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Issuer’s financial results – PZU (PAS)

Annual Report 2018 > Issuer’s financial results – PZU (PAS)
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In 2018, the issuer (PZU) recorded a technical result at a level of PLN 1,539 million compared to PLN 1,218 million in the preceding year, which signifies a 26.3% increase in the result year on year. Net profit was PLN 2,712 million compared to PLN 2,459 million in 2017 (up 10.3%). Excluding the dividend received from PZU Życie SA, PZU’s net profit was PLN 1,454 million and was higher by PLN 425 million compared to 2017.

In the individual net result items, PZU recorded:

  • an increase in gross written premium to PLN 13,003 million, or 4.6%, compared to the previous year, mainly in motor insurance as a result of an increase in the average premium (driven by changes in the tariff introduced in recent years and changes in the structure of the insured vehicle portfolio) and in insurance against fire and other damage to property. Adjusting for the reinsurers’ share and the movement in the provision for unearned premiums, net earned premium was PLN 12,086 million, up 8.1% from 2017;
  • a higher level of claims and benefits totaling PLN 7,520 million, up 4.9%, compared to 2017. The main change was recorded in the motor insurance and third party liability insurance group;
  • net investment result higher by PLN 153 million. These were mainly the effects of the dividends paid out by Pekao, compensated partly by the lower than the year before dividends received from PZU Życie;
  • higher acquisition expenses, taking into account reinsurance commission (an increase by PLN 218 million), mainly due to an increase in direct acquisition expenses driven by the growing insurance portfolio combined with a change of the structure of sales channels (higher share of multiagency and dealer channels characterized by higher commission rates);
  • a decrease in administrative expenses to PLN 655 million compared to PLN 693 million in 2017, primarily as a result of the application of cost discipline measures both in current and in project activities.

In 2018 PZU collected gross written premium of PLN 13,003 million, i.e. 4.6% more than in 2017. They comprised mainly:

  • TPL motor insurance premiums, accounting for 41.5% of PZU’s insurance portfolio (42.4% in the prior year). In 2018, their value was 2.3% higher than in the previous year, mainly as an effect of increase in the average premium as a result of the tariff changes introduced in recent years combined with a lower number of insurance policies;
  • motor own damage insurance premiums with a 25.0% share of PZU’s total gross written premium (i.e. 0.3 p.p. less than in the corresponding period of the previous year) – increase (+3.3% y/y) being the resultant of the average premium and a decease in the number of concluded insurance policies (in the corporate client segment);
  • insurance against fire and ather damage to property premiums, accounting for 19.7% of PZU’s premium portfolio. In 2018 their share in the insurance portfolio increased 0.5 p.p. and the value was higher by 7.4% compared to the previous year – the effect of the higher premiums from household insurance, SME, and indirect activity with the Group Companies;
  • accident and other insurance premiums, whose share amounted to 8.0% (an increase by 0.7 p.p. compared with 2017). In this insurance category PZU recorded an increase in the value of the premiums mainly in assistance insurance (including assistance offered with motor insurance) and various financial losses insurance – in 2017 TUW PZUW was joined by several existing strategic partners and end of cooperation with a big customer under an obligatory quota share inward reinsurance treaty.

In 2018, PZU’s investment activity focused on the continuation of strategic assumptions, in particular on the optimization of profitability of investment operations through greater diversification of the investment portfolio.

In 2018, the result on PZU’s investment activity was PLN 2,152 million compared to PLN 1,998 million in 2017. After netting out the effect of the dividends received from PZU Życie, the net investment result was PLN 894 million compared to PLN 569 million the year before. The increase in the result was attributable mainly to the dividends received from Pekao in the amount of PLN 415 million. In December 2018, the value of PZU’s investment portfolio was PLN 37,571 million compared to PLN 36,553 million at yearend 2017.

The increase in the portfolio value resulted primarily from higher cash flows in connection with the dynamic development of the insurance portfolio, and the investment resulted generated. Compared to the year before, the share of bank deposits and conditional transactions, entered into mainly to enhance the return on investing activity, increased.

In 2018 PZU did not use hedge accounting. 

In 2018, net claims and benefits and the incremental growth in PZU’s provisions totaled PLN 7,520 million, whichi indicates a 4.9% growth compared to 2017.

The following factors contributed to the change in the net value of claims and benefits:

  • higher claims and benefits in motor insurance resulting from change of the structure of the insurance portfolio, remeasurement of the provision for claims for pain and suffering and the observed increase in the average payout;
  • the higher loss ratio in third party liability insurance, resulting to a large extent from an increase in the value of the annuities provision (mainly in third party liability insurance for medical entities) and reporting of several large claims;
  • the lower level of claims in the group of damages caused by elements and other property losses, including much lower level of events with a high unit value and claims under crop insurance in the corresponding period of 2017, there were numerous losses caused by gusty wind and rainfall. 

During 2018, acquisition expenses (without reinsurance commissions) amounted to PLN 2 371 million and increased by 10.9% compared with 2017. This increase resulted predominantly from an increase in direct acquisition expenses (commissions) which resulted from higher sales and change of the distribution channel mix (higher share of the multiagency and dealer channel in the portfolio).

In 2018, PZU’s administrative expenses were at PLN 655 million, which was 5.5% lower than in the prior year. The expense dynamics was affected primarily by the persistent cost discipline in operating areas unrelated to wages (current and project-related operations), partly limited by higher payroll costs in response to clear signs of wage pressure on the market.

The balance of other technical income and expenses in 2018 was negative and stood at PLN 242 million. The deterioration of the balance in relation to 2017 was the result of, among others, revaluation charge for receivables and lower other technical incomes.

In 2018, the net balance of other operating income and expenses was negative and amounted to PLN 447 million compared with the also negative balance for 2017 of PLN 217 million. Starting in mid-2014 the balance of other operating expenses was charged with the interest expense and change of the valuation on account of foreign exchange translation differences on the loan taken from PZU Finance AB for the total amount of EUR 850 million (EUR 500 million in July 2014 and EUR 350 million in October 2015). In 2018 positive foreign exchange differences on the loan received from PZU Finance AB (publ.) amounted to PLN 1 million, compared to the 2017 positive differences of PLN 217 million. Additionally, the level of other operating expenses was significantly impacted by the tax on assets – the resulting charge in 2018 was PLN 190 million (increase by PLN 12 million compared to 2017 ).

On 31 December 2018, PZU’s total assets value amounted to PLN 43,567 million and was 2.8% higher as at the end of 2017.

The main component of PZU’s assets were investments in the total amount of PLN 37,571 million (up 2.8% compared to the end of 2017), which accounted for 86.2% of PZU’s total asset value compared to 86.3% as at the end of the previous year. Net of investments in subsidiaries, the level of investments was higher by 8.8% compared to the end of 2017. The main cause of the increase in the value of investments was the higher level of operating cash flows into the portfolio and increase in the generatedinvestment result.

PZU’s receivables stood at PLN 2,343 million and accounted for 5.4% of assets. For comparison, at the end of 2017, they amounted to PLN 2,315 million (5.5% of PZU’s assets). The highest growth was recorded in the value of receivables on reinsurance, including from related parties (increase by PLN 73 million, compared to the end of 2017 ) resulting from the dynamic growth of the inward reinsurance portfolio with TUW PZUW. Non-current assets – in the form of intangible assets, goodwill and property, plant and equipment – stood at PLN 458 million and constituted 1.1% of assets.

As at 31 December 2018, PZU held PLN 1,222 million of cash (2.8% of assets). The year before their value was PLN 982 million.

At the end of 2018, net technical provisions were the main component of PZU’s equity and liabilities. They stood at PLN 20,998 million (including estimated recourses) and accounted for 48.2% of equity and liabilities. Their share in the balance sheet increased by 1.1 p.p. compared to 2017, while in terms of value they rose by PLN 1,030 million, in particular due to higher provisions for outstanding claims and benefits, mainly in the group of motor TPL insurance and general TPL.

As at the end of 2018, equity amounted to PLN 13,925 million and accounted for 32.0% of equity and liabilities (no changed compared to the end of 2017).

Contingent receivables amounted to PLN 4,490 million, down by PLN 126 million compared to the year before. They comprised among others: guarantees received, bills of exchange issued on account of granted insurance guarantees and other contingent receivables comprising mainly securities received in the form of mortgage on the debtor’s assets and other contingent receivables.

The balance of contingent liabilities increased by PLN 75 million compared to the year before. This resulted mainly from the increase in the granted guarantees and sureties (which include, among others, the guarantee granted to the subsidiary PZU Finance AB), partly compensated by a decrease in other contingent liabilities, including disputable liabilities, challenged by the insurer.

In 2018, PZU generated a return on equity (ROE) of 19.7%, up by 0.5 p.p. compared to 2017. In 2015-2018, the average return on equity (ROE) was 17.5%.

COR (combined ratio) was one of the fundamental measures of productivity and operating efficiency of an insurance company; in PZU SA it has been maintained at a level confirming its high operating profitability in recent years.

Operational efficiency ratios are presented below.

Operational efficiency ratios

1.Gross claims and benefits ratio (simple) (gross claims and benefits/gross written premium) x 100%60.5%60.9%58.8%61.2%65.5%
2.Net claims and benefits ratio (net claims and benefits/net earned premium) x 100%62.2%64.1%66.7%63.8%66.2%
3.Insurance activity expense ratio (insurance activity expenses/net earned premium) x 100%24.8%25.2%27.9%29.4%28.5%
4.Acquisition expense ratio* (acquisition expenses/net earned premium) x 100%19.3%19.0%20.1%19.9%19.3%
5.Administrative expense ratio (administrative expenses/net earned premium) x 100% 5.4%6.2%7.9%9.5%9.2%
6.Combined ratio (COR GLOSSARY) (net claims and benefits + insurance activity expenses) / net earned premium x 100%87.0%89.3%94.7%93.2%94.7%

* after taking into account reinsurance commissions received

Basic profitability ratios of PZU

Return on equity (ROE) (annualized net profit/average equity) x 100%19.7%19.2%12.8%18.2%21.4%
Return on assets (ROA) (annualized net profit/average assets) x 100%6.3%6.2%4.3%6.3%8.1%

* Restated data

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