order to make an • application of an adequate tariff policy; The major risks to which the PZU Group is exposed include the underwriting decision. • application of the appropriate methodology for calculating The process of identifying the market risk associated with following: actuarial risk, market risk, credit risk, concentration technical provisions; insurance liabilities commences with the process of developing risk, liquidity risk, operational risk, model risk and compliance The measurement of actuarial risk is performed in particular • application of an appropriate procedure to assess an insurance product and involves an identification of the risk. The major risks associated with the operation of Alior using: underwriting risk; interdependencies between the magnitude of that product’s Bank and Bank Pekao include the following risks: credit risk • an analysis of selected ratios; • application of a correct claims or benefits handling financial flows and market risk factors. The identified (including the risk of loan portfolio concentration), operational • the scenario method - an analysis of impairment arising procedure; market risks are subject to assessment using the criterion of risk and market risk (involving interest rate risk, FX risk, from an assumed change in risk factors; • sales decisions and plans; materiality, i.e. does the materialization of risk entail a loss commodity price risk and financial instrument price risk). • the factor method - a simplified version of the scenario • prevention. capable of affecting its financial condition. The overall risk of the banking sector entities accounts for method, reduced to one scenario per risk factor; approximately 32% of the PZU Group’s total risk (Q1 2019), • statistical data; Market risk Market risk is measured using the following risk measures: while the largest contribution is in credit risk. • exposure and sensitivity measures; This is the risk of a loss or an adverse change in the financial • VaR, value at risk: a measure of risk quantifying the • application of the expertise of the Company’s employees. situation resulting, directly or indirectly, from fluctuations in potential economic loss that will not be exceeded within Actuarial risk the level and in the volatility of market prices of assets, credit a period of one year under normal conditions, with This is the likelihood of a loss or an adverse change in the The monitoring and control of actuarial risk includes a risk spread, as well as value of liabilities and financial instruments. a probability of 99.5%; value of liabilities under the existing insurance contracts level analysis by means of a set of reports on selected ratios. • standard formula; and insurance guarantee agreements, due to inadequate The process of managing the credit spread risk and • exposure and sensitivity measures; assumptions regarding premium pricing and creating technical Reporting aims to engage in effective communication concentration risk has a different set of traits from the • cumulated monthly loss. provisions. regarding actuarial risk and supports management of actuarial process of managing the other sub-categories of market risk at various decision-making levels from an employee to risk and has been described in a subsequent section (Credit In the case of banking entities suitable measures are Risk identification commences with a proposal to launch the Supervisory Board. The frequency of each report and the and concentration risk) along with the process for managing employed in accordance with the regulations applicable to this an insurance product development process and continues scope of information provided are tailored to the information counterparty insolvency risk. sector and best market practices. until the expiry of the related liabilities. The identification of needs of each decision-making level. actuarial risk is performed, among others, as follows: The market risk in the PZU Group originates from three major When measuring market risk, the following stages, in • an analysis of the general terms and conditions of sources: particular, are distinguished: insurance with respect to the accepted risk and compliance • operations associated with asset and liability matching • collection of information on assets and liabilities that with the existing laws; (ALM portfolio); generate market risk; • calculating the value of risk.
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The risk is measured: • counterparty default risk; • exposures to reinsurance; Liquidity risk • daily – for exposure and sensitivity measures of the • credit risk in financial insurance. • exposure limits and VaR limits; Financial liquidity risk means the possibility of losing the instruments in systems used by particular PZU Group • loan exposures (this pertains to banking entities). capacity to settle, on an ongoing basis, the PZU Group’s companies; Concentration risk is the possibility of incurring a loss liabilities to its clients or business partners. The aim of the • monthly – when using the value at risk model for market stemming from the failure to diversify an asset portfolio or Reporting involves communicating the levels of credit risk and liquidity risk management system is to maintain the capacity risk or a standard formula. from large exposure to the risk of default by a single issuer of concentration risk and the effects of monitoring and control to of fulfilling the entity’s liabilities on an ongoing basis. securities or a group of related issuers. various decision-making levels. The frequency of each report Monitoring and control of market risk involves an analysis of and the scope of information provided therein are tailored to The risk identification involves analysis of the possibility of the level of risk and of the utilization of the designated limits. Credit risk and concentration risk are identified at the stage the information needs at each decision-making level. occurrence of unfavorable events, in particular: of making a decision on an investment in a new type of • shortage of liquid assets to satisfy the current needs of the Reporting involves communicating the level of market risk, financial instrument or on accepting credit exposure to a new Management actions in respect of credit risk and concentration PZU Group entity; the effects of monitoring and control to various decision- entity. Such identification involves an analysis of whether the risk involve in particular: • lack of liquidity of financial instruments held; making levels. The frequency of each report and the scope of contemplated investment entails credit risk or concentration • setting limits to curtail exposure to a single entity, group of • the structural mismatch between the maturity of assets and information provided therein are tailored to the information risk, what its level depends on and what its volatility over entities, sectors or states; liabilities. needs at each decision-making level. time is. Both actual and potential sources of credit risk and • diversification of the portfolio of assets and financial concentration risk should be identified. insurance, especially with regard to state, sector; Risk assessment and measurement are carried out by Management actions in respect of market risk involve in • acceptance of collateral; estimating the shortage of cash to pay for liabilities. The risk particular: Risk assesment consists of estimating the probability of • execution of transactions to mitigate credit risk, i.e. selling estimate and measurement is carried out from the following • execution of transactions serving the purpose of mitigation risk materialization and the potential impact exerted by risk a financial instrument, closing a derivative, purchasing perspectives: of market risk, i.e. selling a financial instrument, closing materialization on a given entity’s financial standing. a hedging derivative, restructuring a debt; • liquidity gaps (static, long-term financial liquidity risk) – by a position on a derivative, purchasing a derivative to hedge • reinsurance of the financial insurance portfolio. monitoring a mismatch of net cash flows resulting from a position; Credit risk is measured using: insurance contracts executed until the balance sheet date • diversification of the assets portfolio, in particular with • measures of exposure (gross and net credit exposure and The structure of credit risk limits and concentration risk limits and inflows from assets to cover insurance liabilities in each respect to market risk categories, maturities of instruments, maturity-weighted net credit exposure); for various issuers is established by dedicated committees in period, based on a projection of cash flows; concentration of exposure in one entity, geographical • standard formula. such a manner that the limits are consistent with the adopted • stress tests (medium-term financial liquidity risk) – by concentration; risk tolerance determined by the management boards of estimating the impact of selling the portfolio of financial • setting market risk restrictions and limits. Concentration risk for a single entity is calculated using the the individual subsidiaries and in such a manner that they investments in a short period to satisfy liabilities arising standard formula. make it possible to minimize the risk of ‘infection’ between from the occurrence of extraordinary insurable events; The application of limits is the primary management tool to concentrated exposures. • current statements of estimates (short-term financial maintain a risk position within the acceptable level of risk A measure of total concentration risk is the sum of liquidity risk) – by monitoring demand for cash reported tolerance. The structure of limits for the various categories concentration risks for all entities treated separately. In the In banking activity the provision of credit products is by other business units by the date defined in prevailing of market risk and also for the various organizational units case of related parties, concentration risk is calculated for all accomplished in accordance with loan granting methodologies internal regulations. is established by dedicated committees in such a manner related parties jointly. appropriate for a given client segment and type of product. that the limits are consistent with risk tolerance as agreed by The assessment of a client’s creditworthiness preceding The banks in the PZU Group employ the liquidity risk the management boards of the subsidiaries. Banking sector In the case of banking entities suitable measures are a credit decision is performed using a system devised to management metrics stemming from sector regulations, entities are in this respect subject to additional requirements employed in accordance with the regulations applicable to this support the credit process, including scoring or rating systems, including Recommendation P issued by the Polish Financial in the form of sector regulations. sector and best market practices. In particular, credit risk is external information and the internal databases of each bank Supervision Authority. measured using a set of loan portfolio quality metrics. in the PZU Group. The granting of credit products is performed Credit and concentration risk in accordance with the binding operating procedures whose To manage the liquidity of the banks in the PZU Group, Credit risk is the risk of a loss or an unfavorable change Monitoring and control of credit risk and concentration risk purpose is to indicate the proper activities to be carried out liquidity ratios are used for different periods ranging from in the financial standing resulting from fluctuations in the involves an analysis of the current risk level, assessment of in the credit process, the units responsible for those activities 7 days, to a month, to 12 months and above. trustworthiness and creditworthiness of the issuers of creditworthiness and calculation of the degree of utilization and the tools to be applied. securities, counterparties and all debtors, materializing by the of existing limits. Such monitoring is performed, without Within management of liquidity risk, banks in the PZU Group counterparty’s default on a liability or an increase in credit limitation, on a daily and monthly basis. To minimize credit risk, collaterals are established in line also perform analyses of the maturity profile over a longer spread. The following risk categories are distinguished in with the level of exposure to credit risk and in accordance term, depending to a large extent on the adopted assumptions terms of credit risk: The following are subject to monitoring: with the client’s ability to provide the required collateral. The about development of future cash flows connected with items • spread; • exposures to financial insurance; establishment of a collateral does not waive the requirement to examine the client’s creditworthiness.
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of assets and equity and liabilities. The assumptions take into Operational risk is assessed and measured by: Model risk has been defined as the risk of incurring financial • consulting on and issuing interpretations and guidelines for consideration: • calculating the effects of the occurrence of operational risk losses, incorrectly estimating data reported to the regulatory the application of the adopted standards of conduct and • stability of equity and liabilities with indefinite maturities incidents; authority, taking incorrect decision or losing reputation as compliance risk management; (e.g. current accounts, cancellations and renewals of • estimating the effects of potential operational risk incidents a result of errors in the development, implementation or • planning and delivery of training and internal deposits, level of their concentration); that may occur in the business. application of models. communication in the field of compliance. • possibility of shortening the maturity period for specific • preparation of compliance risk reports and information. items of assets (e.g. mortgage loans with an early Both banks in the PZU Group, upon KNF’s consent, apply In the entities from the banking sector, given the high repayment option); advanced individual models to measure operational risk and to materiality of model risk, the management of this risk has In turn, activities of the heads of organizational cells and units • possibility of selling items of assets (liquidity portfolio). estimate capital requirements on account of this risk. already been implemented in the past in the course of related to ongoing management of compliance risk, include in adaptation to the requirements of Recommendation W issued particular: Monitoring and controlling financial liquidity risk involves Monitoring and control of operational risk is performed mainly by the KNF. Both banks have defined standards for the model • identification and evaluation of compliance risk in the analyzing the utilization of the defined limits. through an established system of operational risk indicators risk management process, including the rules for developing supervised area; enabling assessment of changes in the level of operational risk models and evaluating the quality of their operation and have • measurement of compliance risk in the supervised area; Reporting involves communicating the level of financial over time and assessment of factors that affect the level of ensured appropriate corporate governance solutions. • determining the instruments to provide protection and limit liquidity to various decision-making levels. The frequency of this risk in the business. the number and scale of irregularities; each report and the scope of information provided therein Compliance risk • reporting any threats and events in the compliance risk are tailored to the information needs at each decision-making Reporting involves communicating the level of operational risk Compliance risk is the risk that PZU Group entities or persons area to the Compliance Department; level. and the effects of monitoring and control to various decision- related to PZU Group entities may fail to adhere to or violate • taking actions to mitigate compliance risk; making levels. The frequency of each report and the scope of the applicable provisions of law, internal regulations or • ongoing monitoring of compliance risk in the supervised The following measures aim to reduce financial liquidity risk: information provided therein are tailored to the information standards of conduct, including ethical standards, adopted area; • maintaining cash in a separate liquidity portfolio at a level needs at each decision-making level. by PZU Group entities, which will or may result in the PZU consistent with the limits for the portfolio value; Group or persons acting on its behalf suffering legal sanctions, Moreover, the Compliance Department at PZU level makes • maintaining sufficient cash in a foreign currency in Management actions involving reactions to any identified and financial losses or a loss of reputation or trustworthiness. efforts aimed at ensuring adequate and uniform standards of portfolios of investments earmarked for satisfying insurance assessed operational risks involve, in particular: compliance solutions in all PZU Group entities and monitors liabilities denominated in the given foreign currency; • risk mitigation by taking actions aimed at minimizing risks, The compliance risk management process at the PZU and compliance risk throughout the PZU Group. • provisions of the Agreement on managing portfolios of for instance by strengthening the internal control system; PZU Życie level covers both systemic activities carried out financial instruments entered into between TFI PZU and • risk transfer – in particular, by entering into insurance by the Compliance Department and ongoing compliance In H1 2019 the PZU Group entities had compliance systems PZU regarding limitation of the time for withdrawing cash agreements; risk management activities which are the responsibility of adapted to the standards designated by PZU. from the portfolios managed by TFI PZU to at most 3 days • risk avoidance by refraining from undertaking or the heads of organizational units or cells in the Companies. after a request for cash is filed; withdrawing from a particular type of business in cases Compliance risk is identified and assessed for each internal The provision of full information on compliance risk in each • keeping open credit facilities in banks and/or the possibility where too high a level of operational risk is ascertained process at PZU and PZU Życie, in line with the demarcation member of the Group is the responsibility of compliance of performing sell-buy-back transactions on treasury and where the costs involved in risk mitigation are of reporting responsibilities. Moreover, the Compliance units of these entities. These units are required to assess securities, including those held until maturity; unreasonable; Department identifies compliance risk on the basis of and measure compliance risk and take appropriate remedial • centralization of management of portfolios/funds by TFI • risk acceptance – approval of consequences of a possible information obtained from the legislative process, from actions aimed at mitigating the likelihood of realization of this PZU; realization of operational risk unless they threaten to notifications to the register of conflicts of interest, gifts and risk. • limits of liquidity ratios in the banks of the PZU Group. exceed the operational risk tolerance level. irregularities, and from inquiries received by the Department. On an ongoing basis, PZU Group entities provide information Operational risk The business continuity plans in PZU Group entities are kept The systemic activities include, in particular: on compliance risk to the Compliance Department at PZU and Operational risk is the risk of suffering a loss resulting from up to date and tested regularly. • development and implementation of systemic assumptions PZU Życie. In turn, the tasks of the Compliance Department improper or erroneous internal processes, human activities, and internal regulations consistent with those assumptions; include the following: system failures or external events. Risk of models • recommending to other PZU Group entities solutions for the • analysis of monthly and quarterly reports received from Taking into account the growing importance of the scope application of a consistent compliance function and compliance units of each member of the Group; Operational risk is identified in particular by: of use of models and the fact that model risk was classified a systemic approach to compliance risk management; • assessment of the impact of compliance risk on the PZU • accumulation and analysis of information on operational as material risk for the PZU Group, the formal process of • monitoring of the compliance risk management process, Group as a whole; risk incidents; identifying and evaluating this risk began in 2018. The process including in particular: performing compliance risk analyses, • analysis of the implementation of recommendations issued • self-assessment of operational risk; aims to ensure high quality of risk management practices reviewing the degree of implementation of guidelines to companies pertaining to the fulfillment of the compliance • scenario analyses. applied to this risk. It is currently being implemented in PZU provided by external entities in respect of compliance risk function; and PZU Życie. management;
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• provision of support to compliance units in various PZU • coordination of external control processes; compliance with the applicable laws and accepted standards Risk concentration Group entities in assessing their own compliance risk; • coordination of the fulfillment of reporting duties imposed of conduct; When managing each type of risk, the PZU Group identifies, • preparation of reports for the PZU Management Board and by the stock exchange (in respect of PZU) and by the legal • verifying procedures and processes in the context of their measures and monitors risk concentration; for the banking Supervisory Board. system; compliance with the applicable laws and accepted standards sector, these processes occur on the entity level, according • increasing the level of knowledge among PZU Group staff of conduct; to requirements in the sector. To meet the regulatory Compliance risk includes, in particular, the risk that the in the field of competition law and consumer protection, • anticipating adjustment of documentation to upcoming obligations imposed on capital groups identified as financial operations performed by PZU Group entities will be out of line tailored to the specific business areas; changes in legal requirements; conglomerates, intensive adjustment is pending to implement with the changing legal environment. This risk may materialize • monitoring of anti-monopoly jurisprudence and proceedings • systemic supervision exercised by PZU over the execution of the management model for significant risk concentrations in as a result of the absence of clear and unambiguous laws conducted by the President of UOKiK; the compliance function in PZU Group entities. a financial conglomerate. or their non-existence manifesting itself in the form of ‘legal • reviews of the implementation of recommendations issued • running analyses and conducting ongoing monitoring loopholes’. This may cause irregularities in the PZU Group’s by the PZU Group’s compliance unit; of the application of the rules for the functioning of the At present the PZU Group identifies the following types of risk business, which may then lead to an increase in costs (for • ensuring a consistent implementation of the compliance Chinese walls – in connection with the additional investor concentration: instance, due to the imposition of financial penalties) and an function within the PZU Group. commitments made by PZU in connection with the • within actuarial risk, it identifies concentration risk with increase in the level of reputation risk, thus in a drop of the proceedings under the notification on the intent to purchase regard to possible losses caused by natural disasters, such PZU Group’s trustworthiness on the market (resulting in a Management actions in the area of response to compliance Bank Pekao’s shares; as, in particular, floods and cyclones and concentration on possible financial loss). risk include in particular: • ongoing monitoring of changes in the legal and regulatory large corporate risks, where in both cases the applicable • acceptance of the risk arising, without limitation, from legal environment in order to identify gaps or areas requiring reinsurance program facilitates reduction of the possible Due to the broad spectrum of the PZU Group’s business, and regulatory changes; action to ensure compliance. net losses; reputation risk is also affected by the risk of litigation whose • mitigation of the risk, including by: adjustment of • with respect to credit and market risks, concentration value varies, which is predominantly inherent in the Group’s procedures and processes to changing regulatory In 2018 and in H1 2019 – after the key legal changes have of risk is identified at the level of groups, sectors of the insurance companies. requirements, evaluation and design of internal regulations come into effect and in connection with the recognition of the economy and countries; to suit compliance needs, participation in the process of PZU Group as a financial conglomerate by KNF and a decision • no risk concentration was identified within operational risk The identification and assessment of compliance risk in the agreeing on marketing activities; under which the PZU Group will be subject to supplementary and other significant risks. Group’s entities is performed for each internal process of these • avoidance of the risk by preventing any involvement of oversight exercised in accordance with the provisions of companies by the heads of organizational units, in accordance PZU Group entities in activities that are out of compliance the Supplementary Oversight Act – the compliance area Risk concentration in the identified areas is subject to regular with the allocation of responsibility for reporting. Moreover, with the applicable regulatory requirements or good market was involved in the work to adapt the Company to the new measurement and monitoring. compliance units in PZU Group entities identify compliance practices or activities that may have an unfavorable impact regulations or new requirements, including primarily the risk on the basis of information obtained from notifications to on the PZU Group’s image. requirements arising out of the following legal acts: the register of conflicts of interest, gifts and irregularities, and • Act of 11 May 2017 on Statutory Auditors, Audit Firms and 6.6 Reinsurance operations from inquiries sent to them. As part of efforts aimed at reducing compliance risk in the PZU Public Supervision; Group at system level and day-to-day level, the following risk • Regulation (EU) 2016/679 of the European Parliament and Reinsurance protection in the PZU Group secures insurance Compliance risk is assessed and measured by calculating the mitigation actions are undertaken: of the Council of 27 April 2016 on the protection of natural activity, limiting the consequences of the occurrence of effects of risk materialization of the following types: • continuous implementation of an effective compliance persons with regard to the processing of personal data and catastrophic phenomena that could adversely affect the • financial, resulting, without limitation, from administrative function as a key function in the management system of on the free movement of such data, and repealing Directive financial standing of insurance companies. This task was penalties, court judgments, decisions issued by UOKiK, PZU Group entities; 95/46/EC (General Data Protection Regulation); accomplished through obligatory reinsurance treaties in contractual penalties and damages; • participation in consultations with legislative and regulatory • Act of 16 December 2016 on Rules for Managing State conjunction with facultative reinsurance. • intangible, pertaining to a loss of reputation, including authorities (supervised entities within the PZU Group) Property; damage to the PZU Group’s image and brand. at the stage of development of the regulations (social • Directive of 15 May 2014 on markets in financial Reinsurance treaties in PZU consultations); instruments (MIFID 2) (this regulation is material for some On the base of the reinsurance treaties it has entered Compliance risk is monitored, in particular, through: • delegating representatives of the PZU Group’s supervised PZU Group entities, in particular for mutual funds (TFI)), into PZU limits its risk related to catastrophic losses (e.g. • analysis of reports obtained from the heads of entities to participate in the work of various commissions of • Act of 15 December 2017 on Distribution of Insurance; floods, cyclones) among others through a catastrophic organizational units and cells; regulatory authorities; • Act of 1 March 2018 on combating money laundering and non-proportional excess of loss treaty and related to the • monitoring of regulatory requirements and adaptation of • participation in implementation projects for new regulations; financing of terrorism; consequences of large single losses under non-proportional the business to the changing legal environment of PZU • training of staff in PZU Group entities in new regulations, • Act of 15 April 2005 on supplementary oversight over reinsurance treaties to protect its portfolios of property, Group entities; standards of conduct and recommended management credit institutions and insurance undertaking, reinsurance technical, marine, air, third party liability and third party • participation in legislative work aimed at amending the actions; undertakings and investment firms comprising a financial liability motor insurance. PZU’s risk is also limited by reinsuring existing laws of general application; • issuing opinions on internal regulations of PZU Group conglomerate. the financial insurance portfolio. • performing various activities in industry organizations; entities and recommending possible amendments to ensure
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Reinsurance premium under obligatory treaties in PZU Reinsurance premium under obligatory treaties in PZU The capital management policy rests on the following Capital adequacy ratio Q1 2019 2018 according to the Standard & Poor’s / AM Best rating Życie according to the S&P rating principles:
• the PZU Group’s capital management (including excess SCR capital) is conducted at the level of PZU as the parent 100% PZU Group* 225% 222% 39% A company; A • sustain target solvency ratios at the level of 200% for the PZU* 244% 240%
PZU Group, PZU and PZU Życie (according to Solvency II); PZU Życie* 458% 449% • maintain the PZU Group’s financial leverage ratio at a level MCR no higher than 0.35; • ensure funds for growth and acquisitions in the coming PZU Group* 364% 352% years; 61% PZU* 907% 890% AA • PZU will not issue any new shares for the duration of this PZU Życie* 1,017% 997% Policy. *unaudited data As at the end of Q1 2019, the estimated solvency ratio Q2 2019 2018 PZU’s reinsurance partners have high S&P ratings. That appropriate obligatory treaty. Reinsurance cover is provided (calculated according to the standard Solvency II equation) evidences the reinsurer’s robust financial position and affords for the most part by PZU, which transfers a portion of the was 225% and remained above the average solvency ratio for CRR the Company security. accepted risk outside the Group. European insurance groups. Pekao Group – total 17.3% 17.4% capital adequacy ratio PZU’s operations in inward reinsurance involves the PZU In Bank Pekao and Alior Bank, the capital adequacy ratio and Tier 1 15.8% 15.8% Group’s other insurance companies. The greater exposure to 6.7 Capital management the Tier 1 ratio were computed on the basis of Regulation protection of the Baltic companies, LINK4 and TUW PZUW is (EU) No. 575/2013 of the European Parliament and of the Alior Bank Group – total capital adequacy 15.8% 15.8% causing the PZU’s gross written premium by virtue thereof to On 3 October 2016, the PZU Supervisory Board adopted Council of 26 June 2013 on prudential requirements for credit ratio rise. a resolution (Current Report 61/2016 of 4 October 2016) to institutions and investment firms (CRR Regulation) and also Tier 1 12.9% 12.8% approve the PZU Group’s Capital and Dividend Policy for 2016- the various types of risk identified in the Internal Capital
In addition, PZU generates gross written premium on 2020 (“Policy”). No changes were made to the Policy in the Adequacy Assessment Process (ICAAP). inward reinsurance under its operations on the domestic first half of 2019. and international market, through facultative and obligatory reinsurance. The introduction of the Policy stemmed from the implementation, as of 1 January 2016, of Directive 2009/138/ Reinsurance treaties in PZU Życie EC of the European Parliament and of the Council of 25 Under the outward reinsurance treaty entered into by PZU November 2009 on the taking-up and pursuit of the business The Solvency II ratio for the PZU Group compared to European insurers Życie, the PZU Życie portfolio is protected against the of insurance and reinsurance (Solvency II), as amended, the accumulation of risk and it has protection for individual policies Insurance and Reinsurance Activity Act of 11 September 2015 with higher sums insured. and the expiration of the PZU Group’s Capital and Dividend 275% Solvency II ratio Average for European insurers Policy for 2013-2015 updated in May 2014. 250%
Its reinsurance partners have high S&P ratings. That evidences 225% the reinsurer’s robust financial position and affords the In accordance with the Policy, the PZU Group endeavors to do 200% Company security. the following: 175% • manage capital effectively by optimizing the usage of Reinsurance treaties in the PZU Group’s international capital from the Group’s perspective; 150% companies, LINK4 and TUW PZUW • maximize the rate of return on equity for the parent 125%
The PZU Group’s other insurance companies, i.e. Lietuvos company’s shareholders, in particular by maintaining the 100% NN Pru SJ P VIG PZU ASR RSA AXA CNP L&G Tryg
Draudimas, Lietuvos Draudimas Branch in Estonia, AAS Balta, level of security and retaining capital resources for strategic Aviva SCOR Aega s Aego n Allianz Talanx Sa mp o Phoenix Ge nerali Admiral Ha sting s Gj ensidige PZU Ukraine, LINK4 and TUW PZUW have reinsurance cover growth objectives through acquisitions; MunichRe Direct Line Direct T opd en mark aligned to the profile of their operations and their financial • ensure sufficient financial means to cover the Group’s Ha nnoverRe standing. Every material insurance portfolio is secured with the liabilities to its clients. Source: Reports of the companies. Q1 2019 data for Ageas, Allianz, AXA, CNP, Generali, Gjensidige, PZU, Munich Re, NN, RSA, Sampo, Scor, Topdanmark and Tryg; 2018 data for all other companies.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 100 101 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b 7.
PZU on the capital and debt markets
PZU was one of the 4 most liquid companies on WSE’s main market in H1 2019 representing 8.7% of trading volume. High liquidity also translates into a low spread between the buy and sell price of 5 basis points compared with a mean of 13 basis points for the twenty most heavily traded companies.
PZU’s market value at the end of June 2019 was PLN 37.7 billion (up 12.0% y/y).
In this chapter: 1. PZU’s share price 2. Banking sector 3. Debt financing 4. Distribution of the 2018 profit 5. Rating 6. Calendar of major corporate events in 2019
103 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU on the capital and debt markets
7.1 PZU’s share price same time, the plans of further interest rate increases were PZU’s growth rate (%) and trading volume versus WIG and WIG20 abandoned. PZU made its debut on the Warsaw Stock Exchange (WSE) on 12 May 2010. Since its floatation it has been included in The good sentiments among investors on global markets 120,00%+20% PLN 43.66 WSE’s most important index, namely WIG20 (calculated on the persistent until the beginning of May 2019 when President basis of the portfolio value of the 20 largest and most heavily Donald Trump announced that there was no progress in 110,00%+10% traded companies on WSE’s Main Market)1. PZU also belongs negotiations with China and that punitive duties were imposed.
to the following indices: WIG, WIG30, WIG-Poland, WIGdiv, This led to a wave of sell-offs on stock markets. The situation 100,00%0% WIG20TR, MSCI Poland (emerging markets), Stoxx Europe 600 changed during the FED meeting in June, which the markets PLN 38.98 (developed markets), FTSE Russel mid cap index (developed interpreted as a realistic possibility of returning to interest rate 90,00%-10% markets) as well as the sustainable development RESPECT cuts. At the end of the first half of 2019, a similar position was Index (since 2012). presented also by the European Central Bank, which withdrew 80,00%-20% from the normalization of its monetary policy and upheld its Q3 2018 Q4 2018 Q1 2019 Q2 2019 The last quarter of 2018 proved to be highly volatile and intention to keep the interest rates at least until mid-2020. The was accompanied by the deterioration of sentiments on the promise of greater liquidity increased appetite for risk and led PZU WIG WIG20 markets. On 19 December 2018, the FED (the central bank to the continuation of growth. Source: www.infostrefa.com of the USA) raised interest rates for the fourth time in 2018 and hinted at two further increases in 2019. The markets In H1 2019 a bullish drive on global markets bypassed Poland responded by rapid depreciation. Therefore, from the very where WIG20 rose by just 2.2% compared to emerging by changes in the MSCI Em index itself, which is a proxy index PZU’s shares traded in a price range of PLN 39.2 – PLN 45.4 in beginning of 2019, investors anticipated any signs and markets (MSCI EM up by 9.6%) or developed markets (MSCI for international investors (which are responsible for nearly H1 2019 (according to closing prices). The standard deviation directions for the continuation or change of this approach. The DM up by 16.4%) in the first 6 months of the year. However 60% of trading on the main market of the Warsaw Stock for PZU’s shares in H1 2019 was 12.5%, i.e. 6.6 pp more than trade war between the US and China and the policy of the in the longer perspective (12 months) WIG20 posted a 9.0% Exchange). At the end of 28 May 2019, Saudi Arabia was in the corresponding period of 2018. Compared to the broad European Central Bank remained in the background, but not growth, which was much higher than the other markets (MSCI added to the MSCI EM index, while Argentina was reclassified WIG market, PZU’s systematic risk expressed by the beta less important. EM up by 1.4%, MSCI DM up by 4.4%). In this context, PZU from Frontier Markets to Emerging Markets. Also, MSCI coefficient (PZU’s share price versus the WIG index for daily (in the period of 12 months) appreciated by as much as 12.0% increased the inclusion ratio of China A shares from 5 to 10%, changes) was 0.86 or 0.42 higher in H1 2019 than recorded in In the second part of March 2019, FED made a decision to (w/o dividends). doubling their weight in the index to slightly less than 2%. H1 2018. suspend the program of reducing the value of bonds held Another stage of changes was also announced for August starting in September 2019 (by reducing the purchases The lower rate of growth of the Polish market in H1 2019 2019. As a result, Poland’s share in the MSCI EM index (after starting in May from 30 to 15 billion USD per month). At the (compared to the MSCI EM index) could have been affected the second round of changes from the current ~1.06% to
1 WIG20 is a price index, i.e. it is calculated only by using the prices of the even ~1,00%, which according to analysts may result in the transactions related to it, without incorporating dividend income. overall supply of shares at the level of PLN 1 to 4 billion.
WIG20 versus the MSCI EM and DM and S&P500 market indices
+20% +20% +18% +16% PZU’s stock* 06.2019 2018 2017 2016 2015
+10% +10% +9% +10% P/BV 2.6x 2.5x 2.6x 2.2x 2.3x +8% Share price / book value per share +4% +2% + 0% + 0% -1% BVPS (PLN) 16.6 17.3 16.3 15.0 15.0 Book value per share
-10% -10% P/E 11.5x 11.8x 12.6x 14.8x 12.5x Price/earnings per share
-20% -20% EPS (PLN) 3.8 3.7 3.4 2.2 2.7 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q1-Q2 2019 Earnings per share / number of shares WIG20 MS CI EM ($ ) WIG20 MS CI EM ($ ) S&P500 ($) MS CI DM ($) S&P500 ($) MS CI DM ($) * Calculation based on the PZU Group’s data (according to IFRS); for the annual data the price per share and book value at yearend and net profit for 12 months; for the semi-annual data: the Source: www.infostrefa.com, www.msci.com price per share and book value at the end of the half of the year and the profit for 12 months (on a moving basis); the number of PZU shares: 863,523,000
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Trading liquidity 7.2 Banking sector PZU’s shares were highly liquid in H1 2019. PZU accounted for 8.7% of WSE’s overall trading volume (ranking 4th), while its average buy/sell spread for shares was a mere 5 basis points WSE-listed banks (the mean for the twenty most heavily traded companies was 13 basis points). PZU’s market value at the end of June 2019 40%140% 140,00%40% was PLN 37.7 billion (up 12.0% y/y).
20% 120,00%20% 120%
WIG Banki +9.5% WIG Banki +6.1% 0% PZU’s trading volume* / number of Capitalization of PZU / PZU’s Capitalization of WSE 100,00%0% PEO -1.1% 100% PEO +2.6% ALR -6.3% PZU transactions* trading value* -20% -20% 80,00% 8 0% ALR -25.5% 11,200 200 600,000600 000 50 1,380 -40% -40% 60,00% 6 0% 11,000 000 500,000500 000 Q3 2018 Q4 2018 Q1 2019 Q2 2019 40 1,129 1,162 Q1-Q2 2019 1,083 1,116 800800 400,000400 000 WI G BANKI WI G20 WIG Al ior Pek ao WI G BANKI Al ior Pek ao
Volume (thous.) 30 600600 300,000300 000 Market cap (PLN bn) (PLN cap Market
Turover value (PLN bn) 20 Source: www.infostrefa.com 400400 200,000200 000
10 200200 100 000
Number of transactions (thous.) 100,000 WSE-listed banks fund rose by 110% to PLN 2.0 billion, while the contribution 00 00 0 2015 2016 2017 2018 30.06 2015 2016 2017 2018 30.06 2015 2016 2017 2018 30.06 In H1 2019, the WIG Banks index has grown by 6.1% and to the deposit guarantee fund fell by 36% to PLN 0.8 billion. 2019 2019 2019 on the 12-month basis the growth was 9.5%. The improved It is important to note that the contribution to the desposit * moving average (12 months) sentiment in the banking segment resulted largely from the guarantee fund is the only one that is evenly distributed over Source: www.infostrefa.com, www.gpw.pl inflow of capital to WSE’s main indices, especially WIG20, four quarters, while the forced restructuring contribution is in which banks constitute more than 30%. The correlation accounted for fully in the first quarter. In the banks forming H1 2019 Q2 2019 between the WIG Banks index and the WIG20 index at the part of the PZU Group, Pekao and Alior, the contribution that Stock-related statistics H1 2018 H1 2019 / H1 2018 Q1 2019 Q2 2019 / Q1 2019 end of June 2019 was 90% (without changes y/y). Beta was fully charged to the first quarter rose by 157% (up to
Maximum price [PLN] 47.34 45.39 (4.1)% 45.39 44.47 (2.0)% (versus WIG20) was 0.95, i.e. an increase of 0.02 y/y. PLN 370 million) and 189% (up to PLN 110 million), respectively. The relatively high charges imposed on the Minimum price [PLN] 36.31 39.18 7.9% 40.23 39.18 (2.6)% The ratio-based valuation of the WIG Banks index at the end results of those banks (compared to the whole sector) affected Closing price on the last 38.98 43.66 12.0% 40.50 43.66 7.8% of H1 2019 (P/BV and P/E was 0.72 and 9.7, respectively) was their the weaker performance of their stock prices versus the trading session [PLN] lower than in the corresponding period of the previous year WIG Banks index. In the case of Alior Bank, the share price Average trading session price (P/BV and P/E was 0.84 and 10.0, respectively)2. The decline drop was additionally impacted by the fear for the condition of 41.95 42.28 0.8% 42.90 41.64 (2.9)% [PLN] in prices in the situation of very good business conditions the loan portfolio in the corporate segment, especially in the PLN volume liquidity (which included growing consumption and lending activity) context of the developing potential problems of two corporate 8,267,241 8,456,098 2.3% 4,809,322 3,646,776 (24.2)% [000s of PLN] reflected fears of the investors related to the persisting remote clients. Average PLN volume liquidity plans of interest rate increases by NBP, especially in the 67,213 68,749 2.3% 76,338 60,780 (20.4)% per session [000s of PLN] environment of easing of the monetary policy by the FED and The banks of the PZU Group (Alior Bank and Pekao) were Number of transactions ECB. responsible for nearly 11% of the trading volume on WSE’s 467,930 464,444 (0.7)% 255,401 209,043 (18.2)% [units] main market at the end of H1. Alior Bank’s share price at the
Average number of trades In the first quarter of 2019, the valuation of banks was end of June 2019 was PLN 49.8, down by 6.3% since the 3,804 3,776 (0.7)% 4,054 3,484 (14.1)% per session significantly affected by the decision of the Bank Guarantee beginning of the year. Bank Pekao’s share price in this period
Trading volume 197,917,506 199,887,098 1.0% 112,326,516 87,560,582 (22.0)% Fund concerning the level of contribution and its allocation rose by 2.6% (w/o dividends) reaching the price of PLN 111.8 among the individual banks. In 2019, the contribution for the (at the end of June 2019). On 26 June 2019, the Shareholder Average trading volume per 1,609,085 1,625,098 1.0% 1,782,961 1,459,343 (18.2)% entire sector increased by 27% (up to PLN 2.8 billion). Out Meeting of Pekao decided to pay out a dividend from the 2018 session (shares) of this amount, the contribution to the forced restructuring profit in the amount of PLN 1.73 billion, or PLN 6.6 per share. Capitalization at the end of 33,660,127 37,701,414 12.0% 34,972,682 37,701,414 7.8% the period [000s of PLN] 2 https://www.gpw.pl/pub/GPW/statystyki/statystyki_polroczne/20191_GPW.xls
Source: www.infostrefa.com
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 106 107 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU on the capital and debt markets
7.3 Debt financing Bank Pekao On 24 May 2019, the PZU’s Ordinary Shareholder Meeting 7.5 Rating On 8 May 2019, the Pekao Management Board adopted a adopted a resolution (in accordance with the PZU’s capital and PZU resolution giving consent to the issue of subordinated bond dividend policy3) to distribute PZU’s net profit for the financial Issuer rating PZU bonds: PLPZU0000037 for a total of PLN 2.25 billion issue with the total par value of no more than PLN 750 million. year ended 31 December 2018 in which it set a following Since 2004, PZU and PZU Życie have been subject to regular distribution of profit of PLN 2,712 million: reviews by the rating agency of S&P Global Ratings (S&P). The On 30 June 2017, PZU effected the largest issue of On 22 May 2019, the Pekao Management Board adopted • PLN 2,418 million as a dividend payout, i.e. PLN 2.80 per rating assigned to PZU and PZU Życie results from an analysis subordinated bonds (in Polish zloty) in the history of the a resolution on the issue of PLN 350 million D series share; of the financial information, competitive position, management Polish financial sector, while at the same time being the first subordinated bonds value with the following parameters: • PLN 7 million as an allowance to the Company Social and corporate strategy as well as country financial situation. issue in Poland complying with Solvency II requirements. The • interest rate: floating rate based on WIBOR6M plus a Benefit Fund; It also includes a rating perspective (an outlook), namely, an bonds with a nominal value of PLN 2.25 billion bear interest margin of 1.70%; • PLN 287 million as supplementary capital. assessment of the future position of the company in the event at WIBOR6M + 180 bps. The maturity date is 29 July 2027, or • issue format: 12NC7, i.e. bonds with a 12-year maturity specific circumstances occur. 10 years after the issue, with an option of early redemption 5 with the right to early redemption of bonds within 7 years The dividend record date was set for 14 August 2019 and the years after the issue date. of the issue date; dividend payment date was set for 5 September 2019. On 14 June 2019, S&P Global Ratings, a US-based rating • issue and redemption date: 4 June 2019 and 4 June 2031. agency raised PZU’s rating outlook from stable to positive. The bonds are listed on the Catalyst ASO WSE/Bondspot. PZU’s financial strength and credit rating remained at A-. The On 8 July 2019, Pekao received a decision of the Polish S&P analysts decided that the PZU Group has demonstrated The issue was effected with a view to supplementing PZU’s Financial Supervision Authority to classify 700 D series its capacity to generate good financial results, both historically equity, following the acquisition of a 20% stake in Bank subordinated bonds with the total par value of PLN 350 million and in comparison to its competitors. They also emphasized Pekao, in order to maintain the Solvency II ratio at a level not maturing on 4 June 2031 as instruments in the Bank’s Tier II the improving risk management practices resulting in greater lower than 200%, as defined in the PZU Group’s Capital and capital. capital resilience and high capital management discipline. The Dividend Policy. agency’s report also refers to PZU’s excellent position on the insurance, banking and asset management market, which will PZU bonds: XS1082661551 for a total of EUR 850 million 7.4 Distribution of the 2018 profit allow it to use this advantage in order to continue generating
(redeemed on 3 July 2019) 3 On 3 October 2016 the PZU Supervisory Board adopted a resolution (Current good financial results, strengthening the fundamentals and On 15 January 2019 the Polish Financial Supervisory Report 61/2016 of 4 October 2016) to approve the PZU Group’s Capital and improving its position in the entire sector. Dividend Policy for 2016-2020. The PZU Group (through its wholly-owned subsidiary, PZU Authority took a stance on the dividend policy of insurance Finance AB) issued Eurobonds totaling EUR 850 million, listed and reinsurance undertakings. As recommended by the on the Official List, Main Securities Market of the Irish Stock regulatory authority, dividends could be paid only by insurance Dividend paid by PZU from its earnings for the 2015 - 2018 financial years Exchange and on the Catalyst ASO WSE/Bondspot market. undertakings meeting certain financial criteria. At the same The listed series of the bonds (PZU0719) consisted of two time, the dividend payout should be limited to no more than H1 assimilated series (under a single ISIN code: XS1082661551) 75% of the profit earned in 2018, while the coverage of the 2019 2018 2017 2016 2015 with a nominal value of EUR 500 and 350 million issued on capital requirement for the quarter in which the dividend was Consolidated profit of the parent 3 July 2014 and 16 October 2015, respectively. distributed should be maintained at no less than 110%. 1,481 3,213 2,895 1,935 2,343 company (in PLN m)
The liabilities arising from the bonds were secured by At the same time, the KNF permitted a dividend payout equal PZU SA’s standalone profit (in PLN m) 1,827 2,712 2,434 1,573 2,249
a guarantee extended by PZU. The bonds bore interest at to the entire profit earned in 2018 provided that the capital Dividend paid for the year (in PLN m) - 2,418 2,159 1,209 1,796 a fixed rate of 1.375% per annum. The coupon was paid once requirement coverage (after expected dividends are deducted Dividend per share for the year (PLN) - 2.80 2.50 1.40 2.08 a year. The bonds were redeemed on 3 July 2019. from own funds) as at 31 December 2018 and for the quarter when the dividend is paid, is at least 175% for insurance Dividend per share on the date of record 2.80 2.50 1.40 2.08 3.00 (PLN) Alior Bank companies operating in section I and at least 150% for In H1 2019, Alior Bank did not conduct any public or private insurance companies operating in section II. Dividend payout ratio from the parent - 75.3% 74.6% 62.5% 76.7% issues of its bonds. company’s profit*** The KNF also recommended that the undertakings that satisfy (a) Movement in the share price y/y (0.6)% 4.1% 26.9% (2.4)% (30.0)% the above criteria, when deciding on the level of dividends, (b) Dividend yield during the year (%) * - 5.9% 4.2% 6.1% 6.2% should take into account the additional capital needs within
the period of twelve months from the approval date of the * ratio calculated as dividend (as at the record date) to the share price at the end of the previous financial year 2018 financial statements, which may result, among others, Source: PZU’s data from changes in the market and legal environment.
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At the same time, S&P stated that the rating may increase 3% in 2019-2002, at 1.5% in 2019 and 2.6% subsequently. PZU rating over the period of the next 12-18 months, provided that According to the agency, the ratio of debt of the general stability of management and good financial results are government sector to GDP in 2019-2022 will be kept below Currently Previously maintained (including high profitability in non-life and life 50%4. Rating and Rating and insurance). Other conditions included maintenance of stable Country outlook Updated on outlook Updated on level of risk in the PZU Group and capital adequacy at least at the level of AA and the capacity to pass the stress test (S&P). PZU
Financial strength rating A- /Positive/ 14 June 2019 A- /Stable/ 27 October 2017 Sovereign rating On 12 April 2019, S&P announced its decision to affirm Credit rating A- /Positive/ 14 June 2019 A- /Stable/ 27 October 2017 Poland’s rating at A-/A-2 for long- and short-term liabilities PZU Życie in foreign currency, respectively, and at A/A-1 for long- and short-term liabilities in the domestic currency, respectively. Financial strength rating A- /Positive/ 14 June 2019 A- /Stable/ 27 October 2017 The rating outlook remained stable. Credit rating A- /Positive/ 14 June 2019 A- /Stable/ 27 October 2017
When justifying the affirmation of the rating, S&P pointed to, TUW PZUW among other things, diversified economy, qualified employees, Financial strength rating A- /Positive/ 14 June 2019 A- /Stable/ 25 June 2018 manageable levels of public and private debt or membership
in the European Union. The agency also noted the good fiscal Source: S&P Global Ratings position of the state budget in 2018. As one of the reasons for the low budget deficit, it pointed to the high growth of tax revenue that resulted, among others, from the good situation Bank Pekao’s financial creditworthiness ratings on the labor market. The agency also noted the significant Bank Pekao cooperates with three leading rating agencies: progress in the closing of the VAT gap. S&P projects the Fitch Ratings, S&P Global Ratings and Moody’s Investors
deficit of the general government sector to GDP at less than 4 Service. In the case of the first two agencies, the ratings are https://www.gov.pl/web/finanse/sp-potwierdza-dotychczasowy-rating-polski prepared upon the Bank’s commission based on contracts. The Bank however has signed no agreement with Moody’s Poland’s rating Investors Service and the rating process is conducted on the basis of publicly available information and review meetings. Currently Previously On 30 June 2019 Bank Pekao’s financial creditworthiness Rating and Rating and Country outlook Updated on outlook Updated on ratings were as follows:
Republic of Poland
Credit rating (long-term in local A /Stable/ 12 October 2018 A- /Positive/ 13 April 2018 currency) Rating (Fitch) Bank Pekao Poland Credit rating (long-term in BBB+ A- /Stable/ 12 October 2018 13 April 2018 foreign currency) /Positive/ Issuer’s long-term rating (IDR) BBB+ A-
Credit rating (short-term in local A-1 12 October 2018 A-2 13 April 2018 Issuer’s short-term rating (IDR) F2 F2 currency) Viability rating bbb+ - Credit rating (short-term in A-2 13 April 2018 A-2 13 April 2018 foreign currency) Support rating 5 -
Source: S&P Global Ratings Minimum support rating No support -
Outlook Stable Stable
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 110 111 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b PZU on the capital and debt markets
On 17 June 2019, the S&P Global Ratings agency (“S&P”) Alior Bank’s rating raised Pekao’s rating outlook from stable to positive and raised On 30 January 2019 Fitch Ratings lowered the Alior Bank’s the stand-alone credit profile from “bbb” to “bbb+”. The long- ratings outlook from positive to stable. term rating stayed at the same level of BBB+.
Fitch Ratings Alior Bank Poland Rating (S&P Global Ratings) Bank Pekao Poland Issuer’s long-term rating (IDR) BB A- Long-Term Foreign Currency Rating BBB+ A- Issuer’s short-term rating (IDR) B F2 Long-Term Domestic Currency Rating BBB+ A Viability rating bb - Short-Term Foreign Currency Rating A-2 A-2 Support rating 5 - Short-Term Domestic Currency Rating A-2 A-1 Minimum support rating 'No Floor' - Standalone rating bbb+ - Outlook Stable Stable Outlook Positive Stable
S&P Global Ratings (counterparty rating in the event of forced restructuring) On 16 January 2019 S&P Global Ratings assigned Alior Bank a Long-Term Issuer Credit Rating of ‘BB’ with a stable outlook and Long-Term Foreign Currency Rating for liabilities A- - a short-Term Issuer Credit Rating of ‘B’. Short-Term Foreign Currency Rating for liabilities A-2 -
Long-Term Domestic Currency Rating for liabilities A- - S&P Global Ratings Alior Bank Poland Short-Term Domestic Currency Rating for liabilities A-2 - Long-Term Foreign Currency Rating BB A-
Long-Term Domestic Currency Rating BB A Moody's Investors Service Ltd. (ratings not procured by the bank) Bank Pekao Poland Short-Term Foreign Currency Rating B A-2 Long-term deposit rating in foreign currencies A2 A2 Short-Term Domestic Currency Rating B A-1 Short-term deposit rating Prime-1 Prime-1 Standalone rating bb- - Baseline Credit Assessment baa1 - Outlook Stable Stable Long-term Counterparty Credit Risk Rating A1(cr) -
Short-term Counterparty Credit Risk Rating Prime-1(cr) -
Outlook Stable Stable
Long-term Counterparty Risk Rating A1 -
Short-term Counterparty Risk Rating Prime-1 -
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7.6 Calendar of corporate events in 2019
31 MARCH
PZU Group’s financial statements (2018) and an update to the 2017-2020 Strategy
14 MAY
PZU Group’s financial statements (Q1 2019)
24 MAY
PZU SA’s Ordinary Shareholder Meeting (Warsaw / online)
14 AUGUST
Record date for dividends from 2018 earnings
29 AUGUST
PZU Group’s financial statements (Q2 2019)
05 SEPTEMBER
Dividend payment date from 2018 earnings (PLN 2.80 per share)
14 NOVEMBER
PZU Group’s financial statements (Q3 2019)
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 114 115 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b 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
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8.1 Audit firm auditing the financial In recent years, PZU’s additional cooperation with KPMG A notification pertaining to movement in the equity stake PZU’s shareholder structure as at 30 June 2018 statements Audyt has covered, without limitation, audits of solvency held in PZU SA by the NN open-end pension fund and the NN
and financial standing reports required by the Solvency II voluntary pension fund was transmitted to PZU on NN OFE and NN DFE On 23 May 2019, the PZU Supervisory Board again selected Directive. 24 July 2019. This notification indicated that as a result of 5% State Treasury KPMG Audyt Spółka z ograniczoną odpowiedzialnością Sp.k. a transaction to sell PZU shares settled on 18 July 2019, NN 34% with its registered office in Warsaw, ul. Inflancka 4A, 00- open-end pension fund decreased its shareholding in PZU from 189 Warsaw, entered by the National Chamber of Statutory 8.2 PZU’s share capital and its 43,995,060 shares to 41,985,060, ie. below 5% of PZU’s share Auditors on the list of audit firms under no. 3546 as the audit shareholders; shares held by members of capital. Thus the funds managed by Nationale-Nederlanden company to review and audit the financial statements of PZU its governing bodies Powszechne Towarzystwo Emerytalne S.A.: NN open-end SA and the PZU SA Group for the financial years 2019-2020. pension fund and NN voluntary pension fund decreased their On 30 June 2015, PZU’s Ordinary Shareholder Meeting shareholding in PZU from 44,010,060 shares, representing Others 61% The scope of the concluded agreement encompasses the adopted a resolution to split all PZU shares by decreasing 5.10% of PZU’s share capital and giving it the right to following in particular: the par value of each share from PLN 1 to PLN 0.10 and 44,010,060 votes at Shareholder Meeting to 42,000,060 Source: Current Report 21/2018 (data rounded to the nearest integer) • auditing PZU’s annual standalone financial statements and increasing the number of shares making up the share capital shares, representing 4.86% of PZU’s share capital and giving the PZU Group’s annual consolidated financial statements; from 86,352,300 to 863,523,000. The split was effected by the right to 42,000,060 votes at the Shareholder Meeting. • reviewing PZU’s interim standalone financial statements exchanging all the shares at a ratio of 1:10. The share split did PZU’s shareholder structure as at 30 June 2019 and the PZU Group’s interim consolidated financial not affect the amount of PZU’s share capital. The PZU Management Board does not have any information statements. about executed agreements as a result of which changes NN OFE and NN DFE On 3 November 2015 the District Court for the capital city may transpire in the future in the equity stakes held by its 5% Main assumptions underlying the policy for selecting of Warsaw, 12th Commercial Division of the National Court shareholders to date. State Treasury 34% the audit firm. Register registered the pertinent amendment to PZU’s Articles The following are among the main assumptions underlying of Association. PZU did not issue, redeem or repay any debt or equity PZU’s policy for selecting the audit firm: securities that would provide its shareholders with special • ensuring that the process of selecting the audit firm is done On 24 November 2015, at PZU’s request, the Management control rights. correctly and determining the responsibility and the duties Board of the National Depository for Securities (Krajowy
of the participants in this process, Depozyt Papierów Wartościowych, “KDPW”) adopted In 2013-2018 as well as in H1 2019 PZU did not have any Others 61% • analyzing when selecting the audit firm the resolution no. 789/15 on setting 30 November 2015 as the employee share programs in place. recommendations given by the Audit Committee, date of splitting 86,348,289 PZU shares with a par value of Source: Current Report 19/2019 • giving consideration to the rule of rotating the audit firm PLN 1 each into 863,482,890 PZU shares with a par value of According to the Articles of Association, the shareholders’ (data rounded to the nearest integer) and the key statutory auditor in the embraced time horizon. PLN 0.10 each. voting rights have been limited in such a manner that no shareholder may exercise more than 10% of the total The main assumptions underlying the Policy for the provision Accordingly, PZU’s share capital is divided into 863,523,000 number of votes in existence in PZU at its Shareholder PZU’s shareholder structure as at 18 July 2019 of permitted non-audit services by the audit firm conducting ordinary shares with a par value of PLN 0.10 each giving the Meeting on the date of holding a Shareholder Meeting subject the statutory audit, by entities related to this audit firm and by right to 863,523,000 votes at the Shareholder Meeting. to the reservation that for the purposes of determining a member of the audit firm’s network: the obligations of the buyers of significant equity stakes State Treasury 34% • ensuring correctness in the process of procuring permitted As at 30 June 2019 the State Treasury and the funds contemplated by the Act on Public Offerings and the Insurance services; managed by Nationale-Nederlanden Powszechne Towarzystwo Activity Act, such limitation of voting rights shall be deemed • determining the responsibility and the duties of the Emerytalne S.A.: Nationale-Nederlanden Otwarty Fundusz not to exist. The restriction on voting rights does not apply to participants in this process; Emerytalny („OFE”, Open-end Pension Fund) and Nationale- the following: • defining the catalogue of permitted services; Nederlanden Dobrowolny Fundusz Emerytalny („DFE”, • shareholders who on the date of adopting the Shareholder Others • establishing the procedure for procuring permitted services. Voluntary Pension Fund) were PZU shareholders holding Meeting resolution implementing this limitation were 66% significant equity stakes in PZU. entitled to shares representing more than 10% of the total In 2019 the audit firm auditing the financial statements number of votes; rendered permitted non-audit services to PZU. The Company The State Treasury holds 295,217,300 shares representing • shareholders acting with the shareholders specified in the Source: Current Report 19/2019 conducted an assessment of the audit firm’s independence 34.19% of PZU’s share capital giving the right to 295,217,300 item above pursuant to executed agreements pertaining to (data rounded to the nearest integer) and the PZU Supervisory Board consented to the rendering of votes at the Shareholder Meeting. jointly exercising the voting rights attached to shares. the foregoing services.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 118 119 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Corporate governance
For the purpose of limiting voting rights, the votes of Shares or rights to shares held by members of shareholders among whom there is a parent or subsidiary management or supervisory bodies and PZU Group relationship are totaled in accordance with the rules described Directors in the Articles of Association. As at the date of publication of this Activity Report, only Tomasz Kulik, Member of the PZU Management Board held In the event of doubt, the provisions regarding the restriction 2,847 PZU shares, which the Company reported in current on voting rights are subject to interpretation according to report 23/2018. There were no any changes in the ownership Article 65 § 2 of the Civil Code GLOSSARY. of PZU’s shares or rights to the shares by the members of the Management Board or the Supervisory Board or the Directors In line with PZU’s Articles of Association, the said voting of the Group in the period from the date of publication of restrictions will expire starting from the moment when a share Activity Report for Q1 2019. of a shareholder who, at the date of adopting a resolution of the Shareholder Meeting introducing the restriction, held shares carrying the right to more 10% of the total number of votes in the Company drops below 5% of the share capital.
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Other
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Truthfulness and accuracy of the presented financial to the Tax Office for the CIT tax due from PZU’s overall Tax Assessment of the performance of investment-related This Report on the PZU Group’s Activity in H1 2019 has 125 statements Group, while the member companies transfer the amount they intentions consecutively-numbered pages. To the best knowledge of the PZU Management Board, the owe in advance payments to PZU’s specified bank account. PZU is in a very good financial standing and satisfies all the PZU Group’s consolidated financial statements and comparative safety criteria imposed by the legal regulations and the Polish data have been prepared in line with the prevailing accounting Purchase of treasury shares in the financial year Financial Supervision Authority. Signatures of PZU Management Board Members principles, and honestly, accurately and clearly reflect the PZU Within its trading activity Bank Pekao enters into transactions Group’s and the Issuer’s assets and financial position as well as on PZU shares and forward contracts. As at 30 June 2019 The Issuer’s stable rating outlook confirms that PZU has their financial result, and that the Management Board’s report Bank Pekao held 10,214 PZU shares. a strong business position, has a high level of equity, and on the PZU Group’s activity shows a true picture of the PZU is well-poised to achieve its intentions when it comes to Group’s and the Issuer’s development, results and position, As at 30 June 2019 consolidated funds held 199,205 thousand investments. including a description of the major threats and risks. PZU shares. Financial forecasts Paweł Surówka – President of the Management Board Information about significant agreements between PZU did not hold any treasury shares as at 30 June 2019. The PZU Group has not published any forecasts of its financial shareholders results. The PZU Management Board does not have any information Granted and received guarantees and sureties about agreements executed until the date of publication of this In H1 2019 neither PZU nor its subsidiaries granted any Disputes Report on the activity of the PZU Group among shareholders sureties for a loan or borrowing or guarantees to any single In H1 2019 and by the date of signing this report on the PZU Adam Brzozowski – Management Board Member as a result of which changes may transpire in the future in the entity or any subsidiary of such an entity where the total Group’s activity, the PZU Group companies were not involved percentages of shares held by its shareholders to date. amount of outstanding sureties or guarantees would be in any proceedings conducted before a court, an arbitration significant. body or a public administration authority which concerned any Information about significant executed agreements liabilities or receivables of PZU or any of its direct or indirect In H1 2019 no significant contracts were executed in respect On 8 November 2017, PZU executed a mandate contract subsidiaries the unit value of which would be material, save Marcin Eckert – Management Board Member of the Issuer’s operations. with Alior Bank on periodic granting of insurance guarantees for the issues described in the condensed interim consolidated constituting unfunded credit protection and a framework financial statements for the 6 months ended 30 June 2019. In 2017 PZU issued subordinated bonds with a nominal value mandate agreement on the periodic granting of counter- of PLN 2.25 billion. The bond redemption date is 29 July 2027 guarantees (Current Report No. 64/2017). The maximum As at 30 June 2019, the value of the subject matter of the with an early repayment option on 29 July 2022. SECTION 7.3 exposure limit for guarantees is PLN 5 billion (say: five billion litigation in all the 238 417 cases pending before courts, Elżbieta Häuser – Schöneich – Management Board Member DEBT FINANCING Polish zloty) and is in force for a period of 3 years. arbitration bodies or public administration authorities in which PZU Group entities take part, was PLN 8 048 million. Related party transactions on non-arm’s length Information regarding the off-balance sheet items as at the PLN 4 246 million of that amount pertains to liabilities and conditions end of H1 2019 is set forth in SECTION 5.6 PZU GROUP’S PLN 3 802 million to the accounts receivable of PZU Group In H1 2019, neither PZU nor its subsidiaries executed any ASSET AND LIABILITY STRUCTURE companies. Tomasz Kulik – Management Board Member transaction with their related parties which were of material significance individually or collectively and were executed on Seasonal or cyclical business Estimates of the provision amounts for individual cases take non-arm’s length conditions. PZU’s business is not seasonal or cyclical to an extent that into account all information available on the date of publishing would justify application of the suggestions set forth in the this report; however, this figure may change in the future. Tax Group International Financial Reporting Standards. Maciej Rapkiewicz – Management Board Member The tax group agreement for fiscal years 2018-2020 was signed on 20 September 2017. According to the agreement, Rules of preparation the tax group consists of PZU, PZU Życie, LINK4, PZU CO, PZU The rules of preparation of the condensed interim consolidated Pomoc, Ogrodowa-Inwestycje, PZU Zdrowie, PZU Finanse, PZU financial statements have been described in the PZU Group’s LAB, Ipsilon, Omicron Bis, Tulare Investments and Battersby interim consolidated financial statements. Małgorzata Sadurska – Management Board Member Investments. Assessment of the management of financial resources, Under the tax group agreement, PZU is the parent company including the capacity to satisfy the assumed liabilities representing the tax group. Pursuant to art. 25 section 1 of and specification of possible threats and actions taken Warsaw, 28 August 2019 the CIT Act, the Tax Group performs settlements with the or to be taken by the Issuer to counter these threats. Tax Office on a monthly basis. PZU makes advance payments
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 124 125 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b 11. Attachment: Glossary of terms
127 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Attachment: Glossary of terms
insurance agent – commercial undertaking conducting IDD – Directive (EU) 2016/97 of the European Parliament and GDPR – Regulation (EU) 2016/679 of the European Solvency II – a solvency system for European insurance agency activity pursuant to an agreement executed with of the Council of 20 January 2016 on insurance distribution Parliament and of the Council of 27 April 2016 on the undertakings taking the risk profile into account. These an insurance undertaking. The activity of agents focuses (Insurance Distribution Directive) protection of natural persons with regard to the processing of requirements have been in force since 1 January 2016 on acquiring customers, entering into insurance contracts, personal data and on the free movement of such data, and participating in the administration and performance of IPO (Initial Public Offering) – public offering of specific repealing Directive 95/46/EC spread – a solvency system for European insurance insurance agreements and organizing and supervising agency securities performed for the first time. One of the most undertakings taking the risk profile into account. These activity important elements of an initial public offering is the CRR Regulation – Regulation (EU) No. 575/2013 of the requirements have been in force since 1 January 2016 preparation of a prospectus and the proceeding before the European Parliament and of the Council of 26 June 2013 on assurbanking – distribution of banking products by insurance institution supervising admission to be traded publicly prudential requirements for credit institutions and investment risk-free rate – rate of return on financial instruments with companies firms zero risk. In PZU the risk-free rate is based on the yield curves cc – The Act of 23 April 1964 - Civil Code for treasuries and it is the basis for determining transfer prices bancassurance – distribution of insurance company products Regulation on Current and Periodic Information – in settlements between operating segments by the bank ccc – The Act of September 15, 2000 the Code of Commercial Finance Minister’s Regulation of 19 February 2009 on Current Companies and Periodic Information Transmitted by Securities Issuers and sum insured – amount in cash for which an insured object insurance broker – entity holding a permit to conduct the Conditions for Recognizing the Information Required by the is insured. In non-life insurance the sum insured ordinarily brokerage activity. Performs activities on behalf or in favor of ECP – Employee Capital Plans defined by the provisions of the Regulations of a Non-Member State as Equivalent (Journal of constitutes the upper limit of the insurer’s liability an entity seeking insurance cover Act of 4 October 2018 on employee capital plans Laws of 2009, No. 33 Item 259, as amended) TSR (Total Shareholder Return) – measure specifying COR – Combined Ratio – calculated for the non-life insurance PRIIP – Commission Delegated Regulation (EU) 2017/653 of credit scoring – method for assessing the credibility of an the total rate of return obtained by shareholders by virtue of sector (section II). This is the ratio of insurance expenses 8 March 2017 supplementing Regulation (EU) No. 1286/2014 entity (usually a natural person or a business) applying for holding shares in a given company during an annual period. related to insurance administration and the payment of claims of the European Parliament and of the Council on key a bank loan. The result of credit scoring is ordinarily presented This measure expresses the sum total of profit stemming from (e.g. claims, acquisition and administrative expenses) to the information documents for packaged retail and insurancebased in the form of a score – the higher the number of points, the the movement in the share price of a given company and net earned premium for a given period investment products greater the credibility of a prospective borrower the dividends paid during the time when an investor holds its shares in relation to its share value at the beginning of a given cross-selling – a sales strategy for selling a given insurance reinsurance – transfer to some other insurance undertaking sell side – part of the financial sector involved in creating, year. It is expressed as a percentage on an annualized basis product in combination with a complementary insurance – the reinsurer – of all or part of the insured risk or class of promoting and selling equities, bonds, foreign currencies and product or an insurer’s partner’s product, e.g. a bank’s risks along with the pertinent portion of the premiums. As a other financial instruments; it includes investment bankers ICP – Insurance Capital Fund, a separate asset fund product. Bancassurance products such as credit insurance may result of reinsurance, a secondary split of risks transpires to who act as intermediaries between securities issuers and constituting a provision created from insurance premiums, serve as an example minimize the risks to the insurance market investors as well as market makers who provide liquidity on invested in the manner specified in the insurance contract, the market. Sell-side analysts release research reports with a component of life insurance with an insurance capital fund P/BV (Price to Book Value) – multiple specifying the ratio outward reinsurance – reinsurance activity whereby the investment recommendations and daily comments for the (ICP), also referred to as an investment policy of the market price to the book value per share insurer (cedent) transfers a portion of the concluded insurance buy side, i.e. for asset managers. Research reports pertain to to a reinsurer or reinsurers in the form of a reinsurance companies that are already public and to companies that are Statutory Auditor Act – Act z 7 May 1999 roku on Statutory P/E (Price to Earnings) – multiple specifying the ratio of agreement being floated on an exchange or that are conducting additional Auditors and their Self Regulation, Entities Authorized to Audit the company’s market price (per share) to earnings per share rights offerings Financial Statements and Public Supervision (Dz. U. 2009 nr 77 inward reinsurance – reinsurance activity whereby poz. 649 z póżn zm.) DPS (Dividend Per Share) – market multiple specifying the a reinsurer or reinsurers accept a portion of insurance or gross written premium – the amounts of gross written dividend per share a class of insurance transferred by a cedent premiums (net of the reinsurer’s share) due by virtue of UOKiK – Office of Competition and Consumer Protection. the insurance contracts executed in the reporting period, The shaping of anti-monopoly policy and consumer protection DY (Dividend Yield) – market multiple specifying the ratio of technical provisions – provisions that should ensure full notwithstanding the term of liability stemming from these policy is one of the powers of the President of the Office the dividend per share to the market share price coverage of current and future liabilities that may result from agreements of Competition and Consumer Protection, inter alia, by executed insurance contracts. The following, in particular, are conducting anti-monopoly proceedings in cases of practices EPS (Earnings Per Share) – market multiple specifying for accounting purposes part of technical provisions: provision net earned premium – the gross written premium in a given limiting competition and in cases of practices violating the earnings per share for unearned premiums, provision for outstanding claims and period giving consideration to the settlement of revenues collective interests of consumers, www.uokik.gov.pl benefits, provision for unexpired risks, provision for investment (premiums) over time through movement in the provisions for risk borne by policyholders and provision for bonuses and unearned premiums and the reinsurers’ share Insurance Activity Act – Act of 11 September 2015 on discounts for insureds Insurance and Reinsurance Activity (Journal of Laws of 2015,
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 128 129 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Attachment: Glossary of terms
Item 1844, as amended), with most regulations in force as of 1 January 2016. This Actintroduced Solvency II requirements in the Polish legal system
WIBOR6M – reference interest rate for a loan for 6 months on the Polish interbank market
Cost/Income ratio (C/I; banking sector) – quotient of administrative expenses and the sum of operating income, excluding: the BFG charge, the levy on other financial institutions and the net result on realization and impairment losses on investments
solvency ratio – statutory multiple (under Solvency II) specifying the level of capital security for the operations conducted by an insurer; by law this multiple should be higher than 100%
leverage ratio of PZU Group – quotient of the debt from long-term financial liabilities (excl. bank deposits, deposit These Financial Statements contain forward-looking statements concerning the strategic operations. Such forward-looking certificates and credit received in connection with the statements are exposed to both known and unknown types of risks, involve uncertainties and are subject to other significant preferential financing of loans) and the sum of: debt from factors which may cause that the actual results, operations, or achievements of PZU Group considerably differ from future results, long-term financial liabilities and PZU Group’s equity less: operations, or achievements expressed or implied in the forwards-looking statements. The statements are based on a number of the value of intangible assets, deferred acquisition costs assumptions concerning the current and future business strategy of PZU Group and the external environment in which the Group and deferred tax assets, which have been presented in will operate in the future. PZU expressly waives any and all obligations or commitments concerning distribution of any updates consolidated financial statements of PZU Group or adjustments to any of the assumptions contained in these Management Board’s report on the activity of the PZU Group and PZU, which shall aim to reflect the changes in PZU expectations or changes in events, conditions, or circumstances on which prudent person principle – principle expressed in article a given assumption has been made, unless provisions of the law provided otherwise. PZU stipulates that the forwardlooking 129 of the Solvency II Directive of the European Parliament statements do not constitute a guarantee as to the future results, and the company’s actual financial standing, business strategy, and of the Council on the Taking-up and Pursuit of the management plans and objectives concerning the future operations may considerably differ from those presented or implied in Business of Insurance and Reinsurance that imposes on such statements contained in these Management Board’s report on the activity of the PZU Group and PZU. Moreover, even if the insurance undertakings and reinsurance undertakings the PZU Group’s financial standing, business strategy, management plans and objectives concerning the future operations comply requirement of investing assets in the policyholders’ best with the forward-looking statements contained in these Management Board’s report on the activity of the PZU Group and PZU, interest, properly matching investments to liabilities and such results or events may not be treated as a guideline as to the results or events in the subsequent periods. PZU does not duly incorporating the various types of financial risk, such as undertake to publish any updates, changes, or adjustments to information, data or statements contained in these Management liquidity risk and concentration risk Board’s report on the activity of the PZU Group and PZU if the strategic operations or plans of
PZU shall change, or in the case of facts or events that shall affect such operations or plans of PZU, unless such an obligation to inform resulted from applicable provisions of the law.
PZU Group is not liable for the effects of decisions made following the reading of the Management Board’s report on the activity of the PZU Group and PZU.
At the same time, these Management Board’s report on the activity of the PZU Group and PZU may not be treated as a part of a call or an offer to purchase securities or make an investment. The Management Board’s report on the activity of the PZU Group and PZU does not constitute also an offer or a call to effect any other transactions concerning securities.
MANAGEMENT BOARD’S REPORT ON THE ACTIVITY 130 131 OF THE PZU GROUP IN H1 2019 WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b
Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group
Condensed interim consolidated financial statements for the 6 months ended 30 June 2019
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019
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 ...... 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 ...... 27 3. Key accounting policies, key estimates and judgments ...... 29 4. Information about major events that materially influence the structure of financial statement items ...... 36 5. Corrections of errors from previous years ...... 36 6. Material events after the end of the reporting period ...... 36 7. Supplementary notes to the condensed interim consolidated financial statements ...... 37 8. Financial assets securing receivables, liabilities and contingent liabilities ...... 66 9. Contingent assets and liabilities ...... 66 10. Equity management ...... 67 11. Segment reporting ...... 68 12. Issues, redemptions and repayments of debt securities and equity securities...... 78 13. Default or breach of material provisions of loan agreements ...... 78 14. Granting of sureties or guarantees for loans or borrowings by PZU or its subsidiaries ...... 78 15. Dividends ...... 79 16. Disputes ...... 79 17. Other information ...... 83
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (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 2018.
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 2019. 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 2019 31 December 2018 30 June 2019 30 June 2018 Euro 4.2880 4.2395 4.2520 4.3000 British pound 4.9130 4.8179 4.7331 4.7895 Ukrainian hryvnia 0.1412 0.1324 0.1427 0.1357
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 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.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Discontinued operations
In the 6-month period ended 30 June 2019, the PZU Group companies did not discontinue any significant type of activity.
Seasonal or cyclical business
The PZU Group’s business is neither seasonal nor subject to business cycles to a significant extent.
Glossary
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. Falck CM – Falck Centra Medyczne sp. z o.o. Alior Bank Group – Alior Bank with its subsidiaries listed in section 1.2. Pekao Group – Pekao with its subsidiaries listed in section 1.2. Link4 – Link4 Towarzystwo Ubezpieczeń SA. Pekao – Bank Pekao SA. PZU, parent company – Powszechny Zakład Ubezpieczeń Spółka Akcyjna. 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. 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 standalone financial statements for 2018 – annual standalone financial statements of Powszechny Zakład Ubezpieczeń Spółka Akcyjna for 2018 prepared in accordance with PAS, signed by the PZU Management Board on 12 March 2019. KNF – Polish Financial Supervision Authority. Commercial Company Code – Act of 15 September 2000 entitled Commercial Company Code (consolidated text: Journal of Laws of 2019, Item 505). IFRS – International Financial Reporting Standards, as endorsed by the European Commission, published and in force as at 30 June 2019. NBP – National Bank of Poland; POCI – Purchased or originated credit-impaired financial assets PAS – Accounting Act of 29 September 1994 (consolidated text: Journal of Laws of 2019 Item 351) and regulations issued thereunder. IASB – International Accounting Standards Board.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
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). PZU Group’s consolidated financial statements for 2018 – consolidated financial statements of the PZU Group prepared in accordance with IFRS for the year ended 31 December 2018. KNF Office – Office of the Polish Financial Supervision Authority. UOKiK – Office of Competition and Consumer Protection. BGF Act – Act of 10 June 2016 on the Bank Guarantee Fund, Guaranteed Deposits System and Forced Restructuring (consolidated version: Journal of Laws of 2019, item 795, as amended). Insurance Activity Act – Act of 11 September 2015 on Insurance and Reinsurance Activity (consolidated version: Journal of Laws of 2019 Item 381, as amended). OSM PZU – Ordinary Shareholder Meeting of PZU.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (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 2018 30 June 2018 30 June 2019 30 June 2019 (restated) 1) (restated) 1) Gross written premiums 7.1 5,938 11,839 6,050 11,881 Reinsurers’ share in gross written premium (137) (239) (285) (336) Net written premiums 5,801 11,600 5,765 11,545 Movement in net provision for unearned premiums (59) (266) (169) (491) Net earned premiums 5,742 11,334 5,596 11,054
Revenue from commissions and fees 7.2 1,032 1,993 1,033 2,030 Net investment income 7.3 3,181 6,234 2,484 5,153 Net result on realization of financial instruments and 7.4 54 107 9 71 investments Movement in allowances for expected credit losses and 7.5 (704) (1,043) (375) (812) impairment losses on financial instruments Net movement in fair value of assets and liabilities 0 93 347 476 401 measured at fair value Other operating income 7.7 388 757 306 795
Claims, benefits and movement in technical provisions (4,013) (8,124) (3,773) (7,504) Reinsurers’ share in claims, benefits and movement in 42 195 54 159 technical provisions Net insurance claims and benefits paid 0 (3,971) (7,929) (3,719) (7,345)
Fee and commission expenses 7.9 (217) (391) (182) (353) Interest expenses 7.10 (540) (1,065) (499) (992) Acquisition expenses 7.11 (823) (1,616) (768) (1,519) Administrative expenses 7.11 (1,656) (3,276) (1,727) (3,342) Other operating expenses 7.12 (965) (2,349) (895) (2,086) Operating profit 1,614 3,103 1,739 3,055 Share of the net financial results of entities measured (1) (3) 1 1 by the equity method Profit before tax 1,613 3,100 1,740 3,056
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (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 2018 30 June 2018 30 June 2019 30 June 2019 (restated) 1) (restated) 1) Income tax 7.14 (427) (902) (431) (771) Net profit, including: 1,186 2,198 1,309 2,285 - profit attributable to the equity holders of the Parent 734 1,481 783 1,410 Company - profit attributable to holders of non-controlling 452 717 526 875 interests
Weighted average basic and diluted number of 0 863,314,163 863,268,725 863,374,918 863,442,942 common shares Basic and diluted profit (loss) per common share (in 0 0.85 1.72 0.91 1.63 PLN) 1) Information on restatement of data for the period from 1 January to 30 June 2018 is presented in section 3.2.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN) 2. Interim consolidated statement of comprehensive income
1 April – 1 January - 1 April – 1 January - Consolidated statement of comprehensive income Note 30 June 2018 30 June 2018 30 June 2019 30 June 2019 (restated) 1) (restated)1) Net profit 1,186 2,198 1,309 2,285 Other comprehensive income 7.14 343 466 (105) (40) Subject to subsequent transfer to profit or loss 322 376 35 192 Valuation of debt instruments measured at fair 299 286 (4) 134 value through other comprehensive income Foreign exchange translation differences (14) (12) 45 56 Cash flow hedging 37 102 (6) 2 Not to be transferred to profit or loss in the future 21 90 (140) (232) Valuation of equity instruments measured at fair 20 88 (139) (234) value through other comprehensive income Reclassification of real property from property, 1 2 (1) 2 plant and equipment to investment property Total net comprehensive income 1,529 2,664 1,204 2,245 - comprehensive income attributable to equity 930 1,799 720 1,309 holders of the Parent Company - comprehensive income attributable to holders of 599 865 484 936 non-controlling interest
1) Information on restatement of data for the period from 1 January to 30 June 2018 is presented in section 3.2.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN) 3. Interim consolidated statement of financial position
Assets Note 30 June 2019 31 December 2018 Goodwill 7.15 3,920 3,871 Intangible assets 7.16 3,032 3,180 Other assets 7.17 570 562 Deferred acquisition expenses 1,590 1,546 Reinsurers’ share in technical provisions 7.26 1,386 1,512 Property, plant and equipment 7.18 4,226 3,184 Investment property 1,796 1,697 Entities measured by the equity method 11 17 Loan receivables from clients 7.19 189,936 182,054 Financial derivatives 0 2,937 2,487 Investment financial assets 0 110,202 101,665 Measured at amortized cost 48,776 45,234 Measured at fair value through other comprehensive income 50,175 38,737 Measured at fair value through profit or loss 11,251 17,694 Deferred tax assets 2,336 2,234 Receivables 7.23 6,083 6,343 Cash and cash equivalents 10,915 17,055 Assets held for sale 7.24 1,139 1,147 Total assets 340,079 328,554
Equity and liabilities Note 30 June 2019 31 December 2018 Equity Equity attributable to equity holders of the parent 14,311 14,925 Share capital 86 86 Other capital 12,988 12,566 Retained earnings 1,237 2,273 Retained earnings (244) (940) Net profit 1,481 3,213 Non-controlling interest 21,962 22,482 Total equity 36,273 37,407
Liabilities Technical provisions 7.26 46,542 45,839 Provisions for employee benefits 556 531 Other provisions 7.27 625 519 Deferred tax liability 732 486 Financial liabilities 7.28 242,863 236,316 Other liabilities 7.29 12,429 7,407 Liabilities related directly to assets classified as held for sale 7.24 59 49 Total liabilities 303,806 291,147 Total equity and liabilities 340,079 328,554
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
4. Interim consolidated statement of changes in equity
Equity attributable to equity holders of the parent Other capital Retained earnings Actuarial gains Non- Consolidated statement of changes in and losses Foreign control- Total Share Other equity Treasury Supplemen- Revaluation related to exchange Retained Total ling equity capital reserve Net profit stock tary capital reserve provisions for translation earnings interest capital employee differences benefits As at 1 January 2019 86 (11) 12,660 (65) 18 - (36) 2,273 - 14,925 22,482 37,407 Valuation of equity instruments measured at fair value - - - 75 - - - - - 75 13 88 through other comprehensive income Valuation of debt instruments measured at fair value - - - 228 - - - - - 228 58 286 through other comprehensive income Cash flow hedging - - - 25 - - - - - 25 77 102 Foreign exchange translation differences ------(12) - - (12) - (12) Reclassification of real property from property, plant and - - - 2 - - - - - 2 - 2 equipment to investment property Total net other comprehensive income - - - 330 - - (12) - - 318 148 466 Net profit (loss) ------1,481 1,481 717 2,198 Total comprehensive income - - - 330 - - (12) - 1,481 1,799 865 2,664 Other changes, including: - 3 445 (4) (340) - - (2,517) - (2,413) (1,385) (3,798) Distribution of financial result - - 440 - (340) - - (2,518) - (2,418) (1,385) (3,803) Transactions on treasury shares - 3 1 ------4 - 4 Transactions with holders of non-controlling interests ------Other - - 4 (4) - - - 1 - 1 - 1 As at 30 June 2019 86 (8) 13,105 261 (322) - (48) (244) 1,481 14,311 21,962 36,273
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Consolidated statement of changes in equity (continued)
Equity attributable to equity holders of the parent Other capital Retained earnings Actuarial gains Non- Consolidated statement of changes in and losses Foreign control- Total Share Other equity Treasury Supplemen- Revaluation related to exchange Retained Total ling equity capital reserve Net profit stock tary capital reserve provisions for translation earnings interest capital employee differences benefits 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 other changes - - - 7 - - - (519) - (512) (1,146) (1,658) As at 1 January 2018 after the change of accounting 86 - 11,824 164 5 4 (73) 2,077 - 14,087 21,815 35,902 policies Valuation of equity instruments measured at fair value - - - (255) - - - - - (255) 8 (247) through other comprehensive income Valuation of debt instruments measured - - - 9 - - - - - 9 6 15 at fair value through other comprehensive income Cash flow hedging - - - 24 - - - - - 24 75 99 Foreign exchange translation differences ------37 - - 37 (1) 36 Actuarial gains and losses related to provisions for - - - - - (4) - - - (4) - (4) employee benefits Reclassification of real property from property, plant and - - - 3 - - - - - 3 - 3 equipment to investment property Total net other comprehensive income - - - (219) - (4) 37 - - (186) 88 (98) Net profit (loss) ------3,213 3,213 2,155 5,368 Total comprehensive income - - - (219) - (4) 37 - 3,213 3,027 2,243 5,270 Other changes, including: - (11) 836 (10) 13 - - (3,017) - (2,189) (1,576) (3,765) Distribution of financial result - - 848 - 14 - - (3,021) - (2,159) (1,659) (3,818) Transactions on treasury shares - (11) ------(11) - (11) Transactions with holders of non-controlling interests - - (19) ------(19) 83 64 Sale of revalued property and other - - 7 (10) (1) - - 4 - - - - As at 31 December 2018 86 (11) 12,660 (65) 18 - (36) (940) 3,213 14,925 22,482 37,407
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Consolidated statement of changes in equity (continued)
Equity attributable to equity holders of the parent Other capital Retained earnings Non- Consolidated statement of changes in Actuarial gains control- Total equity and losses Foreign Share Other ling equity 1) Treasury Supplemen- Revaluation related to exchange Retained Total (restated) capital reserve Net profit stock tary capital reserve provisions for translation earnings interest capital employee differences benefits 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 other changes - - - 7 - - - (519) - (512) (1,146) (1,658) As at 1 January 2018 after the change of accounting 86 - 11,824 164 5 4 (73) 2,077 - 14,087 21,815 35,902 policies Valuation of equity instruments measured at fair value - - - (189) - - - - - (189) (45) (234) through other comprehensive income Valuation of debt instruments measured - - - 26 - - - - - 26 108 134 at fair value 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 - - - 2 - - - - - 2 - 2 equipment to investment property Total net other comprehensive income - - - (158) - - 57 - - (101) 61 (40) Net profit (loss) ------1,410 1,410 875 2,285 Total comprehensive income - - - (158) - - 57 - 1,410 1,309 936 2,245 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-controlling interests - - (19) ------(19) 78 59 Sale of revalued property and other - - 4 (6) - - - - - (2) - (2) As at 30 June 2018 86 (10) 12,613 - 19 4 (16) (899) 1,410 13,207 21,170 34,377
1) Information on restatement of data for the period from 1 January to 30 June 2018 is presented in section 3.2.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
5. Interim consolidated cash flow statement
1 January - 1 January - Consolidated cash flow statement 30 June 2018 30 June 2019 (restated) 1) Profit before tax 3,100 3,056 Adjustments (2,951) (7,892) Movement in loan receivables from clients (8,949) (7,116) Movement in liabilities under deposits 5,172 (753) Movement in the valuation of assets measured at fair value (347) (401) Interest income and expenses (1,254) (1,133) Realized gains/losses from investing activities and impairment losses 910 689 Net foreign exchange differences (24) 400 Movement in deferred acquisition expenses (44) (56) Amortization of intangible assets and depreciation of property, plant and equipment 632 538 Movement in the reinsurers’ share in technical provisions 126 (104) Movement in technical provisions 703 1,025 Movement in receivables (74) (210) Movement in liabilities 1,479 (586) Cash flow on investment contracts (8) (9) Acquisitions and redemptions of participation units and investment certificates of 104 (116) mutual funds Income tax paid (1,104) (963) Other adjustments (273) 903 Net cash flows from operating activities 149 (4,836) Cash flow from investing activities Proceeds 478,255 452,855 - sale of investment property 6 17 - proceeds from investment property 152 155 - sale of intangible assets and property, plant and equipment 31 24 - sale of ownership interests and shares 1,592 1,822 - realization of debt securities 127,106 103,815 - closing of buy-sell-back transactions 139,570 223,228 - closing of term deposits with credit institutions 192,773 109,155 - realization of other investments 16,119 13,779 - interest received 859 809 - dividends received 28 28 - increase in cash due to purchase of entities and change in the scope of consolidation - 4 - other investment proceeds 19 19
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Consolidated cash flow statement (continued)
1 January - 1 January - Consolidated cash flow statement 30 June 2018 30 June 2019 (restated) 1) Expenditures (483,897) (445,904) - purchase of investment properties (112) (42) - expenditures for the maintenance of investment property (63) (51) - purchase of intangible assets and property, plant and equipment (365) (260) - purchase of ownership interests and shares (1,319) (1,754) - purchase of ownership interests and shares in subsidiaries (63) (12) - decrease in cash due to the sale of entities and change in the scope of (32) - consolidation - purchase of debt securities (134,866) (96,626) - opening of buy-sell-back transactions (139,195) (223,316) - purchase of term deposits with credit institutions (192,073) (109,375) - purchase of other investments (15,666) (14,455) - expenditures on leases (132) - - other expenditures for investments (11) (13) Net cash flows from investing activities (5,642) 6,951 Cash flows from financing activities - Proceeds 64,802 117,941 - proceeds from the issue of shares by subsidiaries (in the part paid up by holders of - 12 non-controlling interests) - proceeds from loans and borrowings 758 1,266 - proceeds on the issue of own debt securities 3,589 1,834 - opening of repurchase transactions 60,455 114,829 Expenditures (65,410) (116,843) - repayment of loans and borrowings (1,858) (1,180) - redemption of own debt securities (2,722) (741) - closing of repurchase transactions (60,699) (114,808) - interest on loans and borrowings (45) (51) - interest on outstanding debt securities (86) (63) Net cash flows from financing activities (608) 1,098 Total net cash flows (6,101) 3,213 Cash and cash equivalents at the beginning of the period 17,055 8,239 Movement in cash due to foreign exchange differences (39) 53 Cash and cash equivalents at the end of the period, including: 10,915 11,505 - restricted cash 45 67 1) Information on restatement of data for the period from 1 January to 30 June 2018 is presented in section 3.2.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (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, under file number KRS 0000009831. According to the Polish Classification of Business Activity and the Statistical Classification of Economic Activities in Europe, the core business of PZU consists of non-life insurance (65.12).
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (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 Registered No. Name of the entity control / Line of business and website office significant 30 June 2019 31 December 2018 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. https://www.link4.pl/ Towarzystwo Ubezpieczeń Wzajemnych Polski 4 Warsaw 20.11.2015 100.00% 100.00% Non-life insurance. https://www.tuwpzuw.pl/ Zakład Ubezpieczeń Wzajemnych Vilnius 5 Lietuvos Draudimas AB 31.10.2014 100.00% 100.00% Non-life insurance. http://www.ld.lt/ (Lithuania) 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/ Vilnius 9 UAB PZU Lietuva Gyvybes Draudimas 26.04.2002 99.34% 99.34% Life insurance. https://pzugd.lt/ (Lithuania) Consolidated companies – Pekao Group 10 Bank Pekao SA Warsaw 07.06.2017 20.02% 20.03% Banking services. https://www.pekao.com.pl/ 11 Pekao Bank Hipoteczny SA Warsaw 07.06.2017 20.02% 20.03% Banking services. http://www.pekaobh.pl/ 12 Centralny Dom Maklerski Pekao SA Warsaw 07.06.2017 20.02% 20.03% Brokerage services. https://www.cdmpekao.com.pl/ 13 Pekao Leasing sp. z o.o. Warsaw 07.06.2017 20.02% 20.03% Leasing services. http://www.pekaoleasing.com.pl/ 14 Pekao Investment Banking SA Warsaw 07.06.2017 20.02% 20.03% Brokerage services. http://pekaoib.pl/ 15 Pekao Faktoring sp. z o.o. Lublin 07.06.2017 20.02% 20.03% Factoring services. https://www.pekaofaktoring.pl/ Pekao Powszechne Towarzystwo Emerytalne SA in 16 Warsaw 07.06.2017 20.02% 20.03% Management of pension funds. liquidation Creation, representing and management of mutual funds. 17 Pekao Towarzystwo Funduszy Inwestycyjnych SA Warsaw 11.12.2017 20.02% 20.03% https://www.pekaotfi.pl/tfi/welcome 18 Centrum Kart SA Warsaw 07.06.2017 20.02% 20.03% Auxiliary financial services. http://www.centrumkart.pl/
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Date of % of the share capital and % of votes obtaining held directly or indirectly by PZU Registered No. Name of the entity control / Line of business and website office significant 30 June 2019 31 December 2018 influence Consolidated companies – Pekao Group – continued 19 Pekao Financial Services sp. z o.o. Warsaw 07.06.2017 46.81% 1) 46.82% 1) Transfer agent. http://www.pekao-fs.com.pl/pl/ 20 Centrum Bankowości Bezpośredniej sp. z o.o. Krakow 07.06.2017 20.02% 20.03% Call-center services. http://www.cbb.pl/ 21 Pekao Property SA in liquidation 2) Warsaw 07.06.2017 20.02% 20.03% Development activity. 22 FPB – Media sp. z o.o. in liquidation 3) Warsaw 07.06.2017 20.02% 20.03% Development activity. 23 Pekao Fundusz Kapitałowy sp. z o.o. in liquidation Warsaw 07.06.2017 20.02% 20.03% Business consulting 24 Pekao Investment Management SA Warsaw 11.12.2017 20.02% 20.03% Asset management. https://www.pekaotfi.pl/tfi/welcome 25 Dom Inwestycyjny Xelion sp. z o.o. Warsaw 11.12.2017 20.02% 20.03% Financial intermediation. https://www.xelion.pl/ Consolidated companies – Alior Bank Group 26 Alior Bank SA Warsaw 18.12.2015 31.95% 31.93% Banking services. https://www.aliorbank.pl/ Other activity supporting financial services, excluding insurance and 27 Alior Services sp. z o.o. Warsaw 18.12.2015 31.95% 31.93% pension funds. Centrum Obrotu Wierzytelnościami sp. z o.o. in 28 Krakow 18.12.2015 31.95% 31.93% The company does not conduct any activity liquidation4) Leasing services. 29 Alior Leasing sp. z o.o. Wroclaw 18.12.2015 31.95% 31.93% https://www.aliorbank.pl/wlasna-dzialalnosc/alior-leasing.html 30 Meritum Services ICB SA Gdańsk 18.12.2015 31.95% 31.93% IT services. Asset management services and management of Alior SFIO subfunds. 31 Alior TFI SA Warsaw 18.12.2015 31.95% 31.93% https://www.aliortfi.com/ 32 New Commerce Services sp. z o.o. Warsaw 18.12.2015 31.95% 31.93% The company does not conduct any activity 33 Absource sp. z o.o. Krakow 04.05.2016 31.95% 31.93% Service activity in the area of IT. 34 Serwis Ubezpieczeniowy sp. z o.o. Katowice 30.01.2017 31.95% 31.93% Brokerage activity. 35 Corsham sp. z o.o. 5) Warsaw 04.02.2019 31.95% n/a Business consulting Consolidated companies – PZU Zdrowie Group 36 PZU Zdrowie SA Warsaw 02.09.2011 100.00% 100.00% Medical services https://www.pzu.pl/pl/grupa-pzu/spolki/pzu-zdrowie 37 Centrum Medyczne Medica sp. z o.o. Płock 09.05.2014 100.00% 100.00% Medical services. http://cmmedica.pl/ Specjalistyczna Przychodnia Przemysłowa Prof-Med 38 Włocławek 12.05.2014 100.00% 100.00% Medical services. http://cmprofmed.pl/ sp. z o.o. Hospital, physical therapy and spa services. 39 Sanatorium Uzdrowiskowe “Krystynka” sp. z o.o. Ciechocinek 09.05.2014 99.09% 99.09% http://www.sanatoriumkrystynka.pl/
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Date of % of the share capital and % of votes obtaining held directly or indirectly by PZU Registered No. Name of the entity control / Line of business and website office significant 30 June 2019 31 December 2018 influence Consolidated companies – PZU Zdrowie Group – continued Przedsiębiorstwo Świadczeń Zdrowotnych i Promocji 40 Jaworzno 01.12.2014 100.00% 100.00% Medical services. http://www.elvita.pl/ Zdrowia ELVITA – Jaworzno III sp. z o.o. Przedsiębiorstwo Usług Medycznych PROELMED 41 Łaziska Górne 01.12.2014 57.00% 57.00% Medical services. http://www.proelmed.pl/ sp. z o.o. 42 Centrum Medyczne Gamma sp. z o.o. Warsaw 08.09.2015 60.46% 60.46% Medical services. http://www.cmgamma.pl/ 43 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 44 Kielce 21.12.2016 100.00% 100.00% Medical services. http://artimed.pl/ sp. z o.o. 45 Revimed sp. z o.o. Gdańsk 31.05.2017 100.00% 100.00% Medical services. http://www.revimed.pl/ 46 Centrum Medyczne św. Łukasza sp. z o.o. Częstochowa 09.01.2018 100.00% 100.00% Medical services. http://www.cmlukasza.pl/ Specjalistyczny Zakład Opieki Zdrowotnej Multimed 47 Oświęcim 31.12.2018 100.00% 100.00% Medical services. http://www.multimed.oswiecim.pl/ sp. z o.o. 48 Alergo-Med Tarnów sp. z o.o. 5) Tarnów 31.01.2019 100.00% n/a Medical services. http://alergomed.tarnow.pl/ 49 Falck Centra Medyczne sp. z o.o. 5) Warsaw 03.06.2019 100.00% n/a Medical services. 50 Starówka sp. z o.o. 5) Warsaw 03.06.2019 100.00% n/a Medical services. Consolidated companies – other companies Management of pension funds. 51 Powszechne Towarzystwo Emerytalne PZU SA Warsaw 08.12.1998 100.00% 100.00% https://www.pzu.pl/pl/grupa-pzu/spolki/pte-pzu 52 PZU Centrum Operacji SA Warsaw 30.11.2001 100.00% 100.00% Auxiliary activity associated with insurance and pension funds. Creation, representing and management of mutual funds. 53 Towarzystwo Funduszy Inwestycyjnych PZU SA Warsaw 30.04.1999 100.00% 100.00% https://www.pzu.pl/pl/grupa-pzu/spolki/tfi-pzu Provision of assistance services. 54 PZU Pomoc SA Warsaw 18.03.2009 100.00% 100.00% https://www.pzu.pl/grupa-pzu/spolki/pzu-pomoc Stockholm 55 PZU Finance AB (publ.) 02.06.2014 100.00% 100.00% Financial services. https://www.pzu.pl/pl/grupa-pzu/spolki/pzu-finance (Sweden) 56 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. 57 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. 58 Ogrodowa-Inwestycje sp. z o.o. Warsaw 15.09.2004 100.00% 100.00% http://www.ogrodowainwestycje.pl/
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Date of % of the share capital and % of votes obtaining held directly or indirectly by PZU Registered No. Name of the entity control / Line of business and website office significant 30 June 2019 31 December 2018 influence Consolidated companies – other companies – continued 59 Arm Property sp. z o.o. Krakow 26.11.2014 100.00% 100.00% Purchase and sale of real estate. 60 Ipsilon sp. z o.o. Warsaw 02.04.2009 100.00% 100.00% Provision of assistance services and medical services. London 61 PZU Corporate Member Limited 28.09.2017 100.00% 100.00% Investment activity. (UK) Consulting and training services, development of technology innovation to support technical and procedural security processes and risk 62 PZU LAB SA Warsaw 13.09.2011 100.00% 100.00% management. https://www.pzu.pl/pl/grupa-pzu/spolki/pzu-lab 63 Omicron BIS SA Warsaw 28.08.2014 100.00% 100.00% No business conducted. 64 Sigma BIS SA Warsaw 12.12.2014 100.00% 100.00% No business conducted. 65 LLC SOS Services Ukraine Kiev (Ukraine) 01.07.2005 100.00% 100.00% Assistance services. 66 Battersby Investments SA Warsaw 15.09.2017 100.00% 100.00% No business conducted. 67 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 and administration 68 Armatura Kraków SA Krakow 07.10.1999 100.00% 100.00% and management of the group. http://www.grupa-armatura.pl/ Production and sale of bathroom accessories and fittings. 69 Aquaform SA Środa Wlkp. 15.01.2015 100.00% 100.00% http://www.aquaform.com.pl/ Anhausen 70 Aquaform Badprodukte GmbH in Liquidation 6) 15.01.2015 100.00% 100.00% Wholesale trade. (Germany) Zhytomyr 71 Aquaform Ukraine ТОW 15.01.2015 100.00% 100.00% Wholesale trade. http://aquaform.org.ua/ (Ukraine) Prejmer 72 Aquaform Romania SRL 15.01.2015 100.00% 100.00% Wholesale trade. (Romania) 73 Morehome.pl sp. z o.o. in liquidation 7) Środa Wlkp. 15.01.2015 100.00% 100.00% No business conducted. Consolidated companies – mutual funds 74 PZU SFIO Universum Warsaw 15.12.2009 n/a n/a Investment of funds collected from fund members. 75 PZU FIZ Dynamiczny Warsaw 27.01.2010 n/a n/a as above 76 PZU FIZ Sektora Nieruchomości 8) Warsaw 01.07.2008 n/a n/a as above 77 PZU FIZ Sektora Nieruchomości 2 8) Warsaw 21.11.2011 n/a n/a as above
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Date of % of the share capital and % of votes obtaining held directly or indirectly by PZU Registered No. Name of the entity control / Line of business and website office significant 30 June 2019 31 December 2018 influence Consolidated companies – mutual funds – continued 78 PZU FIZ Aktywów Niepublicznych BIS 1 Warsaw 12.12.2012 n/a n/a as above 79 PZU FIZ Aktywów Niepublicznych BIS 2 Warsaw 19.11.2012 n/a n/a as above 80 PZU FIZ Surowcowy Warsaw 03.09.2015 n/a n/a as above 81 PZU FIO Globalny Obligacji Korporacyjnych Warsaw 30.05.2016 n/a n/a as above 82 PZU Innowacyjnych Technologii in liquidation Warsaw 07.09.2016 n/a n/a as above 83 PZU FIZ Akcji Combo Warsaw 09.03.2017 n/a n/a as above 84 inPZU Inwestycji Ostrożnych Warsaw 10.04.2018 n/a n/a as above 85 inPZU Obligacje Polskie Warsaw 10.04.2018 n/a n/a as above 86 inPZU Akcje Polskie Warsaw 10.05.2018 n/a n/a as above 87 inPZU Akcji Rynków Rozwiniętych Warsaw 10.05.2018 n/a n/a as above 88 inPZU Obligacji Rynków Rozwiniętych Warsaw 10.05.2018 n/a n/a as above 89 inPZU Obligacji Rynków Wschodzących Warsaw 10.05.2018 n/a n/a as above Associates 90 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 91 EMC Instytut Medyczny SA Wroclaw 18.06.2013 28.31% 9) 28.31% 9) sciences and pharmaceutical practice. http://www.emc-sa.pl/ Tortola, British 92 CPF Management 07.06.2017 8.01% 10) 8.01% 10) Consulting and business activity – no business conducted. Virgin Islands 93 PayPo sp. z o.o. Warsaw 15.11.2018 6.39% 11) 6.39% 11) Financial services. https://paypo.pl/ 1) As of 4 June 2018 PZU directly holds a 33.5% equity stake in PFS while Pekao holds 66.5%. 2) On 1 March 2019 the company’s liquidation process was opened. 3) As of 11 April 2019 it operates under the name of FPB – Media sp. z o.o. in bankruptcy. 4) On 17 July 2019, the company was removed from the commercial register, KRS. 5) Additional information is presented in item 1.4. 6) On 15 January 2019 the company’s liquidation process was opened. 7) On 7 January 2019, an application was filed with KRS on the liquidation of the company. 8) As at 30 June 2019, 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: 18 and 18 (as at 31 December 2018: 18 and 18, respectively). 9) The percentage of votes held by PZU is different from the stake held in the share capital, and both as at 30 June 2019 and as at 31 December 2018 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. 10) Pekao’s associate in which it holds a 40.00% stake. Consequently, the PZU Management Board recognizes that the PZU Group has significant influence over this company. 11) Alior Bank’s associate in which it holds a 20.00% stake. Consequently, the PZU Management Board recognizes that the PZU Group has significant influence over this company.
20
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
On 10 June 2019, the court issued a decision to remove Syta Development Sp. z o.o. in liquidation from the corporate register KRS. Control over the company was exercised by a liquidator independent of the PZU Group and for this reason the company was not consolidated. On 14 May 2019, the court issued a decision to remove Ardea Alba SA in liquidation from the corporate register KRS. The court decision became final on 28 May 2019. The removal of the company did not affect the condensed interim consolidated financial statements.
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 2019 31 December 2018
Pekao 1) 79.98% 79.97% Alior Bank 2) 68.05% 68.07% Przedsiębiorstwo Usług Medycznych PROELMED sp. z o.o. 43.00% 43.00% Centrum Medyczne Gamma sp. z o.o. 39.54% 39.54% 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% 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.
Carrying amount of non-controlling interests 30 June 2019 31 December 2018
Pekao Group 17,649 18,251 Alior Bank Group 4,307 4,225 Other 6 6 Total 21,962 22,482
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 Assets 30 June 31 December 30 June 31 December 2019 2018 2019 2018 Goodwill 692 692 - - Intangible assets 1,656 1,777 650 658 Other assets 88 45 45 35 Property, plant and equipment 2,125 1,682 815 461 Investment property 13 13 - - Loan receivables from clients 134,379 128,242 55,557 53,811 Financial derivatives 2,172 1,765 615 579 Entities measured by the equity method - - 4 4 Investment financial assets 48,175 40,356 15,007 13,636 Measured at amortized cost 17,215 12,262 6,861 6,307 Measured at fair value through other comprehensive income 28,622 27,266 8,068 7,280 Measured at fair value through profit or loss 2,338 828 78 49 Deferred tax assets 1,140 1,112 1,137 1,076 Receivables 2,108 2,235 835 815 Cash and cash equivalents 4,336 13,219 2,135 2,069 Assets held for sale 44 4 - - Total assets 196,928 191,142 76,800 73,144
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Pekao Group Alior Bank Group Equity and liabilities 30 June 31 December 30 June 31 December 2019 2018 2019 2018 Equity Equity attributable to equity holders of the parent 22,066 22,824 6,329 6,207 Share capital 262 262 1,306 1,306 Other capital 20,539 20,721 5,627 5,609 Retained earnings 1,265 1,841 (604) (708) Non-controlling interest 12 11 - - Total equity 22,078 22,835 6,329 6,207
Liabilities Provisions for employee benefits 405 407 33 32 Other provisions 407 297 109 119 Deferred tax liability 32 33 - - Financial liabilities 168,065 164,636 68,795 65,373 Other liabilities 5,941 2,934 1,534 1,413 Total liabilities 174,850 168,307 70,471 66,937 Total equity and liabilities 196,928 191,142 76,800 73,144
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 of Elimination of Consolidated profit and loss account Elimination of without PZU Group Alior Bank’s consolidation for the period from 1 January to 30 June 2019 Pekao’s data Pekao and data adjustments Alior Bank Gross written premiums 11,839 - - 7 11,846 Reinsurers’ share in gross written premium (239) - - - (239) Net written premiums 11,600 - - 7 11,607 Movement in net provision for unearned premiums (266) - - 4 (262) Net earned premiums 11,334 - - 11 11,345
Revenue from commissions and fees 1,993 (1,375) (547) 44 115 Net investment income 6,234 (3,397) (2,073) 12 776 Net result on realization of financial instruments and 107 (53) (40) - 14 investments Movement in allowances for expected credit losses and (1,043) 266 804 - 27 impairment losses on financial instruments Net movement in fair value of assets and liabilities measured 347 (38) (9) 2 302 at fair value Other operating income 757 (187) (154) 19 435
Claims, benefits and movement in technical provisions (8,124) - - - (8,124) Reinsurers’ share in claims, benefits and movement in 195 - - - 195 technical provisions Net insurance claims and benefits paid (7,929) - - - (7,929) Fee and commission expenses (391) 179 212 - - Interest expenses (1,065) 604 388 (9) (82) Acquisition expenses (1,616) - - (40) (1,656) Administrative expenses (3,276) 1,677 767 (17) (849) Other operating expenses (2,349) 1,142 394 (22) (835) Operating profit (loss) 3,103 (1,182) (258) - 1,663 Share of the net financial results of entities measured by the (3) - - - (3) equity method
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
PZU Group Elimination of Elimination of Consolidated profit and loss account Elimination of without PZU Group Alior Bank’s consolidation for the period from 1 January to 30 June 2019 Pekao’s data Pekao and data adjustments Alior Bank Profit (loss) before tax 3,100 (1,182) (258) - 1,660 Income tax (902) 382 148 - (372) Net profit (loss) 2,198 (800) (110) - 1,288
PZU Group Consolidated profit and loss account Elimination of Elimination of Elimination of without for the period from 1 January to 30 June 2018 PZU Group Alior Bank’s consolidation Pekao’s data Pekao and (restated) 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 premiums 11,054 - - 6 11,060
Revenue from commissions and fees 2,030 (1,385) (537) 12 120 Net investment income 5,153 (2,954) (1,589) 7 617 Net result on realization of financial instruments and 71 (67) (33) - (29) investments Movement in allowances for expected credit losses and (812) 285 488 - (39) impairment losses on financial instruments Net movement in fair value of assets and liabilities measured 401 (27) (377) - (3) at fair value Other operating income 795 (180) (222) - 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) 3,055 (1,078) (519) - 1,458 Share of the net financial results of entities measured by the 1 - - - 1 equity method Profit (loss) before tax 3,056 (1,078) (519) - 1,459 Income tax (771) 305 140 - (326) Net profit (loss) 2,285 (773) (379) - 1,133
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Pekao Group Alior Bank Group 1 January – 1 January – Statement of comprehensive income 1 January – 1 January – 30 June 2018 30 June 2018 30 June 2019 30 June 2019 (restated) (restated) Net profit 800 773 110 379 Other comprehensive income 176 44 10 39 Valuation of debt instruments measured at fair value 82 117 3 21 through other comprehensive income Valuation of equity instruments measured at fair value 14 (56) (12) - through other comprehensive income Net cash flow hedges 80 (17) 19 19 Foreign exchange differences - - - (1) Total net comprehensive income 976 817 120 418
Pekao Group Alior Bank Group Cash flow statement 1 January – 1 January – 1 January – 1 January – 30 June 2019 30 June 2018 30 June 2019 30 June 2018 Net cash flows from operating activities (2,685) (5,854) 2,275 (457) Net cash flows from investing activities (5,937) 7,422 (1,195) 1,063 Net cash flows from financing activities (252) 1,133 (275) (117) Total net cash flows (8,874) 2,701 805 489
Pekao Group Alior Bank Group Dividend-related information 1 January – 1 January – 1 January – 1 January – 30 June 2019 30 June 2018 30 June 2019 30 June 2018 Date of ratifying the dividend 26 June 2019 21 June 2018 - - Record date 10 July 2019 6 July 2018 - - Dividend payout date 30 July 2019 20 July 2018 - - Dividend per share (PLN) 6.60 7.90 - - Dividend due to the PZU Group 347 415 - - Dividend due to non-controlling shareholders 1,385 1,659 - -
1.4 Changes in the scope of consolidation and structure of the PZU Group
1.4.1. Medical companies
Falck CM
On 13 March 2019 PZU Zdrowie SA entered into a preliminary agreement and on 3 June 2019 a final agreement with Falck Danmark A/S to acquire 403,551 shares in Falck CM, which constituted 100% of the share capital and offering 100% of votes at the shareholder meeting, with par value of PLN 50 each. At the same time, PZU Zdrowie SA, and thereby also PZU, became the indirect owner of Starówka sp. z o.o. in which Falck CM has a 100% equity stake. Since the date of obtaining control, i.e. 3 June 2019, both companies have been consolidated.
Alergo-Med Tarnów sp. z o.o.
On 31 January 2019, PZU Zdrowie acquired 1,432 shares in Alergo – Med Tarnów 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 500 each. Since the date of obtaining control, i.e. 31 January 2019, Alergo – Med sp. z o.o. has been consolidated.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Corsham sp. z o.o.
On 4 February 2019 Alior Bank acquired 100 shares in Corsham sp. z o.o. representing 100% of the share capital and 100% of votes at the shareholder meeting with a par value of PLN 50 each. Since the date of obtaining control, i.e. 4 February 2019, Corsham sp. z o.o. has been consolidated.
Provisional purchase price allocation
The purchase price allocation process for Falck CM and Starówka Sp. z o.o. shares was carried out based on the accounting data of these companies as at 31 May 2019, under the assumption that no material differences in accounting data transpired between 31 May 2019 and 3 June 2019, which was the date of obtaining control. By the date of signing the condensed interim consolidated financial statements the purchase price allocation process of Falck CM and Starówka Sp. z o.o has not been completed. A credible and reliable calculation of the fair value of acquired assets and liabilities requires a large amount of data to be collected and processed in order to make correct calculations. Consequently, this process could not be completed between the date of obtaining control and the date of signing of the condensed interim consolidated financial statements. At the end of the purchase price allocation process, IFRS 3 requires one year from the transaction date and that final purchase price allocation will be included in the consolidated financial statements of the PZU Group for the year ended 31 December 2019. The tables below present the provisional allocation of the purchase price of the medical companies. Value of acquired net assets Preliminary settlement Assets 31 Property, plant and equipment 17 Receivables 7 Cash and cash equivalents 7 Liabilities 18 Financial liabilities 10 Other liabilities 8 Value of acquired net assets 13
Calculated goodwill Preliminary settlement Consideration transferred 68 Net value of identifiable assets (13) Goodwill 55 Goodwill will not reduce taxable income.
1.4.2. Consolidated mutual funds
On account of losing control, the following mutual funds are no longer subject to consolidation: PZU Akcji Spółek Dywidendowych sub-fund, PZU FIZ Akcji Focus, PZU FIZ Forte since 31 March 2019 and PZU Dłużny Aktywny sub-fund since 1 June 2019.
1.4.3. Spółdzielcza Kasa Oszczędnościowo-Kredytowa Jaworzno
On 31 January 2019, the KNF decided that Alior Bank would take over Spółdzielcza Kasa Oszczędnościowo-Kredytowa Jaworzno (SKOK Jaworzno). In line with KNF’s decision, starting on 1 February 2019, Alior Bank assumed management over the assets of SKOK Jaworzno, which was acquired by Alior Bank as of 1 April 2019.
25
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
The acquisition of SKOK Jaworzno was accounted for using IFRS 3. The process was carried out with the assumption that the Bank Guarantee Fund would provide aid to Alior Bank pursuant to Article 264 of the Bank Guarantee Fund Act and it would not require payment by Alior Bank. The aid from BFG will involve provision of a subsidy and extension of a guarantee to cover losses (applicable agreements are being finalized) resulting from the risk associated with the SKOK Jaworzno’s property rights being acquired. The BFG subsidy will be granted to cover the difference between the value of the acquired property rights and the liabilities arising from guaranteed funds of SKOK’s depositors. As at 30 June 2019, the value of the subsidy was estimated at PLN 96 million. In accordance with IFRS 3, the final acquisition purchase price allocation must be completed within 12 months of the acquisition date, that is until the end of March 2020.
Provisional purchase price allocation in the SKOK Jaworzno acquisition
Pursuant to the provisions of IFRS 3, the PZU Group recognized the acquired assets and liabilities at fair value. The fair value of the SKOK Jaworzno’s loan portfolio was calculated for loans with no recognized impairment (performing portfolio). For these loans, the calculation was based on contractual cash flows adjusted for credit risk and prepayments. The fair value of the SKOK’s performing loan portfolio was determined by using a discounted cash flow model by using the observed market values of interest rates adjusted for liquidity margins and cost of capital, broken down into homogeneous sub-portfolios. The fair value of the non-performing loan portfolio was assumed to be equal to the carrying amount due to the expected insignificant recovery levels. The fair value of client and bank deposits and other financial liabilities maturing within 1 year is more or less equal to their carrying amount. When calculating the fair value of financial liabilities with residual maturity above 1 year, the present value of expected payments is calculated based on the current interest rate curves. No difference was observed between this measurement and the carrying amount, as a result of which the fair value was not adjusted. Also, deferred tax assets of PLN 20 million were recognized in connection with the acquired assets and liabilities accepted as a result of the merger. Provisional purchase price allocation Carrying amount Adjustment to fair value Fair value Assets 208 26 234 Property, plant and equipment 7 - 7 Loan receivables from clients 137 6 143 Receivables 40 - 40 Cash and cash equivalents 21 - 21 Other assets 3 20 23 Liabilities 336 - 336 Other provisions 13 - 13 Financial liabilities 320 - 320 Other liabilities 3 - 3 Fair value of acquired net assets (128) 26 (102) Subsidy from the Bank Guarantee Fund 96 Goodwill 6 Goodwill of PLN 6 million was fully covered by an impairment loss.
26
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (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 2019, 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. On 27 March 2019 the PZU Supervisory Board adopted a resolution to appoint Paweł Surówka to the PZU Management Board for the new term of office and entrusted him with discharging the function of CEO of PZU SA. The appointment of Paweł Surówka was for the joint term of office commencing as of the date on which the PZU Supervisory Board resolution on his appointment was adopted and will span three full financial years from 2020-2022. On 28 March 2019, the PZU Supervisory Board adopted resolutions to appoint the following persons to the PZU Management Board for its new term of office: Tomasz Kulik, entrusting him with discharging the function of PZU Management Board Member, Maciej Rapkiewicz, entrusting him with discharging the function of PZU Management Board Member, Małgorzata Sadurska, entrusting her with discharging the function of PZU Management Board Member, Marcin Eckert, entrusting him with discharging the function of PZU Management Board Member, Adam Brzozowski, entrusting him with discharging the function of PZU Management Board Member, Elżbieta Häuser-Schöneich, entrusting her with discharging the function of PZU Management Board Member. Adam Brzozowski and Elżbieta Häuser-Schöneich were appointed on the day following the day of holding the PZU Ordinary Shareholder Meeting approving the financial statements for the 2018 financial year for a joint term of office commencing at the time of appointing the President of the PZU Management Board and spanning the three full financial years from 2020 to 2022. The other persons were appointed on 28 March 2019 for a joint term of office commencing at the time of appointing the President of the PZU SA Management Board and spanning the three full financial years from 2020 to 2022. Roger Hodgkiss served in the capacity of PZU Management Board Member until the date of PZU’s Ordinary Shareholder Meeting under the principle of discharging his mandate according to Article 369 § 4 of the Commercial Company Code. As at the date of conveying this periodic report, the PZU Management Board consisted of the following persons: Paweł Surówka – President of the PZU Management Board; Adam Brzozowski – Member of the PZU Management Board; Marcin Eckert – Member of the PZU Management Board; Elżbieta Häuser-Schöneich – 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.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
2.2 Composition of the parent company’s Supervisory Board
From 1 January 2019, 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; Katarzyna Lewandowska – Supervisory Board Member; Robert Śnitko – Supervisory Board Member; Maciej Zaborowski – Supervisory Board Member. On 24 May 2019, the Ordinary Shareholder Meeting of PZU set the number of PZU Supervisory Board members at 11 and appointed the following to the PZU Supervisory Board of the new term of office: Maciej Łopiński, Robert Jastrzębski, Alojzy Nowak, Marcin Chludziński, Agata Górnicka, Robert Śnitko, Elżbieta Mączyńska-Ziemacka, Tomasz Kuczur, Krzysztof Opolski, Maciej Zaborowski. This appointment was for the joint term of office that encompasses three consecutive full financial years 2020-2022. Moreover, on 24 May 2019, the Prime Minister, acting on behalf of the State Treasury of the Republic of Poland, pursuant to § 20 sec. 7 of the PZU’s Articles of Association, appointed Mr. Paweł Górecki to be a PZU SA Supervisory Board Member. From 24 May 2019, 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; Tomasz Kuczur – Supervisory Board Member; Elżbieta Mączyńska-Ziemacka – Supervisory Board Member; Krzysztof Opolski – 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. From 1 January 2019, the following persons were PZU Group Directors: Aleksandra Agatowska; Tomasz Karusewicz; Bartłomiej Litwińczuk; Dorota Macieja; Roman Pałac.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Tomasz Karusewicz was dismissed from serving in his capacity of a PZU Group Director as of 30 April 2019. From 1 to 24 May 2019 Roger Hodgkiss served as a PZU Życie Group Director. As of 25 May 2019, Adam Brzozowski was appointed as a Group Director at PZU Życie. As at the date of conveying this periodic report the following persons were PZU Group Directors: Aleksandra Agatowska (PZU); Adam Brzozowski (PZU Życie); Bartłomiej Litwińczuk (PZU); Dorota Macieja (PZU); Roman Pałac (PZU).
3. Key accounting policies, key estimates and judgments
Detailed accounting policies and critical estimates and judgments are presented in the consolidated financial statements of the PZU Group for 2018. The accounting policies and calculation methods used in these condensed interim financial statements are the same as those used in the consolidated financial statements of the PZU Group for 2018, except for the changes described below.
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 2019
The following changes in standards were applied to the consolidated financial statements.
Approving Standard/interpretation Comments regulation
IFRS 16 – Leases 1986/2017 The effect of the application of IFRS 16 is described in section 3.1.2. Certain options, which force a lender to accept reduced compensation for granting financing (in the case of negative compensation) failed to pass the SPPI test; accordingly any instruments containing such options could not be classified as measured at amortized cost or at fair value through other comprehensive income. According to the amendment, the positive Amendment to IFRS 9 – or negative sign of the prepayment amount will not be important; this means that, depending prepayment features with 498/2018 on the interest rate in effect when the agreement is terminated, payment can be made to a negative compensation 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 did not affect the PZU Group’s consolidated financial statements. The interpretation is applied when there is uncertainty to the determination of taxable profit, IFRIC 23 interpretation – tax losses, taxable income, outstanding tax losses, unused tax credits and tax rates under IAS Uncertainty over Income 1595/2018 12. Tax Treatments The interpretation had no effect on the PZU Group’s consolidated financial statements. According to the amended IAS 28, long-term interests in associates and joint ventures for Amendment to IAS 28 – which the company does not apply the equity method, the applicable standard is IFRS 9, also Long-term interests in 237/2019 with regard to impairment. associates and joint
ventures The change did not affect the PZU Group’s consolidated financial statements.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Approving Standard/interpretation Comments regulation
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 requirements concerning the plan’s amendment, curtailment or settlement affect asset Amendments to IAS 19 402/2019 threshold requirements. The IASB has decided that the scope of these amendments does not Employee Benefits 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.
The change did not affect the PZU Group’s consolidated financial statements. The amendments pertain to: 1st 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; 2nd 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 3rd IAS 12 - the amendments specify that any income tax consequences of dividends (i.e. 412/2019 IFRS 2015-2017 profit distribution) should be recognized in the profit and loss account, regardless of how the tax arises; 4th IAS 23 - the amendments clarify that if any specific borrowings remain outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds which an entity generally borrows when calculating the capitalization rate on general borrowings. The amendments did not affect the PZU Group’s consolidated financial statements.
3.1.2. IFRS 16 – Leases
IFRS 16 has replaced IAS 17 Leases and any interpretations related to this standard and has introduced a full model of identification and settlement of leases in the lessors’ and lessees’ financial statements. The most important change pertains to lessees, for which the new standard eliminates the distinction between financial leases and operating leases. The recognition of operating leases in the statement of financial position has resulted in the recognition of a new asset (the right to use the leased object) and a new liability (the liability of remitting lease payments). Recognition of leases on the lessor’s side has in most cases remained unchanged due to the maintenance of the breakdown between operating leases and financial leases. Applying IFRS 16 the PZU Group made the following assumptions and adopted the following practical approaches permitted by the standard: As at 1 January 2019 a simplified approach has been applied in accordance with section C5(b) of IFRS 16. Comparative data were not transformed, and the total effect of the first application of IFRS 16 was recognized as an adjustment to the opening balance of retained earnings on the first application date. In the case of leases previously classified as operating leases in accordance with IAS 17 lease assets and liabilities were measured at present value of the remaining lease payments, discounted by the lessee’s marginal interest rate. A single discount rate was used for the portfolio of lease contracts with features that are generally similar. The rules concerning short-term leases were applied for operating leases whose lease term ends within 12 months of the day of first application of IFRS 16. If a contract contained a lease extension or termination option then knowledge obtained after the fact was used in order to determine the term of the lease. The recognition of assets and liabilities in respect of lease is based on a subjective evaluation of the Management Board, taking into account interpretations related to the application of IFRS 16. The subjective evaluation and the effects of the application of
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN) the new standard as presented below may change as a result of new interpretations of IFRS 16 or changes to the general practice of application of new accounting standards. In the consolidated profit and loss account for 2019, fees related to lease and rental were replaced by the amortization of the right-of-use asset of the leased object and by interest expenses on lease liabilities. The effect of the application of IFRS 16 on the statement of financial position is presented in the table. 31 December 2018 Recognition of lease 1 January 2019 Items of the statement of financial position (under IAS 17) contracts (under IFRS 16) Property, plant and equipment 3,184 1,246 4,430 Investment property 1,697 50 1,747 Financial liabilities 236,316 1,296 237,612
On the date when the leased asset is available for use, the PZU Group recognizes the right-of-use asset and the lease liability. In accordance with section 5 of IFRS 16, the PZU Group has taken advantage of the exemptions of short-term leases and for leases for which the underlying asset has a low value. Low value assets were deemed to be assets with a value equal to or lower than PLN 20 thousand. Pursuant to item 4 of IFRS 16, the PZU Group does not apply this standard to intangible assets. On initial recognition: the lease liability is measured at the present value of the outstanding lease payments, including fixed lease payments less any applicable lease incentives, variable lease payments that depend on an index or rate, the amounts that the lessee expects to pay within the guaranteed residual value, the exercise price of the call option, if likely to be exercised, and penalties for terminating the lease if the option is available; right-of-use assets are measured at cost, which includes the initial lease liability amount, any lease payments paid on or before the commencement date, less any lease incentives received, all initial costs incurred by the lessee, and an estimate of the costs to be incurred in disassembling and removing the asset, renovating the site where it was located, if the lease contract so requires. The PZU Group recognized assets and liabilities in respect of lease at a net amount. The VAT amount is recognized in expenses of the current period. Lease payments are discounted using the interest rate implicit in the lease, if it can be easily determined, or the lessee’s marginal interest rate. The lessee’s marginal rate is calculated as the sum of the risk-free rate and fixed risk spread. For all contracts ending on the same date and with a fixed amount of monthly payments (this group includes most lease contracts in the PZU Group) a fixed contract discount rate has been calculated. In subsequent periods: the right-of-use asset is measures using the cost less depreciation and impairment model; the liability is measured at amortized cost. Right-of-use assets are recognized jointly with property, plant and equipment or investment property, respectively, while lease liabilities as financial liabilities.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
3.1.3. Standards, interpretations and amended standards not yet effective
Not approved by the European Commission: Name of standard/ Effective date Date of issue by IASB Comments interpretation (according to IASB) The purpose of the standard is to establish the uniform accounting policy for all types of insurance contracts, including the reinsurance contracts held by the insurer. Introduction of this unified standard should ensure comparability of financial reports between different entities, states and capital markets. The new standard defines insurance contract as a contract under which one entity accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. The scope of the standard does not cover, among others, investment contracts, product warranties, loan guarantees, catastrophe bonds and so-called weather derivatives (contracts requiring payment based on the climatic, geological factor or another physical variable that is not specific to the party to the contract). The standard introduces a definition of contract boundary, defining its beginning as the beginning of coverage, the date when first premium becomes due, the moment when facts and circumstances indicate that the contract belongs to the group of onerous contracts - whichever is earliest. The end of the contract boundary occurs when the insurer has the right or practical ability to reassess the risk for a particular policyholder or a policy group, and the premium measurement does not cover the risk related to future periods. In accordance with IFRS 17, contracts will be measured by one of the following methods: General Measurement Model, GMM – the basic measurement model, wherein the total value of the insurance liability is calculated as the sum of: IFRS 17 – Insurance contracts 18 May 2017 1 January 2022 o discounted value of the best estimate of future cash flows - expected (probability-weighted) cash flows from premiums, claims, benefits, acquisition expenses and costs, o risk adjustment, RA – individual estimate of the uncertainty related to the quantity and time of the future cash flows, and o contractual service margin (CSM) – representing an estimate of future profits recognized during the policy term. The CSM value is sensitive to changes in estimates of cash flows, resulting e.g. from changed non-economic assumptions. CSM cannot be a negative value – any losses on the contract shall be recognized immediately in the profit and loss account; premium allocation approach, PAA – a simplified model which can be applied to measurement of insurance contracts with the coverage period below 1 year or where its application does not lead to significant changes in relation to GMM. In this model, liability for remaining coverage is analogous to the provision for unearned premiums mechanism, without separate presentation of RA and CSM, while the liability for incurred claims is measured using the GMM (without calculating CSM). variable fee approach, VFA – model used for insurance contracts with direct profit sharing. The liability value is calculated in the same manner as in the GMM, the CSM value is additionally sensitive to changes in economic assumptions. IFRS 17 provides for separate recognition of reinsurance contracts from reinsured insurance contracts. The cedent shall measure reinsurance contracts by the modified GMM method or, if possible, by the PAA method. Modifications of the GMM method arise
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Name of standard/ Effective date Date of issue by IASB Comments interpretation (according to IASB) above all from the fact that reinsurance contracts are usually assets, not liabilities, and the cedent pays a remuneration to the reinsurer rather than deriving profits from the contract. Modifications are also supposed to reduce discrepancies arising from separate recognition of the reinsurance contract from reinsured insurance contracts. In the case of reinsurance contracts, both the profit and the loss calculated as at the contract recognition are recognized in the statement of financial position and settled through the reinsurance coverage period. The assumptions for reinsurance contract measurement shall be consistent with those used for reinsured insurance contract measurement. In addition, measurement shall take into account the risk that the reinsurer fails to fulfill its obligations.
In mid 2018 PZU Group formally launched project work to implement a standard in all PZU Group insurance companies. As part of the project, PZU Group works, among others, on: analyzing the gap in existing IT processes, tools and systems; determining new components necessary to be implemented in processes and areas which will be significantly affected by the implementation of IFRS 17; analyzing the current product offer in terms of segmentation and principles of measurement in accordance with IFRS 17.
Despite publishing the content of IFRS 17, IASB continues the works on its final wording. For this reason, the standard version which will be finally approved by a European Commission Regulation will differ from the present text. The IFRS 17 implementation will have a fundamental impact both on the processes in insurance entities and on the financial reporting of PZU Group. At the present stage of the IFRS 17 implementation project and due to the potential changes in its content, it is not possible to estimate the effect of application of IFRS 17 on PZU Group’s comprehensive income and equity. The amendments aim to state precisely the difference between the acquisition of a business and an asset acquisition. Amendment to IFRS 3 – 22 October 2018 1 January 2020 Business combinations The amendments will not affect the PZU Group’s consolidated financial statements. According to the new definition, information is material if one may justifiably expect that if it is overlooked, distorted or concealed Amendments to IAS 1 and this may affect the decisions made by the main users of financial statements on the basis of these financial statements. IAS 8 – definition of 31 October 2018 1 January 2020
materiality The change will not exert a 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. Additionally, they Amendments to the contain explanations pertaining to important areas such as the role of management, prudence and the uncertainty of measurement 29 March 2018 1 January 2020 framework in financial statements.
The amendments will not have a significant influence on the PZU Group’s consolidated financial statements.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (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 changes that have been introduced as compared to the condensed interim consolidated financial statements for the 6 months ended 30 June 2018 are described in the items below.
3.2.1. Change in the presentation of the result on the sale and the result on material modification of accounts receivable
To reflect better the economic nature of the transaction, the result on the sale and the result on material modification of accounts receivable has been transferred.
3.2.2. Change in the presentation of recoveries from credit receivables transferred off-balance sheet
To reflect better the economic nature of the transaction, the presentation of recoveries from credit receivables transferred off- balance sheet was modified. Since such allowances are made regularly and are an element of ordinary activity in managing irregular accounts receivable, the value of recoveries was transferred from “Other operating income” to “Movement in allowances for expected credit losses and impairment losses on financial instruments”.
3.2.3. Margin on foreign exchange transactions
To reflect better the economic nature of revenue generated on the margin on foreign exchange transactions, it has been moved from “Net investment income” to “Revenue from commissions and fees”.
3.2.4. Changes stemming from the application of IFRS 9
Changes were made to the PZU Group’s consolidated financial statements for 2018 in terms of how the allowances for expected credit losses are calculated and how the assets acquired in transactions to take over banks are allocated to baskets at the PZU Group level. The data for H1 2018 were transformed in accordance with the methodology used in the PZU Group’s consolidated financial statements for 2018 and in the condensed interim consolidated financial statements for H1 2019.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (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.
1 January - 1 January - Consolidated profit and loss 30 June 2018 item 3.2.1 item 3.2.2 item 3.2.3 item 3.2.4 30 June 2018 account (historical) (restated) Revenue from commissions and 1,673 1 - 356 - 2,030 fees Net investment income 5,594 1 - (356) (86) 5,153 Net result on realization of financial instruments and 99 (28) - - - 71 investments Movement in allowances for expected credit losses and (838) 26 5 - (5) (812) impairment losses on financial instruments Other operating income 800 - (5) - - 795 Profit before tax 3,147 - - - (91) 3,056 Income tax (789) - - - 18 (771) Net profit 2,358 - - - (73) 2,285 - profit attributable to the equity 1,425 - - - (15) 1,410 holders of the Parent Company - profit attributable to holders of 933 - - - (58) 875 non-controlling interests
1 January - Correction – item 1 January - Consolidated statement of comprehensive income 30 June 2018 (historical) 3.2.4 30 June 2018 (restated) Net profit 2,358 (73) 2,285 Other comprehensive income (40) - (40) Total net comprehensive income 2,318 (73) 2,245 - comprehensive income attributable to equity holders of the 1,324 (15) 1,309 Parent Company - comprehensive income attributable to holders of non- 994 (58) 936 controlling interest
Equity attributable to Non-controlling Consolidated statement of changes in equity equity holders of the Total equity interest parent Historical data Effect of the application of IFRS 9 and other changes (454) (1,042) (1,496) Net profit (loss) 1,425 933 2,358 Equity as at 30 June 2018 13,280 21,332 34,612 Correction – item 3.2.4 Effect of the application of IFRS 9 and other changes (58) (104) (162) Net profit (loss) (15) (58) (73) Equity as at 30 June 2018 (73) (162) (235) Restated data Effect of the application of IFRS 9 and other changes (512) (1,146) (1,658) Net profit (loss) 1,410 875 2,285 Equity as at 30 June 2018 13,207 21,170 34,377
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
1 January - 1 January - Consolidated cash flow statement 30 June 2018 Adjustment 30 June 2018 (historical) (restated) Profit before tax 3,147 (91) 3,056 Adjustments (7,983) 91 (7,892) Movement in loan receivables from clients (6,872) (244) 4) (7,116) Realized gains/losses from investing activities and 715 (26)1) 689 impairment losses Net foreign exchange differences 44 356 3) 400 Income tax paid (957) (6) 4) (963) Other adjustments 892 11 4) 903 Net cash flows from operating activities (4,836) - (4,836) 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.
4. Information about major events that materially influence the structure of financial statement items
On 24 May 2019 the PZU Ordinary Shareholder Meeting adopted a resolution to distribute net profit for 2018. This matter is described in section 15. On 26 June 2019, Pekao’s Ordinary Shareholder Meeting adopted a resolution on the distribution of 2018 net profit, earmarking PLN 1,732 million, i.e. PLN 6.60 per share to be paid in dividends. The record date fell on 10 July 2019 and the dividend payout date on 30 July 2019. PZU received a dividend of PLN 347 million.
5. Corrections of errors from previous years
During the 6-month period from 1 January to 30 June 2019, no corrections of errors were made from previous years.
6. Material events after the end of the reporting period
No material events transpired after the end of the reporting period save for the issues described below.
6.1 Repayment of PZU Finance AB (publ.) bonds
On 3 July 2019, PZU Finance AB (publ.), a subsidiary company of PZU, repaid the entire indebtedness with the due interest on bonds with the par value of EUR 850 million.
6.2 Opening of a long-term bond issue program by Alior Bank
On 5 August 2019, the Supervisory Board of Alior Bank, in accordance with a motion submitted by Alior Bank’s Management Board, gave its consent for the launch of Alior Bank’s Long-Term Bond Issue Program and authorized the Management Board to repeatedly contract financial liabilities under this Program by issuing unsecured bonds. The total par value of the Program will not exceed PLN 5 billion. Additionally, the Alior Bank’s Supervisory Board, in accordance with a motion submitted by Alior Bank’s Management Board, agreed to close Alior Bank’s bond issue program established by a resolution adopted by the Alior Bank Management Board on 29 July 2015 and approved by a resolution adopted by the Alior Bank Supervisory Board on 10 August 2015.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN) 7. Supplementary notes to the condensed interim consolidated financial statements
7.1 Gross written premiums
1 April – 1 January - 1 April – 1 January - Gross written premiums 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Gross written premiums in non-life insurance 3,798 7,607 3,955 7,692 In direct insurance 3,804 7,607 3,979 7,703 In indirect insurance (6) - (24) (11) Gross written premiums in life insurance 2,140 4,232 2,095 4,189 Individual insurance premiums 401 760 373 745 Individually continued insurance premiums 506 1,011 502 1,001 Group insurance premiums 1,233 2,461 1,220 2,443 Total gross written premiums 5,938 11,839 6,050 11,881
Gross written premiums in direct non-life insurance (by 1 April – 1 January - 1 April – 1 January - accounting classes prescribed by section II of the attachment 30 June 2019 30 June 2019 30 June 2018 30 June 2018 to the Insurance Activity Act) Accident and sickness insurance (group 1 and 2) 175 357 149 310 Motor third party liability insurance (group 10) 1,468 2,903 1,547 3,001 Other motor insurance (group 3) 977 1,982 966 1,942 Marine, aviation and transport insurance (groups 4, 5, 6, 7) 25 45 28 45 Insurance against fire and other property damage (groups 8 and 9) 771 1,511 916 1,638 TPL insurance (groups 11, 12, 13) 199 437 189 420 Credit and suretyship (groups 14, 15) 23 43 24 47 Assistance (group 18) 133 259 121 235 Legal protection (group 17) 3 6 2 5 Other (group 16) 30 64 37 60 Total 3,804 7,607 3,979 7,703
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.2 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 2019 30 June 2019 (restated) (restated) Banking activity 861 1,664 851 1,671 Margin on foreign exchange transactions with clients 204 388 184 356 Brokerage fees 26 52 39 87 Fiduciary activity 15 30 18 34 Payment card and credit card services 232 439 208 400 Fees on account of insurance intermediacy activities 17 36 28 60 Credits and loans 101 195 119 220 Bank account-related services 103 204 105 213 Transfers 78 153 78 153 Cash operations 24 47 26 50 Receivables purchased 13 23 10 19 Suretyship, letters of credit, collections, promises 18 38 18 36 Other commission 30 59 18 43 Revenue and payments received from funds and mutual fund 128 252 137 273 companies Pension insurance 35 69 44 84 Other 8 8 1 2 Total revenue from commissions and fees 1,032 1,993 1,033 2,030
7.3 Net investment income
1 April – 1 January - 1 April – 1 January - Net investment income 30 June 2018 30 June 2018 30 June 2019 30 June 2019 (restated) (restated) Interest income, including: 3,188 6,106 2,752 5,423 Loan receivables from clients 2,326 4,559 2,097 4,040 Debt securities measured at fair value through other 289 495 189 437 comprehensive income Debt securities measured at amortized cost 351 616 301 615 Buy-sell-back transactions 20 35 20 37 Term deposits with credit institutions 25 53 32 63 Loans 60 126 43 84 Receivables purchased 28 62 20 55 Hedge derivatives 78 137 40 70 Receivables - 1 - 1 Cash and cash equivalents 11 22 10 21 Dividend income, including: 28 29 45 46 Investment financial assets measured at fair value through profit 6 7 25 26 or loss Investment financial assets measured at fair value through other 22 22 20 20 comprehensive income Income on investment property 68 133 64 128 Foreign exchange differences (72) 24 (360) (400) Investment activity expenses (6) (12) (4) (11) Investment property maintenance expenses (31) (58) (22) (49) Other 6 12 9 16 Total net investment income 3,181 6,234 2,484 5,153
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.4 Net result on realization of financial instruments and investments
1 April – 1 January - Net result on realization of financial instruments and 1 April – 1 January - 30 June 2018 30 June 2018 investments 30 June 2019 30 June 2019 (restated) (restated) Investment financial assets 57 147 84 118 Debt instruments measured at fair value through other 26 56 59 92 comprehensive income Financial instruments measured at fair value through profit or 27 78 23 22 loss Equity instruments (1) 3 (5) 6 Participation units and investment certificates 24 44 (6) (4) Debt instruments 4 31 34 20 Instruments measured at amortized cost 4 13 2 4 Loan receivables from clients measured at amortized cost 12 19 1 1 Derivatives (3) (1) (58) (18) Short sale 2 - 1 3 Receivables (14) (58) (13) (27) Investment property - - (6) (6) Net result on realization of financial instruments and 54 107 9 71 investments
7.5 Movement in allowances for expected credit losses and impairment losses on financial instruments
1 April – 1 January - Movement in allowances for expected credit losses and 1 April – 1 January - 30 June 2018 30 June 2018 impairment losses on financial instruments 30 June 2019 30 June 2019 (restated) (restated) Investment financial assets (15) 26 (13) 3 Debt instruments measured at fair value through other (3) 4 (5) (2) comprehensive income Instruments measured at amortized cost (12) 22 (8) 5 - debt instruments (13) (9) - 8 - term deposits with credit institutions (1) (1) (1) (1) - loans 2 32 (7) (2) Loan receivables from clients (669) (1,066) (354) (769) Measured at amortized cost (671) (1,048) (353) (773) Measured at fair value through other comprehensive income 2 (18) (1) 4 Receivables (17) - (3) (41) Associates (3) (3) (5) (5) Movement in allowances for expected credit losses and (704) (1,043) (375) (812) impairment losses on financial instruments, total
39
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.6 Net movement in fair value of assets and liabilities measured at fair value
Net movement in fair value of assets and liabilities measured at 1 April – 1 January - 1 April – 1 January - fair value 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Investment financial instruments measured at fair value through (64) 309 102 (9) profit or loss Equity instruments (12) 84 (57) (211) Debt securities (105) 32 141 246 Participation units and investment certificates 53 193 18 (44) Derivatives 215 121 246 275 Measurement of liabilities to members of consolidated mutual (1) (4) 9 15 funds Investment contracts for the client’s account and risk (unit-linked) (1) (6) - 10 Investment property (60) (72) 117 110 Loan receivables from clients 4 (1) 2 - Net movement in fair value of assets and liabilities measured at 93 347 476 401 fair value, total
7.7 Other operating income
1 April – 1 January - 1 April – 1 January - Other operating income 30 June 2018 30 June 2018 30 June 2019 30 June 2019 (restated) (restated) Revenues on the sales of products, merchandise and services by 148 293 133 297 non-insurance companies Revenues from direct claims handling on behalf of other insurance 58 109 47 100 undertakings Reversal of provisions 1) 93 188 54 239 Reimbursement of the costs of pursuit of claims 10 21 8 14 Reinsurance commissions and profit participation 14 29 13 22 Reversal of impairment losses for non-financial assets 6 6 8 8 Indemnity received 5 13 5 9 Interest for late payment of amounts due under direct insurance 9 16 5 14 and outward reinsurance Gain from sale of property, plant and equipment 1 1 4 10 Other 44 81 29 82 Other operating income, total 388 757 306 795 1) Including a reversal of PLN 182 million by the banks of a provision for guarantees and sureties given (1 January - 30 June 2018: PLN 233 million).
40
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.8 Claims, benefits and movement in technical provisions
1 April – 1 January - 1 April – 1 January - Claims, benefits and movement in technical provisions 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Claims, benefits and movement in technical provisions 4,013 8,124 3,773 7,504 In non-life insurance 2,386 4,709 2,262 4,415 - claims and benefits 2,119 3,960 1,786 3,565 - movement in technical provisions 53 335 283 462 - claims handling expenses 214 414 193 388 In life insurance 1,627 3,415 1,511 3,089 - claims and benefits 1,495 3,111 1,485 3,077 - movement in technical provisions 99 238 (6) (54) - claims handling expenses 33 66 32 66 Reinsurers’ share in claims, benefits and movement in (42) (195) (54) (159) technical provisions In non-life insurance (42) (195) (54) (159) Total net insurance claims and benefits 3,971 7,929 3,719 7,345
7.9 Fee and commission expenses
1 April – 1 January - 1 April – 1 January - Fee and commission expenses 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Costs of card and ATM transactions, including card issue costs 139 239 114 202 Commissions on acquisition of banking clients 22 41 19 35 Fees for the provision of ATMs 11 21 (1) 21 Costs of awards to banking clients 4 8 4 7 Costs of bank transfers and remittances 11 21 10 19 Additional services attached to banking products 7 13 7 14 Brokerage fees 4 8 3 8 Costs of administration of bank accounts 1 2 1 2 Costs of banknote operations 3 7 4 7 Fiduciary activity expenses 4 9 5 9 Other commission 11 22 16 29 Total fee and commission expenses 217 391 182 353
7.10 Interest expenses
1 April – 1 January - 1 April – 1 January - Interest expenses 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Term deposits 255 504 268 541 Current deposits 135 268 103 201 Own debt securities issued 111 220 94 190 Hedge derivatives 2 3 1 3 Loans 3 5 3 5 Repurchase transactions 11 21 16 30 Bank loans contracted by PZU Group companies 9 16 3 5 Leases 7 14 - - Other 7 14 11 17 Total interest expenses 540 1,065 499 992
41
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.11 Administrative, acquisition and claims handling expenses, by type
Administrative, acquisition and claims handling expenses, by 1 April – 1 January - 1 April – 1 January - type 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Consumption of materials and energy 55 113 70 144 Third party services 391 762 426 828 Taxes and charges 28 56 23 49 Employee expenses 1,208 2,382 1,256 2,425 Depreciation of property, plant and equipment 152 306 95 189 Amortization of intangible assets 94 188 82 170 Other, including: 811 1,609 775 1,558 - commissions in insurance activities 629 1,251 604 1,199 - advertising 67 129 72 130 - remuneration of group insurance administrators in work 52 103 51 103 establishments - other 63 126 48 126 Movement in deferred acquisition expenses (13) (44) (7) (48) Administrative, acquisition and claims handling expenses, 2,726 5,372 2,720 5,315 total
7.12 Other operating expenses
1 April – 1 January - 1 April – 1 January - Other operating expenses 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Levy on financial institutions 284 569 273 542 Expenses of the core business of non-insurance and non-banking 188 358 178 356 companies Direct claims handling expenses on behalf of other insurance 60 113 50 103 undertakings Compulsory payments to insurance market institutions and 35 82 20 53 banking market institutions Bank Guarantee Fund 32 547 47 277 Insurance Indemnity Fund 17 34 18 35 Fee to the National Fire Brigade Headquarters and Association of 1 19 1 21 Voluntary Fire Brigades Expenditures for prevention activity 6 19 22 31 Establishment of provisions 1) 225 333 89 249 Amortization of intangible assets purchased in company 58 116 87 167 acquisition transactions Recognition of impairment losses for non-financial assets 2 4 - 10 Donations - 23 - 24 Costs of pursuit of claims 19 38 23 38 Other 38 94 87 180 Other operating expenses, total 965 2,349 895 2,086 1) Including recognition of a provision for guarantees and sureties given by the banks int he amount of PLN 214 million (1 January - 30 June 2018: PLN 216 million).
42
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.13 Earnings per share
1 April – 1 January - 1 April – 1 January - Earnings per share 30 June 2018 30 June 2018 30 June 2019 30 June 2019 (restated) (restated) Net profit attributable to the equity holders of the parent company 734 1,481 783 1,410 Weighted average basic and diluted number of common shares 863,314,163 863,268,725 863,374,918 863,442,942 Number of outstanding shares 863,523,000 863,523,000 863,523,000 863,523,000 Average weighted number of treasury shares (held by (208,837) (254,275) (148,082) (80,058) consolidated entities) Basic and diluted earnings (losses) per common share (in PLN) 0.85 1.72 0.91 1.63 In the 6-month period ended 30 June 2019, there were no transactions or events resulting in the dilution of earnings per share.
7.14 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 2019 30 June 2019 (restated) (restated) Recognized through profit or loss (427) (902) (431) (771) - current tax (482) (836) (582) (915) - deferred tax 55 (66) 151 144 Recognized in other comprehensive income (deferred tax) (84) (112) 37 23 Total amount of current and deferred tax (511) (1,014) (394) (748)
1 April – 1 January - 1 April – 1 January - Income tax on other comprehensive income items 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Gross other comprehensive income 427 578 (142) (63) Income tax (84) (112) 37 23 Investment financial instruments measured at fair value through (73) (84) 35 31 other comprehensive income Measurement of loan receivables from clients (2) (4) - (9) Cash flow hedging transactions (9) (24) 2 1 Net other comprehensive income 343 466 (105) (40)
7.15 Goodwill
Goodwill 30 June 2019 31 December 2018 Pekao 1) 2,269 2,269 Alior Bank 746 746 Lietuvos Draudimas AB 2) 471 476 Mass insurance segment in non-life insurance (Link4) 221 221 AAS Balta 38 39 Medical companies 170 115 Other 5 5 Total goodwill 3,920 3,871 1) Includes goodwill on the acquisition of Pekao Investment Management SA. 2) Includes goodwill on acquisition of the Lietuvos Draudimas branch in Estonia. The increased goodwill of medical companies resulted from the acquisition of new entities: Falck CM, Starówka sp. z o.o. and Alergo-Med Tarnów sp. z o.o. More information on these transactions is presented in section 1.4.1. As a result of the analyses conducted, no impairment losses of goodwill were made in the 6 months ended 30 June 2019, just as in 2018.
43
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.16 Intangible assets
Intangible assets by type groups 30 June 2019 31 December 2018 Software, licenses and similar assets 1,248 1,250 Trademarks 611 611 Client relations 837 953 Intangible assets under development 323 354 Other intangible assets 13 12 Total intangible assets 3,032 3,180
7.17 Other assets
Other assets 30 June 2019 31 December 2018 Reinsurance settlements 62 105 Estimated salvage and subrogation 166 183 Deferred IT expenses 70 72 Accrued direct claims handling receivables 54 56 Inventories 49 51 Payments for taxes on property, means of transport and land 20 3 Payments for the costs of the allowance to the Company Social Benefit Fund 25 - Accrued commissions 11 6 Other assets 113 86 Total other assets 570 562
7.18 Property, plant and equipment
Property, plant and equipment by groups by type 30 June 2019 31 December 2018 Plant and machinery 585 529 Means of transport 186 138 Property, plant and equipment under construction 108 198 Real property 3,040 2,078 Other property, plant and equipment 307 241 Total property, plant and equipment 4,226 3,184
7.19 Loan receivables from clients
Loan receivables from clients 30 June 2019 31 December 2018 Measured at amortized cost 188,119 180,240 Measured at fair value through other comprehensive income 1,543 1,511 Measured at fair value through profit or loss 274 303 Total loan receivables from clients 189,936 182,054
44
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
30 June 2019 31 December 2018 Pur- Purchased chased or or Loan receivables from clients – origina- Basket Basket Basket Basket Basket Basket originated measured at amortized cost ted Total Total 1 2 3 1 2 3 credit- credit- impaired impaired (POCI) (POCI) Gross carrying amount 166,995 16,409 9,270 6,692 199,366 159,612 16,069 7,855 7,165 190,701 Expected credit losses (892) (1,219) (4,545) (4,591) (11,247) (870) (1,189) (3,601) (4,801) (10,461) Net carrying amount 166,103 15,190 4,725 2,101 188,119 158,742 14,880 4,254 2,364 180,240
30 June 2019 31 December 2018 Pur- Purchased chased or Loan receivables from clients – or origina- measured at fair value through Basket Basket Basket Basket Basket Basket originated ted Total Total other comprehensive income 1 2 3 1 2 3 credit- credit- impaired impaired (POCI) (POCI) Carrying amount 937 606 - - 1,543 1,511 - - - 1,511 Expected credit losses (6) (26) - - (32) (14) - - - (14) 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.
Loan receivables from clients 30 June 2019 31 December 2018 Retail segment 101,726 97,567 Operating loans 241 251 Consumer finance 28,826 27,380 Consumer finance loans 2,304 2,563 Loan to purchase securities 72 69 Overdrafts in credit card accounts 1,131 1,124 Loans for residential real estate 68,079 65,092 Other mortgage loans 816 830 Other receivables 257 258 Business segment 88,210 84,487 Operating loans 34,689 34,371 Car financing loans 25 35 Investment loans 27,110 26,166 Receivables purchased (factoring) 5,377 9,225 Overdrafts in credit card accounts 135 131 Loans for residential real estate 110 128 Other mortgage loans 8,508 8,560 Financial leases 10,066 5,327 Other receivables 2,190 544 Total loan receivables from clients 189,936 182,054
45
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.20 Financial derivatives
30 June 2019 31 December 2018 Derivatives Assets Liabilities Assets Liabilities Interest rate derivatives 2,358 2,947 1,971 2,933 Fair value hedging instruments – SWAP transactions 1 156 21 144 Cash flow hedging instruments – SWAP transactions 492 510 374 770 Instruments held for trading, including: 1,865 2,281 1,576 2,019 - FRA transactions 1 1 2 2 - SWAP transactions 1,852 2,269 1,564 2,012 - call options (purchase) 8 1 6 2 - put options (sale) 4 10 4 3 Foreign exchange derivatives 395 373 302 250 Cash flow hedging instruments – SWAP transactions 86 23 31 1 Instruments held for trading, including: 309 350 271 249 - forward contracts 139 144 92 131 - SWAP transactions 98 128 115 54 - call options (purchase) 44 19 46 22 - put options (sale) 28 59 18 42 Equity derivatives – held for trading 89 50 78 49 - forward contracts - - 10 13 - call options (purchase) 89 2 66 2 - put options (sale) - 48 2 34 Commodity derivatives – held for trading 95 76 136 133 - forward contracts 31 19 35 34 - SWAP transactions 26 26 46 45 - call options (purchase) 28 3 21 5 - put options (sale) 10 28 34 49 Total derivatives 2,937 3,446 2,487 3,365
46
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.21 Investment financial assets
30 June 2019 31 December 2018 at fair at fair value at fair value at fair Investment financial assets at through value at through value amortized other through Total amortized other through Total cost compre- profit or cost compre- profit or hensive loss hensive loss income income Equity instruments n/a 629 961 1,590 n/a 522 1,220 1,742 Participation units and investment n/a n/a 4,498 4,498 n/a n/a 4,298 4,298 certificates Debt securities 38,708 49,546 5,792 94,046 34,652 38,215 12,176 85,043 Government securities 31,587 35,482 5,348 72,417 27,501 26,167 11,986 65,654 Domestic 31,412 33,171 5,218 69,801 27,349 23,419 10,793 61,561 Fixed rate 28,195 21,798 3,412 53,405 24,074 10,745 8,893 43,712 Floating rate 3,217 11,373 1,806 16,396 3,275 12,674 1,900 17,849 Foreign 175 2,311 130 2,616 152 2,748 1,193 4,093 Fixed rate 175 2,311 130 2,616 152 2,748 1,193 4,093 Other 7,121 14,064 444 21,629 7,151 12,048 190 19,389 Fixed rate 839 5,779 27 6,645 1,323 4,501 39 5,863 Floating rate 6,282 8,285 417 14,984 5,828 7,547 151 13,526 Other, including: 10,068 - - 10,068 10,582 - - 10,582 Buy-sell-back transactions 2,858 - - 2,858 3,278 - - 3,278 Term deposits with credit 2,667 - - 2,667 2,769 - - 2,769 institutions Loans 4,543 - - 4,543 4,535 - - 4,535 Investment financial assets, total 48,776 50,175 11,251 110,202 45,234 38,737 17,694 101,665
30 June 2019 31 December 2018 Pur- Purchased chased or or Debt securities – measured at origina- Basket Basket Basket Basket Basket Basket originated amortized cost ted Total Total 1 2 3 1 2 3 credit- credit- impaired impaired (POCI) (POCI) Gross carrying amount 38,390 374 33 - 38,797 34,657 35 33 2 34,727 Expected credit losses (37) (19) (33) - (89) (35) (7) (33) - (75) Net carrying amount 38,353 355 - - 38,708 34,622 28 - 2 34,652
30 June 2019 31 December 2018 Pur- Purchased chased or Debt securities – measured at or origina- fair value through other Basket Basket Basket Basket Basket Basket originated ted Total Total comprehensive income 1 2 3 1 2 3 credit- credit- impaired impaired (POCI) (POCI) Gross carrying amount 49,376 170 - - 49,546 38,142 73 - - 38,215 Expected credit losses (30) (6) - - (36) (37) (3) - - (40)
47
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
30 June 2019 31 December 2018 Pur- Purchased chased or or Term deposits with credit origina- Basket Basket Basket Basket Basket Basket originated institutions ted Total Total 1 2 3 1 2 3 credit- credit- impaired impaired (POCI) (POCI) Gross carrying amount 2,668 1 9 - 2,678 2,770 1 9 - 2,780 Expected credit losses (2) - (9) - (11) (2) - (9) - (11) Net carrying amount 2,666 1 - - 2,667 2,768 1 - - 2,769
30 June 2019 31 December 2018 Pur- Purchased chased or or origina- Loans Basket Basket Basket Basket Basket Basket originated ted Total Total 1 2 3 1 2 3 credit- credit- impaired impaired (POCI) (POCI) Gross carrying amount 4,510 61 - - 4,571 4,595 - - - 4,595 Expected credit losses (25) (3) - - (28) (60) - - - (60) Net carrying amount 4,485 58 - - 4,543 4,535 - - - 4,535
The allowance pertaining to debt investment financial assets measured at fair value through other comprehensive income is recognized in the revaluation reserve and does not lower the carrying amount of assets.
Equity instruments measured at fair value through other comprehensive income 30 June 2019 31 December 2018 Grupa Azoty SA 346 257 Biuro Informacji Kredytowej SA 191 173 Polimex-Mostostal SA 37 38 PSP sp. z o.o. 24 22 Krajowa Izba Rozliczeniowa SA 14 13 Other 17 19 Equity instruments measured at fair value through other comprehensive income, total 629 522
48
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Exposure to debt securities issued by governments other than the Polish government
Carrying amount of debt securities issued by governments other than the Polish 30 June 2019 31 December 2018 government Lithuania 716 638 United States 318 957 Latvia 130 90 Ukraine 105 90 Romania 100 157 Croatia 99 152 Indonesia 87 71 Columbia 80 42 Brazil 77 57 Russia 76 69 Bulgaria 74 75 Panama 70 36 Philippines 59 42 Oman 56 41 Hungary 56 117 Uruguay 55 42 Dominican Republic 52 42 South Africa 50 35 Other 356 1) 1,340 2) Total 2,616 4,093 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: Argentina, Australia, Azerbaijan, Bahrain, Belarus, Belgium, Bolivia, Chile, Costa Rica, Côte d’Ivoire, Denmark, Egypt, France, Germany, Ghana, Guatemala, Holland, Honduras, Ireland, Italy, Jamaica, Jordan, Kazakhstan, Kenya, Mexico, Mongolia, Morocco, Namibia, Nigeria, Paraguay, Peru, Qatar, Saudi Arabia, Senegal, Serbia, Slovenia, Spain, Sri Lanka, Sweden, Trinidad and Tobago, Turkey, Uzbekistan, United Kingdom, Vietnam. 2) The Other line item states Albania, Argentina, Armenia, Australia, Azerbaijan, Belarus, Belgium, Bolivia, Cameroon, Chile, Costa Rica, Côte d’Ivoire, Denmark, Egypt, Ethiopia, France, Germany, Ghana, Greece, Guatemala, Holland, Honduras, India, Ireland, Italy, Jamaica, Jordan, Kazakhstan, Kenya, Morocco, Mexico, Mongolia, Namibia, Nigeria, Paraguay, Peru, Portugal, Senegal, Serbia, Slovenia, Spain, Sri Lanka, Sweden, Trinidad and Tobago, Turkey, United Kingdom, Vietnam.
Exposure to debt securities issued by corporations and local government units
Issuer 30 June 2019 31 December 2018 National Bank of Poland 1,800 2,999 Domestic local governments 6,302 5,710 Foreign banks 4,468 3,495 Companies from the WIG-Energy Index 2,292 1,183 Manufacturing 1,145 978 Financial and insurance services 1,017 725 Public utility services 743 759 Companies from the WIG-Banks Index 556 452 Transportation and storage 732 1,232 Energy and fuel sector companies (including: WIG-Fuels index companies) 637 1,173 Mining and quarrying (including companies included in the WIG-Mining index) 477 130 Construction and real estate market service 409 158 Other professional, scientific and technical activity 421 136 Arts, entertainment and recreation activity (including WIG - hotels and restaurants index 323 188 companies) Information and communication (including: WIG - Telecommunications index companies) 195 4 Other 112 67 Total 21,629 19,389
49
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.21.1. Information on the changes in the economic situation and business conditions exerting a material effect on the fair value of financial assets and liabilities
7.21.1.1. Capital market
In H1 2019, the yields of 10-year treasury bonds of the US and Germany continued to decrease. In the US yields slid from 2.69% at the outset of the year to 2.00% at the end of June. In Germany, yields fell to record low levels; at the end of June they were - 0.33%, compared to 0.25 in the beginning of the year. In both cases, the yield curve flattened. In the USA, the yield curve temporarily reversed at the end of March and since 23 May the interest rate on 3-month treasury bills has continuously exceeded the yield on 10-year bonds. In the past that type of situation ordinarily preceded a recession. Responding to the risk of economic slowdown and lower prices on the financial markets, the US Central Bank (Fed) at the beginning of the quarter did an about-face in monetary policy, signaling the suspension of further interest rate hikes and later it also allowed the possibility of reducing the rates, which in fact happened on 31 July. It also made the decision to bring to an early conclusion the process of shrinking its balance sheet. The European Central Bank (ECB) also reacted to the soft data concerning economic growth and declining long- term inflation expectations by announcing the extension of its policy of stable or lower interest rates until at least the end of 2020. It also decided to introduce a new TLTRO (targeted longer-term refinancing operations) program as of September 2019. The ECB is also giving consideration to the possibility of differentiating interest rates depending by the liquidity surpluses deposited by banks (this solution should serve to counteract the adverse consequences of negative interest rates on banks’ profitability) and restore the asset purchase program. The yields of 10-year Polish treasury bonds fell significantly in H1 2019. At the beginning of the year it was 2.85%, but fell to only 2.39% at the end of June. The yields started to decline in May, which was later than on the core markets, since the announced budget expenditures drove 10-year treasury bond yields close to 3% at the end of February. In the beginning of May they shortly crossed the 3% threshold and it was only after the increase in customs duties on Chinese goods by the US President was announced (which increased concerns about the state of the global economic situation) that they started to decline in line with the trend on the core markets. At that time, market expectations for future NBP interest rates decreased along with the market assessments of Poland’s credit risk. The spread versus 10-year German bonds that at the beginning of the quarter was 260 basis points increased to 302 basis points early in May, only to drop to 272 basis points at the end of June. At the same time, the yield curve flattened. The yield on one-year treasury bonds grew from 0.90% at the end of 2018 to 1.40% at the end of June 2019. On the global equity markets, following the declines at the end of last year, the first half of 2019 saw a sudden recovery which halted only for a moment in May after the aggravation of the US-China trade conflict. The change in the policy pursued by the major central banks was conducive to rapid growth in equity prices. In the first half of 2019 the American S&P500 stock index shot up 17.35% while the German DAX index climbed 17.42%. Polish equities also moved up in the first half of the year. In that period, the WIG index rose 4.3%, much slower than the corresponding indices on the core markets. The WIG20 index climbed just 2.2%, while the prices of smaller cap companies grew relatively faster. The mWIG40 rose by 4.4% while the sWIG80 surged upward 11.8%. Looking at the sector structure, the WIG Telecommunications index noted a particularly strong performance, while the WIG Energy index fell sharply.
7.21.1.2. Interest rate risk and inflation
Over the entire first half of 2019, inflation (measured by CPI) was on average only slightly higher than in H2 2018 (1.8% y/y vs. 1.7% y/y). However the increase in prices of consumer goods and services visibly picked up the pace during the first half of the year. In Q2 of this year, CPI reached on average 2.4% y/y, compared to 1.2% y/y in Q1. CPI growth in H1 was promoted not only by the clear increase in prices of food and fuels – net core inflation rose as well (CPI net of food and energy prices) to 1.8% y/y in Q2 of this year, compared to 1.1% y/y one quarter earlier. The main factor contributing to CPI growth was an increase in prices of services (3.9% y/y in June). Commodity prices, which competed with imports, rose more slowly (2.2% y/y in June). The NBP interest rates remained stable in H1 2019. The reference interest rate has remained at 1.5% since March 2015. According to the Monetary Policy Board, the current level of interest rates supports the maintenance of the Polish economy on a sustainable growth path and enables it to maintain the macroeconomic equilibrium.
50
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.21.1.3. FX rates
The EUR to USD exchange rate reached 1.1388 at the end of H1 2019, which was only 0.4% less than at the end of last year. However starting from the end of April until the beginning of June, the common European currency clearly weakened vs. the US dollar, with the exchange rate mostly staying below 1.12. In the first half of the year, the PLN appreciated slightly versus the two main global currencies. The EUR to PLN exchange rate fell by 1.1% from 4.30 at the end of 2018 to 4.25 at the end of June 2019, while the USD to PLN exchange rate decreased by 0.7% from 3.76 to 3.73. The CHF to PLN exchange rate was 3.83 at the end of June 2019, compared to 3.82 at the end of 2018.
7.21.2. 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 2019, no changes were made to the classification of financial assets resulting from a change in the purpose or use of such assets.
7.22 Fair value
7.22.1. Description of valuation techniques
7.22.1.1. 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 loans and debt securities for which an active market does not exist is measured using the discounted cash flow method. Discount rates are determined on the basis of the yield curve for government bonds adjusted by the credit spread. It is calculated as at the newest issue date based on the issue price and leads to parallel shifting of the yield curve for government bonds by a fixed amount along its whole length or as the difference between the yield of 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.
7.22.1.2. Equity-based financial assets
Fair values of equity-based financial assets are determined on the basis of quotations publicly available on an active market.
7.22.1.3. Participation units and investment certificates of mutual funds
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. In the event that participation units and investment certificates are quoted on an active market, their fair value is determined on the basis of quotations publicly available on an active market.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.22.1.4. 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 (IRSs) 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. 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.
7.22.1.5. Loan receivables from clients
In order to determine a change in the fair value of receivables from clients (excluding current account overdraft), the margins earned on newly granted loans (in the month preceding the date as at which the consolidated financial statements are prepared) are compared with the margins in the whole loan portfolio. If the margins earned on newly granted loans are higher than the margins in the existing portfolio the fair value of the loan portfolio is lower than its carrying amount. Loan receivables from clients 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.
7.22.1.6. 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 exemptions in the payment of rent, 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 appraised by licensed appraisers. The acceptance of each such measurement is additionally preceded by a review conducted by PZU Group companies’ 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;
52
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
real properties held for sale – measured before the commencement of their active exposure to the market in accordance with the requirements of IFRS 5.
7.22.1.7. 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.
7.22.2. 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;
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
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.); 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- Liquidity margin free market rate plus the liquidity margin and current sales margin for the and current loan’s product group. The margin is determined by product group and by Loan receivables from Negative margin from the maturity. For the purpose of estimating the fair value of foreign currency clients correlation. sale of the product loans, the liquidity margin for PLN loans is used, adjusted by quotations of group 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 date. The cash flow Liabilities to clients under Negative Sales margin discounting rate is the appropriate risk-free market rate plus the current deposits correlation. 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 Options embedded in individual shares, indices, commodities and other market multiples, certificates of deposit including interest rate indices and exchange rates and their baskets. All issued by PZU Group separated options are offset on an ongoing basis on the interbank market. companies and options Model parameters Currency options are measured based on the Garman-Kohlhagen option concluded in the interbank pricing model (and in the case of barrier and Asian options based on the so- market to hedge called extended Garman-Kohlhagen model). Exotic options embedded in embedded option deposit agreements and their offsets are measured using the Monte-Carlo positions. technique, assuming a geometric Brownian motion model for risk factors.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Unobservable Impact on Measured assets Description data measurement 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 issue of new Non-liquid bonds and Negative Credit spreads bond series, dates of conclusion of new loan agreements and dates of loans correlation. market transactions on the receivables following from such bonds and loans. Investment property and Capitalization rate is determined through analysis of rates of return Negative property designated for Capitalization rate obtained in transactions for similar properties. correlation. sale Investment property and Construction costs are determined based on market construction costs less Positive property designated for Construction costs costs incurred as at the date of measurement. correlation. sale Monthly rental rate Investment property and per 1 m2 of Rental rates are observed for similar properties of similar quality, in similar Positive property designated for relevant space or locations and with a similar size of leased space. correlation. sale per 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 the historical spread of issues 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 active Quotations of financial services market
7.22.3. Assets and liabilities measured at fair value
30 June 2019 31 December 2018 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 31,195 11,911 7,069 50,175 22,200 9,329 7,208 38,737 through other comprehensive income Equity instruments 394 1 234 629 309 1 212 522 Debt securities 30,801 11,910 6,835 49,546 21,891 9,328 6,996 38,215 Investment financial assets measured at fair value 6,092 4,930 229 11,251 12,758 4,684 252 17,694 through profit or loss Equity instruments 787 - 174 961 1,105 - 115 1,220 Participation units and investment certificates 105 4,377 16 4,498 102 4,182 14 4,298 Debt securities 5,200 553 39 5,792 11,551 502 123 12,176 Loan receivables from clients - - 1,817 1,817 - - 1,814 1,814 Measured at fair value through other - - 1,543 1,543 - - 1,511 1,511 comprehensive income Measured at fair value through profit or loss - - 274 274 - - 303 303 Financial derivatives 7 2,831 99 2,937 35 2,384 68 2,487 Investment property - 144 1,652 1,796 - 141 1,556 1,697 Liabilities Derivatives 4 3,386 56 3,446 34 3,295 36 3,365 Liabilities to members of consolidated mutual funds - 43 - 43 - 266 - 266 Investment contracts for the client’s account and risk - 264 - 264 - 266 - 266 (unit-linked) Liabilities on borrowed securities (short sale) 546 - - 546 120 - - 120
55
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Investment financial assets Investment financial assets measured at fair Loan receivables from clients measured at fair value through Movement in assets and value through profit or loss measured at fair value liabilities classified as Level III other comprehensive income Derivatives – Derivatives – Investment of the fair value hierarchy, in assets liabilities through other property Investment through profit the period ended 30 June 2019 Equity Debt Equity Debt comprehensive certificates or loss income Balance at the beginning of the 212 6,996 115 14 123 68 36 1,511 303 1,556 period Application of IFRS 16 ------43 Purchase/opening of the - 268 - - 325 10 8 120 - 94 position Reclassification from Level II - 575 1) - - - 2 1) - - - - Reclassification from own ------2 properties Profit or loss recognized in the - 79 60 2 3 41 33 (2) (3) (42) profit and loss account as: - net investment income - 77 - - 1 (1) - (2) (3) - - net result on realization of financial instruments and - 2 ------properties - net movement in fair value of assets and liabilities - - 60 2 2 42 33 - - (42) measured at fair value Profits or losses recognized in 22 16 - - - - - 3 - - other comprehensive income Sale and settlements - (454) - - (404) (22) (21) (89) (26) (1) Reclassification to Level II - (645) 1) - - (8) - - - - - Foreign exchange differences - - (1) ------Balance at the end of the 234 6,835 174 16 39 99 56 1,543 274 1,652 period 1) Information on the restatements is presented in item 7.22.4.2.
56
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Investment financial assets Investment financial assets measured at fair Loan receivables from clients Movement in assets and measured at fair value through liabilities classified as Level III value through profit or loss measured at fair value other comprehensive income Derivatives – Derivatives – Investment of the fair value hierarchy in assets liabilities through other property the year ended 31 December Investment through profit Equity Debt Equity Debt comprehensive 2018 certificates or loss income Balance at the beginning of the period – classification at the 221 4,855 95 - 163 100 52 1,556 365 2,204 time of applying IFRS 9 Purchase/opening of the - 3,034 - 14 727 16 10 409 3 139 position Reclassification from Level I - - 2 ------Reclassification from Level II - 1901) ------3 Reclassification from own ------4 properties Profit or loss recognized in the - 49 14 - 3 (30) (9) 29 3 48 profit and loss account as: - net investment income - 49 - - - - - 29 - - - net result on realization of financial instruments and - - (2) - - (3) - - - - properties - net movement in fair value of assets and liabilities - - 16 - 3 (27) (9) - 3 48 measured at fair value Profits or losses recognized in (9) (12) - - - - - 31 - - other comprehensive income Sale and settlements - (1,056) - - (756) (18) (17) (514) (68) (11) Reclassification to assets held ------(831) for sale Reclassification to Level II - (64) - - (14) - - - - - Foreign exchange differences - - 4 ------Balance at the end of the 212 6,996 115 14 123 68 36 1,511 303 1,556 period 1) Information on the restatements is presented in item 7.22.4.2.
57
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.22.4. Assets and liabilities not measured at fair value
30 June 2019 31 December 2018 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 Entities measured by the equity method – EMC - - 6 6 - - 14 14 Loan receivables from clients measured at amortized - - 188,733 188,733 - - 181,635 181,635 cost Investment financial assets measured at amortized 28,661 3,209 20,449 52,319 24,251 2,301 21,541 48,093 cost Debt securities 28,661 1,229 12,279 42,169 24,251 1,239 11,900 37,390 Buy-sell-back transactions - 551 2,307 2,858 - 126 3,153 3,279 Term deposits with credit institutions - 1,429 1,247 2,676 - 936 1,830 2,766 Loans - - 4,616 4,616 - - 4,658 4,658 Liabilities Liabilities to banks - 1,081 6,205 7,286 - 781 5,280 6,061 Liabilities to clients under deposits - - 211,554 211,554 - - 207,668 207,668 Liabilities on the issue of own debt securities 1) - 5,991 6,609 12,600 - 5,295 6,800 12,095 Subordinated liabilities 1) - 2,365 4,134 6,499 - 2,013 4,043 6,056 Liabilities on account of repurchase transactions - 299 - 299 - 540 - 540 1) The liabilities classified to level II are those whose measurement was not affected by unobservable parameters. They are primarily liabilities on account of bonds issued by Pekao.
7.22.4.1. Change in the fair value measurement methodology for financial instruments measured at fair value
In the 6-month period ended 30 June 2019, 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.
7.22.4.2. 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 2019, the following reclassifications of assets between fair value levels were made: reclassification from Level III to Level II was applied to municipal and corporate bonds measured using market information about prices of comparable financial instruments, municipal and corporate bonds for which the estimated credit parameters had no significant impact on their measurement and capital market derivatives because the unobservable factor (correlation) had no significant impact on their measurement,
58
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
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 estimated parameter (correlation) exerted a significant impact on the measurement. In 2018, the following transfers 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; reclassification from level III to level II was applied to municipal and corporate bonds measured using market information about prices of comparable financial instruments, corporate bonds for which the estimated credit parameters had no significant impact on their measurement, treasury bonds denominated in Polish zloty for which the estimated spread to benchmark bond had no significant impact on their measurement and a derivative equity market transaction because the unobservable factor (correlation) had no significant impact on their measurement; corporate and municipal bonds for which the impact of the estimated parameter (correlation) exerted a significant impact on their measurement were reclassified from Level II to Level III.
7.23 Receivables
Receivables – carrying amount 30 June 2019 31 December 2018 Receivables on direct insurance, including: 2,605 2,574 - receivables from policyholders 2,355 2,438 - receivables from insurance intermediaries 117 112 - other receivables 133 24 Reinsurance receivables 87 115 Other receivables 3,391 3,654 - receivables from disposal of securities and security deposits 1) 1,324 1,632 - receivables on account of payment card settlements 798 992 - trade receivables 338 340 - receivables from the state budget, other than corporate income tax receivables 232 237 - receivables by virtue of commissions concerning off-balance sheet products 141 178 - prevention settlements 42 46 - receivables from direct claims handling on behalf of other insurance undertakings 27 27 - receivables for acting as an emergency adjuster 13 14 - receivables on account of Corporate Income Tax 5 6 - receivables from security and bid deposits 36 34 - interbank and interbranch receivables 239 7 - receivables on account of a subsidy from the Bank Guarantee Fund 96 - - other 100 141 Total receivables 6,083 6,343 1) this line item presents receivables associated with executed but outstanding transactions on financial instruments. As at 30 June 2019 and 31 December 2018, 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 2019 was PLN 1,034 million (as at 31 December 2018: PLN 939 million).
59
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.24 Extent of exposure to credit risk
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 No the Credit risk assets at 30 June 2019 AAA AA A BBB BB B Total rating client’s risk Debt securities measured at amortized cost – - - 29,531 245 3 - 8,929 - 38,708 carrying amount - gross carrying amount - - 29,539 245 3 - 9,007 - 38,794 - allowance for expected credit losses - - (8) - - - (78) - (86) Debt securities measured at fair value through other comprehensive income – 311 50 36,675 3,924 365 - 8,221 - 49,546 carrying amount - allowance for expected credit losses 1) - - (4) (5) (1) - (26) - (36) Debt securities measured at fair value 1 11 4,195 187 19 25 151 1,203 5,792 through profit or loss – carrying amount Term deposits with credit institutions and - 124 3,477 260 173 - 1,427 64 5,525 buy-sell-back transactions – carrying amount - gross carrying amount - 124 3,477 260 173 - 1,438 64 5,536 - allowance for expected credit losses ------(11) - (11) Loans – carrying amount - - - 52 608 - 3,883 - 4,543 - gross carrying amount - - - 52 609 - 3,910 - 4,571 - allowance for expected credit losses - - - - (1) - (27) - (28) Derivatives 1,207 83 745 318 2 - 544 38 2,937 Reinsurers’ share in claims provisions - 131 609 - - - 168 - 908 Reinsurance receivables - 12 47 - - - 28 - 87 Total 1,519 411 75,279 4,986 1,170 25 23,351 1,305 108,046 1) The allowance is recognized in the revaluation reserve and does not lower the carrying amount of assets.
60
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Assets at No the Credit risk assets at 31 December 2018 AAA AA A BBB BB B Total rating client’s risk Debt securities measured at fair value through 970 671 23,563 1,304 362 - 11,345 - 38,215 other comprehensive income – carrying amount - allowance for expected credit losses 1) - - (7) (3) (1) - (29) - (40) Debt securities measured at fair value through 49 7 10,080 463 188 - 178 1,211 12,176 profit or loss – carrying amount Debt securities measured at amortized cost – - 83 27,529 1,652 - - 5,388 - 34,652 carrying amount - gross carrying amount - 83 27,537 1,653 - - 5,455 - 34,728 - allowance for expected credit losses - - (8) (1) - - (67) - (76) Term deposits with credit institutions and buy- - - 951 4,151 62 - 793 90 6,047 sell-back transactions – carrying amount - gross carrying amount - - 951 4,151 62 - 804 90 6,058 - allowance for expected credit losses ------(11) - (11) Loans – carrying amount - - - - 612 - 3,923 - 4,535 - gross carrying amount - - - - 613 - 3,982 - 4,595 - allowance for expected credit losses - - - - (1) - (59) - (60) Derivatives 821 405 222 295 - 2 714 28 2,487 Reinsurers’ share in claims provisions - 149 634 - - - 135 - 918 Reinsurance receivables - 21 55 - - - 39 - 115 Total 1,840 1,336 63,034 7,865 1,224 2 22,515 1,329 99,145 1) The allowance is recognized in the revaluation reserve and does not lower the carrying amount of assets. 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 B No rating Ratio 30 June 2019 0.70% 0.73% 1.28% 3.44% 12.22% 24.21% 20.62% Ratio 31 December 2018 0.71% 0.76% 1.34% 3.58% 12.77% 24.95% 24.95% The quantity of credit risk for assets for which the PZU Group incurs risk on 30 June 2019 was PLN 6,113 million (at 31 December 2018: PLN 6,924 million; while if the ratios on 30 June 2019 are applied this figure would be PLN 5,893 million).
7.25 Assets held for sale
Assets held for sale by classification before transfer 30 June 2019 31 December 2018 Groups held for sale 971 1,021 Assets 1,030 1,070 Investment property 955 973 Receivables 14 12 Deferred tax assets 8 5 Cash and cash equivalents 46 76 Other assets 7 4 Liabilities related directly to assets classified as held for sale 59 49 Deferred tax liability 27 27 Other liabilities 32 22 Other assets held for sale 109 77 Property, plant and equipment 73 34 Investment property 36 43 Assets and groups of assets held for sale 1,139 1,147 Liabilities related directly to assets classified as held for sale 59 49 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.
61
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.26 Technical provisions
30 June 2019 31 December 2018 Technical provisions reinsurers’ reinsurers’ gross net gross net share share Technical provisions in non-life insurance 23,971 (1,386) 22,585 23,508 (1,512) 21,996 Provision for unearned premiums 8,562 (478) 8,084 8,416 (594) 7,822 Provision for unexpired risk 8 - 8 10 - 10 Provisions for outstanding claims and benefits 9,408 (715) 8,693 9,098 (724) 8,374 - for reported claims 3,388 (621) 2,767 3,280 (603) 2,677 - for claims not reported (IBNR) 4,039 (74) 3,965 3,939 (103) 3,836 - for claims handling expenses 1,981 (20) 1,961 1,879 (18) 1,861 Provision for the capitalized value of annuities 5,990 (193) 5,797 5,981 (194) 5,787 Provisions for bonuses and discounts for insureds 3 - 3 3 - 3 Technical provisions in life insurance 22,571 - 22,571 22,331 - 22,331 Provision for unearned premiums 99 - 99 99 - 99 Life insurance provision 16,294 - 16,294 16,204 - 16,204 Provisions for outstanding claims and benefits 585 - 585 592 - 592 - for reported claims 148 - 148 152 - 152 - for claims not reported (IBNR) 431 - 431 434 - 434 - for claims handling expenses 6 - 6 6 - 6 Provisions for bonuses and discounts for insureds 4 - 4 4 - 4 Other technical provisions 242 - 242 256 - 256 Unit-linked provision 5,347 - 5,347 5,176 - 5,176 Total technical provisions 46,542 (1,386) 45,156 45,839 (1,512) 44,327
7.27 Other provisions
Balance at Balance at Movement in other provisions in the period the Other Increase Utilization Termination the end of ended 30 June 2019 beginning of changes the period the period Provisions for guarantees and sureties given 316 214 - (182) - 348 Provision for disputed claims and potential 67 16 (6) (5) 3 75 liabilities Provision for penalties imposed by the Office of 85 - - - - 85 Competition and Consumer Protection Provision for restructuring expenses 20 92 (30) (1) - 81 Other 31 11 (6) - - 36 Total other provisions 519 333 (42) (188) 3 625
Balance at Balance As at Applica- the at the Movement in other provisions in the year 31 In- Utiliza- Other tion of beginning Reversal end of ended 31 December 2018 Decem- crease tion changes IFRS 9 of the the ber 2017 period period Provisions for guarantees and sureties given 260 159 419 441 (25) (477) (42) 316 Provision for disputed claims and potential 82 - 82 52 (12) (55) - 67 liabilities Provision for penalties imposed by the Office of 57 - 57 - - - 28 85 Competition and Consumer Protection Provision for restructuring expenses 63 - 63 - (36) (7) - 20 Other 35 - 35 10 (13) (1) - 31 Total other provisions 497 159 656 503 (86) (540) (14) 519
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (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).
Provision for penalties imposed by the Office of Competition and Consumer Protection The amount of PLN 57 million pertains to the penalty imposed on PZU in the proceedings of the President of the Office of Competition and Consumer Protection. Additional information on this matter is presented in section 16.2. The amount of 28 million pertains to a penalty returned by the Office of Competition and Consumer Protection to Pekao. Due to the potential risk of outflow of resources in connection with this case the PZU Group has not recognized the revenue on account of the refunded resources but recognized a provision.
Provision for restructuring expenses The Pekao Management Board reported that on 4 April 2019, in accordance with the provisions of the Act of 13 March 2003 on the Special Rules for Terminating Employment Relationships with Employees for Reasons Not Attributable to Employees (consolidated text in the Journal of Laws of 2018, item 1969), it adopted a resolution concerning the intention of conducting group layoffs and commencing the consultation procedure on group layoffs. In the period from 26 April 2019 to 31 October 2019, the Management Board of Pekao intends to terminate employment contracts with a maximum of 900 employees and modify employment conditions to a maximum of 620 employees. The total costs related to the termination of employment contracts and to the modification of the employment conditions of Pekao employees under group layoffs has been estimated at PLN 85 million and the restructuring provision in this amount has been established for this purpose. The value of the provision as at 30 June 2019 was PLN 65 million.
7.28 Financial liabilities
Financial liabilities 30 June 2019 31 December 2018 Financial liabilities measured at fair value 4,299 4,017 Derivatives held for trading 2,757 2,450 Cash flow hedge derivatives 533 771 Fair value hedge derivatives 156 144 Liabilities on borrowed securities (short sale) 546 120 Investment contracts for the client’s account and risk (unit-linked) 264 266 Liabilities to members of consolidated mutual funds 43 266 Financial liabilities measured at amortized cost 238,564 232,299 Liabilities to banks 7,279 6,044 Current deposits 3,091 1,058 One-day deposits 24 207 Term deposits 360 7 Loans received 3,212 4,386 Other liabilities 592 386 Liabilities to clients under deposits 210,816 207,635 Current deposits 139,009 137,559 Term deposits 70,869 69,350 Other liabilities 938 726 Liabilities on the issue of own debt securities 12,535 12,009 Subordinated liabilities 6,423 6,061 Liabilities on account of repurchase transactions 300 540 Lease liabilities 1,211 10 Total financial liabilities 242,863 236,316
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
7.28.1. Subordinated liabilities
Carrying Carrying amount amount Par value Cur- Issue (receipt) date / Interest rate 30 June 31 December (in millions) rency Maturity date 2019 2018 (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 2,277 2,279 29 July 2027 Liabilities classified as Pekao’s own funds 30 October 2017 A series bonds 1,250 PLN WIBOR 6M + margin 1,257 1,257 29 October 2027 15 October 2018 B series bonds 550 PLN WIBOR 6M + margin 554 548 16 October 2028 15 October 2018 C series bonds 200 PLN WIBOR 6M + margin 201 196 14 October 2033 4 June 2019 D series bonds 350 PLN WIBOR 6M + margin 351 - 4 June 2031 Liabilities classified as Alior Bank’s equity 12 October 2011 Subordinated loan 10 EUR EURIBOR 3M + margin 43 43 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 4 December 2015 I and I1 series bonds 183 PLN WIBOR 6M + margin 147 148 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 series B bonds 67 PLN WIBOR 6M + margin 68 68 29 April 2021 21 October 2014 Meritum Bank series C bonds 80 PLN WIBOR 6M + margin 81 81 21 October 2022 4 February 2016 EUR001 series bonds 10 EUR LIBOR 6M + margin 44 44 4 February 2022 14 April 2016 P1A series bonds 150 PLN WIBOR 6M + margin 151 151 16 May 2022 21 April 2016 P1B series bonds 70 PLN WIBOR 6M + margin 70 70 16 May 2024 27 December 2017 P2A series bonds 150 PLN WIBOR 6M + margin 153 150 29 December 2025 Subordinated liabilities 6,423 6,061 The lower carrying amount of subordinated liabilities compared to the nominal value ensues from the fact that consolidated mutual funds subscribed for some of the bonds issued by Alior Bank.
7.28.2. Liabilities on the issue of own debt securities
Liabilities on the issue of own debt securities 30 June 2019 31 December 2018 Bonds of PZU Finance AB (publ.) 3,663 3,676 Alior Bank series J bonds 268 268 Pekao bonds 2,685 1,978 Certificates of deposit 4,545 4,542 Covered bonds 1,374 1,545 Liabilities on the issue of own debt securities 12,535 12,009
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (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.) under the bonds have been repaid in accordance with the maturity date as at 3 July 2019.
7.29 Other liabilities
Other liabilities 30 June 2019 31 December 2018 Accrued expenses 1,472 1,578 Accrued expenses of agency commissions 355 361 Accrued sales commission expenses in group insurance 2 2 Accrued payroll expenses 185 192 Accrued reinsurance expenses 242 373 Accrued employee bonuses 414 345 Other 274 305 Deferred revenue 342 282 Other liabilities 10,615 5,547 Liabilities to PZU shareholders for dividends 2,421 3 Liabilities to minority shareholders in subsidiaries for dividends 1,385 - Liabilities due under transactions on financial instruments 1,035 909 Liabilities to banks for payment documents cleared in interbank clearing systems 1,838 934 Liabilities on direct insurance 888 835 Liabilities on account of payment card settlements 552 419 Regulatory settlements 198 165 Liabilities for contributions to the Bank Guarantee Fund 677 182 Reinsurance liabilities 248 269 Estimated non-insurance liabilities 86 157 Liabilities to employees 118 141 Estimated refunds of compensation in connection with banks’ clients lapsing or withdrawing 90 98 from insurance purchased during the sale of credit products Trade liabilities 252 367 Current income tax liabilities 301 570 Liabilities to the state budget other than for income tax 112 111 Liabilities on account of donations 23 25 Banks’ liabilities for insurance of bank products offered to their clients 21 20 Insurance Indemnity Fund 14 15 Liabilities for direct claims handling 29 30 Other 327 297 Other liabilities, total 12,429 7,407
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN) 8. Financial assets securing receivables, liabilities and contingent liabilities
Assets securing liabilities and contingent liabilities include primarily mortgage-backed bonds and receivables (in the case of mortgage bond issues) and cash deposits (in the case of coverage of the Settlement Guarantee Fund for the National Depository for Securities). The table presents the carrying amount of the collateral, by type of secured liability.
Carrying amount of financial assets pledged as collateral for liabilities and contingent 30 June 2019 31 December 2018 liabilities Carrying amount of financial assets pledged as collateral for liabilities 9,591 8,254 Repurchase transactions 299 543 Coverage of the Guaranteed Funds Protection Fund for the Bank Guarantee Fund 1,031 1,043 Coverage of liabilities to be paid to the guarantee fund at the Bank Guarantee Fund 110 95 Coverage of liabilities to be paid to the mandatory restructuring fund (BFG) 259 133 Lombard and technical credit 5,088 3,700 Other loans 722 569 Debt securities issued 1,346 1,462 Coverage of the Settlement Guarantee Fund for the National Depository for Securities 63 54 Derivative transactions 673 655 Carrying amount of financial assets pledged as collateral for contingent liabilities - - Financial assets pledged as collateral for liabilities and contingent liabilities, total 9,591 8,254
9. Contingent assets and liabilities
Contingent assets and liabilities 30 June 2019 31 December 2018 Contingent assets, including: 6 6 - guarantees and sureties received 6 6 Contingent liabilities 60,207 57,667 - for renewable limits in settlement accounts and credit cards 12,384 13,211 - for loans in tranches 30,004 28,523 - guarantees and sureties given 8,974 7,682 - disputed insurance claims 653 576 - other disputed claims 227 231 - other, including: 7,965 7,444 - guaranteeing securities issues 3,957 4,470 - factoring 2,596 1,275 - intra-day limit 359 755 - letters of credit and commitment letters 846 822 - other 207 122 PZU Finance AB (publ.), a PZU subsidiary, issued 5-year bonds in the period from 2014 to 2015, with the par value of EUR 850 million, which matured in July 2019. Proceeds from the issue were forwarded to PZU in the form of two loans for the total amount of EUR 850 million. Payments under the loans matched the payments under bonds in terms of the payment date and amount. PZU repaid loans to PZU Finance AB on 28 June 2019. In 2018, in connection with concerns regarding taxation under the Swedish Conversion Act (2000:46) of the FX differences in the situation where Euro is a reporting currency, PZU Finance AB (publ.) applied for an individual tax ruling to the Swedish Tax Interpretation Board (Skatterättsnämnden). On 13 March 2019, PZU Finance AB (publ.) received a ruling under which the FX differences arising on repayment of the loan should be subject to taxation, while the FX differences arising on repayment of the bonds are not subject to taxation. On 3 April 2019, PZU Finance AB (publ.) appealed to the Supreme Court of Administration (Högsta förvaltningsdomstolen). The Board’s interpretation, if it is upheld by the Swedish Supreme Court of Administration (Högsta förvaltningsdomstolen) would mean that a different approach is applied in Sweden to companies reporting in the Euro than to companies reporting in Swedish kronor, which would be inconsistent with the assumptions of the Act. The PZU Group believes that such an approach would stand in contradiction with Article 63 of the Treaty on the Functioning of the European
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Union (TFEU) concerning the necessity to ensure unrestricted movement of capital in the EU, or Articles 49 and 54 of TFEU concerning the freedom of business activity. Accordingly, the PZU Group recognized a contingent liability of PLN 78 million (equivalent to SEK 193 million).
10. 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; 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 2018 report published on 27 May 2019 is available online at https://www.pzu.pl/relacje-inwestorskie/informacje-finansowe. Pursuant
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN) to art. 290 section 1 of the Insurance Activity Act, a solvency and financial condition report of an insurance undertaking is audited by an audit firm. Irrespective of the foregoing, some PZU Group companies are required to comply with their own capital requirements imposed by the relevant legal regulations. The PZU Group’s solvency ratio as at 31 December 2018 published in the PZU Group’s 2018 solvency and financial condition report was 233%. The solvency ratio (standalone and consolidated alike) reported to KNF not audited by an audit firm as at the end of the first quarter of 2019 stayed above the level of 200%. The maintained levels of solvency ratio comply with those assumed in the capital policy of the PZU Group.
11. Segment reporting
11.1 Reportable segments
11.1.1. Key classification criterion
Operating segments are components of an entity for which separate financial information is available and is subject to regular assessment by 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.
Accounting Segment Segment description Aggregation criteria standards Aggregation by similarity of Corporate products offered, similar client Broad scope of property insurance products, TPL and motor insurance insurance groups to which they are PAS customized to a customer’s needs entailing individual underwriting (non-life offered, distribution channels offered to large economic entities by PZU, Link4, TUW PZUW. insurance) and operation in the same regulatory environment. Mass insurance Broad scope of property, accident, TPL and motor insurance products (non-life PAS offered to individual clients and entities in the small and medium As above. insurance) enterprise sector by PZU and Link4. Group insurance addressed by PZU Życie to groups of employees and Group and other formal groups (e.g. trade unions), under which persons under a individually legal relationship with the policyholder (e.g. employer, trade union) enroll continued PAS in the insurance and individually continued insurance in which the No aggregation insurance policyholder acquired the right to individual continuation during the (life insurance) 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 Individual insurance contract applies to a specific insured and this insured is subject insurance PAS No aggregation to individual underwriting. PZU Życie’s offer covers a wide range of (life insurance) 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 rate on The aggregation was effected Investments PAS investments reflecting the value of technical provisions in insurance because of the similar surplus- products, i.e. surplus of investment income allocated at transfer prices based nature of the revenues to insurance segments; 2. income from other free funds in the PZU Group (in particular consolidated mutual funds).
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Accounting Segment Segment description Aggregation criteria standards The aggregation was carried out due to similarity of products Banking Broad range of banking products offered both to corporate and retail and services offered by the IFRS activity clients by the Pekao Group and the Alior Bank Group. companies and the identical regulatory environment of their operations. Pension PAS 2nd pillar pension insurance No aggregation insurance The aggregation was carried out Non-life and life insurance products offered by Lietuvos Draudimas AB due to similarity of products and its branch in Estonia, AAS Balta and UAB PZU Lietuva Gyvybes and services offered by the Baltic States IFRS Draudimas. companies and similarity of the regulatory environment of their operations. The aggregation was carried out Non-life and life insurance products offered by PZU Ukraine and PZU due to similarity of the Ukraine IFRS Ukraine Life Insurance. regulatory environment of their operations. PZU Życie products that do not transfer significant insurance risk within the meaning of IFRS 4 and that do not meet the definition of an insurance Investment PAS contract (i.e. some products with a guaranteed rate of return and some No aggregation contracts unit-linked products).
Other products and services not classified into any of the above Other PAS / IFRS segments.
11.1.2. Information relating to geographical areas
The PZU Group applies additional segmentation by geographic location, according to which the following geographic areas were identified: Poland; Baltic states; Ukraine.
11.2 Inter-segment settlements
The net result of investments (the difference between realized and unrealized revenues and costs) carried in corporate insurance (non-life), mass insurance (non-life), group and individually continued insurance (life), individual insurance (life) is determined on the basis of transfer prices using interest rates from the yield curves for treasuries. For unit-linked insurance products, guaranteed rate products and structured products the net result of investments covering the technical provisions corresponding to them is carried directly.
11.3 Segment’s measure of profit
The PZU Group’s fundamental measure of a segment’s profit is as follows: in the case of corporate, mass, group, individually continued and individual insurance segments – insurance result, which is the financial result before tax and other operating income and expenses (including 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;
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
in the case of the investment segment – the investment result of PZU Group companies minus the result allocated to insurance segments; in the case of investment contracts – the operating result, calculated in the manner approximately equivalent to the technical result in accordance with PAS; in the case of banking activity and foreign insurance activity – the operating result according to local accounting standards in the country of the company’s registered offices or according to IFRS, which is the financial result before tax.
11.4 Accounting policies applied according to PAS
11.4.1. 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 2018. PZU’s 2018 standalone financial statements are available on the PZU website at www.pzu.pl in the “Investor Relations” tab.
11.4.2. PZU Życie
The accounting standards according to PAS applicable to PZU Życie are convergent with the PAS applicable to PZU. What is unique to PZU Życie is the rules of accounting for insurance agreements and investment contracts according to IFRS. 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 contracts. According to IFRS agreements are classified according to the guidelines set forth under IFRS 4 on the classification of products as insurance contracts (subject to IFRS 4) or investment contracts (measured according to IAS 9). In the case of the latter the written premium is not recognized.
11.5 Simplifications in the segmental note
The segmental note has applied certain simplifications permitted by IFRS 8. The justification for their usage is portrayed below: withdrawing from presenting data related to the allocation of all assets and liabilities to various segments – resulting from not preparing and not presenting such tables to the PZU Management Board. The main information delivered to the PZU Management Board consists of data regarding the results of given segments and managerial decisions are made on this basis, including decisions on resource allocation. The analysis of the segmental allocation of assets and liabilities is limited to a large extent to monitoring the fulfillment of the regulatory requirements; presenting the net result on investments as a single amount as the difference between the realized and unrealized revenues and the costs of investments – stemming from the internal assessment of the segmental results based on such a combined measure of investment results; not allocating other revenues and costs to the segment called „investments” besides realized and unrealized revenues and costs of investments – stemming from the method of analyzing this segment’s data and the impracticality of such an allocation.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
11.6 Quantitative data
Corporate insurance (non-life insurance) 1 April – 1 January - 1 April – 1 January - 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Gross written premium – external 735 1,405 893 1,520 Gross written premium – cross-segment 5 6 2 1 Gross written premiums 740 1,411 895 1,521 Movement in provision for unearned premiums and gross 17 72 (216) (166) provision for unexpired risks Gross earned premium 757 1,483 679 1,355 Reinsurers’ share in gross written premium (109) (158) (251) (290) Reinsurer’s share in the movement in provision for unearned (32) (108) 153 94 premiums and the gross provision for unexpired risk Net earned premiums 616 1,217 581 1,159 Investment income, including: 24 49 34 63 external operations 24 49 34 63 intersegment operations - - - - Other net technical income 15 24 9 29 Income 655 1,290 624 1,251
Net insurance claims and benefits (392) (774) (392) (721) Acquisition expenses (129) (254) (120) (233) Administrative expenses (31) (61) (34) (64) Reinsurance commissions and profit participation 9 19 8 17
Other (11) (34) (9) (33) Insurance result 101 186 77 217
Mass insurance (non-life insurance) 1 April – 1 January - 1 April – 1 January - 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Gross written premium – external 2,581 5,264 2,616 5,327 Gross written premium – cross-segment 5 9 5 23 Gross written premiums 2,586 5,273 2,621 5,350 Movement in provision for unearned premiums and gross 38 (123) (44) (304) provision for unexpired risks Gross earned premium 2,624 5,150 2,577 5,046 Reinsurers’ share in gross written premium (12) (47) (23) (26) Reinsurer’s share in the movement in provision for unearned (27) (14) (15) (36) premiums and the gross provision for unexpired risk Net earned premiums 2,585 5,089 2,539 4,984 Investment income, including: 118 238 149 283 external operations 118 238 149 283 intersegment operations - - - - Other net technical income 24 72 25 60 Income 2,727 5,399 2,713 5,327
Net insurance claims and benefits (1,739) (3,287) (1,603) (3,135) Acquisition expenses (491) (966) (454) (905) Administrative expenses (153) (305) (158) (288) Reinsurance commissions and profit participation - - 2 (1)
Other (88) (195) (67) (180) Insurance result 256 646 433 818
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Group and individually continued insurance 1 April – 1 January - 1 April – 1 January - (life insurance) 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Gross written premium – external 1,738 3,471 1,722 3,444 Gross written premium – cross-segment - - - - Gross written premiums 1,738 3,471 1,722 3,444 Movement in the provision for unearned premiums 1 - - (1) Gross earned premium 1,739 3,471 1,722 3,443 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 premiums 1,739 3,471 1,722 3,443 Investment income, including: 174 350 139 261 external operations 174 350 139 261 intersegment operations - - - - Other net technical income 2 3 1 1 Income 1,915 3,824 1,862 3,705
Net insurance claims and benefits and movement in other net (1,230) (2,594) (1,196) (2,510) technical provisions Acquisition expenses (97) (187) (88) (172) Administrative expenses (159) (310) (154) (297)
Other (22) (30) (10) (22) Insurance result 407 703 414 704
1 April – 1 January - 1 April – 1 January - Individual insurance (life insurance) 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Gross written premium – external 367 694 343 689 Gross written premium – cross-segment - - - - Gross written premiums 367 694 343 689 Movement in the provision for unearned premiums (1) 2 - 2 Gross earned premium 366 696 343 691 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 premiums 366 696 343 691 Investment income, including: 124 316 68 83 external operations 124 316 68 83 intersegment operations - - - - Income 490 1,012 411 774
Net insurance claims and benefits and movement in other net (388) (794) (311) (571) technical provisions Acquisition expenses (33) (64) (32) (65) Administrative expenses (16) (33) (19) (37)
Other (1) (2) (2) (3) Insurance result 52 119 47 98
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
1 April – 1 January - 1 April – 1 January - Investments 30 June 2018 30 June 2018 30 June 2019 30 June 2019 (restated) (restated) Investment income, including: 66 223 (208) (293) - external operations (38) 102 (233) (340) - intersegment operations 104 121 25 47 Operating result 66 223 (208) (293)
1 April – 1 January - 1 April – 1 January - Banking activity 30 June 2018 30 June 2018 30 June 2019 30 June 2019 (restated) (restated) Revenue from commissions and fees 990 1,922 962 1,889 Investment income, including: 2,136 4,436 2,252 4,336 - external operations 2,136 4,436 2,252 4,336 - intersegment operations - - - - Income 3,126 6,358 3,214 6,225
Fee and commission expenses (216) (391) (181) (351) Interest expenses (507) (997) (468) (927) Administrative expenses (1,226) (2,439) (1,302) (2,540)
Other (347) (1,080) (272) (639) Operating result 830 1,451 991 1,768
1 April – 1 January - 1 April – 1 January - Pension insurance 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Investment income, including: 2 3 1 3 external operations 2 3 1 3 intersegment operations - - - - Other income 37 69 41 77 Income 39 72 42 80
Administrative expenses (10) (22) (9) (17)
Other (1) (2) (1) (3) Operating result 28 48 32 60
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
1 April – 1 January - 1 April – 1 January - Insurance - Baltic States 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Gross written premium – external 440 856 412 787 Gross written premium – cross-segment - - - - Gross written premiums 440 856 412 787 Movement in provision for unearned premiums and gross (31) (47) (30) (54) provision for unexpired risks Gross earned premium 409 809 382 733 Reinsurers’ share in gross written premium (11) (39) (9) (29) Reinsurer’s share in the movement in provision for unearned (3) 11 (3) 6 premiums and the gross provision for unexpired risk Net earned premiums 395 781 370 710 Investment income, including: 8 22 2 5 external operations 8 22 2 5 intersegment operations - - - - Income 403 803 372 715
Net insurance claims and benefits paid (235) (482) (223) (434) Acquisition expenses (84) (165) (78) (153) Administrative expenses (32) (63) (31) (60)
Other 1 2 1 2 Insurance result 53 95 41 70
1 April – 1 January - 1 April – 1 January - Insurance – Ukraine 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Gross written premium – external 78 149 62 114 Gross written premium – cross-segment - - - - Gross written premiums 78 149 62 114 Movement in provision for unearned premiums and gross (3) (10) (3) (4) provision for unexpired risks Gross earned premium 75 139 59 110 Reinsurers’ share in gross written premium (26) (46) (24) (42) Reinsurer’s share in the movement in provision for unearned 1 (1) 2 1 premiums and the gross provision for unexpired risk Net earned premiums 50 92 37 69 Investment income, including: 6 14 4 6 external operations 6 14 4 6 intersegment operations - - - - Income 56 106 41 75
Net insurance claims and benefits paid (14) (33) (12) (25) Acquisition expenses (26) (51) (21) (40) Administrative expenses (7) (14) (6) (11)
Other 6 12 4 10 Insurance result 15 20 6 9
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
1 April – 1 January - 1 April – 1 January - Investment contracts 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Gross written premium 7 17 8 20 Movement in the provision for unearned premiums - - - - Gross earned premium 7 17 8 20 Reinsurers’ share in gross written premium - - - - Reinsurer’s share in the movement in the provision for - - - - unearned premiums Net earned premiums 7 17 8 20 Investment income, including: 3 11 - (7) external operations 3 11 - (7) intersegment operations - - - - Other income - - - - Income 10 28 8 13
Net insurance claims and benefits and movement in other net (8) (24) (5) (7) technical provisions Acquisition expenses - - - - Administrative expenses (1) (2) (1) (3)
Operating result 1 2 2 3
1 April – 1 January - 1 April – 1 January - Other segments 30 June 2019 30 June 2019 30 June 2018 30 June 2018 Investment income, including: 9 9 12 12 - external operations 9 9 12 12 - intersegment operations - - - - Other income 275 539 247 492 Income 284 548 259 504
Costs (291) (567) (277) (539)
Other 14 17 7 13 Operating result 7 (2) (11) (22)
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Net insurance Reconciliations Net earned Investment Acquisition Administrativ Operating claims and 1 January 2019 - 30 June 2019 premiums income 2) expenses e expenses result benefits paid Corporate insurance 1,217 49 (774) (254) (61) 186 Mass insurance 5,089 238 (3,287) (966) (305) 646 Group and individually continued 3,471 350 (2,594) (187) (310) 703 insurance Individual insurance 696 316 (794) (64) (33) 119 Investments - 223 - - - 223 Banking activity - 4,436 - - (2,439) 1,451 Pension insurance - 3 - (2) (22) 48 Insurance - Baltic States 781 22 (482) (165) (63) 95 Insurance – Ukraine 92 14 (33) (51) (14) 20 Investment contracts 17 11 (24) - (2) 2 Other segments - 9 - - - (2) Total segments 11,363 5,671 (7,988) (1,689) (3,249) 3,491 Presentation of investment contracts (17) (6) 23 - - - Estimated salvage and subrogation - - (5) - - (5) Valuation of equity instruments - 19 - - - 19 Valuation of properties - (4) - - (1) (6) Elimination of the equalization provision - - - - - (3) and prevention fund Allowances to the Company Social - - - - (10) (10) Benefit Fund and actuarial costs Consolidation adjustments 1) (12) (35) 41 73 (16) (383) Consolidated data 11,334 5,645 (7,929) (1,616) (3,276) 3,103
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
Reconciliations Net insurance Net earned Investment Acquisition Administrativ Operating 1 January 2018 - 30 June 2018 claims and premiums income 2) expenses e expenses result (restated data) benefits paid 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 - (293) - - - (293) Banking activity - 4,336 - - (2,540) 1,768 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 4,752 (7,403) (1,571) (3,317) 3,432 Presentation of investment contracts (20) 10 7 - - - Estimated salvage and subrogation - - (4) - - (4) Valuation of equity instruments - (15) - - - (15) Valuation of properties - (4) - - - (7) Elimination of the equalization provision - - - - (7) and prevention fund Allowances to the Company Social - - - - (10) (10) Benefit Fund and actuarial costs Consolidation adjustments 1) (2) 70 55 52 (15) (334) Consolidated data 11,054 4,813 (7,345) (1,519) (3,342) 3,055 1) Consolidation adjustments ensue chiefly from 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”.
Geographic breakdown
1 January - 30 June 2018 1 January - 30 June 2019 (restated) Consolid Consolid Baltic Unalloca Baltic Unalloca Poland Ukraine ated Poland Ukraine ated States ted States ted value value Gross written premium – 10,834 856 149 - 11,839 10,980 787 114 - 11,881 external Gross written premium – 6 - - (6) - 20 - - (20) - cross-segment Revenue from 1,993 - - - 1,993 2,030 - - - 2,030 commissions and fees Investment income 1) 5,609 22 14 - 5,645 4,802 5 6 - 4,813 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”.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
30 June 2019 31 December 2018 Consolid Consolid Baltic Unalloca Baltic Unalloca Poland Ukraine ated Poland Ukraine ated States ted States ted value value Non-current assets, other 7,005 249 4 - 7,258 6,122 238 4 - 6,364 than financial assets 1) Deferred tax assets 2,333 - 3 - 2,336 2,231 - 3 - 2,234 Assets 338,287 2,714 440 (1,362) 340,079 326,874 2,704 409 (1,433) 328,554 1) Applies to intangible assets and property, plant and equipment.
11.7 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).
12. Issues, redemptions and repayments of debt securities and equity securities
In the 6-month period ended 30 June 2019, neither PZU nor its subsidiaries materially issued, redeemed or repaid any debt securities or equity securities, except for the matter described below. On 4 June 2019, Pekao issued series D subordinated bonds. The most important parameters of the instruments issued are presented below: Total Nominal nominal Cur- value per unit Interest rate Issue date Maturity date value rency (PLN) (in PLN m) 4 June 2031 with an early redemption option within 7 years from issue date or if KNF does not WIBOR 6M + Series D 500,000 350 PLN 4 June 2019 consent to classify it as a Tier II instrument, or if 1.70% margin there is a regulatory change to the classification of the bond or a change in bond taxation On 8 July 2019 Pekao received KNF’s decision consenting to the classification of the series D bonds as Tier II capital instruments. After the balance sheet date, on 3 July 2019, PZU Finance AB (publ.), a subsidiary company of PZU, repaid the entire indebtedness on bonds with the par value of EUR 850 million.
13. Default or breach of material provisions of loan agreements
During the 6-month period ended 30 June 2019, 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.
14. Granting of sureties or guarantees for loans or borrowings by PZU or its subsidiaries
In the 6-month period ended 30 June 2019, 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.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN) 15. Dividends
Only the profit captured in the standalone financial statements of the parent company prepared in accordance with PAS is subject to distribution. On 24 May 2019, PZU’s Ordinary Shareholder Meeting distributed PZU's net profit for the year ended 31 December 2018 totaling PLN 2,712 million by earmarking: PLN 2,418 million as a dividend payout to shareholders, i.e. PLN 2.80 per share; PLN 287 million as supplementary capital; PLN 7 million to the Company Social Benefit Fund; The record date was set at 14 August 2019 and the dividend payout date was set for 5 September 2019. Moreover, the PZU Ordinary Shareholder Meeting made a decision on a transfer to supplementary capital of retained earnings resulting from the allocation of the purchase price for an organized part of Bank BPH SA by Alior Bank in the amount of PLN 20 million.
16. 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 contracts, 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. 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. The insurance companies takes disputed claims into account in the process of establishing technical provisions for known losses, considering the probability of an unfavorable outcome of the dispute and estimating the probable awarded amount. As at 30 June 2019, the total value of the subject matter of the litigation in all 238,417 cases pending before courts, arbitration bodies or public administration authorities in which PZU Group entities take part, was PLN 8,048 million. PLN 4,246 million of that amount pertains to liabilities and PLN 3,802 million to the accounts receivable of PZU Group companies. During the 6-month period ended 30 June 2019 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.
16.1 Resolutions of the Ordinary Shareholder Meeting of PZU to distribute the profit earned in the financial year 2006
On 30 July 2007, an action was brought by Manchester Securities Corporation (“MSC”) with its registered office in New York against PZU to repeal Resolution No. 8/2007 adopted by the Company’s Ordinary Shareholder Meeting on 30 June 2007 to distribute PZU’s profit for the financial year 2006 as contradicting good practices and aimed at harming the plaintiff as a shareholder of PZU. The challenged resolution of the Ordinary Shareholder Meeting of PZU distributed the 2006 net profit of PLN 3,281 million as follows: PLN 3,261 million was transferred to supplementary capital;
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
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. 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 on account of its groundlessness. 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 submitted a statement of defense, requesting that the claim be dismissed 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, evidentiary hearings have taken place. The Management Board of PZU believes that MSC’s claims are groundless. As a result, as at 30 June 2019, 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 2006 financial year, including the line items “Supplementary capital” and “Retained earnings (losses)”, and the funds in the Company Social Benefit Fund were not adjusted.
Other demands for payment pertaining to the distribution of PZU’s profit for the 2006 financial year
On 13 November 2018 the Regional Court in Warsaw served a copy of the statement of claim lodged by Wspólna Reprezentacja SA in restructuring, which pertained to a claim against PZU for payment of PLN 34 million with statutory interest from 1 October 2015 to the payment date with court expenses. The claim comprises a claim for payment of damages for depriving the shareholders of their share of profits for the 2006 financial year. The plaintiff claims that the claims for damages were transferred by the shareholders to the plaintiff based on mandate agreements together with a fiduciary transfer of receivables and the claim
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN) pursued by the statement of claim is the total damage caused to the shareholders. PZU does not accept the claims as unjustified and submitted its statement of defense, requesting the claim to be dismissed it in its entirety. PZU did not consent to mediation. The date of the next session was set at 6 November 2019.
16.2 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 competition in the domestic market for sales of group ADD insurance for children, youths and staff of educational institutions consisting of dividing the sales market by entity and transferring PZU’s clients from the Kujawsko-Pomorskie voivodship to Maximus Broker for the provision of services in exchange for their recommending PZU as the insurer of choice and at the same time prohibited PZU from the use of this alleged practice. The PZU Management Board does not agree with the determination of facts and the legal argumentation in the decision, because not all the evidence was taken into account when making the decision and an erroneous legal qualification was made. On 18 January 2012 PZU submitted an appeal against the aforementioned decision (as a result of which it did not become final). In its appeal, PZU indicated the following, among other issues: no agreement (other than a brokerage agreement) was entered into between PZU and Maximus Broker; the President of the Office of Competition and Consumer Protection misunderstands the principles of execution of insurance agreements involving a broker; the majority of insurance agreements involving Maximus Broker were entered into with insurance companies other than PZU; PZU and Maximus Broker cannot and could not in the past conduct competitive activity in the markets in which they operate. On 27 March 2015, the Regional Court in Warsaw 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 in Warsaw issued a judgment in which it repealed the decision of the UOKiK President of 30 December 2011. On 4 October 2017, the UOKiK President filed an appeal with the Appellate Court in Warsaw. The Appellate Court in Warsaw, by its judgment of 23 January 2019, dismissed the appeal put forward by the UOKiK President. The judgment is final. The UOKiK President has filed a cassation appeal with the Supreme Court against the final judgment, to which PZU has given its reply. PZU had a provision for this penalty, which amounted to PLN 57 million as at 30 June 2019 and 31 December 2018 alike.
16.3 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 anti-monopoly procedure in the matter of a suspicion of PZU Życie’s abuse of its dominating position in the group employee insurance market, which could constitute a breach of Article 8 of the Competition and Consumer Protection Act and Article 82 of the Treaty establishing the European Community. As a result of the procedure, on 25 October 2007 the President of 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 or with the legal arguments set out in the decision. It filed an appeal with the Regional Court in Warsaw, 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,
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN) 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 held on 26 September 2017, the Supreme Court decided to refer the case for resolution to the Court of Justice of the European Union in Luxembourg, which through its judgment on 3 April 2019 ruled on this question. The Supreme Court set the hearing date for 16 October 2019. Since the fine has already been paid by PZU Życie in 2015, no additional provision for this purpose had to be maintained.
16.4 Notification of PZU’s claim to the bankruptcy estate of companies of the PBG Group
PZU is a creditor of PBG SA (“PBG”) and Hydrobudowa Polska SA (“Hydrobudowa”), both 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 receivables, PZU received 206,139 PBG 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 2019 was PLN 2 million (PLN 2 million as at 31 December 2018). The bonds, whose carrying amount was assessed to be zero, were recognized in off-balance sheet records only as at 30 June 2019 and 31 December 2018. 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 and the fourth supplementary list of claims contained PZU SA’s claims in the amount of PLN 16 million. Accordingly, the total value of claims pursued by PZU on this account is PLN 32 million. In respect of claims for the amount of over PLN 66 million, on 24 October 2018 PZU filed an objection to the judge commissioner against the refusal to accept the submitted claim. The date of the hearing in the matter of examination of the PZU’s objection was set to 25 September 2019. 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).
16.5 Class action against Alior Bank
On 5 March 2018, a natural person representing a group of 84 natural and legal persons filed a class action against Alior Bank to rule Alior Bank’s liability for a loss caused by the improper performance of Alior Bank’s disclosure obligations to clients and improper performance of agreements to provide services of accepting and forwarding purchase or sale orders of investment certificates of mutual funds managed previously by Fincrea TFI SA and currently by Raiffeisen Bank International AG (Spółka Akcyjna) Branch in Poland. The plaintiffs believe that Alior Bank failed to provide clients with information on the actual risk of investing in investment products, by which it exposed the clients to a loss resulting from the loss of value of investment certificates and loss of guaranteed profits. The PZU Management Board believes that the class action has no justified factual or legal grounds and therefore it should not be resolved favorably to the clients. As at the date of preparing the condensed interim consolidated financial statements, the court with which the class action was filed has not issued a decision on the admissibility of the class action. Additionally, the PZU Group posits that the risk of this action being resolved unfavorably to Alior Bank and the risk of incurring material loss on this account is at a level below average; accordingly, as at 30 June 2019, the PZU Group has not recognized any provisions in relation to this action. At the current stage, it is not possible to estimate the possible financial
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN) consequences for Alior Bank and the PZU Group if the court hands down a resolution other than the one assumed by the PZU Group.
17. Other information
17.1 Related party transactions
17.1.1. Related party transactions concluded by PZU or subsidiaries on non-arm’s length conditions
In the 6-month period ended 30 June 2019, 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 non-arm’s length conditions.
17.1.2. Other related party transactions
1 January – 30 June 1 January – 31 December 1 January – 30 June 2019 2018 2018 Balances and turnovers resulting and as at 30 June 2019 and as at 31 December 2018 and as at 30 June 2018 from commercial transactions between the PZU Group and Key Key Key related parties management Other related management Other related management Other related staff of the parties 2) staff of the parties 2) staff of the parties 2) main entities 1) main entities 1) main entities 1) Gross written premium - 3 - 4 - 3 in non-life insurance - 3 - 4 - 3 in life insurance (including the volumes from investment ------contracts) Other income ------Costs ------Receivables - - - Liabilities ------Contingent assets ------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.
17.2 KNF Office inspections in PZU and PZU Życie
In the period from 19 June 2018 to 17 August 2018, a KNF inspection was conducted in PZU pertaining to claims handling and entering into short-term insurance contracts. On 31 December 2018, the regulatory authority issued two key post-audit recommendations for the claims and benefits handling area and one recommendation regarding the execution of short-term insurance agreements with the deadline of 31 January 2019. The recommendations were fulfilled within the deadline. On 27 February 2019 KNF requested more explanations regarding the performance of the recommendations. On 21 March 2019 PZU forwarded additional evidence and a detailed set of explanations pertaining to the performance of the recommendations. Moreover, PZU undertook to convey to the regulatory authority the findings of the inspections planned in 2019 concerning claims handling and the execution of short-term contracts. On 9 April 2019 the regulatory authority requested the provision of more evidence concerning the performance of the recommendations, inter alia, the findings of the inspections scheduled for Q1 2019. On 16 April and 12 July 2019 PZU conveyed more evidence concerning the performance of the recommendations to the regulatory authority.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN)
In the period from 7 to 25 January 2019 KNF conducted an inspection into PZU Życie’s adherence to the obligations stemming from the act on counteracting money laundering and financing of terrorism. On 8 April 2019 KNF issued 5 post-inspection recommendations with execution deadlines of 30 June 2019, 31 December 2019 and 31 January 2020. On 12 July 2019, PZU Życie informed the regulatory authority that it has carried out the recommendation, for which the implementation date has expired on 30 June 2019. In the period from 9 January to 8 February 2019 KNF conducted a supervisory visit to PZU Życie with respect to the fulfillment of the requirements concerning the risk management system in terms of underwriting insurance risk. On 2 May 2019 PZU Życie received a written summary of the supervisory visit in which the regulatory authority identified an infringement of art. 21 of the Insurance Activity Act. On 16 May, 19 June and 5 July 2019, PZU Życie conveyed to KNF its position and information regarding the actions taken to ensure that the insurance undertaking’s business is conducted in accordance with the law. On 25 July 2019, KNF provided recommendations to be implemented by 30 September and 30 November 2019 and 31 March 2020. Also, by a letter of 28 December 2018, KNF provided a post-inspection protocol for the inspection carried out in PZU Życie in 2016 regarding the use of insurance agent services. On 19 January 2019, PZU Życie passed on its objections to the protocol, to which the KNF responded on 28 May 2019. On 12 June 2019, PZU Życie provided additional explanations to the regulatory authority. The Management Board of PZU believes that the results of the audit have not exerted any impact on the consolidated financial statements.
17.3 KNF’s proceedings to impose a fine on Alior Bank
On 14 September 2018, the KNF launched proceedings against Alior Bank to impose a fine on Alior Bank pursuant to art. 167 sec. 2 item 1 in conj. with art. 167 sec. 1 item 1 of the Financial Instruments Trading Act in connection with the irregularities found. The proceedings are related to the audit conducted by KNF from November 2017 to May 2018, which concerned the correct operation of Alior Bank and the Bank’s Brokerage House in terms of distribution of investment certificates of funds previously managed by Fincrea TFI SA, and currently by Raiffeisen Bank International AG (Spółka Akcyjna) Branch in Poland. On 6 August 2019, KNF imposed a fine of PLN 10 million on Alior Bank.
17.4 Cases involving Alior Leasing sp. z o.o.
On 23 January 2019, Alior Leasing sp. z o.o. received a written proposal from four former management board members regarding the amicable termination of cooperation and their management services contracts; one of the elements of the proposals involved payment by Alior Leasing sp. z o.o. of some of the benefits from the management option plan. Considering the legal opinions issued in this matter, the PZU Group believes that the likelihood that the dismissed management board members of Alior Leasing sp. z o.o. effectively pursue benefits under the management stock option plan is low. Accordingly, no relevant provision was recognized in the condensed consolidated financial statements. Alior Leasing sp. z o.o. has identified the risk of possible claims against the company filed by third parties, which may result from actions of some employees and associates of Alior Leasing sp. z o.o. As at the date or preparing the condensed interim consolidated financial statements, no claims have been filed on this account. The PZU Group believes that there are no circumstances justifying recognition of a provision on this account. The PZU Group will not disclose any further information regarding the possible third party claims mentioned above, to avoid the weakening of its status and position in the potential proceedings.
17.5 Execution of a memorandum of agreement pertaining to the terms and conditions for the transaction involving RUCH Spółka Akcyjna in restructuring
A memorandum of agreement was executed on 11 April 2019 by and between Alior Bank, Polski Koncern Naftowy Orlen SA (“PKN Orlen”) and PZU concerning the terms and conditions for a transaction involving RUCH SA in restructuring (“Ruch”). In accordance with this memorandum of agreement Alior Bank intends to take over a 100% equity stake in Ruch (in the manner
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed interim consolidated financial statements for the 6 months ended 30 June 2019 (in millions of PLN) agreed by and between Alior Bank and PKN Orlen after the arrangement is approved with legally binding force under the accelerated arrangement proceedings) for the purpose of reselling it to PKN Orlen. PKN Orlen’s acquisition of the shares in Ruch will take place after the fulfillment of the conditions contemplated by the executed memorandum of agreement, i.e. among others: asserting with legally binding force the performance of the arrangements executed in the accelerated arrangement proceedings concerning Ruch; the parties to the memorandum of agreement obtain corporate consents and the UOKiK President or the European Commission give their consent for PKN Orlen to acquire shares in Ruch. On 29 May 2019, Alior Bank received information that the District Court for the Capital City of Warsaw in Warsaw, 10th Economic Division on bankruptcy and restructuring, did not approve the compositions adopted by the meetings of creditors in the accelerated composition proceedings for RUCH, for procedural reasons, in connection with formal shortcomings. Accordingly, RUCH filed complaints against these decisions, which were transferred to the second instance court. The Alior Bank’s Management Board upholds the opinion that the restructuring scenario is the most advantageous.
17.6 Act on Special Rights of Injured Persons with an Exhausted Indemnity Determined on the basis of Applicable Regulations for Damage Suffered before 1 January 2006
On 14 August 2019, the President signed the Act of 19 July 2019 on Special Rights of Injured Persons with an Exhausted Indemnity Determined on the basis of Applicable Regulations for Damage Suffered before 1 January 2006. The Act defines the special rights granted to injured persons in the event of damage arising in the territory of the Republic of Poland in situations where the indemnity has been exhausted. The injured person will be entitled to a claim for the payment of an annuity from the Insurance Indemnity Fund, limited to the indemnity amount set as at the date of submission of the claim in a situation where the insurance undertaking was not required to pay an annuity on the basis of a court ruling setting a different amount of indemnity than that specified in the insurance contract. The claim for the payment of an annuity will apply to periods following the date of the Act’s entry into force. The Act’s entry into force will trigger the need for verification and potential adaptation of the methods used to calculate technical provisions.
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WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b Powszechny Zakład Ubezpieczeń Spółka Akcyjna Group Condensed Interim Consolidated Financial Statements according to IFRS for Q1 2019
Signatures of the PZU Management Board Members:
Name Position
President of the Paweł Surówka PZU Management Board ...... (signature)
Member of the Tomasz Kulik PZU Management Board ...... (signature)
Member of the Adam Brzozowski PZU Management Board ...... (signature)
Member of the Marcin Eckert PZU Management Board ...... (signature)
Member of the Elżbieta Häuser-Schöneich PZU Management Board ...... (signature)
Member of the Maciej Rapkiewicz PZU Management Board ...... (signature)
Member of the Małgorzata Sadurska PZU Management Board ...... (signature)
Person responsible for drawing up the consolidated financial statements:
Director of the Katarzyna Łubkowska Accounting Department ...... (signature)
Warsaw, 28 August 2019
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This document is a free translation of the Polish original. Terminology current in Anglo-Saxon countries has been used where practicable for the purposes of this translation in order to aid understanding. The binding Polish original should be referred to in matters of interpretation. Independent Auditor’s Report on Review of Condensed Interim Consolidated Financial Statements
To the Shareholders and Supervisory Board of Powszechny Zakład Ubezpieczeń Spółka Akcyjna
Introduction We have reviewed the accompanying — the interim statement of changes in condensed interim consolidated financial consolidated equity; statements of Powszechny Zakład — the interim consolidated statement of Ubezpieczeń Spółka Akcyjna Group (the cash flows; “Group”), whose parent entity is Powszechny Zakład Ubezpieczeń Spółka and Akcyjna (the „Parent Entity”), which supplementary notes to the condensed comprise: — interim consolidated financial — the interim consolidated statement of statements (the “condensed interim financial position as at 30 June 2019, consolidated financial statements”). and, for the three-month and six-month The Management Board of the Parent periods ended 30 June 2019: Entity is responsible for the preparation and presentation of these condensed interim — the interim consolidated statement of consolidated financial statements in profit or loss; accordance with IAS 34 Interim Financial — the interim consolidated statement of Reporting, as adopted by the European comprehensive income; Union. Our responsibility is to express a conclusion on these condensed interim and, for the six-month period ended 30 consolidated financial statements based on June 2019: our review.
1 KPMG Audyt spółka z ograniczoną odpowiedzialnością sp.k. ul. Inflancka 4A, 00-189 Warszawa, tel. +48 (22) 528 11 11, fax +48 (22) 528 10 09, Email [email protected], Internet www.kpmg.pl
© 2019 KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp.k., a Polish limited partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative („KPMG International”), a Swiss entity. All rights reserved.
WorldReginfo - 35b8e694-a22f-4240-a5d1-0f41a928a85b
Scope of Review We conducted our review in accordance with and other review procedures. A review is the International Standard on Review substantially less in scope than an audit Engagements 2410 Review of Interim conducted in accordance with National Financial Information Performed by the Standards on Auditing or International Independent Auditor of the Entity as adopted Standards on Auditing and consequently does by the resolution of the National Council of not enable us to obtain assurance that we Certified Auditors as the National Standard on would become aware of all significant matters Review 2410. A review of the interim financial that might be identified in an audit. statements consists of making inquiries, Accordingly, we do not express an audit primarily of persons responsible for financial opinion. and accounting matters and applying analytical Conclusion Based on our review, nothing has come to our not prepared, in all material respects, in attention that causes us to believe that the accordance with IAS 34 Interim Financial accompanying condensed interim consolidated Reporting, as adopted by the European Union. financial statements as at 30 June 2019 are
On behalf of audit firm KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp.k. Registration No. 3546
Signed on the Polish original Signed on the Polish original
Justyna Zań Stacy Ligas
Key Certified Auditor Management Board Member of KPMG Audyt Registration No. 12750 Sp. z o.o. Limited Partner, Proxy
Warsaw, 28 August 2019
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