1. Overview of consolidated financial performance .......................................................................... 5 2.1 Major economic trends/economic growth rate ........................................................................... 5 2.3 Monetary policy, interest rates, inflation ..................................................................................... 6 2.4 Labour market and consumption ................................................................................................ 6 2.6 The impact of macroeconomic factors on the insurance sector ................................................ 7 2.7 Market share of PZU SA, PZU Życie SA and PTE PZU (data in line with PAS) ....................... 7 2.8 Macroeconomic factors that will affect the activities of the PZU Group in 2011 ...................... 11 3. Organization of the PZU Group ................................................................................................... 11 3.1 Business activities of the PZU Group....................................................................................... 11
In 2010 the CPI dropped considerably from 3.5% to 2.6%. The trend was related to limited pressure of demand and salaries. In such conditions, the Monetary Policy Council maintained the reference rate at a very low level of 3.5%. After a summer drop to 2% YoY, inflation started to grow again, mainly due to the increase in prices of food and energy and it finally reached 3.1% YoY. In October, the Monetary
After a decrease in 1Q10 (by 0.3% YoY), in two consecutive quarters average annual employment in the Polish economy increased gradually (respectively by 0.7% YoY and 1.6% YoY). Despite higher demand for work, unemployment of 11.5%-13% and higher professional activity observed in 2010 allowed for controlling the increase in salaries. Based on preliminary data, annual salaries growth in the Polish economy in 2010 was lower than in the preceding year (4% vs. 5.4% YoY). Still, the employment growth and lower inflation contributed to the salaries growth rate similar to those reported in 2009. The growth of pensions and disability allowances was not as fast.
Average annual rate of exchange of the Polish zloty increased in 2010 as compared to key global currencies such as euro (by 7.7%) US dollar (by 3.2%). During the year the rate of exchange of the Polish zloty was considerably affected by periodic growth of aversion to risk in global financial markets, resulting from the effects of the debt crisis in peripheral economies of the euro zone.
In 2010 the credit market was still stagnated. Despite relaxing the credit policy of banks towards enterprises, the demand for credit remained relatively low. The credit dynamics grew insignificantly.
As at the end of September 2010, gross written premium for the entire insurance sector in Poland amounted to PLN 40,196.1 million marking the growth of 4.8% (+ PLN 1,841.8 million) year on year.
The share of PZU Lycia (hereinafter "PZU Lycia”) in the life insurance market amounted to 28.5%. The
TPL motor insurance 1 951.8 5 661.3 3 709.5 2 035.3 5 494.2 3 458.9 Other products 2 323.2 7 441.8 5 118.6 2 474.5 6 866.8 4 392.3
Warsaw n/a n/a n/a n/a n/a Property and personal insurance 2 Powszechny Zakład Ubezpieczeń na Życie SA (PZU Życie)
Its core business includes:  brokerage activities within the meaning of Article 69 of the Act on trading in financial instruments including investment portfolio management on behalf of investment funds;  provision of portfolio management services.
The reasons for the above change have been presented in detail in the segment performance section.
The operating profit in 2010 amounted to PLN 3,088,085 thousand and was lower by PLN 1,513,666 thousand (-32.9%) year on year, which was mainly caused by a rise in net claims paid in the current year and a lower value of released technical provisions in the life insurance segment. A drop in the operating profit led directly to a decrease in the net profit by PLN 1,323,682 thousand (-35.2%).
On 30 December 2010 the capital increase was registered in the National Court Register.
carried out in H2 2009 and cost optimization activities performed in the Group. The activities brought a desirable outcome in the form of 14.8% reduction of FTE at the end of 2010 YoY and a decrease in personnel costs by 9.6% YoY despite unplanned additional costs of remuneration arising from handling of flood effects. At the same time, tighter cost regime in 2010 brought positive results –
Written premium by product group – life insurance 2010 2009 %
The difference in the balance of technical provisions (PLN 588,828 thousand) resulted mainly from slower conversion of multi-year group cover policies into single-year renewable ones (in the first half of 2010 PLN 520,261 thousand of provisions was released in group cover insurance, while in the corresponding period of 2009 the amount was PLN 1,339,811 thousand). At the same time, the Company saw a decrease in loss provisions resulting from changes in loss handling procedures, including lead time reduction.
The net profit decreased by PLN 17,311 thousand (-14.8%), which corresponded to the drop in the operating profits.
VAT Act;  low flexibility of numerous product applications in the PZU Group companies, impeding fast adaptation to market needs;  possible changes (amended laws) to the principles for measuring provisions for capitalized annuity, which may require increasing their value in line with the prudence principle;  increase in the average cost of personal claims due to a growing share of private healthcare and the principle of compensation for a relative’s death (Article 446 § 4 of the Civil Code), which may require an increase in the value of TPL motor insurance provisions;  risk of higher number and value of claims and victims related to the act on group claims, which came into force;
On 29 December 2009 the Management Board of PZU and PZU Życie announced an implementation plan of the restructuring program for 2010-2012.
On 10 February 2010, the Management Boards of PZU and PZU Życie adopted a resolution concerning planned group lay-offs in 2010.
As of 31 December 2010 the provision for restructuring costs amounted to PLN 75,253 thousand
(vs. PLN 158,763 thousand as of 31 December 2009), which implied a change in the provision of PLN 83,510 thousand in 2010.
The social welfare initiatives included:  competition for grants entitled “Developing social activity of disabled children and teenagers”, aimed at creating a system supporting the disabled and their families, and levelling out the opportunities of the disabled in social and family life;  grants for individuals, including PZU employees – financial support for the PZU Group employees and their families and other individuals affected by accidents or persons in difficult financial situation.
(the solution shared with PZU);  implementing a new portal platform (Liferay) for the PZU Group website with pilot of selfservice functions designed for clients;  initiating remodelling of the Filenet workflow platform and extending it to other processes in PZU and PZU Życie to allow automation of business processes in CGW, COK and ACRM
In 2010 the IT infrastructure was redesigned. Two professional data processing centres were created under the project of the Data Processing Center Reallocation. Dispersed elements of the IT systems and infrastructure were centralized in these units. At the same time, the service outsourcing model was used to reduce maintenance costs of processing centres. These activities allowed improved efficiency of data processing and server protection on TIER 4 level assuring 99.995% system availability.
The above measures are to reduce costs of call handling and at the same time improve user satisfaction. In 2010, call handling costs were reduced by more than 50%.
The key driver of insurance guarantees is the situation in the economy and investments in domestic fixed assets. In 2010 the development of guarantees was driven by investments related to Euro 2012 and higher EU financing spent by responsible entities in Poland.
As the entire market, the company saw a YoY drop of written premium (in 2010 the marked was reduced by -4.5%). Despite difficult situation on capital markets, investment income remains stable and allows recording a financial profit at year end (pre-audit data). The reduced written premium results among others from the decision on restructuring of the corporate portfolio, in particular TPL
Marketing and sales support include new incentive systems for agents, coordinators and brokers.
In 2010, the Company modified its product offer. Among others, work aimed at transforming open-end investment funds into one umbrella fund with sub-funds were carried out, as well as establishing of dedicated closed-end funds.
At the end of 2010, the total net assets of funds managed by TFIPZU increased by 14% YoY
According to plans, in 2010 the following new products were implemented:  PZU Dłużny Rynków Wschodzących;  PZU FIO Energia Medycyna Ekologia;  portfolio hedging the sale of structured products.
 implementation of the Internet platform to manage the loss effects, which allows for optimizing the property loss value;  E-szkoda project:  creation of the Communication platform for seasonal loss adjusters;  creation of the Internet Module of Settlements with Assistance Service Providers;  creation of integration services in view of cooperation with brokers' applications;  creation of the internet notification form for foreigners;  creation of the functionality informing of the loss adjustment status by SMS;  The Kłos project:  limiting the time for loss adjustment in crop insurance, by way of optimizing calculations and eliminating unnecessary documentation.
 Line 2: risk management through specialized units and committees (established for the purpose of specific risk management) within the existing risk management framework, based on the applicable principles, methodologies and procedures.
PZU as such operations are carried out only by that entity.
The provisioning policy is based on:  the prudence principle with respect to determining the value of technical provisions;  the going concern principle, which assumes that the methodology of creating technical provisions should not be changed unless significant circumstances occur, which would justify such change.
The purpose of the rating policy carried out by PZU and PZU Życie is to guarantee an adequate premium level. Simulations concerning the projected technical result in the following years are carried out when preparing premium rates. At the same time, regular premium adequacy and portfolio profitability analyses are carried out based on various types of analyses and lists, such as evaluation of the technical result of a given product for a given financial year.
 activities related to strategic asset allocation, i.e. determining optimal mid-term asset structure
Since the high-price period, the prices of PZU shares dropped by over 13% at the end of 2010. At the last session the price was PLN 355.5. Investors that acquired shares at the issue price
Average daily turnover of PZU shares in 2010 amounted to 317 391 shares and the highest level
In accordance with the agreement on 22 April 2010 funds under the closed repo transaction (debt repayment) were transferred to BHW SA and BGK:  BHW SA – PLN 992,980,574.00; transaction concluded on 22 October 2009 (4.05%)
The agreement on the audit of condensed separate financial statements of PZU and condensed consolidated financial statements of the PZU Group for the period of six months ended 30 June 2010 was concluded on 9 July 2010 and regarded only audit of the financial statements mentioned herein.
Principle II.1 of Good practices concerning the content of the corporate website and II.2 of Good practices concerning the English version of the website were not fully complied with, as the Company had only a Polish language website, where it placed selected documents and statements specified in principle II.1 of Good practices. The website did not provide the following information: regulations of the Management Board, regulations of the Supervisory Board, professional resumes of members of the Supervisory Board, annual reports on the activities of the Supervisory Board, including works of its committees with the evaluation of operations of the Supervisory Board provided by the Supervisory
As for principle I.5 of Good practices, concerning the policy of remunerating members of management and supervisory bodies, remunerations of members of the Supervisory Board are determined by the General Shareholders’ Meeting of PZU SA and those of the Management Board are set based on a resolution of the Supervisory Board.
The principles of remunerating members of the Management Board were determined by the Supervisory Board. The remuneration of members of the Management Board has a few components and includes the base salary, benefits and annual bonus, payable once a year and dependent on the decision of the Supervisory Board taken in the form of a resolution based on business and financial performance in a give financial year.
A General Shareholders’ Meeting is called by placing an appropriate announcement on the Company website in accordance with the method of providing current information specified in the Act on public offering, conditions governing the introduction of financial instruments to organized trading, and public companies, i.e. in the form of current reports. Such announcement should be made not later than 26 days before the date of the General Shareholders’ Meeting.
Shareholders’ Meeting, the list of attendees should be checked by a specially appointed committee comprising at least three persons. The requesting shareholders may choose one member of the committee.
In accordance with the Regulations, meetings of the Management Board are held at least once a fortnight. The work of the Management Board is administered by the Chairman of the Management
Board;  designating a person to administer the work of the Management Board during the absence of the Chairman.
The regulations of the Supervisory Board have been adopted by the Supervisory Board on 4 March 2010. The regulations of the Supervisory Board specify the composition of the Supervisory Board and the way in which its members are appointed, the tasks and the scope of activities of the Supervisory
State Treasury 43 338 098 50.19% 50.19% Eureko B.V. 19 856 968 23.00% 23.00% Kappa SA 12 866 492 14.90% 14.90% Other shareholders 10 290 742 11.92% 11.92%