Powszechny Zaklad Ubezpieczen SA

WSE:PZU

Earnings Call Transcript 2022-Q1

[Tomasz Kulik, executive]

[Audio Gap] We have some selected activities in PZU Group in the first quarter of 2022. We have more protection for electrical vehicles. We've extended the scope of motor own damage insurance for electrical vehicles to include charges, cables and batteries. We have 7 new funds in PZU. They are new index funds, special purpose funds, giving you the opportunity to invest in the areas sector IT, gold and real estate.

The first year of cooperation between PZU and [indiscernible] is something we've got behind us in Q1 '22. Our cooperation with her in the role -- with us is the role of the main sponsor for our PZU more than PLN 21 million advertising equivalents in the last 12 months more than -- nearly PLN 63 million. Of course, we're the first on the Polish market to offer insurance for the payment of rent and we're doing this together with the Polish-British start up called simpl.rent. We've prepared a special offer for insurance for owners and people who are managing apartments for rent and for renters.

We have done PZU help for Ukraine. We've offered a number of 30-day policies which PZU has covered. And so we've provided assistance of some PLN 12 million. We have new services for drivers. We have new AI tools. We have also the purchase of TFI and [indiscernible]. We have an exceptional offer for fisherman. So we've introduced insurance in the form of a bundle. So it's for their equipment, fishing equipment as well as ADD and TPL.

We have strategic partnership between ourselves and the Bank Ochrony Srodowiska. And so the customers of that bank can utilize PZU insurance offering as they do joint project of services, for example PV installations, which they can ensure lower ESG risk for PZU. This is an award that the agency, Sustainalytics, has assessed our risk as being very low.

PZU has insurance now for [indiscernible] which is tickets to various sporting and cultural events. We have a new system to manage car fleets. And we've won a special prestigious award from the Parkett Magazine.

So I'd like to welcome you very cordially and we have an out of the ordinary way of starting our sum up of Q1 2022. We'd like to welcome those of you who are joining us today using remote means of communication. We'd also like to welcome for the first time those of you who have made the decision to join us physically on-site. And so all of you who would like to join us, not just through the online transmission or webcast, we're open. We would invite you to join us physically to have face to face contact with us. So any and all of you who would like to interface with us directly and check your ideas, pass on some questions, pose some questions, we'd heartily invite you to do that.

And so regardless of whether or not you're here physically or if you're attending online, today's presentation of the results just as in previous quarters will be divided into the following blocks. And we'll start with our main accomplishments. We'll talk about business development, we'll talk about certain -- you saw the film which wrapped up a few things that we've done up until now, and it gives us some context. We'll talk about the financial results. We'll you where we are in terms of the execution of the PZU Group's strategy up until 2024 and then we'll wrap as usual with a Q&A session.

So without any further ado, we'll go ahead and talk about PZU Group's main accomplishments. I'm going to walk through this pretty quickly, because I assume that you're all well aware of this. So we can talk about a short summary.

So we started the year with a very robust accent. In terms of the results, we've generated PLN 880 million, so we have an increase over last year of some 50% if you look at the result and we have a high level of profitability. So we have some 18% nearly and so a large amount of contribution.

If we talk about the segment -- the banking segment. And so, we have the positive impact of the interest rates and we have a very resilient capital position, security position, the capital safety, solvency ratio, talking about everything that's happening on the capital markets.

If you look at sales, so we can say as follows. We've started this year in a way that's not entirely flat, not entirely even. So we do see and we're grappling with certain challenges on the life side. So despite the growth we see in our protection offer Q1 has seen 2 events, 2 from the point of view of the overall market.

The first one is the rather large decline in the bancassurance channel and this decline is because of the ability of partners in the banking channel to generate new sales where we are distributing insurance products. So these challenges, one of the causes for the life segment to be slightly lower this time around.

The other area of challenge is about the financial market itself and what's been happening in Q1 of this year. We have seen a lot of outflows in asset management, a lot of growth in the interest rates. And all of this has transposed or translated into a lot of uncertainty and individual clients making decisions. Well as opposed to what we saw in Q1 of last year, they were restricting their contributions to their unit-linked fund accounts, or in extreme cases, they've decided to withdraw some of the funds and trying to wait through this period.

This is the second reason or the second cause contributing to the slightly worse sales results in the life company. And we saw good solid growth in terms of protection business, protection policies. Nevertheless, we do see some decline here for the reasons I've mentioned.

On the other hand, we have very strong, vibrant growth at PZU SA. So in non-life insurance, also our insurance company, and P&C business also, the Baltic companies. So we had double-digit increases year-on-year. So we can say the non-life segment has seen strong growth.

In Poland, we can say that the growth is very significant outside of motor, above all in Class 8, Class 9 property. If we look at the Baltic States, we can say that we are already in the next phase of the underwriting cycle. This is very important information. Our colleagues this time have started earlier than in Poland and this is what's driving that double-digit sales growth.

All of this, of course, is under the slight shadow of what's happening on the motor market, but the situation here is not homogeneous. So we have motor own damage on one side and we have nearly 10% growth. If we look at new business, we're growing in terms of renewals. We also see premiums, the average transaction premiums rising, and all of this is contributing to strong, vibrant growth in motor own damage. On the other hand, we have motor TPL which has challenges linked to price. Nevertheless, this is something that's muffling growth.

And so what does this mean in terms of the overall business? We've responded to that question in part, we have a very high ROE, above the strategic objective. What's keen in here and what we'd like to turn your attention to above all is that we have very strong underwriting foundations. So the combined ratio at 90%, but we can say that even or despite everything we've been talking about over the last 12 months, today we've been able to replicate those high levels of profitability which we saw in Q1 of last year.

If we look at the life side in the core business group and individual continued business, we do see an increase in profitability after a very challenging and demanding 2021. Let me remind you, we had a high wave between Q1 and Q2, and we saw the summit or the peak of COVID with respect to the frequency of death. It was up to 14,000 per week compared to the average annual pre-COVID level of, let's say, 8,000, 9,000 deaths per week. So this shows you what we were grappling with in that period. Today, we're exiting that situation and we can see improvement in profitability and this improvement is in the loss ratio and well other things are influencing that and I'll talk about that a little bit later in the presentation.

So we have a very good situation, if you look at the main portfolio. So we have profitability in excess of 4%. And so we believe that this is a very good result, having in mind the various circumstances. And all of this leads to the net result of PLN 758 million.

What also is important here is that costs are at a very strict control. And so the costs and cost stated as a percentage of revenue, despite inflation, all of the challenges, and of course, we're all fighting inflation. So what's pleasing us is that we have the same relationship between costs and revenue. And this is something that we've been able to do on do and replicate.

If we look at the capital strength, this is something that sets PZU apart. We have a very stable position, resilience to turbulence, first linked to COVID, now the war in Ukraine. And this has led to higher interest rates, greater volatility. And so these are the things that are quite difficult for insurers, having in mind also the asset portfolio. Nevertheless, we're pleased by being able to show that we have and demonstrated that we have high level of capital.

Naturally, we do share our solidarity with Ukraine, and we show our solidarity in a number of different dimensions. One is, we're supporting our employees. And so we've met the challenge in terms of support, medical support, support from psychologists and everything that's really needed by our people who were trying to do what they can to find a safe shelter, running away from the war. And also for the people who were crossing the border, so we have insurance. We've issued some 54,000 motor TPL policies of 30 days in length. And the cost was covered in full by PZU. This was a cost of PLN 7.5 million. And then we have additional care, medical care free of charge and some of the other costs that have been covered. And so the total outlay was more than PLN 12 million. We're working with the foundation voluntarism, and we have a First Contact platform. And these are thing that we've done and we'll continue to do as we try to assist the persons who have been insured or affected by what's happening in Ukraine.

If we look at business development, I think it's good for us to start with the market context. So if we look at the most recent data published by the Polish FSA, this is for Q4 of last year, we can remind ourselves that in motor and non-motor business in Q4, we saw substantial growth, a little bit different from what we would see in profitability. But Q4 in motor business just as Q1, where our Q1 was a natural continuation of these phenomena, we can see that there is a lot of growth in excess of 9% in motor own damage. And so motor TPL was deflating that growth.

And we can see that our number of policies is on the rise, which is not so obvious. When we think about a country where we have such saturation of cars, per 100 or 1,000 inhabitants, even though we have quite a high-level saturation, we can say that the number of cars is still on the rise. But all of this was happening unfortunately until the strong price pressure. And the price didn't want to grow, and basically this stifled growth.

In non-motor business, we saw a double-digit pace of growth, some 17%. And above all, if we talk about property insurance, Class 8 and Class 9 accident insurance, some 20-odd-percent year-on-year. And so PZU after very strong Q4, where in Q4 our market share exceeded 34%. So we were at 32.3% in terms of our direct business. And if we include our inward reinsurance, we're at 32.5%.

If we look at the motor insurance segment, what's noteworthy, if you look at the trough, the price trough, the bottom point has something where we should have a gradual reversal of the declines we've seen in previous years. We had a classic price for them. We had COVID which actually shifted the balance of the equivalent between cost and price. And you can see on the bottom graph, because of the substantial declines in frequency, claims frequency, since Q3 of last year we've seen increase in terms of claims frequency. And this was slightly muffled by what was related to higher fines if people violate the rules of the road here in Poland, and so people have changed their style of driving. And in Q1, this impacted the claims frequency and perhaps certain decisions which were inevitable. It's worth mentioning here. So perhaps some things have been deferred or postponed, but we do see some positive trends. And in terms of the premium, this is something that we'll see in subsequent quarters.

Now if we look at non-life insurance, as we've said previously, we saw a growth above all in the mass segment. So residential insurance, SMEs, corporate insurance, primarily for construction equipment and we also have agriculture insurance, crop insurance, subsidized crop insurance. We've seen a decline in sales if we look at our cooperation with banks and we already talked about one of the situation in terms of what's happening on the motor business.

So now what's happening on the life side? If we look at the periodic premium insurance, which is the prevalent portion of the markets, more than 80%. This portion of the market, which is for us the most significant in absolute terms and this is partially because of our long-term relations that we cultivated with customers, and we've observed growth here to the tune, let me remind you, this is Q4 of last year. And so the growth was a little bit under 5%, at 4.7%. And above all, this was due to growth in Class 1 as far as life insurance and also riders.

And we can say that we had a robust continuation of the growth that had started at the beginning of the year. And so basically, we are gradually exiting the pandemic. And on the extreme other end, we see what's happening with single premium business. Here once again, we see a lack of synchronicity, and so it's asynchronous.

If we look at -- if the investment component has a decline, I don't know which ones, about 26% year-on-year in the negative. So if we look at the protection business, we saw a growth rate that was -- at a growth rate of roughly to 0. So we can say that the market was more or less at the same level. So we can say that PZU's market share measured by premium was 43.7%.

Now if we look at the insurance we offer, we can put as follows. We observe the same phenomenon in our portfolio in group and individual continued life insurance. So despite what's been transpiring over the last 2 years, having in mind of course COVID and despite -- or on top of this natural phenomenon, we continue to grapple with economic phenomena. Nevertheless, we have been able to grow despite these challenges. And so it's a little bit around 2% despite the negative. We have negative phenomena. So we have riders, we have health insurance, so we have more than 2.5 million in-force health insurance contracts. And we have other riders, and we continue to have that saturation growth, for example, for malignant neoplasms.

And if we talk about individual customers, so we have product intervention from the regulator and then also the behavior of the customers on the financial markets. So we've seen substantial decline around PLN 200 million compared to last year. And most of this in terms of our cooperation with partners from the banking channels. Unfortunately, the growth we've seen in Individual Protection business is not capable of offsetting the negative phenomena. But what we're pleased about is that this is a very profitable bit of business. It has a recurring impact in terms of its contribution to our consolidated results.

So if we look at the development of operations in the health pillar, we can say, Q1 is another period in which we continue to build scale, measured both by revenue as well as the number of contracts. So 15% in terms of revenue and the number of contracts set by some 9%. What's the most important here is despite what's happening on the marketplace and perhaps this phrase will continue to be uttered today, during today's presentation and perhaps throughout the rest of the year. Despite high level of inflation, which has also affected the health pillar, we've been able to drive the cost structure, the benefit structure, in terms of the health pillar. So we continue to grow the scale of business and we have more and more of our own health centers, plus partnership health centers. And so we can say that the proportion is more and more favorable. So 31% of the health centers are our own health centers.

And so since we're -- probably to have our own scale of operations and since we're capable of redirecting traffic to our own branches and book visits for them, and having in mind the physical consultations or on-site consultations. And we're able to enrich that with telemedicine. So therefore, the cost is more or less at the same level, very close to the same level year-on-year. And this of course is driving the profitability in this health pillar. This is very important information, having in mind, all of the inflationary events.

If we look at assets under management, here I would like to share with you 2 pieces of information. We know what's happened in Q1 and this is something we can see in terms of the assets of third-party clients of our banking TFIs. And we saw assets outflowing and also the measurements of assets, the valuations were falling down some 12%.

If we look at the PZU TFI, this is an entity which above all is the top player in terms of net sales in Q1. The other thing, it's the only TFI that in every month of Q1 generated a positive net result in terms of inflows, for example, and this is linked of course to the product structure which TFI has and it's linked to regular savings programs. And multiplying, these are not one-off large-scale tickets, big tickets. It's not linked to short-term sentiment or changes that are happening on the capital markets. And so that means, this is a matter of regular savings, wealth management approach. And so we also see nearly triple growth in PPK. So this is a very important piece of information.

If we look at bancassurance and assurbanking, what's happening here with respect to the development of product offering, we can say that we continue to do what have been doing up until now. So it's more of the same and we're extending our product offering and also making it more available. But as we've already indicated today, if we look at life insurance, investment insurance, we see a major decline.

If we look at non-life insurance, the sales of insurance is linked to the situation in the banking segment. We have the new sales that's taking place there. So in banks, there's less lending activity. And this is as a result of the interest rates, Polish FSA's decision in terms of how the creditworthiness of individual customers and corporation should be as it is estimated. So we can say that this approach is much more rigorous to ensure that we don't have to write down large amounts of bad debts and have NPLs. So all of this is limiting the amount of new lending in banks and this is something that's affecting the non-life insurance portfolio -- the non-life insurance business.

And so how has this affected the financial results. If we look at sales, I don't think it will be sensible for me to reiterate anything here. So the growth is a little bit under 2% year-on-year. And we talked about the drivers. And we have a lot of growth on the non-life side muffled on the life side.

In terms of claims and benefits paid, there are 3 or 4 major events. The first one is linked to insurance activity. So we have strong profitability in motor insurance, slightly adjusted in terms of non-life. So in non-motor, in February, we had a lot of single events mass, whether cyclones, gusty winds, all of that affected the profitability of the non-life business -- non-motor business, especially in the mass segment and that meant the claims benefits paid grew by more than 5 percentage points. So that's something that happened in the non-life business.

If we look at life business, in turn we had 2 phenomena. One, the exiting from the pandemic phase. So moving into a lower mortality period. Then once again we had the phenomenon which to some extent is muffling, then in fact we have greater utilization of medical bundles. So higher utilization of hospitalization, critical illnesses, dismemberment, so all of that has meant that rather big improvement year-on-year in terms of loss ratio was muffled by the visible return to the National Health Fund, not just amongst our customers, but amongst all people after a 2-year sort of moratorium period and this is something that it's called a health debt. And so people are moving back into the health service, health sector and utilizing the services.

We also see the decline in provisions for investment products, unit-linked products because of lower income and term deposits here are investments. And this was offset by higher surrenders. This is something we talked about some customers made the decision to close their positions. And having in mind the hampered predictability, this is something that have to be weighted out. So the 3 items that caused this item to drop from quarter-to-quarter.

If we look at the investment result, on one hand we have a very stable interest income. We have good additional contribution from floating coupon bonds and we have good result in real estate. So commercial properties in the real estate sector, we've seen strong growth in private equity, especially with respect to technology. All of that means that in the main portfolio we have a profitability at the end of Q1. On an annualized basis above 4% and 4.2%.

So having in mind the situation on the marketplace, this is a very good and predictable recurring result. And this is something that pleases us. This line also includes the results of -- the payments of claims and benefits. So in 2021, we had a lot of risk that was -- there are appetites rewarded for that and that was adjusted in terms of the products we are offering. It turned out that they made a negative contribution, but we all remember this doesn't have any impact on the results of the company.

And if we look at admin expenses, they are flat year-on-year. This is very important information because this shows that despite the negative inflationary phenomenon, we've been able to deal with these phenomena, these topics quite well and this is something you can see, if you look at the cost ratio.

We also see the cost of distribution, still the percentage of premium are rising especially in the mass segment. And here we can say that there are 2 or 3 events. The first one is we have a very low base from last year. This is one of the last quarter's within the mass segment, the average acquisition cost ratio was 19% and 19.5% in the quarter last year, we made the decision. We made -- we undertook a number of activities for the purpose of PZU growing in terms of sales.

We want to grow very strongly. And so we have to grow across all channels, also in third-party channels. So that also means multi-agents or intermediaries or some multiple insurance agents. And so it's not only our own channels and tied agents, but we want to grow across all channels. We want to have a fair share in terms of the sales. And that means of course that the percentage of the other channels has to grow their percentage of the mix and they have higher cost of bank insurance and that's one of the reasons for this growth to take place. And this is going to be insurance change that we'll be dealing with.

If we look at the non-banking side, we have a result of PLN 517 million and there is a big change in the banking, so it's 3x what we saw last year, so we end at PLN 241 million. So the consolidated result is PLN 758 million. We have an ROE of nearly 18%. So if you look at the profitability of the various segments, I don't want to drill down very deeply or dive down very deeply.

I want to reiterate, 2 things here. Year-on-year, so Q1 of this year to Q1 of last year, we can see the profitability is highly comparable despite all the negative things that have happened over the last 12 months, especially if we look at motor business. And we can say that the profitability is even improved in motor business because this was muffled by what's happened in the non-motor business. If we look at life business, we've seen growth.

In the Group portfolio and in the portfolio of individual insurance, we have a slight deterioration in the Baltics. Once again, we were dealing with the similar situation as in Poland. But this was taking place in January and February. And if you remember some of those pictures that cars were inundated with snow up to roof. And so our colleagues from the Baltics were dealing with that for the first 2 months of the year. And that's what is responsible for the higher loss ratio and the lower profitability.

So I think we've talked quite extensively about some of the other elements. So I don't want to repeat that. If we look at pandemic and loss ratio in group and individually continued segment as we've spoken already, the mortality is down, the frequency of deaths is down. We have more higher frequency in terms of hospitalization, surgical operations, dismemberment. So all of this is muffling some of the positive information related to mortality. And this was something that was positive. So it had an impact, a positive impact on profitability to the tune of 6%. So this is what the contribution of this segment is with respect to profitability.

If we look at the main portfolio vis-a-vis the investment result, we have a very stable growing share in terms of the interest income. What we're pleased by is, the growth in real estate year-on-year, it's nearly double, practically speaking. And then also if we look at equity instruments, we have big growth. And this means that the main portfolio as a result of PLN 445 million with very strong profitability. And so we've maintained our cost effectiveness. This is something that I want to emphasize very strongly. And so this is something that is very important and will drive whether or not we're going to be able to maintain those profitability with having in mind, what's happening in terms of pricing. So Q1 cost is evidence of our capability of maintaining our cost effectiveness.

So now if we look at solvency, so we have high levels, 221% end the quarter. So what's happened? We saw a decrease in own funds in Q4. And so with some operational flows, they were positive on one hand and then the investment result from the third, while this is all under pressure because there are changes in the yield curve. And we moved into our own funds.

So in Q4, the impact was PLN 800 million. And then we had a decline in the measurement of treasury bonds, then decline in the measurement of technical provision. So there is a matching effect between assets and liabilities with a small increase of SCR as a result of what's happening with market risk and underwriting risk in the non-life business.

And so if we sum up the strategy, I think we can say that we're on course. And today, I don't see any areas that could signal any major threats to achieving our key parameters, the key metrics we've defined under our strategy up until 2024, having in mind a high solvency ratio and high ROE.

And so this is where more or less, I'd like to stop in terms of the summary. And now what I'd like to do is move into the last portion of our meeting. So I have in mind, our Q&A session. And maybe now to incentivize you to pose some questions. Are there any questions from here in room? So the people in attendance physically are shaking their heads. No, there are no questions from the room. So that means we can go ahead and fill the questions online.

[Tomasz Kulik, executive]

Are you considering withdrawal from the banking sector, having in mind the declining return on investment and the pressure, regulatory pressure in terms of sharing the results with customers credit vacations? Perhaps it would be better to allocate your capital to other activities.

At present, we are not considering such a decision. It seems to us that this segment or the banking sector fits pretty well to insurance for a variety of reasons. Of course, there are clear sales synergies, cost synergies. And if I could put it this way, there is the third element leading to a good fit. Having in mind what's happening in the market and how this splits out into the banking and insurance sector, certain negative things basically are offset between these 2 sectors. So as a result of that, we don't have such a large exposure to a single market, so let's say the insurance market and that means we're able to be more predictable, less volatile and that means that we have a more stable result. And so for now, the question -- response to that question is no.

And so if you look at the individual level, in terms of premium, we've had the lowest level of premium in years. Is this a level we should get used to? I'm not sure. 316 is the level, the benchmark. The response to this question is no. Perhaps, Q2 will not be confirmation of what I've said. We won't be able to fill the gap that showed up in Q1. But I assume that we're in a transition phase where over a period of 2 quarters, interest rates have grown by more than 500 basis points, and this is not something that has no impact on many things that are happening on the financial markets and how this translates into investment decisions and the capabilities -- investment capabilities of our customers, whether we're speaking about the banking or the insurance sectors. But this is a transition phase in obvious manner. So we can't say that quarter-on-quarter, we're going to see that level of hikes in interest rates, quarter-on-quarter.

The second response is very similar to -- very much related to the first one. I don't assume that this decline in lending activity amongst banks is something that's going to be permanent. If you look at the macro, there is an impact here of course, but again this is something that's transition ephemeral.

And at some point in time, it will disappear -- dissipate. And so then the banking sector, banking segment will rejuvenate and this is going to be true in own channels and also with respect to the investment products because they are responsible for the lowest level seen in many years. So again the response to this question is that this is a transitional phase, why do you have a loss in the investment result at the standalone level.

This loss ensues from different measurement of assets to -- in the standalone versus consolidated statements. In consolidated statements, we have 4 consolidation. So this is the sum of results of all subsidiaries consolidated under the full method. But in the standalone, this is done by equity method. And so basically this is stake times the change of equity. And here, it's not so rosy, because in the banking sector, having in mind, what's happened. And the interest rates and debt, all of that taken together has contributed to a situation in which banks -- all banks on the market updated their valuations through their equity. And as a result, there is a big negative measurement in instruments in Q4 and Q1 of this year.

And so as a result in the standalone financial statements, we valued them in this manner. In the consolidated financial statements, we valued them differently. And so then it goes through the P&L. And we will observe these type of negative phenomenon will have to go through the standalone P&L and so that's the response to your question.

Is PZU making changes to its investment portfolio as a result this inflation that's waging?

Yes. But these changes are not revolutionary in nature, they are evolutionary in nature. So it's more a matter of matching or fitting to what's happening on the marketplace. But I would say here and remind you of a few things. If you look at our investment portfolio, it consists from 2 components to simplify things. The first component are assets to cover insurance provisions, technical provisions. And here we won't change much at all with respect to that segment.

Our reference point is the technical rate. And this is something that we have to deliver speaking colloquially in the quality of the assets we used to cover those provisions we have to deliver. So we're talking about classes of assets or asset classes that are rather limited. They have to have a certain quality, limited volatility, predictability, liquidity and so on and so forth, because they ensure the ability to pay liabilities, the money that's been entrusted to us and this is our obligation to our customers. And we're a public trust institutions, so we can't play roulette.

On the other hand, we have the portfolio, which is the surplus above our provisions. And here the appetite for risk is a bit higher and that's why we have investment properties, we have some equities, but more from the point of view of private equity or seed money in terms of equity strategy in TFI funds. And this is more the case as opposed to selective picking, stock picking or an index or picking individual stocks.

And so this is an area where we will adapt not so much on the inflation side, but in terms of the interest rates to ensure that we won't be overly exposed to too big of a risk, and without going beyond our risk appetite which is defined as the value at risk.

And so a single loss that we were able to accommodate, big loss that we were able to accommodate in a given period and we want to be able to generate a recurring result. But this is something that will change evolutionary and this is more with respect to the surplus portfolio.

So you're presenting changes in the average market price of motor insurance from Q1. How has the cost of handling such claims changed over time for motor TPL?

I can respond as follows. It has changed negatively and this is not something where you have to be -- you don't have to have a detective mind in order to arrive at these conclusions. But if you look solely at the profitability in this segment, through the average cost of claims handling, I think you're actually talking about the average claim value. But this is only a single-sided way of looking. We should think about the rental costs, what's the average percentage of claims and the average exposure under motor TPL.

And so what's happened in this period, let me tell you, once again, on one hand, we see prices that have diminished have fallen. On the other hand, what has happened and this shift is over a period of 2 years, the COVID years. We saw strong declines in frequency of claims. And so that did more -- actually did more than cover the costs of these claims. So the average cost of claims was rising, frequency was falling.

So if we take into consideration those 2 factors together, we can say that in motor business, we had room to give that back, to reinvest in that and back that money back to the customer. And that's something that's been happening over the last 2 COVID years.

Now we have the following situation. The transaction price is in the trough in terms of the cycle. And it started to play against us, not against us as PZU, but against the overall market because we can see frequencies are climbing strongly. I'm saying they're starting to come back to the levels seen prior to COVID and you'll see that in Q2 results.

We also see the costs of claims rising, the costs of handling claims are rising for obvious reasons. And we can say that this price can simply not withstand the pressure. So this is something that will drive the price increases and we can see them in 2Q already. I can also tell you one other thing and let me remind you what we were talking about last year in PZU.

PZU somehow preached the status quo in terms of its relations with body shops. For some period in time, we -- that's how we understood it. We were in a situation in which we had a destabilized relation -- disrupted relation in terms of the price we were paying to third-party body shops. And unfortunately, our competitor benefited from that. And so there was a question mark in terms of the proportion of claims handled by third-party body shops and this was written quite -- written up quite extensively couple of quarters ago.

And so we can't accept such a situation -- reconcile ourselves to such a situation. But having in mind, the body shops seeing some deficits in their P&L accounts and this is something that has to be filled up by their -- the competition. And so I can tell you that all the players in the market were all basically grappling with the same forces on the market. And thanks to that. As a result, I can tell you this time, I am more optimistic in terms of these prices changing.

So as frequencies come back, as inflation is taking place, and based on what I told you just a moment ago, we're in a slightly privileged more preferential situation vis-a-vis our competition where those costs are growing strongly. And so that rate of growth is for our competitors is much higher than here in PZU. And so, I hope, and I'm convinced that this will nearly have -- will only have a positive impact on the price changes we're seeing here.

[Unknown Analyst]

[Technical Difficulty] market to evolve over the course of the year given the backdrop of regulatory intervention and price rationalization adopted by some players. Would you say that motor have the bottom [Foreign Language].

[Tomasz Kulik, executive]

Sorry. Thanks for jumping on this page.

[Unknown Analyst]

Out or do you expect further declines here?

[Tomasz Kulik, executive]

So responding to this question, I can reiterate what I said previously. I am certain that the -- the bottom, the trough, we've got the trough behind us. The bottom of the market is behind us. So I can't be a guarantor of the rate of change, in other words, how quickly prices will gain traction and climb having in mind all the factors I've talked about. Nevertheless what we can see in the marketplace, as I mentioned previously, that the smaller players, why can't I speak about this with such full convictions because we have such players in the portfolio.

They are not capable of competing anymore and they're facing a simple dilemma, either they will have to be an active player in sales. And so I'll find my place on the market with such a low price point. But then, I know this will affect my equity and my results. So I'm going to have to have some additional equity that I'm going to burn. And we can see that fewer and fewer players are financially able to afford that. There are very few who are able to endure the situation and that means there is only one direction that can be followed.

What operational cost, rate of growth should we anticipate and the same is true with acquisition costs. So our OpEx and acquisition expenses, what's going to happen with them?

If you look at acquisition expenses, the level we saw in Q4 of last year and Q1 of this year, which is more or less at the same level of 3, 4, 1, they are more or less at the same levels. And I think this corridor is more or less representative of the costs of distribution stated as a percentage of premium. And this is something we should anticipate having in mind the shift in distribution channel mix in our strategy, both in the life and non-life business.

If we're looking at OpEx, what you see slide that's on the screen, they've been flat year-on-year. Is this sustainable? No. But I would like to be convinced that what is sustainable is the ratio of costs to revenue. So it's sort of like a cost to income ratio. And as long as that relationship will be preserved, we'll be able to generate replicable profitability.

[Unknown Analyst]

[Technical Difficulty] frequency compared to pre-pandemic levels, do you see an effect of the higher fuel prices on a post-pandemic frequency recovery? In other words, do you observe sensitivity of mobility to fuel prices?

[Tomasz Kulik, executive]

Yes, we do observe this type of interaction between fuel prices and mobility. We can say that we are dealing with the following situation. At the beginning of the year, what was preying claims frequency down, it's not inflation or the cost of raw materials or fuel, petrol. What's happening in the regulatory sphere, so the change in penalties for violating the rules of the road. And if we look at the end of first quarter and the big changes and shocks, if you will, on the fuel prices, I think there are part or an element that was muffling, what we saw in terms of the penalties for violating the rules of the road. And so if you look at what's happening now, we are using the roads to the same level that we saw in January and February of this year. So we can say that the one effect was slightly muffled out by the other. That's what we can see. But to what extent this will be entrenched very difficult to say.

Today when we look at the Polish market and the price of fuel, we have a protective umbrella to some extent. And the main question is as follows. So if the anti-inflation shield, when they are removed -- when will they be removed, at what time and to what extent will this coincide with the standing of households in terms of their disposable income. So the question is really whether we'll have enough money in our disposable income as households to absorb or offset these negative phenomena until we can get past the peak of these negative changes with -- that are inflationary driven or not.

If not, then the pre-pandemic levels in terms of frequency is something we will reach a little bit more slowly and this is something we'll have to think about in terms of means of transport, will we sit, get into our cars or will we use public transport, but if this effect is going to be alleviated and we're going to be able to overcome that peak, and this will take place more quickly. What we can clearly see is that the frequency levels between Q1 and Q2 are much more different. And so this will affect profitability. And I hope and I'm convinced this will form the grounds for the policy or the strategy in pricing amongst our competitors and hand back.

When will you give a different recommendation? By the end of this month. That's the simplest, the shortest question and shortest response. HSBC.

[Unknown Analyst]

Inflation as a challenge for your margins...

[Tomasz Kulik, executive]

Yes. In no way or to no degree are we a Green Island here on this market. In terms of salaries, today inflation of salaries is also impacting PZU, the biggest challenge on the price side is our ability to pass on. That's have an inflation into prices.

Is there a big risk for the dividend of 2023 in terms of the update of your measurements of [ bronze ] and then also the credit vacations and banks?

So I think, perhaps I'd respond as well. Yes, this is a risk factor, but I would not today want to quantify whether this is a big risk factor, medium or small risk factor. Of course, we are monitoring tracking the situation on an ongoing basis. What will impact the dividend in 2023 -- how we ramp up the year in PZU SA on a standalone basis. What the Polish FSA recommendation will be for the distribution of profits?

According to the recommendation given by the Polish FSA, we are going to be forced to retain in the organization for now. So we can't distribute it. We can distribute from the 2021 result only 50% of the results. So I assume that the other 50%, there'll be access to that in terms of the discussions we're talking about the dividend to be paid in 2023.

And then the third thing, it's my hope that having in mind the rational decisions -- rational price decisions made by the marketplace, but this is something we don't know yet. We can only treat this as somewhat probable. But we're going to be able to, let's say, in the latter half of the year, to a certain degree, we're going to be able to rebuild in terms of what took place or what might -- may take place in Q2 amongst the subsidiaries, we might be able to rebuild, recover that result in terms of the asset, changes in the measurement of assets. It's little bit difficult to process these right now.

This is not a single dimension or a discussion of one single dimension. There at least 3 dimensions, and this is something that we're analyzing. We're thinking about it on an ongoing basis. And it's a little premature right now for us to be able to respond to this question that this is a major risk factor.

It is a risk factor. How we'll manage that risk, I hope that we're going to be able to deal with it, cope with it in such a way that we're going to be able to deliver on our promises once we made during this strategy where we emphasize quite strongly that we are a dividend paying company.

And that was the final question from iPad or from the web. I don't have any other questions. I don't see any questions coming in from the room. And once again, I'd really like to welcome you cordially, invite you cordially to have direct contact with us. And so I'd like to thank all of you for your attention, for your attendance and I'll say goodbye and see you next time.

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