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Edited Transcript of PZU.WA earnings conference call or presentation 29-Aug-19 10:00am GMT

Half Year 2019 Powszechny Zaklad Ubezpieczen SA Earnings Call

Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Powszechny Zaklad Ubezpieczen SA earnings conference call or presentation Thursday, August 29, 2019 at 10:00:00am 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

* Tomasz Pawel Kulik

Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO

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Conference Call Participants

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* Marta Jezewska-Wasilewska

Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland

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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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[Interpreted] We'd like to welcome you very cordially. I would like to apologize

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as members. We have some other numbers of people. Roman Palac will not be joining us because he's on vacation. But I'd like to welcome Adam Brzozowski who's with us now from the beginning of the new term of office, and he's responsible -- Mr. Adam Brzozowski is responsible for insurance products. He's come to us from Singapore. I hope that he's not sorry that he's joined us, not yet. He's not sorry about that yet. So we have the same number of management board members present even though Mr. Roman Palac is missing. So if you have any questions, then we'll have the opportunity to talk to him. So in any case, I'd like to walk through the major factors, the drivers that have impacted our results, and then I'll dwell a little bit on our strategic activities and then also a few words about the market. And then Tomasz Kulik will walk us through the life market and the health market as he'll fill in for Roman Palac.

So if we begin with business development and we'll begin with sales. Basically, as you are fully well aware, this quarter or the first half of the year was not a simple period. Comparing to 2018, we were affected by a number of factors representing challenges, so we had a larger charge being paid to the bank guarantee fund and this affected our banks. Interest rates remained low. We had certain limitations on the ability to grow the business profitably. The stock markets are -- the global stock markets, equity markets were and continue to be a challenge. And so all of this made it more difficult to generate investment performance. And we'll have the opportunity to talk about this a little bit later. We see some activity in terms of pricing of motor business across the market. And so these were challenges we had to face. We had to measure up to them, and that's all the more reason why we're happy to be able to post robust results, and so the net result is higher than last year. And so if we compare the 2 comparable periods, we're 5% above where we were last year, so this is the best result in the last 5 years. So in terms of the revenue side of things, we had gross written premium of PLN 3.3 billion in nonlife insurance. And as we'll explain in just a few months -- a few moments, this is a stable level, slightly higher. And if we look at seasonality in some of the large contracts, so last year, we had entered to certain big contracts already in the first half of the year. This year, they'll probably be in the second half of the year

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excuse me, was comparable or slightly higher than what we saw last year. This year, in a more challenging marketplace, so we see an acceleration in the pace of growth in gross written premium in retail nonmotor insurance to 6% in Q2. And to some extent, this reflects the market vibrancy in Poland, what's happening in our market. And so we have also life insurance periodic premium

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We are happy because we are not just defending our business, but we are developing our business. We look at individual protection insurance, and we see that it's up by 37% year-on-year. This is something that pleases us greatly. And we have pretty good conditions, pretty good results if we look at our investment performance despite the fact that the unit-linked business was not as vibrant. Another parameter we're

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more than 100,000 employees in terms of the number of employees employed by the companies which have signed a contract with us, and so we crossed or achieved this milestone a little bit ago. And we're quite pleased with this because the strength of our sales network is represented by that. And so when we get to the right slide, we'll say a few more words about that. And we can see that more growth, strong growth in PZU Zdrowie, PZU health, so this segment is up 31% year-on-year.

So then we'll go on to the financial results. So we've had nearly PLN 1.5 billion net profit for the ex-minorities in H1 2019, so we're 5% up over last year. So the net result on nonbanking business was PLN 622 million. So we believe this is quite a strong result, having in mind the bigger impact of losses triggered by unfavorable weather conditions.

And so if we looked at the combined ratio in the nonlife segment in the first half of the year, it continues to be quite low at 89.2 -- 89.2%. In Q2 alone of this year, it was 91.4%. And so we're under the 92% threshold, which was sort of the water mark for us in terms of the ambitions we have in our strategy. So we've got a strong profitability margin in group and individual -- individually continued insurance. So in the full first half of the year, we were at 20%. In Q2 alone, we were at 23.2%, so we've seen that we've grown in Q2 alone. We're very pleased by our investment performance.

Despite the very challenging market environment, we've achieved a result of 2.4 percentage points above the risk free rate, which is above the water mark established in our strategy where we have a 2.2 percentage point. So the ROE is 20.3% in first half of 2019, and so we're at 23.9% TTM. So we believe that we're at a very good strategic level, which fulfills our strategic ambitions and indicates, portends that we will be able to deliver on our strategy across-the-board this year.

And if we look at our capital strength, so let me remind you that the S&P rating agency has raised its rating outlook to positive. This reflects, of course, the very strong position we have within the framework of Solvency II, so that's 225% solvency. And so if we compare that, this places us, as we understand things, amongst the very top players in terms of European insurance companies. As you know, we've earmarked PLN 2.8 per share as dividend per share, which is 6 -- gives it 6.8% dividend yield. We believe that this is a very attractive dividend yield for our shares. And so as we continue to face the low interest rate environment, we believe that this makes our shares, our equities attractive to our investor base.

We also see the share of debt moving downward after paying down EUR 850 million of debt. And so Tomasz Kulik will address that in greater detail. And this is in the main portfolio.

You know very well that we continue to work not only on sales, but we're continuing to develop. Basically what we want to do is that we want to utilize new technologies to reflect our predominance on the nonline business, so offline business into the online business, and so we want to be able to continue to generate that 20% ROE.

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across the organization, we're looking for applications of artificial intelligence and robotization to apply that to a greater and greater extent. We can talk about that in claims handling. So when we analyze pictures using artificial intelligence, we've been able to shorten the time period needed to analyze claims handling cases, and we've been able to detect possible imperfections in the technical work done on cars. And so this has shortened the time dramatically and sped up the process. And so if we look at the team of Adam Brzozowski, they're entering the next phase, where we're looking at price per client and prices online, where we could take into consideration risk parameters and market parameters. But we're also going to be able to measure to a greater, greater extent the behavioral factors. And so I hope that Adam is going to be able to help us with the know-how he's gained in a number of leading insurance undertakings across the world, which will form a basis or benchmark for PZU. So our portal, which is called mypzu.pl, so (inaudible) is helping us more and more -- it becomes more -- it's no longer just a part of the service process but also the sales process offline as well, agents, so we want it to be the mortar that connects us with our customers as well. And so we are focusing on relations with customers, and so this portal will be at the very center of that relationship, so we're going to continue to roll out functionalities there. So I'd encourage you to visit that portal.

If we look at some of the other things that we're doing, the fact that we are able to brag about having such a high percentage in the new business, the employee capital schemes, this is because we've decided quite early to launch the product or the platform called inPZU where we are able to utilize essentially this platform in the framework of these new employee capital schemes, and so user-friendliness is continuing to build our competitive advantage on the marketplace. So there are a few other innovations and we brag about them, but they've been appreciated and noticed at the international level, on the international arena. So we're working with the MIT Enterprise Forum. What we're very pleased by is that this My PZU has been recognized by Efma and it's seen as one of the -- one of the most important insurance transformation projects. And so PZU GO received an award as an innovation in the insurance industry, and this was at the FinTech & InsurTech Congress (sic) [FinTech & InsurTech Digital Congress] where we received this award. So a few more words about the employee capital schemes. What's really important here is that we see this new product not only as a product where we can continue to cultivate and build our business. We want to go a step farther. As we've said in our strategy, we want to build an effective ecosystem and tangential points to interconnect with our customers. And so you can see this in our numbers, in the names of the companies that are joining us. We're going to be fighting, of course, for the greatest amount of participation amongst these employees. We believe that the employee capital schemes will be one of the life product -- it'll join the other life products, the other, sorry, health products and the other products that we are offering through My PZU. And together they will form a strong foundation for us to cooperate with our customers and we'll be able to build our position, so we'll be able to depart from just being a product company but to being a relationship company. So this is also an important touchpoint with our customers. And the numbers are quite important to us. And across the group, we (technical difficulty) want to attain the highest result, so this applies, of course, to PZU products. So Bank Pekao SA is also distributing the employee capital schemes, and so their results should be calculated on top of the result that we've achieved as PZU.

So if we look at business development itself, and so we can look first at the market development, so you can see that the market has grown in nonmotor business, so the growth was 9.5% in Q1, and so the premium in motor

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was 33.5%. As I said, we should also incorporate the fact that there have been some shifts in the timing of signing certain major contracts, which in our opinion would have contributed to a higher market share. Even so, we see that there is full activity in a number of the channels by competitors who are focused on price cuts. It's hard for us to assess to what extent this is an alteration of their philosophy and to what extent this is a tactical move. What's quite important to us, however, is to maintain our strategic position, our strong position, which is quite stable, on one hand; but at the same time, it's a profitable position on the marketplace, so we're monitoring the development of the market very closely.

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We see this in terms of what percentage we have of the overall technical result in the market, which is at 53.2%. We've seen that in some of the channels

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and measures, and that's why we decided not to participate in growth that wouldn't entail profitability. And so we continue to monitor that. And we're taking the necessary steps in order to protect our portfolio as well as our profitability.

If then we could move on to motor insurance. Here, we see that we have 36.7% market share. We have a high level of profitability in the segment. We continue to match and align prices to customers and their needs. This is the direction that the work done by Adam Brzozowski is going, and so we hope that this will generate more and more effects. What we want to emphasize in our strategy is that we want to have relationships, cultivate relationships with our customers. We want to nurture the cooperation. We want to have -- we don't want to just be a product pusher. We want to be a one-stop shop and offer multiple products to our customers. And that's why we can see that we want to have relations with the customers, and so the dealer channels are less interesting to us and nonmargin channels and that's why we focused on the

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and so we're always going to favor that approach and our profitability.

And the last slide about the nonmotor insurance market. We'd like for you to know that there was a larger number of claims linked to weather events. We had several bigger claims, which had an impact on our loss ratio. Even so, it's had a good and acceptable level of 82% if we look at the mass segment. In the corporate segment, it's 77%. That's more or less it in terms of the marketplace. I'll be here if you have more questions.

Let me go ahead and give the floor now to Tomek Kulik.

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Tomasz Pawel Kulik, Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO [2]

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Thank you very much. So ladies and gentlemen, let me say a few words about what's happening on the life market in Q1 of this year. This is the last period of data published by the Polish FSA. We saw additional shortage -- shrinkage of the market measured by gross written premium, and so this was primarily in the unit-linked business that the shrinkage took place. Since our market share in that segment is

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market share -- about 45% market share, about 40% across the market. And so if we have relationships with customers where the premium is paid regularly, we continue to grow and we maintain our position. So there's not been any major movement here compared to the previous quarter. What here is important that we're able to grow on a stable footing, tapping into PZUs [that are the PZU] Health segment and new riders enriching our offer working on the [sums] insured as well as scopes of insurance. So if we look at the profitability of the overall life

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We focus more strongly on profitability, and that's why at the end of the first quarter, our percentage of the technical result was nearly 50%, so it's 46%. And so this shows you to what extent we've been able to replicate those high margins.

So if you look across the various segments, and we'll begin with group and individually continued insurance. As we've said, we've seen growth because of growth in health products year-on-year. We can say that the health segment has more than 17% of the growth. A second important growth element, this is individual continuations, upselling of riders, and then working on scopes of insurance and sums insured. If we look at the profitability, cyclically speaking Q1 has suppressed profitability and so in Q2 we're back up to 23%. So loss ratios fell in terms of deaths, also in births, and so we can say where there's a certain amount of cyclicity or seasonality linked to loss ratio, so dismembers and surgical operations, all of these things contributed to improved profitability of up -- it was up nearly 6 percentage points from Q1 to Q2.

So if we look at individual business, what we're pleased by is the fact that we're growing. And so our sales are the highest they've been in the last 18 months. We're growing in our own channels, and we're also growing thanks to our cooperation with 2 banks and then we're selling up protection business to cash loans. And so this is quite strong sales growth rates. So we've been able to move up by 0.5 percentage point in margins. So you can say that there's a certain amount of seasonality and changes in the structure of the products, so the life insurance product for borrowers in one of the banks with which we're cooperating. And there's also the distribution over time from the structures and the type of provisions that we set up for that product.

And so if we go on to our health activity, what we're working on is scale. So we're trying to grow the scale of that business and offer greater accessibility to our clients. We would like for all of our customers to have equal access to our products regardless of whether we're talking about people who live in large cities or small towns and communities. So we're growing the number of medical centers where we're working. So we have 2,300, more or less. After we've acquired Falck, we've got nearly [50] hospitals, more than 50 specializations, nearly 2,000 physicians, 8,000 pharmacies. So this means that we're going to be able to reach our customers better and better, the ones who are already our customers in other products. And we're going to be able to obtain or attract additional customers as we offer good price to value relationship. What we're very happy with is that, so recurring clients setting up or booking visits with doctors during first contact, so we're already at 40%, so this is one of the highest rates in the country. And we're very pleased by the role played by my platform --

My PZU portal. So customers are able to book visits with doctors themselves on their own without calling our call center. And so this means that this improves the relationship as well. So on one hand, we have some cost savings, and at the same time, we're improving the quality, and so there's a positive reception amongst the customers of this approach we've taken.

If we look at the numbers, the spending, we've -- the CapEx we've spent in order to achieve our strategic goal, which is PLN 1 billion in revenue by the end of next year. So we've made our product offering available to all of our insurance companies. So it's not just PZU Zdrowie and PZU Life. It's in LINK4, it's in PZU SA, so you can buy our -- and our mutual insurance company, so you can buy the health insurance products anywhere. So we're up by 30% year-on-year. We're expanding the scope. So PZU Health also includes dentist work. We also have nice packages for women, for children, for senior citizens. And so that means we've got more and more attractive proposals for our customers.

So if we look at the asset management market, we have more good information, so the assets of our customers -- so our -- in our own TFIs, management fund companies, fund management companies, as well as the banks that cooperate with us, we see that the assets are up quite strongly. It's double digit growth of 12% in our own TFI -- we're in single digit growth in the bank side of things. So that means

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peer groups, and this means that customers are happy to utilize our services. Another important and obvious component of our strategic competitive edge is the cooperation we have with banks. So additional funds are coming in through this channel. We're working with investment [advisors] who aren't associated with the group as well. And so then the mix of the portfolio which has a large percentage of employee pension plans or programs, and so we can say that there's more and more new assets, new money coming in through that.

And so if we look at our cooperation with banks, in terms of insurance, this is growing. We're pleased with this. The number of customers we're accessing or attracting through our banks is on the rise, and that applies to nonlife products as well as life products, so protection products. So on the nonlife side, it's more than 85,000 products, more than 40,000 in protection, life protection products. So this is an area where we're able to grow. On the other hand, we're achieving what we've told you about, which is cost effectiveness across such a large corporate group, consisting of 2 insurers and 2 banks. So we utilize our negotiating power with large vendors. We anticipate that we'll have savings of some PLN 80 million. So we continue to have challenges in investment products.

If we talk about unit-linked business, we continue to scrutinize the development of the situation in the overall marketplace. We don't have the problems and challenges faced by some of our competitors. Nevertheless, we are fully abreast of the fact that the market reception of these products may be negative. So if we come on to the recap of what we achieved in Q2 of this year, starting with sales. As the CEO said, it's more and more frequently the case that we have exposure to events, maybe not nonrecurring events, but they are recurring over a 12-month period. To be blunt, we have more and more contracts where the coverage is offered for periods in excess of 12 months. So we're talking about products sold through our mutual insurance company to large corporates. Up until now, it's not the gross written premium, but the earned premium that shows the pace of growth of our portfolio.

So if you look at the gross written premium, having in mind what's happening in motor business but also having in mind the incomparability (sic) [noncomparability] year-on-year, we have a negative growth rate of gross written premium. But if you look at our exposure and the growth in our exposure over time, so if you were to look at a different line item where we'd see that the fluctuation between quarters is more even, so you would see that we're growing on this difficult market by 3%, there's pressure in the nonlife business. This is good information, because this shows the growth power that we have on the very demanding nonlife insurance market.

In terms of the various segments on the terms of sales, we've already talked about that. We see that there's motor insurance price pressure, especially amongst mass segment. If we look at the corporate side of things, we are growing despite the fact what's happening with prices. So we're growing very strongly in terms of volumes. We've changed entirely our philosophy and approach to how we quote, so it's not just a straight flat rate where we're using -- losing better customers from our portfolio. We're starting to benefit from what we've done, and the portfolio is on the rise. So we also see growth of 5% to 6% elsewhere in the mass segment. And in the corporate segment, I'm talking about the normalized growth in the corporate segment.

If we look at the life business, we can say that we've got the highest level of sales in 18 months, so 6 quarters, both in group business and the retail business, so personal lines. So in protection, we're very pleased with that because we want to build these long-term, long-lasting relations with customers. And so protection business is what gives us that competitive edge.

And if we look at our insurers, subsidiary insurers, we can say that they're growing about 8% to 10%. This is very important. So these companies are contributing to a greater extent than in the past to our consolidated result.

So if we look at our profitability, we're particularly pleased by the fact that even though we've got the compression of the margin -- contraction of the margin in nonlife business, so in the banking segment, we're not able to repeat the good result of Q2 of last year where there was no major weather events or losses. So we can say that in terms of prices, the market was totally in a different spot. But even despite that, despite this pressure, the competitive pressure, so we were able to generate better results than we had last year. What's the challenge is the contribution of the banking sector, which in this quarter behaved a little worse because of this fierce pressure linked to one bank having a non

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periods. Up until now, we had to give frequent explanations about is the limited visibility of our investment performance quarter-on-quarter -- investment results quarter-on-quarter, year-to-year. We were not very resilient to what's happening in the market, both on the debt market and the equity market. So this most recent quarter had some 240 basis points above the risk-free rate, so a very stable interest result. We have a portfolio also that's being developed very consistently, so we have much less volatility in terms of our debt instruments.

In real estate, we see that we've had stable performance where the rate of return is in excess of 5%. So it contributed to a -- led to a situation in which, on one hand, we're much more predictable in terms of our results, and at the same time we're less susceptible to bad decisions or suboptimal decisions leading to fluctuations quarter-on-quarter, which can affect our results in the course of a given interim period toward the full year period, and this would have an impact on our ability to pay dividends. So having in mind the portfolio we've built, I'm convinced that it will enable us to maybe not achieve spectacular results but will have limited differences quarter-on-quarter, year-on-year. And I'm also confident that on this insurance market, having in mind the cycle, business cycle we're in right now, this will decide about the final success.

So if we look at cost effectiveness, you can see that we're improving year-on-year. We're flat Q2 to Q1. We're streamlining our processes. We're trying to move in the direction of digital processes. We want to have lower capital intensity and we also have in mind human capital intensity as well as [subutilization]. So we want to be right the first time around. We don't want to (inaudible). We don't want to utilize too much capital or too much human resources, too much capital resources, also financial resources in order to do everything we're doing. So if we're right the first time, this means we're going to be more cost-effective

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effectiveness, economic effectiveness. This is not a paper result. This is a result which has a direct impact on the equity we have of the own funds. This converts into a positive bottom line. So as we generate results, we're generating real cash, hard cash, which means compared to many of our competitors, we're much more resilient to some of the negative factors taking place on the overall financial markets or the insurance markets.

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

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So thank you very much, Tomek. And so in the last slide, quite briefly, which is we want to show you our results versus our strategic ambitions first in nonlife insurance. So you can see that we're at 33.5% market share, which is below our ambition of 38% positive in our target. This is a result of the shifts between quarters. I've talked about that already twice. On the other hand, if we look at the activity of our competitors, we have to think about to what extent we want to maximize market share, to what extent we want to maximize profitability. This is where we look at combined ratio. And so you can see that profitability is quite important to us. We're below the target.

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So having in mind this context, which is quite challenging, we've been able to sustain our percentage of the technical result. And we've done this at a higher level in the nonbanking world, at a higher level than when we saw in the previous quarters. So we've been generating sales in those channels, in those products which continue to be profitable for us. So having this in mind, we continue to be optimists as we try to achieve the key parameters, which are quite important to us, above all, return on equity. Our admin expense ratio is slightly above the threshold or the target we have. We're striving, through higher cost discipline, to achieve this target. We're also changing processes. We want to have more robotization, more artificial intelligence in our processes, and this should enable us to push beyond that -- push things down, push our admin expense ratio below the target.

So in life business, we have 10.8 million customers. Our strategy talks about having 11 million customers. But in our strategy, we had allowed for the opportunity to dip below and then come back up. And so we believe that the reconstruction of the agency sales network in the life company and incentivizing people to generate new sales, we believe that we're going to be able to achieve that threshold. So the margin is specifically at the level -- at the target we have in our strategy. But we see in Q2 that we've been able to sustain that level of margins. So if you -- Solvency II, we have excess capital. This testifies to our strength. It gives us certain opportunities to be active in nonorganic or inorganic growth. In terms of investments, there is a gap between where we want to be and where we are. We want to

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at target. It's still one of our ambitions, but as a group. So we're close to the net result on third-party asset management. Our target was PLN 200 million. We're at PLN 197 million, so we're very close to our target. So the return on our portfolio is above where we had in our strategy. We have a 2.4 percentage points above the risk-free rate compared to the 2 percentage points that we want to achieve in health. We maintain our goal, so we think that we're going to be able to generate PLN 1 billion in revenues next year and then have a 12% EBITDA. We've now surpassed the double-digit threshold, so we have a positive EBITDA here.

If we look at the bank side of things, you know very well that the net financial result of our banks shows that we have a challenge this year because of the charge being paid to the bank guarantee fund. What's happening on the overall markets makes it a little more difficult to sell investment products. The low interest rate environment, but there's also some cost being generated by the restructuring done in Pekao S.A. that is generated. And then we also have the investment division and other bank having some cost-generating projects as well. And so the results are below our expectations. So we are counting on these factors reversing next year. Of course, nobody can control the premium we have to pay to the banking guarantee fund, but we hope that the restructuring efforts in Pekao S.A. will contribute to a higher result in subsequent quarters and bringing us closer to our objective. At the same time, we see strong sales activity in both banks, but primarily in Pekao S.A., and so these banking assets are on the rise. So our ROE is at 20.3%. But if you look at the 12 months period, we're above the threshold and we have quite a big amount of optimism that we're going to be able to achieve this target, and this is the most important metric for us.

That would be more or less it for our presentation. Now we're more than willing to field any questions you may have at this time.

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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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We've spoken for such a long period of time that perhaps there are no questions. Maybe somebody has finally shown us some mercy to pose a question.

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Unidentified Analyst, [2]

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I have 2 questions. One is about your investment result. And the other investment income, what does that incorporate? And then I'll pose the second question. Perhaps this is getting ahead of myself, I know it's a little early, but do you continue to uphold your ambition of high -- paying out a dividend per share higher than this year?

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Unidentified Company Representative, [3]

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In terms of the other income line, I can tell you what we have there. So we have receivables and impairment losses under the main portfolio. We have investments from noninsurance companies and then we have our own bonds. This is something that shows up in a fixed amount now and again. So these are the factors that are incorporated in the other line items from investment income. What's driving the major volatility here quarter-on-quarter? On one hand, these are impairment losses especially if we're talking about the portfolio. And in Q1, we reversed impairment losses from previous periods, and that's why they offset some of the costs. The other costs are cost items in terms of their impact on investment income from investments and subsidiaries. Another element that makes it more difficult to analyze things quarter-on-quarter especially between second and first quarter. These are differences in FX on our investments in real estate. What do I have in mind here? We are able to show the value in line with the appraisals to find in the original currency, and then give [a peal-in] value for that. And so we're able to do this when this is done. So this is, logistically speaking, a difficult thing do, have all of those appraisals for our investment. So we can only do this maybe twice a year in terms of looking at all the buildings, office buildings or commercial buildings or logistics buildings. These are distributed across the country, and it's quite difficult to do appraisals. So in other periods, apart from the periods where we actually do those appraisals, we have a duty to revalue the value of our liabilities according to the current FX rate, but the assets are held at the value of the date when the appraisal was defined. And so then we will have basically FX gains or (inaudible) technical thing. Unfortunately, we're not able to deviate from that.

In terms of your second question, the thing I can tell you is we are aware that the market and macroeconomic environment is more ambitious nowadays than when we tendered this declaration. But you're right to say it's premature to give any specific guidance. Today, we don't see any reasons to abandon our declaration for [DPS] to grow year-on-year at (inaudible).

So well, I see that somebody else has a question.

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Unidentified Analyst, [4]

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I'm from Santander. I wanted to ask about Alior Bank. In this quarter, Alior Bank added 0. That was its contribution to PZU Group. And the rate -- sorry, the share price fell below the price you paid for the bank. What's the risk that you're going to have to write down Alior? And why is it 0 contribution even though they've generated a positive return?

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Pawel Surówka, Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO [5]

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I shouldn't say too much about Alior because I'm in the governing bodies of another bank. I can talk about this from the point of view of PZU. From our point of view, Alior Bank actually is fulfilling its role within the framework of our strategy. And I can say once again what I said in our meeting with some of the journalists that our cooperation has never been better in terms of the share banking or selling insurance products through the bank. And so this is something that we can see on day-to-day basis. And so we have the cash product -- cash project where we have access given to group insurance customers. They get access to very attractive cash loans. This is the type of cooperation we had in mind when we're transforming the PZU Group from a pure insurance group into a bank insurance group. And we're able to generate a margin on more products than just one, and that's the direction we're following. So the value of the Alior Bank is because of the strength the bank has, its market position, its skills and competencies, the innovation, but also through its cooperation with the PZU Group and that's something that I can count on. And I'm confident and convinced that the current share price does not reflect the value which we see in this bank. Of course, share prices are subject to the operation of various factors. You understand better than I do. There's also an unfavorable news flow. And it seems to me -- I'm not sure if it was suitable to the situation, but we've been a little bit sad to see some of the information where Alior Bank wasn't contributing at the level that we wanted. My feeling is that the management team is in the course of closing some of the topics that have been ongoing for some time, and they're focused 100% on moving forward and also to move forward with -- in terms of their cooperation with the PZU Group. And that's why I'm quite a big optimist. I don't know if Tomek -- you'd like to say something?

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Tomasz Pawel Kulik, Powszechny Zaklad Ubezpieczen SA - Management Board Member & CFO [6]

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What I can tell you, Alior Bank is an asset like the other assets we have. And so we have an impairment test at the end of every single period. So at the end of H1, we did such an impairment test, and based on our analysis of plans of Alior Bank and their knowledge. And so those plans had to be checked. And all of the things we read in the press had to be taken into consideration. And you certainly talked about that with the management team of that bank. So we believe that we're on the safe side of the fence today. I haven't identified any risk that we're going to have to recognize a major impairment as a result of the value moving down. We're not sure what's going to happen with the share price today. This bank has fallen excessive prey to what's happening on the overall banking market in terms of CHF loans, Swiss loans. So Alior Bank couldn't [put a spade] in this in a material way or because of its exposure to corporate clients. Let me remind you of one thing. Today, the Alior Bank, in terms of capital adequacy, is in a totally different place from where it was several years ago. So every quarter, the bank was doing an audit just to be able to incorporate the results of the last quarter to incorporate in the capital adequacy parameters. Today, that situation is no longer in place. The bank has a very safe buffer. That doesn't mean that it's disavowing what's happening in the market, and it's willing to sacrifice that buffer. No, it just means that the bank is aware of this, and the bank wants to build value jointly with PZU announced core business as well. So once we navigate through this more difficult period, and I think that's what's going to happen, there won't be any need to talk about impairments. One thing we should emphasize once again, people managing this bank, even despite those nonrecurring events which took control of the news flow on that bank. So if you look at the adjusted risk factor, it's still one of the more profitable banks in the sector in Poland. So we don't want to have 2 Pekao banks. We believe that Alior Bank is doing well, what it does, and it's part of the market. And so if the proper processes are utilized and as they cooperate with us, this bank will be able to recover very quickly its dynamism and revert to those levels that we've all become accustomed to in the recent period.

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Unidentified Analyst, [7]

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So you talked about Alior Bank and banks. I have a small question about Slide 23. I don't really understand the nuances in terms of your cooperation with banks within the group. You are praising but there is the Pekao bank account and you're doing this through the contact center at PZU. Why is it the Pekao S.A. bank account and not the Alior Bank? Why do you make decisions like this? Is it the case that you selected the Bank Pekao S.A. and you want to sell this bank account, and you don't want to sell Alior Bank? Or is it the case that Alior Bank didn't care too much about it and didn't do the work necessary to sign a contract with you? You could be selling both contracts or bank accounts with both banks. You've got a higher percentage, equity stake in Alior than you do in Pekao S.A.?

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Unidentified Company Representative, [8]

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(technical difficulty)

We have different customer profiles, different sales strengths, and so their market presence is different in terms of large cities and smaller communities. So on one hand, we have to have in mind what banks offer us. And in certain aspects, we're seeing which bank is going to offer a better product to us. There are certain elements, and this I would admit freely, took prevalence when we talk about the cash product, so this loan for customers and group insurance business. So time to market's quite important to you. So Alior was able to move more quickly. So we have to have in mind the various strengths the banks have as diverse institutions. So that's what we were guided by. So Pekao S.A. has a much bigger scale, lower cost of risk, and that's why they're able to offer some very interesting solutions. Alior Bank, in turn, as I said, technologically speaking, is capable to deliver solutions more quickly, and these are the kind of things that we take into consideration.

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Unidentified Analyst, [9]

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I'm from Trigon. I'd like to ask a question about the large contracts in your big mutual insurance company. Have they shifted to Q2 or even beyond in corporate business?

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Unidentified Company Representative, [10]

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Well, these are contracts for periods in excess of 12 months. They last for more than 12 months. So if that contract is 15 months, if that's its length, it's very difficult to catch it quarter-on-quarter. Since these are large contracts for large customers, they're negotiated individually. And so the sales process lasts longer. So we're convinced. But until the contract's on the table, we can only say that we're going to do our best, our utmost to ensure that these contracts are delivered. So we want to make sure that those customers appear in our portfolio by the end of the year.

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Unidentified Analyst, [11]

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And I have a question about the employee capital schemes. As of when do you have 100,000 employees? I understand that you want to have a 30% market share in the employee capital scheme market. And in the first group, there was 2 million, 2.5 million people. Is there some sort of pipeline of these [ECS] contracts?

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Unidentified Company Representative, [12]

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This is not an apples-to-apples comparison. What we have to say first is the following: Companies have time to select their supplier, so still we're in the middle of this process. So if you compare the information posted by our competitors or the Polish Development Fund where they talk about

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We don't want to communicate too much of the data about our market share yet. We believe that our market share is substantially above the threshold you've mentioned. We have a fair share of the market, looking at who we are as PZU as some -- I think we can boldly venture to say that we're amongst the top players.

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Marta Jezewska-Wasilewska, Wood & Company Financial Services, a.s., Research Division - Co-Head of Research & Head of Research Poland [13]

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I want to ask -- I'm from (inaudible), Marta Jezewska. I want to ask about your activity in the motor insurance segment and what's happening on the price side of things. I understand that there's pressure on the market. It's being considered by some players who want to reduce prices. Last year, PZU lowered its prices in the segment. But 1 or 2 quarters ago, you communicated to us that you're thinking about raising prices. What's happening in this segment for PZU?

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Unidentified Company Representative, [14]

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Well, let me phrase this a little bit differently. I don't think you'll find a situation in which the PZU Group would be the entity lowering the price level. We're trying not to compete. Perhaps -- let me interject. We were talking about a slight price correction in terms of where you saw the market. Let me react to your statements. It was a matter of how prices were changing last year. And especially in the first half of the year, we saw there was much -- there was a fierce pressure on the marketplace triggered or something last year. So we didn't respond to that. And so there's transaction price differential between us and the markets. So for the first 6 months of the year, that differential was growing. And that's something that was entirely unfavorable. And so we moved a little bit to -- closer to our competitors. In the beginning of June, as we sort of modified or altered our prices, it wasn't the case that we cut prices across-the-board. We were looking at the profitability of our various channels and groups of customers and we were trying to make adjustments, match that, and so then to catch up to that price. So over the next 3 quarters, we tried to gain that money back. So that correction was made, and then individually and gradually, we tried to earn that money back.

So if we look at where we are at present, we're just slightly under the threshold where we were last year. At the same time, the market has steadily behaved the way it was behaving, so not treating value so seriously, and they're trying to dump prices. We, as the President said, don't want to play that game. We want to cultivate relations with the customer, and we're not interested in attracting somebody who's price-sensitive and who will jump to somebody else the second there's a lower price offered. So there's a certain amount of price [fluctuality] that's natural and price volatility. That's part of the -- the name of the game. And what we see, we've called things the way they are, you can see very well. If there's growth amongst our competitors where they don't increase their share of the technical result, they're moving in the direction of price channels that don't build value. And so they're either at the -- in the money or they're even below money. And so we believe that's not favorable to the marketplace. So the regulator has defined certain rules by which we should play. So there's certain thresholds that have to be met, and that's why we're quite reticent to participate in such undertakings.

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Pawel Surówka, Powszechny Zaklad Ubezpieczen SA - President of the Management Board & CEO [15]

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So in that case, I'd like to thank all of you very cordially for your attendance, and we're at your disposal if there are any follow-up questions you'd like to ask. Thank you very much.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]