6.1 Judgments made

6.1.1. Consolidation principles

6.1.1.1. Judgments in exercising control

PZU Group assumes that it is in control only when it simultaneously has power over the entity, is subject to the exposure, or retains the rights, to variable financial results, and has the ability to use its power to affect the amount of financial results.

In order to determine whether PZU Group holds the rights which are sufficient to exercise power, i.e. practical possibility to single-handedly manage significant activities, PZU Group analyses i.a.:

• how many votes it holds and whether it holds more votes than other investors (including potential voting rights and rights resulting from other contractual arrangements);
• how many entities would have to act together in order to outvote PZU Group;
• distribution of votes at previous general meetings;
• obligations, if any, to ensure undisturbed operations of the entity in which the investment was made;
• if the key personnel of the entity or members of the management body of the entity where the investment was made have ties to PZU Group;
• capacity to appoint members of management and supervisory bodies of the entity;
• possibility to oblige or prevent the entity to perform significant transactions;
• other prerequisites.

With respect to Alior Bank, PZU Group performed analysis of the above prerequisites and determined that:

• as at 31 December 2016, it holds a total of 29.4488% of Alior Bank shares that entitles it to the same number of votes at the General Shareholders’ Meeting of Alior Bank;
• only three shareholders hold share packages of over 5%, whereas the rest of shareholding is fragmented and a large number of entities would have to act together to outvote PZU at the general meeting;
• the held share package would entitle to a majority of votes at the majority of general meetings (as a result of an analysis of attendance and schedule of votes at the general meetings of Alior Bank in the years 2013-2016);
• upon PZU Group’s request, member of the Alior Bank management board, who previously served as member of the PZU Management Board, and three members of the Alior Bank supervisory board who are key managers at PZU were appointed;
• PZU Group does not have knowledge of potential agreements concluded between other shareholders of Alior Bank;
• PZU Group undertook investment obligations towards Alior Bank, due to which it is vulnerable to the variability of Alior Bank’s financial results to a larger extent than it would result from its percentage share in Alior Bank’s capital.

In the light of the above prerequisites, it was stated that, as at both 31 December 2016 and 31 December 2015, PZU Group exercises control over Alior Bank, along with its subsidiaries, and included it in consolidation.

6.1.1.2. Principles of consolidation of investment funds

PZU Group has assumed that it controls the investment fund if both conditions mentioned below are met:

• PZU Group entities together have the ability to use their power over the fund in order to influence the value of the return on investment and the rationales for this ability are, among others, the control over the investment fund management company, a significant share in the total number of votes at the general meeting of investors or the board of investors;
• the total exposure of PZU Group entities to variable returns from involvement in the investment fund is significant, which means that the total share of PZU Group entities in the net assets of the fund equals or exceeds 20% (whereas the determination of the so understood total share does not include the fund assets that are attributable to unit-linked products. If the involvement does not exceed 20% in the net assets of the fund, the exposure to variability of the fund’s financial results considered together with decision-making powers imply that such a fund is not under control.

PZU Group accepts that the consolidation of the fund will be maintained (or dropped, accordingly) during the period of two subsequent quarters following a quarter which closed with a decrease (or increase, accordingly) of the share in the net assets of the fund below (or above, accordingly) 20% when this decrease (or increase) resulted from amounts paid in (or out) of participants not belonging to PZU Group.

Investment funds controlled by PZU Group are consolidated. Their assets are fully presented in the statement of financial standing as financial assets by type and classified to portfolios, whereas the liability related to the net assets of the fund held by third-party investors – under “Financial liabilities”.

6.1.2. Classification of insurance contracts in accordance with IFRS 4

PZU Group entities that carry out insurance activity apply guidance included in IFRS 4 regarding classification of their products as insurance contracts subject to IFRS 4 or investment contracts. A contract can be classified as an insurance contract only when an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (i.e. have no discernible effect on the economics of the transaction), i.e. when the contract involves significant insurance risk transfer.

Assessment whether a contract does transfer significant insurance risk requires an analysis of cash flows related to a product under various scenarios and estimation of probability of their occurrence. The assessment is based on a subjective judgment which significantly impacts accounting principles applied. Based on the assumptions adopted by PZU Group, significant insurance risk occurs when an insured event results in payment of claims at least 10% higher than claims paid if the event had not occurred. Based on the aforementioned criterion, concluded contracts are recognized either in accordance with IFRS 4 or IAS 39.

6.1.3. Contract classification in non-life insurance

The analysis carried out proves that all non-life insurance contracts transfer significant insurance risk and therefore are governed by regulations of IFRS 4.

Additionally, in the light of work on IFRS 17 (IFRS 4 Phase II) carried out by IASB, insurance contract accounting is still applied to financial guarantees that meet the definition of a financial instrument.

6.1.4. Classification of life insurance contracts

Based on the carried out analysis, it was concluded that PZU Group’s offer contains products which do not transfer significant insurance risk (including certain products with guaranteed return rate and some unit-linked ones) and thus do not meet the definition of an insurance contract pursuant to IFRS 4. Therefore, these products have been classified in the consolidated financial statements as investment contracts measured in accordance with IAS 39 (depending on the product construction) at amortized cost or fair value.

Investment contracts include, among others: individual life and endowment Pewny Zysk insurance (recognized at amortized cost), unit-linked PZU IKZE insurance and Program Inwestycyjny Prestige [Prestige Investment Program] (recognized at fair value).

Both insurance and investment contracts can include discretionary participation features (DPF). They entitle the insured to receive additional claims or bonuses as an extra to the guaranteed claim. Such a claim constitutes a significant part of the total contractual claim; its amount and period of validity are of contractual nature and they depend on the insurer’s discretion, whereas their occurrence depends on:

• a specific set or type of contracts;
• profit or no profit from specific assets;
• profit or loss of the insurer, fund or other entity related to the contract.

All contracts with discretionary participation features, unilaterally specified by the insurance company, are measured in accordance with IFRS 4.

Additionally, no life insurance contracts have been identified which would provide for the simultaneous transfer of both insurance and financial risk and require unbundling of insurance and investment components. In the case of contracts for which unbundling of embedded options (e.g. the right to surrender a contract, change it into a premium-free contract, guaranteed annuity for a set premium, indexation of the sum insured and premiums) is permitted, but not required according to IFRS 4, the investment component is not unbundled.