Contribution made by the market segments to the consolidated result

 The following industry segments were identified in order to facilitate management of the PZU Group:

• corporate insurance (non-life insurance) – this segment covers a broad scope of property insurance products, liability and motor insurance customized to a client’s needs entailing individual underwriting offered by PZU and TUW PZUW;
• mass insurance (non-life insurance) – this segment consists of property, accident, liability and motor insurance products. PZU and Link4 provide insurance to individuals and entities from the SME sector;
• life insurance: group and individually continued insurance – PZU Życie offers it to employee groups and other formal groups. Persons under a legal relationship with the policyholder (e.g. employer, trade union) enroll in the insurance agreement and individually continued insurance in which the policyholder acquired the right to individual continuation during the group phase. This spans the following types of insurance: protection, investment (other than investment contracts) and health insurance;
• individual life insurance – PZU Życie provides those products to retail clients. The insurance agreement applies to a specific insured who is subject to individual underwriting. These products include protection, investment (which are not investment contracts) and health insurance;
• investments –the revenues of the investments segment comprise the investments of the PZU Group’s own funds, understood as the surplus of investments over technical provisions in the PZU Group insurance companies based in Poland (PZU, Link4 and PZU Życie) plus the surplus of income earned over the risk-free rate on investments reflecting the value of technical provisions of PZU, Link4 and PZU Życie in insurance products, i.e. the surplus of investment income of PZU, Link4 and PZU Życie over the income allocated at transfer prices to insurance segments. Additionally, the segment includes income from other free funds in the PZU Group, including consolidated mutual funds;

• banking segment - broad range of banking products offered to corporate and retail clients by Pekao and Alior Bank;
• Pension insurance segment – includes revenues and costs of PZU OFE pension funds
• Baltic States segment – includes non-life insurance and life insurance products provided in the territories of Lithuania, Latvia and Estonia;
• Ukraine segment – includes non-life insurance and life insurance products provided in the territory of Ukraine;
• investment contracts – include PZU Życie products that do not transfer material insurance risk and do not satisfy the definition of insurance contract. These are some of the products with a guaranteed rate of return and some products in unit-linked form;
• other – include consolidated companies that are not classified in any of the above segments.

Corporate insurance

In 2019 the corporate insurance segment generated an operating result of PLN 327 million, or 22.0% higher than in the corresponding period of last year. The pace of growth in this segment’s result was the highest among all the insurance segments in Poland.

The level of this segment’s result in 2019 was affected mainly by the following factors:

• a 6.4% increase in net earned premium combined with a 7.1% increase in gross written premium versus 2018. The growth rate of the PZU Group’s gross written premium was driven by:
• premium growth in insurance against fire and other damage to property (+16.3% y/y) – including in Q4 2019 the acquiring of a contract with a high unit value through inward reinsurance,
• development in the portfolio of insurance for various financial risks, in particular GAP financial loss insurance offered to individual and institutional clients with the support of PZU Group leasing companies,
• sales growth in general TPL insurance (+8.3% y/y) due to the conclusion of several high unit value contracts and development in the portfolio of medical insurance and strategic partners in TUW PZUW,
• lower premium in motor insurance (-4.7% y/y) offered to leasing companies as a consequence of the lower average premium and the lower number of insurance policies
• net claims and benefits moved up by 1.2% compared to the corresponding period of 2018 signifying an improvement in loss ratio of 3.4 p.p. to 65.0% in combination with the growth in net earned premiums (+6,4%). The decrease in the total loss ratio in the segment was the outcome of the following:
• lower loss ratio in the motor TPL insurance class – in the corresponding period of 2018 as the result of remeasurement of the provision for pain and suffering claims,
• lower loss ratio in the portfolio of general TPL insurance and insurance for damages caused by natural catastrophes despite the occurrence of several high unit value losses in the first half of the year,
• higher average disbursement in motor own damage insurance;
• the level of income from investments allocated to the segment according to transfer prices fell 11.5% to PLN 100 million, which was dictated in particular by the EURPLN exchange rate lower by 1.0% compared to the strengthening of 3.1% in the corresponding period of the previous year;
• acquisition expenses (net of reinsurance commissions) reached PLN 519 million, rising by 8.8% compared to 2018, mainly due to the higher direct acquisition expenses and changes in the mix of the portfolio and sales channels (higher percentage of non-motor insurance and the multi-agency channel);
• administrative expenses stayed flat, which coupled with earned premium being up 6.4% implies improvement in the administrative expense ratio by 0.3 p.p. Keeping administrative expenses at an unchanged level was possible(despite higher personnel costs stemming from the constant wage pressure on the market) thanks to maintaining cost discipline in the other cost categories.

Insurance result in the corporate insurance segment (in PLN m)

Mass insurance

In 2019 the mass insurance segment generated an operating result of PLN 1,449 million, or 16.0% lower than in the corresponding period of last year. The level of the segment’s result in 2019 was affected by the following factors:

• 0.9% y/y increase in net earned premiums coupled with a comparable level of gross written premium. The PZU Group posted the following under sales:
• lower gross written premium in motor TPL insurance as a consequence of the declining number of insurance policies coupled with the comparable average price level, ensuing from the active pricing policy among competitors,
• higher premium in motor own damage insurance,
• higher level of sales of insurance against fire and other damage to property, mostly in insurance for apartments and small and medium enterprises offset to a slight degree by the decline in the premium on agricultural insurance ensuing from the market’s high level of competitiveness translating into a loss of a portion of the portfolio of insurance for farm buildings and the lower average premium in crop insurance,
• higher premium in other TPL insurance (+5.8% y/y) and accident and other insurance (13.0% y/y), mostly assistance and accident insurance;
• net claims and benefits in 2019 up 3.9%, which coupled with net earned premium being up 0.9%, translated into deterioration in the loss ratio by 1.8 p.p. versus 2018. This change resulted mainly from the following:
• upswing in the loss ratio in insurance against fire and other damage to property as a result of the above-average number of losses caused by atmospheric phenomena, including ground frost and precipitation in the form of rain and hail,
• deterioration of the loss ratio in motor own damage insurance as the outcome of lower sales growth and rising inflation of losses;
• income from investments allocated to the segment using transfer prices to the mass insurance segment totaled PLN 481 million, signifying a year on year decline of 8.6%, mostly due to the softening of the PLN-EUR exchange rate totaling 1.0% compared to the strengthening of 3.1% in the corresponding period of the previous year;
• acquisition expenses (net of reinsurance commissions) hit the level of PLN 1,986 million growing by PLN 96 million (+5.1% y/y) compared to the corresponding period of the previous year, which, taken together with the 0.9% growth in the net earned premium translated into a 0.7 p.p. growth of the acquisition expense ratio . The factor driving the change in the level of acquisition expenses was the higher level of direct acquisition expenses as an effect of the shift in the product mix and the sales channel mix (rising share of the multi-agency and dealer channel coupled with the simultaneous lower growth rate of sales of motor TPL insurance featuring lower commission rates);
• administrative expenses in this segment were PLN 651 million, signifying growth of PLN 57 million versus last year, i.e. 9.6%, chiefly as the outcome of higher personnel costs due to constant wage pressure on the market and intensification of project-related activities.

Insurance result in the mass insurance segment (in PLN m)

Group and individually continued insurance

Operating profit in the group and individually continued insurance segment in 2019 was PLN 1,497 million, slightly down from last year (down 3%, or PLN 46 million). Operating profit, net of the conversion effect on long-term contracts into renewable term contracts in type P group insurance deteriorated PLN 43 million y/y (2.8%). The expanding portfolio of profitable health contracts and the lower level of benefit payments linked to deaths and childbirth were the main positive drivers of performance. In turn, the unfavorable factors were rising operating expenses and the growth in the loss ratio on some of the risks in the group protection portfolio.

The following factors affected the level of, and the changes in, the segment’s result in 2019:

• gross written premium growth compared to the corresponding period of the previous year of PLN 75 million (1.1%), which was mainly the result of the following:
• attracting more health insurance contracts in the form of group or individually continued insurance (new clients in outpatient health insurance and sales of different options of the medicine product). At the end of December 2019 PZU Życie had more than 2 million in-force contracts of this type in its portfolio. The continued insurance rider called “PZU orthopedic injury” enjoyed a particular amount of success. In case of an accidental orthopedic injury, e.g. fracture, dislocation or sprain, the insured will be provided assistance of a physiotherapist and an orthopedist. The insured will also be able to use rehabilitation procedures in private medical centers across Poland. The insurance garnered excellent response from the clients – three out of four clients enrolling in individual continuation selected this rider as well,
• active up-selling of other riders in individually continued insurance products, especially while offering the underlying contract in PZU branches and raising the sum insured during the lifetime of these contracts. Besides the rider stated above, in Q4 2018 PZU Życie rolled out a rider covering a myocardial infarction or stroke to provide financial support when these types of events occur, while in Q3 2019 insurance to safeguard the policyholder in the event of permanent bodily injury or broken bones in the form of a cash benefit and access to medical services, 

At the same time, revenue on group protection products was under pressure from more frequent lapses as insureds left groups (work establishments) while limiting the pressure placed on the growth rate of the average premium made it possible to control the loss ratio in group protection products;

• higher investment income (up PLN 87 million, or 15.0% y/y). The investment result consists of income allocated using transfer prices and income on investment products. Income allocated according to transfer prices is subject to slight fluctuation and its level depends largely on the level of technical provisions in protection insurance products. In 2019 the change in the segment’s investment income stemmed mostly from improved income in unit-linked products, especially Employee Pension Plans (EPS, a third pillar retirement security product) following better conditions on the Polish debt and equity market. This component of income on investing activity does not affect the segment’s result because it is offset by growth in technical provisions;
• higher insurance claims and benefits and the movement in other technical provisions by PLN 126 million, i.e. 2.6% y/y to PLN 5,057 million. This change was driven by the following factors in particular:
• growth in technical provisions in EPS compared to last year’s decline, which was caused by this year’s higher investment performance coupled with a stable level of client contributions to, and higher disbursements from, unit-linked insurance accounts,
• rising value of medical benefits in health products in proportion to the dynamic growth in this portfolio of contracts,
• higher nominal level of benefit payments due to critical illnesses and hospitalization.

The foregoing effects were partly offset by the following:

• lower than last year increase in mathematical provisions in continued products as a result of the change in the percentage of “old” and “new” continuation among the persons joining and remaining in the insured portfolio – in “new” continuation the unit cost of setting up mathematical provisions for future benefit payments is lower; additionally, the level of lapses in the portfolio is lower than last year,
•  lower value of benefits related to deaths, especially co-insureds and to childbirth, which is correlated with the frequency of these events in the overall population in accordance with the data published by the Central Statistical Office (GUS),
• this year’s limited disbursements of benefits in the portfolio of bank protection products, which was linked to the shrinking portfolio with high unit benefits,
• lower than a year ago pace of converting long-term insurance policies into yearly-renewable term business in type P group insurance. As a result, provisions were released in 2019 for PLN 14 million, or PLN 3 million less than in the corresponding period of 2018;
• acquisition expenses up 39 million (11.2%) in the group and individually continued insurance segment. The factor driving the movement in this line item was the increasing remuneration for insurance intermediaries, especially for selling health and protection products, modification made to the remuneration system in the agent network, and increasing sales levels;
• incremental growth in administrative expenses of PLN 36 million (6.0%) y/y having regard for organizational changes in sales divisions and higher staff costs stemming from wage pressure on the market.

Insurance result in the group and individually continued insurance segment (in PLN m)

Individual insurance

In 2019 the PZU Group posted a record-breaking operating result in the individual insurance segment. It totaled PLN 271 million, up PLN 44 million compared to the previous year. The improvement in the operating result (19.4% y/y) only slightly lagged behind the growth rate in the result generated by the corporate non-life insurance segment, which demonstrated the fastest incremental growth in Poland. The main contributors were the rising portfolio of high-margin protection insurance products distributed through own channels and bancassurance, changes to the annuity product and the falling acquisition expenses for unit-linked products. In addition, the shift in the revenue structure towards having a higher percentage of protection products with a considerably higher margin level than investment products contributed to the segment’s improved margin. 

The following factors affected the level of, and the changes in, the segment’s result in 2019:

• the growth in gross written premium of PLN 235 million (17.5%) to PLN 1,581 million compared to 2018 was the result of the following positive factors:
• constantly rising level of premiums on protection products in endowments and term insurance offered in own channels – the level of sales and premium indexation on contracts remaining in the portfolio have outpaced the level of lapses,
• growth in the portfolio of insureds in protection products in the bancassurance channel, including in particular protection products in cooperation with Alior Bank rolled out in H2 2018 and Bank Pekao in early 2019,
• growth in the premium acquired in investment insurance in the bancassurance channel on products offered in cooperation with Pekao and other banks;
• higher investment income (up PLN 489 million). The investment result consists of income allocated using transfer prices and income on investment products. Income climbed above all on account of improved performance in investment products, especially due to better conditions on the Polish equity market. This component of income on investing activity does not affect the segment’s result because it is offset by growth in technical provisions. At the same time, the level of the segment’s revenue due to TFI refunding the management fee charged to assets in unit-linked products fell by PLN 6 million y/y as assets shrank due to net outflows and negative investment performance last year. Income allocated using transfer prices varies slightly with its level being driven largely by the technical provisions in protection products;
• insurance claims and benefits together with the movement in other technical provisions up PLN 664 million compared to 2018. The change in the result generated on funds in investment products made a major contribution to this increase. This factor does not, however contribute to the segment’s operating result as it is fully offset by higher income on investing activity. Additionally, this was an effect of higher client contributions to their accounts in the products offered in collaboration with Millennium and Pekao. Worth noting were also the positive developments in the annuity portfolio; more technical provisions were released in the period under review and the cost of benefit disbursements was lower - this is the old, maturing portfolio;
• acquisition expenses up 10.3% to PLN 139 million. Higher fees to intermediaries for selling protection products, chiefly in the bancassurance channel and additional costs of sales support in the own network were partially offset by lower commissions for the sales of unit-linked products in the bancassurance channel;
• inflation of administrative expenses, mainly due to higher personnel costs stemming from wage pressure on the market. Administrative expenses rose PLN 3 million (4.3%) versus 2018.

Insurance result in the individual insurance segment (in PLN m)

Investments

The revenues of the Investments segment comprise the investments of the PZU Group’s own funds, understood as the surplus of investments over technical provisions in the PZU Group insurance companies seated in Poland (PZU, Link4 and PZU Życie) plus the surplus of income earned over the risk-free rate on investments reflecting the value of technical provisions of PZU, Link4 and PZU Życie in insurance products, i.e. surplus of investment income of PZU, Link4 and PZU Życie over the income allocated at transfer prices to insurance segments.

Additionally, the investment segment includes income from other free funds in the PZU Group (including consolidated mutual funds).

Operating income of the investment segment (based exclusively on external transactions) were higher than in the corresponding period of last year, primarily due to the better conditions on the Warsaw Stock Exchange. 

Banking segment / Banking activity

The banking activity segment consists of the following groups: Bank Pekao and Alior Bank.

In 2019, the banking activity segment posted PLN 3,498 million in operating profit (net of the amortization of intangible assets acquired as part of acquiring banks), representing a decrease of PLN 538 million compared to 2018. The lower result was precipitated chiefly by additional charges, among others, the higher contribution to the Bank Guarantee Fund y/y mainly on the account of higher payments to the banks compulsory resolution fund and the adverse impact exerted by the CJEU judgment related to consumer loans.

Operating profit in the banking segment (in PLN m)

In 2019 Pekao made a contribution of PLN 3,003 million to operating profit (net of amortization of intangible assets acquired as part of the Pekao acquisition transaction) in the “Banking Activity” segment while Alior Bank contributed PLN 495 million.

The key element of the segment’s revenue is investment income which climbed to PLN 9,014 million y/y in 2019 (1.7% growth y/y). Investment income consists of: interest income, dividend revenue, trading result and result on impairment losses and provisions.

In 2019 Bank Pekao and Alior Bank posted higher sales of credit products y/y on favorable business conditions and low interest rates. As a consequence of the higher volume of loans to clients both banks reported higher net interest income (interest income minus interest expenses). The client loan portfolio in both banks in 2019 moved up by a total of 6.9% versus the end of 2018.

The profitability of the banks in the PZU Group in 2019 measured by the net interest margin was 2.9% in Pekao and 4.6% in Alior Bank. The difference between them stems in particular from the mix of the loan receivables portfolio. Bank Pekao reported improvement in its interest margin of 4 bps as a result of new sales higher margin while Alior Bank reported decrease in its interest margin by 12 bps. due to lower interest result in consequence of CJEU judgment related to consumer loans.

Net fee and commission income in the banking segment was PLN 3,146 million, up 1,0% y/y. This segment’s administrative expenses totaled PLN 4,850 million with Pekao reporting costs of PLN 3,375 million and Alior Bank having costs of PLN 1,475 million. The 2.8% y/y decline in costs follows, among others, from maintaining cost discipline in both banks and releasing some of the provisions for deferred salary components in Alior Bank.

Moreover, other operating income and expenses contributed to the operating result; their main component consists of fees to the Bank Guarantee Fund (PLN 611 million) and the provisions for refunds of fees, resulting from the CJEU ruling on consumer loans in the amount of PLN 243 million in Alior Bank and of PLN 29 million in Bank Pekao.

As a result, the Cost/Income ratio was 41% for the two banks. Pekao’s ratio was 41% and Alior Bank’s ratio was 39%.

Pension insurance

In 2019 the operating profit of the pension insurance segment was PLN 101 million, down 5.6% from 2018. The major drivers of the operating result’s level and movement are as follows:

• other revenue of PLN 142 million fell 4.7% compared to the previous year. This change resulted from the decline in revenue due to the reimbursement of funds from the Insurance Guarantee Fund; 
• administrative expenses of PLN 43 million were up 7.5% from the previous year. This change resulted mainly from:
• amortization of the right to manage Pekao funds (the management of OFE Pekao was acquired in 2018),
• higher personnel costs due to onboarding the team of employees from Pekao PTE;
• other line items totaling PLN 4.0 million signifying a decline of 42.9% versus last year (impact exerted by lower acquisition expenses and handling expenses and the release of provisions for the reimbursement of fees charged to contributions overpaid by ZUS for previous years).

Operating profit in the pension insurance segment (in PLN m)

Baltic States

In 2019 the PZU Group’s business in the Baltic states generated a record-breaking insurance result of PLN 185 million with a high pace of improvement (it was up PLN 47 million or 34.1% versus the previous year). The improvement of the result was attributable to increasing the scale of business, lower loss ratio, positive effects of the operating leverage and improved investment results.

 This result was shaped by the following factors:

• increase in gross written premium. It totaled PLN 1,713 million versus PLN 1,592 million last year. Premium in non-life insurance climbed PLN 114 million y/y (7.5%). The pace of growth was generated in particular by non-life insurance as a result of entering into new contracts, chiefly in the corporate segment in Lithuania, Latvia and Estonia and by health insurance with higher sales in Latvia and Lithuania. Sales growth was also recorded in motor TPL and motor own damage insurance by maintaining higher insurance rates in the early part of the year. Premiums in life insurance increased by PLN 7 million (10.8%);
• growth in investment income. In 2019 the result was PLN 38 million and was up PLN 36 million versus the previous year, mainly due to price growth on the equity markets;
• higher net claims and benefits. They totaled PLN 989 million and were up PLN 84 million compared to the previous year. The loss ratio in non-life insurance edged down by 0.8 p.p. to 60.3% versus last year. In life insurance the value of benefits was PLN 68 million, up PLN 78.9% versus last year;
• higher acquisition expenses. The segment’s expenditures for this purpose were PLN 335 million. The acquisition expense ratio stated as a percentage of net earned premium dwindled by 0.5 p.p. to 20.9%;
• increase in administrative expenses. They were PLN 133 million on growth of 6.4% versus the past year. Despite the increase in the costs incurred the administrative expense ratio dropped to 8.3%, or by 0.1 p.p. versus 2018. The decline in the administrative expense ratio was plausible thanks to maintaining cost discipline coupled with growing business volume.

Insurance result in the Baltic States segment (in PLN m)

Ukraine

The Ukraine segment wrapped up 2018 with an underwriting result of PLN 39 million compared to PLN 23 million in 2018.

The improvement of the segment’s result was the outcome of the following factors:

• increase in gross written premium. It was PLN 335 million and had increased by PLN 78 million (30.4%) versus the previous year. The premium in non-life insurance increased (26.7% y/y) mainly in accident and tourism insurance as a result of higher compulsory insurance sales for visas obtained by people traveling to Poland. Premium in life insurance shot up PLN 24 million (43.6%);
• higher investment result. This segment generated PLN 33 million for that reason, or some PLN 14 million more than in 2018;
• increase in net claims and benefits. They amounted to PLN 81 million, up 37.3% compared to last year. In life insurance value of the benefits paid moved up PLN 8 million (42.1%) compared to last year. The loss ratio measured against net earned premiums in non-life insurance was 38.0%, signifying a decline of 2.4 p.p. versus last year;
• increase in acquisition expenses. They were PLN 118 million vs. PLN 82 million in the previous year. Due to higher commission burdens the expenditures for this purpose trended up by PLN 14 million (41.2%) in life insurance. The segment’s acquisition expense ratio went up 0.4 p.p. to 54.4% last year;
• higher administrative expenses. They were PLN 31 million, up PLN 6 million compared to the past year. The administrative expense ratio stated as a percentage of net earned premium dwindled by 2.2 p.p. to 14.3%.

Insurance result in the Ukraine segment (in PLN m)

Investment contracts

In the consolidated financial statements investment contracts are recognized in accordance with the requirements of IFRS 9.

The results of the investment contracts segment are presented according to Polish Accounting Standards, which means that they include, among other things, gross written premium, claims paid and movement in technical provisions. These categories are eliminated at the consolidated level.

Gross written premium generated on investment contracts in 2019 fell PLN 5 million (-12.5%) compared to 2018 to PLN 35 million. These changes stemmed chiefly from the drop-off of contributions to IKZE accounts after this product was withdrawn from the offer.

Income on investing activity in the investment contracts segment improved by PLN 30 million over the previous year, mainly as a result of a better rate of return on individual pension security accounts (IKZEs) and unit-linked funds in the bancassurance channel.

The cost of insurance claims and benefits coupled with the movement in other net technical provisions rose y/y by PLN 27 million to PLN 42 million, mainly due to the difference in investment income in the unit-linked products as described above.

In the investment contract segment, no active acquisition of contracts is currently underway.

Administrative expenses were PLN 4 million thereby falling year on year as a consequence of the shrinking portfolio of contracts in this segment.

The segment’s operating result was PLN 5 million with changes resulting from the falling level of costs due to the dwindling size of business in this segment.

 Operating result of the investment contracts segment (in PLN m)

Profitability ratios

The return on equity attributable to the parent company (PZU) for the period from 1 January 2019 to 31 December 2019 was 21.2%, i.e. a level materially outpacing the figures achieved by the overall market and the main competitors (based on data for the first three quarters of 2019). ROE was down 0.9 p.p. compared to the level achieved in the previous year.

Operational efficiency ratios

One of the fundamental measures of operational efficiency and performance of an insurance company is COR – Combined Ratio – calculated, due to its specific nature, for the non-life insurance sector (Section II).

The PZU Group’s combined ratio (for non-life insurance) has been maintained in recent years at a level ensuring a high profitability of business. This ratio also remained low at 88.5% in 2019.

The operating efficiency ratios, broken down into individual segments, were presented in the ATTACHMENT.