Share of the industry segments in the results

In 2015, the corporate insurance segment (composed of PZU and Link4) earned the operating profit of PLN 311.6 million, which is 43.5% more than in corresponding period of the previous year.

The commencement of Link4 consolidation in September 2014 entailed the growth of particular items in the 2015 operating result in comparison with the corresponding period of the previous year.

The following factors primarily had a key impact on this segment result in 2015:

• 0.9% growth of the net earned premium despite the slight decrease in the gross written premium by 0.4% compared with 2014. Lower sales were recorded mainly in the TPL insurance group resulting in finalization of several large tenders conducted by medical entities in the December 2014 (with no effect on the premium earned in 2014) and the motor own damage insurance group for rail vehicles and guarantees. Decrease in the written premium was partially offset by the increase in sales of motor own damage insurance as a result of a higher number of insurance policies and in the group of insurance against fire and damage to property resulting from the acquiring several strategic clients and entering contracts for the period longer than one year;
• 9.8% decline in net claims and benefits in comparison with the corresponding period of 2014, which, considering a 0.9% increase of the net premium earned, means that the loss ratio decreased by 7.0 p.p., to the level of 58.9%. The decline was recorded mainly in TPL insurance (lower level of provisions for previous years claims) and insurance for damage caused by forces of nature (lower claims rate). The effect is partially offset by the increased claims and benefits in motor insurance as a result of the higher average claim payment and higher number of reported claims;
• 11% decline in the investment income allocated to the segment at transfer prices to PLN 121.4 million, which was caused by the lower market interest rates;
• decline in acquisition expenses by PLN 18.7 million, i.e. 6.1 % compared with 2014, resulting from higher level of deferred acquisition costs partially offset by the increase in commission from inward reinsurance and indirect acquisition costs;
• an increase in administrative expenses to the level of PLN 127.4 million, i.e. 1.9 %, compared with the previous year. The level of expenses in 2015 was influenced by e.g. implementation of changes in client relations management, including mainly implementation of a new model of the corporate insurance sales network.

Operating profit in the corporate segment (PLN million)

The operating profit of the group and individually continued insurance amounted to PLN 1,574.7 million and was 10.6% lower than in the previous year. This was a result of:

• growth of the gross written premium by PLN 149.6 million (+2.3%) was primarily due to:
  • development of group protection insurance (growth of the average premium and number of insured parties, including high level of new sales);
  • acquisition of the premium in group health insurance (new clients in ambulatory insurance and sales of medicine product versions);
  • upselling of riders and higher sums insured in individually continued products.

The positive effects were partially offset by the decrease in premium in unit-linked insurance, which resulted from the transfer of EPP agreements of PZU’s employees to the EPP operated by TFI PZU;

• lower investment income. In 2015, it amounted to PLN 601.7 million, i.e. dropped by 15.6%, which resulted from the decline of the revenue allocated according to transfer pricing as the effect of lower market interest rates and from the decrease in revenue from unit-linked products as the effect of lower treasury bond prices compared to the rises in the previous year;
• 5.6% higher net insurance claims and benefits. In 2015, they closed at PLN 4,750.1 million. The change resulted mainly from the following:
  • increased mortality ratio in protection insurance compared with the previous year, confirmed by the CSO (Central Statistical Office) survey on the entire population and additional growth of the agreement portfolio itself;
  • higher endowment payments in short-term endowment products and structured products in the bancassurance channel - maturity dates reached for the subsequent product tranches; no effect on the result – offset by the change to the technical insurance provisions.
• PLN 31.6 million drop in other net technical provisions compared to the PLN 70.3 million provision growth of the previous year. The main cause was the lower growth of provisions in individually continued products – higher mortality ratio (a client’s death entails the need for benefit payment, but simultaneously releases the technical and insurance provision) and higher share among people entering the portfolio following the modification allowing for the creation of lower initial technical and insurance provisions. Furthermore, PZU Życie’s modified these rules from the start of 2016 in the scope of the annual process of establishing the rules for possible indexation of the sum insured by the clients in continued insurance. This had a positive impact on the level of technical provisions in this portfolio. There was also a greater decline of provisions in short-term life and endowment products and structured products in the bancassurance channel compared with the previous year – endowment of the subsequent product tranches in the face of the lack of sales of new contracts. Moreover, the slightly higher 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 75.4 million were released, i.e. PLN 5.5 million more than in 2014;
• acquisition costs similar to those of the previous year. These costs amounted to PLN 356.3 million. Factors determining the level of direct and indirect acquisition costs included high sales of riders to continued protection insurance (agent remuneration, costs of distributing the offers to the clients and associated indirect costs) and increased sales activity in the scope of health products. These factors were offset by the lower acquisition costs in group protection insurance as the effect of the rising focus of the agency network on acquisition of individual protection products;
• 6.3% higher administrative expenses. The growth to PLN 577.2 million was determined mainly by strategic expenses in distribution and operating support. 2015 saw the continuation of several strategic products aimed to build an innovative distribution channel and for other purposes;
• the PLN 47.0 million year-on-year decline in other revenues and expenses was caused by a prevention fund charge (no such cost was recorded in the previous year, eliminated at the level of the consolidated result) and higher costs related to PZU Życie financing the premium (higher promotional sales of additional insurance policies to individually continued insurance).

After excluding the one-off effect related to the conversion of long-term contracts into renewable contracts type P from the segment’s result, the segment’s 2015 operating profit amounted to PLN 1,499.3 million, compared with PLN 1,692.0 million in the corresponding period of 2014 (a 11.4% drop). The main cause of the inferior result is the higher claims ratio of the protection portfolio resulting from higher mortality ratio.

Operating profit of the group and individually continued insurance (PLN million)

Income from the investment segment investment activity conducted with PZU Group’s own funds defined as the surplus of investments over technical provisions in the insurance companies within PZU Group with their registered offices in Poland (PZU, Link4 and PZU Życie) increased by the surplus of income exceeding the risk-free rate from investments matching 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 to insurance segments according to transfer prices. Additionally, the investments segment includes income earned on other excess funds in PZU Group.

The operating profit of the investments segment (external operations only) amounted to PLN 506.2 million and was 12.6% lower than in 2014, mainly due to lower yield of investment portfolio caused mainly by decrease in income on interest-bearing financial assets as a result of increased yield of Polish treasury bonds in the middle and at the end of the yield curve in 2015 compared to the decreases along the entire curve in 2014.

The following changes with considerable impact on data comparability occurred in the Baltic states structure over the years 2014-2015:

• PZU Lithuania was a part of the segment until 30 September 2015;
• in 2014, the segment was expanded to include: AAS Balta (June 2014), Lietuvos Draudimas (November 2014), Estonian branch operating under the Codan brand (November 2014).

PZU Group generated an operating profit of PLN 43.3 million in the Baltic states in 2015 compared with an operating loss of PLN 17.1 million in the previous year. The result arose from the following factors:

• increase in gross written premium. It amounted to PLN 1,193.9 million, where the companies acquired in 2014 generated the premium of PLN 981.2 million and life insurance recorded a written premium growth of PLN 5.9 million (i.e. 15.9%) from the previous year;
• growth of the investment income. In 2015, the result amounted to PLN 21.8 million, up by 49.0% from the previous year;
• increase in net claims and benefits. They amounted to PLN 686.9 million and were 120.0% higher than in 2014, with the value of claims and benefits of the companies acquired in the previous year amounting to PLN 546.7 million.

In life insurance, the value of claims amounted to PLN 29.3 million, 13.6% up from the previous year.

• increase in acquisition costs. The respective expenses of the segment amounted to PLN 252.8 million, including PLN 202.5 million of acquisition costs incurred by the companies acquired in 2014. The acquisition cost ratio to the net earned premium dropped by 1.4 p.p. to 22.8%;
• increase in administrative expenses. They amounted to PLN 146.4 million, up by 82.5% from the previous year, while the expenses of the newly acquired companies amounted to PLN 111.7 million. At the same time, the administrative expenses ratio amounted to 13.2%, a drop of 3.6 p.p. from the previous year.
• increase in interest-bearing costs. They amounted to PLN 1.8 million and were PLN 1.1 million higher than in the prior year.

Operating profit in Baltic states insurance segment (PLN million)

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 1.1 million of operating profit compared with PLN 15.1 million in the previous year (drop of 92.5%) 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 unit- linked products).

The following had an impact on the results of the segment in 2015:

• gross written premium from investment contracts dropped by PLN 233.4 million (-62.3%) from the corresponding period of 2014 to PLN 141.1 million. The main reasons for the changes to the gross written premium included:
  • lower sales of short-term endowment products in own channels,
  • withdrawal of short-term endowment products in the bancassurance channel.

In both cases, the reason was the low profitability of such agreements for the clients following the drop of market interest rates to unprecedented lows and introduction of the tax on capital revenue for such policies. A positive factor is the year-on-year growth of contribution to accounts observed in IKZE.

• lower investment income. The income was PLN 16.1 million, i.e. 63.1% lower than in the corresponding period of 2014, mainly in the short-term endowment products in own and bancassurance channels, as well as unit-linked in bancassurance channel as the effect of a decline in investments level;
• lower value of net insurance claims and benefits resulting from the considerable drop in endowment payments from short-term endowment products in the bancassurance channel (last year saw the maturity of high-value tranches; considerably lower sales in subsequent periods; no effect on the result – corresponding effect in changes to technical provisions). These amounted to PLN 694.5 million, i.e. they were 50.1% lower than in the prior year;
• lower negative balance of the change in the balance of other technical provisions. This amounted to PLN 558.5 million compared with PLN 1,015.5 million in the prior year. This difference arose mainly from the changes in the portfolio of short-term investment endowments sold through the bancassurance channel, i.e. lower level of endowment combined with the withdrawal of such products from the offer;
• lower acquisition costs. These amounted to PLN 10.0 million, i.e. they were 39.3% lower than in the prior year. This resulted from considerable reduction of sales and declined asset value in unit-linked products of the bancassurance channel (some of the bank’s remuneration is determined by the level of assets);
• lower administrative expenses. These amounted to PLN 9.3 million and declined by 3.8% compared with 2014 – the result of a decrease in the contracts portfolio. The decline is less than proportional because some of the service processes must continue despite failure to generate revenue.

Operating profit in in investment contracts segment (PLN million)

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 (Section II).

The combined ratio of PZU Group (for non-life insurance) remains in the last few years at the level which guarantees high profitability. In 2015, the ratio dropped, mainly because of the declined provisions for claims from damage in previous years in PZU’s third-party liability insurance group.