Powszechny Zaklad Ubezpieczen SA

WSE:PZU

Earnings Call Transcript 2020-Q1

[Tomasz Kulik, executive]

[Audio Gap]

substantially positive. Actually, we would like to look at the high level of capitalization and the capital safety, which is affirmed by our solvency ratio in excess of 200%. After we pay down our subordinated debt -- or senior debt, excuse me, what today we see in our capital, this is a mix, some 90%, 87% consists of Tier 1 capital.

We'll tell you also about our operations in the face of the situation that has never been seen before, linked to the pandemic and our investments linked to digital transformation, which are important, not only here and now for us to be able to communicate with our clients and render remote services to our customers, but digital transformation is going to be all the more important post coronavirus. Our customers will understand and they see that not only branches, not only direct links and interactions with an agent or a broker, but doing direct business will be the key to success in the post-pandemic world, and we want to be duly prepared for this.

If we look at sales in Q1 of this year, we had PLN 6.1 billion in sales. The increase over Q1 of last year is higher than 3%. So even though the market conditions in non-life were down, even though we had a slowdown in motor business premiums, we actually had negative growth, which, on one hand, was driven by volume, and I will say a little bit more about that later, but also transaction prices.

Last year, we observed basically price cuts, discounts on the market, which means that we started with a lower transaction prices, both in motor TPL and motor own damage. Despite that pressure, we saw a very good growth rate of sales. And then we also saw good results in non-motor business year-on-year. We had digit growth of 12%, despite the softening market conditions. And we saw that we had a totally different set of market conditions in Q1 of this year.

We also saw robust growth in life business. If we think about life, we grew over the whole portfolio by 6% year-on-year. It's no longer just group and individual continued business, our individual life portfolio, where we have regular periodic premiums, protection business, and the growth rate year-on-year was at 27%, a very high level, which gave us very good results.

If we look at health, we see growth year-on-year in excess of 40%. We're pleased with what's happening in the TFI portfolio. This is the only TFI or investment fund management company where it has attracted more assets, which is different from the rest of the market. We saw that some PLN 19 billion was paid out by the rest of the market. We continue to cooperate with the banks. And all of this taken together has contributed to further sales.

If we look at the result, we can say that Q1 should be divided into 2 buckets: the first bucket, quite important, linked to the stable insurance business; and then the second bucket was linked to what was happening in the banks, where we've observed quite a bit of pressure linked to coronavirus directly, where we had the deterioration of the loan portfolios and their quality. I'm not thinking here about PZU Group's banks but the overall sector. And then we saw what we had yesterday, so it's the third cut of the interest rates, a third cut that took place over less than 2 months, which means that we're in a totally different world from the one we knew at the beginning of this year.

So as we decompose that in that way, and this is the way we would like to approach the subject today, we could say the following thing. The comparable or recurring result of our underwriting business, our insurance business, is 8% growth year-on-year. We've retained profitability in terms of our non-life business. We have a combined ratio of 87.4%. This is practically at the same level we had last year at this time despite the declines in the non-life business that I mentioned previously and despite the pressure we had to deal with in terms of claims handling costs.

Over the recent months for motor business, they've been growing at a double-digit pace, a number in the teens. Despite that, we've been able to close Q1 with a very good, robust combined ratio. If we look at our operating margin in group and individually continued business, a situation we haven't seen for a long time, the circumstances are such that in this segment, we've been able to start a certain type of seasonality, where in the first quarter, we've had lower profitability as in Q4 because of the winter period, because of morbidity sickness linked to influenza and higher death rates, which take place not only in our portfolio but across the entire population in Poland.

Well, this year, we've seen a totally different situation. Despite the fact that the third month in this quarter of March was affected by coronavirus, despite the higher level of disease and death, we see linked to coronavirus, we can say that the death rate is lower -- at a lower level than we've seen in the last 4 years. And that means that benefits paid to our insureds and their families as a result of the major life risk, but we also see good profitability on paramedical benefits. So critical illness, hospital treatment, dismemberment, all of those products have had very good contributions to the result.

So we've got a good investment result of 190 basis points above this period. So this is close to the long-term strategic objective, the one that had been defined in a totally different set of circumstances, where the interest rates -- market interest rates were substantially higher than what we've seen in the last 2 months. We can say the costs continue to be under strict control, admin expense ratio at 7%. And once again, the ROE, return on equity, on our recurring business cleaned of coronavirus factors is 19.5%.

If we look at our capital position, we can say that we have a rating of a with A- with a stable outlook. Our capital position is seen as a AAA rating. What we've seen in recent times, we've talked with some of you, there was the recommendation made by the Polish FSA, KNF in Polish, where we had to conduct ourselves in a certain way and looking at all of the risks linked to coronavirus as well as the challenges ensuing from that. So we have to retain all of the profits from last year and not pay out a dividend, where that dividend would normally be paid in September of a given year.

I want to emphasize very clearly one thing here. We are and we want to be seen as a dividend company -- dividend-paying company. Nothing has changed here outside of the fact that coronavirus has broken out. We're a very good company. We've been capable of converting our accounting results into a business result. So a monetary result, we are capable of, and we want to share that result with you.

Now I would like to go and look at the pandemic and talk to you a little bit about how we've been able to walk through that. And I'll ask Ela to take the floor.

[Elzbieta Hauser-Schoneich, executive]

Thank you very much. I'd like to walk you through our operations during coronavirus and talk about our sales results in Q1. PZU has reacted with lightning-like speed to what transpired in our environment, and it's taken a large number of actions with respect to our stakeholders both with respect to our employees and our clients. On top of that, we have taken actions with respect to the overall society.

So during this pandemic, we wanted to maintain our business continuity and ensure safety. The PZU Group in recent months has given more than PLN 20 million for various socially beneficial goals. So we participated in financing respirators, gloves, protective gloves, as well as cars to distribute test samples. We've offered Poles unlimited advice through our medical hotline. And there are a number of other things, other measures we took. We maintained business continuity for all of our customers. And all of these actions taken towards the customers in terms of sales and service, we did all of this remotely.

What is worthwhile of being emphasized here, and this really underlines that we accepted the right strategy a few years ago, we were prepared to deploy remote services because of the digital transformation we had orchestrated previously. And recently, it has accelerated. It's usually the case in crises that the pace of change is quicker. So we utilized our platform called My PZU to render services. We have nearly 1 million people registered as users of our My PZU platform. Nearly 30% of our tied agents uses that platform. And those tied agents enter into contracts through that platform. We've also developed the provision of medical services remotely.

And so if you were to look at Slide 11 in the presentation, you can see clearly -- just a second, let me flip to that slide, so it will be easy for you to see that. If you look at the mix of services offered remotely, so telemedicine, and the services that we offer on-site through a physical meeting with doctors, so 90% of our visits were remote visits, doctors' visits. On top of that, all of the benefits in the non-life business and in the life business were offered to customers remotely. We were successful in bringing about a situation in which some 90% of the cases submitted through the hotline were handled during that first contact.

So the methods of interaction in distribution and claims handling have moved PZU into being a leader of rendering services not just in the conventional scheme, but we're also the leader in rendering services remotely. So this digital transformation that we've been implementing over the last 2 years has reached fruition. So if we look at startups and the work done by startups in terms of looking for solutions to combat the pandemic and having in mind COVID-19, we launched a competition. We have more than 200 applications of young, dynamic people who are working on the battle against coronavirus.

So I'll flip to Slide 13. If you look at our position on the non-life market, I would say that our position is very stable. We have retained our 34% market share. There are some changes we have observed from Q1 of last year. As a result of changes in terms of price policy for motor TPL, we see that the mix of the market has changed. This for years has been the prevalent market, it continues to be the prevalent market. But it has changed somewhat. So it's roughly 50% of the overall non-life market as opposed to 59%. So we can say the non-motor section of the market has accelerated its growth, and we're a very big player also in the non-motor business.

It's also worth mentioning that PZU is 1 of 3 companies in the Polish market, which continues to maintain a substantially higher percentage of the technical result of more than 49% versus

[Audio Gap]

And this is something that hasn't changed in years. We're not planning on doing anything that would adjust our position.

So we have an increase of more than 2% in gross written premium in Q1. This is primarily done through non-motor business, where we have an upswing, an uptick of 12%. If we look at the motor business, we have a 3% downturn linked primarily to the market situation. What's worthwhile saying here, during the most recent 2 months, we could say from when COVID-19 commenced, we see that new car sales are down substantially as well as private imports. That means there's less free float on the market. So we can say 50% of the potential is still available on the market compared to what we had prior to the advent of COVID. I talked about free float here. But if we look at the mix of what's available on market, so the inflow -- influx of new cars is limited. We have observed some additional effects. We have a much higher retention of the portfolio. In PZU, this portfolio is of gigantic importance.

And this is only a portion of our gross written premium. So retention has improved. And this is certainly a result of 2 factors. One of them is that customers feel much better as they stay on with a company they trust. But what's also equally important is maintaining relations with customers. And these relations are very strong. So customers stay with the player where those relations have been duly cultivated. So we continue to make these type of offers to our customers. We see some changes also in distribution channels. So you can see that the growth of own channels has taken place in the framework of cultivating these channels.

If we look at the life market, we can say PZU has bolstered its position. If we're looking at the available data, which is at the end of 2019, 31 December 2019, so the market fell by 2%, but PZU grew by 4%. And as a result, it's improved its position, where its market share is in excess of 40% measured by gross written premium. We're also pleased, not just by the retention of our position, but our ability to continue improving that position with respect to periodic premiums, especially with respect to protection business, where we had a market share in excess of 62%.

What's also important to mention is group business, which is really our domain. We're accentuating very strongly our position in individual business. We're the clear leader in new business for life insurance. And so the growth in excess of PLN 24 million year-on-year in terms of annual premium equivalent testifies to our ability to sell and utilizing our own networks and cooperation with banks. All of this has borne fruit. You know very well that for long-term portfolios, the guarantee of stability is having individual business. And this is a business that we've continued to develop.

So PZU has seen further growth in individual insurance. It's improved its position by more than 3 percentage points year-on-year. So the market growth seen through the prism of market share measured by gross written premium. We've maintained also high profitability. It's more than 20% compared to the market average of 12% while at the same time, we've been able to maintain a very high percentage of the technical result, which is more than 50%.

So if we can go on to health insurance at this time. So this is also a story of growth. So in Q1 2020, we had more than 2 million in-force contracts for health insurance. We continue to grow sales of riders to individual continuation. We also see that if we control the loss ratio, so building this portfolio is an important parameter that we've kept at a strong level. And Tomek will talk about that in just a couple of minutes.

One other piece of information that you can see on Slide 16, in individual life insurance, we're growing very nicely. In typical protection business, I think it's worth mentioning that in the last 1.5 months, we've seen much more interest amongst customers in protection business. The number of questions is rising 20%, 30%. We do not see yet that this increase in interest has affected conversion data. We assume that this heightened interest will convert a little bit later. But we think this is a good prognostic for our life business also with respect to health insurance.

If we go back to health insurance on the revenue side, revenue is on the rise. We have more than PLN 231 million in revenue on health services in Q1. If we look at an annualization of that premium, we are coming close to the strategic objective of topping PLN 1 billion in revenue in 2020. We have growth in our medical centers as well as with respect to subscription and insurance business. Right now, we can say that we have a portfolio of 2.8 million insurance policies that are in-force in our portfolio. So it's up by some 300,000.

So if you look at assets under management and our cooperation with banks, Tomek mentioned previously that we have the only TFI on the market that has a net balance of incoming funds into our TFI. And this is certainly a mark of trust in PZU. PTE PZU's decline is a result of the market condition. And this is an effect of the slide mechanism, so we're basically behaving just the way the overall market is.

If you look at our cooperation with banks, it has flourished and is flourishing. As a result of this cooperation, banks in the group, have reached a level of PLN 1 billion. So PZU's share of bancassurance has moved up by some 5.5 percentage points. So we can say that it's delivering measurable results, not only in terms of cost synergies, which has already been achieved strategically, but it's also delivering additional revenue.

We should also mention our cooperation with Alior Bank through the cash platform. So our customers are utilizing this service because it's basically access to relatively inexpensive cash. But at the same time, it's an element that integrates cooperation between the PZU insurance group and the banking portion of the group.

[Tomasz Kulik, executive]

Now let's move on to the financial results. Thank you very much, Ela, for that recap of our sales performance. As I said, in this atypical period, we'd like to propose that you take a different look at these results. And we can take a look at what's been caused by this specific situation linked to the coronavirus. And everything that's linked to our core business, as a result, has a lesser impact in terms of the susceptibility to the negative phenomena we're dealing with.

So if I begin with the result of PLN 116 million and I decompose it, I think I could say the following. With respect to COVID-19, what has contributed to this result? We have a slightly lower loss ratio, which is visible in motor business, non-life business and, to a slight extent, in life business, which is linked to the lockdown, lesser level of traffic we saw, especially in March. And this has affected the frequency of non-life events and also, to a lesser extent, medical risks.

If we look at the investment results, we can say that Q1 saw some temporary FX differences unrealized in the real estate portfolio. In Q1 and Q3 of every year, we talk about that. Because at the midyear point and at the end of the year, those differences are eliminated because we're able to utilize the same exchange rate between PLN and euro for our hedges and for the underlying real estate. But we use -- at Q1 and Q3, we use the hedge rates that are current plus the real estate valuations at middle, 30th of June and 31 December dates.

If we look at the other elements, what other elements do we see? We see the impact of FX differences. We're talking about the depreciation of foreign currencies. Then we also look at the impact on provisions that shows you how closed our position is in terms of foreign exchanges. We're not trying to benefit from any movements of FX rates. This is not our area of operations. We try to be fully short up here. As you know, we'll talk about this a little more strongly in a moment, the outbreak of coronavirus, and we had a level of [ 222, 230 ], we're down to [ 1,500 ]. So we had big decreases in share prices because we were at [ 2,200, 2,300 ] down to [ 1,500 ], so we worked [indiscernible] portfolio wouldn't be so exposed. We wanted to have greater resilience to these type of situations. So we started 2020 with a very good portfolio, well prepared for these type of shocks, even though that loss as a result of revaluation took place on the stock exchange.

If we look at the banking portfolio, we had 2 events. The first one was credit risk and the provisions recognized in banks as a result of the expected deterioration in the loan portfolio quality and what our share of those provisions is. And the second item was the write-down of our position in Alior Bank. So after the first 2 declines or cuts in the market interest rates, we were compelled to recognize that impairment. And this is something that's part of the results for Q1. Why are we proposing to look at this, this way? Because it better reflects what's happening with our core business and what the foundations are of our operations. This shows you that we're poised to grow, and we keep -- we are capable of growing and the level of growth is high at 8% year-on-year.

If we move on to our P&L, starting with sales. Ela already told us about what's happened there. Let me remind you, we had growth of 3.3% in Q1 2020 versus Q1 2019, a much higher rate of growth than in last year at this time. Despite the pricing pressure on motor business and the lower conversion in new business in March, we've been able to achieve these good results. If you look at claims paid, they are substantially lower, which, on one hand, as we'll see in a moment, in profitability, both non-life and in life business. So this means we have very good insurance results, the profitability are very good and we benefited from that in this quarter.

So if you look at our investment result, for the first time in this line, we see a red figure, which is negative. We'll talk about that in details. There are 3 major items. This is the main portfolio, where these results are very, very high. And they're not representatively high if you look at what's happening in the financial markets. The second contributor, which has made the main impact, this is the investment result of our clients in terms of their strategies on PZU products. And these strategies in Q1 of this year had a lot of appetite for risk and then the outbreak of coronavirus, and our clients recognize that in the rate of return on these strategies. The third element is the one we just discussed, which is the temporary situation as a result of the mismatch in the real estate portfolio in terms of what's hedged and the property valuations.

If we look at admin costs, we've grown by 10% year-on-year. The biggest impact here was made by salaries. So there was a lot of pressure because of wage inflation last year, just as for everybody. We have seen a market dominated by employees. And so those salaries grew quite strongly. This affected PZU as well. We tried to create attractive working conditions for our employees. And for some time, we had a profit-sharing mechanism with our employees, which encouraged them to deliver above-average results because then they would participate in that. So we have higher sales. And non-motor products are growing, even though the acquisition expenses are a little higher because this segment is more profitable, and it's not under the same type of pressure as we see in the motor business.

So to recap, net profit in the nonbanking portion of our business, PLN 577 million. Unfortunately, we were compelled in the current situation of a macroeconomic nature to recognize an impairment on our investment in Alior Bank of PLN 516 million. And these 2 elements, having in mind the smaller contribution of the banking sector itself, we mentioned credit risk and the additional provisions that were added in Q1. So we have -- the quarter is now being wrapped up with a net result of PLN 116 million. What I would like to emphasize, we have a very high ROE on our recurring business. We have an outstanding combined ratio in our non-life business. And despite price cuts in motor business and what's happened in claims-handling expenses, as I mentioned, they were growing by a number in the teens in motor TPL and motor own damage. We had outstanding results in Q1, which broke with tradition. We also had changes in the product mix and what happened with our admin expense ratio, everything, admin expenses were under strong control. All this was quite good.

Now a few words about profitability in our various segments. So if we look at non-life insurance, we can see that more business is being routed through remote channels. We talked about -- or Ela talked about the My PZU platform. So we're trying to serve our customers through our remote channels, which also has an impact on our profitability. What we see in Q1 with respect to frequency of motor claims, so the best period, we were 30% to 30-some-odd percent below the frequency of claims target nowadays. We're more or less at the same level as prior to the coronavirus.

What happened, unfortunately, at the same time, as a result of the depreciation of FX, so we see the value of claims grew, especially in euros. So the spare parts, where most of those spare parts are priced in euros because those spare parts are produced for manufacturing outside of Poland, well, all of this will stick with us for a little bit longer in terms of what we were able to achieve and earn, thanks to lower frequency in Q1 and a little bit after Q1. So we can see that we have good experience in agricultural insurance, residential insurance and non-life products for small and medium enterprises.

So in corporate business, we saw a greater contribution, up by some PLN 30 million and above. What are we doing? So we want to manage and create long-term customer value. So we're talking about CLTV. We want to break with thinking, where we think about profitability per product, we want to optimize profitability per client, per basket of products. Of course, we have to have in mind regulatory requirements. But this is a totally different philosophy of how you manage prices. Naturally, we continue to work on tariff solutions. We continue to run projects enabling us to manage our prices with greater granularity. We're talking about price tariffs 3.0 here.

So in Q1 of this year, as we mentioned, we had higher margins. And for the first time we're above 20 percentage points of profitability in group and individual continued business, above 20% profitability in Q1. And this is linked to a number of things. One, we have lower loss ratio in paramedic products. And then we have lower death rate, which is true not only of our population but also across Europe, also having in mind -- or despite the fact that we had coronavirus in this period. So if we look at individual insurance, so the market margin is down by 3-point-some-odd percent. But as we're growing, and we're growing quite strongly, as Ela mentioned, so in absolute terms, we had a bigger contribution to the results.

A few words about what's happening in terms of mortality loss ratio in group and individual continued business. So the peak of mortality in terms of the number of deaths in Poland from 2017, we're substantially below that peak. From Q1 2017, we're 8% below that, so 1.5 percentage points compared to last year. So we see a lower loss ratio because of deaths with respect to the main insured and the co-insureds. We also have good profitability on paramedical products. We're talking about hospital treatment, dismemberment, critical illnesses. So in this particular segment, we were capable of showing a loss ratio or claims ratio for the first time since Q1 2020 that would be below 80%.

So if you look at our segmental note, once again, this confirms how resilient the insurance portfolio is to the coronavirus. If we look at the combined ratio in non-life in Poland, we already mentioned it was 87.4%. And this is underpinned by mass business and corporate business, where we've been able to generate robust margins in life business that's above 20%, not only in group and individual continued business but across the portfolio including individual insurance. If we look at our international operations, we also have high results. So we can say that the insurance business in our portfolio, in particular, are very resilient to these shocks precipitated by coronavirus.

We started the year well in terms of rebuilding our portfolio of investments in our main portfolio. I would reiterate what we said many times last year, the change in management philosophy, where we think about short-term profits and move into long-term profits, where the volatility or the fluctuations caused by changes in sentiment on the market or with respect to specific investments are somehow dissipated and goes through capital, so we have greater activity on long-term bonds. We reduced risky exposures in terms of sectors and geographies and also liquidity.

So if you were to look at our portfolio as a whole, we can say 82% of our portfolio is bonds. And the bulk of those bonds are treasuries. Everything else is money market instruments, then we have the rest, real estate. And this seems to be the best prescription for what the investment portfolio mix or composition should be in these uncertain times. And so as we speak to you, we can show you our profitability in terms of our surplus above the risk-free rate of 190 basis points.

If we look at the individual buckets of our corporate business, we only invest in investment-grade papers, very defensive. We're talking about sectors like IT, data processing, data mining, sophisticated technologies, communication. These are things that mean that our portfolio has a low level of risk or a moderate level of risk. It's well prepared, in our opinion, to face the current situation.

If we look at our real estate portfolio, it's very well-diversified. It's fully closed in terms of FX risk. So to a large extent, it's in the logistics vision, so warehouses, so where you have high storage warehouses and it's a base for e-commerce. And we all see that in the face of coronavirus, this is the direction in which the trade industry is moving. So if you look at our debt portfolio and our real estate portfolio, we think we're well positioned in terms of those strategic areas where we should see growth and we should benefit from that growth. I've already mentioned that we have some temporary FX differences in every single Q1 and Q3 of every year because we have different FX rates used for the hedging -- hedges, the derivative instruments we use and the underlying property valuations, where we use the exchange rate from the end of the year.

So if you look at the overall investment result in our main portfolio, PLN 421 million, so this was a very good outcome. Unfortunately, our clients can't say the same about their results because, as I said, in their strategies, they recognized a loss in Q1. We have high surplus of profitability above the risk-free rate. We've built new long corporate debt portfolios. So the fixed coupon business has seen growth in its valuation, the profits generated on the OCI, other comprehensive income. And then we have contribution of euro investments, which is something that fully hedges our liabilities for insurance purposes.

So if we look at then expenses, we've already said a couple of words. Payroll expenses are on the rise, then also IT fees for licenses plus depreciation of those elements responsible for automation and new systems, which enable us, not just in the back office but also in the front office, to have interactions with our customers and deploy our strategies. Ela mentioned My PZU, which is a platform where we have some million customers. And this positions us well in terms of the pandemic itself as well as in the post-pandemic world.

We talked about solvency. We have a very high level of solvency, which is largely caused by recommendations given by the Polish FSA. And we had the letter from the Chairman of the Polish FSA of 26th of March both to the -- addressed to the insurance market and the banking market. And it recommends that the results generated last year be retained because of the uncertainty linked to coronavirus. Naturally, we are in compliance with this recommendation. And that's one of the reasons why we have a major increase in this solvency because of the investment results and underwriting results from last year.

A couple of words to sum up our strategy execution over the period from 2017 to 2020. This is a pretty special year because it's the last year of our strategy. At the same time, there's a lot of pressure, gigantic pressure because of the current situation. So at the end of this year, we will most certainly want to present to you a new strategy, a new strategy that would address the situation we're currently grappling with. So it will be, in part, our response to this uncertainty as well as to the challenges. We'll have in the insurance and banking segments, after we return to what's commonly referred to as the new normality, so everything suggests that in terms of the market shares, perhaps we'll not be able to achieve this goal because of the pandemic, so having the high levels of profitability and the market shares of 34% above. So we can remember that we had a strategic of 92%, for combined ratio, we're at 87%. And then if we have the culture of admin expense ratios in sales and admin, so we had 10.5 million customers. Our goal was to have 11 million customers in the life business. And the high margin here, where in Q1 of this year was boosted by the low mortality rate plus we had the higher risk -- profitability in paramedical products.

So if we look at the Polish Stock Exchange in respect of our assets under management objective, well, what happened on the market had the biggest impact here this year compared to what happened last year. And then the gap with respect to the strategic objective. Here, we've not been successful in terms of participating in market consolidation in asset management or asset management. And perhaps that's good. Because what did transpire on the market and what has happened on the stock exchange and on the -- what's happened with the interest rates, so the value we would have thought about generating prior to the coronavirus, well, we would have difficulties now in the world post coronavirus achieving. Despite that, the contribution made by this business is above the level posited in our long-term strategy.

So we have a return above the risk-free rate, which is 190 basis points, close to our long-term objective. So we have PLN 1 billion is our revenue target for the health business. If you annualize our first quarter results, we're above PLN 900 million, so we're close. So we have the slowdown in the market in closing some medical centers because of coronavirus. So we believe that this situation can be made up for up to the end of the year. If we look at banking sector, the assets seems -- the target seems to be within reach. But we're going to probably have to recognize some differences because of the -- with respect to the contribution made to the overall results so if we get rid of or clean up the results from COVID, we can say that ROE is quite close to the target.

Maybe a few words about COVID and how we see it. We're looking at all of the factors linked to this pandemic and how they affect our ability to achieve our objectives. Both now and in the future, we look at this just as we look at the P&L. And we're looking at banking operations separate from insurance operations. So what sort of challenges do we see in insurance? We see that there's going to be a slowdown in new sales, smaller volumes of new business because of conversion rates. This would be offset by a higher level of renewals in the portfolio. This is a sufficiently positive sign because renewals don't cost as much in terms of commissions.

What's going to happen later in the year? What's going to happen with respect to the coronavirus? Whether or not the rebound will look like the letter V or the letter U, we will slowly come back, where we're going to have double comeback in the form of a letter W. So we're going to have to follow the interest of our customers in non-mandatory products. So increases in joblessness could affect group and individual continued business. So in order to prepare ourselves well for that situation in the post-pandemic world, we have to invest in technology and we have to become a digital insurer, transforming from a conventional insurer.

If we look at expenses, frequency of claims but also the currency is important, the costs of spare parts in foreign currencies, especially for foreign claims, international claims. Then we have credit risk in insurance products to the various type of guarantees for payments and things of that nature, everything that's linked to our clients' ability to repay their liabilities. And in the extreme cases, we're going to have to take responsibly for that. We haven't seen that materialize, but that risk does exist. So we're trying to secure ourselves against that, hedge our position. And so we want to have certainty that we're well prepared and secured and protected with respect to our customers.

If we look at business interruption, frequently, you pose questions here. And so if the situation doesn't exist, then our liability is limited. So this only happens in non-life business. So our exposure to tourist business is very limited, so we don't have bad information here, quite the opposite. The only costs we have are the costs to prepare ourselves to deal with this situation with respect to investments. I think we've already talked about our investments.

If we look at banking activity, on one hand, we have the interest rates and the second side is interest rates. And the third thing is interest rates. And the interest rates are going to be the name of the game this year. There's a lot of pressure here. This will affect the net interest income, the ability for banks to achieve their own strategies, which will have an impact, of course, on our consolidated results. Then the limited demand for loans that banks have reported, not only our banks, many banks in the market have reported provisions being created because of the expected deterioration in the quality of the loan portfolio. And this is something that we will have to handle and track in subsequent quarters of this year and then the impairment we recognized in Q1 of this year for Alior Bank.

So ladies and gentlemen, this is everything we would like to convey to you during the main portion of the presentation. Now we want to go on to your questions, and we'll try to respond to your questions at this time.

[Operator]

[Operator Instructions]

[Tomasz Kulik, executive]

If there are no questions to be posed by the phone, we can look at the questions we've received through the Internet. I'm not sure if we actually have any questions that have been posed through the Internet functionality or chat functionality. We don't have any questions from the Internet either. I don't see any questions. But I think there may be a question, just a moment.

[Operator]

[Operator Instructions]

[Tomasz Kulik, executive]

We do have a question from the Internet. So we'll begin here. In terms of the perception of PZU as a dividend company, Pekao S.A., PKO BP, have decided not to distribute or classify their earnings as retained earnings. Why isn't PZU doing the same thing? Because that enables those banks to pay out that money later.

I can respond to the question in the following manner. Our conduct, how we've behaved ourselves, how we've conducted ourselves, does not rule out the ability to pay a dividend in 2020. If the situation linked to coronavirus normalizes and if we gain certainty, of course, this would have to be confirmed in our dialogue with the Polish FSA that such a transaction would be perceived by the regulator as something that would not pose a threat to PZU discharging its duties and liabilities to its customers. So I would not like to create the erroneous impression that we've deviated from this topic. As soon as we will be able to return to normality, as soon as we're going to be able to work out or elaborate an approach with the Polish FSA, because a discussion has to be held, an agreement has to be obtained from the Polish regulator, then perhaps we'll be able to revisit the dividend topic. Today, however, we're in a very difficult situation. I'm not talking about the insurance portfolio. But interest rates have a major impact. And until we have certainty that the situation is very well understood and is under control, we won't be able to promote these type of solutions. As I mentioned, this situation is totally entirely new. We find ourselves in a business environment where the cost of money is virtually nonexistent.

We have another question. If you look at the main portfolio, what is the level of result you expect to receive or generate if the interest rates stay at the same level? I'm thinking about your estimate of the lower industry rates on your result. That's the first question.

So I can respond to this question as follows. I'll look at the slide which depicts our portfolio composition. You see here that our portfolio consists primarily of instruments measured at amortized cost. So this is long-term approach buy and hold. So we're speaking here about accounting susceptibility. Because in Solvency II, everything is mark-to-market. But the second part of my response is as follows. Considering the bonds we hold in our portfolio and their sensitivity to interest rates, we can say the following, that if you look at the non-HTM portfolio, the changes of interest rates by 1% -- 1 percentage point, that's roughly PLN 5 million. So it's easy to calculate our sensitivity based on what we believe in and how that will impact things. I can say that on average in this portfolio, mark-to-market, the duration of our bonds is roughly 5 years, which is pretty important information based on what you believe in and how the yield curve will change, how steep it will be at the beginning and the end, then you can make your calculations.

How strongly can you improve combined ratio in Q2 if claims improve? And how big will the impact be this year?

I think we've responded to that question in part, the situation we saw in Q1. In Q2, I'll give the floor just a moment to Ela, it will be offset entirely. And so all of these positive stories in terms of lower frequencies, I think this is where the question is heading, will basically be erased with higher claims expenses in Q2. And the problem is that while in Q1, we benefited from the lockdown, in Q2, we might have a breakeven here. Well, the higher claims expenses will stay with us for a longer period of time. And the shield we had for a short period of time, because of smaller frequencies with less traffic, is something that will disappear. So I think the hypothesis linked to a substantial improvement in combined ratio is not a true postulate.

[Elzbieta Hauser-Schoneich, executive]

Let me add. We're talking about changes in the mix of the portfolio. So we saw faster growth in non-motor business, where we have smaller claims ratios that can benefit us. So having for 1.5 months a lower claims base or frequency, well, we've actually -- that was for 6 weeks. And now we have returned to that level from prior to COVID. And so we're thinking for a relatively period of time, customers weren't used to that level of traffic on the streets, perhaps we'll have more frequent collisions. So I think we should conduct ourselves cautiously if we think about the combined ratio, especially for the motor business. What sort of price trends do we see in motor business? Can we see pressure on the prices? What's the -- how does that flesh out between motor TPL and motor own damage?

If we look at the material that was presented, we showed you some of the changes transpiring on the market, much fewer cars coming on to the market, much smaller private import, so this is not a gigantic impact on the age structure of cars in Poland, but there is some impact. My impression is that for a short period of time, so insurers were pleased with the declining frequency of claims and made some price adjustments, which I don't think we'll see in the future. What I can say on behalf of PZU is as follows. We need price stabilization in motor business. We need a market with a predictable profitability. That's the guarantee of safety on insurance in Poland. I would once again draw your attention to PZU's share of profitability in the market, it's nearly 50%. And we will clearly be guardians of profitability on the market. And I'm convinced that our regulator will scrutinize this market. Thank you.

[Tomasz Kulik, executive]

Thank you. So we have another question from JPMorgan. In OCI in Q1, you had a negative valuation of debt, PLN 403 million. Can you give us a comment about cash flow hedging? What are you thinking about revaluation of treasury bonds?

Well, these are 2 things, 2 elements. First one is the situation linked to Q1 and everything that's happened in terms of the interest rates. Second thing is realization in Q1, what we've done and what exerted a positive impact on the results in the P&L, so the realization of those effects of other comprehensive income up until the end of last year.

What sort of -- in Q2, how much will gross written premium fall in non-life and life? Should we anticipate to see substantial falls in Q2?

I think we can say indicatively what we believe in. In terms of 2020, everything depends on what's going to happen. In terms of the coronavirus and volatility, to what extent the Polish economy will emerge from this stronger, to what extent in the second half of the year, we're going to have a low GDP or negative GDP, which will be largely driven by a downward trend in consumption. And this would have a knock-on impact on the insurance portfolio in non-life business as well as in life business. If we look at the costs of acquisition, whether or not they'll fall in Q2, I think this is an unjustified expectation. We will continue to grow, especially in non-motor business. And on top of that, and this is something that's quite new, and this has started in the first quarter for our agents and for our employees and intermediaries in branches, we have decided to create a COVID shield, if we can put it this way.

As you know, in sales, employees receive salaries based on volumes. But nobody is walking around in the streets and it's very difficult to attract new business. Despite that, we didn't close our branches. They were open but for shorter working hours. But there was basically no traffic through our branches, no footfall. So to make sure that our agents, intermediaries and employees, who would be frustrated with the situation with being unable to earn would have left us or switched industries, we proposed them a portion of their salary that's not linked to volume. So our cost acquisition expenses will be not synchronized with sales because of that. We did this on purpose to ensure that our biggest asset, our own sales force, would not be destroyed in this very difficult period. I'll ask Ela to expound on that.

[Elzbieta Hauser-Schoneich, executive]

I understand the question was focused on acquisition expenses linked to new business versus the portfolio renewals. Ladies and gentlemen, I think we should speak about this with respect to 3 variables. One, it's very clear, so we have higher retention of the portfolio. So that will make acquisition expenses change. So non-motor business has higher acquisition expenses, that's one thing. The second thing, the level of costs will be driven by changes in the relative weight of various distribution channels. We looked at the changes in the car business, in particular, as dealers' share falls, other external channels, see their share falling because they primarily interact with new business. So that's what I've called the free float. And this is something that can have a positive impact on the level of costs. And then the third element that Tomek mentioned, where we have this sort of aid package would offset some of the benefits we'll achieve through those first 2 elements in the new areas. So the distribution costs we have at PZU are much better than the ones we see or observe across the market in Poland. So we have to have that in mind.

One more commentary, if the question was moving in the direction of whether or not the change in the distribution model, where technology is a part of that deployment mechanism, it has a cost at the beginning in terms of creating that and then later, it's somehow neutral. Well, then my response would be as follows. We are very strongly interested in humanized digitalization. So the share of technology in remote channels will be built around agents having a share in that process. So we can't assume that there's going to be a direct link one-to-one between technology and lower costs of acquisition. So we have triggered now, the number of debts fell in Q1 only by 1.5% year-on-year.

[Tomasz Kulik, executive]

Why is the margin improving so much in group and continued business?

Please take a look at Slide 24. Here, you see the precise response to that question. So we have the frequency of deaths having an impact on the group and continued business. So we have a decline of 5.2%. So that's responsible for 3 percentage points of that 5.2%. And so the difference is 5.2% and 3% is the impact of mortality differences. The other 2 less than 0.5 percentage point can be allocated to health products and paramedic products. And so we can say paramedical products. We can say part of that benefit, incremental benefit, if I can use that term, is a temporary thing. Because there was a lockdown, nobody was visiting a physician, doctors' visits weren't taking place, so medical services -- so internal medicine and diagnostics and specialized medical services weren't being provided.

So we're present in tens upon tens of key specializations in the health sector. So all of those things that weren't life-saving procedures just didn't take place. People were afraid of going to the doctors and they stayed at homes. And so some of that traffic will return to us. So we assume that we will recognize in Q2 slightly higher claims frequencies in these risks. But every health center has its own capacity in regardless of the demand put forward by our customers will be able to render only a specific number of services, to what extent our physical capacities enable us to do, so the number of physicians along with our space. So this is an important element.

So if we look at permanent dismemberment, in terms of the lockdown, people weren't walking around in the streets. They didn't break their legs or twist their ankles. And so we had record low levels of accidents. But the first day when we had parks open, then we had permanent dismemberment or accidental claims coming back to their normal level. So we had standard numbers of broken bones and things like that. All of that is linked to what we had observed in the past, which we didn't see at the end of Q1, beginning of Q2. So all of these things contributed to the results in Q1 for group and continued business.

So let's go on Autonomous Research. I'll translate the question immediately. During previous press conferences, you said we should consider our presence in the banking sector. In terms of our exposure, we have 2 banks. And we should respond to the question how we should position ourselves, giving consideration to all of the challenges.

So today, I don't want to respond to that question because this response would be completely different during the publication for last year's results, so somewhere in March. So the response would have changed partially once we had the first cut in monetary rates and then we had the second and now we've had the third cut in monetary rates. So we have to take a look at this from a strategic point of view. Once again, I would reiterate there are certain things that we can influence and there are other things we can't influence. So a bank or banks on one side, it's a wonderful partner for cooperation so that our offers and services are more comprehensive and would not just focus on insurance but would run the span or the full array of financial services. It's also a new channel of distribution, which we didn't have prior to the bank investments. We had limited exposure. Well, basically, every insurer is cooperating with one bank or another. So this was kind of a second pillar. And now we have the cut, the slashed monetary or interest rates.

So now we have to think through this subject and we have to give ourselves, first, a response. And so I think we'll come back to that during the presentation of the strategy. We're going to have to delay that presentation. We had originally thought that the presentation would be delivered at the turn of Q1 and Q2. But coronavirus has called those plans into questions. So you have to give us a little bit more time. We, ourselves, first, have to understand what we're dealing with before we can responsibly come back and convey to you what our strategy will be and how we can create value. So I think I already responded to the question about motor own damage pricing, motor TPL pricing. So thank you for those questions. Let me just walk forward a little bit.

What is the technical rate? Since the Monetary Policy Council has changed interest rates, is that a good reason for you to change the technical interest rate you use? So today, what is the valuation of the Alior Bank in your consolidated balance?

It's the same level. It had minus PLN 516 million. I'll come back to the first question because it's not as simple as the second question.

So what are the reasons for lowering the valuation of Alior Bank? So should this also apply to Pekao S.A.? Why did you only take an impairment charge for Alior?

So perhaps I'll begin with the banking impairments, and I'll come back to the interest rates and what's happening with the technical interest rate. Sorry, the question disappeared from my tablet. If we think about how we approach the recognition of possible impairments. So at the end of every quarter, we go through an analysis of causal factors, which could generate the reason for us to run a full impairment test. So in terms of Alior Bank, this did transpire. So that's why we did a full impairment test. These premises weren't meant for Pekao and so we didn't do that for Pekao. So to go through that process, well, we've asked our bank in terms of its idea about Alior Bank and its strategy that was announced at the beginning of the year.

More than a bank, having in mind the decline in interest rates, how can this affect its ability to generate long-term value?

We've received several scenarios from the bank. And based on these scenarios, we made the decision. As stated at the end of Q1, these premises did not materialize with respect to the larger bank. We will come back to this analysis and we come back to it at the end of every quarter. So if yesterday's decision will shift the scales, then we'll perhaps do a full test on Pekao S.A. whether or not -- we'll see what the conclusion is to check whether or not the carrying value of the bank, so we have the surplus value above of net asset value over the purchase price. And the benefits we'll generate from that cooperation, whether or not what the relationship will be between them, then we'll be able to give a response to that question during Q2. But if we look at the technical rate.

The question is whether or not the Monetary Policy Council's cuts of interest rates are a reason to look at the technical rate. Of course, it is. Of course, they are. It depends on the products. What sort of time cohort we're talking about, if I can use this statement. Well, we have different time cohorts. So based on what Polish accounting standards say, we have to have an asset portfolio that would cover the liabilities, which has the proper liquidity and quality parameters and guarantees repayment, repayment of these liabilities, and the interest rate, the technical rate, so the profitability of these assets. So it's higher by 20%. So let's say it's 80% of -- it's a tough sentence to understand. So basically, everything that's happened, well, the assets have to generate some 20% more. So all of this is a good reason to think about whether or not now or not, our portfolio of bonds, because this is the portfolio that constitutes the guarantee for discharging these liabilities, whether or not it's going to be capable of dealing with the portfolio that's already been sold of insurance.

Of course, the market rate, there's a clear statement here that products -- our product offering has to be remodeled because products, the offers we've had up until now, can't be maintained in the new world, where we haven't had to deal with this up until now. So I can partially respond to your question this way. If you look at the solvency report, we have information about our sensitivity to bell in terms of the economic assumptions. And we have recognized changes with respect to that bell coefficient because of expected changes vis-à-vis interest rates. But today, I would not like to respond in a straightforward manner about the sensitivity to 1 or 2 percentage points differences. This is a problem of not just PZU but of the overall market. And the market is going to have to respond to how it will deal with this difficult question. So the Polish FSA has already looked at this problem. And there's kind of a duality between Solvency I and Solvency II. And so KNF has invited us to cooperate on the subject. And so we are participating in certain assignments about trying to combine or blend these 2 totally different worlds, where the current situation was very difficult. To what extent it's permanent and to what extent it's ephemeral, I'm not able to respond to that question.

What things will have to be done immediately? What things now have to be done immediately, if at all, in terms of higher provisions because of the technical rate falling?

Right now, we're working with the regulator in dialogue. It's not just a problem of PZU. We're not a solitary island. This is the voice of the entire market. And if you follow a mathematical approach and not a logical approach, this could lead to a large number of insurance undertakings becoming insolvent. And that's not something that the regulator would like to see happen. So we'll have to think about some tools that enable us to apply to this situation. To the extent this is a permanent situation or, as I said, an ephemeral situation, well, right now, I'm not really capable of responding to that question in full. So I think those questions have been exhausted.

What is the risk that yesterday's interest rate cut will cause you to write down Alior and Pekao S.A.? Well, we do see this risk. Whether or not it's small, medium or large, I can't really respond to that. I think we've already talked about that at rather great length in terms of describing the process we'll follow. So we'll come back to you at the right time with the response.

I'm sorry the questions are changing. Now we have a question about the situation linked to COVID from HSBC. In light of our position on the market, do we anticipate that we'll be forced to apply some tools or solutions to let the market and the economy restart?

Yes. We do see and recognize our position as a systemic player on the market, both in insurance and banking. And we feel responsible for this market not only in terms of insurance products, not only in terms of being a guardian of value but also being a guarantor of the stability on this market. And so depending on that, we can say that discussions are quite advanced. In terms of the insurance sector, the banking sector, Polish FSA, Polish Insurance Chamber, so today, we're working on solutions which may -- we may be able to tell you about in the future. But today, it would be premature for us to discuss specific proposals. In Q1, on top of some of the simple tools used by banks, credit vacations, loan vacations or insurers in terms of deferring payments of premiums, we took one further step, where we even took upon ourselves the liabilities of our customers to help customers move through this difficult period, to ensure that our portfolio of our customers wouldn't -- that our customers wouldn't evaporate because of coronavirus. Well, I think it's premature to talk about other systemic solutions.

[Elzbieta Hauser-Schoneich, executive]

I would only add to what Tomek said, all of the systemic solutions discussed in the insurance community at meetings of the Polish Insurance Chamber or with the regulator, we have done that, so either suspensions, prolongations, extensions, giving customers longer terms of payment, so taking over some customer liabilities, all that has happened. So we don't see any major interest of customers to utilize these instruments. That's interesting information, which means that our customers are extremely mature, and they're fully aware of the importance of an insurance product as a safety valve. So I'd like to emphasize that neither the installment system we offered without any additional fees hasn't moved people away from their current payment schemes to other payment schemes or the ability to achieve extended prolongations, rollovers. This hasn't substantially changed anything.

[Tomasz Kulik, executive]

So one question finally showed up here. And I just saw -- oh, my goodness, so I think it would take us a long amount of time to respond to all of these questions, so if you want to try to respond to all of them. Is the trend of having better margins in life business continued in Q2? I can say partially yes. But we'll talk about that in greater detail when we talk about the results for Q2.

The next question, whether or not the customer identifies significant credit risk in its -- that portfolio. No. I'm happy that this was a short question, the next question of whether or not in your real estate portfolio, do you have negative revaluation risk because of lower rents? We are practically not present. So our share in the commerce sector, so commercial shopping centers where those discounts were given, well, we have very limited share there. We are primarily present in logistics, so warehouses. So those solutions that have become more important. As shopping goes through a transformation, so this thing moves into the world of e-commerce. So our response to that question is no.

The next question, the impairment of Alior Bank, will it have an impact on possible dividends because it affects the stand-alone results and the consolidated results? Well, the question itself is the response to the question. So that's how I would respond to it.

I'm not really sure what's happening with the device because -- will the impairment of Alior affect Solvency II? Let me remind you that in the economic result, so intangible values are written down to 0. That's the response to the question. The higher retention in motor business means that you have -- or can you give me a comparison of corporate and mass segment policies year-on-year? So I'll give that question to Ela for the response.

[Elzbieta Hauser-Schoneich, executive]

So with respect to the first question, is the retention increase meaning that you have higher prices? Well, there is no such link between having better retention and higher prices. We always said -- so I think the equipment is -- the device is going a little bit crazy because the questions are disappearing. So we benchmark our prices to parameters of loss ratio. There are a large number of factors contributing to the loss ratio. And this affects our competitive position versus the market. So I think that's the response to this question.

Again, prices of motor TPL. Well, information has already been given, generally speaking, motor TPL in 2019, prices for corporate and mass segment, based on information published by the Polish FSA. Well, those prices have fallen. We should be able to say that the retail market is behaving differently from the corporate segment. Both in both segments, we saw -- we've seen falling prices. And I think it's worth mentioning at the same time that this was not caused by the number of policies we saw. It wasn't the case that we had a classic discount.

[Tomasz Kulik, executive]

I think there was one more part to the question. At the conference, it was mentioned that the Alior impairment only incorporates the 2 cuts made by the Monetary Policy Council. What about the third cut? Well, the third cut is an important reason that will require us to look to what extent and what impact it will have on the impairment. Hence, we'll come back to a response to the question when we report Q2 results. So what's the average portfolio of the treasury bond? HTM portfolio is around 8.5 years.

So it seems to me that, that was the final question. If I see well what I have on my device, I think that was the last question. And so ladies and gentlemen, I would like to thank all of you for your time for today's meeting, which is a nonstandard meeting. And I hope that we'll be able to return to the new normality as soon as possible. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]