CEO Letter to Shareholders

Beata Kozłowska-Chyła, Ph.D. Hab.
President of the PZU Management Board

Dear Shareholders,

I submit to you the report on the activities of the PZU Group for the year 2022. This was a period in which we faced many challenges related to the geopolitical and macroeconomic situation. After Russia’s assault on Ukraine, the global and Polish economies came under tremendous pressure. The warinduced energy and food crisis, as well as problems in supply chains, have contributed to rising inflation. The great flexibility and adaptability of the Polish economy and the government’s anti-crisis measures had us avoid a major crisis; nevertheless the aforementioned factors still affect our business and the lives and plans of our current and potential clients and employees on many levels.

Given the dynamics of change and the difficult-to-predict conditions in which we had to operate, we can consider 2022 a time well spent, in which we achieved the goals we had set. Once again, we have proven the high resilience and effectiveness of our business model, the efficiency of those who manage and oversee our operations, and the commitment of our employees. This is evidenced by the financial results achieved, as well as the growth of operations in all of the PZU Group’s key markets, the certainty and quality of protection provided to clients, and the benefits generated for shareholders. The extraordinary challenges we faced last year confirmed that the goals we set in the Strategy for 2021-2024 and the decisions we made during its implementation were correct. Consistent implementation of strategic goals has been the best response to these challenges.

Structurally, non-life insurance was the main driver of premium written growth. In the mass segment, we achieved the highest sales growth in MOD insurance, which increased its share of total premium written by more than PLN 400 million in 2022. Increasingly rapid replenishment of mandatory motor vehicle owners’ TPL policies with MOD policies has been observed since the beginning of 2021. Between 2017 and 2020, this saturation level increased by 2 percentage points, while from the end of 2020 to 2022, it has already increased by 2.6 percentage points. With our activity, PZU will be the biggest beneficiary of this trend. In the corporate segment, on the other hand, we increased insurance sales in the noncommercial segment the strongest – by more than PLN 680 million year-on-year.

In 2022, we generated the highest net income since PZU SA’s debut on the Warsaw Stock Exchange 13 years ago. Profit attributable to owners of the parent company amounted to PLN 3.374 billion, implying a return on equity (ROE) of 19.5% – 2.1 p.p. above strategic ambitions and 0.9 p.p. above 2021 levels. It is worth noting that we achieved this result with regular dividend payments. Since 2010, PZU SA has already allocated a total of more than PLN 27.2 billion for dividend payments to shareholders.

Contributing to the solid net result was not only growing sales, but also the maintenance of favorable profitability in the core business and the good results of the placement business. The combined ratio (COR) in property insurance remained at a good 89.8% (up 0.7 p.p. y/y), the margin in group life and individually continued insurance increased by 5 p.p. y/y – to 17.4%, while the return on the core portfolio was 5.2%.

The high interest rate environment, on the one hand, affected the decline in mortgage loan sales and worsened the performance of PZU Group banks, while on the other hand, it allowed the Group to optimize its investment portfolio by renewing maturing sovereign bonds at higher profitability, as well as offering clients life and endowment insurance with a more attractive guaranteed upfront rate of return. Despite the decline in loan demand and the significant increase in operating costs that the banking sector was subjected to, the contribution of banking activities to the PZU Group’s result in 2022 was nearly PLN 580 million, only 4% less than a year earlier.

At the halfway point of our “Potential and Growth” Strategy planned for 2021-2024, we can say that its implementation is proceeding very smoothly and underpins the solid repeated results we have achieved in recent years. In the past year, we focused on better understanding client needs, introducing new and refreshing existing property and life products, and further digitizing business processes.

Our ambition to make the PZU Group a provider of comprehensive solutions that will help clients protect and multiply their assets, properly ensure their own and their family’s health and financial security, seamlessly align their business to operate in a sustainable manner, and build engaging and business-efficient relationships with employees, taking into account the care of their loved ones, remains fully relevant. To this end, we are steadily expanding ecosystems that integrate a range of products and services – from insurance to banking, investment to medical and extended assistance packages, targeting many customer groups, including drivers, those interested in the best health care, seniors or employers.

We are taking advantage of new sales opportunities opened up by our cooperation with banks and strategic partners – major energy suppliers, leading e-commerce and service providers. In particular, we are building synergies with PZU Group banks, implementing more insurance products in the banking channel – linked to banking services and stand-alone. In the latter case, an important step was to enable the purchase of PZU motor policies in all branches of Bank Pekao in Poland from November 2022.

We are making increasing use of artificial intelligence algorithms and robotic process automation (RPA) not only to streamline internal operations, but more importantly to improve the client experience. For example, we have implemented a solution that instantly and objectively analyzes photos of vehicle damage and cost estimates from repair shops – it already handles more than 500,000 vehicle damages per year, significantly speeding up claims procedures. At the end of September of last year, we became the first insurer in our region of Europe to introduce the AiHome app for handling damage to home movables, in cooperation with a Swedish startup. It was also the year we completed testing AI algorithms in handling crop damage caused by hurricanes and torrential rains. They analyze satellite images of crops, allowing them to accurately determine the area and extent of damage, thereby reducing their handling time.

The PZU Group’s organic business growth in key markets is complemented by well-conceived acquisitions. In July 2022, we acquired TFI Energia from PGE SA and subsequently merged it with TFI PZU. Thanks to the integration of the companies, we have significantly increased the assets under management and gained valuable clients, such as employees in the energy sector, who can invest their funds through TFI PZU. Last November, we signed a letter of intent with PKN ORLEN about the possibility of PZU acquiring all the shares of Polski Gaz TUW and Polski Gaz TUW na Życie. We look forward to the implementation of this agreement, which will allow us to offer the best insurance cover to PKN ORLEN Group, which has become one of Europe’s largest multi-utility companies.

The year 2022 was marked by intensive implementation of ESG criteria in all business segments and at all management levels of the PZU Group. We reduced carbon dioxide emissions from PZU’s own sources and PZU Życie by a total of 25.5% over the duration of the strategy. We also compensated for the portion of emissions that we could not reduce in 2021 through the UN platform’s purchase of certified offset units, corresponding to 17,500 tons of CO2 equivalent. We are effectively building a position as a trusted partner in the energy transition of the Polish economy. We have increased our financial commitment to wind farm projects to PLN 420 million. We have introduced or developed innovative eco-products to facilitate our clients’ participation in the green transition, from insurance for renewable energy installations and EVs, to funds that enable investment in shares of the world’s leading renewable energy companies.

In the wake of Russian aggression against Ukraine, the PZU Group has actively joined the nationwide campaign to help neighbors affected by the war. In addition to in-kind and financial assistance, we initiated a custom action that was a great success. In the two months since the war broke out, PZU issued more than 54,000 insurance policies for cars of Ukrainian refugees entering Poland who had not managed to purchase mandatory insurance. 30-day liability policies, covering the cost of these premiums with their own funds.

A very important event for us, fulfilling the goals in each of the areas described by the ESG criteria, was the finalization of the move of our headquarters to the PZU Park office building in Warsaw. More than 4,500 employees of the PZU Group have been given a modern, ergonomic, friendly workplace, adapted to modern expectations and standards. The building itself reduces its carbon footprint by more than 2,500 tons of CO2 per year, thanks to the eco-friendly materials and technologies used, and its location encourages employees to use environmentally friendly forms of transportation. The move was correlated with the permanent implementation of a hybrid work model that fosters employee engagement and makes it easier for employees to balance work and family responsibilities. Employees have received extensive support during this transition, including the launch of a new well-being program.

The PZU Group’s strong, stable capital position and solid financial performance, in particular sales growth and high profitability in key business segments, have allowed us to strengthen our competitive advantages and enter 2023 with confidence. Despite the exceptionally challenging macroeconomic environment, we are well positioned to successfully pursue the PZU Group’s strategy, including the adopted dividend policy.

I have no doubt that we have built a strong, turbulence-proof and highly effective business model. Thanks to the support of the Supervisory Board, the commitment of all Employees and our Partners, as well as the trust of Shareholders and Customers, we are able to meet the market challenges and implement the declarations we make.