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Issuer’s financial results – PZU (PAS)

PZU AR 2020 > Results > Comment on the financial results for 2020 > Issuer’s financial results – PZU (PAS)
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In 2020, the issuer (PZU) recorded a technical result of PLN 1,533 million, compared to PLN 1,405 million in 2019, a growth of 9.1%. Net profit was PLN 1,919 million and fell by 27.6% relative to PLN 2,651 million achieved in the previous year. Disregarding the dividends received from PZU Życie, PZU’s net profit was PLN 588 million, and was by PLN 731 million, i.e. 55.4%, lower compared to 2019.

As regards the individual net result items, PZU recorded:

  • decrease in gross written premium down to PLN 12,537 million, i.e. by 3.9% relative to the previous year. It was a result of lower sales of motor insurance (due to the much lower new vehicle sales and a slowdown in the leasing market), as well as of the increased premiums on accident, sickness and various financial losses insurance. After the reinsurers’ share and movement in the provision for unearned premiums, net earned premium was PLN 12,061 million and was 2.0% lower than in 2019;
  • lower level of claims and benefits - amounting to PLN 7,523 million, which means a fall by 3.1% compared to 2019. The major change, i.e. the drop in the motor insurance and assistance, was partly set off by a higher loss ratio in insurance against fire and other damage to property and general third party liability insurance;
  • a fall of the net investment result1 down to PLN 1,103 million (by 50.4% in comparison to 2019), as a result of lower results of subsidiaries;
  • lower acquisition expenses, including the reinsurance commission, by PLN 19 million, i.e. 0.8%, in comparison to 2019, resulting from lower premiums on motor third party liability insurance, which are characterized by lower commission rates and a high share of the multiagency channel with higher commissions;
  • increase of administrative expenses by 3% - from PLN 704 million in 2019 up to PLN 725 million in 2020. It resulted primarily from the introduction in sales of an COVID-19 pandemic aid package and increase of personnel costs due to payroll pressure.

In 2020, PZU collected gross written premium of PLN 12,537 million, i.e. 3.9% less than in 2019. The premium comprised mainly:

  • TPL motor insurance premiums, accounting for 38.3% of PZU’s insurance portfolio (39.2% in the prior year). The lower share in the portfolio, by 0.9 p.p., was attributable to a lower number of policies combined with a drop in the average price. The slowdown in sales, chiefly in the branches as well as in the Group’s own network and dealership network, was a consequence of the restrictions imposed in connection with the COVID-19 pandemic and the resulting limited availability of services to customers. The negative effect was further amplified by: a fall in the average price due to changes in sales channel mix (slowdown of new vehicle sales in dealerships and leasing), and the continuing price pressure;
  • premium on motor MOD insurance, with a 23.8% share of PZU’s total gross written premium (i.e. 0.9 p.p. less than in the previous year). Alike for the TPL motor insurance portfolio, a strong impact was felt of the slowdown in the leasing financing sector and lower sales of new vehicles (primarily in dealerships);
  • premiums on insurance against fire and property damage, accounting for 20.2% of PZU’s premium portfolio. In comparison to 2019, their share in the insurance portfolio fell by 0.5 p.p., and by 5.9% in terms of value. It is a result of the conclusion in 2019 of a long-term agreement of high standalone value and lower premium on crop insurance (due to the high competitiveness of the market and the natural erosion of the portfolio in the context of a limited pool of government subsidies);
  • premiums on ADD and other insurance, whose share in the portfolio reached 11.5%, i.e. up 2.0 p.p. higher than in 2019. Premium value increased mainly in accident and sickness insurance. It is a result of higher sales, offered in cooperation with PZU Group banks, cash loan insurance and mortgage loans. Another factor of this increase is insurance cover extended to doctors and medical personnel against COVID-19 infection. The effect was further augmented by the higher premium written from aircraft casco insurance, following conclusion of a few high value agreements, as well as from various financial risks insurance (predominantly loss of profit).

A fall in 2020 of the net investment result down to PLN 1,103 million (by 50.4% in comparison to 2019) was primarily an outcome of lower results of the banking sector subsidiaries portfolio. It was also related to a non-recurring effect of the impairment loss on goodwill arising from the acquisition of Alior Bank, in the amount of PLN -781 million, out of which PLN-747 million was recognized through the income statement, and Bank Pekao, in the amount of PLN - 374 million, out of which PLN - 51 million was recognized through the income statement. The other impairment losses have been charged to the revaluation reserve.

In 2020, net claims and benefits and the incremental growth in PZU’s provisions totaled PLN 7,523 million, i.e. 3.1% less than in 2019.

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

  • lower claims and benefits in motor TPL and MOD insurance. It was a result of a lower frequency of claims due to the traffic restrictions introduced at the time of the COVID-19 pandemic. The negative factors were partly offset by increased value of average disbursement;
  • higher level of losses caused by natural forces and other property damage, including events of high standalone value and claims under crop insurance policies. The number of losses caused by weather phenomena, such as rain and hail, increased disproportionately at the turn of Q2 and Q3 2020;
  • increased claims and benefits in third party liability insurance. It is mainly a result of a higher movement in provisions for outstanding claims and benefits, primarily in third party liability insurance of medical entities;
  • higher loss ratio in accident and sickness insurance, predominantly group ADD insurance.

In 2020, acquisition expenses (including reinsurance commissions) amounted to PLN 2,423 million, and declined by 0.8% in comparison to 2019, which along with a 2% decrease in net earned premium y/y translated into a deterioration of the acquisition expense ratio by 0.2 p.p. The growth rate of the acquisition expense ratio was influenced, among others, by a change in the product and sales channels - lower growth rate of motor TPL insurance, which are characterized by lower commission rates and high share of the multi-agent channel.

In 2020, administrative expenses reached PLN 725 million, i.e. 3% higher than in the previous year, which alongside the drop in net earned premium by 2% y/y translates into a worse administrative expense ratio, by 0.3 p.p. The increase in administrative expenses is attributable mainly to higher intervention expenses incurred in connection with the COVID-19 pandemic and higher personnel costs responding to a continuous payroll pressure. The growth has been partly curbed by cost discipline in non-personnel items.

The balance of other technical income and expenses in 2020 was negative and stood at PLN 251 million. The improvement by 1.4% in comparison to 2019 is an outcome of a higher allowance to prevention fund and an impairment charge on receivables, as well as higher interest income for untimely premium payments.

The balance of other operating income and expenses was also negative. It amounted to PLN 148 million, whereas in the previous year - when it was also negative - it was PLN 387 million. In 2019, the balance of other operating expenses was charged with the interest expense and change of the valuation on account of foreign exchange differences on the loan taken from PZU Finance AB for the total amount of EUR 850 million and repaid on 28 June 2019. In 2019, revenues on account of foreign exchange differences on the loan received from PZU Finance AB (publ.) amounted to PLN 38 million, while the costs of interest on the loans received amounted to PLN 29.7 million. Furthermore, the level of other operating expenses in 2019 was significantly influenced by adding a provision for taxation risk related to different interpretations of the provisions of the Swedish tax law pertaining to taxation on foreign exchange differences realized on repayment of loans granted in a currency other than the functional currency of the company granting the loan, in the amount of PLN 79 million - the provision was released in 2020.

As at the end of 2020, the total balance sheet value of PZU was PLN 44,665 million and was 7.4% higher compared to the previous year.

The main component of PZU’s assets were investments of the total value of PLN 40,207 million (up 9.7% compared to the end of 2019), which accounted for 90% of PZU’s total balance sheet value, compared to 88.1% as at the end of the previous year. Investments, excluding investments in related parties, increased in connection with the achieved investment performance and the inflow of premiums driven by business growth.

As at the end of 2020, PZU’s receivables stood at PLN 1,689 million, and accounted for 3.8% of assets, whereas in the previous year they amounted to PLN 2,085 million (5.0% of PZU’s assets). The biggest drops were noted in the value of receivables on direct insurance (PLN -352 million y/y) and other receivables, including from related parties (PLN -80 million y/y), where the fall was attributable to the lower receivables from the service of acting as emergency adjuster to Group companies.

Non-current assets, in the form of intangible assets, goodwill and property, plant and equipment, were disclosed in the balance sheet at PLN 424 million (PLN -18 million y/y). They accounted for 0.9% of assets

As at the end of 2020, PZU held cash of PLN 124 million (0.3% of assets). The year before, the corresponding value was PLN 126 million.

At the end of 2020, technical provisions were the main component of PZU’s equity and liabilities. They reached the value of PLN 21,707 million (net), which accounted for 48.6% of equity and liabilities. Their share in the balance sheet decreased by 3.3 p.p. compared to 2019, while in terms of value they rose by PLN 134 million, in particular due to a higher provisions for outstanding claims and benefits, mainly in the group of motor TPL insurance and general third party liability insurance. It was partly offset by: a lower provision for unearned premiums and release of the equalization provision.

As at the end of 2020, equity reached the value of PLN 17,689 million and accounted for 39.6% of equity and liabilities, up 3.6 p.p. compared to the end of 2019.

Contingent receivables amounted to PLN 3,976 million, i.e. were lower by PLN 281 million (-6.6% y/y) in comparison to the previous year. They comprised among others: guarantees and sureties received, bills of exchange issued on account of granted insurance guarantees and other contingent receivables comprising mainly securities obtained in the form of a transfer of the debtor’s assets, mortgage on the debtor’s assets and other contingent receivables.

The balance of contingent liabilities was PLN 1,201 million, which represents a growth by PLN 52 million (+4.5% y/y) in comparison to 2019. It is primarily a result of the higher, by PLN 87 million, level of liabilities under guarantees and sureties granted as well as disputed claims not recognized by the insurer.

In 2020, PZU generated a return on equity (ROE) of 11.8%, up 6.6 p.p. compared to 2019. In 2016-2020, the average return on equity (ROE) was 16.4%.

Operational efficiency ratios 2016 2017 2018 2019 2020
1. Gross claims and benefits ratio (simple) (gross claims and benefits/gross written premium) x 100% 58,8% 60,9% 60,5% 61,7% 63,2%
2. Claims and benefits on own share ratio (net claims and benefits/premium earned on own share) x 100% 66,7% 64,1% 62,2% 63,1% 62,4%
3. Insurance activity expense ratio (insurance activity expenses/premium earned on own share) x 100% 27,9% 25,2% 24,8% 25,6% 26,1%
4. Acquisition expense ratio* (acquisition expenses/premium earned on own share) x 100% 20,1% 19,0% 19,3% 19,9% 20,1%
5. Administrative expense ratio (administrative expenses/premium earned on own share) x 100% 7,9% 6,2% 5,4% 5,7% 6,0%
6. Combined ratio (COR) (net claims and benefits + insurance activity expenses) / premium earned on own share) x 100% 94,7% 89,3% 87,0% 88,7% 88,5%

* having accounted for reinsurance commissions received

Basic profitability ratios of PZU 2016 2017* 2018 2019 2020
ROE (Return on Equity)  (annualized net profit/average equity) x 100% 12,8% 19,2% 19,7% 18,4% 11,8%
ROA (Return on Assets)  (annualized net profit/average assets) x 100% 4,3% 6,2% 6,3% 6,2% 4,4%

* restated data

1 Investing activities include investment income, unrealized gains from investments, costs of investment activities, unrealized losses on investments, and share in net profits (losses) of subordinated entities valuated through equity method