REPORT ON THE ACTIVITIES OF THE CAPITAL GROUP OF POWSZECHNY ZAKŁAD UBEZPIECZEŃ SPÓŁKA AKCYJNA IN 2010 Warsaw, 15 March 2011 1 PZU Spółka Akcyjna Capital Group Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2010 ____________________________________________________________________________________________________ TABLE OF CONTENTS INTRODUCTION ........................................................................................................ 5 1. Overview of consolidated financial performance .......................................................................... 5 2. Macroeconomic conditions in 2010 ............................................................................................... 5 2.1 Major economic trends/economic growth rate ........................................................................... 5 2.2 Capital market ............................................................................................................................ 6 2.3 Monetary policy, interest rates, inflation ..................................................................................... 6 2.4 Labour market and consumption ................................................................................................ 6 2.5 Foreign exchange rates ............................................................................................................. 7 2.6 The impact of macroeconomic factors on the insurance sector ................................................ 7 2.7 Market share of PZU SA, PZU Życie SA and PTE PZU (data in line with PAS) ....................... 7 2.8 Macroeconomic factors that will affect the activities of the PZU Group in 2011 ...................... 11 3. Organization of the PZU Group ................................................................................................... 11 3.1 Business activities of the PZU Group....................................................................................... 11 3.2 PZU Group Companies ............................................................................................................ 13 FINANCIAL PERFORMANCE OF PZU GROUP IN 2010 ........................................ 16 4. Events significantly affecting the activities and financial performance of PZU Group in 2010 ... 16 5. Comments to the consolidated financial performance of the PZU Group ................................... 16 5.1 Premiums ................................................................................................................................. 16 5.2 Investment performance .......................................................................................................... 17 5.3 Claims ...................................................................................................................................... 18 5.4 Acquisition costs and administrative expenses ........................................................................ 18 5.5 Other items ............................................................................................................................... 19 5.6 Performance and performance ratios of PZU Group ............................................................... 19 5.7 Assets and liabilities structure .................................................................................................. 20 5.8 Changes in investments in controlled entities .......................................................................... 20 6. Comments to segment reporting ................................................................................................. 22 6.1 Property and personal insurance ............................................................................................. 22 6.2 Life insurance ........................................................................................................................... 25 6.3 Investment contracts ................................................................................................................ 27 6.4 Pension fund activity ................................................................................................................ 27 7. Risk factors which may affect financial performance in the following periods ............................ 28 7.1 Property and personal insurance ............................................................................................. 28 7.2 Life insurance ........................................................................................................................... 29 7.3 Pension funds ........................................................................................................................... 29 8. Management Board’s position concerning previous performance projections ........................... 30 PZU ACTIVITIES IN 2010 ........................................................................................ 30 9. Activities, key developments and achievements of the major PZU Group Companies .............. 30 9.1 Rating ....................................................................................................................................... 30 9.2 Restructuring of PZU and PZU Życie ....................................................................................... 31 9.3 Key developments and implementation of the strategy .......................................................... 31 9.4 Key marketing activities in 2010 .............................................................................................. 33 9.5 Corporate social responsibility activities in 2010 ..................................................................... 34 9.6 Key HR activities ...................................................................................................................... 35 9.7 Key activities in Accounting Transactions and IT ..................................................................... 36 9.8 PZU activities in 2010 .............................................................................................................. 39 2 PZU Spółka Akcyjna Capital Group Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2010 ____________________________________________________________________________________________________ 9.9 Activities of PZU Życie in 2010 ................................................................................................ 42 9.10 PTE PZU activities in 2010 .................................................................................................... 45 10. Other selected PZU Group companies – development and performance .................................. 46 10.1 PZU Lietuva ............................................................................................................................ 46 10.2 PZU Ukraine ........................................................................................................................... 46 10.3 TFI PZU .................................................................................................................................. 47 10.4 PZU AM .................................................................................................................................. 48 10.5 PZU Pomoc SA ...................................................................................................................... 49 10.6 PZU Centrum Operacji SA ..................................................................................................... 49 11. Key developments planned ......................................................................................................... 49 12. The summary of Initial Public Offering of PZU shares ................................................................ 51 12.1 The Settlement Agreement performance and the IPO .......................................................... 51 12.2 IPO costs ................................................................................................................................ 52 13. Risk management ....................................................................................................................... 53 13.1 Risk management policy ........................................................................................................ 53 13.2 Establishment of the Risk Division within the structure of PZU and PZU Życie .................... 54 13.3 Risk types ............................................................................................................................... 55 13.4 Risk sensitivity ........................................................................................................................ 58 13.5 Stress tests ............................................................................................................................. 58 NOTES ..................................................................................................................... 59 14. Shares or rights to shares held by members of management or supervisory bodies of PZU as of the date of providing the annual report .............................................................................................. 59 15. Other information ......................................................................................................................... 60 15.1 Remuneration of members of management and supervisory bodies of the PZU