Powszechny Zaklad Ubezpieczen SA
WSE:PZU
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[Interpreted] I would like to welcome you cordially to the presentation summing up the PZU Group's results in Q3 2022.
During today's meeting, I'll walk you through the key events, the key highlights that took place in this period. We'll also talk about the market context in order to say a few words about how the changes transpiring in the market, have affected PZU and what we look like in the framework of these changes, and I'll say how this is translated into Q3 results, where we are with the execution of the PZU Group strategy basically at the midpoint. And in a very classic fashion, will end up with a Q&A session.
So I would like to invite all of you very cordially, and we can go ahead and kick off.
So if we look at Q3, we can say the following: Q3 is a wave of totally new challenges. So we had to deal with them. Our colleagues in the banking segment had to deal with them. There is additional volatility, uncertainty linked to development, economic growth, rising costs especially in terms of the inflationary pressure. And in this environment, once again, we've been able to prove that our diversified model, business model is the best recipe, the best response to market turbulence.
This is a period in which we've grown extensively in terms of sales measured by written premium. This is also a period in which we have above average profitability in terms of our core business, so our underwriting business.
What pleases us is the very strong growth in non-life especially nonmotor. And so as I said, this is coupled with robust technical results, along with our investment results. So this means that we had a very high return on equity. So year-to-date, we've surpassed the target we indicated in the strategy. But if we look at Q3 on a stand-alone basis, it's a very high level of 17.3%.
As I've mentioned, Q3 featured volatility, but more than volatility, there was quite a bit of challenges in terms of what was going on in the banking segment. This time around, the banking segment made a negative contribution to the consolidated results. This is more than PLN 120 million in the red, despite the high return on equity. So we can see that this is something that is very pleasing having in mind the environment in which that result was achieved.
Now if we look at our revenue, the top line, we can say our situation is as follows: that in Q3, we're reporting very high growth rate. It seems to us that it's above the level accessible to other players outside of PZU. This is in excess of 8%. And this can be decomposed into things that was happening outside of Poland.
So in the Baltic states, in Ukraine, despite the fact that there is pressure, we do have a growing segment at a clip in excess of 20%. As I mentioned previously, we have non-life business, where in the same period, it delivered 12% growth year-on-year.
In a moment, I'll speak to the subject at greater length. We can say that nonlife is growing very fast, especially nonmotor business is growing very fast where we have slightly higher margins, and that's something that's particularly pleasing.
If we look at the growth in the life business or generally speaking, the position in the life business, we can say that it's not entirely unambiguous. So we're growing the markets, expanding in terms of regular premium period-on-period in protection business, in Class I as well as in riders. And the growth is pretty decent.
All of this is facing the pressure in terms of instruments, investment instruments, especially if we look at solutions with single premium products. So the situation is that on one hand, we have very good solid growth in protection business, but at the same time, having in mind what's happening on the asset management segment and market, we continue to see as a market that we're losing a lot of assets being written down in terms of debt strategies. This is linked to what's happening with interest rates.
That's more or less the situation in this segment and then an additional negative factor is the slowdown with respect to products that are sold as riders to bank agreements. So we're talking about complementary products with respect to the core bank products. So there's a dip in new sales in this channel. And that means there's less interest in protection products as well and this translates into what's happened with the premium itself and basically, the overall revenue in the life side of the business.
But we can say that we have the same gross written premium levels. So the situation and the interest in our abilities to reach customers with protection solutions, we can say that this is -- represents great value to us. It enables us to balance that, offset that situation in life business.
If we look at sales, as I mentioned previously, it's not just the very high pace of sales, but it's profitable sales. So we're talking about profitability in Q3 of 17.3%. We have improved our loss ratio in, practically speaking, each segment, each type of business in non-life business, when we look at the mass client corporate business as well as in the life business. So group and individual continued business, but also in individual lines, we're seeing growth in the margins.
All of this -- so we have very strong growth, robust growth in the interest result, and we have good profitability in the main portfolio. And so we have 5.2% in Q3. In terms of the investment result, acquisition costs have moved up slightly. Admin expenses have moved up slightly. So it's 7.8% is the cost ratio.
And all of this has happened with a high level of safety in our operations, and we have a high level of own funds linked to the capital requirements.
Solvency, we’re above the average for the reference of the peer group. So 226% is a very good level, a sound level, which brings us into the next quarter of next year. And so having in mind the challenges that face us, this is a very good starting point.
If we look at the conflict between Russia and Ukraine, the war and the repercussions and consequences for the PZU Group, we could sum this up in 2 sentences. We are active in providing aid to the victims of war in Ukraine. And in this way, our mind sight as a group is a socially responsible mindset. Especially if we look at our equity exposure, our business activity in insurance, in life insurance and non-life insurance on that market, we want to be a company that is responsible and is capable of showing the directions in which our colleagues should proceed.
So we want to see now a couple of words about what's been happening on the marketplace. This, to show you the very strong sales growth, and at the same time, the high profitability, we want to give you some context and some color about how the market is growing.
But before we come into this section, we're talking about a market that's reported with 1 quarter lag. So right now, when we talk about the results at the end of Q3, we're talking about the market and its growth and its condition 1 quarter earlier because this is the most, the newest data that's available, the most recent data that's available in the public domain.
So if we begin with non-life, in both segments in motor and nonmotor as we see growth. So motor is up 7.4%; and nonmotor's, up 6%. If we look at the motor business, we can say that the pace of growth is different in terms of motor TPL and motor own damage. In motor TPL, the first bit of information is that the market is saturated. Exposition or exposure is growing. It's at 2.6% in terms of the scale.
On the other hand, there's a negative constriction if we think about that in terms of the gross written premium growth rate. So the average transaction price, it's fallen by 1 percentage point. So the motor TPL business or market continues to grow. But we can say that the basically the quarter growth is between 1.5% and 2%.
If we look at motor own damage in turn, we can see that we have a totally different situation. This market is growing very fast, very strongly. So we're talking about 16%, 17%. This is partially growth achieved as a result of price hikes, reflecting the increase in the value of the market. We're all aware of the fact that the prices of new cars and used cars have been growing around 10% year-on-year. And the value of that growth, that incremental growth is reflected and responsible for the insured objects.
But the other 6%, 7%, that's an increase in terms of exposure, that's linked to the volume. And this is something that's pleasing for 2 reasons. On one hand, we see that the magnitude is growing in terms of motor business, the number of cars is growing on a highly saturated market. At the same time, we see that the -- we have kind of a double driver of this growth because more and more motor TPL policies are accompanied by motor own damage, hence we're trying to tap into these type of solutions, especially as we look at what's happened in recent periods that there has been -- well, the average age of the vehicle has dipped recently.
So if we look at nonmotor insurance, the situation is slightly different. The growth is quite dynamic. It's a little bit slower pace, it's 6%. We can say that there's been a bit of a slowdown because in Q3, Q4 of last year, we had a faster pace. This is where we started 2022 and this is the case in terms of Class 8, Class 9 in non-life business. So the growth rate in these products is 8% year-on-year. Motor TPL assistance on that market, at the end of Q2, we have seen market share of 31.7% in terms of gross written premium. It's more than 51% if we look at our share of the technical result. And this is a real reason for us to be proud.
Now if we take a look a little more deeply and scrutinize how the market for motor TPL is behaving, we see one thing. This data, as I mentioned, goes through to the end of Q2. We don't have newer data, but you can see 1 thing here. So last year and in the first 2 quarters of this year, this is a market that is generating profitability, in the black. So it's a market where you can earn some money. The profitabilities are constricting. Last year, it was 5%. Now it's 4.5%; 3.3%, if we look at Q1 and Q2 of this year.
But in this environment, we have been observing greater interest in terms of how customers could be acquired and to build exposure as opposed to think about how it would be possible to prevent margin erosion.
This part of the business is where you can continue to earn money, people think, and that's why you don't have to prevent margin erosion. But what I would like to draw your attention to is the rising frequencies.
At the bottom, you have a graph. This was prepared based on the data published by the Polish Insurance Chamber. We see that in Q3, the frequencies rebounded stronger. I can calm you to this extent that the growth in frequency is not something that we've observed in our portfolio. So those of you who look at documents published by the Polish FSA or the Polish Insurance Chamber, we can say that, that data could paint the picture, create the impression that there is a rapid growth in the frequencies of claims growing by leaps and bounds. But as I mentioned previously, our data in terms of the corporate segment and the mass segment do not affirm such sharp growth.
We can say even more than that. We, today, see room or space for claims and benefits handling. We can say that remote work continues to persist. We see that there is a substantial decline in the number of road accidents, car accidents. This is 30% less than prior to COVID advent, so prior to 2019. So we continue to see a downward trend.
So these data confirm that in terms of costs in the motor TPL product, there is room to generate a positive margin as evidenced by PZU's results in Q2 and Q3 and across the overall period.
If we look then at sales, we've said quite a bit. I would just add a couple of words. Some nonmotor insurance, we have growth in excess of 18%. So Q3, PZU, we saw nearly 19% in [ cost co ] and so a little under 2%.
As you can see here at the bottom, we can see over time, over the last 2 years, we can see that there are more and more motor own damage policies overlapping with motor TPL. We're tapping into those solutions. This gives us better information that this is the business, which enables you to generate positive returns.
Frequently, we speak to you about our results, and we talk to you about our strategy without saying too much about the products, how we're addressing that strategy. And here, we'd like to give you -- share some information with you to meet your expectations here. And what's in blue in the blue shaded sections are very important areas where we're doing more intensive work. We believe in these areas, that they will directly contribute to building our competitive advantage.
We have AiHome. So basically, if there were to be a claim in the residence, this would enable the customer to become basically the claims handler and document the claim and then assess the value and send us the documentation. This should basically accelerate the claims handling process. And this would also make it possible to lessen the burden that we bear as PZU. So it’s a classic win-win situation, which means that customer satisfaction can grow, can be augmented in this process.
So in all of those areas where we have a better assessment of risk, better underwriting, understanding of motor risk and making sure that the premium is matched to the customer profile in terms of what loss ratio would be associated with such a driver. And as a result, what type of premium is needed to cover that risk.
Naturally, we endeavor to reach a solution where we prepare and offer our products to various customer segments where you have a better matching, and we won't face a situation where the clients and the prices offered to them would somehow be offset, so basically worse risk would be covered by better risk. So this is the classic problem of a mismatch.
So there's more work to be done, and this will make it possible even if prices would be falling to continue to generate a positive technical result on this product in the mass segment and the corporate segment alike.
Then we have Truck Assistance, PZU travel insurance called PZU Woja?er, PZU Education, auto tires and housing associations and cooperatives. Well, these things are happening, but I can tell you that they're not going to -- from your point of view, they're perhaps not so interesting topics.
But in any case, it enables us to continue refreshing our offering and to expand the offer. And this means that we're able to reach new customers and to build value in terms of our current customer portfolio.
Now let's turn our attention to the life insurance market. What we've told you, so the situation in investment products and savings products, totally different in terms of periodic premiums and the classic investment products, so single-premium products.
If we look at the single-premium products, in Q2, the growth rate was minus 40%. In Q3, we're at minus 36.6%. We can say this is another quarter in which it's very difficult to maintain interest of customers in this form or in this offering. This, of course, is linked to what's happening on the overall marketplace in various asset classes. And so customers, as they look at the risk linked to investing in various strategies are making decisions and are trying to invest their money in solutions that are much safer to them.
As I mentioned previously, we've seen some attrition. So assets have flowed away from the asset managers. And so this is some PLN 23 billion in Q3, and this applies also to policies containing an investment product. So we can say that this market is under substantial pressure.
If we look at the periodic premium products, we can say that in investment insurance, so unit-linked business, it's more than minus 7%.
So then we have the positive information in terms of protection business in Class 1, it's 5.2% year-on-year. Riders is up 5 point or 5.8%. That means we can wrap up Q2 with a growth rate of 2.8% in terms of regular premium products or periodic premium products.
What does PZU look like against this backdrop of the overall market? In terms of our core products, we're growing, which is group and individual continued business. We're growing at a pace of 2% per annum. So our premiums are growing in ambulatory products, health products. So it's more than PLN 150 million. So the growth rate is in excess of 16%.
If we look at the health products, 2.6 million in force health contracts; that's the exposure we have to the health sector through group insurance and insurance. Then we also have malignant neoplasm, we have various riders like that under continuation. So these are products or areas, which have driven the growth.
If we look at individual lines of business, we can see the following in the PZU portfolio, and this is more or less true of the overall marketplace. We can see the investment products where it was roughly PLN 160 million last year in Q3. It's fallen to, say, PLN 12 million.
On the other hand, we see protection business expanding thanks to a new solution that was rolled out, a new product called Bezpieczne Jutro and Pewny Profit. It's a single premium product, and it's distributed through the banks in the group, and so the impact, some PLN 160 million. So it's a product that corresponds very well to customer expectations in terms of offering protection and value growth. So it’s a classic short-term endowment enabling you to benefit from this very particular situation we're dealing with in asset management, and investments.
Maybe I'll say a couple of words about changes to our product offering. I mentioned one of the products, which is called Bezpieczne Zysk, so share profit. And basically, it's possible to -- then we have a single policy that has protection, medicine, insurance, health insurance, and it's addressed to corporate customers. This is the PZU Na ?ycie Plus. This one has assistance as well. So it's kind of an all-in product. So at present, this is one of the most extensive and comprehensive solutions out there in the market.
Now if we look at the health pillar. So we have dynamic growth, both in terms of revenue and portfolio size. So the execution of our strategy is we want to have 1.7 billion in 2024.
If we look at assets under management, so this is a tough topic. Why is that? It's because of what's happening on the marketplace. On one hand, we see assets evaporating from the market. And then we also see the revaluation of debt instruments in particular, and dollar instruments generally. And having in mind the product structure, we're able to grow, and we are a TFI that can brag about positive net inflows.
So nearly PLN 650 million. So we also had growth where we took over TFI Energia, and so PLN 3.4 billion. What's important here, these are savings in retirement or pension schemes. So this is a perfect fit for the profile and the product that we're well versed with.
If we look at bancassurance and assurbanking, the declines we discussed, we mentioned why we have seen dwindling premium. This is transferring in non-life and life protection and investment business. To a certain degree, the magnitude of decline has been offset because I mentioned single-premium endowments, which is a short-term product, endowment product, which gives you a 2- to 3-year investment horizon depending on customer preferences. And this enables you to benefit from what's available on the asset management market, using treasuries where you have an alternative with a guaranteed rate of return as opposed to the money market or term deposits and deposits in general. So this is an offering that resonates well with customers.
And in a single customer, strict quarter, it generated PLN 165 million written premium. Well, how has all of these -- how have all of these things we've discussed translated into our financials? If we start with gross written premium, we've already mentioned or said quite a bit, so I won't say much more. So it's up by more than 8%. It's flat quarter-on-quarter.
So Q2 in PZU, we saw 2 things above all. Ag insurance, the spring campaign, if we look at comparability in the mass segment quarter-to-quarter, there's an additional PLN 100 million that we wouldn't see in Q3.
If we look at corporate insurance, there were 2 big contracts lasting 18 months through our mutual. So we have a similar situation there. So even though this happened, it's flat quarter-on-quarter, but having in mind the rising earned premium, this is important to us because the earned premium in large movements is a better proxy of how and what this recurring business will spread over the period of coverage.
So here, we're speaking of growth to the tune of 5%, 6%. These are not one-offs. This type of growth is something that we'll retain and assuming that we're going to be able to continue growing there with the premium, we should observe a similar situation in Q4 as well.
If we look at claims and benefits paid, we see the loss ratio is down in nonmotor business in both segments. Improved loss ratio in motor own damage, motor TPL is under pressure. But as I mentioned, there's still room enabling us to generate positive margins.
On the other hand, we're dealing with a decline in technical provisions as a result of having lower investment income. This is where we see the unit-linked business, lower sales, higher payouts. So this is what's happened in that line, and that's pretty characteristic for this period of uncertainty in which customers are trying to protect the value of their investments, and they're making decisions to invest [ money ] that are suitable in their opinion.
If we look at the investment result, we had a very robust interest result, interest income and good contribution from the real estate portfolio, the investment portfolio. So by 15% year-on-year, 17% quarter-on-quarter. So these are things that have contributed to very high growth.
So the admin expense and the acquisition expenses are rising. If we look at acquisition costs, this is linked to spreading excess slightly differently and the share of the product portfolio follow. So we have a bigger -- we have more nonmotor business products in the mix. So based on experience, we can say these type of products are much more profitable.
If we look at admin expenses, we can say there's quite a bit of pressure in terms of wages and salaries, real estate, maintenance, group work, the movement into remote work system or switch into cloud, working in the cloud and having a hybrid work environment. This has contributed to cost inflation. So this is something that really dominated Q3.
So the profit at the end of the day on nonbanking activity, this is the net result attributed to equity holders of the parent company. So it's up by some 40% and PLN 740 million. What I'd like to emphasize -- PLN 784 million. So this is a result that was generated by -- well, through -- it was generated by recurring business. So it's free of one-offs which might not appear in the next quarter or half year. So this shows you how healthy and sound the situation is in terms of our technical results.
Unfortunately, this is affected by what's happened in the banking segment. We know about the loan vacations, the bank protection system and the fund to support borrowers. All of these things have made a negative contribution in Q3. And that means that this segment had a negative contribution, and that means that our ROE was 17.3%, with the result of PLN 660 million, but we had high profitability in our core underwriting business.
Here's a short deep dive. So if we look at the combined ratio for non-life insurance in Poland, we see improvement in Q3 of this year versus Q3 of last year. So the same is true in the mass segment. This whole exception is motor TPL, but is still profitable. So we see the same information in corporate business. So profitability is up. We have improvement in nonmotor and motor own damage. And so there are challenges in motor TPL. Margins are up on the life business. Our international companies are also seeing rising margins.
These were the factors that we had in place in Q3. So if we look at nonlife more closely, I think the combined ratio and what the distribution is of profitability over the quarters, I think these are subjects we've already summed up, to be honest. So I'll go ahead and skip over that.
In the life business, what is pleasing to us is we have the return to high profitability, which is something that we saw pre-COVID, then we have a margin of some 22%, which is almost up by a 4 percentage point over last year. We have lower mortality. That means we can say that the excess mortality in COVID no longer appears. The loss ratio is a bit higher. I'll address that in a moment because we have higher utilization of health benefits, ambulatory benefits and services.
But as I said, what is particularly pleasing is the return to a situation in which, especially in Q2 and Q3, we're able to generate a high margin, recurring high margin in excess of 20% in the individual lines.
My commentary would be as follows. So when we look at the results in this segment, to sales, perhaps we don't have the best method and there's the new standard 17 will be something that's much better. It will reflect much better how this insurance contributes to the consolidated result.
What I would like to leave you with here is the growing result and recurring results in nominal terms. This is what I want to emphasize as opposed to the volatility of 11, 12, 27. This depends on the method used and the method is not entirely adequate or suitable.
If we look at pandemic and the loss ratio, in the group and individual continued insurance segment. So we have more normalized readings now. If we look at the number of deaths on a quarterly basis, we're talking about thousands of deaths. This is a comparable level to Q3 of last year. So the growth is under 2.5% pre-COVID. So we can say that we're at a normalized level again.
What is influencing in driving our loss ratio? And that's why it grew in Q3. This was the utilization of health products, ambulatory insurance. We have frequencies on the rise. Frequently, we have -- we're dealing with the health debt, where people didn't go to doctors during pandemic. And so this is probably 1.5% of the loss ratio in Q3. Then the death portion had a positive impact. There is dismemberment or child birth, these are the other things. That means that the loss ratio quarter-on-quarter is falling.
If we look now at the investment result, I would emphasize once again that we have a high interest income. If we look at real estate investment income, investment strategies, this time, there was a negative impact. We know what's happened in terms of equity measurements and valuations. So our private equity exposure is something that's positive and offsets the result in other equity exposures. So in total, in Q3, the contribution was negative. Here in the other segment is growing. It starts growing from PLN 183 million to PLN 280 million.
Let me tell you what's characteristic of Q3 and Q1, where we have major swings in the euro and zloty exchange rate. So in both directions here, we saw the growth of the euro exchange rate, so depreciation of the Polish zloty, which means that we had negative FX rates or movements.
In terms of our investment real estate or investment properties, we've talked about that multiple times, but the magnitude and impact of the negative FX losses, so PLN 130 million in the quarter, so then we also saw a decline in investment income in subordinated entities. And then we saw some growth and also what was happening with debt servicing had an impact.
So maintaining cost effectiveness. This is something that's a major challenge. We've talked about the main drivers of cost growth, so staff costs, real estate, maintenance, the new head office, the new organization of work, new labor work methods or work methods linked to training. And then at the same time, we see returns to normal transactionality with much higher inflation year-on-year. And this is something that's influencing this indicator.
We hope in upcoming quarters that the growth rate will slow, and this will be linked to higher sales. So in subsequent quarters, we should be able to normalize the costs stated as a share as a percentage of revenue. And this is something we've mentioned in previous years.
If we look at solvency, 226%, we already talked about that. So where are we in terms of strategy and execution? And basically, I can give you a summary in terms of where we are at the midpoint. So gross written premium at PLN 19 billion for 3 quarters, so up by more than 4%. So you see what happened in Q4 of last year. Assuming that we're able to grow, we could say that we would add that result from Q4. And this would say that we're very close to achieving our revenue target in terms of the time when we shared the strategy with you for the first time.
In terms of our net profit, we're below where we were last year by -- down by 10%. But we've talked about the reasons for that, so what happened with our banking assets. So it's our hope that all of the bad information that was reflected in the results and the balance sheet of the banking entities in Q3, and they had a negative contribution to the consolidated results, and we hope this is something we've been able to put behind us. And that would suggest that we would be able to generate slightly better growth in Q4, bringing us more closely -- closer to our targets in terms of solvency and having a higher contribution from the health pillar as well as the banking pillar.
And if we look at the asset management segment, so AUM, we continue to be above the target level in terms of the return on equity.
And so with this positive accent, I'd like to wrap up this portion of the presentation. And now I'd like to move on to the Q&A session. So now I understand that I should receive now some questions.
[Interpreted] So there's a question from the room.
[Interpreted] You mentioned the robust growth in earned premium, gross written premium that we could expect in Q4 2022. Can I ask you give us an outlook for 2023 by life and non-life segments?
[Interpreted] I can respond as follows. Usually, we're pretty conservative when it comes to giving guidance about what might happen in terms of our revenue position in subsequent quarters. But I can say how we see the market. We believe that in non-life, this market will continue to expand. And it will -- in our opinion, it will expand at a pace of in excess of 5%. Much depends on what's going to happen in motor and how and whether our competitors will make decisions to raise their rates. This is something I'm not able to address.
I could say the following. If we adjust for that and take it out of the parentheses, we should continue to observe pretty robust growth in nonmotor insurance. And this would be accountable or responsible for the bulk of growth.
So in motor business, much depends on what's going to be happening in terms of the profitability section of the business. In terms of recommendations made by the Polish FSA in terms of claims handling and what's being paid out in cash, we know that inflation for claims, if other perimeters don't change, well, we know that next year for that reason alone, we'll see even more pressure being placed on profitability. And now the question for 100 points is how and when various undertakings, insurance undertakings will respond? This will clearly depend on what's happening with claims frequency.
We've said multiple times that with other parameters being the same, this market, especially TPL, should start to grow, and this is not something that happened and that's for a large number of reasons. We talked about that honestly. So I don't see additional growth for the claims inflation.
I can go back to the slide. This is a slide that was prepared based on data from the Polish Insurance Chamber. Q3 shows a very big growth in TPL. I'm not able to give confirmation based on PZU's data, if PZU data would have replaced the market data. I think that next year, in the best dimension, we should have a really flat trend in terms of frequencies and perhaps, perhaps, let me emphasize that, giving consideration to the fact that there's wage pressure, we would see more hybrid or remote work versus work on site. And that means we would see further declines in claims frequency. So if that happens, that means the point of balance between prices and costs would be shifted, that point of equilibrium. And so that's probably the most important thing when we make an attempt to estimate what the growth rate will be on the marketplace.
If we look at the life business in turn, I think we'll continue to see growth at PZU. If we look at the health risk in this quarter, one of the bigger growths was here, and we will consistently implement our strategy.
We know that frequencies are on the rise. The cost of medical services are also on the rise. And at the end of the day, that should lead to the market value growing, measured in terms of gross written premium. So this is what the market might look like.
So if we look at investment, insurance investment products, my assumption is that the market would be flat. We have a big appetite to continue doing what we started in Q3. As the data show, as sales show, there was positive take-up amongst our customers. So we will strive to promulgate and spread the word about these solutions.
So we could say the following. If we look at gross written premium, I think next year should be a positive year.
[Interpreted] One more follow-up question. In terms of this IFRS 17 standard, will it be necessary to adopt or tweak PZU's strategy as a result? What would be the impact on the equity or the dividend?
[Interpreted] I would like to say one thing. The fact that the way in which we weigh or measure or talk about something, that doesn't mean that your strategy has to change. To speaking about differently, we’ll be obligated by the new standards -- by the new standards to talk about certain things differently. Perhaps we'll have to think differently in terms of how we build long-term value in customer relations.
Today, the standard we're discussing, even though it’s very intuitive, it has some inherent challenges. When we talk about premium, we're talking about the future. When we talk about costs, especially claims and benefits costs, we're talking about the past. So in a way, we have kind of a mismatch where that new standard is trying to grapple with that.
This does not at all affect strategy. We are consistent and will, in an unwavering fashion, continue those things we've talked to you about. And we announced that when we published the strategy, that we would do certain things. The fact that we're going to measure them or track them differently, and we're going to talk about the time distribution differently doesn't actually influence the underlying strategy itself. We're going to have to give you a type of interface between the world of today and the world of tomorrow.
So we'll organize a meeting where the purpose would be to show you how we should understand what we said 2 years ago, how it should be understood in the -- as part of the new world and the new KPIs.
That doesn't at all mean that we're going to modify the strategy. So under the current strategy, we'll give you a series of additional information points to understand, gain a grasp and to understand our portfolio. So we can say that the extent of disclosures will be much greater than what we see in the current financial statements. So certain indicators, certain values would morph. But the strategy will not change as a result. So whether you measure somebody in basically kilos or pounds, you have the same weight or stones.
What about the impact on the dividend well, I can say the following. We're going to have to. So we'll have the same business model and the same strategy. Let's say, KPIs, KPIs would have different values for the purposes of this discussion. So when we think about our capital and dividend policy, we're going to have to align that to those KPIs. We can call them KPIs for a moment, where we can see the readings that it will take and the new reality.
Right now, it's being done with number 4, in mind. Now we're going to have to use the metric system. So it doesn't mean that anything in strategy in terms of how we perceive things, how we want to be perceived, if we look at -- it doesn't mean that the capital flows would change at all or would have to change.
So we have the first question from the Internet. Could dividends support the stand-alone result in Q4?
I assume that this question boils down to the following. I'm trying to read the underlying meaning. So do you see room for dividends, which -- well, the dividends pace is defined by the stand-alone result for PZU at the end of this year. I think that's what the person is asking this question has in mind.
So I could respond to this question in the following manner. Well, A, I'm not surprised by this question. So I tried quickly to collect a few figures. But this is only something to give you a picture of our approach. But I'd like to leave you with your own assumptions in terms of the components.
Today, we have the following situation. PZU SA result is PLN 783 million. At the end of Q3, we know what Q3 was. I think it's the most representative. It is the newest. We know that the PLN 783 million was under pressure from investment activities. In terms of subsidiaries, subordinated entities and everything else that was taking place and what was going through the revaluation result in the banking segment. And this means that in Q1 and Q2, we had recognized the negative impact of this item, and this was roughly PLN 400 million in the negative in each of the quarters.
In Q3, we had banks generating results in the red. In Q4, I assume that none of these events would be continued. So that means that looking at interest rates, which have an impact on changes in values that go through the revaluation of equity. And then we have additional impairments or loan vacations that we're not going to deal with any of those things again. So even if we were to venture to say that PLN 783 million is a representative figure, I've told you why it's not, but even if we were to come to that conclusion, then we could say that the unit, the stand-alone result would be around PLN 1.1 billion in Q4 if we had Q4.
It seems to me that's not a representative figure. That's why I'm talking about the method and not about the assumptions. It's going to be entirely up to you to put your own reflections and ideas in mind and plug them into the model here.
We continue to have in mind that PLN 1.3 billion is still not distributed from last year. And then we have the recommendation from the Polish FSA, this would be kind of carbon copy of what we had last year. Well, so the first value should be divided by 2. So we could say that it's the PLN 1.3 billion plus the PLN 783 million divided by the certain figure. This would give us the potential room for dividends if we agree to that approach.
And if we say, but this is a figure which could be potentially paid out in the form of a dividend, then we're saying that it could be more or less PLN 2 and above. And so if we look at the number of the value of shares, this would give you a dividend yield of 7.2% and above. And so here, I will allow you to think about this on your own and mull over it.
That's more or less, I think the proper way of thinking about this, and it would be improper to think about additional dividends that could support the stand-alone results in Q4.
Next question. What is the purpose of the investment in Orlen? So does PZU intend to sell the shares quickly like Pekao? Or do you have a swap agreement? With the change in the exchange rate -- sorry, in the share price, would that affect your quarterly results? So do you -- will you intend to sell those shares, divest the shares quickly?
So when making that decision to increase our equity exposure, this decision was fully in line with our strategic asset allocation, and it is fully within the limits and constraints that we have for these type of exposures. We made the decision of our investment strategy for this asset. And this strategy will affect the method in how we recognize this asset -- this investment in our assets.
And the strategy boils down to the following. We intend to generate benefit on that exposure linked to the movement of the share price. And for that reason and the way in which we're going to do that would enable us to recognize that asset in terms of its measurement and what happens with that.
This is going to be an asset that the changes in the valuation would go through the revaluation. So it’d go through the balance sheet and not through the result. Have we entered into a swap agreement? No. Do we intend to sell it quickly? That's another definition. What it means to say quickly, I could respond to that question as follows. This is what I feel subcutaneously. This is what I feel as the sense of that question. This is not a strategic investment for us. This is not something that we want to keep on our balance sheet for a long time. And I think that is a full response to that question.
What are your ambitions in terms of selling [indiscernible] profit and best [indiscernible]? What are the guaranteed rates? What's the profitability of these products?
So the guaranteed rate of return is something that depends on when you customers enroll and in which tranche because each tranche has a different instrument, hedging instrument, and this determines the profitability to the customer.
And having in mind the rapid changes in the hedges, well, these are treasuries, so this is, I think, more or less clear what happens. I can plug in some figures. Give me a second to check that.
Here, I would not like to respond consciously to a question, a question about the possible gross written premium. This is something that we don’t -- we don't share that type of information in this respect. So I have that information.
Now, in terms of the guarantee, the guaranteed rate of return in terms of this -- the 2-year instrument, it’s a range from 10.4%, nearly 11%, depending on the tranche. If we look at the 3-year instrument, the corridor is between 17% and 19%. That's what that looks like.
Does PZU expect that motor TPL will start to grow by leaps and bounds? When might that start happening?
I can't respond to that question differently from -- well, the only way I can talk about that is like a consultant. It depends. It depends when there's going to be a product in the market that you can earn money on. We don't have data yet for Q3, but assuming that PZU was able to generate a margin, and under the assumption that our market share in the technical result hasn't changed between Q2 and Q3, then we would assume that in the Polish market, there will be other insurance undertakings that we'll be able to demonstrate profits in motor TPL. Whether or not that happens or not, we'll be able to tell you on the basis of data confirmed by the Polish FSA and so that could take place during our upcoming meeting.
So basically, everything depends. And I'm not saying that just to run away from this question. I'm just saying this because our environment is less and less predictable. I said to you, and the graph here is displayed, the market, based on the report published by the Polish Insurance Chamber, they reported growth in frequencies, and that would suggest that today's margin would be under major pressure.
But at the same time, I said to you that I do not confirm that our portfolio has sustained a similar graph. And so that means this is not a graph that could speak to the profitability in our -- the motor CPL product we distribute as PZU. As long as everybody is going to be able to earn money on it or most of the companies will be able to earn money on that, that means we would not be dealing with the situation we are facing today. So I think this is a source of the dependency.
But looking at changes in Q4 for obvious reasons. We've talked about this many times. So it's not yet now whether or not next year this would happen. We'll have to wait.
[Interpreted] The litmus paper test -- the litmus test could be information about the provisions for unexpired risks that will be reported by insurers in their financial reports for the year ending 31 December 2022. Why do you have growth in the interest income by leaps and bounds?
[Interpreted] Two things because we have greater exposure and bigger share of the instruments purchased at current profitability. So we had a historical tranche, pretty large, sizable that matured and a similar thing will happen at the turn of Q3 and Q4 next year. And so we were investing originally at totally different profitability levels than the ones available to us now.
And so that's why we're talking about inflationary bonds, which have contributed strongly to this growth in terms of our interest result.
[Interpreted] In nonmotor and motor own damage, are the high rates of growth sustainable?
[Interpreted] What I think is when we think about the motor own damage product, in Q4, I would be astonished if we were not to observe similar growth rates because this started this year. We're talking about the part responsible for covering the incremental increase in car value.
So having in mind the fact that the market has reflected that growth in the car value, but insurers, in order to -- well, they have another 12 months to reflect that. And so that's something that should be continued in subsequent months. So that's part of the response to the question.
The second part of the response to the question, it depends on put the share of motor TPL and motor own damage will be. And will the interest continue to be as strong in terms of the magnitude. But I think in Q4, yes, I would say that's probably going to be continued and probably in Q1 of next year as well.
In terms of TPL, well, the situation is totally different. Here, we're not saying that we have sustainable growth. We're saying that this is a situation where we have transaction prices falling in parallel with the overall size of the business growing. So I believe that as long as this market has positive profitability, that means we will continue having the same situation in front of us. And we'll see how long this will last.
It seems to me, but -- we're now starting to surmise and speculate that this should not last for an exaggeratedly long period because especially, we have in front mind that insurers have to look at inflation and cost estimates of claims handling, and this would lead to further growth in the average value -- average cost of claims.
[Interpreted] Accident frequency trending in Q4 so far. Do you expect the expected economic slowdown to drive down frequency?
[Interpreted] What I can say right now, well, I do not confirm the frequency graph, well, one that would look the way this one looks, I can't confirm that that's the case in PZU.
At the same time, I do not see strong arguments in favor of these frequencies starting to grow strongly, especially having in mind the slowdown in the situation in which more and more frequently will be compelled to make these decisions, so whether we're going to use our own car or use public transport. So we will continue to observe more and more remote work. And that means we should have fewer or less traffic on the roads, and that means fewer accidents. And we don't see any factors that could cause the situation to change by leaps and bounds.
[Interpreted] How does PZU see its operations in the new head office? Are there positive effects? Or is it just a matter of paying more for the higher standard vendor?
[Interpreted] Perhaps this is a little bit provocative. Well, this means since we've just matched market standards, that means for many years, we were below the standard on the market.
[Interpreted] Well, this question is, I would say, where we can look at this on a market basis. Well, how do we see operation in the new office building?
[Interpreted] Well, this is an office building, well -- it's well located because we have subway stops very close by. It's in a very great venue, great spot. So this is an office building, which from the point of view environmental impact, we have the highest quality building, I think, in Poland now in terms of environmental protection.
On top of that, we have tools which were not available to us because of the infrastructure in the old building. As I said, we were able to consolidate our office buildings. Up until now, we were spread over several buildings. Now, practically speaking, we're located in a single building. And this was made possible because we moved into a hybrid work environment but also having in mind the tools we can use. These are very good changes, which resonates well amongst our employees. So it's an event, across the board, this is a very positive change.
[Interpreted] Over 20% margin for group and individual business. Should we expect the margin to return to pre-COVID levels next year onwards?
[Interpreted] The response to this question consists of 2 elements. The first one is about the loss ratio and other elements. So if we look at the loss ratio, I'll try to find the right graph to illustrate the point. As you can see on this graph, what we've been observing in terms of the loss ratio, well, the levels are consistent with what we -- the levels of our readings are consistent with what we saw pre-COVID. So I would say that this is rather -- yes, that's how we would see that.
But to a certain extent, this optimism is slightly eclipsed in terms of the incremental utilization or in terms of utilization, we hadn't seen pre-COVID in terms of paramedical risks or hospital treatment, insurance, things of that nature. So the response is as follows.
Yes, from the point of view of loss ratio observe a return to substantially lower levels, but they would be slightly adjusted by what's officially referred to as the health debt. So that's the first part of the response.
The second part of the response is linked to the cost layer. The paradox here is I'm not thinking about admin expenses; I'm thinking about inflation itself and what accompanies it in terms of potential growth in sums insured, especially for individual continuation. And for some of the portfolio, we might have a lack of adequacy because the price of insurance after a few years and the bulk and the size of the sum insured. So if those things happen, and this happens in the first half of the year, then we are obligated to cover that deficit by bumping up provisions and the provisions should cover the expected costs of benefits and claims paid. So it seems to me that this type of response would be the most exhaustive.
[Interpreted] Increase are required for the MTPL market to meet the impact of the existing high claims inflation and additional effects of the FSA recommendations on claims handling. Do you see that happening next year?
[Interpreted] So replying to this question about claims inflation, I can say the following. Today, in PZU's portfolio, this inflation, depending on the quarter and what's happening with exchange rates because some of the provisions are already FX provisions, so if we're seeing a depreciation of the Polish zloty like in Q3, then we have additional costs linked to the measurement of that claim in FX terms. Then we have the opposite next quarter. So it depends where we are in a given moment in time. We see claims inflation between 7% and 9% this year.
Having in mind the mix for claims handling, so broken down by the method of claims handling and the recommendation issued by the Polish FSA, and this is something that the question addressed, well, then these costs, the average claim cost will grow next year.
So Polish FSA did an estimate at a certain point in time, in terms of what their recommendations should do in terms of how claims based on cost estimates would look. And so Polish FSA said, it depends on the structure of the methods for claims handling, and there should be an additional cost of 4% to 5%.
So as a result, if other perimeters are unchanged, that would give you the value, which perhaps, depending on the profitability -- relative profitability of the various insurance undertakings, for some people, this might be a missing element or something that would reduce your profitability next year. So probably not at the beginning of the year because the overall market is trying to come to terms with this new situation.
There are questions going to KNF Polish FSA. And so you could read about that in [indiscernible] today quite extensively. So we can see that KNF will be quite rigorous in its approach. And if so, that means that next year, we would deal with the incoming of these recommendations and the net claims inflation. And so inflation in terms of labor expenses will make a contribution. And so this will be an integral part of the motor claims cost and then higher prices for fixed parts, paint, or varnishes and other components.
So with other parameters not being changed, and this is frequency, well then this type of change should take place next year.
[Interpreted] Can you be more precise in terms of how long you're going to retain the shares in Orlen? Will you prefer to sell the shares to the market like Pekao?
[Interpreted] I'm not sure what form we have in mind. So it's hard for me to respond to that. I'm not able to imagine selling this in any other form besides selling it through the market, but I can't really respond to this question because now I would start through my response to affect the behavior of the market in terms of this being a specific asset.
So we should respect one another as well as the commercial secrets. You understand that transparency is a value that goes beyond time, but is also limited. So I can only say that according to the investment strategy, anticipated for this asset is how we'll proceed.
[Interpreted] Next year, do you plan to come back to the bonds issue?
[Interpreted] We do not plan to do that. We're not considering that. We're going to stick with the instruments we have in the balance sheet for another 5 years. So with other parameters being unchanged, we'll have another pit stop in 5 years from today.
As you see, our solvency is buoyant at the consolidated level and at the individual level of the 2 insurance undertakings. So there's no need to go back to that project at this time.
And in this manner, we have exhausted all of the questions from the Internet. So I'd like to thank you very cordially and it was a pleasure for me to spend this time with you for the first time in the new building. So once again, this is kind of equalization and an adaptation of PZU to the standards that were available in the market. And I'm pleased that this room is something that you'll see in the future during our subsequent meetings.
Once again, thank you very much. And I would invite you to join us for the next meeting of this type. So thank you very much.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]