In 2011, the net profit of the PZU Group amounted to PLN 2,343.9 million and was 3.9% lower in comparison to previous year.
amounted to 18.3% and dropped by 2.0 p.p. compared with the end of the previous year.
ROE – the ratio is calculated as the ratio of the net profit/loss to the average value of equity as at the end and at the beginning of the reporting period.
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 2. Macroeconomic environment in 2011 2.1 Basic trends in the economy and rate of economic growth
In 2011 GDP in Poland increased by 4.3%, which exceeded both expectations and last year‟s dynamics (3.9%). In 2011 the rate of increase in domestic demand slowed a little to 3.8% compared with 4.6% in 2010, and contrary to 2010, net exports contributed to the growth in GDP. Once again, in 2011 retail consumption was the most important factor behind economic growth and increased by 3.1% compared with 3.2% in 2010. However, in the 2 nd half of the year, its dynamics started to decrease significantly due to the gradually lower increase in real income. Moreover, the domestic consumption was lower in 2010. In 2011 capital expenditure on fixed assets increased quarter on quarter, mainly as a result of public investments in infrastructure. During 2011 investments increased by 8.5%, compared with the drop of 0.2% in the prior year, and became a factor almost equally significant to GDP growth as retail consumption. In 2011 the input of investments to GDP was significantly lower than in 2010, and in the first quarter of 2011 it was for the first time negative since
On the supply side of economic growth, added value in the construction industry increased the most in 2011 (11.8% compared with 6.4% in 2010), thus confirming the important part played by infrastructural investments. Added value in the industrial sector increased at a lower pace in 2011 compared with 2010 (6.3% compared with 9.4%). The pace of growth of added value increased in trade and repairs of motor vehicles (4.6% compared with 2.6%).
In 2011, despite the good financial position of companies and the relatively high increase in GDP, the key indices of the Polish equities market WIG and WIG20 noted drops of 20.8% and 21.9%
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 2.3 Monetary policy, interest rates, inflation
achieving 3.1% at the end of the year. The Monetary Policy Council (RPP) increased interest rates four times during the first half of 2011, each time by 25 basis points. Since June, in view of the escalation of the debt crisis in the euro zone and an increase in the related uncertainty as to Poland‟s further economic growth, RPP decided to maintain the interest rates at an unchanged level (with the
In 2011 conditions on the labour market deteriorated systematically. Despite the increase in employment in the corporate sector by ca. 124 thousand people in December 2011 compared with
Increased aversion to risk on the global financial markets related to the intensification of the debt crisis in the euro zone in the 2 nd half of 2011 (especially in the 3 rd quarter) contributed to weakening the
Polish zloty and its increased volatility. The exchange rate of the EUR to PLN (NBP fixing) was 11.5%
The macroeconomic conditions had an ambiguous impact on the sales of insurance. On the one hand, the relatively high increase in GDP should contribute to an increase in demand for insurance services.
In 2011 the credit market revived somewhat which could have a positive impact on the sales level and the related financial insurance. This phenomenon related mainly to corporate loans. The increase in mortgage loans was lower than in the previous year and the value of consumer loans granted dropped.
The drop in share prices in 2011 – resulting from a global increase in aversion to risk – had an unfavourable impact on investment income and on the demand for unit-linked investment insurance.
Gross written premium in the whole Polish insurance sector according to Polish Accounting Standards
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 2011. PZU remains the leader on the Polish insurance market, specifically in the motor insurance sector.
Source: KNF (www.knf.gov.pl). Quarterly Bulletin. Rynek ubezpieczeń 4/2011, Rynek ubezpieczeń 4/2010, PZU data
The main reason for the drop in PZU‟s market share in the property insurance market is its pursuit of the corporate insurance portfolio restructuring program, mainly in the area of motor insurance, aimed at lowering the loss ratio. Under this program a restrictive underwriting policy is pursued in respect of areas of operation with increased risk, where the key focus is on the security of the portfolio held and earning a technical profit.
The gross written premium in life insurance has increased by +1.4% YoY, which implies a smaller growth than in the years 2010 vs. 2009, which amounted to +3.8%. The lower growth was visible in regular premium (+1.9% growth in 2011 vs. 2010, as compared to a +8.3% increase in the years 2010 vs. 2009). Single premium increased slightly (+0.9%, as compared to the years 2010 and 2009, when no growth had been reported). A slower growth of the regular premium results from higher unemployment, which entailed a gradual decrease in the growth of remunerations in the business sector. Stable level of single premium is the effect of reducing the supply of products combining the
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 features of a life insurance policy and a bank deposit (poliso-lokata), which results from low profitability, significant capital requirements and a lower demand for unit-linked insurance (unstable situation in the financial markets and investing funds low-risk assets).
and Millenium SA banks, the share of PZU Życie in the single premium segment increased by 1.9 p.p.
Source: KNF (www.knf.gov.pl). Quarterly Bulletin. Rynek ubezpieczeń 4/2011, Rynek ubezpieczeń 4/2010, PZU data 2.7.4 Pension insurance
As at the end of 2011, Otwarty Fundusz Emerytalny PZU “Złota Jesień” (“OFE PZU”) had ca. 2,215 thousand members, which is 14.3% of the total number of open pension fund (“OFE”) members and ranks OFE PZU third on the market. Compared with the end of the prior year, the number of OFE PZU
In 2011 the number of people underwriting contracts with open pension funds for the first time dropped by as much as 40% compared with 2010. The main reason for the drop was the limitation of acquisition activity of the funds indirectly caused by the statutory ban on acquisition on the secondary market, and an increase in the unemployment rate among graduates.
Moreover, the number of people who decided to change funds dropped (a drop of 5.0% compared with 2010). OFE PZU is among those funds which have a negative balance in transfers
According to data provided by Izba Zarządzających Funduszami i Aktywami (Chamber of Fund and
Asset Managers - “IZFA”) as at the end of December 2011 the net asset value of investment funds in
Poland amounted to ca. PLN 114.7 billion, and the drop in managed assets in 2011 amounted to ca.
The largest outflows were noted in mixed funds (ca. PLN 5.8 billion) and equity funds (ca. PLN 2.9 billion). The share of the five largest investment fund management companies in terms of the net asset value of the managed investment funds as at the end of December 2011 amounted to 41.3%.
In terms of the net asset value of funds, TFI PZU ranks tenth among the 33 investment fund management companies covered by the IZFA report. At the same time, TFI PZU remains the leader in the segment of employee pension funds among Polish investment funds, with assets exceeding
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 2.8 Macroeconomic factors which will have an impact on PZU Group’s operations in 2012
The Eurozone debt crisis will continue to pose a risk to Poland‟s economic development in 2012. It may also contribute to the sustained high volatility of financial asset prices and in the event of its further exacerbation – even to a drop, which would negatively impact income on investments.
As of 1 April 2012, so-called one-day bank deposits will be liquidated, which were structured on a loophole in the Act of 29 August 1997, the Tax Code (Journal of Laws No. 8 of 2005, item 60 as amended) which allowed refraining from calculating tax on capital gains if the amount did not exceed
The PZU Group engages in various insurance services. PZU Group entities offer services in the area of life insurance, other personal and property insurance and manage client assets under an open pension fund and investment funds.
In the period from 1 January to 31 December 2011 no significant changes took place in the operations of the key PZU Group entities.
Kraków 10.02.2009 63.83% 64.63% 63.83% 64.63% Use of free cash flows, development investment projects
Warsaw 15.12.2009 100.00% 100.00% N/A N/A Investing funds collected from fund members
16 Ipsilon Bis SA Warsaw 02.09.2011 100.00% N/A 100.00% N/A The Company does not conduct activities.
Warsaw 12.07.2001 100.00% 100.00% 100.00% 100.00% Managing third party portfolios of securities on consignment.
Consolidated under the full consolidation method as at 30 June 2011. Discussed under item 3.3.
Servicing motor claims adjustment under the Green Card (from the beginning of 2011 the Company does not engage in operations).
Państwowy Zakład Ubezpieczeń (a state-owned enterprise) into a joint-stock company where the
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 2. Sickness insurance; 3. Comprehensive insurance of land vehicles, with the exception of rail vehicles; 4. Comprehensive insurance of rail vehicles, covering damage to rail vehicles; 5. Comprehensive insurance of aircraft covering damage to aircraft; 6. Insurance of maritime and inland navigation and vessel comprehensive insurance; 7. Insurance of goods in transport covering damage to transported goods; 8. Insurance of damage caused by natural disasters; 9. Insurance of other damage to goods; 10. Insurance of all types of liability resulting from the ownership and use of land vehicles with their own propulsion, including shipper‟s liability; 11. Insurance of all types of liability resulting from the ownership and use of aircraft, including shipper‟s liability; 12. Insurance of general maritime and inland navigation liability resulting from the ownership and use of maritime and inland vessels, including shipper‟s liability; 13. Liability insurance (general liability insurance); 14. Loan insurance; 15. Insurance guarantees; 16. Insurance of various financial risks; 17. Insurance of legal cover; 18. Insurance in respect of providing assistance for people who have encountered difficulties during travel or absence in their place of residence.
Fund Act”). In connection with the Act of 25 March 2011 on amendments to some acts related to the operation of social insurance coming into force on 1 January 2012 (Journal of Laws No. 75 of 2011, item 398), which amended, among other things, art. 92 of the Pension Fund Act, introducing a ban on acquisition by insurance companies on behalf of open pension funds; as of 1 January 2012 the
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 3.2.2 PZU Życie
PZU Życie‟s core business is conducting insurance and directly related activities in respect of section I
insurance – Life insurance, in accordance with the categories specified in the Act on insurance activities: 1. Life insurance; 2. Dowry insurance, providing for children; 3. Capital fund-linked life insurance; 4. Annuity insurance.
In 2011 and 2010 PZU Życie did not file a request to change the scope of the permit to carry out insurance activities. Moreover, in 2011 and 2010 permits for insurance activities issued for PZU Życie were not withdrawn with respect to one or more insurance class and no receivership was established.
The PZU Group conducts activities on the Ukrainian market in the area of property and life insurance via two companies:
TFI PZU offers investment products and services for both retail and institutional clients, including additional savings programs under Pillar III of the social insurance program, which include:  IKE (Individual Pension Accounts);  Specialized Investment Programs;  PPE (Employee Pension Plans);  ZPI (Company Investment Plans).
PZU AM manages selected asset portfolios of PZU, PZU Życie companies and provides management services in respect of investment portfolios managed by TFI PZU on the basis of art. 46 clause 1 of the
and assets of Employee Pension Fund “Słoneczna Jesień” managed by Międzyzakładowe
PZU Pomoc SA engages specifically in the following activities:  organizing assistance services consisting of providing assistance to Clients;  lease and rental of motor vehicles;  conducting Internet auctions and Internet trading;
 managing loyalty programs as part of conducting other business supporting activities not classified elsewhere;  managing post-accident assets;  activities in the area of medical services.
The statutory activities of PZU CO cover business in the area of the following services:  auxiliary activities related to insurance and pension and disability pension funds;  constant intermediation in underwriting insurance contracts, financial and investment, and assistance contracts;  Contact Center services;  Data Center services;  printing services;  IT services.
Fundusz Inwestycyjny Otwarty Dłużny (specialist open debt investment fund). The market value as at the transfer date amounted to PLN 954.2 million and PLN 1,004.3 million respectively; the sole participant in the fund is PZU Życie.
The above transactions had no impact on the net assets or financial results of the PZU Group.
Inwestycyjny Otwarty Dłużny was covered by consolidation under the full consolidation method as at
Transfer of PZU CO, TFI PZU and PZU AM from PZU Życie to PZU
Currently PZU is the sole shareholder in those companies. The transaction was conducted in connection with, among other things, the expansion of the Tax Group, as described in item 14.6.
On 9 August 2011 PZU established a joint-stock company, Ipsilon Bis SA, with a share capital of
On 30 August 2011 PZU established a joint-stock company, Omicron SA, with a share capital of
PLN 100 thousand which was registered with the National Court Register on 13 September 2011.
On 22 December 2011 PZU Ukraine and PZU Ukraine Life concluded an agreement with PKO BP SA
On 16 January 2012 the ownership rights to shares in Inter-Risk were transferred to the acquirer.
5. Commentary to the consolidated financial results of the PZU Group
increase compared with the prior year resulted from an increase in sales in both segments– life and non-life. The main product lines which noted increases in 2011 comprise: motor liability (OC)
Net change in fair value of assets and liabilities measured at fair value
The drop in the “net change in fair value of assets and liabilities measured at fair value” of PLN 943.0 million was caused mainly by a drop in prices of equity instruments on financial markets – the WIG
index dropped by 20.8% in 2011, whereas in 2010 it grew by 18.8%.
Net income on realized investments was PLN 386.7 million lower than in the prior year, which was also due to a drop in the prices of equity instruments on the financial markets in 2011.
The increase in new investment income of PLN 145.7 million was due, among other things, to the impact of foreign exchange differences on financial instruments denominated in EUR - in 2011 on an annual average the PLN weakened by 3.1% against the EUR, contrary to the PLN‟s strengthening against the EUR by 1.7% in 2010. In 2011 interest income, income on dividend and investment properties were also higher than in the prior year.
The investing activities of the PZU Group are conducted by applying an appropriate degree of safety, liquidity and profitability. What is more, the PZU Group Companies don‟t apply hedge accounting.
The drop in the share and value of equity instruments was mainly due to the drop in their market value
The balance of other operating income and expenses deteriorated by PLN 62.4 million in 2011 compared with the prior year (a change from PLN -212.1 million to PLN -274.5 million). The main reasons for the change were as follows:  setting up a provision for reorganization and restructuring of PLN 96.8 million;  adjusting the estimated settlements of reinsurers‟ commissions and shares in profit of
Konsumentów (Office for Competition and Consumer Protection – “UOKiK”) (for applying the practice of limiting competition on the domestic market for sales of group NNW insurance to children, adolescents and personnel in educational establishments referred to in Note 52.1.2.2. of the consolidated financial statements of the PZU Group) of PLN 56.6 million; and
 starting the consolidation of the Armatura Group under the full method in the consolidated financial statements of the PZU Group, which led to recognizing one-off revenue of PLN 118.9 million in 5.6 Results and business ratios of the PZU Group
Basic and diluted weighted average number of ordinary shares in issue
Table 14: Data from the consolidated cash flow statement of the PZU Group
The main component of assets are investments (financial assets and investment property) comprising 90.8% of total assets. As at the end of 2011 they amounted to PLN 47,309.6 million, which is an increase of 3.3% compared with the balance as at the end of 2010. The increase in the balance of financial assets as at the end of 2011, despite the drop in the prices of shares quoted on the capital markets, was a consequence of business development.
In accordance with the Act on insurance activities, an insurer with its registered office in the territory of the Republic of Poland is obliged to have own funds no lower than the solvency margin and no lower than the guarantee capital.
There are no regulations that would define the calculation of the solvency margin and the amount of own funds for the capital group and therefore tables 17 and 18 present the data separately for PZU
Table 18: Calculation of own funds to cover the solvency margin of the PZU Życie (according to PAS)
In the table below, key items of the consolidated statement of financial position of the Armatura Group with reconciliation to the consolidated net assets of the Armatura Group as at 1 January 2011
Reconciliation of net assets of the Armatura Group as at 1 January 2011 Value
Impact of the consolidation of the Armatura Group on the consolidated results of the PZU Group
Carrying amount of shares of Armatura Kraków SA (measurement at the historical purchase cost net of impairment)
In 2011 the capital restructuring of the Ukrainian companies of the PZU Group was completed. In connection with the resolution of the Extraordinary General Shareholders‟ Meeting of PZU Ukraine and
was received by PZU on 31 January 2011); On 2 February 2011, based on the above agreements, PZU transferred ownership rights to the shares to their acquirers.
The remaining 27,998 shares in PZU Ukraine Life, which were to be redeemed were purchased from another shareholder - PZU Ukraine (based on an agreement concluded on 18 January 2011).
The decrease in share capital was registered by the Securities and Capital Markets Commission of the
Ukrainian PZU Group was done without the participation of PZU – shares in the life insurance company were taken up by the property insurance company increasing its previous interest and the shares in the property insurance company were taken up by the life insurance company, thus becoming its shareholder. The process was registered on 13 October 2011. As a result of the share issues, PZU‟s direct interest in the capital and voting rights of the Ukrainian companies of the
exchange rate, PZU Ukraine Life stopped meeting the minimum share capital requirement which the
PZU Ukraine and vice versa. This transaction was intended to enable meeting the licence requirements without the additional involvement of PZU funds.
On 30 June 2011, on the basis of the recommendation of their Supervisory Boards, the Extraordinary
On 16 September 2011 the Ukrainian companies concluded share purchase agreements in accordance with the terms and conditions described above. The respective Memorandums of
Association accounting for the capital increases were registered on 26 September 2011, and on 13 October 2011 share registration certificates were issued. The increased share capital of
PZU Ukraine is UAH 17,954 thousand, and of PZU Ukraine Life - UAH 18,701 thousand.
6. Commentary to segment reporting 6.1 Property and personal (non-life) insurance
In the non-life sector, 96.7% of gross written premium (excluding intrasegment adjustments)
As of 1 January 2011, PZU introduced a change consisting of recognizing revenue from premium written on the date of concluding the insurance contract instead of on the date of commencement of insurance cover. Additionally, the date of recognizing commission expense relating to the underwritten contracts was changed in an identical manner.
Gross written premium in the non-life segment (after intrasegmental adjustments) for the year ended 31 December 2011 and 31 December 2010 amounted to PLN 8,527.5 million and PLN 8,028.5 million respectively. Motor insurance constituted 62.8% of the premium collected by PZU, i.e. 0.5 p.p. more than in 2010. Sales of motor liability insurance increased by PLN 295.0 million – in the mass client segment +13.1%, and in the corporate client segment +2.0% - mainly due to the increases in tariffs effected in 2010. In AC insurance, written premium increased by PLN 36.8 million – in the mass client segment, premiums increased by 3.8%, and in the corporate client segment dropped by 3.4% in connection with the profitability improvement policy (verification of unprofitable clients).
Total property and personal insurance net of motor * including SMEs ** This item includes loan guarantees and other financial insurance, travel insurance, assistance insurance, maritime, rail and air transport insurance.
*** Gross written premium recognized by date of assuming liability by PZU Ukraine and PZU Lietuva.
Fire and other property damage insurance 1 712 046 1 625 210 5.3%
The drop in claims in the non-life sector of PLN 272.4 million resulted mainly from the absence of large natural disaster claims (in particular compared with the snow and flood claims in 2010). In the first half of the year the number of claims related to the effects of the poor condition of crops after winter increased, but had an insignificant effect on the results.
Income from investing activities in the non-life segment, adjusted by the dividend received from
contrary to its strengthening against the EUR of 1.7% in 2010).
(an increase in the share of commission channels compared with non-commission bearing automatic renewals) and an increase in additional commissions (additional commissions supporting the
In 2011 a model for allocating indirect costs to particular insurance products according to activity based costing (ABC method) was implemented in PZU, which led to transfers of particular costs between cost categories such as acquisition, administration, loss adjustment and investing activities.
This has no impact on the overall volume of the indirect costs. The model assumptions were described in chapter 3.2.2.1 of the consolidated financial statements of the PZU Group. The ABC method led to changes in the cost structure in the years 2011 and 2010:  administrative expenses dropped by PLN 245.6 million and PLN 221.7 million respectively;  acquisition costs increased by PLN 133.5 million and PLN 125.3 million respectively;  loss adjustment costs increased by PLN 103.4 million and PLN 89.1 million respectively;  other costs increased by PLN 8.7 million and PLN 7.3 million respectively.
The deterioration in the balance of other operating income and expenses of PLN 185.4 million was mainly due to:  adjusting the estimated settlements of reinsurers‟ commissions and shares in profit of
PLN 91.8 million;  setting up restructuring provisions of PLN 73.3 million;  setting up provisions for the costs of the penalty imposed by Urząd Ochrony Konkurencji i
Konsumentów (Office for Competition and Consumer Protection – “UOKiK”) (for applying thepractice of limiting competition on the domestic market for sales of group NNW insurance to children, adolescents and personnel in educational establishments referred to in Note 52.1.2.2. of the consolidated financial statements of the PZU Group) of PLN 56.6 million.
In 2011, in the property insurance segment, no one-off events were noted which would have an impact comparable to those in the prior year (flood and snow claims). The events with a significant impact on the results for the period comprised:  payment of claims in crop insurance – frost and poor conditions of crops after winter of PLN 128.4 million;  setting up a provision for disputed settlements in respect of reinsurers‟ commissions and shares in profits of PLN 91.8 million;  setting up provisions for the costs of the penalty imposed by Urząd Ochrony Konkurencji i
Konsumentów (Office for Competition and Consumer Protection – “UOKiK”) (for applying a
The listing of PZU assets covering technical reserves according to PAS as at 31 December 2011 is presented in Table 24. The requirements for covering technical reserves with assets are specified in art. 154 and 155 of the Act on insurance activities. As at the end of 2011, the degree of coverage of the technical reserves with assets amounted to 127.0% (130.4% as at the end of 2010).
In accordance with the letter from KNF no. DN2/107/4/2004 MP dated 25 March 2004, PZU may include the share of technical reserves ceded to AXA France IARD in assets constituting the coverage for technical reserves in an amount exceeding 5% of the reserves.
Description Total % RTU Maximum 1. securities and bonds issued or warranted or guaranteed by the State Treasury, local authorities or associations of local authorities 4. properties or their parts, with the exclusion of properties or their parts used for internal purposes 68 672 0.5% 25%
Table 27. Premium written by type of payment – life insurance segment
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011
The increase in gross written premium of PLN 239.2 million (3.7%) resulted mainly from the development of protective group insurance (an increase in average premium and in the number of insured) and from the growing sales of endowment insurance with a single premium in the bancassurance channel. An increase was also noted in premiums collected on Employee Pension
Życie” introduced to the offer in 2010;  conducting six subscriptions of structured insurance with a single premium “Świat Zysków”;  introducing, in cooperation with Bank Millenium SA, a new individual unit-linked product with a single premium;  an increase in interest in the IKE (individual pension account) product;  introducing an additional insurance package “PZU Ochrona Rodziny” (family protection) to the offer.
These changes were partly offset by the expiry of the endowment insurance portfolio underwritten in the 1990s.
The increase in net claims and benefits paid and the change in technical reserves of PLN 115.3 million
(2.5%) was due to an increase in payments of endowment benefits of PLN 171.7 million (+55.5%) with a significant drop in reserves in insurance where the investment risk is borne by the insurant in 2011
Gross claims and benefits with a change in gross technical reserves increased by PLN 290.2 million mainly as a result of higher benefits in group protective insurance (a small controlled growth in loss ratio), an increase in endowment benefits in short-term products of an investment nature, partly offset by a change in the actuarial reserve, higher endowment benefits from insurance underwritten in the 1990s, a drop in benefits in the continued portfolio and a lower value of insurance benefits from the so-called “old portfolio”.
The difference in the change in technical reserves (PLN -174.9 million) results mainly from a drop in the balance of reserves where the investment risk in borne by the insurant in 2011 as a result of a loss on investing activities compared with a significant increase in 2010. This effect was partly offset by a slowing in the rate of conversion of multi-year policies into annual renewable policies in protective group insurance (the conversion effect on technical reserves in protective group insurance in 2011 translated into releasing PLN 406.1 million of reserves, whereas in the prior year it was PLN 520.3 million), and a faster pace of increase in the actuarial reserve in continued insurance due to the ageing of the portfolio.
Income from investing activities in the life segment, adjusted by the dividend received from PTE PZU
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 the bear conditions on the financial markets in 2011 (in 2011 the WIG index dropped by 20.8% in 2011, whereas in 2010 it grew by 18.8%).
Acquisition costs in the life insurance segment in 2011 and 2010 amounted to PLN 334.0 million and
Administrative expenses in the life insurance segment dropped by PLN 44.3 million (-6.8%), which was the effect of economizing, including reduction in employment and the fixed costs optimization program conducted in the PZU Group.
In 2011 operating profit in the life insurance segment dropped by PLN 711.4 million (27.4%), mainly as a result of losses incurred on the equity part of the investment portfolio.
The listing of PZU Życie assets covering technical reserves according to PAS as at 31 December 2011 is presented in Table 28. The requirements for covering technical reserves with assets are specified in art. 154 and 155 of the Act on insurance activities. As at the end of 2011, the degree of coverage of the technical reserves with assets amounted to 106.9% (112.4% as at the end of 2010).
no restrictions 3. participation units or investment certificates in investment funds 3 559 863 11.3% 40%
C. Excess/(shortage) of assets for covering the technical 6.3 Investment contracts
Investment contracts concluded by PZU Życie are shown in the segment “Unallocated (consolidation eliminations and other)”. Investment contracts are accounted for under the deposit method, in consequence the transaction volumes from investment contracts do not constitute revenues according to IFRS.
Transaction volumes obtained from investment contracts in 2011 and in 2010 amounted to
PLN 3,054.4 million and PLN 2,787.7 million respectively. The PLN 266.7 million (9.6%) increase resulted mainly from higher sales of short-term endowment products both in the banking channel and in the proprietary channel. This change was partly offset by a drop in sales of unit-linked investment products distributed via the banking channel.
Fee and commission income in the pension segment in 2011 and 2010 amounted to PLN 231.6 million and PLN 246.9 million. The PLN 15.3 million (-6.2%) drop resulted mainly from a drop in the level of contributions transferred from ZUS (Social Insurance Institution) to OFE PZU from 7.3% to 2.3% of base pension insurance contributions (as of May 2011).
The increase in acquisition costs of PLN 32.8 million (67.3%) resulted mainly from settling the commission expense and an impairment write-down in respective assets in 2011 in connection with the drop in contributions transferred by ZUS to OFE PZU. Administrative expenses of PTE PZU
dropped by PLN 20.0 million (-21.5%), which was mainly the effect of lower costs of the ZUS fee collected on contributions transferred to OFE PZU, and lower payments to the Guarantee Fund.
Laws No. 7 of 2010, item 44 as amended);  changes in bank regulations which may have an impact on the reduction in the number of mortgage loans granted and borrowers‟ insurance.
investment income depends on the trends on this market which translates into the value of assets and amount of management fees collected by PTE PZU; 8. Management position on the previously published forecast results
The PZU Group did not publish forecasts of separate or consolidated financial results.
PZU and PZU Życie are rated on a regular basis by the rating agencies. The rating granted to PZU
and PZU Życie is an evaluation following from an analysis of the financial data, the competitive position, management and corporate strategy. The rating also includes a rating outlook, i.e. the future assessment of the company‟s position if specific circumstances arise.
The table below shows the ratings granted to PZU and PZU Życie by Standard&Poor‟s with the ratings awarded a year earlier.
Rating of financial strength A /stable/ 22 July 2011 A /stable/ 5 July 2010
In 2011 PZU‟s activities concentrated mainly on improving returns on the corporate insurance portfolio and proactive sales of insurance for mass clients.
 tools for quoting and servicing fleet insurance of small and medium enterprises were developed.
Prices of home insurance were also adapted to flood risk in particular parts of the country, and at the same time an option to eliminate flood cover from the standard insurance contract was eliminated.
 The basic offer for SME clients was modified – the PZU Doradca (advisor) package. The changes were aimed at extending the availability of the product on all SME clients and improving the profitability of insurance. Depending on client needs, insurance may be expanded by assistance services and insurance of risks specific for a given business (such as the PZU HOTEL clause addressed to clients in the hotel and catering industry).
 In the area of property insurance as part of the activities related to improving profitability and portfolio quality, the essential role of underwriting was maintained through: o further limitation of sales to entities from high loss ratio industries; o improving the efficiency of the selection process, classification and risk assessment
(including flood risk); o wider application of additional clauses and other technical insurance restrictions changing the scope of insurance.
 In general liability insurance, new risk assessment tools were applied and changes were introduced to the terms and conditions of insurance and quotation principles.
 In respect of insuring monetary receivables and bank loans, a policy was pursued aimed at securing the portfolio held and earning a technical profit. This was realized by using restrictive risk assessment criteria, hedging the transactions concluded and maintaining safe legal regulations in the contracts concluded.
 In 2011 cooperation was continued with its current business partners – lead banks on the Polish market – such as PKO BP SA, ING Bank Śląski SA, Bank Millennium SA, BGŻ SA. The offer was supplemented by new insurance being added to banking products, such as protection programs for payment cards and insurance of buildings and apartments added to mortgage loans and advances.
 Cooperation was continued with partners with large client bases or those handling mass payments such as telecoms, power companies and commercial chains. It comprised several new, specialized insurance products such as mobile phone and notebook insurance, insurance of loan repayment in case of loss of one‟s job.
In 2011 as part of the process of improving the loss adjustment effectiveness in motor insurance, the following actions were taken:  electronic flow of documents was introduced;  a procedure was implemented for simplified claims adjustment in a vehicle;  cooperation started with ControlExpert in respect of automating the verification of the motor claims valuation process;  a pilot solution was implemented to improve management of the PZU Repairs Network;  a telephone service was launched “Proposed Vehicle Sales” in respect of partial damage to vehicles in motor liability insurance; Including dealers cooperating with PZU on the basis of exclusive contracts (182)
 the process for renting substitute cars was centralized for motor liability claims;  an auction platform was launched to trade in vehicle remains after vehicles have been totally damaged.
The following changes took place in respect of property loss adjustment in 2011:  electronic flow of claims documents was introduced;  the loss adjustment system (SLS) was integrated with the expert claims valuation systems in buildings;  a simplified system for valuing claims in buildings was implemented;  new tools were used for property loss adjustment (among other things, Mini Mobile PZU
In the area of personal loss adjustment, the following actions were conducted:  a new model for cooperation with certifying physicians was implemented – four entities providing medical services for the purpose of certifying claims in motor liability and NNW were selected and cooperation with them commenced;  a program for mental rehabilitation groups for children injured in motor accidents was implemented
PZU Życie offers a wide scope of life insurance products, and specifically protective group insurance, individual insurance and insurance offered in cooperation with banks. Protective group insurance constitute the most important group of products in terms of the share of gross written premium in the total gross written premium in PZU Życie.
 changes in the offer for group employee insurance of the P Plus type dedicated to the SME sector
In 2011 PZU Życie continued to participate in the submission of tender offers for group insurance. In connection with the duty of applying the requirements resulting from the Act on Public Procurement to submitting orders for insurance services, there has been a visible increase in the number of public employers who have decided to apply tender procedures.
Card) (general insurance terms and conditions – “OWU” – and the Regulations) were adapted to the amendments made as of 1 January 2012 to the Act of 6 September 2001 Pharmaceutical Law
In 2011 the sales of Plan na Życie insurance were continued, offering the possibility of investing and saving in insurance unit-linked funds which enjoy huge client interest. Under the “Plan na Życie”
In 2011, in connection with the continued interest in structured products observed on the market,
Through the “Świat Zysków” insurance PZU Życie offers its Clients products that are an alternative or supplementary to other investment products. In 2011 six consecutive successful subscriptions of the product with different investment strategies were conducted. The insurance is still in the offer and in 2012 further subscriptions are planned. To better adapt the investment strategies proposed as part of the product to changing economic conditions and Client needs, it was decided to increase the number of subscriptions and shorten their duration.
In 2011 the product offer was being further developed under cooperation with former business partners and new banks.
“poliso-lokaty” (investment policies)). In accordance with the adopted strategy, the possibility of offering this type of product depends on the scope of cooperation with a given Partner in respect of other product lines.
In the 3 rd quarter of 2011 the group insurance offer was expanded by products based on the “fee for service” settlement model, due to a new medical service provider PZU Pomoc SA. Also in the second half of the year, under the Healthcare (Opieka Medyczna) product line, a pilot comprehensive health insurance program was adopted in respect of refunding drugs, organized in cooperation with the
Additionally, distribution channels, which are modern and popular on the Polish market, are used such as the banking channel or direct mailing. The key distribution channels are as follows:  Corporate sales – employees of PZU Życie, whose key task is to sell and maintain the group insurance portfolio;  Agency sales – a network of ca. 2.3 thousand exclusive agents and 181 Sales Team Managers, whose actions are aimed at selling group and individual insurance and maintaining and servicing the individual insurance portfolio;  A network of proprietary outlets – a network of common PZU SA and PZU Życie outlets, which apart from the service functions also serve the selling functions, in particular in individual insurance (including individually continued cover);
 Direct sales – a distribution channel used to acquire individually continued insurance clients
(including up-selling additional insurance);  The banking channel – a network of banks in cooperation with which the Company distributes a wide scale of investment and protective products.
In accordance with the Regulations of the PZU Życie Management Board, tariffs for mandatory and voluntary insurance and general terms and conditions of insurance are passed in the form of a resolution.
In 2011, under the process of improving the process of benefit claims adjustment, the following actions were taken:  a new system was implemented in the process of benefit claims adjustment in further product groups (group protection, continued, investment-linked), including total elimination of paper documents for handling claims;  a new model for cooperation with certifying physicians was implemented – four entities providing medical services for the purpose of certifying benefit claims were selected and cooperation with them commenced;  a new form of benefit payments was launched – Autowypłata;  “old portfolio” benefit payments were centralized in a one instance benefit system.
Acting in the interests of OFE PZU members, the Management Board of PTE PZU decided to change the bank which acts as Depositary, to ING Bank Śląski SA, which on 18 November 2011 obtained a
KNF permit. The first day on which ING Bank Śląski SA performed this function was 14 January 2012.
The organizational structure of PZU and PZU Życie is based on functional and geographical coordination of tasks. Divisions coordinating particular functions have been developed in PZU and
As at 31 December 2011, the organizational structure of PZU and PZU Życie comprised the following organizational units:  head office – supporting the Management Boards of PZU and PZU Życie in the scope of managing the operations of the PZU Group; it prepares the key assumptions for the operations and organization of the companies in the PZU Group and constitutes the planning and management center;  specialized units – specialized operational units responsible for mailing customer service and the call center, for managing insurance operations, loss adjustment, accounting and payroll services, administration and logistic support;  regional branches (9) - with outlets.
and PZU Życie covering administration of insurance operations, the call center, loss adjustment and asset management.
In 2011 the functioning of common consolidated IT structures in the PZU Group stabilized. The following, among other things, were completed:  the 1st stage of the project for a common ERP class system for PZU and PZU Życie was implemented, which is to gradually take over the currently operating systems;  the system for supporting the creation of separate and consolidated financial statements was implemented (the Hyperion system);  the process of automatic loading of policies issued in the sales system to the policy administration system was launched;
Moreover, in 2011 several important initiatives were launched which could lead to implementing new
In 2011 the PZU Group conducted eight widespread advertising campaigns:  in February and March a campaign was conducted relating to the fixed sum insured and door-todoor services, which was aimed at building the perception of a wide and comprehensive PZU
All the above campaigns were conducted on TV and in the Internet, and in selected media other than on TV (such as radio, press).
 enhancing standard mass correspondence sent to clients with marketing communication (e.g. in the form of the newspaper Moje PZU and Moje PZU Dobry Rolnik, or leaflets informing clients how a claim lodged can be easily monitored);  issuing PZU Business Club cards – a program directed to corporate clients of PZU and PZU
Życie;  marking the best PZU EU branches to improve awareness of the location of branches among potential clients.
On 29 December 2009 the Management Board of PZU and PZU Życie announced a plan for implementing a restructuring program for the years 2010-2012.
On 11 May 2011 the Management Board of PZU and PZU Życie passed a resolution on the intention to conduct group layoffs in 2011.
On 26 May 2011 an agreement was concluded relating to group layoffs between PZU and PZU Życie, and the labour unions operating in the companies. In accordance with the determinations from 13 June to 10 October 2011 employment restructuring and optimization processes were implemented under the group layoffs.
The employment restructuring process in 2011 are a continuation of the activities begun in 2010 and consisted of – among other things – further integration of particular teams which carry out similar tasks in PZU and PZU Życie, implementing IT tools and optimizing processes enabling the achievement of higher work effectiveness standards (ratios), and further centralization of some functions in central entities. The employment restructuring processes in 2011 mainly covered the following areas: transactions, finance, administration, HR and payroll, loss adjustment and benefits, and the network, in all areas, both in local entities and in central entities, including PZU‟s and PZU Życie‟s Head Office.
In 2011 a maximum of 3,303 PZU and PZU Życie employees were to be covered by the change, which include net layoffs, i.e. an assumed decrease in the number of employees of 1,199 people.
The people who were laid off or who did not accept the proposed change in the terms and conditions of employment were offered favourable resignation terms, better than those offered in accordance with the law in similar situations (the Act of 13 March 2003 on specific principles for terminating employment contracts for reasons not relating to employees (Journal of Laws No. 90 of 2003 item 844 as amended)).
In 2011, 1,943 employees were covered by the layoff procedures, of which termination of contracts was initiated with 1,276 employees as a result of a termination agreement or handing them declarations about terminating the contracts or as a result of the employees not accepting the new terms and conditions of employment, not due to the fault of the employer. Moreover, employment
Total restructuring expenses amounted to PLN 58.2 million in 2011 (in 2010: 147.8 million).
As at 31 December 2011, the restructuring provision costs amounted to PLN 113.0 million (as at 31 December 2010: PLN 75.3 million), which meant a change in the balance of the provision of PLN
Projects conducted in the previous year were directly related to the pursuit of the PZU Group strategy for the years 2009-2011 aimed at profitable growth and constructing a cost-effective organization aimed at satisfying client requirements.
 analytical work was started on the concept for developing healthcare related business, including preparations for the potential reform of the public health insurance.
PZU Pomoc Online (trading in vehicle remains after the vehicles have been totally damaged), and as part of building brand awareness, substitute cars used by clients under the door-to-door service were appropriately marked.
In the area of customer service, apart from the project mentioned above related to the construction of a chain of modern outlets, the following activities were pursued:  110 PZU branches were marked according to a unified standard, so as to improve their visibility and facilitate clients finding the outlet;  the process of unifying management structures in the current PZU Group outlets and of front-office employees was continued to enable comprehensive servicing of life and property insurance clients in all outlets;  IT tools were implemented to support office processes and handling correspondence from all channels and moreover a Central Office was opened which provides services to all PZU Group companies;  the functionality for servicing PZU Życie group insurance clients was expanded by the option of upselling or downselling other PZU products to the clients, and sales network training was conducted - this will enable using the cross-selling potential of Group products (cross-selling is planned to start in the 1st quarter of 2012).
PZU Group aimed at improving process efficiency and cost optimization. They comprised, among other things:  a further stage of employment restructuring as a result of which the employment level dropped by ca. 1,050 full-time positions;  analytical work on a project aimed at developing PZU‟s operating model and as a result the PZU
policy system will be replaced;  stage 1 of joint implementation of the PZU and PZU Życie ERP class system - in 2011 unified processes in the area of financial accounting, procurement and a joint chart of accounts were implemented (start-up in 16 January 2012);  starting analytical work related to the process of restructuring the real estate portfolio necessary from the perspective of PZU‟s and PZU Życie‟s statutory operations;  creating the HR and remuneration service centre for contractors and intermediaries of PZU and
“JakieUbezpieczenie.pl”. The character of the site is purely informative and educational. It explains the benefits of insurance products in a simple and easily accessible manner.
Similarly to the preceding years, PZU also conducted preventive activities aimed at improving public safety and limiting various risks. In this respect the following actions were taken in 2011:  cooperation with TOPR, GOPR and selected WOPR groups was continued;  cooperation with Stowarzyszenie Misie Ratują Dzieci (Teddies Save Children Association) was initiated in the area of therapeutic and psychological help for children injured in accidents;  the Bezpieczna Flota (Safe Fleet) project was undertaken addressed to selected fleet drivers.
The mission of Fundacja PZU (the PZU Foundation) is acting in the interests of the public in the area of education, culture, art, healthcare, and social security. The PZU Foundation pursues its goals cofinancing the projects carried out by non-governmental organizations and other organizational entities in the area of operations of the PZU Foundation.
In its activities in 2011, the PZU Foundation awarded subsidies under consecutive editions of the competitions and projects outside the competitions, and for individual aid.
Museum in Kraków and the National Museum in Warsaw by acquiring new collections on their behalf.
In the area of “Social care and social aid” subsidies were awarded: o in the competition “Developing social activity in handicapped children and adolescents”; o to disadvantaged individuals, including PZU employees; o to Stowarzyszenie Wspólnota Polska in Warsaw by financing insurance for children and adolescents from our eastern neighbours during their stay in Poland; o to Mokotowskie Hospicjum Św. Krzyża (hospice) in Warsaw; o to organizations indicated in the PZU employees commitment survey.
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 o to Stowarzyszenie Wspólnota Polska in Warsaw by financing insurance of the medical mission in the Ukraine and Moldavia; o to Polska Unia Onkologii (oncological union) in Warsaw.
In the foreseeable future, the operating model of the PZU Group will be transformed from an organization operating according to product lines to an organization operating according to client segments. These transformations will enable the Group to better understand the needs of its clients and to react appropriately to these needs. In consecutive years, further operating optimization of the
These goals will be realized thanks to actions focused on:  in the mass client segment: o maintaining the market share in the motor insurance and property insurance segment and introducing advanced principles for price-setting and reacting to market changes; o dynamic development of savings and investment products, and in particular long-term savings products; o further development in the area of mass sales, among other things, by developing basic distribution channels;  in the group client segment: o maintaining the profitable lead position in life insurance; o creating a health insurance market to increase the scale of business in that area; o actively upselling products related to health and drug insurance to group clients; o strengthening direct relations with the insured thanks to PZU Club‟s offer “Pomoc w Życiu”
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 o introducing a new product system in PZU which will enable an increase in operating effectiveness; o implementing a new customer service model which assumes an integrated contact channel structure, compliant with customer expectations, and specifically building a network of modern sales and service outlets; o further optimization in the area of loss adjustment and benefits, where the key initiatives are as follows:  a new management module which suggests, in a simple way, the optimum form of loss settlement and the best and closest cooperating enterprises;  implementing a mass printing service;  improving the current recourse servicing process;  recovering overdue recourse claims;  centralized adjustment of all motor claims with foreign elements;  implementing a simplified loss adjustment process for motor claims.
PZU Group‟s business strategy. In order to achieve these objectives the PZU Group conducts operations in accordance with a clearly defined risk policy and within the established risk limits;
 Clearly defined responsibilities – the PZU Group operates in line with the principle of allocating tasks, competencies and responsibilities. The delegated employees are responsible for the risk they undertake, and their incentives are harmonized with the business objectives of the PZU
Group;  Adapting to changes occurring in the business environment – the ability to respond to changes occurring in the business environment, both those arising from external and internal conditions of the PZU Group, are an integral part of the risk control process in the PZU Group.
Financial assets exposed to currency risk include deposit transactions and debt securities constituting security of the realization of expenses in respect of technical reserves denominated in foreign currencies, and exposure in equity instruments listed on stock exchanges other than the WSE, exposures in derivatives denominated in foreign currencies and financial assets of consolidated insurance companies in Lithuania and the Ukraine. The increase in sensitivity to currency risk at the end of 2011 compared with 2010 is mainly due to the increased exposure in deposits denominated in foreign currencies and the increase in foreign exchange rates.
European Stress Tests for the insurance sector carried out by EIOPA, the results of which were submitted to the PFSA. The stress tests showed that the PZU Group has sufficient capital to be able to safely continue its operations after the strong turbulence in the business environment has abated.
12. Selected other PZU Group companies – directions of development and results 12.1 PZU Lietuva
The company‟s objective in 2011 was further improvement of the profitability of motor vehicle portfolios and improving its position on the corporate property insurance market. Despite the difficult situation on this market, the company increased its sales by nearly 10% and managed to reduce both the loss ratio and the ratio of operating expenses net of reinsurance.
In the reporting period, activities initiated in the previous year were continued aimed at full unification of property and life insurance of the PZU Lietuva Group. The objective of the process was to adapt the structure of PZU Lietuva to corporate governance guidance, among others, by reducing operating expenses.
In 2011, PZU Ukraine recorded high premium dynamics accompanied by a small growth in the
The modifications in the approach to the tariffication of motor vehicle insurance products, constituting a significant portion of the portfolio of PZU Ukraine, introduced in 2010, led to a considerable improvement in profitability in 2011.
 actions aimed at organizing the distribution network;  promoting the best TFI PZU funds in the media.
Significant achievements of TFI PZU in 2011:  honouring the Employee Pension Scheme maintained by TFI PZU with the Polish Promotion
Rating;  launching a new unit-linked product with Towarzystwo Ubezpieczeniowe Benefia na Życie SA;  forming and launching, together with PZU Życie, the Millennium Prestige 2 Investment Scheme;  commencing works on launching a service for distributing units of TFI PZU funds through remote channels: the internet and phone.
As planned, in 2011 PZU AM provided services solely to the PZU Group companies, i.e. to PZU, PZU
 launching an auction platform “PZU Pomoc ONLINE” the purpose of which is to sell damaged vehicles and property;  purchase of cars for providing roadside and home assistance;  implementing loyalty programmes: o “Klub PZU Pomoc w Życiu” – for clients of PZU Życie holding life insurance in the group insurance sector; o “Karta Klienta PZU-niezguba” – for clients of PZU holding a motor vehicle insurance package
In July 2011, the company ended its preparations for launching activities in the scope of offering and organizing medical services, with more than 600 medical facilities signed up throughout
On 11 August 2011, the company signed a cooperation contract with PZU Życie for providing medical services to health insurance Clients of the PZU Group. Therefore, on 1 September 2011,
In 2011, PZU CO executed a number of undertakings, which included:  incorporating the Insurance Services Centre in Warsaw and a part of the Call Centre within the organizational structure of PZU CO (transferring a part of the operations of PZU and PZU Życie);  carrying out the project for handling and distribution of the Individual Pension Insurance Account
13. Shares or rights to shares held by members of management and supervisory bodies of PZU as at the date of submitting the annual report
Supervisory Board 3 Piotr Kamiński (SB Member until 4 Grażyna Piotrowska-Oliwa (SB Member 8 Dariusz Daniluk (SB Member until 9 Zbigniew Derdziuk (SB Member until n.d. - as at 17 March 2011 the persons were not Members of the Management Board
14. Other information 14.1 Remuneration of Management and Supervisory Board Members of the
Detailed information on the remuneration of the Management Board Members of PZU has been presented in Note 52.6.1 to the Consolidated Financial Statements of the PZU Group.
PZU made its debut on the Warsaw Stock Exchange on 12 May 2010. The Company‟s shares are continuously traded on the primary market. In 2011, the shares of PZU were included in the WIG,
WIG20, WIG PL indices and from 1 February 2012 also in the RESPECT Index.
Table 35: Basic information on PZU shares measurement unit 1 January –
Number of shares as at the end of the year units 86 352 300 86 352 300
Number of shares in trading units 86 344 698 86 340 692
Market value of PZU as at the end of the year PLN 26 682 860 700 30 698 242 650
Dividend (gross) paid out in the financial year out of prior year profit distribution
PLN/share * excluding the dividend paid on 26 November 2009 as interim dividend on account of the dividend anticipated at the end of the financial year 2009 of PLN 12,749,917 thousand (PLN 147.69 per share).
The closing price of PZU shares from the last trading session in 2011 was PLN 309.00, which represented a 13.1% decrease compared with the price on the last day of December 2010 of
PLN 349.40 which was PLN 22.93 lower than in 2010. The average daily trading volume of PZU
In 2011, PZU was on the list of 21 domestic and foreign financial institutions whose analysts issued a total of 49 recommendations for PZU shares. “Buy”, “Accumulate” and “Overweight” prevailed – a total of 31 recommendations, 17 recommendations were neutral (“Hold” or “Neutral”) and 1 was
(Market price of shares at the end of the period – market price of shares at the start of the period + dividend paid out in the period) / market price of shares at the start of the period * excluding the dividend paid on 26 November 2009 as interim dividend on account of the dividend anticipated at the end of the financial year 2009 of PLN 12,749,917 thousand (PLN 147.69 per share)
On 11 May 2011, the Management Board of PZU passed a resolution concerning the Issuer‟s dividend policy.
The adopted dividend policy provides for the following: 1. The consolidated profit or loss of the PZU Group in accordance with the IFRS shall be the basis for establishing dividend to be paid out by PZU for a given financial year.
2. The amount of the dividend:  shall not be lower than 50% or higher than 100% of the net profit shown in the consolidated IFRS
financial statements;  shall not be higher than the stand-alone net profit of PZU in accordance with the PAS;  shall not result in reducing PZU's equity below the amount corresponding to 250% of the solvency margin;
 shall not result in reducing the financial strength of the PZU Group below the level corresponding to the AA rating according to the Standard & Poor‟s methodology;  should take into account the additional capital requirements of PZU in a 12-month perspective from the moment of approval of the consolidated financial statements of the PZU Group for a given year by the Management Board of PZU.
The resolution on the dividend policy is binding from the date of coming into force of the articles referred to in Art. 311 of the Directive 2009/138/EC of the European Parliament and Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance
On 5 September 2008, the Management Boards of PZU and PZU Życie passed a resolution on PZU
On 27 September 2011, a new Tax Group agreement was signed between the PZU Group companies, comprising 9 companies: PZU, PZU Życie, TFI PZU, PZU AM, PZU CO, PZU Pomoc SA,
PZU is the parent company and the company representing the TG in both the above-mentioned agreements. In accordance with art. 25 clause 1 of the CIT Act, the TG conducts settlements with the
The main partners granting obligatory reinsurance protection to PZU in 2011 are the following reinsurers: Swiss Re, Hannover Re, Scor, Munich Re, Lloyd‟s. PZU‟s reinsurance partners have high ratings according to S&P, which ensures certainty of a good financial standing of the reinsurers to the
The following reinsurance companies are partners granting reinsurance protection to PZU Życie: RGA,
As for investment activities of PZU and PZU Życie in 2011, the entities extended loans totaling PLN
865 million maturing in the period from 2016 to 2018 at arm‟s length interest rates based on an appropriate WIBOR rate, margin or a fixed rate. Loans are collateralized in a manner typical for a given instrument.
In the 12-month period ended 31 December 2011, PZU or its related entities did not grant any warranties in respect of loans and borrowings or guarantees – in aggregate to one company or an entity related to that company - if the total value of the existing warranties or guarantees would constitute the equivalent of at least 10% of PZU‟s equity.
14.11 Evaluation of financial resources management, taking into account the ability to cover the liabilities drawn, and identification of potential threats and action taken or planned by the Issuer in order to counteract those threats
The Issuer is in a very good financial situation and it fulfils all the safety criteria imposed on it by the
Act on insurance activities and by the PFSA. The stable rating perspective of the Issuer confirms the
Due to the Issuer‟s strong competitive position and very good financial standing, the Management
The PZU Group companies participate in numerous litigation cases before the court, arbitration and administrative proceedings. Typical litigation cases in which the PZU Group companies participate include disputes related to insurance contracts concluded, disputes related to employment relationships and disputes related to contractual obligations. Typical administration proceedings in which the PZU Group companies participate include proceedings related to ownership of real estate.
The majority of the disputes with the participation of the PZU Group companies relate to two companies: PZU and PZU Życie. Additionally, PZU and PZU Życie are parties in proceedings before the President of the Office of Competition and Consumer Protection and proceedings before the Polish
PZU Group companies‟ debt, which represented 10.84% and 3.12% respectively of PZU‟s equity according to PAS.
The information on the proceedings of the Office of Competition and Consumer Protection against
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 14.13 Information on significant contracts concluded
In the 12-month period ended 31 December 2010, PZU did not conclude one or a number of transactions with related entities if individually or in total they were material and were concluded on terms other than an arm‟s length basis.
PZU and PZU Życie intend to adjust the salaries to market standards and link individual employee objectives to the performance of the PZU Group's strategy.
In the period from 1 January 2011 to the date of preparing this Directors‟ Report of the PZU Group, no business combinations were carried out between PZU and other companies.
14.18 Information on contracts concluded that are significant to the PZU
(including those concluded after the balance sheet date) as a result of which the current shareholding structure may change in the future.
In 2011 and 2010 the PZU Group companies did not cooperate with any international public institutions.
The contract for the review of the abridged interim consolidated financial statements of the PZU Group and the abridged separate financial statements of PZU for the 6 months ended 30 June 2011 and for the audit of separate financial statements of PZU and consolidated financial statements of the PZU
Information on the fee of the registered audit company is provided in the Consolidated Financial
In 2011, PZU complied with “The Best Practices of Companies Listed on the Warsaw Stock
Apart from the above-mentioned corporate governance principles, PZU applies ethical principles and social responsibility principles contained, among other things, in the following documents:  Principles of Good Insurance Practices enacted on 8 June 2009 by the General Meeting of the
Polish market. The principles adopted by PZU regulate the rules of conduct for insurance companies in relations with clients, insurance agents, the PFSA and the Polish Insurance
Ombudsman and the media. They also regulate the relations between the insurers themselves and the actions of insurance companies acting as participants in public trading in securities. The document is available on the website of PIA: praktyk/project/132/pagination/1;  The Best Practices in PZU. The document underlines the role of ethical values binding in all the aspects of PZU's operations. It describes the best business practices in PZU. It promulgates and promotes the culture of compliance with the binding law, making decisions based on ethical criteria and responsibility for the decisions made. The document is available on PZU‟s website: c53f3668c66a&groupId=10172;  The social report of PZU. This is the first report concerning sustainable development and social activity of the Issuer, which has been prepared based on the guidance and standards of Global
The year 2011 confirmed PZU‟s devotion to the highest corporate governance standards. There were no violations of the rules specified in The Best Practices of WSE Listed Companies, as provided in
Best Practices of WSE Listed Companies. The announcement of not fully complying with those recommendations was not made, in line with the exemption based on the resolution of the
With regards to chapter I of The Best Practices of WSE Listed Companies containing
With reference to recommendation I.5 of The Best Practices of WSE Listed Companies concerning the remuneration policy for members of management and supervisory bodies, the decision on the remuneration of the Supervisory Board members lies within the competencies of the General Meeting of PZU and decisions on the remuneration of the Management Board members are made by a resolution of the Supervisory Board of PZU.
The remuneration of the Supervisory Board members is clearly specified in the resolution of the
The principles for remunerating the Management Board members were specified by the Supervisory
The remuneration policy for members of management and supervisory bodies does not contain all the elements indicated in the Recommendation of the European Commission of 14 December 2004 fostering and appropriate regime for the remuneration of directors of listed companies (2004/913/EC), as supplemented by the Recommendation of the EC of 30 April 2009 (2009/385/EC).” Moreover, PZU
Currently, there is one woman in the seven-member Supervisory Board – Marzena Piszczek who is the Chairman of the Supervisory Board.
Companies introduced by a resolution of the Board of WSE no. 20/1287/2011 and binding from
The Annual General Shareholders‟ Meeting of PZU should be held within six months after the end of each financial year of the Company.
General Meeting. The demand should contain justification for a draft resolution concerning the proposed point on the agenda and should be reported to the Management Board not later than twenty one days before the set date of the General Meeting. The Management Board is obliged to immediately announce changes in the agenda introduced on the demand of the shareholders, not later however than eighteen days before the set date of the General Meeting. The announcement should be made on PZU‟s website and in accordance with the procedure for announcing current information specified in the provisions of the Act dated 19 July 2005 on public offering and terms and conditions of introducing financial instruments to an organized trading system and on public companies (Journal of
Laws No. 184 of 2005, item 1539 as amended, “the Act on public offering”), i.e. in the form of current reports.
The right to participate in the General Meeting only falls to persons who were PZU's shareholders sixteen days before the date of the General Meeting (the date of registering participation in the
PZU to prepare a list of shares authorized to participate in the General Meeting.
In the period between the date of registering participation in the General Meeting and the date of closing the General Meeting, a shareholder of PZU may transfer shares.
Each share gives the right to one vote at the General Meeting, taking into account the restrictions concerning the execution of voting rights. A shareholder may vote differently based on each of the shares held. PZU‟s shareholders may participate in the General meeting and execute the voting rights in person or through a proxy.
The General Meeting is a body authorized to make decisions through resolutions in matters related to the PZU‟s organization and operation. The resolutions passed by the General Meeting are reached by an absolute majority of votes, except for special cases provided for in the Commercial Companies
On 8 February 2012, the Extraordinary General Meeting of the Company, in amending PZU‟s Statute, granted competence to the General Meeting to pass a resolution concerning the Company buying or selling real estate, perpetual usufruct or a share in real estate or in perpetual usufruct with a value exceeding the equivalent of EUR 30,000,000 (thirty million Euro), gross. The said change in the
The shareholders‟ rights and entitlements arise from the provisions of the Commercial Companies
The Company‟s shareholder may request that the shareholders' list be sent to him free of charge by electronic mail, after giving the address to which the list should be sent.
Each shareholder of the Company has the right to request a copy of the motions concerning the issues on the agenda of the next General Meeting within one week before the General Meeting. The request should be submitted to the Management Board.
At the request of shareholders holding one tenth of the share capital represented at the General
Management report on the activities of Powszechny Zakład Ubezpieczeń Spółka Akcyjna Capital Group in 2011 at least three persons. The persons tabling the motion have the right to elect one member of the commission.
Supervisory Board members (in the Company‟s case – five members of the Supervisory Board) may form a separate group in order to elect one Supervisory Board member, but they may not participate in the election of the remaining Supervisory Board members. Mandates in the Supervisory Board not filled by an appropriate group of shareholders as part of the procedure described above, shall be filled by a vote of all the Company's shareholders who did not cast votes when electing the Supervisory
Supervisory Board shall not apply in respect of such election of the Supervisory Board, in recognition of the fact that if the Supervisory Board contains a person appointed by an entity specified in a separate Act, only the remaining members of the Supervisory Board shall be elected.
The Management Board member may refuse to provide information should it constitute a basis for his penal, civil law or administrative liability. A response shall be considered to have been given if the relevant information is available on the Company‟s PZU‟s website on the site designated for the shareholders to ask questions and for providing them with answers. In response to a request made by a shareholder, the Management Board may provide an answer in writing outside the General Meeting if there are valid reasons to do so. The Management Board is obliged to provide an answer not later than within two weeks from the date of making a request during the General Meeting. In the event of a shareholder making a request for information about the Company outside the General Meeting, the
(Journal of Laws No. 33 of 2009, item 259; “the Decree on current and periodic information”), the
As of 21 April 2011, the Supervisory Board appointed Mr Tomasz Tarkowski member of the
As of 1 July 2011, the Supervisory Board appointed Mr Bogusław Skuza and Mr Ryszard Trepczyński members of the Management Board.
On 6 October 2011, Marcin Halbersztadt resigned as a member of the Management Board of PZU.
The current term of office of the Management Board of PZU commenced on 28 June 2011 and will last for the next three full financial years. The mandates of the Management Board members shall expire at the latest on the date of holding the General Meeting to approve the financial statements for the last full financial year of their performing their functions.
The Management Board exercises all the rights in the scope of managing the Company, which are not reserved by the provisions of the law or the provisions of the Statute to the General Meeting or the
Board are passed by an absolute majority of votes and if the number of votes is equal, the Chairman of the Board has the casting vote. The Management Board, on the approval of the Chairman of the
Board, may pass resolutions by circulation, in a written or electronic form (i.e. using remote means of communication and using a qualified electronic signature). The Statute also provides for the possibility of holding Management Board meetings using means of direct communication over a distance. Two
The functioning and competencies of the Management Board arising from the rules and regulations of the Management Board
The rules and regulations of the Management Board were enacted by the Management Board on 23 February 2010 and approved by the Supervisory Board by a resolution dated 4 March 2010.
Board; (ii) the competencies of the Chairman of the Board and of the remaining Board Members; (iii)
 adopting the financial statements for the prior financial year and the Directors' Report of the
Company;  adopting the proposition concerning appropriation of profit or covering loss;  establishing a tariff for compulsory and voluntary insurance contributions and the general terms and conditions for voluntary insurance;  establishing the scope and size of outward reinsurance and tasks in the scope of inward reinsurance;  adopting the annual audit and control plan and report on its execution including conclusions;  establishing the principles for investment, prevention and sponsorship activities;  granting warranties and guarantees (excluding those which constitute insurance procedures) and drawing and granting loans and borrowings by the Company (excluding loans and borrowings granted from the Company Social Fund); and
The Chairman of the Management Board makes decisions in the form of directives and official orders.
The Supervisory Board is composed of eleven members: The number of the Supervisory Board members is established by the General Meeting. The Supervisory Board members are appointed by the General Meeting for a joint term of office lasting for three full consecutive financial years. At least one member of the Supervisory Board must have accounting or auditing qualifications as defined in and in accordance with the provisions of the Act of 7 May 2009 on registered auditors and their selfgovernment, entities authorized to audit financial statements and on public supervision (Journal of
Laws No. 649 of 2009, item 77, “the Act on registered auditors”). Additionally, at least one member of the Supervisory Board should meet all the independence criteria specified in the Statute (the
Independent Member) concerning, among others, professional relations or kinship, in particular with members of management and supervisory bodies of the Issuer and the PZU Group companies. The
As at 1 January 2011, the following persons sat on the Supervisory Board of PZU: 1. Marzena Piszczek Chairman of the Board 2. Zbigniew Ćwiąkalski Deputy Chairman of the Board 3. Krzysztof Dresler Member of the Board 4. Dariusz Filar Member of the Board 5. Waldemar Maj Member of the Board 6. Piotr Maciej Kamiński Member of the Board 7. Grażyna Piotrowska-Oliwa Secretary of the Board
On 30 June 2011, the Annual General Meeting appointed the following persons for the new term of office of the Supervisory Board of PZU: 1. Marzena Piszczek Chairman of the Board 2. Zbigniew Ćwiąkalski Deputy Chairman of the Board 3. Krzysztof Dresler Secretary of the Board 4. Dariusz Filar Member of the Board 5. Waldemar Maj Member of the Board 6. Zbigniew Derdziuk Member of the Board 7. Dariusz Daniluk Member of the Board
Ćwiąkalski and the function of Secretary of the Board to Krzysztof Dresler.
The functioning and competencies of the Supervisory Board arising from the Statute
Management Board can perform the aforementioned actions without the obligation to obtain the
Management Board members who were dismissed, resigned or are unable to perform their duties for other reasons;  accepting instructions concerning the execution of the voting rights by the Company‟s representatives at the General Meetings of PZU Życie in matters relating to: increasing or reducing share capital, issuing bonds, selling and leasing out the PZU Życie enterprise and establishing the right of use thereon, demerger of PZU Życie, merger of PZU Życie with another company, liquidation or closing of PZU Życie;  electing the entity authorized to audit the financial statements to whom the audit of the Company‟s annual financial statements shall be entrusted;  establishing a consolidated text of the amended Statute;  approving the long-term development plans of the Company and the annual financial plans prepared by the Management Board;  approving the rules and regulations of the Management Board;
 analyzing and giving opinions on issues brought by the Management Board for the consideration of the General Meeting.
Moreover, the competencies of the Supervisory Board include granting approval to:  buy or sell real estate, perpetual usufruct or a share in real estate or in perpetual usufruct with a value exceeding the equivalent of EUR 3 million;  the Company to conclude a significant contract with its related entity as defined in the Decree on current and periodic information, excluding typical contracts concluded by the Company on an arm's length basis as part of its operating activities (the requirement to obtain approval in this scope will come into force on the date of the first quoting of Shares on the WSE);  the Company to conclude a contract with a subissuer referred to in Art. 433 § 3 of the Commercial
Resolutions of the Supervisory Board are passed by an absolute majority of the votes. If the number of votes is equal, the Chairman of the Supervisory Board has the casting vote. The Supervisory Board may pass resolutions both using remote means of direct communication and in writing by circulation.
Board Members or the entire Management Board, as well as making decisions on ceasing such suspension, which are made in a secret ballot. Moreover, a secret ballot can be ordered based on a motion tabled by a Supervisory Board member.
The functioning and competencies of the Supervisory Board arising from the Rules and
Supervisory Board may appoint other permanent advisory and consultative committees with competencies, in a composition, and with work procedures established in the rules and regulations of a given committee enacted by the Supervisory Board. The Rules and Regulations of the Supervisory
In accordance with the rules and regulations of the audit committee adopted by a resolution of the
Supervisory Board in the scope of examining the correctness of financial reporting, the effectiveness of internal control, including the internal audit and risk management system. Moreover, the audit committee may apply to the Supervisory Board to commission the performance of specified control activities in the Company, and the controls commissioned may be performed by an internal unit or an external company.
The audit committee was appointed by a resolution of the Supervisory Board on 3 June 2008. As at 31 December 2011, the audit committee was composed of the following persons: Marzena Piszczek
(Chairman of the committee), Dariusz Filar (member of the committee) and Dariusz Daniluk (member of the committee). Dariusz Filar was indicated by the Supervisory Board as an independent member having accounting / audit qualifications as defined in Art. 86 clause 4 of the Act on Registered
(Journal of Laws 183 of 2005, item 1538 as amended), the Supervisory Board may appoint the nominations and remuneration committee. The detailed tasks and principles for the appointment and operation of the nominations and remuneration committee are specified by the Supervisory Board in a resolution. The committee should include at least one independent member. If the Supervisory Board is composed of five members as a result of voting on its composition, the nominations and salary committee shall not be formed and its tasks shall be performed by the Supervisory Board as a whole.
Supervisory Board in the scope shaping the management structure, including organizational issues, the remuneration system and salaries and selecting staff with appropriate qualifications.
Board appointed a strategy committee composed of the following persons: Waldemar Maj (Chairman of the committee), Krzysztof Dresler (member of the committee), Marzena Piszczek (member of the committee) and Zbigniew Derdziuk (member of the committee). As at 31 December 2011, the composition of the strategy committee had not changed.
As at 1 January 2011, the following persons were PZU Group Directors:  Dariusz Krzewina;  Rafał Grodzicki;  Przemysław Dąbrowski;  Mariusz J. Sarnowski;
On 4 May 2011, the Management Board of PZU dismissed Tomasz Tarkowski as PZU Group Director.
On 7 February 2012, the Management Board of PZU appointed Przemysław Henschke PZU Group
15.4 Discussion of the main features of the internal control and risk management systems applied in the issuer's enterprise in respect of the process of preparation of financial statements and consolidated financial statements
The process of preparing financial statements is performed by the Finance Division of PZU supervised by a Member of the Management Board of PZU.
The preparation of data in the source systems is subject to formalized operational and acceptance procedures, which define the scope of competencies of the individual persons.
The key controls in the process of preparing financial statements comprise:  controls and regular monitoring of the quality of the input data, supported by financial systems in which data correctness rules have been defined in accordance with the internal documents of PZU
In accordance with the Statute of PZU, the Supervisory Board of PZU appoints an audit committee composed of three members, including at least one member with accounting or auditing qualifications as defined in and in accordance with the requirements of the Act on registered auditors. The audit committee is an advisory and consultative body to the Supervisory Board of PZU and is appointed in order to increase the effectiveness of the supervisory activities performed by the Supervisory Board of
Coordination of activities in the scope of the consolidated financial reporting processes is achieved, among other things, by the organizational structure of the Finance Division in the Head Offices of PZU
and PZU Życie, which is a joint unit, i.e. it is organized based on personnel unity, and additionally it also employs part-time key persons responsible for the reporting of the majority of the companies covered by consolidation with their seats in Poland. In the case of all the consolidated subsidiaries,
15.5 The list of PZU shareholders directly or indirectly holding significant packages of shares
The remaining shareholders hold a total of 51,627,739 shares, representing 59.7874% of the
PLN 1 each, giving a right to 86,352,300 votes at the General Meeting.
15.6 Holders of any securities which give special controlling rights, including a description of those rights
In accordance with the Statute of PZU, the shareholders' voting rights have been restricted so that, at the General Meeting, none of them can have more than 10% of the total number of votes existing at the Company on the date of holding the General Meeting, with the reservation that for the purpose of establishing the obligations of the acquirers of significant packages of shares provided for in the Act on public offering and in the Act on insurance activities, this restriction of the voting right shall be considered non-existent.
The Statute of PZU does not introduce any restrictions concerning the transfer of ownership rights to securities issued by the Company.
Amending the Statute of PZU lies within the competencies of the General Meeting and requires passing a resolution by a majority of three fourth of the votes, obtaining approval from the PFSA in the cases indicated in the Act on insurance activities and entry in the National Court Register. The Statute of PZU provides for the Supervisory Board‟s competence to establish a consolidated amended text of the Company's Statute..
Members of the Supervisory Board of PZU are appointed and dismissed by the General Meeting.
Until such time as the State Treasury's share in PZU's share capital drops below 20%, half of the
Supervisory Board members are appointed by the General Meeting from among the persons indicated by the State Treasury.
PZU applied to the PFSA for approval of the amendments to the Statute of PZU. On 28 June 2011, the
The amendments to the Statute came into force on the date of their entry by the registration court. On 17 October 2011, PZU received the court‟s decision concerning entering the amendments to the
Statue of PZU in the National Court Register with effect from 6 October 2011.
The above amendments to the Statute were dictated by the need to ensure the stabilization of PZU‟s position. They ensure stabilization of the execution of the voting rights from shares and thus demotivate any actions leading to speculative trading in PZU‟s shares, especially such as might lead to temporary investment decisions. The amendments related to the principles for appointing the