Powszechny Zaklad Ubezpieczen SA
WSE:PZU
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Ladies and gentlemen, we would like to welcome you very warmly to our results conference at PZU. We'd like to thank you for turning up in so -- such strong numbers. We'd like to present to you today briefly, succinctly some information about our results for the quarter. We'll say a few words about the dividends and then we'll talk about the execution of our strategy. And then after the presentation, we're more than welcome -- more than ready to field your questions. So let me go ahead and step into the most important events and drivers in this quarter. From the point of view of shareholders, the decision of the management board and approved by the supervisory board, which is our recommendation of the dividend distribution for 2017, we, as the management board, with the approval of the supervisory board are recommending a PLN 2.5 per share dividend. I'll talk about it a little more in a few minutes. So in terms of our insurance, we continue to witness very positive developments in terms of gross written premium. The motor portfolio has been buoyant in terms of its profitability. Also if we look at provisions for general damages, I'll speak about that at greater length in just a few moments. Also, with respect to other nonlife insurance, we've been able to improve our results. Even though we have had suppressed profitability in agricultural insurance, in group and individual continued, we have consistent [indiscernible] compared to the previous year. In health, we continue to have a very fast growth rate. We've add individual continued insurance to that segment. And we continue to be active in building our presence as a medical service provider. In the recent period, we purchased a medical center, the St. Luke Medical Center in Czestochowa, and we continue to purview the market. We're looking -- I'll say more about that a little later.
In terms of investments, you're all very well aware. So if you compare Q1 2018 to Q1 2017, you can see a pretty strong delta in terms of what the Stock Exchange in Warsaw did last year and what they will allow you to do this year. This delta is something that's noticeable on the equity side of our main portfolio and partially, this was offset by lower profitability. So that is to say the more expensive Polish treasuries. Then on the bank side, we've got Pekao S.A. And this has a major impact on the comparability of our results. At the same time, Q1 has certain seasonality. We've had relatively low compared to the 2 banks' level. If we look at the PTE, the pension fund company, we're steadily building our cooperation with PKO. As we have indicated, in the field of asset management, we've gained the consent from the Polish FSA to combine the 2 PTE companies under PZU's brand name, and we'll continue that. Now a few words about the dividend. The proposed dividend for last year is PLN 2.5 per share, which is 74.2% of the overall result. This is quite a bit higher, 80% higher than last year. It was PLN 1.4 per share last year. And so if we invoke our dividend policy, some of you could post the question, how do you calculate the 74.2%? Let me remind you, when we calculate the dividend, there are 3 portions. One, 50%, this is what we're going to use to pay out to our shareholders. Then, we have the bucket of 20%, which we can retain for organic growth. And then, 30% is for potential M&A activity. This year, in 2017, we have had quite a bit of growth in terms of gross written premium. It was the highest in the history of the group. And if we look at some of the other areas where PZU is growing according to its strategy, it seems to me that retaining that 20% for organic growth is justified. If we look at the little bit more than 5% that we've allowed ourselves to retain from the M&A portion, we should say that the PZU Group, as you know, under its strategy, has announced that there are several areas in which we will actively seek transaction possibilities, one of them was health -- one of these areas is Health. The other area is asset management. We've not only announced this as a hypothesis, but we, in fact, are scrutinizing this market quite meticulously. And in the framework of our research, our analysis, well, none of the ops is sufficient, the will [indiscernible] that we could talk about of a specific deal, but it's likely that based on the analysis that we are doing that something could materialize and having an awareness of our decision to maintain a positive trajectory for DPS, dividend per share, so we want to make sure that the dividends we're paying per share is going to grow. We decided that this would be safe to retain a 5% buffer in terms of our equity, in terms of our talks or the analysis that we're doing right now, if this were to materialize. So you can see that in terms of the specific amount that would be retained, we're not talking about large transactions. This is nothing that would be comparable to our most recent large-scale M&A transaction to build some strategic value. On one hand, we are trying to have that capital backdrop in order to retain the 200% SCR coverage -- solvency coverage requirement. But we want to be able, at the same time, to guarantee to our shareholders that we're going to be able to propel upwards our DPS every year. And so we're trying to offset things in the following year if something were not to be achieved in terms of the M&A activity. That would be it in terms of dividends. Of course, we're open during the Q&A session to respond to any questions you may have about that. I've already talked about gross written premium. So in the nonlife side, we can say that all of the segments and all of the products had a positive sales development. In the life side of business, the thing is true. In individual insurance, we had 1 negative. This is more as a result of unit linked business. Generally speaking, we can say that we had a very strong record-breaking quarter in which we had the highest gross written premium, we -- that was something we did in 2017. We've been able to beat that record by 1 percentage point, but even so, we did beat that record of last year. And so this is something that we consider to be quite positive, especially as the overall market was expanding. We continue to retain a stable market position, market share. Even if we calculate it with our subs like Link4 and the mutual company, we've been able to edge up our market share in the nonlife business. So then we can go on to profitability. We'll start with other nonlife insurance. We'd like to uphold what we said after the last quarter after an exceptional 2016, which was affected by one-offs in the form of ground frost. Well we did have them again in the previous period, but nevertheless, we've been able to return to that corridor of profitability to which we've become accustomed and to which our shareholders have become accustomed, where we talk about 60%, 75%. And so we believe that this product should be within that band. And from our point of view, the return to a controlled level of profitability in the mass segment is proper and equitable, and then also in the corporate segment. So if we look at our motor business, on one hand, we should say that we're reacting to the repercussions of the price war as well as the recommendations given by the Polish FSA as the rest of the market, we've regained profitability. We continue to analyze on a constant basis what's going to happen with prices in the future. But as I said, we have a stable position. There is a very slight dip from 35% to 34%, which you can see year-to-year. This is linked above all to Polish FSA recommendation that we should be profitable in every product and every segment. So in terms of lease dealers and fleet insurance submitting ourselves to the recommendations of Polish FSA, we had to sever certain contracts that were not profitable, and so this is something that's really just a trace element, has a limited impact on reducing our market share, but at the same time, this is a very strong position we intend to retain and, in fact, expand. Some of the profitability, and this should be said in terms of the motor business. At the very outset in this quarter, the final ruling made by the Supreme Court of March of this year about the general damages for pain and suffering. And so the result of this quarter has been burdened with a provision, which in our opinion, should be aligned to the magnitude of this phenomenon and how it will impact our portfolio. No one has a crystal ball, and so nobody is able to say what form or what shape that curve will actually assume. But according to our best knowledge, our best estimate, this is what we believe could happen in terms of trying to estimate the impact exerted by that Supreme Court ruling on our profitability. What's interesting, by maintaining rigorous cost discipline, we've been able to generate a position, that despite this one-off -- this nonrecurring effect, we've been able to retain a strong market position and profitability. And third, we haven't raised prices. So we've not altered the marketability of our product. And so this is something we believe that we'll be able to do on a long-term persistent basis. Now we can come on to the life business, and I'll ask Roman Palac to go ahead and take the floor.
Let me say a few words about the life insurance market. I'm going to focus on the periodic premium. This is what is of greatest interest to us and I think to you as well. For several years, we've seen that life insurance market has sort of stood in place and hasn't really developed, outside of PZU, we can say, that there has been some shrinkage happening. We've grown slowly, but we are still growing. And this has increased our market share. As we ended up 2017, we've had our market share up by nearly 1% and with our magnitude, this is a result that's very good. And I think this trend will continue to be propagated. And so if we go on to the results of Q1, we can say that the gross written premium compared to Q1 2017, well we're up, we're in the black there in terms of the growth. We're trying to grow our business in such a way to maintain our profitability, and the margin we want to deliver on a stable basis is around 20%. So I'll tell you where we are in a moment in Q1. So we've had a couple elements: one is related to a positive impact, one a negative impact. In terms of the growth rate of our premium, we do have the impact coming from the reduction in the retirement age because this applies to our portfolio, and we are able to offset that with new sales. But this has an impact on our health -- our health business has impact, they have 1.5 million agreements. And this part of the business is making a very strong contribution in order to make up for the losses coming from people retiring. And if we look at the profitability of group and individually continued insurance, here you can see in Q1 of 2018 versus Q1 2017, there is a very positive trend that has come forward here, the profitability has soared by nearly 3 percentage points. This is a season -- this business has seasonality. Q1 is always softer than the subsequent quarters as you're very well aware, and this is because of the winter season, we have more illnesses, we have more deaths. So the frequency of these events was lower than -- in 2018 than in 2017. This has affected the profitability. And I'm confident that in upcoming quarters, we'll be able to achieve the target profitability in excess of 20% in our group portfolio. And so if you look at our health business, I've already said a couple words, that we're very pleased with the development of this business. Our growth rate is in excess of 30% year-on-year. And if we look at our products, the insurance products as well as other products, for example, subscriptions, we have nearly 1.7 million people. We have development in our network. The CEO mentioned that we completed 1 acquisition in this quarter in the town of -- city of Czestochowa. This is an element of our business that we plan to grow. We want to consolidate the market on a regional basis. And so these type of events will not have a major financial size, but they will bolster our network and so we'll take over medical centers across the country. So thank you very much. Now I'll ask Tomasz Kulik to walk us through our investments and our expenses.
So distinguished ladies and gentlemen, in terms of what we experienced in our own portfolio in Q1, we can say there was a lot of volatility. What we've observed on the markets is decline on the Polish Stock Exchange. So bond par -- yields fell. We also saw a slight growth in the FX market, and if we compare it to the corresponding period of the previous year, that situation was totally different. We had flat bond yields, the euro exchange rate fell, and we also saw a climbing market on the equities market. And this was a good environment to generate above-average returns. If we look at our main portfolio and how it performed and the various elements that performed, we look at various equities, to which -- which in a great extent, drove our investment performance. While the difference between Q1 2018 and Q1 2017 is PLN 280 million and what was responsible for the volatility was our exposure to Azoty last year. It gave us PLN 40 million of unrealized profit. This quarter, that asset didn't perform. We're not showing the volatility through the profit or loss. We are doing this through other income. And as of 2018, this specific exposure and changes in it will not generate any changes in terms of a management result or it won't cause you to think about what will happen with our results as a result of that exposure. The fact that it's not in our P&L doesn't mean that it doesn't exist, but the volatility will be shown in the balance sheet instead of the P&L or the profit or loss statement. The other 2 major changes year-on-year is the result on Polish bonds. So the yields are down by nearly 20 basis points. Last year, we had a flat market in this asset class. If we think about our global macro strategy predicated on debt, so the portfolio is being shortened so to lower the exposure as a result of the extensive volatility. So looking at our assets' strategic allocation, we're trying to limit that volatility. And if we look at the FX yields, for example, the dollar, if we look at Q1 2018 to Q1 2017, we can say it was responsible for slightly worse results, softer results and that the overall FX situation has had an impact of PLN 40 million in terms of differences between these 2 quarters. That was the overall FX impact. If we look at our cost position and what's happening in the PZU group, we continue to deliver on our commitment. We've presented to you in our strategy. So we've been active in continuing to improve our cost effectiveness. Last year, PZU was involved in changes, in efficiency programs starting in Q4. So in Q1, we released or reversed the last provision, which was I have set up for the purposes of the 2017 restructuring. So we're -- we have a lower headcount in PZU. Some of the processes have been automated, and as a result, these costs aren't growing, but quarter-on-quarter, they're actually lower, which means we're capable of sharing the savings with our customers by offering attractive prices on our insurances. And so by [ 0.8 ] percentage points, we've been able to reduce our administrative cost or expense ratio. So the net result at the consolidated level is higher than last year. So once again, we had beaten the PLN 1 billion watermark. So this year, we're at PLN 1.043 billion compared to PLN 1.007 billion as we're incorporating Pekao S.A. here. So if we look at the parent company, so on one hand, we should record that the result is lower compared to Q1, well -- Q1, and we've repeated this. It was an exceptional period. The profitability on the Polish Stock Exchange in Q1 2017 contributed a lot. So it was an atypical investment result and so that was not replicated in Q1 2018. And this is quite important information. And then, we also had to set up provisions because of the general damages decision made by the Supreme Court. And then we had PLN 40 million on -- so we have to mention that last year, Azoty made a contribution, and we no longer see Azoty in our net result. And of course, this has an impact on our ROE. As we said at a previous conference, this is the level of ROE we had anticipated having in mind seasonality in life insurance as well as in banks. We continue to believe that we're on track in order to discharge our strategic investment commitment of beating the 22% ROE watermark. And we have gross written premium in excess of PLN 5.8 billion, which is up above last year's result. So maybe now [ Tomek ] can walk us through the individual elements.
Of course, so if we start with sales, the CEO has already addressed that issue. The next thing is another record-breaking quarter for PZU. In previous quarters, there was price pressure coming from the good results, where you were concerned that this would contribute to declines in terms of PZU's ability to continue generating this. We're quite pleased to see that across all -- practically speaking, across all of the product groups, we've been able to grow. If we look at the claims and benefits, even though the portfolio has grown, this has to be emphasized, we can see that our claims are lower. They are lower because what happened in the life business, we have a lower frequency of deaths of the insureds and co-insureds. On the other hand, we have lower payments for health loss, dismemberment and also childbirth. So these are risks for which we pay. We have lower conversion of long-term business to yearly renewable term business. So the delta is roughly PLN 15 million. So all of this has been slightly covered over by having to set up a provision for the general damages as a result of the Supreme Court decision. But this is a single event. So -- but overall, we can say that even though portfolio has grown, our claims paid are down. If we look at the investment results and what's happened in the main portfolio, we already talked about that. And so if we look at profit sharing and we can say where they make the investment decisions our insureds. So if you look at the investments, we can say that the situation is quite different from what happened last year compared to the previous year. So our insureds had a change in the profits they generated from their investment strategies, a difference of PLN 300 million. But this is a position that's neutral from the point of view of the net result. And this section, in terms of investments, there are 2 other important things. The first one is, of course, is write-offs. Then, we have the payments for our own bonds. We're more or less at the same level at the second thing, which is quite technical, which is the measurement of our investment properties, where in Q1 and Q3 -- every Q1 and every Q3 of the year, we refer them to the exchange rates at which those group properties are measured. So at the end of each year and mid-year, we have to firm that up. And so what pleases us and where we are generating these results, while at the same time curtailing our cost expenses, we have growing cost effectiveness. This is something that pleases us greatly. At the same time, we've been able to create incentive programs for intermediaries, where we're able to foster the growth of profitable products. And we don't want PZU to be seen only as a motor insurance player, but also as a player offering other types of nonlife insurance. So we want to reward our partners, our agents better for higher quality. And this means that our cost of acquisition are -- have edged up a bit. And the expense -- acquisition expense ratio also for corporate segment, this has gone up a little bit. But from the point of view of profitability, this is incontestably something that's been a valuable maneuver because it's building the profitability of the segment and is making a positive contribution to the overall result. Our profit this year was strongly driven -- or the comparability of this result in Q1 was affected by the consolidation of Bank Pekao S.A. Let me remind you, we purchased the bank in June of last year, so our 20% equity stake in that bank distorts a little bit comparability between Q1 2018 and Q1 2017. The banking segment in this quarter gave us an additional PLN 127 million. Last year, it was -- at this time, it was less than PLN 30 million. That means at the group level, we have a net result attributable to the parent company or to the holders of the parent company. We are talking about PLN 640 million, which gives us an ROE above 17%, 17.6% with a very high level of underwriting profitability, and my colleagues have already addressed that issue.
Thank you very much, [ Tomek ]. Now just a few words before we let you post your questions. Let's take a quick look at strategy. Where we are in terms of its execution. If we look at ROE, as I mentioned previously, this quarter, because of seasonality, but also as a result of setting up that provision for general damages and the lower investment result, we are at 17.6%. Even so on a net -- if we look at net profit and ROE, this is in line with our projections for this quarter. And we see ourselves as being on the trajectory in order to be able to beat the 22% watermark in 2020. So we believe that this goal is possible to be achieved and will be achieved. If we look at our market share of 35.7% in nonlife, this is a strong position we continue to bolster. And we believe that we'll achieve our target by the end date we've set up. We've achieved our target in terms of the combined ratio. We can't always say it's going to be so buoyant, but we do have a buffer in the event of things like court judgments. But the goal has been achieved and we count on upholding that level. So our goals have been achieved in terms of costs despite the fact that there's a lot of growth going on. If we look at life business, the number of customers will fall a bit before it begins to grow again. We have some demographic factors and also the retirement issues Roman talked about. We have much more active sales, and we can see that clearly and we're trying to rebuild this portfolio as quickly as possible as a result of that attrition. And so profitability in Q1 is not too comparable, both in this year and in 2017, we believe that the 20% threshold is quite possible, and so we maintain our solvency ratio above 200%. And so if we look at the amount of assets that we want to achieve, so today with Pekao S.A., I think we've got PLN 47.1 billion in assets. We want to have PLN 50 billion in assets. And so this is one of the areas where we're actively looking for the opportunity to engage in consolidation, and we think we'll be able to achieve that also at the net profit level. If we look at the overall profitability of the portfolio, I will have the same comment. This quarter, especially the first 3 months of the year, show a strong downward movement in the equities portion of the market. And as a result of the rest of the portfolio, the debt portion and corporate debt, performing, the equity will be less important, and we've remodeled that to ensure that we're going to be able to deliver the results on a stable basis. We can see that this year, how we're going to be able to achieve the 200 basis points of profit above the risk-free rate. So Palac -- Mr. Palac has already said we've achieved a part of -- a large part of our goal here. But in the next 2 years, we want to have PLN 1 billion in revenue in the health business. And so our margins are being bolstered, and so we're expanding our medical centers. So we have to generate revenues first and then we'll work on profitability. This is in line with our plan for the segment. And if we look at the banking segment, the 300 million -- so our banks have PLN 254 million in assets -- billion in assets. We have a goal of PLN 300 billion. If you look at the net financial assets, we're a little bit more conservative than the strategy that both of the banks have adopted, and we are counting on both banks being able to deliver on their strategies. And I think I've pretty much -- we've pretty much finished our presentation, and we are ready now to respond to your questions at this time.
I'm from Trigon. I have a question about the additional provision for general damages. You said that your best estimate is that this provision will be sufficient. So my question is when will this be checked, when will you revise that figure, either upwards or downwards. Roman?
Well, we estimate or measure that provision based on the understanding of our portfolio and the Supreme Court judgment. We're waiting for the justification of that Supreme Court decision, that will make it possible for us to respond. According to our best knowledge today, the provision is adequate, but we have to wait for the details, the specific elements that are linked to the judgment. This is a dynamic situation. We know that there are some legislative processes that could add greater clarity to the situation. So this process has its own pace, and so Roman's team is looking at making assessments of the claims being put forward to us. Well, today, we can say that this provision incorporates all of our knowledge about this process, and we think it's a prudent provision, but it's hard to say when we'll revise that.
If I can ask you for an update -- a market update about motor insurance, what's happening with prices in recent months, has that international players calmed down a bit or not?
Well, we should have say -- we should say that the picture is quite mixed. Mr. Kulik talked about this as well at the most recent quarterly results. We did what is called a swing back after the price war. So prices went up. The whole market is in profitable territory. So one could surmise, one could expect that some players, like the one you mentioned, will test to what extent customers who are more price-sensitive and more susceptible to switch carriers based on price to fight for those customers and to exert greater pressure on those customers and on the average price. This is something that could exert an impact on the average price. We also have things like this judgment -- the Supreme Court judgment, which will exert an impact, impact not only on us, but on the overall sector. I am so bold to say that we're well prepared for that, and we have a profitability that would enable us to navigate that, also looking at the cost side of things. What's going to happen with other insurance companies, I don't know, especially if we talk about the smaller insurers. That question should be posed to them. So I can imagine a situation, in which one of the outcomes that could offset for this tendency that we see. This could be one of them. At the same time, it's very clear, this is hard to say what would be the clear trend. We're scrutinizing the market very closely. We're tracking it. We're not the player that's going to move the market in one direction or the other. That's why in one of the recent meetings, we said, we try to ensure for this segment -- for this product to be less susceptible to major price swings. We want to move in the direction of the overall market. We want to talk about more individual -- more individualized pricing. So we want to deliver our strategy. We want to demonstrate that telematics or better claims adjustment or handling, creating a better picture of our customers giving certain services, additional services, to have more of a relationship than a product. Relationship with our customers will enable us to have good profitability regardless of possible attacks taken by customers. So there are some customers sensitive customers -- price-sensitive customers, who are not necessarily going to be interested in working it.
If we look at M&A, are you only thinking about asset management services as well as health? Or are you thinking about insurance M&A activity abroad?
As I said, we track our market closely. We're very vigilant. And this was said about the overall insurance market. Here, in Poland, today, we don't see any target that would be of interest to us. We're looking afield -- further afield. The situation there is quite dynamic. Today, however, there is no specific set of talks we would be involved in right now. As I've said, we are focusing on that part we mentioned in our strategy. So asset management, health, generally speaking, so expanding that and expanding the role played by PZU in this portion of services, which are somehow in the general area of insurance or around insurance. So we're not just passively open with respect to our strategic declarations. We want to go out there and look for opportunities, and that's why we've built this capital cushion. But there's no specific target abroad which we would have in our sights at this point.
I'm from IPOPEMA Securities. I wanted to revisit life insurance and the general damages. Do you think this is going to be more of a result of customers coming forward? Or do you think it's going to be law firms that are going to be more active in? I'm talking about motor insurance, not life insurance, I'm sorry, I misspoke.
Well, you're asking, if I understand you correctly, you're talking about the benefits we talked about and this is in reference to the provision we took. Is that right?
Yes.
Well, I can tell you what we've seen in our portfolio historically. Recently, the most recent wave of claims pertain to deaths and this was more triggered by law firms. That's the history. Today, we're not really sure which group of customers would be affected. We have certain scenarios, and we're able to identify certain customer groups ourselves on our own. So once we see the interpretation given by the court, this will give us some information about how to reach that group of customers.
If I may, I wanted to ask you about the amount of donations that have grown quite strongly in Q1. Could you say a few words about your donations?
So the CFO has spoken a little -- too little this afternoon.
Well, if we compare Q1 2018 to Q1 2017, but if we talk about the way in which we cooperate with the foundation last year, the foundation received a donation in Q2. And so if we look at the data after Q1, we'll see full comparability with respect to that specific line item.
I don't see any further questions. Oh, there is after all a question. PKO to bring things to a conclusion.
My question is about the slide of a cooperation between PZU and banks. You're talking about synergies of PLN 27 million that you've already achieved. What sort of areas have you been able to -- in which areas have you been able to slash costs?
In terms of our cooperation, I'm trying to click through to that slide so we can all look at it at the same time. Is this the slide? I'm sorry. Yes. [indiscernible] as the gentleman with the beard who's drinking the coffee here on the right -- left -- on the right. So the cooperation is going on in procurement in IT, media purchasing, marketing costs. These are areas where we have 3 large entities and having a competitive position coming from our economies of scale. This is where we can utilize that. Another group of topics -- where we're working on them. This links to property, rent of office space, and how we're able on one hand to move out of real estate. We're not using or -- real estate, which because of the distance between specific branches or outlets is -- they're too dense and they're not giving us additional value that we -- sometimes when we share space. So those are the 2 groups. So it's procurement and real estate. Those are the 2 areas. So real estate, our property seems to be a quite promising area. We started in Warsaw, so like a PZU branch and Pekao S.A. branch. So here would be some opportunities to optimize our footprint in Poland by cooperating in certain locations where there's a question mark about the presence of one or the other player.
I think that pretty much wraps everything up. We've asked -- responded to all your questions. Let me look one more time at the Internet users. [Foreign Language] It seems to me that the international analysts haven't thought of anything that our local analysts haven't posed questions about. So I'll close the conference at this time. And I can say go ahead and buy some shares.