59.9 Conflict in Ukraine

Due to the Russian Federation’s invasion of Ukraine and the armed conflict lasting since 24 February 2022, PZU’s Management Board assessed the impact of this situation on the PZU Group’s operations, business continuity, financial position and going concern.

As a result of this analysis and due to the downgrading of Ukraine’s rating, the PZU Group recognized in the consolidated income statement, among others:

•  increased allowance for expected credit losses for investment financial assets in the amount of PLN 53 million;
•  impairment losses on receivables in the amount of PLN 41 million

As of 31 December 2022, the total net assets (assets less liabilities and adjusted for mutual interests between PZU Ukraine and PZU Ukraine Life) of the three companies operating in Ukraine (PZU Ukraine, PZU Ukraine Life and LLC SOS Services Ukraine) amounted to PLN 25 million (as of 31 December 2021: PLN 70 million).

The assets (net of the shares held mutually between PZU Ukraine and PZU Ukraine Life) of these companies subject to consolidation totaled PLN 391 million (as of 31 December 2021: PLN 554 million), including, among others:

•  investment financial assets – PLN 207 million (as of 31 December 2021: PLN 322 million), of which PLN 78 million (as of 31 December 2021: PLN 159 million) – instruments issued by the Ukrainian government, and PLN 129 million (as of 31 December 2021: PLN 163 million) – term deposits;
•  the share of reinsurers in technical provisions is PLN 49 million (as of 31 December 2021: PLN 134 million), of which PLN 32 million (as of 31 December 2021: PLN 47 million) accounted for PZU’s share.

The companies’ liabilities totaled PLN 366 million (31 December 2021: PLN 484 million), including:

•  technical provisions of PLN 318 million (as of 31 December 2021: PLN 414 million);
• other liabilities PLN 48 million (as of 31 December 2021: PLN 70 million).

PZU Group banks held PLN 294 million of bank credit exposures as of 31 December 2022 (as of 31 December 2021: PLN 335 million) and 107 million bank off-balance sheet exposures (as of 31 December 2021: PLN 317 million) to entities that are residents in Ukraine, Russia or Belarus.

Other than the aforementioned assets of companies with operations in Ukraine and exposures to Alior Bank and Pekao, the PZU Group had no significant exposure to markets subject to hostilities or sanctions. All of the bonds held on 31 December 2021 issued by the governments of Russia (90 million PLN), Belarus (1.6 million PLN) and Ukraine (4 million PLN) were sold by 3 March 2022 (the realized loss was 13 m PLN and was charged to the PZU Group’s consolidated income statement in Q1 2022).

With martial law in effect throughout Ukraine as of 24 February 2022, and active hostilities carried out in the east and south of the country, as well as the risk of airstrikes conducted throughout the territory, Ukrainian companies in the PZU Group are working with wartime considerations in mind:

•  operational processes are carried out with ongoing alignment to the situation, all important processes are executed (onsite and remotely), while ensuring the continuation and execution of critical processes, all IT systems are accessible;
•  Ukraine has been divided into three zones – red (occupied territories – conclusion of agreements is prohibited), blue (territories adjacent to the occupied territories or recaptured from the Russian Federation – conclusion of agreements is possible under the strict control of underwriters) and green (western and central parts of Ukraine – no restrictions on sales);
•  PZU Ukraine’s sales processes are conducted on a limited basis – offices are closed wherever there are hostilities, the company sells both new and renewal insurance in all three main business lines (in motor, property and personal insurance) through all channels.
  In 2022, the largest share of sales came from motor insurance – compulsory TPL, Green Card and MOD – as well as health and travel (accident) insurance;
• PZU Ukraine Life’s sales processes concerning new business activity were initially halted in all sales channels, but as of June 2022 the company resumed sales through the banking channel of short-term products with limited risk and additional territorial restrictions on underwriting and insurance amounts, and as of July 2022 resumed sales of new business policies not requiring underwriting, with restrictions on risk and insurance amounts, in the agency and brokerage sales channels;

•  the functionality of the full cycle of claims handling is ensured – in PZU Ukraine Life payments are made with complete documentation and withdrawal amounts payments are made as far as possible. PZU Ukraine carries out MOD and TPL insurance payouts in accordance with the terms of insurance contracts and applicable legislation – the company carries out payouts only if it has a complete set of documents, while the declaration of martial law throughout the country excludes the insurer’s liability for losses incurred due to acts of war;
• the contact center and hotline are running without interruptions (LLC SOS Services Ukraine);
• companies maintain a personnel policy ensuring that labor relations are matched with the actual status of employees who are non-working, mobilized, staying abroad, to whom the companies currently cannot offer work due to limited operations, apply “suspension of employment contracts” – in accordance with the regulations following from the Act on the organization of labor relations during martial law of 15 March 2022;
• the liquidity of the companies is ensured, and employee and other obligations, including administrative and tax obligations, are serviced on an ongoing basis to the extent technically possible;
• the companies have revised the liquidity management, by providing more preference to the cash on the current accounts and short term deposits within the banks, members of foreign banking groups;
•  the companies focus on ensuring cybersecurity, information security and physical server security.

In addition, as of 24 February 2022, the NBU has introduced and maintained restrictions affecting the conduct of business in Ukraine, including:

•  a temporary ban on the purchase of foreign currencies;
•  a ban on international money transfers from Ukraine.

At the end of 2022, NBU eased the above restrictions, among other things: it decided to partially lift the ban on international payments from reinsurance to non-residents. An insurer using reinsurance to make a foreign payment was required to obtain prior approval each time from NBU, which examines compliance with a number of requirements (including a transparent ownership structure, an impeccable business reputation, compliance with solvency and capital adequacy ratios, and riskiness of operations) before issuing it. On 18 January 2023, PZU Ukraina received confirmation from NBU that the conditions stipulated in the NBU Resolution had been met, as well as a one-time approval to repay a portion of its reinsurance obligations to designated nonresidents. As part of the approval, PZU Ukraina paid off part of its reinsurance obligations between 27 January and 2 February 2023.

On 14 February 2023, the NBU Resolution of 10 February 2023, came into effect, under which insurers may settle international reinsurance obligations (with the exception of mandatory motor TPL insurance), once they are included in the list of insurers authorized to conduct reinsurance operations with non-resident reinsurers. An insurer may be included in this list provided that the indicated requirements are met on the date of application to NBU and during the period of being on this list, confirmed by a decision issued by NBU on their fulfillment. PZU Ukraina meets the requirements and on 17 February 2023, it submitted an application to NBU for inclusion in the aforementioned list of insurers and by resolution of 13 March 2023, was included in the list.

In addition, as part of the so-called “wartime regulation” of the market, on 6 March 2022, the NBU adopted Resolution No. 39 on the regulation of the activity of non-banking financial services market participants, non-banking financial groups, payment market participants, debt collection companies and legal entities licensed to provide money transport services to banks, under which sanctions will not be applied for violations of regulatory criteria and standards for capital adequacy, solvency, liquidity, profitability, asset quality and risk of the insurer’s business during the martial law period.

The martial law was extended up to 20 May 2023.

In addition, rating agencies have changed Ukraine’s ratings several times during 2022. The current ratings are as follows:

•  as of 19 August 2022 according to S&P Global Ratings, Ukraine’s long-term and short-term foreign currency sovereign ratings are at CCC+/C, respectively;

•  as of 17 August 2022 according to Fitch Ratings, the rating for long-term and short-term foreign currency liabilities (confirmed on 20 January 2023) is CC/C;

•  as of 10 February 2023 according to Moody’s Investors Service, the long-term rating of the government of Ukraine in foreign currencies and in hryvnia, as well as the rating of the unsecured debt in foreign currency has been lowered to Ca from Caa3 and the forecast has been changed from negative to stable.

Due to the aforementioned extraordinary circumstances, the Ukrainian companies of the PZU Group did not meet the sales targets set for 2022. As at the date of signing the consolidated financial statements, the assessment of the possibility of maintaining business continuity (materialization of the risk of the full loss of operational capabilities) of the PZU Group’s Ukrainian companies is subject to uncertainty due to the following potential threats, among others:

•  long-term persistence and escalation of hostilities (about 16% of Ukraine’s area is covered by hostilities);
•  continued shelling of civilian and military objects with long-range weapons, including objects of critical infrastructure, which leads to significant losses among the human population and disruption in supply of communal services, such as energy, heating and water supply;
• lack of access to key systems, including by destroying the companies’ physical infrastructure;
•  cessation of the handling of all internal money transfers by the Ukrainian banking system;
•  unavailability of employees.

The PZU Group analyzes the developments on an ongoing basis and examines forward-looking scenarios for the run of events. Due to the situation in Ukraine, the valuation of assets and liabilities (especially technical provisions) of Ukrainian companies requires a number of assumptions and is subject to significant uncertainty.