9. Capital management

On 26 August 2013 the Management Board and the Supervisory Board adopted the capital policy and dividend policy for PZU Group for the years 2013-2015. Assumptions of the capital policy and dividend policy are presented below.

9.1 Capital policy

The PZU Group’s Capital Policy in 2013-2015 is intended to increase Total Shareholder Return (TSR) and is based on the following rules:

• managing the PZU Group’s capital (including surplus capital) at the PZU SA level;
• maintaining the PZU Group’s shareholder funds net of subordinated debt at a level no lower than a 250% solvency margin for PZU Group and striving to maintain the PZU Group’s shareholder funds including subordinated debt at approximately a 400% solvency margin (as at the end of the financial year), to maintain the PZU Group’s financial security;
• maintaining assets to cover the provisions in PZU SA and PZU at a level no lower than 110%;
• obtaining an optimal financing structure by replacing the capital surplus with subordinated debt up to an amount no higher than PLN 3 billion, not to exceed a 25% cap of shareholder funds to cover the solvency margin as referred to in article 148 of the Insurance Activity Act;
• retaining equity at a level corresponding to a AA rating according to Standard & Poor’s methodology;
• providing funds for development and acquisitions in the upcoming years;
• no equity issues by PZU SA in the upcoming years.

9.2 Dividend policy

On 13 May 2014, the Management Board of PZU decided to update the capital and dividend Policy of PZU Group for the years 2013-2015 (“Policy”). At the same time, the Management Board of PZU decided to file a request to the Supervisory Board of PZU to adopt a resolution to approve the update of the Policy. In accordance with the request, on 13 May 2014, the Supervisory Board of PZU approved the updated Policy with the wording prepared by the Management Board.

Due to the uncertainty existing at the time of adopting the current Policy concerning the profit and loss of PZU Group in 2013, as well as the implementation of acquisition plans, the Policy does not specify the proceedings in a case the safety indicators are met, despite the lack of subordinated debt issue.
Due to the fact that PZU Group's financial results for 2013 were higher than expected and the current and projected safety indicators will be no lower than the ones assumed in the Policy, amendments have been made to the Policy, under which the advance paid on 19 November 2013 towards the dividend expected at the end of the financial year 2013 was considered as part of the payment from the capital surplus.

9.3 External capital requirements

Equity management involves, among others, monitoring of the insurers’ key solvency parameters, such as the level of own funds and the degree to which such funds are sufficient to cover the required solvency margin and the guarantee capital. The International Financial Reporting Standards do not lay down principles applicable to calculation of the required solvency margin or own funds covering the above margin.

In accordance with the Act on Insurance Activity, an insurance company with its registered office on the territory of the Republic Poland is obliged to maintain its own funds at an amount of no less than the solvency margin and no less than the guarantee capital.

In order to determine the value of own funds, assets are reduced by the value of intangible assets, deferred tax assets, assets allocated to settle all expected liabilities as well as shares and other assets (subordinated loans granted) held by PZU used to finance the equity of insurance companies operating within the insurance capital group. The value determined in the above manner is adjusted in proportion to the shares held by PZU by the total surplus or shortage of own funds of the controlled insurance companies over their solvency margins.

The principles of calculating own funds to cover the solvency margin are specified in the Insurance Activity Act and the principles for calculation of the required solvency margin and the minimum value of the guarantee capital have been laid down in the Ordinance of 28 November 2003 on the manner of calculation of the solvency margin and the minimum amount of the guarantee capital for insurance sections and classes (Journal of Laws No. 211 of 2003, item 2060 with subsequent amendments, the “Solvency Margin Ordinance”).

Calculation of own funds and solvency marginal includes financial data in accordance with PAS.