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2.3 Changes in the scope of consolidation and structure of the PZU Group

Annual Report 2019 > 2.3 Changes in the scope of consolidation and structure of the PZU Group
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The detailed accounting policy pertaining to settlement of acquisition transactions are presented in section 5.6.

The purchase of entities providing medical services (in 2019 those were: Tomma, Asklepios Diagnostyka sp. z o.o., Bonus-Diagnosta sp. z o.o., FCM, Starówka sp. z o.o., Alergo – Med Tarnów sp. z o.o.) is aimed at supplementing specialist medical services offered by the PZU Group under health insurance and other health products. Development of the medical products and enlargement of the own medical center network providing highest level of services is one of the core elements of the PZU Group strategy. Provision of some of the services in own centers will increase the PZU Group’s competitiveness in this market and allow it to provide an integrated patient service model. The goodwill recognized in the consolidated financial statements is the effect of the planned increase of the scale of this business and the volume of services generated by health insurance and other health products, combined with improvement of the profitability of these services thanks to retaining some of the margin in the PZU Group and incessant search for synergies between own medical entities.

2.3.1.  Acquisitions of companies

2.3.1.1.  Medical companies

Tomma

On 29 October 2019, PZU Zdrowie signed with THC SICAV-RAIF SA a preliminary agreement and on 9 December 2019 the final agreement on the purchase of 150,000 shares in Tomma, representing 100% of the company’s share capital and carrying the right to 100% votes at its shareholder meeting. At the same time, PZU Zdrowie, and thus also PZU, became an indirect owner of the following subsidiaries of Tomma: Asklepios Diagnostyka sp. z o.o. and Bonus-Diagnosta sp. z o.o., in which Tomma holds a 100% stake and 100% of votes at the shareholder meeting.
Since the date of obtaining control, i.e. 9 December 2019, all the companies have been consolidated.

FCM

On 13 March 2019 PZU Zdrowie SA entered into a preliminary agreement and on 3 June 2019 a final agreement with Falck Danmark A/S to acquire 403,551 shares in FCM, which constituted 100% of the share capital and offering 100% of votes at the shareholder meeting, with par value of PLN 50 each. At the same time, PZU Zdrowie SA, and thereby also PZU, became the indirect owner of Starówka sp. z o.o. in which FCM has a 100% equity stake.
Since the date of obtaining control, i.e. 3 June 2019, both companies have been consolidated.

Alergo-Med Tarnów sp. z o.o.

On 31 January 2019, PZU Zdrowie acquired 1,432 shares in Alergo – Med Tarnów sp. z o.o. representing 100% of the share capital and 100% of the votes at the shareholder meeting with a par value of PLN 500 each.
Since the date of obtaining control, i.e. 31 January 2019, Alergo – Med sp. z o.o. has been consolidated.

2.3.1.2.  Other acquisitions

Corsham sp. z o.o.

On 4 February 2019 Alior Bank acquired 100 shares in Corsham sp. z o.o. representing 100% of the share capital and 100% of votes at the shareholder meeting with a par value of PLN 50 each.
Since the date of obtaining control, i.e. 4 February 2019, Corsham sp. z o.o. has been consolidated.

2.3.1.3.  Settlement of the acquisition

The allocation process of the share purchase prices was carried out based on accounting data:

  • FCM and Starówka sp. z o.o. – as at 31 May 2019;
  • Tomma, Asklepios Diagnostyka sp. z o.o. and Bonus-Diagnosta sp. z o.o. – as at 30 November 2019.

It was decided that no material differences existed between accounting data on the dates for which the accounting data were prepared and the dates of obtaining control, which is respectively between 31 May and 3 June 2019 (for FCM and Starówka sp. z o.o.) and between 30 November and 9 December 2019 (for Tomma, Asklepios Diagnostyka sp. z o.o. and Bonus-Diagnosta sp. z o.o.).

The consolidated financial statements contain the final fair value of the acquired assets and assumed liabilities of FCM and Starówka sp. z o.o. In the process of calculating goodwill:

  • intangible assets not previously recognized in the financial statements of FCM and Starówka sp. z o.o. were recognized;
  • fair value measurement of assets and liabilities presented in the financial statements of FCM and Starówka sp. z o.o. was performed;
  • no contingent liabilities requiring recognition were identified;
  • no potential indemnification assets requiring recognition were identified.

The final settlement of the transaction is presented below on the basis of the fair value of the acquired assets and liabilities.

By the date of signing the consolidated financial statements the purchase price allocation process of Tomma, Asklepios Diagnostyka sp. z o.o. and Bonus-Diagnosta sp. z o.o. has not been completed. A credible and reliable calculation of the fair value of acquired assets and liabilities requires a large amount of data to be collected and processed in order to make correct calculations. Consequently, this process could not be completed between the date of obtaining control and the date of signing of the consolidated financial statements.

The final purchase price for Tomma shares will be adjusted, in accordance with the terms of the agreement, based on the final settlement of the transaction approved by both parties.

At the end of the purchase price allocation process, IFRS 3 requires one year from the transaction date.

The tables below present the purchase price allocation of the acquisition of medical companies.

Value of acquired net assets Alergo-Med Tarnów sp. z o.o. Final settlement FCM and Starówka sp. z o.o. Final settlement Tomma, Asklepios Diagnostyka sp. z o.o. and Bonus-Diagnosta sp. z o.o.Preliminary settlement
Assets 1 46 90
Intangible assets - 15 -
Property, plant and equipment - 17 73
Receivables 1 7 12
Other assets - 7 5
Liabilities - (18) (87)
Financial liabilities - (10) (76)
Other liabilities - (8) (11)
Value of acquired net assets 1 28 3
 
Calculated goodwill Alergo-Med Tarnów sp. z o.o. Final settlement FCM and Starówka sp. z o.o. Final settlement Tomma, Asklepios Diagnostyka sp. z o.o. and Bonus-Diagnosta sp. z o.o.Preliminary settlement
Consideration transferred 4 66 147
Net value of identifiable assets (1) (28) (3)
Goodwill 3 38 144

Goodwill will not reduce taxable income.

Financial data of acquired entities

The following table presents the financial data of entities acquired in 2019 and included in the consolidated profit and loss account. The data have been prepared in accordance with IFRS and cover the period in which these companies were under the PZU Group’s control.

Consolidated profit and loss account  
   
Other operating income 50
Interest expenses (1)
Other operating expenses (52)
Operating profit (3)
Profit before tax (3)
Income tax -
Net profit, including: (3)
– profit attributable to the equity holders of the Parent Company (3)
– profit (loss) attributed to holders of non-controlling interest -
   

Consolidated profit and loss account taking into account acquired entities

The table below presents the profit and loss account of the PZU Group, taking into account the financial data of acquired subsidiaries calculated as if the beginning of the year was the acquisition date for all the combinations effected during the year.

Consolidated profit and loss account 1 January – 31 December 2019
Gross written premiums 24,191
Reinsurers’ share in gross written premium (1,012)
Net written premiums 23,179
Movement in net provision for unearned premiums (89)
Net earned premiums 23,090
   
Revenue from commissions and fees 4,139
Net investment income 12,391
Net result on realization of financial instruments and investments 278
Movement in allowances for expected credit losses and impairment losses on financial instruments (2,166)
Net movement in fair value of assets and liabilities measured at fair value 837
Other operating income 1,591
   
Claims, benefits and movement in technical provisions (16,085)
Reinsurers’ share in claims, benefits and movement in technical provisions 390
Net insurance claims and benefits paid (15,695)
Fee and commission expenses (860)
Interest expenses (2,133)
Acquisition expenses (3,363)
Administrative expenses (6,606)
Other operating expenses (4,416)
Operating profit 7,087
Share of the net financial results of entities measured by the equity method (4)
Profit before tax 7,083
Income tax (1,895)
Net profit, including: 5,188
– profit attributable to the equity holders of the Parent Company 3,298
– profit (loss) attributed to holders of non-controlling interest 1,890
   

2.3.1.4.  Spółdzielcza Kasa Oszczędnościowo-Kredytowa Jaworzno

On 31 January 2019, the KNF decided that Alior Bank would take over Spółdzielcza Kasa Oszczędnościowo-Kredytowa Jaworzno (SKOK Jaworzno). In line with KNF’s decision, starting on 1 February 2019, Alior Bank assumed management over the assets of SKOK Jaworzno, which was acquired by Alior Bank as of 1 April 2019.

The acquisition of SKOK Jaworzno was accounted for using IFRS 3. The process was carried out with the assumption that the Bank Guarantee Fund would provide aid to Alior Bank pursuant to Article 264 of the Bank Guarantee Fund Act and it would not require payment by Alior Bank. The aid from BFG involved provision of a subsidy and extension of a guarantee to cover losses resulting from the risk associated with the SKOK Jaworzno’s property rights being acquired. The BFG subsidy was granted to cover the difference between the value of the acquired property rights and the liabilities arising from guaranteed funds of SKOK’s depositors. On 22 November 2019 Alior Bank received a subsidy in the amount of PLN 110 million.

Settlement of the acquisition

Pursuant to the provisions of IFRS 3, the PZU Group recognized the acquired assets and liabilities at fair value.

The fair value of the SKOK Jaworzno’s loan portfolio was calculated for loans with no recognized impairment (performing portfolio). For these loans, the calculation was based on contractual cash flows adjusted for credit risk and prepayments. The fair

value of the SKOK’s performing loan portfolio was determined by using a discounted cash flow model by using the observed market values of interest rates adjusted for liquidity margins and cost of capital, broken down into homogeneous sub-portfolios. The fair value of the non-performing loan portfolio was assumed to be equal to the carrying amount due to the expected insignificant recovery levels.

The fair value of client and bank deposits and other financial liabilities maturing within 1 year is more or less equal to their carrying amount. When calculating the fair value of financial liabilities with residual maturity above 1 year, the present value of expected payments is calculated based on the current interest rate curves. No difference was observed between this measurement and the carrying amount, as a result of which the fair value was not adjusted.

Also, deferred tax assets of PLN 20 million were recognized in connection with the acquired assets and liabilities accepted as a result of the merger.

Final settlement of the acquisition Carrying amount Adjustment to fair value Fair value
Assets 208 26 234
Property, plant and equipment 7 - 7
Loan receivables from clients  137 6 143
Receivables 40 - 40
Cash and cash equivalents 21 - 21
Other assets 3 20 23
Liabilities 336 - 336
Other provisions 13 - 13
Financial liabilities 320 - 320
Other liabilities 3 - 3
Fair value of acquired net assets (128) 26 (102)
Subsidy from the Bank Guarantee Fund 110
Gain from a bargain purchase 8

Gain from a bargain purchase is recognized in other operating income.

2.3.2.  Changes to consolidation of mutual funds

On account of losing control, the following mutual funds are no longer subject to consolidation: PZU Akcji Spółek Dywidendowych sub-fund, PZU FIZ Akcji Focus, PZU FIZ Forte since 31 March 2019 and PZU Dłużny Aktywny sub-fund since 1 June 2019.

On 27 September 2019, the liquidation process of PZU FIO Innowacyjnych Technologii and on 31 October 2019 of PZU FIZ Surowcowy was completed.

Since 28 October 2019, the newly-established investment funds controlled by the PZU Group were consolidated: inPZU Goldman Sachs ActiveBeta Akcje Rynków Wschodzących, inPZU Goldman Sachs ActiveBeta Akcje Amerykańskich Dużych Spółek, inPZU Akcje CEE plus.

2.3.3.  Liquidations and transactions under joint control

During 2019, the following companies were deleted from the register of commercial undertakings of the National Court Register:

  • Syta Development sp. z o.o. in liquidation – 11 June 2019 (control over the company was exercised by a liquidator independent of the PZU Group and for this reason the company was not consolidated);
  • Ardea Alba SA in liquidation – 14 May 2019;
  • Centrum Obrotu Wierzytelnościami sp. z o.o. in liquidation – 17 July 2019;
  • CDM – 30 August 2019. This is the result of the split of CDM pursuant to Article 529 §1(1) of the Commercial Company Code, namely by:
    • transfer to Pekao of certain property (assets and liabilities) as well as rights and obligations in the form of an organized part of CDM’s enterprise related to the provision of brokerage services, and
    • transfer to Centrum Bankowości Bezpośredniej sp. z o.o of certain property (assets and liabilities) as well as rights and obligations in the form of an organized part of CDM’s enterprise related to the provision of call center services;

In compliance with Article 530 § 1 of the Commercial Company Code, CDM was dissolved without the conduct of a liquidation procedure. On the date of deletion from the National Court Register and in compliance with Article 531 § 1 of the Commercial Company Code, the split of CDM became legally effective.

  • Revimed sp. z o.o. – merged with PZU Zdrowie SA on 31 October 2019;
  • Artimed Niepubliczny Zakład Opieki Zdrowotnej sp. z o.o. – merged with PZU Zdrowie SA on 29 November 2019;
  • Specjalistyczny Zakład Opieki Zdrowotnej Multimed sp. z o.o. – merged with Elvita on 16 December 2019.

The deletion of the companies from the register did not affect the consolidated financial statements.

2.3.4.  Other transactions

On 3 October 2019 PZU sold 6,600 shares in Sigma BIS SA representing 66% of the company’s share capital and carrying the right to 66% of votes at its shareholder meeting. As a result, on 3 October 2019 Sigma BIS SA became an associate. The transaction did not have any significant effect on the PZU Group’s consolidated financial statements.

In connection with an increase of the share capital of EMC Instytut Medyczny SA entered in the KRS on 23 December 2019, the share of the PZU Group in the share capital and votes at the shareholder meeting fell to 16.95% and 15.88%, respectively. Accordingly, as of 23 December 2019, the company is no longer an associated company. Because of the recognized impairment losses, there was no difference between the valuation by the equity method and fair value. As a result, the loss of significant influence had no effect on the consolidated profit and loss account.