Impact of the COVID-19 pandemic on the PZU Group’s results

Impact on the PZU Group’s results

Considering the comprehensive range of financial products offered (insurance, banks, investments, health-related products), the COVID-19 pandemic has had an impact on many aspects of PZU Group’s operation and its financial performance. The total effect of the factors that were material for the 2020 results amounted to PLN 1.93 billion.

The banks experienced the strongest adverse impact of the pandemic, in particular as a result of the deterioration of economic conditions. Consequently, the negative effects on performance were the most prominent in this area of PZU Group’s operations. The pandemic considerably increased the cost of risk, which resulted in establishment of additional loan provisions for the forecast deterioration of the loan portfolio quality. The value of allowances for expected credit losses and for impairment of financial instruments in Bank Pekao amounted to PLN 1,620 million, of which PLN 830 million was estimated as the result of the COVID-19 pandemic. In Alior Bank, the value of credit allowances amounted to PLN 1,736 million, including PLN 418 million related to COVID-19, of which PLN 270 million pertained to changes of parameters in the models, and PLN 148 million to allowances. The total effect on the Group’s net result attributable to equity holders of the parent company was PLN -242 million.

The lowering of interest rates three times (in March, April and May 2020), by a total of 140 basis points, brought the basic rate down to 0.1%. It in turn translated into lower interest income for banks. This impact has been partly offset by a limit on interest rates applicable to interest liabilities of banks and increased lending activity (receivables from loans increased by 1.1% y/y), however the impact on PZU Group result attributable to equity holders of the parent company over the entire 2020 was PLN -205million.

Falling interest rates and increased credit risk led to shortfalls in the impairment test of PZU Group banks, which required impairment losses to be recognized through the Group’s profit and loss account. A non-recurring impairment loss on goodwill arising from the acquisition of Alior Bank and Bank Pekao - pursuant to IAS, the impairment charge for Alior Bank was PLN 746 million, and for Bank Pekao - PLN 555 million. Furthermore, a non-recurring impairment loss on assets arising from the acquisition of Alior Bank (i.e. trademark and relations with clients), in the amount of PLN 161 million, was charged through the income statement, which after accounting for the deferred income tax and minority interest had an impact on the result attributable to equity holders of the parent company in the amount of PLN 42 million. The total effect of the impairment losses recognized in the results for 2020 is PLN -1343 million.

Materialization of the above mentioned factors: lowering of interest rates, increase of credit risk and - consequently – impairment loss charges for bank-related assets, reduced the Group’s net result attributable to equity holders of the parent company by PLN 1.79 billion.

The pandemic did not have any major impact on financial results from insurance and investment activities or in the area of health.

In life insurance, the Group recorded - mainly in Q4 2020, a rise in insureds’ and co-insureds’ death benefits, which could be a result of, among others, COVID-19-related complications. It was partly set off by smaller benefit disbursements for critical illness and hospital treatment, as well as for permanent impairment of health, which resulted from decreased activity of the insured in lockdown, as well as postponement of medical treatments resulting from reduced access to health care during the COVID-19 pandemic. The effect on the result attributable to equity holders of the parent company in 2020 was estimated at PLN -101 million.

In non-life insurance, the Group noted lower loss ratio in motor insurance. It was an outcome of a lower frequency of claims due to the traffic restrictions at the time of the COVID-19 pandemic, and an increase of the average disbursement. The effect was partly offset by a lower premium written from motor insurance, which was a result of the prolonged pandemic. Sales of new vehicles in the dealership channel declined (the drop in the registration of new passenger cars was 23% y/y), as did the leasing market, combined with continuing price pressure. Furthermore, personnel costs increased as a result of payroll pressure and introduction of aid packages due to the COVID-19 pandemic in the sales area.

Thanks to the fact that the PZU Group’s investment portfolio had already been poised for an expected economic slowdown, its impact on the investment result was minor and limited in particular to lower interest income from variable coupon debt portfolio by an estimated PLN -44 million, whereby the effect was limited by the distribution over time of interest rates reductions in 2020.

Impact on the Issuer’s result - PZU (PAS)

The impact of the pandemic was also visible in the results of the Issuer - PZU. The most critical factor was the impairment loss on goodwill arising from the acquisition of Alior Bank and Bank Pekao, which was the effect of deteriorated performance and bank development prospects, as well as no dividend payout by Bank Pekao, which is an important element of the Issuer’s investment result. After the onset of the pandemic in Poland, in March 2020 KNF recommended to banks to retain the entire profit achieved in the previous years and refrain from dividend payouts in 2020. 

As a result of an impairment test, an impairment loss was made on goodwill arising from the acquisition of Alior Bank - in the amount of PLN -781 million, out of which PLN -747 million was charged through the income statement, and Bank Pekao - in the amount of PLN -374 million, out of which PLN -51 million was charged through the income statement. The other impairment losses have been charged to the revaluation reserve. The total effect on PZU’s net result was PLN - 797 million.

Assuming that Bank Pekao would pay out 75% of the profit achieved in 2019, the dividend income in 2020 would have been PLN 336 million.