Major factors contributing to the consolidated financial result

In 2018, the PZU Group generated a result before tax of PLN 7,086 million compared with PLN 5,474 million in the previous year (up 29.4%). Net profit surged to PLN 5,368 million, i.e. PLN 1,183 million more than the result in 2017. Net profit attributable to the parent company’s shareholders was PLN 3,213 million compared to PLN 2,895 million in 2017 (up 11.0%).

The net result, adjusted for non-recurring events rose 27.5% compared to last year. The operating profit in 2018 was PLN 7,087 million, up by PLN 1,629 million compared to 2017.

Operating profit was driven in particular by the following factors:

• growth in gross written premium in motor insurance (due to the higher average premium coupled with the decline in the number of insurance policies), the acquisition of several high-value contracts and higher sales in international companies (chiefly in motor insurance);
• higher profitability in the mass insurance segment, mainly due to the higher result of the non-motor insurance portfolio connected to the lower level of weather-related claims and the motor own damage portfolio, slightly offset by the decline in the result on motor TPL insurance – as a result of remeasurement of the provision for claims for general damages for pain caused by an injured relative being in a vegetative state;
• higher underwriting result in the corporate segment due to improved profitability in the portfolio of motor own damage insurance partly offset by the higher loss ratio on motor TPL and third party liability insurance;
• increased profitability in group and individually continued insurance as a result of the constantly growing insurance portfolio, improvement in the loss ratio in protection products compared to last year and a change in the mix of individually continued products with a lower standalone expense for provisioning the future disbursement of benefits;
• better performance in the banking segment at Alior Bank in connection with the high sales level of credit products supported by good business cycle and a low interest rate environment;
• lower result on listed equities, in particular due to the weaker performance of stocks listed on the Warsaw Stock Exchange.

The incorporation of Bank Pekao in the PZU Group’s structure in June 2017 materially affected the comparability of results year on year. Pekao contributed PLN 3,047 million to the banking segment’s operating result in 2018 compared to PLN 1,749 million in 2017.

The tendencies observable in the main constituents of operating result were the following:

• 2.7% increase in gross written premium to PLN 23,470 million. That growth pertained chiefly to motor insurance in the mass and corporate client segments (due to the higher average premium) and ensued from the acquisition of several high-value contracts and higher sales in international companies. Including the reinsurers’ share and movement in the unearned premium reserve, the net earned premium was PLN 22,350 million and was 4.7% higher than in 2017;
• higher net result on investing activity, was a combination of a higher investment income earned on the banking activity after the start of consolidation of Pekao SA in June 2017 and a lower net result on investing activity excluding banking activity. The net result on investing activity was PLN 10,630 million, up 25.5% compared to 2017. Income on investments, excluding banking business, fell mainly due to the worse performance achieved in listed equities, driven in particular by the deterioration of market conditions on the WSE – the WIG index fell by 9.5% in 2018 versus an increase of 23.2% in the previous year, translating in particular into softer investment performance in the portfolio of assets to cover investment products that does not have any impact on the PZU Group’s overall net result. This effect was partially offset by the better performance of the marked to market treasury bond portfolio, due the more favorable movement of the debt market;
• interest expenses up to PLN 2,046 million vs. PLN 1,350 million in the corresponding period of the previous year, associated in particular with the start of consolidation of Pekao. The increase pertained mainly to interest borne on current and term deposits on banking activity and interest on own debt securities issued, primarily in connection with the issue of subordinated bonds by PZU in the amount of PLN 2,250 million in June 2017;
• lower level of claims and benefits. They amounted to PLN 14,563 million, which indicates a 2.5% drop compared with 2017; In particular, the decline was recorded in life insurance in connection with the lower investment result on most unit-linked product portfolios, compared with high positive results achieved last year (this effect was offset by the changes in the net investment result) and lower client contributions to accounts in individual unit-linked products in the bancassurance channel, as well as in insurance against fire and other damage to property as a result of a lower level of damage caused by weather conditions (gusty wind, torrential rain);
• higher acquisition expenses (a PLN 229 million increase) in the mass and corporate client segments alike, driven mainly by higher sales and the evolution in the sales channels mix;
• the increase in administrative expenses to PLN 6,609 million from PLN 5,357 million in 2017 was due to the start of consolidating Pekao in June 2017. Administrative expenses of the banking segment rose by PLN 1,246 million. At the same time, the administrative expenses of the insurance segments in Poland were PLN 5 million higher compared to the previous year. This change largely resulted from higher payroll costs in response to clear signs of wage pressure on the market while maintaining persistent cost discipline in operating areas unrelated to wages – both current and project-related operations;
• higher negative balance of other operating income and expenses of PLN 2,165 million. The change resulted mostly from a higher levy on financial institutions and an increase in Bank Guarantee Fund charges. The PZU Group’s expense on the levy on financial institutions (on insurance and banking business alike) in 2018 was PLN 1,092 million vs. PLN 822 million in 2017, while the BFG charges rose from PLN 121 million to PLN 372 million (in both cases due to the consolidation of Pekao).

Operating result of the PZU Group in 2018 (PLN million)

Key data from the consolidated profit and loss account