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Edited Transcript of PZU.WA earnings conference call or presentation 14-Nov-19 11:00am GMT

Q3 2019 Powszechny Zaklad Ubezpieczen SA Earnings Call

Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Powszechny Zaklad Ubezpieczen SA earnings conference call or presentation Thursday, November 14, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Pawel Surówka

Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO

* Roman Palac

Powszechny Zaklad Ubezpieczen na Zycie S.A. - CEO & Chairman of Management Board

* Tomasz Pawel Kulik

Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO

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Presentation

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Pawel Surówka, Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO [1]

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Ladies and gentlemen, I'd like to welcome you very cordially to the review of PZU Group's financial results for Q3 2019. I'd like to thank you for your attendance. So we'd like to begin with a short presentation, and then we'll go through the major accomplishments of this quarter. Then we'll say a few words about the market, business development, then we'll walk through the financial results, and then we'll wrap things up with a discussion of our strategy execution. We'll try to do this succinctly to make sure that we'll be at your disposal to respond to any questions you may have.

So we're pleased with this quarter as you anticipate as we look at the development of gross written premium. So we've got some PLN 17 billion. So this is the best result we've had to date in terms of sales, and this shows that we're well poised not only in terms of products, but the channels we have at our disposal. And this shows that we're gradually feeling the positive drivers coming from bank sales.

So we've got 21% growth in nonmotor insurance. So Roman Palac will say more about our life insurance development and growth there. And this is happening despite the challenging market we have with respect to unit linked business, and that's why we're pleased with the growth of individual life insurance in the protection business, which is up 32% year-on-year in Q3.

At the same time, our PZU Zdrowie, So Health has grown its revenues by some 38% year-on-year. And for this reason, we're happily breaking the -- about the execution of a strategic transaction. So we've acquired the Tomma Diagnostyka Obrazowa network. So this will extend the portfolio of services that we will provide in the course of our operations and will make our product even more attractive. And Roman Palac will say a few words about that.

So our results are 2.5x larger in the banking -- bancassurance channel. This shows that this is becoming a self-standing, self-existent, if you will, and independent distribution channel.

If we look at the net result. So it's optimistic at some PLN 4 billion --sorry, PLN 2.4 billion. So we'll talk about this. So this is a comparable result to the one we've had in last year at PLN 2.4 billion. And so we were pleased with having the record [breaking] net result over a 5-year period. And at that time, Q3 was the highest ever. And now we're all aware that this year was incomparable in a variety -- for a variety of reasons; because of the higher premium or charges to the banking guarantee fund; what happened with the court decision handed down by the Court of Justice and the European Union; what's happening in the motor business segment.

And at the same time, we have relatively higher loss ratio. If we look at our combined ratio at the end of Q3, we're at 89.6%. In Q3 alone, we're at 90.2%. So we're coming in under our strategy or the market and this pleases us. We're doing this on a challenging market. And so we're elated with our operating margin in group and individual -- individually continued business. So it's 21.3% in 2019, 23.9% in Q3. And we've had very good investment performance. We're 2.3 percentage points above the risk-free rate. So we can say, in fact, that the objective -- we had to make sure that our investment, in fact -- our investment performance would be resilient to market conditions. We can say that this undertaking has been a successful one. And this continues to build, on a long-standing basis, the results of our growth.

One other thing that gives us satisfaction is that we have a lot of cost discipline year-on-year. So we have 6.2% cost expense ratio in 3Q and 6.5% year-to-date. If you look at our return on equity, we were at 23.7% in Q3. And so this portends well if you look at the full year ROE. So on a year-to-date basis, we come in at 20.8%.

Now a few words, just really briefly, about our solvency ratio. We are very high. So S&P has affirmed the positive outlook of A-. We paid a dividend of PLN 2.8 per share. So the dividend yield at that price was 7%. So in this context, we can say there are not many companies that have a AAA strength rating and are able to pay dividend with a dividend yield of 7% plus. And so I think this is something that international investors treat as a positive element. And this will stabilize our share price as we move forward. If we look at the solvency, it's well above 200%. So it comes in at 222%.

So the funding mix is even safer because we've paid down bonds of EUR 850 million, and so this has softened the -- lowered the FX exposure. Sometimes this was a question up for discussion in our forum here. So we're not sitting on our laurels. We continue to build the foundations for new savings and new initiatives. And so we're utilizing artificial [agents] in our claims handling procedures. We are highly keen on a market like ours. To do this, we want to match prices to the risk to -- so we have this Radar Live, and so we want to make sure that we're going to be able to match or align our premium to the rest to an even greater extent. And we'll be able to target those questions we're interested -- those clients were interested in having. And at the same time, we'll be able to continue growing our business profitably.

Then we have the portal, moje.pzu.pl. This is something that's developing quite nicely. And we've had a new unveiling of some new functionalities. I think the rest of the things you're familiar with. So My PZU is something that clients see, but also international conferences have recognized it. So for example, the Efma, when we talk about core insurance transformation category. If we look at the nonlife market, this is something that you track, and you're fully cognizant of the fact that the nonmotor business grew by some 3.7% in H1. If we look at motor insurance, business grew by 2.1% in H1. If we look at motor TPL in direct equity, this was another quarter in which we saw some declines. This is a reflection of the cycle -- business cycle we have at present. So our market share in nonlife insurance comes in at 33.5%. While in motor insurance, we have a market share of 36.2%. Our percentage of the profit generated in this market in the form of technical result comes in at 47.2% if we look at motor business alone.

As I mentioned previously, we've seen some fairly aggressive activity posed by some competitors. And this means that prices were under strong pressure. So in the last couple of quarters, this led to some [attrition of] sales, but we can see that prices are stabilizing based on customer contact and behavior. So we can suggest that perhaps the cycle is recently flattening because the price seems to bear no relation to the costs. We see a lot of inflation in terms of the claims handling costs as well as distribution costs. And this is something that's caused by the consolidation of intermediaries. So on one hand, we believe that these factors mean that prices should stabilize, potentially even trend up. So the PZU Group has a very strong position, to a large extent, thanks to the fact that we have our own tight network. So on this challenging market, we're able to maintain a relatively high level of profitability.

If we look at other nonlife insurance, we can -- as we look at the combined ratio, we're at the expected level, although slightly higher than last year in the mass segment. This was a result of weather-related phenomena.

If you look at the corporate segment, in turn, there's a larger number of claims with a higher value. Naturally, we try to act proactively with our customers and try to master these claims, no loss ratio when we see that they come in at a high level.

That would be more or less it in terms of my short preparatory remarks concerning the nonlife market.

Let me ask Roman Palac to take the floor now to talk about the life insurance market.

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Roman Palac, Powszechny Zaklad Ubezpieczen na Zycie S.A. - CEO & Chairman of Management Board [2]

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Thank you very much. And so as we go on to the life market, maybe I'll make a few general statements, and then I'll walk you through the individual segments.

As we look at the evolution and the growth of the life market, this is a very stable market. There's not a lot of change. So the periodic premium market, in principle, is not really growing. Where if you look at single premium market, it's dipping or falling down year-to-year because of -- falling year-to-year because of the unit-linked business. So it's down by some PLN 200 million. As a company, we believe that we have a very good quarter behind us. On one hand, we've been able to grow our market share to nearly 40% across the market while maintaining our profitability. This is one of our goals. We want to have very robust growth while maintaining our profitability across the board. So we have more than 50% of the overall technical result of the market.

If we can go on to our main business, which is group and individually continued insurance. So for many quarters and over the course of many of our meetings, the message we deliver to you is pretty much invariable. This market is very important to us. We see this market as one that we're able to protect our -- where we're able to protect our volume and our profitability. So we treat this very cautiously. We're working very strenuously on our portfolio. The principle that we espouse is to protect our profitability because it has an impact across the group.

This quarter, we're wrapping up in terms of business volume, as in the previous 3 quarters, so PLN 1.7 billion. So we have profitability of nearly 24%. So this is above the objective. We communicated to you of 20%. So this is something that portends well in terms of what awaits us throughout the rest of the year.

If we look at individual lines of insurance, situation is much more dynamic. This is an area we're trying to develop. So if you look at the bottom portion of the graph, which is protection products, so we're up year-on-year by some 40%. This is a result of our work with banks and the contribution made by this business line. On the other hand, we can see the scale of our new agency channels, which we've been developing over the last 2 years. And we can say that this market is an area where we're starting to appear. We've been able to grow quite strongly. So we should see new products enabling us to work even more closely with a portion of our customer base utilizing these services.

A couple of words maybe about margins. Well, the margin comes in at around 16%. This is primarily the result of the growth in single-premium, low-margin products, which were growing quite strongly in Q3, so they've diluted the margin as a matter of percentage. But the margin of the various lines of business was more or less upheld at the historic low level.

So maybe just a couple of words of commentary about the employment capital scheme -- employee capital schemes. We've completed the initial phase. We've signed contracts with more than 1,000 customers. So nearly 4,000 was -- so more than 4,000 companies participated that employ more than 250 employees. So the market has received our product well in terms of the platform, the technological platform we have, so we'll have time to assess the overall program once all of the market segments will enroll in this program.

Now we'll move on to companies that hire somewhere between 50 and 250 persons. Later, we'll have smaller companies, then the admin sector of the economy will be matriculated into this program and then we'll be able to wrap up more or less how the employee capital schemes system is working.

Maybe a few words about the health business. As you've noticed in recent days, we issued a press release that we've -- that we're in the process of making another acquisition, which is we've acquired the Tomma imaging diagnostics network. This is an important landmark in the development of our PZU Health network. We're becoming a more comprehensive provider of medical services on the Polish market. So this means we're moving towards a more sophisticated model of cooperation with our customers. So we're attaching more importance to diagnostics. We'll be able to improve quality of services because access to these networks is starting to become problematic and, at the same time, will make a strong contribution to PZU Health's bottom line.

We can't talk about a full transaction because the antimonopoly authorities are now in the process of vetting this transaction, so I think we'll discover at the end of the day that we fulfill all the conditions.

Here's a slide you've become accustomed to seeing. So the development of our business size is something that doesn't include the transaction we just talked about. But once you add the branches from the Tomma network, we would have more than 130 own locations, and this would give us the ability to provide quality services at a good price. And so you can see that PZU's -- Zdrowie PZU Health is one of the fastest-growing segments of our business. We're up by some 30%. And so we have nearly 2.6 million customers utilizing our services in the form of health insurance.

So in life business as well as nonlife business, so we have our mutual insurer that can also distribute these health products, and we also have subscription services. And so all of these channels contribute to the overall number of 2.6 million clients.

Thank you very much. And now I could ask Tomasz to walk us through the financial portion of our presentation.

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Tomasz Pawel Kulik, Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO [3]

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Yes. Maybe, first, a couple of words about the other 2 lines of businesses.

So asset management. Today, the PZU Group and entities specializing within PZU in assets -- or managing -- management -- of asset management, so we have more than PLN 30 billion in assets and we're growing on account of 3 things. One, we have very good return on assets in some of our key funds through which we've built regular savings programs, pension programs, employee pension programs, our schemes. We've signed an additional 130 EPS contracts, employee pension scheme contracts, that means assets have spiked. And basically, they stabilize the results of the TFI, the mutual fund insurance management company.

The next leg is the influx of new assets. Here, our cooperation with banks, both our banks as well as banks from outside the group, we can mention Millennium, ING, as part of our insurance portfolios and products. We have a large amount of allocation large -- a high allocation to our funds, and this means that more and more customers are allocating funds for their assets to our funds.

And so then if we look at bancassurance, we continue to tweak our offer, as Mr. Palac has stated. So we have new products in terms of banking products and writers to banking products as well as stand-alone products. So our products are available in Alior Bank's money exchange platform. So we're trying to reach new customers utilizing all of the available distribution channels.

So if we look at the other side of these operations, so assurbanking, so we have Pekao in our contact center at Alior. We have the cash platform. And so that means the relations with our current customers and new customers are even more attractive because it's possible to receive an attractive offer, a loan offer, very quickly. We [continue] to work on the savings side of things. So at present, 3 groups, PZU, Pekao and Alior, have continued cost-savings initiatives with total annualized savings of -- in excess of PLN 100 million.

So if we look at gross written premium, Q3 in the nonlife market is the softest quarter. Cyclically speaking, there's nothing here that would portray PZU in a less attractive light, so it's very difficult to compare Q3 and Q2. But if you look at our results year-on-year, we can say the following. That we have strong growth in gross written premium, more than 5%. The same is true of nonlife insurance premium, especially nonmotor business in both segments. So individual -- so we have fire and other acts of chance, events of change -- chance.

If we look at the corporate segment in nonlife business, we've seen very strong growth in excess of 50%, primarily in groups or classes 8 to 9 and 18. So this is assistance. So we can say that the portfolio continues to evolve. And so this, we are attracting business through our mutual insurance company as well as through our standard channels, but the mutual is an attractive way of reaching our customers.

If we look at the motor business, we can say that the situation differs between the mass segment and the corpo segment. The common denominator is extensive price pressure. And this is something we see in particular in motor own business -- sorry, motor TPL.

In individual business of the mass segment, we can see the information is quite good because motor own damage has higher profitabilities, and this is something that pleases us. We've seen some small declines because of price, we continue to hold our portfolio and develop our portfolio, but there's a lot of price pressure amongst fleet insurance for corpo segment in international transport, shipping and in large contracts we've recognized discounts there.

So if you look at the life business, in group and individual continued insurance, we've got growth of 1.5%. On one hand, we continue to sell up health insurance or some of those riders to our current portfolio and new customers. We're indexing premiums, and so we're growing because of the broader scope of cover offered to existing customer base. We've got a lot of growth in our international companies, double-digit growth in nonlife -- nonmotor. And so we've got a lot of strength in the big portfolio. While in motor business, we can say that we've had a good underwriting cycle.

So if we come on to the bottom line. What would I like to draw your attention to? Well, we can say that the quarter was outstanding. We've had an outstanding set of 3 quarters last year. We said that we had the best result we have delivered in the last 5 years. So in the nonbanking segment, this result is even better. And in the banking segment, we're operating according to slightly different conditions.

What's changed? We can say the fees paid to the banking guarantee fund have grown substantially. We also had court decisions handed down by the Court of Justice of European Union, which has made it necessary for the banks to establish no provisions. So if we look at the adjusted result, adjusted for nonrecurring events for things that are independent of us, so if we look at the normalized results in both segments, we continue to grow. And this is a great [prognostic] as we think about the full year results in 2019 and as our ability to launch 2020.

But if we look at Q3 on a stand-alone basis, we've said that our ROE is quite strong at 20.3% -- 23.7%. And then we have the combined ratio of 90.2%. So it's under the strategic objective. So for the full 3 quarters, it's under 90%.

So our margin is nearly 24% in group and individual continued business. Our admin expense ratio is 6.2%, which is very good. And so we see this being as a result of nonmotor business as part of the sales. So it's not a good thing in terms of what's happening at the [motor] business. But if we look at the distribution of this type of insurance where we have higher acquisition expenses or distribution expenses, but it has slightly higher profitability. So generally speaking, this is very good information that nonmotor business is growing.

So if we think about the nonbanking activity, this is the best quarter. It was the best quarter in terms of the result attributable to the parent. So there's a lot of reasons to be quite happy.

If you look at our investment performance, this is something that had worried us some time ago, and we had stated that we'd like to stabilize the circumstances here to have much more predictability and stability for yourselves and also for our shareholders. We want to be strong and reliable partner that's not so susceptible to shifting sentiments on the financial markets. We've been able to do that consistently since the outset of the year. So we're at 230 basis points above LIBOR if we look at our return, and this is above the strategic objective both on a stand-alone basis and year-to-date.

And if we look at our OCI portfolio, so we can say that some of this volatility amongst customer sentiment is not something that goes through the P&L. And so we've got stable cash flow in the subsegment of real estate, primarily looking at the rates or the yields on real estate, but also changes in valuations of property development projects, and this means that our consolidated results are recurring this year. In Q1, Q2 and Q3, our investment performance has been above the comparable periods of the previous year.

As we move on to cost effectiveness, we've already said quite a few things about this. You frequently ask us to what extent admin expense ratio is changing. So we can say what's the result of the premium growth and what's the result of the cost savings. So we split that out. So in Q3, costs were lower in nominal terms, and that means that our admin expense ratio moved down to 6.2%, and we have a strategic objective of 6.5%, so we're below that watermark.

So if you look at the solvency and capital strength of the overall group, we present this data with 1-quarter lag. We're above 220%, so we're quite high. And our ability to monetize our results is responsible for that. So it's not accrued results or paper results. This is -- these are economic results, and this is something we want to emphasize quite strongly. At the same time, we see that the portfolio is growing. That means our capital requirement is on the rise. And that means that these 2 vectors grow more or less in line with one another. And so we're on a quite safe position, both on a consolidated basis as well as a stand-alone basis. Thank you very much.

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Pawel Surówka, Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO [4]

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Let me wrap up now with this one slide with which you're very well familiar. Here, you see the key metrics under our strategy. And you can see that as we look at the nonlife insurance market, we're under our ambition. Our ambition was to have 38% market share. Right now, we're at 33.5%, but you're probably aware that during a cycle in which prices fall, it's necessary to make the decision. Do you want to maximize market share? Or your combined ratio or profitability? It's important for us to build value for shareholders and defend the value of our business, counting on the fact that once the market stabilizes, we'll be able to rebuild our portfolio and grow our market share. As I've stated previously, we have reason to believe that stabilization is starting to transpire and will continue over upcoming quarters.

Our profitability is at a satisfactory level of 89.6%, which is under the watermark we have in our strategy. If we look at the admin expense ratio, it's stable, and it comes in at the level where we wanted to be under our strategy. We will endeavor to maintain this level of 6.5%.

If we look at life insurance, the number of clients has submerged below our target of 11 million. But as you've heard, we're selling quite strongly and dynamically, and we think that we're going to be able to fill that gap. At the same time, we focus on a margin our product should deliver. So we have an insurance margin in group and individual continuation of 21.3%, which is above the targets set in our strategy. At the same time, our solvency ratio shows that we are resilient, we have capital if needed.

In the investment segment, we are under our target of having PLN 65 billion AUM. We have room to expand our presence to have a bigger chunk of the market, which is of strategic importance to us. But if you look at the net result of all of the companies engaged in asset management, so you can see that we have a result of PLN 213 million. Our net result is already at the strategic level we had called for.

Tomasz Kulik already mentioned about our surplus yield above the risk-free rate. We come in at 2.3 percentage points compared to 2 percentage points. That's good. So if we look at the health business, we come in at PLN 727 million compared to the PLN 1 billion we want to earn in 2020. We're well poised to achieve that. The EBITDA margin also is coming in line.

If you look at the net financial result for banks, it's under the level we wanted to achieve, but we've told you that this is a result of low interest rates as well as the other factors that have adversely affected the market. So we believe that in our banking segment, we'll have some of these negatives behind us. And so next year, we'll be able to realize the full potential of the consolidated result of our consortium of the combined group of PZU in next year.

So our ROE at the end of Q3 comes in at 20.8%. This third quarter came in at 23.7%. And so this informs our belief about what our full year ROE will be.

And so that's more or less it in terms of our presentation. Now we're at your disposal to field any questions you may have.

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Questions and Answers

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Pawel Surówka, Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO [1]

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Well, it seems we've already answered -- we've already said -- it seems that somebody's willing to show us some mercy.

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Unidentified Analyst, [2]

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I'm from IPOPEMA. I wanted to start with a question. The response was given at the previous conference where we're talking about acquisitions. Could you say a few words about the attractiveness of assets, yes or no, of mBank as well as AXA?

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Pawel Surówka, Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO [3]

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As I said at the previous conference, I'm sorry. I have burned the news flow, but -- so you are fully cognizant these are issues that have a strong regulatory basis. I can't say anything more than I've already said. So on one hand, we have the strategy, and we'll look at regional expansion and we'll consider enlarging our base, for example, the investment segment. So it would not be consistent with our strategy. If we were not to look at what the AXA Group has said about the fate of its assets here -- so we'll certainly scrutinize this.

At the same time, as I've said, the process launched by Commerzbank for mBank is too important of an event for us not to look at it. So not so much with the optics that we'd like to have a third bank on board, but that's not our strategy, but only in the context of prospective synergies within our existing banking operations.

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Unidentified Analyst, [4]

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One more follow-up question. I'm sorry that I'll move to some questions that are not linked to the results about Alior Bank. This was something that was discussed in the most recent conference, the share price is lower than it was last quarter. We've got the judgment handed down by the Court of Justice of the European Union. So having in mind the value or the price at which the stake has been booked in your accounts, well, has something in your approach changed?

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Tomasz Pawel Kulik, Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO [5]

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If you think about our approach to Alior, we frequently respond to this question saying that Alior Bank is a strategic investment, not a capital investment. So we're thinking about it not only in terms of the results of the bank, those results are very important, but this is not the sole dimension we consider.

The second dimension is the ability to build and generate additional business, both banking as well as insurance business, and we see how this is blossoming in the insurance segment, nonlife, the cash loan platform, sales of products through one of their platforms. Many things are happening there which are not directly linked to the results of the banks themselves.

We, of course, benefit from that cooperation. So this is a strategic asset. This is part of the response that I'd like to give to you.

The second portion of my response is that this year has been a tough year for Alior Bank. So on one hand, we've got the banking guarantee fund with higher charges. We've got the judgment of the Court of Justice of the European Union. So we can also think what else might transpire. A lot has been written about a variety of exposures taken by that entity, and then a lot of that has been provisioned. We're doing a scrutiny of the portfolio, looking at the corporate segment and the [agro] segment. So we've rebuilt processes overall in terms of decision-making processes for large-scale exposures. And so the monitoring process has been revamped over the duration of a loan to react better and not to have situations like the ones that have transpired this year. So I'm convinced that the bank has the worst behind it. It's not, like you said, I know and I won't tell you, but it is sensitive information. We know what level of normalized income this bank is able to deliver quarter-on-quarter, year-on-year. This bank is in a different place from where it was a year ago or 2 years ago. And from a regulatory point of view today, it could start to pay a dividend. So it's in a different position from before. And for that reason, I believe that today's share price fails to reflect the fundamentals of that bank.

In reference to your question about whether or not this could mean some -- or imply challenges for our valuation, actually we discuss the subject with our auditor. Our discussion is based on financial plans, and just as at the beginning of the year -- middle of the year, we've done an impairment test, and we were easily able to pass, and we'll have a discussion at the end of this year as well. I don't imagine that in this context, much more could happen.

So to recap, the market price does not reflect the economic value we can extract from this business relationship.

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Unidentified Analyst, [6]

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Perhaps, I'll talk about strategic investments. A lot has been said about cooperation with Alior Bank. Could we receive more color about the distribution networks which are primarily distributing the life business products, in particular? You say that an exchange platform is delivering this. What's happening in Pekao? What's the balance in terms of cooperation with PZU amongst these 2 institutions?

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Roman Palac, Powszechny Zaklad Ubezpieczen na Zycie S.A. - CEO & Chairman of Management Board [7]

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We don't break that down for public information. We don't divulge it publicly. I can tell you a little bit about the networks that are involved. Of course, Alior Bank's money exchange platform is not the main distribution platform, it's an interesting new idea. We think and rely primarily on traditional networks, banking networks, the branches themselves. And the major product lines, where we're selling those products together. So I can tell you, without the numbers, we see dynamic development of online channels in banks. And this is consistent with what these banks are investing in and how those banks want to develop them and groom them.

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Unidentified Analyst, [8]

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Perhaps I'll pose a slightly different question. You have provisions of nearly PLN 150 million for the Supreme Court judgment in terms of damages for the loved ones of persons who've been injured in traffic accidents. What's happening with the payouts? I know there was an interpretation. Perhaps this was favorable for PZU? Are these provisions sufficient? Or have you exhausted those amounts if you look at the historical cases?

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Pawel Surówka, Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO [9]

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I can talk about this from the process of handling claims and then Tomek can say a few words about provisions. It seems to me that we have a pretty safe level in terms of our expectations about how to manage the subject. We don't see a very major scale yet. That doesn't mean it won't appear. So the subject can appear if there is some margin of error for interpretation, of course, for court decisions. So the legal doctrine is moving in a direction that will be relatively safe for the overall sector.

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Tomasz Pawel Kulik, Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO [10]

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If we look at the provisions themselves, when we set up those provisions, it seems to us that the level of provisioning is safe and that we don't have confirmation. It's not been affirmed yet in the process. That was just the starting point in terms of what claims would flow in. And we have to wonder about whether or not our conservatism was warranted. That's also what we said at that time, but now we can see that the real development has proven that our conservatism was warranted, and that we're in a safe level as we move forward.

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Unidentified Analyst, [11]

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I'm from JPMorgan. Coming back to Alior Bank. The fact that the share price has fallen doesn't lead to an automatic adjustment of the value of this institution in your books. So if you don't show an impairment loss, then you wouldn't have an impairment loss.

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Tomasz Pawel Kulik, Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO [12]

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I would say that the share price is an indicator and not something that is -- makes an automatic impact. So we look at the historical cost of acquisition in our books. So PZU acquired Alior shares in 2 tranches. Today, the share price is where it is, and it's slightly below our weighted average cost of purchase. But based on our best knowledge in terms of how this bank in a recurring fashion will be able to replicate and augment its operations, of course, net of bancassurance, insurer banking. So at least at the end of H1 of this year, this threat wasn't in place then. What has changed? This is the judgment handed down by the Court of Justice of European Union. And in my opinion, this will not make a material impact on a potential impairment loss. Naturally, that's something we'll discuss with the auditor, as we do during every audit or review. We present full documentation. And so if we talk about the impairment loss test, I think we'll be able to move through that.

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Unidentified Analyst, [13]

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If we look at your potential interest in mBank or AXA, if you were to be interested in either of those entities, to what extent would this impact or affect your dividend policy?

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Pawel Surówka, Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO [14]

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So you have a minimum payout of 50%, depending on your interests in prospective.

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Unidentified Analyst, [15]

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Acquisitions, would the 50% remaining be sufficient to finance such a transaction-based note?

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Pawel Surówka, Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO [16]

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So through this question, I'd like to address a similar question posed by Autonomous Research, which is also asking about a potential transaction vis-à-vis our dividend policy.

The only thing we can say today is that we're analyzing this. It's firmly premature for us to embark on any type of considerations of how to structure or what terms and conditions would be in place. This is not the right time, and it's premature to think about how that structure would be funded, through whom and how.

What I can tell you is that we will scrutinize that transaction. We believe that it's sufficiently [pithy] or important that we should take a look at it. And we will think about the value it would create for PZU Group shareholders.

So the key thing is would we be able to achieve synergies within our current operations and to what extent those synergies would be material? On the other hand, we'll look at that to assess whether or not we can capture those synergies, having in mind the obligations we have towards our investors. And one of those commitments we have to our investors is our current dividend policy. That's all I can say. I think that's going to have to suffice for today. Okay. Thank you for your understanding.

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Unidentified Analyst, [17]

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If we could revisit Slide 29, we have the split of the investment performance. I wanted to ask you, where do we see the impact exerted by the unit-linked segment? Well, do we see that impact? Yes or no?

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Tomasz Pawel Kulik, Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO [18]

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So let me just switch slides to 29. It's good you have glasses. Yes, now I can see. So if we look at the main portfolio, this is our own portfolio. This is some PLN 40 billion, which PZU manages for its own account and on its own behalf. If we look at investment products, they're a separate line item. As you see on this slide, this is some PLN 46 million, and this is a totally separate line item from our main portfolio. And so it's totally neutral to us. So we have provisions that are shown in parallel with movement in claims and benefits paid.

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Unidentified Analyst, [19]

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What does the group other mean?

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Tomasz Pawel Kulik, Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO [20]

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So as you recall, in other, one of the strong components -- and this distorts the picture, and we're not able to do that, any type of flattening over the course of the year, this isn't line item that's characteristic of Q1 and Q3. These are FX differences from surveys or from appraisal values of our real estate.

So in our assets, we have the exchange rate utilized on the date of the appraisal value. So the euro exchange rate, most of our real estate is denoted in euro, where we can see the exchange rate has moved up since 30 June to 30 September. So we have a symmetrical increase in our liabilities, which leads to an unrealized loss, which will then be reversed at the end of Q4. This is something that we talk about quite frequently. So that's -- it's reversed. Well, at the end of Q4, we'll have a new appraisal value of our real estate. And so then we would use the valuation based on the end of December at -- based on the current exchange rate. And so basically, we can say that, that figure would be zeroed out, and we would have the full value of the real estate segment here within the scope of our main portfolio.

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Unidentified Analyst, [21]

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Okay. Thank you. I understand you. I wanted to ask about your premium and corporate segment, nonlife business. There's a lot of growth last quarter, there was -- the quarter before, there was a big decline because some of the renewals shifted because we had contracts for longer than 12 months. Is this a quarter impact?

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Tomasz Pawel Kulik, Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO [22]

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This is not a result of renewals. Renewals will be in subsequent quarters. That was a 15-month policy. Sometimes the time shifts. So it's 15 or 16 months, but sales in this quarter in the corporate segment, there's been a lot of sales in PZ U.S.A. and the mutual. We don't have contracts above PLN 100 million. We have several contracts that are quite large, but those aren't the contracts we're talking about. We're just talking about sales. These are sales, but not such large unit values. Having...

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Unidentified Analyst, [23]

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At the press conference, you said that your investment in Alior Bank is a strategic investment and you don't intend to sell it. Do you have the same approach to Pekao S.A.?

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Pawel Surówka, Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO [24]

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This is sort of like a mom who says she loves all of her children equally. Well, there is a question about the share price, and I was trying to, more or less, convey what Tomek Kulik said. But since Alior is a strategic investment, we don't treat it as if it were a portfolio investment. We will hold it long term. We consolidated its result. We look more closely at its ability to generate cash flow, so we look at it as a stand-alone business and in conjunction with us, so the share price is less important.

And the same is true in terms of our thinking about Pekao S.A. I was trying to emphasize that with respect to Alior Bank because I didn't think that I would need to say anything about Pekao S.A. in that context. So I wouldn't believe a company in whose Supervisory Board I sit not to be a strategic company. So we can firmly review any type of speculation that we're considering the sale of either of the banks. Both of the banks are strategic banks, investments for us.

So we have a few -- 2 questions from the web online. From Autonomous Research, the first question -- in motor TPL, profitability has remained strong with a combined ratio of 90% reported in the first 9 months of 2019. Is this a sustainable level? Or do you see -- still expect a gradual increase to the 92% target?

Of course, it would be very difficult to say because we would have to be able to say exactly how the market will grow. I would say that in the recent period, we do see stabilization of prices in the recent period. And we're cautious optimists. So the result on motor TPL does have a time lag.

Nevertheless, we, on a permanent basis or a constant basis, will -- our combined ratio is across the board. And so we want to be a diversified company. So if there would be any other challenges on the motor business market, we try to fill that out with the nonmotor business, which has a higher profitability level. And so I hope that as a result of that mix, we'll be able to achieve our target of 92% and basically defend it.

We also had 1 other question, third question. I won't be able to say much, but to be fair, I'll read it out.

The Eastern European assets would push your market share in Poland in nonlife to around 41% and 50% in life. Do you foresee any issues securing approval from the competition authorities?

Well, this is much too far-reaching. The only thing that we confirm is that since this is in line with our policy, that we would take a look at those type of transactions and we would analyze it. But today, we can't really contemplate or anticipate what a prospective structure would be, what the market shares would be. And certainly, we can't say anything about what the antimonopoly office would say. So at present, the only thing that we can really say, that we're fully transparent within the scope of our strategy. We will analyze these transactions. And the same is true of -- well, basically AXA, but we can't say that we would run this or complete this acquisition in what way. So over time, we'll be able to say more about the subject.

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Unidentified Analyst, [25]

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If I can, I want to ask about your ability to make investments. You've got 222% solvency. I'm not a specialist on insurance requirements, it's just -- you're saying it's just minimally higher? It's only 10% higher than the average. It's 220% compared to an average of 200%, so 10% above. Well, my question, do you have enough surplus capital that you could spend? Or is it the case that you only have the ability to take out subordinated debt?

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Tomasz Pawel Kulik, Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO [26]

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If you look at our current position, our position is a little more complicated. We're a conglomerate. And at the same time, we have to meet stand-alone requirements. So PZU, on a stand-alone basis, life company on a stand-alone business. That's sort of the brief look. We do have a certain amount of surplus capital we're able to utilize if it were to turn out that the asset is sufficiently good where an investment in it would be profitable for the group over a long-term basis.

So a portion of the main portfolio could be assigned to such an investment. We also have the ability to access debt markets, subordinated debt markets. But today, since we're at such a preliminary phase, any type of discussion would be pure speculation at this stage. It's an early stage.

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Pawel Surówka, Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO [27]

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Thank you very much. We'd like to wish you a nice day.

So thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]