Powszechny Zaklad Ubezpieczen SA
WSE:PZU
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
39.15
55.5
|
| Price Target |
|
We'll email you a reminder when the closing price reaches PLN.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
You don't have any saved screeners yet
Ladies and gentlemen, we are very pleased to be able to welcome you to our presentation concerning the results of the PZU Group for Q1 2019. As you can see, our team is a little bit smaller. Our CEO, Mr. Surówka, would like to apologize to you who, despite extensive efforts, is not able to join us today for the presentation, and that's why the 2 of us will have the pleasure of running today's presentation, myself, along with Mr. Palac, who is responsible -- as you very well know, responsible for what is actually the essence of what the PZU Group is.
So therefore, let's go, as a matter of tradition, through a recap of our results. We'll discuss what's happened in Q1 across the various segments, and then we'll go through the results, and we'll sum up where we are at the end of Q1 in terms of achieving the various key ratios and how we're coming closer to achieving the strategic objective we had talked about when we reminded or refreshened the strategy at the outset of this year.
So some of the major accomplishments of the PZU Group. So the first information, which is very good on one hand and on the other hand is something that runs counter to some of the skeptical voices out there, we continued to grow in terms of sales measured by gross written premium. And something else that's also very good information is that we continue to have that growth potential, that upside, despite the fact that there are certain cyclical or seasonal things, where we have seasonal cycles in nonlife business. We feel the pressure of the competition. Rates actually fell quite strongly last year, but if we compare sales and results, we can see that today's business, business that was sold in Q1 of this year, is being done at transaction prices that are slightly lower than, say, a year ago. At the same time, in the life business, we've been able to stabilize our sales measured by gross written premium despite the negative phenomenon that Roman will address in a couple moments. These are some of the phenomenon that are happening on the investment business, both in individual life as well as in group life.
We know what's happening in terms of the more stringent supervision and the attempts to bring more civility to this market. These are efforts being taken by the Polish FSA. We'll say a few words about this in greater detail. What we're pleased with is that despite the challenging marketplace, we've been able to grow, but we've been able to grow while retaining above-average profitability on the nonlife side of things. If we look at the combined ratio, it's sub-90%. This is something that particularly pleased us, especially as we look at the panning out of -- or the utilization of the last bits -- remnants of profitability in motor insurance. We've got good, of course, profitability in life business, although seasonally it has dips. And so for the first time, we're showing you basically the moving profitability in the group life, which is above 22%, which is actually a very good result.
If we look at our profitability overall, you can say that we've communicated to you some of our objectives that we'd like to achieve. We see that the main portfolio, the annualized result, which is 4.5% return in our investment portfolio, and this is a major reason to be proud and to be pleased. So if you look at the nonbanking sectors, we see that things are moving up 30% on year -- year-on-year. So despite the challenges we have in the banking sector linked to the major burdens in the form of the fees and charges being paid to the banking guarantee fund, we've been able to grow by some nearly 20% if we look at our ROE, and we've been able to put together a very strong capital position. We have a solvency ratio in excess of 220%.
So now if we walk through the individual segments of the business, we'd like to give you, as traditionally, a little bit of information about the nonlife business. What we've observed on the market, we see growth, especially from Q4 of last year. Of course, this is the last touch point we have, which is Q4 last year. We have nonmotor business. We continue to see strong growth in motor business despite the declines in rates on the transaction prices. Transaction prices have edged down by nearly 5% compared to last year. We've retained our market share at a stable level. And as you know, even though we have very ambitious objectives in terms of growth, we're not going to try to achieve them at all costs. What we're interested in is having profitable growth at a steady pace. And that's why we're trying to strike a balance to find a golden mean between growth and profitable growth, and so it seems that Q1 shows that we've been able to strike that golden balance -- find that golden mean. And so if we look at the technical result of the PZU Group, it represents more than 50% of the overall result of the sector.
If we look at what's happening then in motor business in particular, we can see that the margin has been exhausted. If we look at new business, we continue to see attempts to find and identify growth areas, places where you can grow profitably. The competition is trying to optimize pricing in those segments where they believe they have added value to offer and, as a result, we continue to see heightened levels of migration. And so sometimes, we see that the price differential is big enough to attract people to change their carriers.
So at the end of Q4, in order to offset last year's results, we didn't want to raise prices. We wanted to remain flat in Q1 with the intention to return to the price level that we had in place prior to the price cuts last year. So we will certainly not encroach on some sort of price war. We won't embark on that price war path.
We see the reaction taken by the Polish FSA, which has addressed all of the market players. They've addressed a request to present pricing strategies. Polish FSA is watching what's happening after the lesson from 2015 and 2016, when the entire market saw a PLN 1 billion loss in motor TPL, and they don't want to allow something like this to happen again. They've asked the insurers to be a little more reticent and, at the same time, they want to see -- the Polish FSA wants to see their price strategies. And we want to make sure that we're talking about price adequacy that the insurance sold today is capable of covering all of the costs related to offering this product to customers in a given channel of distribution to the customers who're buying that product.
If we look at profitability in other nonlife business, 2 pieces of information. We see that the portfolio continues to be quite profitable. So we have 73% in corporate [ bershin ] -- corporate business 70%, so we continue to be in the quarter that we frequently talk about. So if we look at this quarter compared to the previous quarter of last year, we have had a little bit higher claims paid both with respect to mass claims as well as corporate claims. This is not anything that would cause any bigger concern. These aren't mass events linked to price pressure.
As you recall, in nonmotor business, there's much less pressure. So I think many insurers treat this part of the market as an area where they can cover loss of profits or losses if they generate them in other areas of their business. So we're convinced here that we'll be able to grow persistently on a profitable footing. And the growth of the overall market, especially in Q4 of last year, is a very good signal portending our ability to achieve this objective.
So thank you very much. We can come on now to life insurance. Let me say a few words about 2018. We've got data for the entire sector, and then I'll look at Q1. If we look at the overall sector, you can see that we have 2 markets. As you very well know, we have single-premium business, which in 2018 was shrinking quite strongly. We had nearly 50% shrinkage, if we look at that segment. In turn, the periodic premium segment was quite stable. We did pretty well on this market.
As you look at the results, our market shares, at the end of the year, we've topped 38%, something that pleases us greatly. And one thing that we benchmark, we look at our market share in periodic premium, nearly 46%, so we have a very stable footing on this market. So we have more than 55% of the profit on the market. So you can say that the group has a very stable position in life business.
If we look at Q1 results in group business and individual continued business, we are where we wanted to be. We have a stable portfolio, well-managed, solid profitability. We see the operating margin in the segment year-on-year. As we move on, we continued to improve that. We have stable premium with some growth. This is -- this portends well for the full year 2019. So we also see the growing scale of health premiums, health business. We have 1.9 million group life health contracts. So we see that this is an area that's enjoying more and more popularity amongst our customers. So we can see the loyalty being built in our portfolio. We have good discussions with our clients about broader or more extensive cooperation.
If we move on to individual business, once again, I'd like to break that down into investment products and other products. But let me draw your attention to the portion where we have a periodic protection premium. All of last year, we spent working on shifting the product structure and refining our offering. This has delivered results. This is a segment. It is growing. If we look at the single-premium market, we see that it's shrinking, it's falling. So we can see that the overall sector is shrinking. We've been able to recover the most profitable part of the market, where we have the periodic premium, where we have the very high level of profitability. And so in Q1, our profitability was in excess of 20%.
So a couple of words about our health business. As you saw at our most recent strategic presentation, we've talked about taking over Falck. So we intend to close this transaction in Q2 because we've received consent from The Office of Competition and Consumer Protection, and so that means we're going to have a footprint across the country. We have 97 owned branches, 2,100 partner outlets. So this is a scale that will in fact mean that we are a nationwide network.
So if we go on now to some of the specific numbers in health, health is the fastest-growing part of PZU. If we look at the number of contracts year-on-year, it's up by more than 30%. We completed or ended Q1 with 2.4 million contracts, and that means we had revenue of PLN 164 million. So this gives us an optimistic view in terms of our ability to achieve our strategic targets in this area.
So now I'd like to walk you through the portion of our presentation talking about asset management and our banking business. If we look at the assets we have under management, we have TFI, which is a mutual fund management company, and the open-end pension fund. So we have more than PLN 30 billion in assets under management. We see growth in the PTE company, which is pension fund management company, primarily coming from taking over the pension fund company from Pekao. So then with the TFI, we have attracted external funds, third-party funds. So you can see that our new product is gaining traction, which is delivering new assets. We're working well with banks.
If you look across the group, we'll have assets under management in excess of PLN 50 billion across the group. If we look now at our cooperation with banks, the first part concerns the assets we have in unit-linked products distributed by banks. Well, the growth is dynamic, but if we look at the insurance products on the market, I've already talked about that a bit, but you can see that we're cooperating to a greater extent with banks belonging to the group, and we can see the number of clients we've attracted to our investment products, our protection products and our nonlife insurance products. So in 1 quarter, we've been able to attract more than 50,000 customers in nonlife. We've got nearly 20,000 in the life business. So these are lines of business, which will continue to be resilient and grow in upcoming quarters. So banks are introducing products with PZU products as the core element or an underlying element. So if we look at assurbanking, this is a part of the things we're doing. We can see some clear growth. The numbers themselves aren't that big, but there are some legal and financial things, which will make it possible for us to be able to offer banking products to our customers. And so then we can -- I'll give the floor back to Tomek to walk you through the financials.
So if we look at the financial results, we should start by summing up sales. So once again, we'll begin -- we have the best beginning of the year. So it's the best year in history for us. We've moved up by 1.2% year-on-year, but we have a 5% decline quarter-on-quarter. Right, the devil's in the detail. So let's look through the individual lines and segments in order to understand what's happening inside the portfolio in order to understand better the changes that are transpiring.
So if we look at the nonlife mass insurance year-on-year, we can see that there's a small decline. If we look at gross written premium, this is primarily the case in motor business. We said that our transaction price today is slightly different from what it was in the corresponding period of last year. So as I mentioned, we are gradually starting to raise that price again in order, within Q2, perhaps Q3, be able to fill in that missing part of the premium income depending on what the markets are going to allow us to do. So despite this negative change, we see that the motor owned damage business has grown, and so we've had more policies here. And we see a minimum amount of growth, but it is growth in individual nonlife business.
So under this quarter, we've seen strong growth amongst the corporate customers, both in terms of motor and nonmotor business. We're growing both in terms of the contract numbers as well as their prices, and this is something that pleases us. Our prices are seen as being very attractive amongst the corporate business customers. So we've seen strong growth in Q4, and we see that our rate of growth continues to be quite decent.
If we look at the life business, as Mr. Palac said, we should see protection business quite different from the way we see investment business in life. So in protection business, we're growing both with respect to group business as well as individual business. So also, as writers to loans -- consumer loans with -- offered with banks in the group, so the banking segment to a large extent is responsible for this upward movement. So our own network is also generating sales growth, so our branches as well as our agents, especially agents. And this is the program called Network Plus. You know about this. We've talked about it quite frequently. We are investing in our own network to ensure that the shortages we see in life business as a result of natural events -- and we see a large number of these deaths in, say, Q1, and so we need to attract new customers on the mass segment as well as in the corporate segment. So our annual premium equivalent is growing in double digits, some 20%. And so that means that the CapEx we've spent is converting into real income, measured in Polish zloty.
What we'd like to draw your attention to, if we look at investment business, we can say that the Polish FSA financial supervision authority has said that unit-linked products will be reviewed, scrutinized quite strongly in terms of the distribution model. We know what sort of practices were prevalent on the marketplace in terms of creating incentives for distributors, where value is and what the quality of the product is and how much value growth customers see. So on one hand, this is something that pleases us, this is an attempt to bring stability to the market, where the clients' interests were not always taken care of to the utmost degree. So we hope that we're going to be able to benefit from these changes and new regulations because our products are transparent, and our customers have benefited from the strategies we've utilized in asset management.
If we look at international insurance, we've seen double-digit growth. Our operations in Lithuania, Latvia, Estonia are growing in nonlife business, both in terms of motor business and nonmotor business. We can say that, that region is moving through a similar set of processes like in the Polish market. There's a little bit of lag time in terms of the [ volume ] we're seeing in the Polish market. If we look quarter-on-quarter, I would draw your attention to one thing, that's the special situation we see in corporate business.
So in motor insurance, we've seen a large amount of growth in fleet insurance and lease contracts because of tax and legal regulations because it was possible to treat those costs as tax-deductible. We also saw in Q4, generally speaking, as a matter of seasonality, it's a bigger quarter. So this negative figure is not something that should worry us. This is the result of the heightened level of renewals we generally see in Q4 and corporate business. We've seen some bigger unit contracts, accounts signed by our mutual company, but also by our distribution networks, but also from our corporate segment.
So if we look at our results, they are outstanding. And if we look at the contribution of banking activity, the banking segment has contributed much less than in the similar quarter of last year. This is because of the fees or charges, contributions made to the banking guarantee fund. We're all familiar with what's happening there. And despite those higher levels of charges to that fund, we've been able to grow quite strongly. So ROE above 20%, and so our combined ratio is below 90%, so far below our strategic objective, which was to have a 92% combined ratio. This is something that's across the cycle.
If we look at the margin in life business, it's growing slightly, even though seasonally it's a little shallower. But if we look at a 12-month rolling basis for our life insurance return, we continue to see that it's quite high. It's in excess of 22%. If we look at our costs, we can see that we've shown a lot of discipline here in terms of admin expenses as well as acquisition expenses. We have higher admin expenses, were growing because of payroll costs, what's happened this quarter. And affects the comparability with Q1 2018, we've recognized a little earlier a program we're signing with our employees. And this is a profit-sharing program. So we signed an agreement at the end of Q2, and we recognized a 6-month effect as a result of their expected profit-sharing. Here in this year in Q1, we've recognized that pro rata share linked to that timing. And so it's a classic solution, which means that our employees are even more interested in making sure that their day-to-day work translates into higher profitability and mean they can earn more. So it's a variable incentive plan. So they have, basically, an ability to participate in profit-sharing.
So if we were to bring this down to a comparable basis, we would have a lower admin expense ratio, probably about 6.3%, and so we can say that admin expenses are basically flat despite the fact that they're growing. Acquisition expenses are trending up, but this is linked to the change in the mix of products. So we have more nonmotor products being sold, which have slightly higher acquisition expenses.
So if we look at claims and benefits paid, we can say that there is growth, but we, at the same time, see that the asset portfolio has grown, where we're managing savings. We have investments. So if we were to clean or adjust for asset increases, we wouldn't have a 9% increase, but like a 4% to 5% increase. Some of you had said this morning that this growth in claims paid was above average. Let me tell you that it's quite decent, and it's below the level that we've laid down in our strategic targets.
And so the last element here in our insurance underwriting activity, this is our investment activity in the main portfolio. So we have an annual yield of 4.5% that's 70 basis points above the strategic objective. So I said that we're going -- want to be able to generate -- put together a portfolio that would generate 200 basis points of profit above the risk-free rate. So this is very good. We've seen this across investment classes, say, for treasury bonds. We'll talk about treasury bonds in just a moment. So if we go on -- well, we've already talked about costs. One thing I'd like for you to remember once again that costs are under control. Our normalized admin expense ratio is 6.3% post in Q1. So it's more than in Q4, but we have seasonality, which focuses all of this on Q4.
If we look at our investment performance, this has surprised some of you. Let me remind you of what we talked about many times in terms of what's going to happen. And this is something that's happening, and Q1 is a very good summary of that. We see a change in the management philosophy. So if we look at debt instruments and fixed income, we don't do selective asset packing. We're looking more at long-term strategies as opposed to short-term strategies. We want to flatten the result over the year, but at the same time, we want to make sure that it has a better fit with our liabilities. So if we look at the treasuries, we had -- so of the PLN 9 billion, some PLN 6 billion has been converted into [ feso, quasi feso ]. So on the P&L side, we've got amortization of the coupon, but on the capital side, we have that portion that's responsible for changes, and this is above that level of amortization. So we have international bonds, and this is swapped to PLN. So we've got more than PLN 1 billion there. And we continue to build our portfolio in that currency. So we have ongoing reduction in the equity portfolio in Q1 of this year. We've cut it short by [ PLN 350 million ] this quarter. So our total along -- exposure along with we're not exiting the [ Azoty ] company. So equity insurance represents some 2% of our total exposure. So we try to manage our corporate bonds portfolio.
So on one hand, we're trying to mitigate risk, but at the same time trying to mitigate concentration risk, so slightly smaller tickets, especially if we look at the volatility on the market. So if we think about the market conditions, where things start to flatten or go down, we don't want to be hit by the problems suffered by the issuers of these instruments. So to give you a flavor for some of the figures, how we're trying to eliminate the volatility in the portfolio, at the end of last year, instruments that had mark to market and went through our P&L, they represented some 25%. Now it's 16%. We want their percentage of these type of instruments and these type of strategies to be no larger than 5% of the portfolio. If we look at our capital position, even though we have a very high dividend proposed by the management team and approved by the supervisory board, so your customers who make the decision to invest in PZU will be able to generate a high level of profitability, a good yield, more than 6%. So despite the fact that we have to carve out that PLN 2.4 billion from our own assets because that's the value of the dividend that would be subject to payment. We closed the year with some PLN 23 billion. So even though we have a bigger size of the portfolio, our solvency ratio is above 220%, and that means that our financial result is not a paper result, but an economic result where we converted immediately into capital. So I'll ask Mr. Palac to say a few words about our strategy.
So to be brief, where are we in terms of the execution of our strategy and the various business lines? So if we look at nonlife business, so we have a market share in excess of 35%. Our goal is to have 38%, but having in mind where we want to be in terms of profitability, as you can see, we have a very good profitability with a core combined ratio of 87% versus our strategic objective of 92%. So we've got room in order to build our market position. So this will be a blended outcome of these various elements. If we look at our life insurance position, so the size of the business is nearly exactly where we want to be. So the profitability is 20% the rolling 12-month yield in Q1. It's always a little lower, but over the course of the year will be in line with the strategic objective.
If we look at investments, assets under management, we've got more than PLN 50 billion. Our goal is to have PLN 65 billion. So the goal had assumed that the organic growth could be supported with additional acquisition activity. We're not abandoning that objective, but we have to observe the market responsibly in terms of what sort of targets could appear on the market. So we need to have the organic support as well. We will continue to grow these employee capital accumulation schemes, Polish abbreviation is PPK. But this will not be such a big program in order to be able to fill in the GAAP up to 2020, at least organically.
So Tomek has already talked about our surplus yields on the main portfolio. About the risk-free rate, Tomek has already said that we're 70 basis points above. If we look at health, we have seen very strong organic growth. We're very active on the acquisitions field. We have more than PLN 600 million revenues. We're on a good path in order to deliver PLN 1 billion in 2020. If we look at the profitability for the first time, we have double-digit profitability, and so we're looking quite optimistic at our goal for 2020. We can see banks making their contribution to the result. So it's more than PLN 600 million for 12-month period. We'd assume that it would be PLN 900 million by 2020. So we think it's something that's doable. We'll see what the external environment will give us because this will have an impact on the banks. We've given extensive commentary about the banking guarantee fund and so the other goals are feeding into our major objective, which is return on equity. So we have 19.5% ROE in Q3 -- or sorry, Q1 of this year, but our goal in 2020 is to have more than 22%. So that's more or less it in terms of the presentation.
So let's go ahead and field any questions, if you have any questions at this time, ladies and gentlemen.
So could you give some more flavor about the Polish FSA position in terms of price adequacy? Should we see price increases like what we had in 2016, 2017? What sort of impact would you expect on your business?
So we're talking about the position of the Polish FSA in terms of price adequacy, but I'm interested in particular about the motor business prices. It's hard for me to say what the Polish FSA is going to do, but they are saying that prices should be adequate to the costs that are being incurred. Today, we've seen that now and again signals are generated, especially as new market entrants show up, which can, of course, destabilize the market to some extent, but as I said, we will behave responsibly, and we want to be able to run our business on a stable footing using the price paid by the customer. That's what's important at the end of the day.
What I would like to add -- this is something we've talked about, now I want to add this that we saw strong discounts on the motor markets. So if we talk about motor TPL or bundled prices, we saw discounts in the teens, high-teens, whereas, last year we had the continuation of the trend that had gotten started in the previous year. So at the end of last year, we had witnessed a series of cuts, which had been going on for about 18 months. We're aware and, I think, the Polish FSA is aware that people's memory is rather myopic and people might not remember too well what happened in 2015 and 2016. And so they're utilizing their tools on a preventive basis in order to disincentivize these entities from continuing these paths so they don't jack up the spiral. But at the same time, they're looking at the capital position of the various insurance undertakings. Not all of the players working here have a capital adequacy or solvency ratio of 220%. Most of our competitors give the bulk of their profits to their mother companies, leaving their capital position at close to barebones basis, the minimum. And this is something that could also be of importance.
So I have 2 questions. My first question is about the employee capital accumulation scheme. Is there a market share target? And when do you anticipate to hit the breakeven point on this project?
We don't have a number in our head in terms of a target market share. We know our position on the marketplace when it comes to group life business, and we'll utilize the channels of distribution we utilize for group business. I would anticipate that will be closer to the upper range. We don't want to make any declarations about specific figures. The breakeven is something we do not divulge. It's a strategically important project to us. So in the long run, we see value in participating in this program.
My next question is about insurers from Europe. We see more and more insurers are cutting away from certain segments, we're talking about coal, and so it's going to be difficult to cut away or carve out some of the dirty industry. What sort of idea do you have in counteracting this?
So I can respond to this. If we talk about insurance for industry overall, we are an insurer that locates a large portion of its business in Poland, and so the business done in Poland will have an impact on our portfolio. If we think about concentration, it doesn't seem to me that it's a threat because we're able to utilize reinsurance programs in order to distribute or dilute concentration despite certain market statements about how entities will treat the coal sector. We don't see any problems with diluting this risk. So I would say that our portfolio has a very good and safe position. So reinsurers continue to accept this risk. They're not refusing to accept that. We've, of course, seen that many companies have this on their agenda, but the reinsurance market is quite deep and broad. We're able to give safety and have a large amount of risk spreading across the global reinsurance market.
I'm from Santander. I have a question about the sense you've mentioned a moment ago about having -- that only 5% of your assets will be mark-to-market. What sort of yield will the other 95% be earning? Are you going to talk -- what sort of risk will you have in the balance sheet? Will it be equity risk or other types of risks?
Let me give a little more precision here. 5% of our assets, those will be assets where their volatility will go directly through the P&L. That doesn't mean that we're going to toss out from our portfolio everything that's mark-to-market because it's impossible to do that. You can't build a PLN 40 billion portfolio in such a way to eliminate volatility. But there is a difference, and we're aware of that, that you and your customers assess us through the P&L, where that volatility, if it appears, is it going to be posted in the P&L or will it be post in the revaluation reserve or will be spread across those 2 places? So what I've said is that at the end of 2019, we want to build a portfolio, where volatility stemming from the volatility in various asset classes, where only 5% of that will -- if we can use -- maybe it's the wrong word to say that we would take a hit, but only 5% of that would go through the P&L. All of our other strategies will involve portfolios, where if volatility will occur because of political tensions or trade wars, Brexit or any other events, we want to see that volatility in our capital, in our balance sheet, in our equity. And that means that it would not have such a major impact on our position and our ability to pay dividends.
If we look at the changes in our management philosophy from highly selective to a philosophy of buy-and-hold, it doesn't mean buy, hold and forget but buy, hold, monitor, react. We would be able, under the assumption that we won't commit errors, in terms of asset selection to manage short-term volatility in our capital position because its impact on our own funds, shareholder funds will be much smaller than the same impact if it were to be run through our P&L. I'm not sure if I responded to your question. Basically, it doesn't mean -- let me give you an example, I talked about treasury bonds. Last year, we had PLN 10 billion at the start of the year mark-to-market, plus we had some PLN 19 billion in our HTM portfolio. Today, the structure of the portfolio hasn't changed a lot. We have Polish treasury bonds around 60% of our main portfolio. However, of that PLN 10 billion portfolio, we've created 2 portfolios where we have a ratio as follows. The split is 3.5 to 6.5, where the PLN 6.5 billion portfolio is a portfolio that was created where a change in the yield goes through the balance sheet, and this is the difference between depreciation and mark-to-market valuation. So that means over a longer period of time, it will be easier to manage that because we want to hold these instruments to maturity. So we're even more interested especially in life business to match assets to liabilities when we have 25 to 30 years tenors. We don't have those type of asset classes nor is there supply for that on the market, but this is the direction and philosophy we want to espouse, and we want to eliminate volatility from our portfolio to the greatest extent possible.
You said that in 2019, the scale of savings on new contracts is PLN 40 million. What percentage of that will go through PZU? What sort of contracts are we talking about that you've been able to renegotiate for such major amounts?
These are various contracts. We have 3 sources of these contracts. So we have IT contracts. That's the first bucket. The second bucket are media related, where we can run our marketing campaigns more effectively. We're talking about a joint basket of costs in 3 companies or 3 groups, so the PZU Group and the 2 banks groups. So we estimate that just like last year, we had PLN 40 million in savings. This year, we'll be able to achieve that same level of savings you mentioned a moment ago.
If we look at corporate TPL, on one slide you say that this is where you have the biggest amount of pressure. I think this is on Slide 8, lease companies and fleet insurance, but at the same time year-on-year you're growing in the segment despite the fact that the combined ratio is 100% or 99%.
99%.
So I assume that the combined ratio will deteriorate.
I think it's a bold hypothesis to say that our combined ratio will move downward. This is a demanding market. There's a lot of pressure, of course, but it is something we haven't had up until now, and we're gradually implementing in terms of our lease partners. We'll have totally different tools for quotation from the ones we've had up until now. I've talked to some of you and mentioned this. We talked about quotation services where it's going to be possible to do it differently from what the market has done up until now. So it will be possible to have a single flat rate for everybody. Well, that meant that we had to do a lot of gymnastics last year. So an attempt to raise prices in this segment was counterproductive because by raising prices in this segment we were losing customers, but we were losing the most profitable customers because that price wasn't acceptable. We weren't able to differentiate price. Depending on the quality of portfolio, risks in the portfolio would be retained here at [ loss ].
So our higher margin customers underwent attrition and moved to other customers, so we had a similar level of claims or loss ratio. We lost the portfolio where we had profitability and so the financial takeaway was opposite to what we intended. So we are deploying a totally different approach to how we quote and underwrite this business. That's why I said your hypothesis was quite bold or daring to say that we would have a loss of profitability. We have an idea about how to grow profitably and that's why we want to do that. We'll see how that will play out just as in other areas and perhaps some adjustments will be needed. And we'll make those adjustments. But -- so we will certainly act in an intelligent fashion as we penetrate various markets. We're not going to act just mechanically.
I would revisit your investment performance with respect to your strategy. Perhaps this is a naive question. We can say that the level of equity has fallen in your overall portfolio.
I wouldn't say that the level of equity has to stay where it is. I'm sorry, perhaps we can continue in this approach -- sort of an interactive approach. It's not the case that it has to stay at this level at all costs. The way in which we see the market, what's happening in the market, and looking at what's happening in recent days is showing that we have 2 models. So there is the golden rule for a strategic allocation. You can under weigh individual classes depending on what's happening in the market. Today, and we've communicated this to you at the end of last year, we don't have an appetite for the risks that are materializing. So in certain periods, we will try to get rid of excessive concentration, excessive volatility. Of course, it's all very subjective. We want to have higher quality debt exposures. We want to get rid of certain bonds or instruments that don't meet certain qualitative criteria. And so the recipe for PZU is not to have an exposure of 5% to 7% equity. That doesn't mean that in some time from now, please don't ask me when, I could ask you the question and perhaps then we could redefine our roles -- when will this market start to show a totally different face, but it will be at a different end of this cycle. We'd like to benefit from certain circles and perhaps in different asset classes from now. So the volatility and the above-average risk is not something we have an appetite for.
That's what I wanted to ask about. The essence of my question was, in the long run, where do you want to generate that surplus yield above the risk-free rate. I had the impression that these equities would continue to be a small portion of your portfolio, and I was wondering how the bond portfolio would actually deliver that surplus yield above the risk-free rate, but I think you've responded to my question.
Let me remind you of one thing. So one thing that's difficult to roll over at the same yields in the hold-to-maturity portfolio, well, equities are not the only instrument where we have yields of 5% to 6%, that's why we have corporate debt. That's why we've built an investment portfolio in real estate for it to offset, to some extent, those other things that are linked to equities, where we're not going to be able to control them at certain time junctures. If I remember correctly, real estate investments haven't grown in terms of magnitude. So it's 7% of the portfolio. That's correct. It hasn't grown.
In terms of investments overall, so I've not always covered the company, but if you'd remind me why is the investment in the [ Azoty ] company a strategic investment?
It is because we don't want to sell it.
So maybe the final question, if there is one more question out there. Okay. Thank you very much for your attendance.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]