PZU 2020 - More Than Insurance 75 4.1 The tenet underpinning the #newPZU Strategy 76 4.2. Strategy operationalization 78 4.3 Pursuit of key projects and initiatives 89 4.4 Completed activities in 2018 92
Last year, economic conditions on the global capital markets were challenging for investors. High volatility returned to the financial markets. Positive sentiments persisted only at the outset of the year, riding the wave of optimism from 2017 when the main indices of the Polish stock exchange rose by more than 20%. This situation changed on 23 January 2018, when the WIG index, shadowing the rise in global risk appetite, reached its historic high of 67.5 thousand points. The rest of the year, however, was dominated by substantially grimmer sentiments on the Polish market. At the end of 2018, the WIG
1 indicator calculated on the basis of average equity attributable to the owners of the parent company on January 1, 2018 after the change in accounting principles and December 31, 2018
Rebranding PZU’s Initial Public Offering (IPO) Acquisition of a stake in OJSC „Skide-West” (PZU Ukraine), business launch on the Ukrainian insurance market
Ukraine In 2018, the Ukrainian economy remained on a stable growth path initiated in 2017. In Q3 2018, Ukraine’s GDP increased 2.8% compared to the corresponding period of the previous year. In December 2018, the country’s annual inflation rate was 9.8%, the lowest in the last 5 years. The inflation rate was affected predominantly by the following main factors: an increase the discount rate by the National Bank of Ukraine reflecting the strengthening of the country’s domestic currency and wage increases, and the ensuing increase in consumer demand.
In 2017, the statistical Pole spent on insurance, or more than 5 times less than the European average
As a consequence of the act of 20 July 2018 on transforming the perpetual usufruct right to developed land for residential purposes into the right of ownership to this land, the perpetual usufruct right to developed land for residential purposes was transformed by the power of law into the right of ownership as of 1 January 2019. The act treats as developed land for residential purposes single family or multi-family residential buildings in which at least one half of the units are residential units, including commercial-purpose buildings, garages, other construction facilities or construction equipment making it possible to utilize residential buildings correctly and reasonably. By virtue of transformation, the new land owner incurs a fee to the owner to date equal to the annual perpetual usufruct fee charged to date, to be paid for 20 years from transformation. A land owner who is a commercial undertaking, in reference to real property used to do business may submit a declaration to the authority of its intent to remit a fee for 99 years, 50 years or 33 years a financial penalty up to PLN 5 million on a management board member of a financial institution if that person, within the framework of discharging his or her function at the time of the breach found by UOKiK GLOSSARY deliberately permitted, through his or her action or inaction, a financial institution to violate bans against practices violating the collective interests of consumers or the ban against the usage of impermissible contractual clauses.
Macroeconomic and geopolitical factors The growth rate, level and structure of the key macroeconomic factors in Poland and abroad (GDP, inflation interest rates) translate into the growth rate of business in all sectors in which the PZU Group operates and the profitability of individual sectors. On one hand, they determine, directly or indirectly, and with a certain time lag, the gross written premium growth rate in non-life insurance, changes in demand for credit and accumulation of deposits, and funds’ asset inflows. On the other hand, they impact the loss ratios in non-life insurance, investment performance, determine fund management performance and the key measures affecting the performance of the banking sector (interest margin and costs of risk).
PZU Group grasps how new technologies are changing the insurance and banking industry, carefully keeps track of the dynamic social and demographic changes and constantly analyzes the threats and opportunities affecting the development of the markets in which it operates. The PZU strategy for 2017-2020 published on 9 January 2018 and entitled “The New PZU – More Than Insurance” is also our response to the ongoing changes. PZU’s goal is to take advantage of the opportunities ensuing from the transformation of the insurance market, address our current clients’ needs better and enhance their satisfaction as well as reach those segments that value digital solutions SECTION 4 PZU 2020 - MORE THAN INSURANCE
In the first three quarters of 2018, the overall non-life insurance market generated a net result of PLN 3,749 million, signifying incremental growth of PLN 739 million in comparison with the corresponding period of 2017. Excluding the dividend from PZU Życie, net profit of the non-life insurance market increased PLN 911 million (57.7%).
The non-life insurance undertakings in total estimated their net technical provisions at PLN 52,110 million, signifying 6.9% growth compared to the end of 2017.
PZU Group’s operations since 2010. The year on year growth rate of gross written premium at PZU Życie in this segment was 0.6%, while the other market players taken together posted a negative growth rate of -0.1%. One of the major factors was the rapid growth in the health insurance portfolio. PZU Życie now has more than 1.8 million policies of this type in its portfolio. PZU’s share in just the life insurance segment (class I) for periodic premiums at the end of Q3 2018 was 64.0% when measured by gross written premium and 70.7% when measured by the number of agreements in force. In turn, PZU’s market share in terms of the method of entering into an agreement just in the life insurance segment (class I) was 66.6% for agreements executed in group form and 39.2% for individual agreements (measured by gross written premium).
Plus [PZU Me Plus] accident insurance. In this insurance, PZU covers not only the insured (the parent) but also all the children (who are older than 1 year old and younger than 18 years old). This insurance provides for a benefit payout in case of being in a hospital, having a broken bone, permanent disability and accidental death or death in a motor accident. When entering into an agreement,
The following changes were made by PZU Życie to the product offering in investment insurance: • launch of sales in Bank Pekao of Program Inwestycyjny
Multi-Alokacja [Multi-Allocation Investment Program] (a single premium unit-linked product for Private Banking clients) and Świat Inwestycji Premium [Premium Investments World] (a single premium unit-linked product for clients of the Retail Network and CDM Pekao); • bancassurance unit-linked products (Multi Capital, World Investment Program) were migrated from the previous transfer agent’s systems to Pekao Financial Services’ systems to enhance the effectiveness of cooperation in the group and optimize service processes; • additional subscriptions of the structured insurance product known as World of Profits (Świat Zysków) that has enjoyed tremendous client interest were sold. Various investment strategies that adapt to volatile market conditions were offered in the individual subscription tranches, based on various models of calculating the investment bonus.
New products and services According to Bank Pekao’s strategy, its growth among retail clients is driven by the significant acceleration of growth in the number of accounts, among others thanks to its new personal account offer, a new offer for young people and the cutting edge mobile banking function featuring BLIK.
In 2018, based on estimates by Analizy Online, net outflow (the balance of payments and withdrawals) from retail funds offered by TFIs exceeded PLN 22 billion. It was a difficult year for the whole mutual fund market. However, the segment that was hit the hardest was that of non-public funds – their assets shrank by over PLN 16.3 billion. The unfavorable economic situation and market events caused a decrease in the assets of equity funds by more than PLN 7.8 billion and absolute rate-ofreturn funds by PLN 6.2 billion.
At the end of 2018, there were 13 companies operating in the non-life insurance sector (including 4 branches of foreign insurance companies) among which the top 4 held a combined 68.7% market share.
PZU Finance AB issued five year Eurobonds with nominal value of EUR 350 million on 16 October 2015. These bonds have been assimilated and now form a single series with the tap bonds with a nominal value of EUR 500 million issued by PZU Finance AB (publ) on 3 July 2014. SECTION 8.7 DEBT FINANCING
Higher volume of assets under management and merger of the investment fund management companies (TFI) within the PZU Group to facilitate achievement of synergies
Implementation of solutions employing artificial intelligence 92% combined ratio 6 innovative solutions which at least 100 thousand clients of the PZU Group will use 1 m clients acquired for the banks in the PZU Group 1 bn PLN of incremental premium obtained from the bank channel Cut costs by 100 m PLN
#12 Integrated service model for SMEs Inicjatywa: zintegrate sales models in the Small and Medium Enterprise (SME) segment.
Execution: • reorganization processes in the sales of group products were conducted in 2018. The Product Factory project was launched, i.e. a modular offer for SME clients making it possible to take a very flexible approach to products based on the nature of the risks involved. Special processes responding to client expectations for entering into contracts and obtaining after-sales service have been designed.
The new model brings together all of the PZU Group’s activities and integrates them in a client-focused manner: life insurance, non-life insurance, health insurance, investments, pensions, health care, banking and assistance services. This approach will drive the gradual transformation of an insurer from focusing primarily on valuation and transfer of risk toward being an advisory and service company (operating on the basis of technological know-how). Achieving a high degree of quality and number of client interactions calls for the creation of a new model in which the core is client knowledge and the skill of building long-term relations. The transformation in the direction of an advisory and service company will make it possible to care for the clients’ future and satisfy their needs comprehensively when it comes to life, health and property insurance and savings and finance.
The PZU Group proposes abandoning “product centricity” in favor of an ecosystem whose overriding objective is to manage client relations skillfully by offering solutions in all venues available to clients. Accurately anticipating the future, understanding client needs and building ever better methods of becoming part of their daily lives are the logical grounds underpinning other initiatives in PZU’s new strategy. These initiatives will contribute to transforming the Group’s operating model in the direction of an ecosystem spanning not just insurance, but also banking, health protection and payments. SECTION 4 PZU 2020 - MORE THAN INSURANCE
Business Model messages for clients to the principles of a simple language so that the information provided to the clients is clear and comprehensible.
The ESTools system, developed by PZU LAB together with its technological partner F@BE (FABE Safety Factory) under an acceleration program, serves to increase and maintain safety in industrial plants using modern technical measures and organization management methods. The system supports ongoing control of insurance audit orders. Installed in the insured enterprises, it ensures control scheduling and configuration of execution requirements (including a list of controlled elements and the methods of control of individual element types). The control comprises measurements, tests and inspections, as well as verification of correctness of fulfillment of organizational requirements. Each control is planned, executed and evidenced using GNSS (Global Navigation Satellite Systems). The system has implemented functions for mapping the course of the route planned in the map of the analyzed area, spatial and temporal location of the user and the controlled infrastructure (RFID (Radio-frequency identification) support), spatial and temporal location of the measurements and time synchronization.
With us you will take care of your health using the services of private medical centers. We provide doctor consultations, diagnostic tests, outpatient procedures and rehabilitation.
◦ creating a list of things to do related to ongoing handling of occupational medicine services and sending reminders by e-mail; ◦ enabling the handling of several companies from the same capital group.
In 2018 an important decision was made concerning the model of cooperation between Bank Pekao and Alior Bank within the PZU Group. On 23 October 2017, at their own initiative, Bank Pekao and Alior Bank signed a letter of intent to commence preliminary talks on potential cooperation strategies that might be developed to increase their value for shareholders and clients. Following the analyses performed by both banks, the option of a merger between Alior Bank and Bank Pekao (under which Alior Bank’s shareholders would obtain shares of the merged bank) was considered to be an opportunity for generating potentially the greatest added value to shareholders. Accordingly, negotiations were commenced to select of the optimal form for the merger between Alior Bank and Bank Pekao. Finally, on 7 August 2018, the banks decided to wrap up their analyses and negotiations on a possible merger. According to the banks’ final decision, it will be more beneficial from the shareholders’ point of view for the banks to keep operating as separate entities and cooperate with each other as members of the PZU Group in order to fully tap into the potential of the largest financial group in Central and Eastern Europe.
In 2018, PZU also entered into a strategic partnership with Allegro - the internet sales leader in Poland. The cooperation concerns the sales and distribution of innovative, fully digital insurance products customized to the specific nature of the needs of users on the allegro.pl service. PZU offers three insurance products: “Alleopona” [Alle-tire] assistance, (new or used) bicycle insurance and insurance of brown goods.
The net result, adjusted for non-recurring events1 rose 27.5% compared to last year. The operating profit in 2018 was PLN 7,087 million, up by PLN 1,629 million compared to 2017.
Result on other operating income and expenses In 2018, the balance of other operating income and expenses was negative and stood at PLN 2,165 million, compared to the balance in 2017, which was also negative at a level of PLN 1,580 million. The following contributed to this result: • levy on financial institutions – the PZU Group’s expense on account of this levy (combined on insurance and banking activity) in 2018 was PLN 1,092 million compared to PLN 822 million last year. The increase in the liability was caused by the commencement of Pekao’s consolidation in June 2017; Treasury debt securities Non-treasury debt securities Monetary market instruments Equity instruments – quoted Equity instruments – unquoted Investment properties
The assets held for sale stood at PLN 1,147 million and moved up PLN 830 million compared to the previous year due to changes in the classification of a portion of the investment property portfolio.
The following factors had a key impact on this segment’s performance in 2018: • a 16.0% increase in net earned premium associated with a 13.1% increase in gross written premium in comparison to 2017. The PZU Group posted the following under sales: ◦ higher premiums in motor insurance (+6.9% y/y) offered to leasing companies and in fleet insurance as a consequence of the higher average premium coupled with the lower number of motor own damage insurance (this decline is particularly noticeable in the insurance group for leasing),
Ne t c la im s an d be ne fit s
Investment income consists of: interest income, dividend revenue, trading result and result on impairment charges.
The segment’s administrative expenses amounted to PLN 4 989 million and comprised Pekao’s expenses in the amount of PLN 3 389 million and Alior Bank’s expenses of PLN 1 600 million. In of 2018, Alior Bank reduced its personnel costs, which resulted from, among others, lower current operating expenses and project-related expenses.
In the consolidated financial statements investment contracts are recognized in accordance with the requirements of IFRS 9.
The fourth decision-making level pertains to operational measures and is divided into three lines of defense: • the first line of defense – entails ongoing risk management at the entities’ business unit and organizational unit level and decision-making as part of the risk management process; • the second line of defense – risk management by specialized units responsible for risk identification, monitoring and reporting, as well as for limits control; • the third line of defense – internal audit which conducts independent audits of the individual elements of the risk management system, as well as of control activities embedded in operations.
The structure of credit risk limits and concentration risk limits for various issuers is established by dedicated committees in such a manner that the limits are consistent with the adopted risk tolerance and in such a manner that they make it possible to minimize the risk of ‘infection’ between concentrated exposures.
Compliance risk Compliance risk is the risk that PZU Group entities or persons related to PZU Group entities may fail to adhere to or violate the applicable provisions of law, internal regulations or standards of conduct, including ethical standards, adopted by PZU Group entities, which will or may result in the PZU Group or persons acting on its behalf suffering legal sanctions, financial losses or a loss of reputation or trustworthiness.
The identification and assessment of compliance risk in the Group’s entities is performed for each internal process of these companies by the heads of organizational units, in accordance with the allocation of responsibility for reporting. Moreover, compliance units in PZU Group entities identify compliance risk on the basis of information obtained from notifications to the register of conflicts of interest, gifts and irregularities, and from inquiries sent to them.
Interest rate risk decrease by 100 bp 1,450 1,334 increase by 100 bp (1,369) (1,250)
Alior Bank Group 2,251 537 1-day VaR – fx risk – trading book (PLN thous.) 31.12.2018 31.12.2017
Reinsurance protection in the PZU Group secures insurance activity, limiting the consequences of the occurrence of catastrophic phenomena that could adversely affect the financial standing of insurance undertakings. This task was accomplished through obligatory reinsurance treaties in conjunction with facultative reinsurance.
In addition, PZU obtains a gross written premium from inward reinsurance from activity on the domestic and foreign market through optional and mandatory reinsurance.
Min/max ceny 3,500 pts 3,250 pts 3,000 pts 2,750 pts 2,500 pts 2,250 pts 2,000 pts 1,750 pts 1,500 pts 0 PLN
P/BV Share price / book value per share 2.5x 2.6x 2.2x 2.3x 3.2x
Despite the diminishing valuations of banks listed on the stock exchange, the overall condition of the banking sector remained good. Banks recorded increases in lending activity and net interest income, driven to a large extent by the high rate of economic growth and wages in Poland and the falling rate of unemployment. On the other hand, greater regulatory pressure resulted in a lower result on fees and commissions. This notwithstanding, already in November 2018 the profits 3 It is an income-based index and thus, when it is calculated, it accounts for both the prices of underlying shares and income from dividends and pre-emptive rights.
The Company’s key events, achievements and plans are again presented in the form of an online Annual Report at annualreport2017.pzu.pl. Users have been provided with tools enabling a multi-directional analysis of corporate and macroeconomic events as well as financial results. The report includes interactive infographics, animations and video materials, which offer a succinct presentation of PZU Group’s activity in 2017.
Wood & Company Marta Jeżewska-Wasilewska +48 22 222 15 48 marta.jezewska-wasilewska@wood.com
Dividend per share for the year (PLN) ** 2.50 1.40 2.08 3.00
On 30 June 2017, PZU carried out the largest issue of subordinated bonds (denominated in Polish zloty) in the history of the Polish financial sector, while the issue was the first one in Poland to comply with Solvency II requirements (download the information note here). The bonds with a nominal value of PLN 2.25 billion bear interest at WIBOR6M + 180 bps. The maturity date is 29 July 2027, or 10 years after the issue, with an option of early redemption 5 years after the issue date at the earliest.
As a result of classifying the series B and C bonds as instruments in Tier II capital, there will be an increase in the total capital ratio (TCR) for the bank and the bank’s group by roughly 0.6 p.p.
Bank Pekao’s credit ratings Bank Pekao cooperates with three leading rating agencies: Fitch Ratings, S&P Global Ratings and Moody’s Investors Service. In the case of the first two agencies, the ratings are provided on a solicited basis under relevant agreements
9.4 System of control in the process of preparing financial statements
• review of the Management Board’s report on representation expenditures and expenditures for legal, marketing, public relations and public communication services and management consulting services; • distribution of profits or coverage of losses; • decisions on claims to remedy damages incurred during the incorporation of the Company or in its administration or oversight; • transfer or lease of a business or an organized part thereof or establishing a limited right in them thereon; • redemption of shares or issue of bonds; • establishing reserve capital accounts and making decisions on their allocation or manner of allocation; • split of the Company, merger of the Company with another company, winding up or dissolving the Company; • appointment and dismissal of members of the Supervisory
On 8 January 2018, Aneta Fałek tendered her resignation from membership in the Supervisory Board effective as of that date. As at 8 January 2018 Maciej Łopiński was appointed by letter. On 9 January 2018, the Supervisory Board entrusted the function of Chairman to Maciej Łopiński and the function of Deputy Chairman to Paweł Górecki.
Graduate of the European Regional and Local Studies and the Faculty of Journalism and Political Sciences of the University of Warsaw. From 2004, associated with Invent Grupa Doradztwa i Treningu. From 2009, President of the Management Board of Urbino sp. z o.o., a licensed coach and consultant specializing in strategic and organizational planning and project management.He has been working for the University of Warsaw, the Collegium Civitas and the Łazarski University as a lecturer. Has gained extensive experience in corporate governance in companies with a State Treasury shareholding and municipal companies. Author of articles on public management.
In the Supervisory Board since 12 April 2017, she served as the Supervisory Board Chairwoman from 13 April 2017 to 8 January 2018.
A Management Board Member may not be a person who fulfills at least one of the following conditions: • acts as a social associate or is an employee of an MP’s office, senator’s office, MP-senator’s office or office of a member of European Parliament pursuant to an employment agreement or provides work on the basis of a mandate agreement or other similar agreement; • is a member of a body of a political party that represents the political party externally and is authorized to incur liabilities; • is employed by a political party pursuant to an employment agreement or provides work on the basis of a mandate agreement or other similar agreement; • is an elected official of a company trade union or a company trade union in a group company; • his/her public or business activity raises conflict of interest with the Company’s business.
As at 1 January 2018 the Management Board composition was as follows: • Paweł Surówka – President of the Management Board; • Roger Hodgkiss – Management Board Member; • Tomasz Kulik – Management Board Member; • Maciej Rapkiewicz – Management Board Member; • Małgorzata Sadurska – Management Board Member.
SA and Przedsiębiorstwo Świadczeń Zdrowotnych i Promocji Zdrowia Elvita-Jaworzno III Sp. z o.o. on 19 December 2018 for the amount of PLN 20.6 million maturing on 31 December 2028; • Loan agreement entered into by and between PZU Zdrowie SA and Revimed Sp. z o.o. on 06 March 2018 for the amount of PLN 3 million maturing on 31 December 2023; • Under the loan agreement entered into by and between PZU and PZU Zdrowie SA on 23 March 2015 and subsequent annexes thereto, on 21 December 2018 a tranche in the amount of PLN 20 million was paid out. The loan maturity date is 31 December 2030.
Basic and diluted PZU Group’s profit per ordinary Issuer’s share (in PLN) 3,72 3,35 2,24 2,71 3,44
"Gain on acquisition of the spun-off part of Bank BPH" - - 465 - -
Loss due to the change in fair value of Alior Bank shares purchased within tranche I