Powszechny Zaklad Ubezpieczen SA

WSE:PZU

Earnings Call Transcript 2023-Q1

[Tomasz Kulik, executive]

[Interpreted] Ladies and gentlemen, I'd like to welcome everyone who's gathered here in our office. And today, we are going to sum up the results of the PZU Group for the first quarter of this year. I'd also like to welcome all those who have joined remotely.

Okay. So without further ado, let's get to our main topic. This is a very important quarter, and that's because it's the first time when we're showing our results according to the new standard that is binding for all insurance companies from this year, including a transformation for the parallel period from the period -- the previous year. So it's the first time when we are presenting the results in such a way. The preparation of the market for the implementation of the new standards took a lot of time, which means that it was not trivial.

So I can assume that this presentation may not be obvious for some of you, so I will try to build the dynamics of this presentation in a different way than I did before. So I will try to go quickly through the obvious things, which you can easily read on or easy to understand or the ones that are related to our situation on the market, the way we've built our scale, our portfolio. So they have not changed despite the change of the standard. So we are building our relations with the customers in the same way. But the evaluation, the financial report has changed, and that's what I want to focus on.

So let's start the first quarter with good results when it comes to sales and the translation of our activities into net profit. Net profit attributable to the equity holders of the parent company. And what's important is that when we talk about the growth of the scale in insurance activities, so this is our main activity. But it's not a one-off event. It's not the effect of introducing the standard. This is a natural growth of scale. And we hope that in subsequent quarters, we'll be able to monetize it. We are glad that we have maintained high profitability both when it comes to the investment portfolio and the profitability in life insurance.

So in terms of the situation on the market, we are very proud of our results. High interest rates of the investment products and other elements, they have contributed to the result of this quarter, and they have translated into a growth over 30% year-to-year, the value for 2022 measured according to the new standard. And they have translated into a high equity growth. We have also recalibrated our strategy. So we've said why we want to start using a bit slightly different measure than the one before when it comes to one's own equity. So thanks to this new index, it eliminates certain fluctuations in our interest rates and different factors, and also where we are getting other revenues, which come from a revaluation of technical liabilities on a current rate. So it's a very good and high opening.

As to the areas of growth, we are growing in every area, both when it comes to nonlife insurance, in motor insurance. And here, the main driver of growth are MOD insurance, especially in the 8 and 9 group, also TPL, general TPL insurance and assistance. Also in the segment of Baltic countries, so abroad, we have a dynamic of over 20% mostly in nonlife insurance, motor insurance. Here, we are in a very important stage of the cycle, and this is the cause of these large changes in year-to-year when it comes to the gross written premium. As for life insurance, the main growth took place in group and individual continued insurance. So after the pandemic, we came back to the channel of 2.5% growth in this segment. On the other hand, we have high growth when it comes to the sales of life and endowment insurance product, it's been introduced at the end of last year, to react to the demand and expectations of customers in light of high interest rates. So it's an offer that can be an alternative to deposit bank products.

So that's all when it comes to investment products. And we are using the new standard, we should not be using the written premium but other indices. So as we've promised, this year we'll be communicating with you through 2 investments, the investment [ 17 and 4 ]. But we would like to move as quickly as possible to the new dimension because keeping accounting in the 2 versions is quite a burden. So we'd like to convert to the new formula as quickly as possible so that we can help you understand us anew because the introduction of the standard will expect that from us.

As for the revenue of the insurer in terms of the new standard, just let me remind you that in nonlife insurance, they are quite similar to the equivalent of the gross premium. And the bars of the premium ascribed to acquisition costs is shown separately, and it's adjusted for the provision from active [indiscernible]. And when it comes to bad loans, so we are moving to a different dimension, so this is different from the written premium. So we should remember about that. So we have a small adjustment from the viewpoint of thinking about the nonlife insurance market. So we have such property products which are short lived, and they are valued with a simplified model, the model of premium allocation. So we can find a lot of analogies with gained premium.

So that was in terms of our revenues from insurance. So they are an expression, not only of what was happening in Q1 of this year and the way our portfolio was shaped through new sales or maintaining the portfolio allocated in previous periods, but it's also a consequence of our growth over time in the past 12 months, here we are talking about nonlife insurance products with a short-term, less than 12 months. So as the revenues from insurance on the nonlife insurance products, we also have revenues which are a consequence of high sales dynamics, which took place in the second half of the past year. That happened especially in the third and fourth quarter. We were growing a bit faster than the market itself. So this translated into the growth that we are observing on the side of nonlife insurance.

As for the main driver of the growth, just as with the written premium, motor insurance which is shaped, first of all, by MOD; and in MTPL, we also have growth, but they are mainly counted with the exposure of the portfolio, especially with the price factor. So as I said, this is shaped by the dynamics of MOD when it comes to motor insurance. And in nonmotor insurance, we have growth, first of all, in nonlife insurance, in property insurance, so 8th and 9th group, general TPL and assistance. So we see the growth, especially on the side of corporate investment, especially with the situation of the second half of last year, so the growth has been significantly higher.

As for life insurance, and we'll be repeating this many times, but there may be a lot of questions regarding this sphere. So when it comes to life insurance, let me just say that we are using the general model to recognize them. We are using the fluctuating payment. So that means that you are looking at the sum of our flow over time, and we are trying to match them as best as possible to the way that the flows will be carried out in different periods. So one of the main components you'll see in life insurance will be claims, technical costs which are made up of acquisition costs, administrative costs. So if they are a good match to the experiences of the given period, then if we have the revenues, the site costs that is shaping our revenue, and this depends on how the margin from insurance is being revealed, the so-called CSM. So this will be the main source of our outcome when it comes to nonlife insurance in the new standard.

As you can see here in the graphic below, it's the contractual margin that grew from PLN [ 290 ] million to PLN [ 340 ] million, and the correction linked to nonfinancial risk were the main factors that shaped our solvency on the life insurance products. The decline in the absolute volume by 4% compared to the value from 2022, this is shaped by the correction of our expectations regarding the death rate, particularly the death rate, well, regarding the end of COVID and the pattern of mortality or death rate that we have seen in previous periods in 2019, which was not a burden. It doesn't include additional factors of the pandemic of COVID-19.

We see results and sales and really high profits are visible here in this slide. As I mentioned, in terms of the profit attributable to the equity holders of the parent company, we may say it is composed of the following components: PLN 854 million of insurance service results. And this is the result in insurance from the previous year. And it's important because the distribution of services and benefits was really special in the last dozen months. We've mentioned that several times already, and I will mention it today still, that there are some events around the life space such as high death rate in the first quarter and entirely different experiences in the first quarter of this year. They are partially offset by the situation around the health-related products.

On the health-related products, the experience and elements will be discussed further today. And we can see there that the health debt is taking part, is being materialized. It is a challenge for our company and for other players in this segment as well. Still, we may say that life insurance, particularly PZU on the life insurance part, so the increase in rentability, increase of margins, and here you can see the point with asterisk, the standard changed not only the valuation prices but also the way we group and present our business segments. Previously, as you can remember, the life insurance part, we spoke about group and individual segments. Both of those segments contained both the protection and investment.

Now a new standard, this is separated. And as a result of that, we can see that in the presentation we have a new segment, a separate one from the group and from the individual insurance. The contracts that have this investment quality, they were transferred to that third group. So please remember, when we compare the group insurance segment from before the change and after, it's not comparable. Now in terms of other factors, that's still the same. We have a mass and corporate segments separately, and we are glad to be able to still maintain relatively high margins. And relatively low as for the nonlife insurance, that is mixed ratio, that is at the level of 86%. So our activity is profitable -- very profitable. It is being built obviously from the expanding portfolio on noncommunication insurance. The motor insurance is maintaining the level and nonmotor insurance is a little decline year-to-year.

In this quarter, we also show a really dynamic growth in the investment portfolio, it's by 33%. Taking into account what we see in the market currently, strategies we carry out, how well they are adapt to the changeability of the market and, on the other hand, to the nature of our activity, which is the insurance activity, and the fact that we need to have the technical and insurance provisions. So we need to be able to maintain liquidity and low volatility, particularly if we were to be in a situation in those provisions to be paid out to the clients. This is a much safer way of handling things, and the excess of risk is being managed like that. The risk that is above the strategy is well managed. We grow and when we take into account this particular structure, an increase in the debt strategies, in the money market, in the real estate market, they're high growth. And that allows us a 30% of increase despite the fact that share-related instruments and equity ones, they grow less significantly.

The profitability of the banks grow. In the first quarter, it has been relatively low. But let me remind you that in the second and the third quarter of the previous year, the growth started. That's why we expect it to still contribute to the result, and we see high dynamics there. The sum of those elements enables us to report very high results today. And all of that is in the context of high security of operations. This is measured by the Solvency II ratio. And it's much higher -- significantly higher than compared to the group -- comparable groups in Europe. That's why we can pay the dividends in the higher brackets that the regulators have foreseen. PLN 2.40 per share was proposed by the Management Board and approved by the Supervisory Board, and that translates into 6% dividend rate.

We have, at the same time, very high commitment to corporate social responsibility, but I would prefer to discuss rather the technical aspects. Still, we continue to remember about our role in the market, and it is not purely business activity based. What we have is the health prevention or sickness prevention, taking care of health. And I'm sure our clients will benefit from our services when they're in good shape. At the same time, we implemented the digital dimension of the PZU Group. The number of accounts is growing, and it allows us to enable clients to interact with the insurer the way they prefer to.

Now that was the summary. We'd like to say now -- to update what happened in the first quarter this year and the fourth quarter last year and to make the reference to the market because this has been very important to PZU. We are not an entity with a large share of the activity outside of Poland, like in terms of geography. So it is more impactful on our financial standing what the situation is like in Poland. Now let me remind you, our comparison is to the last data published by the regulator, that is for the fourth quarter of 2022. The data for the first quarter this year, I hope will be soon published, and then we will be able to give you more information in the next meetings.

The fourth quarter last year was a relatively good one in terms of growth of the market itself. That's the -- first quarter continued along that trend. Let's start with nonlife insurance market in Poland. High dynamics in quarter 4. In nonmotor insurance, as I've mentioned, high growth in nonmotor life insurance, over 24% year-to-year, relatively smaller with general TPL, and MOD was the driver of the increase in that segment. The motor segment has been difficult. So our increase by 5% is relatively good, particularly the commission premiums from the MOD. That was really well. The scale is growing. The fourth quarter in terms of prices was in the [ side ] trend. Slight correction as compared to the previous quarters made the growth of a little less dynamic nature.

And with this market, the share of PZU grew. So we grew faster than the whole market, and it enabled us to close the fourth quarter at the level of 33.4% in terms of business operations, clarified active [indiscernible] 33.7%. This is a particular time when we are able to experience high growth in sales. Now in this difficult market of motor insurance, particularly TPL, as you can see, the fourth quarter differed from the third one. And it enabled insurers to show and to go back to the minimum positive results in solvency. Those positive results were realized, we might say, thanks to the changes in the frequency of claims that we have recognized in the fourth quarter. That is why the fourth quarter year-to-year, the frequency of claims went down by 7%. And then it was well translated in the [ slide ] positive result in solvency in the fourth quarter.

The first quarter of this year, increase as compared to the previous quarter. But year-to-year, it's still a slight correction. So considering claim inflation, it's quite a big challenge for the whole market. But unfortunately, we cannot show you yet how it translates into profitability and the change of average prices. So the market is really accelerating. And on such a market, the PZU Group, based on some preliminary estimates published by PZU, we have higher sales results, plus 14.8%. So we hope that the data of KNF, the Polish Financial Supervision Authority, will confirm that.

And we hope that this will translate into the further strengthening of investment measured by written premium. And as we already mentioned in -- previously mentioned, the main drivers of growth were mainly motor insurance, especially MOD, and in noncommunication insurance, mainly nonlife insurance. And we are very satisfied that with a small adjustment in the first quarter, the share -- the ratio number of MOD to TPL on the market in Poland, especially in light of macro indices, this is a very positive information. And it's a very good strength that's been observed practically from the end of 2018.

Going back to the fourth quarter, it was influenced by negative dynamics in investment insurance with the component of equity funds. So when it comes to a regular premium, which is most of the market, 86%, as well as the periodic premium, that was an element which had a negative impact on the dynamics. In the regular premium, there was an adjustment of around 7% and around 70% when it comes to a one-off premium. When it comes to premium -- periodical premiums, in category 1 and 5, it was 5; and in addition, almost 7% when it comes to riders. So we see how the basis is built when it comes to onetime premium. There was -- the dynamics amounted to around 0. So it was quite a stable level and increasing level when it comes to the share of -- on the market of the regular premium, it was almost 40% with the growing dynamics and the share when it comes to the onetime premium.

As for sales, we are growing in the channel of 2.5%. This growth is carried out both in terms of the [ basis ] and riders, riders especially in health agreements. We have additional riders and association of the portfolio of the already existing ones. This contributed to the growth of this segment when it comes to PZU. And as for individual insurance, there is a growth in life and endowment with a guaranteed amount, which are distributed mainly through the bank channel. But for a short time, they have been available also in different -- 2 different channels. So these are products such as [Foreign Language]. So here, you can determine the profitability in perspective of 2 or 3 years. It's quite an interesting product if you haven't heard about them, I encourage you to take a look on them -- at them.

Also, decreasing premiums from bank protection products, which is related to the sales of basic products, such as [ loans ], et cetera, as well as complementary products, which are mainly a collateral of the payment. Slowdown in sales of individual investment banking products in own channels, this was shaping our sales, measured by the written premium. And in the health sector, we were consistently carrying out the strategy, both when it comes to revenues in both dimensions, so subscriptions of insurance and medical facilities. But it's very good news because this is not revenue based on the same or decreasing base adjusted in terms of price. And we know that medical inflation has been growing quite strongly. So we are glad to see a growing number of agreements at the end of the period. It has grown by 6%. So this shows that we are able to continually build the portfolio and relationships with clients. We are opening new facilities, we are trying to expand the covering so that -- since this is a difficult market with growing costs. But we want to make sure we are able to attract customers and clients to our own facilities.

Assets under management, here, we've seen quite big growth when it comes to the valuation of assets and new sales. So this year, contrary to the previous year, we have quite a stable inflow on the market, and this allowed us to grow in terms of net sales, PLN 476 million. We are growing in terms of assets in ECS. We have a stable share in them, which is measured by the level of managed assets, and it's about 21%.

When it comes to bancassurance and assurbanking, we've already spoken about this. What's important is that despite of the difficult situation in this segment, we've been able to get a growing value measured by the written premium. Also in the channels of cooperation with banks within the group, there is a growth of 30% year-by-year, almost 20% in terms of change year-to-year of the premium allocated to the whole bancassurance channel. I want to talk about product offer, but I encourage you to familiarize yourself with it, especially when it comes to their combination with the onetime premium and also for agreements for clients of individual continuation.

And now we are moving to the financial results within the new standard, the new reporting standards. I'm having some technical issues. So I guess it's a suggestion for me that I should speed up, maybe you have to touch it or something. Maybe I'm boring you. I'll try to go faster. Okay, it's working now. Thank you very much.

And now let's move to the financial results. Gross insurance revenue, we've already discussed that. So we have a growth of almost 7% year-to-year. But we are growing on the side of corporate insurance. Corporate insurance, especially in high-risk areas are very strongly reinsured. There is a growth of the ratio of the premium to reinsurance. Also when it comes to gross insurance revenue, this is valued through the simplified model of the allocation of the premium. So its level is influenced, to a large extent, what we've seen in the second half of the previous year. So very high stable growth in corporate insurance and in the reinsured products. So they translate into the current results. So revenue -- net insurance revenue at the level of 5%.

And how about the cost side? So we have a fairly stable development of the portfolio of claims and benefits. So this translates into high profitability, both in life and nonlife insurance. And how is it divided quarter-to-quarter? So first of all, we see a lower mortality rate, so lower benefits when it comes to life insurance clients. But as I said before, this is offset with a higher claim in outpatient and medical insurance. So that was life insurance. And in the non-life insurance, that claims in noncommunication insurance has been improving year-to-year. Let me remind you that last year in this period, we were experiencing some mass events, also weather events, and that led to low results of the segment but they were nonrepresentative. And right now we are going back to a normal trend, and the mixed index in this segment on a level of 80 or even something around that, a bit less than 80.

So this all happened in the context of the situation shaped by communication products. We have growing benefits, and this is caused by the growing value of insurance, which translates into the price. We talked about that in terms of MOD and TPL. So it's a good information, I would like to emphasize that, and it's happening in light of decreasing claim frequencies. Administrative costs have been on the rise. We are being impacted by the market situation, inflation, inflation of wages and remuneration. So on the cost account of PZU, this is also visible. But we are growing when it comes to different costs, also technological costs, so IT costs, for example. And this is related to the implementation of digitization in PZU. We already talked about this, about various initiatives that are aimed at creating some stable, constant, competitive advantages.

So this is important in the context of other dynamics of change, also in terms of the premium and the costs. So this element will allow for a stable building of advantages on the market. So thanks to that both in the fourth quarter and in the first quarter, we've been growing thanks to communication insurance. We've been doing it faster than the market itself. As for acquisition costs, we're also seeing growth. They stem from the growing share of more expensive channels, outside channels, mainly the multi-channel. Its share in the sales portfolio is comparable to the channel of exclusive agents or the broker channel as well as the leasing channel. So they have higher distribution costs than sales as part of our own networks.

In the first quarter of this year, we have recognized and composed a loss component in the amount of PLN 347 million, and this covers both nonlife insurance as well as life insurance. It's a small growth of PLN 46 million compared to the previous quarter. And let me remind you what this value represents. This is the expectation regarding how in what way the life policies and nonlife insurance portfolios can behave over the whole life period both of the policies or the portfolios. So this is different than in the previous standard because here, they do not reflect the way in which the policies, let's say, we think that we won't be able to have some positive margins. So in this standard, they may be offset, compensated by different policies or different portfolios of -- which are profitable. So here, unfortunately, we have to look for such solutions.

But in spite of that, we are showing throughout all the segments and all products in this quarter positive profitability and positive contribution of different elements of given sectors. They will contribute to the consolidated results. This is a very important information. And I'd like us to understand this specific element, this new element as part of the balance sheet very well on the side of the insurer. Now at the end, the result from the insurance services. The result is similar to the previous year. It is a good information, even more that we take into account the cost inflation. That's a very good information. Despite what happened in the economy in the last 12 months, we're still able to show similar levels of profitability of the insurance business.

One more element that introduced is introduced by the new standard, the insurance financial costs. Relatively PLN 461 million this year, low amount in [ 2020 ]. Still, and I want to pay your attention to the fact that this value, just as the one that's lower, [ allocated ] financial results from the insurance activity. They are related to investment product portfolio that influenced the comparability of the values year-to-year in quite a significant year. Last year around this time, what we had was a situation where our clients and their strategies had losses on their investment activities. This year, it is a different situation. This is a similar value but with different trends. The loss last year was PLN 200 million. This year, we have income at the level of PLN 112 million.

On the one hand, it influences the comparability of that, both in the financial costs for insurance, and it shows the increase of cost at the level of PLN 30 million year-to-year. This amount represents the cost of money in time and the fact that the standard, contrary to the previous one to standard 4, is [indiscernible] standard and all of the [ flows ] are indexed. That is why when we move along the time, we recognize the cost of money in time throughout the months. On the one hand, it is recognized as the change in sales and then it is visible in the results as the financial cost from the insurance activity. What is good information is that this cost is here with a large excess of investment activity. So we have strong increases. Taken out the element of the insurance capital part, the increase is 50%. And in a moment, we will sum up the investment portfolio as such.

Now all of that, when we sum it up, the [indiscernible] insurance grows year-to-year by [ 17% ] with PLN 1,139 billion with the net result attributable to the equity holders of the parent company with PLN 884 million, 30% increase year-to-year with contributions for the banking insurance thanks to the increased interest rates. And that allows us to close the first quarter this year a very high result of PLN 1,155 billion and a 30% increase year-to-year in -- with the high level of rentability of nonmotor and nonlife insurance sectors and life insurance sectors. I hope this rate I'm presenting is acceptable.

Now let's sum up what we saw in particular segments. We shall start with nonlife insurance. Let me remind you what I've mentioned before. They are not comparable between the old life and nonlife insurance in the previous standard. On the nonlife insurance, this is what we have. In the mass segment, the income grew by 9%, revenue by 9.2%, mainly due to TPL. And that -- the trend is visible also in other products. And this portfolio has been gradually built in the last 12 months with good dynamics of those products, particularly in the second half of the previous year. What we can also see is the increase in cost of the premium for the acquisition costs due to some relatively more expensive model distribution based on channel 3.

Insurance service expenses, we have higher growth than in the insurance revenue both by claims sector. There's an increase in claims ratio this year plus administrative base costs, and acquisition costs went up also in multi-channel and brokers channel. Apart from that, the component of the loss was recognized more than the previous year, PLN 95 million, but without a significant impact on the profitability of the whole segment and nonlife insurance as such. That is why in this segment, the end result is nearly PLN 0.5 billion, that was [ PLN 4.5 billion ] last year. The decrease is 3 points. And that translates into rentability of the whole segment at the level of 86.9 percentage points in the mixed indicator. The increase of the indicator, 92.1%, relatively important increase, still at high rentability level for the nonlife insurance product mix. In index, 92% with rentability of 20% of nonlife insurance products.

In motor insurance, there's different dynamics on particular dimensions. The market is relatively flat, the TPL, relatively flat. In MOD, more increase, there's a more allocation of premium for reinsurance, much more so in the business sector for the last 12 months. Here, we have costs of the insurance services that go up more slowly than in the other segments. That translates into operating results in a positive way. It is supported by the higher allocation and attribution of investment results allocated to this segment. The operating results went up to PLN 130 million, nearly 30% last year.

Life insurance group and individual will be continued. It's a section where I would like to pay your attention to 2 things. The first of them is the fact that although we speak of a product segment that is characterized with its finite idea from the business point of view, that's group insurance and that we have corporate clients. For those clients, for their employees, we have an attractive insurance contract. That group policy is then transformed after this phase into an individually continued policy. We would like to have our clients benefit from those solutions in the individual phase. Despite that, what we have are 2 subsegments, so to speak: the group insurance, that is yearly and renewable. There we have a right to negotiate and modify and speak about the price with our corporate partner every year; and individual continued policies, where quite often, the clients gain the right in that group phase.

Why is that important? It is important because in terms of revenue allocation in the standard form, it changes in the group and individual continued phase. I -- it's different. The group part, it is allocated from group to individual continued. What consequences does it have? When we look at the group business, without that element, sometimes it has relatively higher claims ratio and lower rentability in the group segment. And the individually continued, when that premium is reallocated from the group phase. It shows a slightly higher profitability. It is significant as much so as the lack of symmetry influences the rate scale and time distribution of the claims that we recognize in those -- both components, so to speak. So I'd like to emphasize that we have to remember about that.

And as for summing up of revenues from life insurance. So as I mentioned before, when it comes to life insurance, we'd like to encourage you to look at the value of revenues in a different way. So contrary to short-term agreements where we have many similarities to the old world whereas, here, it is being built through the perspective of our expectations on how we'll be shaping our relations with our clients. So how we are going to recognize in our results different elements, both the ones related to claims and benefits, administrative costs and others? And why am I mentioning this? Because especially in this area, perhaps the standard won't be as intuitive for all of you because we are recognizing a very particular situation in this quarter. So in light of a decrease in mortality, and improvement in profitability in life insurance, we are allocating a smaller part of the insurance components, such as claims and benefits. Thanks to that, we can recognize the higher element of insurance margins.

So as you see, in 2023, that is on the level of PLN 294 million. Last year in this period, it was at the level of around PLN 250 million. So this is happening in spite of our -- especially because of the way that our expectations are shaped when it comes to the distribution over time of costs and claims and benefits and how they match the actual reality. So from the viewpoint of adjustments of the expectations, in the context of the COVID pandemic, so this can make understanding of this topic a bit more difficult. The seasonal character of mortality, let us remember that the distribution over the course of the year is such that it's high in Q1 then it drops in Q2 and 3, and then it goes back to high values in the fourth quarter. And it's all from the viewpoint of modeling the revenues, especially in short-term products in group and individually continued products. So this makes a difference in this regard.

So this is the situation, and this translates into decreasing revenues measured by the sum of the components year-to-year by 5% with a growing element which is significantly building the profitability of the sector, which are CMS and insurance margins.

Now on the side of cost, we are seeing a decrease which amounts to 3.5% year-to-year. And here, we've shown you the components of this value. So we've shown you the decreased loss component. So between the last quarter of past year and the first quarter of this year has dropped by PLN 40 million. And this was in light of lower claims due to mortality in this sector. So this all translated into the results -- of the operating results. It has grown to the level of PLN 279 million. So that was the increase of margin from 14.1% to 15.3%. But the structure of revenues is behaving a bit differently than the structure of costs, especially when it comes to the dynamic between different periods. So the operating result and its increase, it's predominantly shaped by elements related to investment results allocated to this segment, so an investment result, which is covering the insurance risk.

As for individual protection insurance, so here, this story may not be as difficult because there is a decrease in revenues due to a lower expected distribution of claims and the lower valuation due to insurance liabilities year-to-year. So this is accompanied by an increase in the level of [ CMS ]. But this drop of expectations is symmetrically related and is seen in our experiences in the cost of insurance services. Here, there is a decrease of over 4%, which translates into the increase of the operating result, both when it comes to the contribution of margins from insurance services as well as the investment component.

And 2 words about the evolution of [ CMS ]. As we mentioned, this is the product that is mainly responsible for the profitability of life insurance, its value over time. The main drivers of the change in the balance value of this measure year-to-year. So we have some good news that there is an increasing value of CSM in both segments. And this tells us that in terms of value creation, we have such a situation both in group and individually continued insurance, it's been growing by almost 3%, and in individual protection insurance by almost 4%. So this is good news. And I'd like to emphasize that on the one hand, we are creating CSM from new sales. For example, on the example of open individual continued insurance, PLN 39 million. But we are also creating CSM because throughout this time, we've been providing insurance protection. So proportionally to the units of insurance coverage, we have to also recognize the elements over time.

So the depreciation, the release of this component related to the first quarter which amounted to PLN 274 million. Different factors have not changed. So we might have the wrong impression that we are in a situation where this value is being depreciated and it's not being built. But actually quite the opposite is taking place.

And let me look at the other building block, so to speak. PLN 163 million, which is built predominantly through changes in the portfolio development between the primary policy valuation in our portfolio and what happened in the first quarter. So in this component, the there is a large share of riders for insurance. And due to the method of valuation, this will be shown as a change of the portfolio development from the viewpoint of value and not as new sales. So again, this may not be too intuitive, but this is important from the viewpoint of proper CSM development over time. We have different levels of opening and closing balance sheets in our individual protection insurance, and this depends on different factors that influenced the results.

As for profitability by operating segments. So as we said, high profitability of nonlife insurance, around 86%, measured by a mix index. This is a new measure, new index. It's also very important to emphasize that, both when it comes to the creation of the denominator of this value. But this is the best proxy that we can propose today as we referred that and we try to compare this with the values from standard 4. And we emphasize that both in terms of mass insurance and corporate insurance, in all corporate lines, MOD and TPL, there are values below 100%. So this shows that despite creating the loss component, we are nonetheless still able to create value and to have operational results in the segments of such products and this proves our theory.

Total life insurance, we have margins almost resembling those from before the pandemic. So it was 14.5% in the first quarter of 2022. Now in 1Q '23, it's 18.1%. So it's a scale measured by revenues, it's almost 80%, and year-to-year growth due to the decline in mortality amount to 15.3%. And I just mentioned briefly that we have a good and growing contribution in terms of foreign business. Let's not forget about that. As we mentioned before, the first quarter of this year means going back to the previous measures in terms of mortality to levels from before the COVID pandemic. So I will not go into that, but this is confirmed by our experiences and the influence of different risks to changes in claims. So there has been an improvement when it comes to risk of debt. And we also have the health debt, which compared to a similar period in the previous years, was building the claims rate year-to-year. And it worsened by 4.5 percentage points.

The investment result was shaped by a very safe portfolio. Some of them are debt instruments, mostly the treasury debt. We also have corporate debt, additional 17%, 18%. And profitability is high and it's on the rise. So today, we are trying to be a beneficiary of the market changes. And we've been a bit lucky when it comes to the timing of changes on the market in view of our historical maturation of quite a large tranche, which amounted to the value below 5%, and now it has rolled at the level of 6.5%. So it's quite an exceptional situation. A large part of the result has been shaped by growing share of the interest result that is growing -- it grows year-by-year by 40%, 44%. Drop of the results in capital instruments, mainly in our investments in private equity funds in technological market and declining valuation at the end of the previous year and the beginning of this year. A stable increase in real estate portfolio, mainly from the FX hedging instruments as well as increase in rental rates.

All of that still in the context of high solvency, a high-end solvency that grows mainly thanks to the own funds increase and operating cash flow. This one is another component that confirms that we're growing in scale. The investment result also contributes to that result on solvency. It is slightly corrected by the increase of the estimate of provisions, and what happens until the third quarter of [ 2020 ], which is the recommendation by the Management Board of paying the dividends and its missing element compared to the value reported in the cash flow as own funds at the end of the third quarter. Decline in SCR in fourth quarter 2022 by PLN 0.03 billion. From the point of view strategy, we have good information, a very high strategic objective in insurance revenue. What we did is put the -- by higher up at the level of PLN [ 28 ] billion will grow on a good way. It's easy to estimate that it will not be an easy road.

We will try to be able to keep growing in this dimension in the same way as we did at the end of last year and the beginning of 2023, over 30% increase in the health segment, growing net profit attributable to the parent company, growth in bank segment, very high Solvency II ratio on equity.

Now why do we speak about correct solvency of own equity? That's ROE. As you know, the new standard was supposed to equal the assets and liabilities in terms of how they react to the [ context ] in which the company is, discounting of the cash flow, discounting of -- in terms of the expected characteristical distribution of factors typical for the market. Today, this is a parameter that is difficult to estimate. We all know why. Nonetheless, this strong assumption in this concept level is not possible for us to implement 100%. Why? It's because contrary to other insurers in our peer group, we're not able to forget that PZU were looking at the whole things that we are talking to you about in the context of international standards. We need to be the guardian of the market in terms of local standards. And at the unit level, we are not able to give them up or modify them.

Why do I say this? It's because due to that dichotomy, due to the fact that in the level of the asset and liability management, we need to remember that we have some commitments to insurers expressed by technical rates. In our portfolios, where the main role is to provide protection, to have the assets to be provided at the level lower than the technical rate. We are not able to change our investment strategy. And it is the investment strategy that determines the valuation of assets and -- not the valuation of assets but is determining the strategy. And for that very reason, we are not able to make decisions about the valuation of assets to the market that will lead to the perfect matching of the 2 sides of the balance sheet, just because in the extreme situations in the last 3 years showed us that we have to deal with extreme situation.

So we cannot make a decision to expose our shareholders to lack of possibility of delivering this technical rate. That would mean that we would have to do that from our shareholders' money, from the money that may be shared as additional return. And because of that, that standard in its scope is not implemented in an identical way in PZU as in our competitors in the markets, where the local standard is international as well.

I am bringing your attention to that because that's the very element which makes us a bit mismatched in -- well, because the assets and liabilities behave a little bit differently. So when we need to close the balance sheet, turning to the same value, we need to find the space where we can actually have this difference. Other total revenue is that space for us. And there, well, we're working on it. We still have no impact on that -- well, I've been joking. Without much of impact on that, we are not able to manage this parameter in a responsible way. And because of that, the reference value and the value that expresses our ambition and the strategy is the value with the correction of that element because only in that way, we are able to say we're able to control all the variables.

Let's end at this point that part of presentation and open the meeting to questions and answers. All questions are welcome from the room and from online.

[Tomasz Kulik, executive]

[Interpreted] That's a moment, I wanted to say that we haven't had the questions from the room, and I was given an iPad well, very well then. No questions. Okay. Let's take the question.

Can you explain [indiscernible] more important? What are your expectations on pricing?

[Interpreted] It is a very interesting question, and I will be happy to answer it. As you see the situation of the market -- modern market development, and the last [ object ] is at the end of the previous year, shows us the following things. Thanks to significant drop in the frequency of claims, we can -- went back to slight rentability on that product. We need to remember that at the end of the previous quarter, the commission of financial supervisions recommendation was implemented. That impacts the level of claims paid to the clients in that segment. The growing costs should be accompanied with some assumptions around price adequacy, then we should expect -- and that's our central scenario as well. We should expect some correction on the profit or revenue side. But what we see today are the corrections happening around, what, at a pace that's significantly slower than the changes in the cost side. We shall see how we go around and what we can do in the next quarters about that.

Let me remind you that in case of PZU, what we are dealing with in terms of local standard, the situation is with weaker rentabilities of the current year, it is accompanied with a release of [ surplus ] from the previous years, and that allows us to still show positive rentability on the TPL -- moderate TPL. Historically, that has been a function of us in cautious. And today, contrary to our competitors, it gives us some space to have an easier way to manage this super demanding situation. Taking into account a local price adequacy requirement, I expect nothing but just one thing.

[Unknown Analyst]

[Foreign Language]

[Tomasz Kulik, executive]

[Interpreted] Wait, I think we've talked about this. We had a separate slide about that. So if you need any further explanation, please let me know.

[Interpreted] Is the COR in the first quarter in '23 at the level of 85.7%, is it comparable to the way of measuring under the old standard? While we have the loss component, which now reflects the loss for the whole period of the insurance coverage. So it's different than in the previous standard, when it was related to per premium through the coverage period. So it had less impact on the costs, and it was offset by profitable policies. So there are some small differences due to which the -- we cannot compare the different standards. But this is the best measure that we can propose to you. And consequently, from the first quarter, we can use it and then use it in the subsequent quarters. The comparable net profits under the old standard is a bit lower than under IFRS 17, which positions have the greatest impact on that revenues, claims or the location results. Nonetheless, the location results that does not impact the portfolio so much. So I mentioned that at the end of my presentation, So there is a difference here in terms of the logic that underlies this idea, the logic of those who proposed this shape of the standard.

As I assume the main objective was to create a certain symmetry in terms of reaction to changes in the environment both in terms of assets and liabilities of the balance sheet. So we were not able to enforce that, as I mentioned. So it's not the location result that has an impact here because it is presented and valued the same way as it was before. So as for the results under the new standard. They are impacted as it may be easy to guess, and it's a standard related to insurance activities. So this is what influences this new standard, a different valuation of different components both in terms of costs and revenues. And when it comes to costs, there is a slightly different approach. So we are recognizing them a bit sooner and on a different level of potential losses, if such appear. So again, there is a distortion of the symmetry that we had in standard 4 and a different approach to revenues, especially on the side of life insurance. So these are the components that have the greatest impact on the differences between, as you saw, the value of PLN 1.155 billion and PLN 1.80 billion.

[Interpreted] What is the target level of combined ratio in the long-term according to the new standard? Well, it's no trivial question, and let me tell you why. I could say assuming that nothing changes, and to a certain extent, I'm quite skeptical as I say this because I remember similar changes in the banking sector, how the interpretation of the new standard changed over the course of the first 12 months after its introduction. So I am aware that here, the situation may be similar when it comes to the interpretation and the approach in the execution of this new standard and how it will impact balance sheets and financial reports. So if you're talking about the combined ratio in the long-term, and since the valuation of provisions is not so conservative as it was under standard 4. And this conservative aspect is also related to the character of the Polish market. So I would say that this is a move in the right direction, if I may assess it like that, that it's in the right direction. And now the increase in the level of provisions are smaller.

And on the other hand, if we look at the share of costs, which are costs attributed to insurance activities and differently than in standard 4 are not completely fulfilling the catalog or meeting the catalog of costs, so their value is a bit lower. And also looking at the construction of the denominator, which is a bit different than in the old standard, number 4. So in the old standard, we were talking about long-term over the cycle. So we want to stay at the level below 92%. So now we should be able to say, starting from the same price long-term over the cycle, below 90. But here, I'd like to put an asterisk to this, that this is all under the assumption that we are talking about the same and we're talking in the same way, also looking at different factors which differ and which influence the way that things are reported, also the value of business which yields certain liabilities.

[Unknown Analyst]

Can you talk about claims inflation and pricing dynamics in the motor segment? And do you see further worsening of this trend?

[Tomasz Kulik, executive]

[Interpreted] I'm not sure if I agree with the premise, the first part of this question, so I want to go back to the division into segments. So yes, there's been a worsening in quality when it comes to TPL. But when it comes to MOD, especially in the corporate business, that is hard to say that. So it's not exactly like that. And -- but I do agree with the second part. So if you are talking about claims inflation, then our estimates about the impact of the use of the recommendations of the Polish Financial Supervision Authority, KNF, that could lead to 2 digits increase growth. But at the same time, and I spoke about this many times, we have launched several projects aimed at lowering, decreasing this dynamic so that we don't have to recognize 100% on the part of profitability or revenue. So these are activities which are connected to the improvement of the way we manage this and we channel this to our own network and also the period of dealing with claims, handling claims by outside networks.

So contrary to what we thought at the beginning, we thought that these projects would limit our costs, and now we think that these are instruments which have limited our increase of the average claim value. So from the early 2-digit dynamics, we should go below 10. So we should close at the level of maybe 8 or below 8. But it's too early in the project to be able to tell. So we'll keep you updated.

[Interpreted] But if you look at inflation, the cost of work, the parts of inflation or varnishes of different elements, all that influenced the cost of claims but also of handling the claims over the course of the past 12 months, then also in terms of the recommendation of KNF, this value is growing. So as you saw in the previous slide, to some extent, the growth is being limited to a drop in the frequency rate, but not fully. And the insurance market will have to deal with that.

[Unknown Analyst]

[indiscernible] those are upcoming for maturity this year that could be invested at current high rates.

[Tomasz Kulik, executive]

[Interpreted] It's about PLN 2.3 billion. That's the portfolio.

And that was the last question from this set that I've received. Do we have any other -- any more questions? No? Well, then I'd like to thank everyone who joined our meeting remotely. And I'd like to thank all the participants who are here on site, at the PZU office. Thank you for joining us. Thank you for our meeting. And I'd like to use this occasion to invite you to a workshop. We believe it will help you to understand this new standard in PZU through the lens of the new standard. So we hope that they will also answer some of your questions that maybe we were not able to cover today. It will take place on June 2. Do we have the exact time? Around 10 AM, but we'll confirm the exact time. So we'll confirm that in a standard way.

[Interpreted] So thank you very much for your attention, and I hope to see you soon.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]