CEO letter to shareholders

Dear Shareholders,

on behalf of the management boards of the PZU Group companies, I am pleased to present you the Management’s Report for 2016.

At the beginning of the year, the PZU Management Board, under my leadership, reviewed the operations of the entire Group. We identified potential risks and established new operating directions. We set ambitious goals based on both the development of core insurance activity, and complementary ventures such as investments in the banking sector, asset management, and health care, which will provide the generation of high growth dynamics and exceptional profits.

In implementing the strategic direction for the development of the PZU Group, our main plans include the growth of the scale and profitability of activities, and the implementation of innovative solutions based on a digital operating model. There will be considerable support for new technologies provided by the Witelo fund, which was established in the second half of 2016 to support the development of an ecosystem that allows for the growth of Polish entrepreneurship and investments in Polish start-ups that will, with time, raise the potential of innovative solutions applicable directly to the PZU Group.

The ambitions presented in Strategy 2020 include numerous options that are associated with the Government’s Capital Accumulation Program. When these changes take effect, we will be able to offer attractive and efficient investment tools to our clients. We want to actively contribute to growth of the savings of Poles.

As we implement the adopted strategy, we will stay true to our values. We want to develop the PZU Group based on a foundation of rational and responsible financial, human, social, environmental, and intellectual capital management.

I can say with satisfaction that we were able to observe the first effects of these operations as early as 2016. The PZU Group is starting 2017 with a balance sheet of PLN 125 billion, which will grow considerably before the year is over, to roughly PLN 300 billion (i.e. almost three times the amount from 2015) after the acquisition of shares in Bank Pekao is finalized. Once this transaction is finalized, PZU will become the largest financial group in Central and Eastern Europe, and the leader in insurance, banking and asset management. I am convinced that the existence of such a strong financial institution with its registered office in Warsaw will significantly impact the financial stability and prospects for the responsible development of the Polish economy.

Besides our acquisitions in the banking sector (other than the purchase of shares in Bank Pekao, we also provided financial support to Alior Bank for the acquisition of separated business of Bank BPH), we did everything in our power to return our core insurance business to the proper development path.

By taking advantage of the improving market situation, competitive advantages, and efficient sales structures, we were able to meet the market with a very well prepared offer for motor insurance. In effect, we sold over 700 thousand more MTPL insurance policies and our market share rose by 3 p.p. y/y. We also expanded the activity of TUW PZUW in the corporate insurance segment. The competitive product offer, which was prepared in the form of mutual insurance, was very well accepted by hospitals, local authorities, and state-owned companies. In effect, non-life insurance premiums grew by 20.4% y/y, to PLN 11 billion. The scale building process also includes 3 new acquisitions in the health area. We are already working with approximately 1,800 establishments and providing our products to 1.3 million clients, i.e. 300 thousand more than at the end of 2015.

After the intensive growth of the written premiums in 2016, I expect that we will continue to improve the profitability of our activity in 2017, including that of the motor insurancesegment. We will be able to do this thanks to i.a. a consistent cost discipline, which saved the Group almost PLN 80 million in 2016 alone. We will also support processes by implementing innovative solutions. Last year alone, we implemented claim self-service, which allows the client to monitor the whole process via mobile channels.

By 2020, we want to be perceived as a stable, strong, highly profitable, and innovative financial center providing insurance, health, asset management, and banking products.

The PZU Group has all the components to become one of the most innovative groups in Europe. Specifically, we want to use Big Data to a greater extent in quotation and sales. We will develop electronic distribution and service channels. We will use the potential of cross-selling in insurance and banking products. We will implement effective know-how transfer within the PZU Group through local innovation centers: LINK4, Alior Bank, and selected foreign companies. We are looking at the telematic solutions tested by LINK4; if the project turns out to be a success, we will introduce these solutions throughout the Group.

In 2016 we achieved an unprecedented profit margin (25.8%, + 3 p.p. y/y) in group and individually continued insurance. Despite emerging competition, we have no plans to lose in this area of operations, which is key to our profitability. In 2017 we will introduce new products that will raise our profile among small and medium enterprises. We will also introduce the offer of additional insurance coverage for millions of our life insurance clients.

By 2020, we want to be perceived as a stable, strong, highly profitable, and innovative financial center providing insurance, health, asset management, and banking products. In effect, the investment attractiveness of PZU will grow for both dividend investors as well as investors searching for growth companies with high potentials for generating capital gains on the market share valuation.

At this point, I would like to thank our employees and agents for their efforts in building PZU value. I would also like to thank the Supervisory Board for the trust and cooperation during Group Strategy realization.

Yours faithfully,

Michał Krupiński
Chairman of the Management Board of PZU


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