PZU Group, 1H2018: consolidated net profit up 38.3% y-o-y

30 August 2018 — Daniela GHETU
The Polish PZU Group ended 1H 2018 with GWP increasing by 2.4%, to PLN 11.8 billion (EUR 2.7 billion), while paid claims went up by 1.8%, to PLN 7.34 billion. The Group's consolidated net profit reached PLN 2,358 million, 38.3% up y-o-y.

The following factors in particular exerted a positive impact on the PZU Group's financial results in H1 2018:
  • the growth in GWP in motor insurance, the conclusion of several high-value contracts and higher sales in international companies;
  • higher profitability in the corporate insurance segment due to rising earned premium and an increasing loss ratio in motor insurance, while administrative expenses remained flat and the acquisition expense ratio improved;
  • higher profitability of the mass insurance segment driven mainly by the improved profitability of the motor insurance portfolio;
  • increased profitability in group and individually continued insurance as a result of improvement in the loss ratio in protection products and changes in the mix of individually continued products;
  • better performance in the banking segment at Alior Bank in connection with the high sales level of credit products supported by the good business climate and a low interest rate environment.
The lower result on listed equities, in particular due to softer conditions on the Warsaw Stock Exchange adversely exerted this period's results.

The incorporation of Bank Pekao in the PZU Group's structure in June 2017 materially affected the comparability of results year on year. Pekao contributed PLN 1,277 million to the banking segment's operating result in H1 2018, compared to PLN 227 million in H1 2017. Pekao's contribution in Q2 2018 alone was PLN 714 million compared to PLN 227 million in the corresponding period of 2017.

Premiums

In H1 2018 the PZU Group collected gross written premium of PLN 11,881 million, i.e. 2.4% more than in the corresponding period of the previous year. Growth materialized mainly in motor insurance and as a consequence of concluding several high-value contracts. After considering the reinsurers' share and movement in the provision for unearned premiums, the net earned premium was PLN 11,054 million and was 6.8% higher than in the corresponding period of last year. In Q2 alone gross written premium climbed 3.6% y/y to PLN 6,050 million, while net earned premium moved up 6.1% y/y to PLN 5,596 million.

Claims and benefits

Net claims and benefits in H1 2018 (including the movement in technical provisions) reached PLN 7,345 million, meaning they were 1.8% higher than in the corresponding period of the previous year.

In turn, the increase in net claims and benefits (mainly in the class of motor insurance in the corporate client segment and the mass segment) was affected by the Q1 remeasurement of the provision for claims for general damages for the pain caused by the vegetative state of a relative injured in an accident. The higher claims paid in agricultural insurance are also the outcome of the higher number of claims in agricultural insurance (in the mass client segment) caused by ground frost and torrential rain and hail (Q2 2018).

Net claims and benefits in just Q2 2018 totaled PLN 3,719 million, meaning they were 6.1% higher than in the corresponding period of the previous year.

Administrative and acquisition expenses

In H1 2018, acquisition expenses went up PLN 107 million compared to the corresponding period of the previous year. This increase was driven in particular by an increase in direct acquisition expenses in the mass and corporate client segments that ensued from the burgeoning portfolio and the change in the product mix. In Q2 2018 alone, acquisition expenses went up PLN 50 million compared to the corresponding period of the previous year.

The PZU Group's administrative expenses in H1 2018 were PLN 3,342 million compared to PLN 2,036 million in the corresponding period of 2017. The upward movement in H1 costs of PLN 1,306 million stemmed mainly from commencing the consolidation of Pekao (administrative expenses of the banking segment rose PLN 1,304 million).

In just Q2 2018 administrative expenses totaled PLN 1,727 million compared to PLN 1,174 million in the corresponding period of 2017. The administrative expenses of the banking segment accounted for roughly PLN 500 million of that figure in connection with commencing Pekao's consolidation.

Investment activity

In H1 2018 the net investment result1, including interest expenses, was PLN 4,264 million, compared to PLN 2,607 million in the corresponding period of 2017 (up by 63.6%). Such a significantly higher result was driven mostly by the commencement of Bank Pekao's consolidation in June 2017. In Q2 2018 the net investment result, including interest expenses was PLN 2,270 million versus PLN 1,105 million in the corresponding period of 2017 (up by 105.4%).

After the contribution of banking activity is netted out, the net investment result after factoring in interest expenses in H1 2018 was PLN 468 million and was PLN 619 million lower than in the previous year. The lower result on listed equities (in particular due to the deteriorated market conditions on the Warsaw Stock Exchange) especially contributed to this decline, as did the investment income in the portfolio of assets to cover investment products, which was down PLN 327 million y/y (this does not affect the PZU Group's overall net result). After netting out the impact exerted by banking operations, the net investment result including interest expenses in Q2 2018 shot up by more than 200% year on year to PLN 319 million versus PLN 106 million in the corresponding period of 2017.

Profit

The PZU Group's consolidated net profit in H1 was PLN 2,358 million meaning it was 38.3% higher than the net result in the corresponding period of the previous year. In Q2 2018 net profit totaled PLN 1,304 million versus PLN 718 million in the corresponding period of 2017 (up by 81.6%).

The net profit attributable to parent company shareholders was PLN 1,425 million compared to PLN 1,438 million in H1 2017. In Q2 2018 net profit attributable to the parent company's shareholders was PLN 782 million versus PLN 504 million in the corresponding period of 2017 (up by 55.2%).

Equity

At the end of H1 2018, consolidated equity hit PLN 34,612 million, down from the end of 2017 (7.8% drop). The decline in consolidated equity affected in particular non-controlling interests, which fell by PLN 1,629 million reaching PLN 21,332 million driven by the designation of PLN 2,074 million for a dividend payment by Pekao, where PLN 1,659 million of that was the dividend attributable to noncontrolling interests, and the effect of the application of IFRS 9. Equity attributable to the parent company's shareholders fell by PLN 1,319 million compared to the previous year - as an effect of the distribution of the 2017 profit by PZU, including the allocation of PLN 2,159 million as a dividend and the effect of the application of IFRS 9.

ROE

In H1 2018 the return on equity attributable to the parent company was 20.8%. ROE was 1.2 p.p. lower than in the corresponding period of the previous year.

In just Q2 2018 the return on equity attributable to the parent company was 22.3% compared to 14.9%, signifying growth of 7.4 p.p. in comparison with the corresponding period of the previous year.

Solvency according to Solvency II

As at the end of Q1 2018, the solvency ratio (calculated according to the standard Solvency II equation) was 227%, a level above the average solvency ratio reported by insurance groups in Europe.

The PZU Group's interim report is available here

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