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Consolidated financial results

PZU Group achieved in 2014 gross profit at a level of PLN 3,691.7 million compared with PLN 4,120.5 million in the prior year (decrease of 10.4%). Net profit attributable to the shareholders of the parent company amounted to PLN 2,967.7 million, compared with PLN 3,293.5 million in 2013 (a 9.9% decrease).

Key factors affecting the achieved financial results

PZU Group achieved in 2014 gross profit at a level of PLN 3,691.7 million compared with PLN 4,120.5 million in the prior year (decrease of 10.4%). Net profit attributable to the shareholders of the parent company amounted to PLN 2,967.7 million, compared with PLN 3,293.5 million in 2013 (a 9.9% decrease).

Excluding one-off events1 the net result fell by 3.6% compared with the last year.

Operating profit for 2014 amounted to PLN 3,913.1 million and was lower by PLN 267.7 million in comparison to 2013. This change was brought about, in particular, by:

  • drop of PLN 310.8 million in profitability in the retail client insurance segment compared with 2013. A decrease of profitability mainly in motor insurance in relation to the increased claims provisions from previous years;
  • drop of PLN 174.4 million in profitability in the corporate insurance segment. A decrease of profitability mainly in the motor insurance group as a result of a slowdown in sales and a simultaneous increase in claims and benefits for losses from previous years, and other third party liability and non-life insurance due to several claims of high unit value;
  • higher net investment result related to increase in valuation of debt instruments;
  • improvement of profitability in the area of group and individually continued insurance by PLN 215.6 million, excluding the conversion effect. An increase in profitability mainly due to larger portfolio and a decrease in the loss ratio associated with the insurance products;
  • lower rate of conversion of long-term insurance contracts into annual renewable contracts in type P group coverage by PLN 57.2 million, which contributed to a lower increase of the operational result in the group and continued insurance segment.

What is more, the following one-off events had significant impact on year-on-year comparability of the results:

  • higher results in the pension insurance segment due to the open pension fund (OFE) reform (an increase in revenues due to liquidation and withdrawal of funds from the additional part of the Guarantee Fund, partially offset by a drop in revenues from premiums and assets management);
  • revenue on consolidation of investment funds in 2013;
  • gross profit on the settlement agreement with the reinsurer on the Green Card insurance of PLN 53.2 million (PLN 73.3 million was recognized in other operating revenue and expenses).

In 2014, as a result of the acquisition transactions, PZU took over Link4 (the leader of Polish direct insurance market), as well as the Lithuanian company Lietuvos Draudimas, Latvian AAS Balta and the business of the Estonian company Codan Forsikring A/S. Since their purchase, the companies have contributed to the results of PZU Group and contributed to the increases in particular items in the operating result and assets and liabilities in comparison to 2013.

Within particular item of the operating result, PZU Group recorded:

  • increase in the gross written premium to the level of PLN 16,884.6 million compared with the previous year (higher by 2.5%) mainly due to the growth of its foreign operations and the premium collected by Link4. After accounting for the share of reinsurers and the change in provision for unearned premium, the net premium earned amounted to PLN 16,429.4 million, which was 1.1% higher than in 2013.
  • higher net investment result, in particular due to the increase in the price of debt instruments. Net investment result amounted to PLN 2,733.5 million, namely 8.7% higher than in 2013;
  • higher amount of claims and benefits. The claims and benefits amounted to PLN 11,541.7 million, which means that they increase by 3.4% compared with 2013 mainly in motor TPL insurance in relation to significantly higher level of claims provisions from previous years;
  • higher acquisition expenses (an increase of PLN 131.1 million) related to the changes of commission rates for motor insurance packages, an increase in the group protection portfolio and modification of the remuneration system in the Agency Network in the individual insurance segment;
  • increase in administrative expenses to the level of PLN 1,527.7 million compared with PLN 1,406.5 million in 2013, related mostly to higher costs of projects, including the strategy implementation, IT, as well as personnel costs and the costs of customer service training;
  • a higher negative balance of other revenues and expenses in the amount of PLN 370.1 million mainly due to the depreciation of intangible assets identified as a result of the acquisition of insurance companies.

PZU Group operation result in 2014

Basic amounts from the consolidated income statement 2014
PLN million
2013
PLN million
2012
PLN million
2011
PLN million
2010
PLN million
Net premium earned 16,429.4 16,248.8 16,005.2 14,890.5 14,213.0
Revenue from commissions and fees 350.8 299.2 237.1 281.4 288.0
Net investment result 2,733.5 2,514.6 3,704.7 1,593.8 2,777.8
Other operating revenues and expenses and benefits and change measurement of investment contracts -384,1 -298,1 -207,5 -242 -389,6
Net claims and benefits -11,541.7 -11,161.2 -12,218.7 -10,221.1 -10,384.1
Acquisition expenses -2,147.0 -2,015.9 -2,000.4 -1,962.0 -1,911.3
Administrative expenses -1,527.7 -1,406.5 -1,440.3 -1,383.9 -1,505.8
Operating profit/(loss) 3,913.1 4,180.8 4,080.2 2,956.7 3,088.1
Financial expenses -219.9 -61.7 -41.5 -49.2 -58.7
Share in profits/ (losses) of entities measured using the equity method -1.5 1.4 - - -
Gross profit/(loss) 3,691.7 4,120.5 4,038.7 2,907.6 3,029.4
Income tax -724.1 -825.5 -784.9 -563.6 -590.2
Gross profit/(loss) 2,967.6 3,295.0 3,253.8 2,343.9 2,439.2

Revenue

In 2014 PZU Group collected gross premiums of PLN 16,884.6 million, i.e. 2.5% more than in 2013.

Premiums

In 2014 PZU Group collected gross premiums of PLN 16,884.6 million, i.e. 2.5% more than in 2013. They comprised mainly:

  • regular life premiums, which had a 41.6% share of the total gross written premium (41.9% in 2013). Their value was higher by 1.7% compared with the previous year mainly due to the growth of group protective insurance and the premiums in the health insurance;
  • MTPL insurance. This comprised 16.2% of the Group’s insurance portfolio (17.2% in the prior year). In 2014, its value was 3.1% lower than in the prior year. This was the effect of a decline in policy prices as a result of strong competition on the market and lower car sales;
  • Motor own damage insurance. This type of insurance had a 12.1% share of the Group’s total gross written premium (i.e. 0.2 p.p. less than in the prior year), a decrease caused by price pressure from the competition;
  • Fire and non-life insurance – this type of insurance represented 11.3% of total premiums. Its value increased by 0.1% compared with the prior year, foremost because of the upsale of the basic types of risk in household insurances;
  • accident and other insurance premiums, which had a 5.5% share, which meant a 0.5 p.p. increase compared with 2013. In this insurance category, the most significant increase was recorded in the value of financial insurance in relation to large guarantee policies and the resumption of long-term contracts;
  • single premiums in life insurance, where the written premium represented 4.7% of the Group’s total premiums (compared with 5.1% in 2013). In particular, there was a fall in the sales of structured products in the bancassurance channel;
  • premiums obtained in Ukraine and in the Baltic states, their share in the Group’s premium amounted to 4.2% and increased in comparison to 2013 as a result of PZU Group’s expansion in the Baltic states. Due to the fact that the premiums collected by the newly-acquired companies were included in PZU Group’s result only from the commencement of the consolidation (not for a full year), a further increase of this group’s share in the structure of PZU Group’s gross written premiums is to be expected in the next period.

Gross written premium structure in PZU Group (in %)



Revenue from commissions and fees

Fee and commission revenue in 2014 contributed PLN 350.8 million to PZU Group’s result, which is 17.2% higher than in the prior year.

Fee and commission revenue comprised mainly:

  • asset management fee from OFE PZU Złota Jesień. It amounted to PLN 112.1 million (a drop of 33.5% compared with 2013 as a result of statutory transfer of a portion of the assets of OFEs to the Social Insurance Institution (ZUS) corresponding to 51.5% of the units on the account of every member of OFE PZU).
  • revenues from the liquidation and withdrawal of funds from the additional part of the Guarantee Fund in the amount of PLN 132.3 million related to statutory changes in OFE PZU (one-off effect);
  • revenue and fees from investment funds and investment fund management companies of PLN 67.9 million, i.e.
  • PLN 4.7 million more than in the previous year, mainly as a result of the increase in sales of fund units through the external channel;
  • front fees from contributions transferred to OFE PZU. This amounted to PLN 19.9 million, namely 40.8% of their prior year’s value. A fall related to a statutory decrease in the fees from the level of 3.5% to 1.75% from 1st February 2014;
  • revenue from fees charged on investment contracts at the customer’s expense and risk. PZU Group earned PLN 12.3 million, i.e. 34.7% less than in the prior year on these fees. It is related to the discontinuation of sales of the shortterm endowment products by PZU Group.

Net investment result and financing expenses 

 In 2014, PZU Group ’s net investment result amounted to PLN 2,733.5 million compared to PLN 2,514.6 million in 2013 (increase by 8.7%). The following factors had the greatest impact on the increase in the revenue:

  • decrease in the profitability of Polish treasury bonds across the whole yield curve in 2014 compared with the increases in the middle and on the far end of the curve in the previous year which influenced the increase in the result on the interest-bearing financial assets by PLN 583.0 million compared with 2013;
  • Increase in the value of investment property related mostly to the higher valuation of development projects;
  • increase in the value of the assets portfolio denominated in EUR, i.a. due to the issuance of debt instruments and a simultaneous increase in the EUR exchange rate.

At the same time, the results from shares portfolios were lower than in the previous year, which was caused by worse conditions on capital markets (the WIG index increased by 0.3% in 20014 compared with 8.1% in 2013) related mostly to the increased risk aversion in the face of increasing geopolitical tensions.

In 2013 there was a one-off event  amounting to PLN 172.7 million regarding consolidation of investment funds, mostly for the property sector.

* The value includes a one-off effect of the consolidation of investment funds (PLN 172.7 million) which took place in 2013.

Financial expenses increased during 2014 by 256.6% as compared to the previous year.

Financial expenses (PLN million)







The increase in financial expenses is foremost due to the increased EUR FX rate with the higher level of liabilities denominated in EUR due to the issuance of own debt securities and an increase in the use of sell-buy-back transactions. Monetary market transactions were performed in order to boost effectiveness of investment activities and achieve additional margins.

In December 2014 the value of PZU Group’s investments portfolio2 amounted to PLN 53,958.7 million compared with PLN 51,198.6 million as at the end of 2013.

Investing activities of PZU Group are conducted in compliance with the statutory requirements, ensuring an appropriate degree of safety, liquidity and profitability, therefore treasury debt instruments accounted for more than 60% of the investments portfolio both as at 31 December 2014 and 31 December 2013.

An increase in non-treasury debt market instruments and investment property resulted from the consistently implemented investment policy aimed at ensuring greater diversification of the investment portfolio.

As compared to the end of the previous year, the currency structure of the investment portfolio has been changed mainly due to:

  • increase in the value of the assets portfolio denominated in Euro i.a. due to the issuance of debt instruments;
  • acquisition of the prestigious logistics property portfolio (four logistics parks located in Lodz, Wroclaw and Gdansk) for about EUR 140 million;
  • consolidation of the assets portfolios of the newly acquired Baltic companies.

Structure of financial assets (in%)3






According to the strategy, the plan is to further diversify the investment portfolio by increasing the share of corporate debt and alternative assets at the expense of the share of treasury debt instruments, as well as the growth of property investments.

Other operating revenue/expenses (net) 

In 2014, the balance of other net operating revenue and expenses was negative and amounted to PLN 370.1 million compared with the also negative balance for 2013 of PLN 220.4 million. The following factors had an impact on this result:

  • increase of other operating expenses of newly acquired companies, including mostly the expenses resulting from the depreciation of intangible assets identified as a result of the acquisition of insurance and health care companies in the amount of PLN 87.8 million;
  • one-off revenue from conclusion of a settlement with the reinsurer (the one-off impact on other operating revenues in 2013 was PLN 73.3 million, the total impact on gross profit was PLN 53.2 million). The settlement agreement related to the settlement of Green Card reinsurance commissions, which were adjusted for 2011, while the result for that period was reduced by PLN 91.8 million.

Claims and technical provisions

In 2014, the net value of claims and benefits, as well as the increase in PZU Group’s technical provisions amounted to PLN 11,541.7 million, compared with 2013, the value of claims, including the change in technical provisions, was higher by 3.4%.

In 2014, the net value of claims and benefits, as well as the increase in PZU Group’s technical provisions amounted to PLN 11,541.7 million, compared with 2013, the value of claims, including the change in technical provisions, was higher by 3.4%. The following factors also contributed to the increase in the net value of claims and benefits:

  • lower rate of conversions of long-term contracts to renewable annual contracts in type P group insurance (the effect of conversion in 2014 translated into a release of PLN 69.9 million of provisions, i.e. PLN 57.2 million less than in 2013);
  • increase in the group protection portfolio, including health insurance, with lower loss ratio;
  • higher claims ratio in motor insurance, in particular caused by a significantly higher level of technical provisions covering claims from previous years;
  • increase of claims ratio in other TPL insurance as well as fire and other non-life insurance, which is a result of a higher level of claims technical provisions related to several individually significant claims;
  • higher level of claims in the agricultural insurance group caused by weather conditions.

On the other hand, the following contributed to the decrease in the net value of claims and benefits:

  • decrease of the ratio of possible indexation of the sum insured by the clients of continued insurance;
  • Lower sale of structured products in the bancassurance channel.

Acquisition expenses and administrative expenses

In 2014, acquisition expenses amounted to PLN 2,147.0 million and increased by 6.5% compared with 2013.

In 2014, acquisition expenses amounted to PLN 2,147.0 million and increased by 6.5% compared with 2013. The main reasons for the increase were the following:

  • changes of commission rates for motor insurance packages and activities promoting sales in the multiagency channel, mainly in the retail client insurance segment;
  • modification of the remuneration system in the tied agents channel in the individual insurance segment;
  • increase of the contract portfolio and high sales of new insurance policies in group protective insurance, as well as an increase of the share of more expensive distribution channels in the portfolio;
  • start of consolidation of the newly-acquired insurance companies.

In 2014, the Group’s administration expenses were at a level of PLN 1,527.7 million, which was 8.6% higher than in the prior year. The following factors had an impact on their level:

  • higher costs of projects, including the strategy implementation, IT, as well as personnel costs and the costs of customer service training, with two systems coexisting simultaneously – the effect of implementing projects from previous years which will make it possible to change the philosophy of customer relations management;
  • an obligatory additional payments to the Guarantee Fund in the Central Securities Depository of Poland by PTE PZU in the amount of PLN 19.5 million (a statutory change of the required level from 0.1% to 0.3% of the net assets of the open pension fund (OFE);
  • inclusion of the administrative expenses covered by the newly-acquired insurance companies in the results of the Group.

 

Structure of assets, equity and liabilities

As at 31st December 2014, total assets of PZU Group amounted to PLN 67,572.8 million and were 7.6% higher than as at the end of 2013

As at 31st December 2014, total assets of PZU Group amounted to PLN 67,572.8 million and were 7.6% higher than as at the end of 2013.

Assets

The key components of the Group’s assets were investments (financial assets and investment property). In total, these assets amounted to PLN 58,996.0 million and were 4.3% higher than at the end of the prior year. They represented 87.3% of the Group’s total assets compared with 90.1% at the end of 2013. The increase in the value of investments was mainly caused by:

  • a higher price of interest-bearing financial assets;
  • the start of consolidation of the newly-acquired insurance companies.

PZU Group asset structure (%)







PZU Group’s receivables, including receivables from insurance contracts, amounted to PLN 3,068.8 million, i.e. they represented 4.5% of the total assets. For comparison, at the end of 2013 the receivables amounted to PLN 2,672.0 million (4.3% of the Group’s assets) and their increase was mainly caused by the start of consolidation of the newly-acquired insurance companies and applied foremost to the receivables from policyholders.

Non-current assets – in the form of intangible assets, goodwill and property, plant and equipment – were recognised in the statement of financial position at PLN 2,656.0 million. They comprised 3.9% of total assets. Their balance more than doubled in 2014 in comparison to 2013, mostly due to the start of consolidation of the newly-acquired insurance and health care companies, including:

  • calculation of the goodwill in the amount of PLN 777.0 million;
  • Identification of new intangible assets, such as the trademark, present value of future profits (PVFP), relations with customers and brokers, which were previously not recorded by the companies.

As at 31 December 2014, PZU Group’s cash and cash equivalents amounted to PLN 324.0 million (0.5% of the assets). A year earlier, they amounted to PLN 569.2 million.

An increase of PLN 427.7 million in the category of assets held for sale is caused by the sale of PZU Lithuania.

Equity and liabilities 

At the end of 2014, the main component of PZU Group’s equity and liabilities was technical provisions. They amounted to PLN 40,166.9 million, which represented 59.4% of total equity and liabilities. Their share in the statement of financial position did not change in comparison to the previous year, but their value increased by PLN 2,842.5 million, mainly due to:

  • higher claims provisions in motor insurance in the mass and corporate insurance segment;
  • development of the unit-linked products (sale and high investment result) and the portfolio of continued insurance;
  • the start of consolidation of the newly-acquired insurance companies (influence of the technical provisions of PZU Group of PLN 1,256.3 million).

Investment contracts amounted to PLN 1,108.1 million compared with PLN 2,121.0 million as at the end of 2013. This fall was caused, in particular, by the decrease of the level of the investment contracts value due to the subsequent tranches in short-term endowment products, mostly in the  bancassurance channel, reaching their maturity dates. In effect, their share in the structure of liabilities and equity dropped from 3.4% as at the end of 2013 to 1.6% as at the end of December 2014.

PZU Group liabilities structure (%)







At the end of 2014, equity amounted to PLN 13,167.6 million and remained at the similar level to the one as at the end of 2013 (0.3% higher). An increase in the consolidated equity resulting from the net result for 2014 in the amount of PLN 2,967.6 million was offset by the dividends paid in the amount of PLN 2,936.0 million.

The balance of other liabilities and provisions as at the end of 2014 amounted to PLN 13,130.1 million and included, in particular, liabilities from the sell-buy-back transactions in the amount of PLN 4,411.5 million, liabilities to participants in consolidated investment funds in the amount of PLN 856.9 million, liabilities to the policyholders in the amount of PLN 686.7 million. The increase of the balance by PLN 2,915.9 million compared with 2013 resulted mostly from the liabilities arising from the issuance of debt instruments in the amount of PLN 2,127.5 million and dividend liabilities to the shareholders from the 2013 profit appropriation, which remained to be paid in 2015 in the amount of PLN 1,468.0 million.

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Cash Flow Statement

Total net cash flows as at the end of 2014 amounted to PLN -282.6 million and decreased by PLN 595.4 million compared with the previous year, i.a. due to the lower inflows from investment contracts.

Off-balance sheet items

Under the guarantee line agreements of 2013 concluded between PZU and PZU Życie and Bank Millennium SA, the bank extended bank guarantees (bid bonds and contractual guarantees) to companies in tenders for insurance services.

The guarantee facilities are, respectively, PLN 15 and 10 million. They are valid for one year and may be extended by another. As at 31 December 2014, 79 guarantees totalling PLN 7.1 million had been given under the facility provided for the period from 21 October 2014 to 20 October 2015. 

Loans taken and granted

As at the end of 2014, the balance of loans taken by PZU Group amounted to PLN 219.5 million, including: Grupa Armatura – PLN 83.9 million, and the SPVs established for the investment funds: PH3 Sp z o.o. SKA – PLN 62.7 million and PORTFEL PB2 Sp. z o.o. PLN 76.1 million. As at the end of 2013, the balance of loans taken by the Armatura Group amounted to PLN 88.5 million. All the loans and borrowings were granted at arm’s length. As at the end of 2014, the balance of loans incurred amounted to PLN 54.0 million and concerned the liabilities of PZU SFIO Universum.

Share of the business segments in the results

 

For management purposes, PZU Group has been divided into the following industry segments:

  • corporate insurance (non-life). This segment encompasses a wide range of non-life insurance, general liability and motor insurance, which are adapted to customer needs and, with individually valued risks, offered by PZU and Link4 to large business entities;
  • Mass-market insurance (non-life). This segment comprises property, accident, general liability and motor insurance. PZU and Link4 provide the insurance to individuals and entities from the SME sector;
  • life insurance – group and individually continued. PZU offers this insurance to groups of employees and other formal groups (e.g. trade unions). Individuals who have a legal relationship with the policyholder (for instance an employer or a trade union) may enroll in the insurance; and individually continued insurance in which the policyholder acquired the right to individual continuation during the group phase. It includes the following types of insurance: protection, investment (which however are not investment contracts) and health insurance;
  • individual life insurance. PZU provides this to individual customers. The insurance contract relates to a specific insured, subject to the assessment of the individual risk. This group comprises protection, investment (other than investment contracts) and health insurance products;
  • investments - comprising investment activities in respect of PZU Group’s own funds constituting a surplus of investments over technical provisions in the key insurance companies of PZU Group (PZU and PZU Życie) increased by surplus of investment income over the risk-free rate corresponding to the value of technical provisions of PZU and PZU Życie in non-investment products. Additionally, the Investments segment includes income earned on other excess cash on other excess cash in PZU Group;
  • pension insurance. Activity conducted by PTE PZU;
  • Ukraine. This includes both non-life and life insurance;
  • Baltic States. Non-life and life insurance products provided by PZU in Lithuania, Latvia and Estonia;
  • investment contracts. These include PZU Życie products which do not transfer significant insurance risk and do not satisfy the definition of an insurance contract. They include some products with a guaranteed rate of return and some unit-linked products;
  • other. This encompasses consolidated entities not allocated to any of the segments above.

Corporate insurance

In 2014, the corporate insurance segment earned an operating profit of PLN 217.1 million, which is 44.5% less than in the prior year. The acquisition of Link4 had a negative impact on the result in 2014. It contributed to the segment’s result from the moment of its acquisition and caused the increases in particular items of the operating result. After the effect of this change has been eliminated, in 2014 operating profit in the corporate segment was PLN 219.5 million.

The following factors primarily had a key impact on this segment result in 2014:

  • decrease in the premium earned by 6.0% despite an increase of the gross written premium by 5.2% compared with 2013. In 2014 there was an increase in the other TPL insurance group (increased by PLN 65.6 million) as a result of acquiring several strategic clients and entering contracts for the period longer than one year. A difficult situation on the business insurance market and a decline in prices resulted in the greater inclination to enter into long-term contracts – this tendency was already observed last year. What is more, the sales structures oriented towards the development of the so-called medium and big corporate business were able to raise the premium and significantly increase the number of insurance policies. Additionally, several big insurance guarantees were granted in the category of financial insurance (an increase by PLN 59.1 million, including Link4’s share of PLN 1.5 million). The increase in the written premium was partially offset by the decrease in the motor insurance group (a decrease of PLN 29.5 million), which was the result of a strong price competition;
  • total amount of claims and benefits was PLN 964.0 million and it was PLN 109.9 million higher than in the prior year. Net claims and benefits in 2014 increased by 12.9% in comparison with 2013, which, considering a 6.0% decline in the net premium earned, means that the loss ratio decreased by 11.0 p.p. The increase was recorded mainly in other non-life insurance (increase in the value of claims of 16.6%) as a result of several individually significant claims, in particular, in miscellaneous financial loss insurance and in insurance covering property damage and damage caused by forces of nature. As far as motor insurance is concerned, despite a decline in the frequency of losses, the level of claims and benefits increased (by 10.6% y/y) as a result of the higher average claim payment and the increase in the technical provisions for bodily injury claims. In 2014, the loss ratio in corporate insurance amounted to 65.9% compared with 54.9% in the previous year;
  • decline in the investment income allocated to the segment at transfer prices. This income amounted to PLN 136,5 million and was 2.6% lower than in the previous year. This decline was caused by lower market interest rates used as the basis for calculating the income from portfolios replicating insurance liabilities;ù
  • increase in acquisition expenses by PLN 6.0 million, i.e. 2.0 %, compared with 2013, was caused mainly by higher indirect acquisition expenses and the inward reinsurance commission, partially offset by an increase in the deferred acquisition expenses for multiyear contracts;
  • increase in administrative expenses to the level of PLN 125.1 million, i.e. 8.0 %, compared with the previous year, as a result of implementation of projects aiming to change the philosophy of customer relations management and improving the key servicing processes, which in the long term are to led to higher effectiveness of the sales network.

Mass-market insurance

In 2014, the operating profit in the mass-market insurance segment amounted to PLN 756.5 million (a 29.1% decrease compared with the prior year). The acquisition of Link4 had a negative impact on the result in 2014. It contributed to the segment’s result from the moment of its acquisition and caused the increases in particular items in the operating result. After the effect of this change has been eliminated, in 2014 the operating profit in the corporate segment was PLN 771.0 million.

The following factors primarily had a key impact on this segment result in 2014:

  • gross written premium was PLN 6,569.5 million, i.e. it increased by 0.5 % compared with the previous year (after excluding Link4’s share, a 1.4 % decline). In this, the motor TPL premium was lower by 1.1 % as a result of price pressure from the competition. The effect was partially offset by higher sales of insurance concerning damages caused by forces of nature (an increase of PLN 23.5 million) and general liability insurance (an increase of PLN 18.8 million) – mostly household insurance because of the upsale of the basic types of risk (movable to immovable property and the other way around) and TPL insurance as additional insurance. The premium earned amounted to PLN 6,563.0 million and was 0.2% higher than in the previous year, which is the result of recognition of the premium from Link4 in the 2014 result (after excluding Link4’s share, the premium earned declines by 1.6 p.p.);
  • investment income allocated at transfer prices to the massmarket insurance segment amounted to PLN 562.8 million (1.1% increase compared with the prior year);
  • claims and benefits were at the level of PLN 4,363.4 million, i.e. they increased by 4.1% in relation to 2013 (after excluding Link4’s share, a 1.9% increase). A deterioration of the results with respect to the previous year was brought about by higher amount of claims and benefits in the motor insurance, determined mainly by an increase in the technical provisions for bodily injury claims, including claims concerning pain and suffer claims pursuant to Article 448 of the Civil Code for the damages incurred before 3rd August 2008 (justification of the judgement of the Supreme Court of 2014 – catalogue number III CZP 2/14). What is more, the claims caused by forces of nature (mostly frost) was higher in agricultural insurance and had a negative impact. The adverse events were partially offset by a lower level of mass claims in non-life insurance and a low level of individually significant claims;
  • acquisition expenses amounted to PLN 1,238.9 million, i.e. they were 8.5% higher compared with the previous year. The primary type of costs that increased were direct costs which grew mainly as a result of a change in the commission rates for motor insurance packages;
  • administrative expenses which amounted to PLN 617.5 million, increased by 12.9% compared with 2013. The higher costs were caused by the implementation of projects aiming to change the philosophy of customer relations management (customer centricity). The increase applies mainly to the IT and personnel costs, as well as the costs of customer service training.

What is more, a one-off event from 2013 had a significant impact on comparability of the results, the event in question being the one-off gross profit on the settlement agreement with the reinsurer on the Green Card insurance of PLN 53.2 million (of which PLN 73.3 million was recognized in the reinsurance commission and the shares in the profits).

 Group insurance and individually continued insurance 

The operating profit of the group and individually continued insurance amounted to PLN 1,761.8 million and was 9.9% higher than in the previous year. This was a result of:

  • gross written premium of PLN 6,539.1 million, which was 1.9% higher than last year. Because of the discontinuation of the short-term endowment insurance offering with a single premium, this was entirely regularly paid premium.
    In 2014, a stable growth trend was maintained as a result of the development of group protection insurance (an increase in the average premium and in the number of insured, including new sales), upsale of riders and an increase in the sum insured in individually continued products, the acquisition of premiums in group health insurance (new customers in outpatient insurance and development of drug products);
  • investment income – comprising allocated income at transfer prices and income from investment-type products – amounted to PLN 713.3 million, i.e. it declined by 3.0%, mainly due to decline of the income allocated at transfer prices as a result of low market interest rates used as the basis for calculating income from portfolios replicating insurance liabilities;
  • net insurance claims and benefits amounted to PLN 4,499.4 million (a 4.6% increase). The main reason was the transfer of assets from the insurance policy of the EPP policy of the PZU’s employees to the EPP scheme run by TFI PZU (PLN 141.3 million, offset by a change in mathematical provision – a neutral impact on the result) and, additionally, an increase in the group protection portfolio, including health insurance. A simultaneous decrease in the loss ratio of insurance products as a result of a decline of the frequency of events due to death compared with 2013 – confirmed by the Central Statistics Office’s (GUS) data concerning the increase of the number of deaths in Poland in January 2013;
  • increase in other net technical provisions amounted to PLN 70.3 million. The increase in provisions was by PLN 200.6 million lower than in the previous year. The main reason for that was the decline in the mathematical provision in the pillar III pension product (EPP) in comparison with the increase in the previous year which resulted from the transfer of assets from the PZU’s employees’ policy to the TFI PZU. Additionally, PZU Życie, in the course of the annual process of establishing the ratio of possible indexation of the sum insured by the clients of continued insurance, made a decision to lower said ratio in relation to the low market interest rates and a low level of inflation. This had a positive impact on the level of technical provisions in this portfolio. There was also a decrease of provisions in short-term endowment products in the bancassurance channel compared with a small growth in the previous year – the endowment of the subsequent tranches in the face of the lack of sales of new contracts. Moreover, the lower rate of conversion of long-term contracts into annual renewable contracts in type P group cover also affected the level of these provisions. As a result, provisions of PLN 69.9 million were released, i.e. PLN 57.2 million less than in 2013;
  • acquisition expenses amounted to PLN 356.6 million, i.e. they increased by 10.5%. A higher portfolio of contracts and an increase of the broker and agency channels’ share in the portfolio, and in the case of bancassurance, also changes in the contract’s terms and conditions, were the factors determining the increase in direct and indirect acquisition expenses in group protection insurance;
  • the segment’s administrative expenses amounted to PLN 543.0 million and the previous year’s level was maintained;
  • year-on-year improvement of the result in other revenues and expenses by PLN 87.7 million was caused by lack of the Prevention Fund charge in 2014 (eliminated for the purpose of the consolidated result) and lower costs related to PZU Życie financing the premium (lower promotional sales of additional insurance policies to individually continued insurance). After excluding from the segment’s result the one-off effect related to the lower effect of conversion of long-term contracts into renewable contracts in type P, the segment’s operating profit amounted to PLN 1,692.0 million in 2014, compared with PLN 1,476.3 million in 2013 (a 14.6% increase). The main reason was an increase of the portfolio and a simultaneous fall in the loss ratio of protection products.

Individual insurance 

In 2014, the operating result of the individual life insurance segment amounted to PLN 162.8 million, i.e. it was 16.4% higher than in the prior year. The main factors affecting the level of the segment’s operating result were:

  • gross written premium of PLN 1,268.6 million, i.e. 4.6% less than in the previous year. This was the result of: a significantly lower than in the previous year sales of the structured product in cooperation with Bank Handlowy, a withdrawal of the Plan na Życie savings product with a protection component and regular premium and a decline in the level of contributions to the individual pension accounts (IKE). There was a positive y/y change in the written premium of the protection products in the Company’s own sale channels (high new sales and the introduction of a new additional insurance Pomoc od Serca PZU ŻYCIE – ACTIVITIES ON THE LIFE INSURANCE MARKET IN POLAND and higher than in the previous year sales of the structured product Świat Zysków;
  • investment income consists of income allocated at transfer prices and income from investment-type products. In the individual insurance segment the income increased y/y by PLN 4.8 million to the level of PLN 326.7 million mainly due to the higher level of assets of unit-linked products. The income allocated at transfer prices remained at the similar level;
  • value of net claims and benefits which amounted to PLN 638.8 million, i.e. they increased by 1.9% compared with 2013. This increase is caused by higher disbursements on endowments in structured products both through the Group’s own and through the bancassurance channel (maturity dates reached for the subsequent product tranches) and higher redemptions of unit-linked bank products (an increase of the portfolio y/y). Both these effects had a neutral impact on the result – they are offset by an adequate change in the mathematical provision. These increases were partially offset by lower than in the previous year redemptions from the individual pension accounts (IKE) and a decrease in the endowment disbursements from old policies in the individual endowment portfolio underwritten in 1990s (an expiring portfolio);
  • increase in other net technical provisions being lower than in the previous year. They increased by PLN 611.1 million, which was PLN 101.3 million less than in 2013. The lower increase was connected with decreased provisions in structured bank products (compared with the increase in the previous year), which was the result of lower sales of these products (compared with the previous year) and simultaneous higher disbursements related to reaching the maturity dates of the policies. A similar effect was observed in the unit-linked products;
  • increase in acquisition expenses. These amounted to PLN 126.4 million (a 15.5% increase compared with 2013). This was caused foremost because of the increased cost of the agency network’s commission, which was the result of a change in the remuneration policy, and which contributed also to a higher volume of new sales of protection products, and also to changes in the contract’s terms and conditions in the case of life insurance where the investment risk is borne by the policyholders in the bancassurance channel. The above-mentioned effects were offset by a lower sales commission which was caused by a withdrawal of the Plan na Życie savings product with a protection component and regular premium and limited cooperation with Bank Handlowy;
  • administrative expenses in the segment were at the same level as in the previous year;
  • changes in the other revenues and expenses category (expenses lower by PLN 9.4 million) as a result of the lack of the Prevention Fund charges in the current year (eliminated for the purpose of the consolidated result).

Investments 

Income from investment segment comprises investment activities in respect of PZU Group’s own funds constituting a surplus of investments over technical provisions in the key insurance companies of PZU Group (PZU and PZU Życie) increased by surplus of investment income over the risk-free rate corresponding to the value of technical provisions of PZU and PZU Życie in non-investment products. Additionally, the „Investments” segment includes income earned on other excess cash on other excess cash in PZU Group.

Income from operating activities in the investments segment amounted to PLN 578.9 million (external operations only) and was 35.4% lower than in 2013. It was mostly a one-off effect of the beginning of the consolidation.

Pension insurance 

 In 2014, the operating p rofit in the pension insurance segment amounted to PLN 203.5 million, i.e. it increased by 48.1% compared with 2013. This was the result of:

  • fee and commission revenue which amounted to PLN 270.6 million, i.e. it increased by 23.9% compared with the prior year. This change was the result of:

    • statutory withdrawal of funds from the additional part of the Guarantee Fund in the amount of PLN 132.3 million;
    • decrease of PLN 58.3 million in the management fee resulting from the transfer of a portion of the assets of OFE to the Social Insurance Institution (ZUS);
    • decrease of PLN 28.8 million in fee from contributions mainly due to the statutory decrease in the rates from 3.5% to 1.75% as at February 1st 2014;
    • overpayments in the Guarantee Fund in the Central Securities Repository of Poland in the amount of PLN 5.3 million as a result of lower net assets of OFE PZU at the end of the fourth quarter of 2014; 
    • increase of PLN 1.9 million in revenue from the reserve account.
       
  • acquisition expenses amounted to PLN 6.3 million, i.e. they were 62.2% lower than in the previous year. It was caused by a decrease in the costs of commission remuneration linked with the fact that in 2013 the costs of commissions related to the contracts concluded before 31st January 2010 ceased to be settled over time;
  • administrative expenses amounted to PLN 72.8 million, i.e. they were 6.5% lower than in the prior year. In particular, the costs of managing pension fund registers declined by PLN 15.1 million as a result of lowering the management fee of the accounts of the members of OFE PZU from February 1st 2014 as well as the resignation from the additional compensation for the transfer agent due to the fulfilment of objectives related to improving the quality of provided services. The fees on premiums transferred by the Social Insurance Institution (ZUS) to OFE were lower by PLN 6.2 million due to statutory changes regarding the amount of fees and premiums. The decrease in personnel costs by PLN 1.7 million was caused by a lower level of employment and the change in the remuneration system.
    Additionally, the costs of obligatory additional payments to the Guarantee Fund in the Central Securities Repository of Poland increased by PLN 19.5 million (mainly the result of a statutory change of the required level from 0.1% to 0.3% of the net assets of OFE).

 

Ukraine 

Taking into account the significant depreciation of the Ukrainian currency, the choice was made to present the data in this segment in the currency in which the companies report their results.

In 2014, the Ukraine segment earned an operating profit of UAH 9.0 million, compared with UAH 40.4 million in the previous year.

The change of the segment result was caused by:

  • increase in the gross written premium. The premium amounted to UAH 658.2 million and increased by 25.6% in comparison with the previous year. The sales of the Green Card (increased rates) and accident insurance improved. Taking into account the depreciation of the currency, the written premium showed a reverse trend (a fall by PLN 30.1 million);
  • increase in net investment result. This segment earned UAH 155.7 million in this respect, which is 148.2% more than in 2013. The following factors had the positive impact on its level: the increase in the liquid assets base and positive FX differences, in particular in the life insurance offered mainly in foreign currencies;
  • significant increase in claims and benefits. The segment disclosed UAH 357.8 million, i.e. 71.9% more claims and benefits than in the previous year. The increase was mainly caused by the increase in the technical provisions in the life insurance company, which amounted to UAH 132.7 million. In 2014, the non-life company paid UAH 155.5 million claims, i.e. 6.7% more than in the prior year;
  • increase in acquisition expenses. They amounted to UAH 197.7 million compared with UAH 160.7 million in the prior year. Their level was the result of an increase in the written premium for the property, motor and travel insurance which are characterised by higher commission charges;
  • increase in administrative expenses. They amounted to UAH 106.7 million. For comparison purposes, in 2013, the administrative expenses of the segment amounted to UAH 92.4 million. A the same time, the administrative expenses ratio calculated with net premium earned improved slightly and amounted to 20.7% (a decline by 0.3 p.p. compared with the previous year).

In the presentation currency the written premium amounted to PLN 173.6 million and was lower by 14.8% compared with the previous year. The segment’s gross result decreased to PLN 9.3 million (from PLN 15.6 million in 2013). The lower results in this segment were caused by lower revenue on investments and deposits in non-life insurance, together with the combined ratio remaining at the similar level as in the previous year and a significant depreciation of the currency.

 

Baltic states

Due to the new companies acquired by PZU Group in this region, the data for this segment for 2014 include the data from all companies, including the newly-acquired ones. For 2013, on the other hand, we present only the data of the companies which had been consolidated up to the end of 2013: non-life and life companies (PZU Lithuania and PZU Liethuania Life).

PZU Group generated an operating loss in the amount of PLN 16.3 million in the Baltic states in 2014, compared with PLN 0.9 million of the operating profit in the prior year. The gross result was negative and amounted to minus PLN 32.1 million. The recorded losses were to a large extent caused by the oneoff costs related to the acquisition and then post-acquisition mergers of the companies within PZU Group.

The result arose from the following factors:

  • increase in gross written premium. It amounted to PLN 536.5 million, and included PLN 226.0 million of the companies which had not been consolidated in 2013. For comparison purposes, in 2013, the written premium in the segment amounted to PLN 262.3 million. In non-life insurance, without taking into account the newly-acquired companies, the biggest increase was in the non-life insurance (increased by 26.3%) and motor insurance (increased by 18.8%) In life insurance, the largest sales increase was recorded in traditional life insurance, which were higher by 30.3% compared with the previous year and in unit-linked insurance (an increase of 4.6% compared with the previous year);
  • increase in the net investment result. In 2014 the result amounted to PLN 14.6 million and was 124.5% higher than in the previous year;
  • increase in net claims and benefits. They amounted to PLN 312.2 million, with the share of claims and benefits of the companies non-consolidated in the previous year in the total claims and benefits amounting to 42.9%. The non-life insurance company presented in the previous year, as a result of the increase in technical provisions, recorded an increase of 28.5% in the value of claims and benefits, which was foremost the result of an intense development of branches on the Latvian and Estonian market. On the other hand, in life insurance the value of claims was by 26.6% higher than in the previous year due to the increase in technical provisions (the technical rate was lowered);
  •  increase in acquisition expenses. The respective expenses of the segment amounted to PLN 115.4 million, including PLN 41.3 million of acquisition expenses incurred by the companies acquired in 2014. The increase in acquisition expenses resulted mainly from an increase in sales of insurance;
  • increase in administrative expenses. They amounted to PLN 80.2 million, while the expenses of the newlyacquired companies, where due to the change of the owner additional expenses had to be incurred, amounted to PLN 47.8 million.

 

Investment contracts 

The consolidated statements present the investment contracts in accordance with the requirements of IAS 39.

The results of investment contracts segment are presented as per the Polish Accounting Standards, which means that, among others, the following items were included: gross written premiums, paid benefits and change in technical provisions. The above categories are eliminated for the purpose of the consolidated results.

PZU Group earned PLN 15.1 million of operating profit compared with PLN 11.3 million in the previous year (increase of 34.2%) on investment contracts, i.e. PZU Życie’s products which do not transfer significant insurance risk and which do not meet the definition of an insurance contract (such as some products with a guaranteed rate of return and some unitlinked products).

The following had an impact on the results of the segment in 2014:

  • drop in gross written premium. This amounted to PLN 374.5 million, i.e. was 65.9% lower than in the previous year. In particular, sales of short-term endowment products dropped (by PLN 711.9 million, the effect of the strategy consisting of withdrawing from this type of products);
  • deterioration of the investment income. The result was PLN 43.6 million which means it was lower by 58.3% than the in 2013, mainly in the bancassurance unit-linked products and endowment insurance products, as the effect of lower investment level;
  • higher value of net claims and benefits resulting from an increase of redemptions of unit-linked products in the bancassurance channel. They amounted to PLN 1,391.7 million, i.e. they were 4.7% higher than in the previous year;
  • higher negative balance of net technical provisions. This amounted to PLN 1,015.5 million compared with PLN 172.3 million in the prior year. This difference arose mainly from the changes in the cover portfolio of short-term investment endowments, sold mainly through the bancassurance channel, i.e. lower sales and revenue from investing activities, together with a comparable level of endowment disbursements;
  • lower acquisition expenses. These amounted to PLN 16.5 million, i.e. they were 10.1% lower than in the prior year. This was the effect of a decline in the sales volume;
  • lower administrative expenses. These amounted to PLN 9.7 million and declined by 14.6% compared with 2013 – the result of a decrease in the contracts portfolio;
  • change in the other revenues and expenses category (expenses lower than in the previous year by PLN 4.1 million) mainly as a result of the lack of the Prevention Fund charge in the current year (eliminated for the purpose of the consolidated result).

 

Profitability ratios

In 2014 PZU Group’s return on equity was 22.6%. ROE was 1.5 p.p. lower than in the prior year. The profitability ratios achieved in 2014 by PZU Group exceed the levels achieved by the whole market (according to the data for three quarters of 2014).

Operating efficiency ratios 

One of the basic efficiency and operating measure of an insurance company is the combined ratio (COR), which is calculated for the non-life sector because of its specific nature.

The combined ratio of PZU Group (for non-life insurance) remains in the last few years at the level which guarantees high profitability. The ratio increased in 2014, however it was caused to a large extent by a higher loss ratio in motor own damage insurance resulting from an increase in the technical provisions covering claims from the previous years.

Key profitability ratios of PZU Group20142013201220112010

Return on Equity (ROE) (annualised net profit / average equity) x 100%

22.60% 24.10% 24.00% 18.30% 20.30%
Return on assets (ROA) (annualised net profit / average assets) x 100% 4.60% 5.60% 6.00% 4.60% 4.70%
Administrative expense ratio (administrative expenses / premium earned net of reinsurance) x 100% 9.30% 8.70% 9.00% 9.30% 10.60%
Return on Sales (net revenue / gross written premium) x 100% 17.60% 20.00% 20.00% 15.30% 16.80%

Operating efficiency ratios20142013201220112010
1.Claims ratio gross (Claims gross along with change in technical reserves/written premium gross) x 100% 69.50% 67.90% 76.20% 67.90% 75.20%
2.Claims ratio net of reinsurance (net claims paid / net premium earned) × 100% 70.30% 68.70% 76.30% 68.60% 73.10%
3.Insurance activity costs ratio (Costs of insurance activity/ premium earned net of reinsurance ) x 100% 22.40% 21.10% 21.50% 22.50% 24.00%
4.Acquisition expenses ratio (acquisition expenses / premium earned net of reinsurance)x 100% 13.10% 12.40% 12.50% 13.20% 13.40%
5.Administrative expense ratio (Administrative expenses / premium earned net of reinsurance) x 100% 9.30% 8.70% 9.00% 9.30% 10.60%
6.Combined ratio in non-life insurance (claims + costs of insurance activity / premium earned net of reinsurance ) x 100% 95.70% 87.80% 92.80% 95.30% 104.50%
7.Operating profit margin in life insurance (operating profit / gross written premium) x 100% 24.40% 22.30% 19.80% 28.70% b.d