ANNUAL REPORT OF THE PZU GROUP

Transcription

1 PZU G ANN RE 2007 ANNUAL REPORT OF THE PZU GROUP

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3 Table of cotets 1. Basic iformatio o the PZU Group Fiacial highlights of the PZU Group i Letter from the Presidet of PZU SA Letter from the Chairma of the PZU SA Supervisory Board Factors ad evets ifluecig the PZU Group operatios i Polad s ecoomic situatio i Cetralizatio of fiacial supervisio i Polad The Polish fiacial market i The Polish market for isurace ad for pesio ad ivestmet fuds i Major evets with a impact o the PZU Group s operatio ad performace i Factors with a potetial impact o the PZU Group s operatio i The PZU Group o the Polish isurace market i Structure of the PZU Group Major busiess etities scope of activity Shareholders The directig bodies of major PZU Group compaies The PZU Group portfolio of products ad services Property ad casualty isurace PZU SA Life isurace PZU Życie SA Bacassurace PZU SA, PZU Życie SA Pesio isurace ad products PZU Życie SA, PTE PZU SA, TFI PZU SA Ivestmet products TFI PZU SA The share of PZU Group compaies i the Polish isurace market i 2007 market positio Marketig ad advertisig Major awards for the PZU Group compaies ad their products ad services i The developmet of the PZU Group orgaizatio ad ifrastructure Distributio etwork, distributio chaels ad customer service Claims ad beefits IT solutios for the PZU Group processes ad other busiess iitiatives Risk maagemet ad capital maagemet i the PZU Group Risk maagemet Risk maagemet priciples Risk maagemet structure Risk factors i the PZU Group Capital maagemet Reisurace

4 10. Asset maagemet Ratig Directios of the PZU Group developmet The Group s strategy ad its implemetatio New Corporate Goverace Foreig ivestmets of the PZU Group Mai objectives of the PZU Group compaies i Corporate social resposibility of the PZU Group Prevetive activity Sposorig activity The PZU Foudatio The PZU Group as a good employer Overview of the fiacial performace of the PZU Group ad its particular compaies Gross premiums writte Claims ad beefits Cost of isurace activities Uderwritig results Ivestmet activity Fiacial result Techical reserves Profitability, fiacial security ad efficiecy ratios Fiacial statemets ad chartered auditors opiios I. Itroductio to the cosolidated fiacial statemets II. Cosolidated fiacial statemets the PZU Group III. Fiacial statemets PZU SA IV. Fiacial statemets PZU Życie SA V. Fiacial statemets PTE PZU SA Cotact details of the PZU Group

5 1. BASIC INFORMATION ON THE PZU GROUP Gross premium writte (PLN ml) 12,347 12,963 42% 13,748 15,454 15,462 42% 44% 49% 47% Net fiacial result (PLN ml) 3,215 3,706 3,600 2,123 58% 58% 56% 51% 53% 1, property ad casualty is. life is Retur o equity ROE (%) Equity (PLN ml) 23.8% 28.7% 33.4% 30.6% 23.8% 6,455 8,366 10,893 13,331 16, Retur o assets ROA (%) Total assets (PLN ml) 7.8% 8.0% 7.1% 34,934 38,964 43,136 49,445 52, % 5.8% Fiacial Stregth Ratig (FSR) ad Credit Ratig (CR) of the major PZU Group compaies (PZU SA ad PZU Życie SA) Stadard & Poor s Ratig A- Outlook egative Iformatio o the actual ratig is available at Ratigs do ot guaratee fiacial stregth of the isurer ad do ot costitute the recommedatio of the isurace group 3

6 4 Piotr Wiśiewski Ivestor Relatios Coordiator Maagemet Board Office I have bee workig i PZU for some time ow. Last year I decided to udertake a ew professioal challege as I joied the team of specialists employed i the Maagemet Board Office. My curret job cosists i providig the ivestors with updated, reliable ad complete data o the results, operatios ad future plas of the PZU Group. It is rewardig to be sure that the fiacial market participats receive the best possible feedback to assess the Group ad take well-iformed decisios related to it.

7 Throughout 2007 the Capital Group of Powszechy Zakład Ubezpieczeń SA (the PZU Group) remaied i the positio of the uquestioable leader i the Polish isurace market. With assets amoutig to PLN 52.7 bl (a icrease of 6.5% o a yearly basis), it costitutes oe of Polad s largest fiacial istitutios ad couts as oe of the leadig isurace groups i Cetral ad Easter Europe. PZU i Numbers 1 : Net profit amoutig to PLN 3.6 billio places the PZU Group i the positio of oe of the most profitable fiacial istitutios i Polad, Gross premium writte o property ad casualty isurace i the amout of PLN 8.2 billio is the highest result i the compay s history, Combied ratio of 92.3% o property ad casualty isurace is below the mea market value, 72.8% of the total uderwritig result o life isurace ad property ad casualty isurace i Polad costitutes the uderwritig result of major PZU Group compaies, Ow equity of the PZU Group amoutig to PLN 16.9 billio esures coverage of the statutory capital requiremets, with the fiacial security idicators cofirmig a fiacially stable coditio of major PZU Group compaies, ROE value of 23.8% demostrates high effectiveess i maagig capital allocated to the PZU Group, ROA value of 7.1% cofirms high potetial of the assets ivolved i geeratig results of all PZU Group assets to geerate profit for each equity uit, The stadard rage of isurace services offered by the PZU Group cosists of 200 items. The Group is also ivolved i maagig pesio fuds, ivestmet fuds ad savigs plas, Approximately 14 millio customers have chose isurace products offered by the PZU Group, which ca be purchased i more tha 700 outlets aroud Polad, with property ad casualty isurace distributed by a etwork of 7200 exclusive agecies ad 1800 multi-agecies ad life isurace sold by more tha 5100 active isurace agets, The PZU Group employs approximately 16 thousad staff, owig to which it couts as oe of the major employers i the Polish fiacial services sector, The PZU brad is recogized by 98% of Poles, with its logo classified as oe of the most widely recogized Polish trademarks. Thus, the PZU brad ame remais oe of its most sigificat assets. 1 Data for

8 2. FINANCIAL HIGHLIGHTS OF THE PZU GROUP IN 2007 Source: The PZU Group, fiacial statemets Item PZU Group PZU SA PZU Życie SA Gross premium writte (`000 PLN) Premium eared et of reisurers` share (`000 PLN) Gross claims paid (`000 PLN) Claims paid et of reisurers` share (`000 PLN) 15,462,027 15,454,108 7,981,990 7,677,355 7,265,830 7,589,821 15,034,813 15,098,464 7,590,398 7,383,274 7,258,933 7,579,467 9,533,388 8,780,838 4,512,263 4,368,448 4,897,365 4,276,050 9,333,357 8,488,547 4,329,030 4,102,413 4,897,365 4,276,050 Loss ratio (%) Costs of isurace activities (`000 PLN) Acquisitio expeses (`000 PLN) Admiistrative expeses (`000 PLN) Reisurace commissio ad share i reisurers profits (`000 PLN) 3,099,397 2,970,294 2,102,083 1,974, , ,076 1,482,874 1,417,760 1,115,203 1,004, , ,759 1,659,314 1,673,048 1,022,369 1,066, , ,863 38, ,679 35,489 96, ,546 Combied Ratio (%) x x x x Uderwritig result (`000 PLN) 3,383,705 3,526,432 1,036,694 1,362,082 2,349,426 2,265,454 Ivestmet icome (`000 PLN) 3,838,480 3,923,911 1,560,495 2,925,492 2,374,746 2,466,297 Gross profit (`000 PLN) 4,469,869 4,617,237 1,785,568 3,737,300 2,663,435 2,367,146 Net profit (`000 PLN) 3,600,445 3,706,456 1,430,088 3,280,883 2,177,253 1,936,329 Assets (`000 PLN) 52,653,897 49,445,091 30,046,996 26,204,195 29,312,911 27,685,531 Equity (`000 PLN) 16,864,989 13,330,887 17,017,442 13,448,705 6,697,157 4,517,269 Ivestmets (`000 PLN) 49,784,115 46,614,710 27,920,595 24,050,156 28,570,968 27,051,278 Gross techical reserves (`000 PLN) 34,040,285 33,602,247 12,217,050 11,955,358 21,675,897 21,458,005 Techical reserves coverage ratio (%) x x Solvecy margi coverage ratio (%) x x 1, , ROE (%) ROA (%)

9 3. LETTER FROM THE PRESIDENT OF PZU SA Dear Sir/Madam I would like to preset you with the Aual Report of the PZU Group for the year 2007, which brought about a umber of sigificat chages to the overall macroecoomic eviromet, the coditio of the etire isurace idustry ad the PZU Group itself. The reversal of the positive tred at the Warsaw Stock Exchage, itroductio of the so-called Religa tax, a highly ustable persoal compositio of the Maagemet Board ad a umber of uresolved disputes betwee the major shareholders cout as the most sigificat factors ifluecig the operatio of the PZU Group i Bearig all of those i mid, oe ought to assess the et fiacial result of PLN 3.6 billio achieved by the PZU Group as very good. Such a result allowed us to obtai the retur o equity amoutig to 23.8%, which places the PZU Group i the leadig positio amog all Europea fiacial istitutios. It should be emphasized that the most essetial factor cotributig to the high level of profit cosists i the excellet results of the ivestmet activity. However the Group still cotiued to lose its market share. To my mid, the profit o basic isurace activity could ad should have bee higher. The commitmet of all PZU employees eabled the Group to maitai the high level of writte premium, which did ot chage i relatio to the previous year ad amouted to PLN 15.5 billio despite escalatig competitive activity. PZU cotiues to ejoy the trust of millios of Polish citizes, which I would like to thak them for, at the same time assurig you that our customers have every reaso to feel secure. To cofirm the stable fiacial coditio of the compay oe may quote the solvecy margi coverage ratio, which amouts to 1,165.6% i property ad casualty isurace ad 424.2% i life isurace. The well established market positio of our istitutio combied with the trust we receive from our customers is reflected i the umber of awards the PZU Group was grated i The strategies the Group has bee implemetig i order to improve customer service ad expad the product rage are already marked by visible results. I ca assure you that the PZU Group will sigificatly itesify efforts to be ot oly the largest but also the best Polish isurace compay. At the ed of the year the Polish Treasury Miister itroduced some persoal chages to the compositio of the PZU Maagemet Board. Sice mid-december 2007 I have had the hoour to lead the Maagemet Board comprisig a group of experieced maagers who possess profoud kowledge of the compay ad have cotributed to its successes. Oe of the key challeges we are facig at the momet cosists i rebuildig the team of professioal maagers motivated ad determied to pursue far-reachig busiess objectives. I strogly believe that the upcomig years will allow the PZU Group to cosolidate its market positio ad expad i directios util ow uderestimated, such as direct telephoe ad Iteret sales or close cooperatio with baks. I hereby declare that the PZU Group will itesify efforts to improve its positio i Cetral ad Easter Europe. Presidet of PZU SA Adrzej Klesyk 7

10 4. LETTER FROM THE CHAIRMAN OF THE PZU SA SUPERVISORY BOARD Dear Sir/Madam The year 2007 featured i evets which strogly iflueced both the PZU Group itself ad the geeral coditio of the fiacial markets i Polad ad aroud the world. Faced with escalatig competitio, PZU SA ad PZU Życie maaged to maitai their leadig positio i Polad. The fiacial results of the PZU Group for the year 2007 are still impressive with the gross profit value of PLN 4.5 billio ad et profit value of PLN 3.6 billio. Eve though these results show a slight decrease whe compared with the profit recorded i 2006, this ca be associated with a lower retur o ivestmets resultig from fluctuatios o the fiacial markets, which were beyod the cotrol of the Group s compaies. It is worth emphasizig that the balace value of the etire capital group cotiues to grow from PLN 49.4 billio at the ed of 2006 to PLN 52.7 billio at the ed of The Group s ow equity icreased by 26.5%. All this provides a stable groud for the PZU Group to expad at a safe pace both i favourable cojucture ad i a eviromet characterized by dyamic chages, which ought to be expected i the ear future. The icrease of reserves for coverig the solvecy margi i both PZU SA ad PZU Życie SA additioally cosolidates the compaies firm fiacial basis. The retur o equity (ROE) value has bee maitaied ad remais at a high level i terms of the scale of the etire Group. The major compaies of the Group have sustaied a A- fiacial stregth ratig, awarded by the reputable orgaizatio, Stadard ad Poor s. The operatio of PZU SA was adversely affected by dyamic reshufflig of the Polish political area. I 2007 the role of Maagemet Board Presidet was subsequetly performed by three differet people ad the compositio of the Maagemet Board ad Supervisory Board chaged five times. At the same time a destabilizig dispute escalated betwee major shareholders. I spite of all of these fluctuatios the coditio of the compay remaied stable, with the hope of defiite improvemet appearig at the ed of the year. The Maagemet Board headed by Adrzej Klesyk appoited by the Treasury Miister has wo the trust of the major shareholders ad is respected i the Polish busiess area, which allows us to hold optimistic beliefs cocerig the future of PZU SA. After a legthy break the Supervisory Board of PZU SA ca fuctio at full stregth led by a chairma appoited with the coset of major shareholders. I have had the hoour to perform this fuctio sice September 2007, as a perso to guaratee idepedece, which is of major importace i the evet of shareholder coflict. The declaratio of the Treasury Miister allows us to trust that this dispute is about to be resolved, which, as I firmly believe, will facilitate releasig PZU s greatest potetial ad asset i the form of its employees. The year 2008 presets a umber of challegig tasks for the PZU Group, amely: defedig the decreasig market share, orgaizatio of ew fields of busiess (such as medical isurace ad direct sales) or the first batch of secod pillar pesio paymets. The deterioratig state of affairs at the Warsaw Stock Exchage, which has cotiued to show a dowward tred sice the secod quarter of 2007, also costitutes a sigificat obstacle. I firmly believe that the commitmet of all maagers ad employees will precipitate favourable ews for the PZU Group shareholders, customers ad compaies i Chairma of the PZU SA Supervisory Board Tomasz Gruszecki, PhD 8

11 5. FACTORS AND EVENTS INFLUENCING THE PZU GROUP OPERATIONS IN Polad s ecoomic situatio i Ecoomic growth Accordig to our estimatios, the year 2007 saw aother, much less spectacular, however, icrease i the rate of ecoomic growth up to 6.5%. The highest growth dyamics was recorded i the field of ivestmets (20.4%), which costituted the mai driver of GDP growth. The icrease of expeditures was based o the growth of compay ivestmets (by 26.2%) as the implemetatio of EU projects slowed dow sigificatly i the secod half of Household cosumptio also developed dyamically (5.2%) followig a rapid icrease i icome from hired jobs. A icrease i the cosumptio of goods was reflected i the itesified demad for goods of permaet ad semi-permaet use (such as vehicles, shoes ad clothig, electroic equipmet, domestic appliaces, cosmetics, pharmaceuticals, ad other specialist products). Exports grew more slowly tha i 2006 (below 10% i real terms), which could be associated with limited opportuities of itesive expasio to EU markets as well as a decreasig competitive advatage of Polish compaies resultig from equalizig salary levels ad work efficiecy as a cosequece of the strog positio of the Polish zloty (the rate of growth i the EU did ot chage i compariso with the previous year). At the same time, the rate of import growth decreased, thus the foreig trade deficit i stable prices grew slightly. The balace of the curret savig accout demostrated a icrease of deficit to the value of 3.7% GDP. As far as the aspect of supply is cocered, strog domestic demad was related to a dyamic growth i the buildig idustry (added value icrease of 15.6%) as well as the developmet of market idustry ad services. Owig to a high share i GDP the latter oes couted as drivers of the ecoomic growth. Whe compared to the results recorded by other ew EU member states, the Polish rate of growth ca be defied as moderate the Baltic States ad Slovakia demostrated a higher growth rate, with that of Sloveia, the Czech Republic, Bulgaria ad Romaia similar to Polad ad Hugary at a sigificatly lower level. Gross Domestic Product growth i Polad, (real terms, %) Source: GUS

12 Compaies fiacial performace The persistig favourable ecoomic eviromet was reflected i cotiuig improvemet of the compaies fiacial performace. I 2007 the rate of reveue icrease was slightly higher tha i 2006 (14.6% o a yearly basis compared to 13.9% i compaies with more tha 49 employees), with the et reveues o sale icreased by 14.5%. Despite a sigificat growth i salaries the total cost level idicator dropped to 93.8% (from 94.2% for the correspodig period i the previous year). As a result, the value of gross fiacial results was higher by 24% ad the retur value grew to 6.2% (from 5.8% for the correspodig period i the previous year), with the et result amoutig to 88.1 bl PLN ad et retur value of 5.1% (compared to 4.7% i the previous year). The share of eterprises ivolved i export icreased agai (to 50%, from 49% i the previous year) ad the share of export i et reveues o sale grew to 20.7%. Export compaies tured out to be more reliable as fiacial idicators tha the other types of compaies, with 80.6% demostratig et profit compared to 77.8% i the case of all compay types i the same period (upward tred recorded i both cases). Treds i the ecoomy were reflected i the sales figures of particular busiess braches ad sectors. The most dyamic growth of icome o et sales was recorded i the buildig idustry (30%), health care (26%), services for real estate ad compaies (23%), trade ad servicig (16%) ad the processig idustry, especially i the productio of machiery ad equipmet, wood ad metal products ad products maufactured from other o-metal raw materials (predomiatly buildig materials) 24-25%, precisio istrumets, rubber products, refied oil products, leather products (17-19%). However, i the case of the leather processig idustry ad maufacturig machiery ad equipmet the cost of products icreased at a comparable pace, therefore the fiacial results o sales were less impressive. Gross Retur o sales ratio i Polad, (%) Source: GUS

13 Labour market The uemploymet rate cotiued to fall throughout 2007, reachig 11.4% at the ed of December (3.4% less tha i 2006) ad the umber of uemployed amouted to 1.75 millio. Oe of the related aspects of udoubtedly positive character is the fact that the decrease applied to youg ad log-term registered persos as well as the geeral populatio of uemployed. Ulike i 2006, the decrease i uemploymet i 2007 was rather due to the growig umber of employed persos tha the cotiuig retiremet of the ecoomically active from the labour market (icludig ecoomic emigratio). At the same time, the decrease i the ecoomic activity ratio, which cotiued i the previous quarters stopped (54.1% at the ed of the fourth quarter which correspods with the last year s value). The umber of employed i 2007 grew by approximately 280 thousad, which icludes the umber of employees i the busiess sector that rose by 250 thousad (mea growth by 4.7%). The sectors, which demostrated the highest rate of employmet growth, iclude idustry (equipmet for radio, TV ad telecommuicatios, automobile, metal products, electric equipmet, ad rubber products), costructio, retail sale, tourism ad IT. Pressure o salary growth resultig from employee deficits i certai sectors ad favourable fiacial results recorded by compaies cotiued throughout 2007 (the mea salary growth i the busiess sector stood at 9.2%, i.e. 6.7% i real terms). Pay rises occurred i all major braches except for productio of equipmet for radio, TV ad telecommuicatios ad demostrated little variety. The highest salary growth was recorded i the buildig idustry, retail sale, wood idustry, precisio istrumets, ad productio of goods from metal ad o-metal raw materials. Uemploymet rate ad professioal activity ratio i Polad, (%) Source: GUS Recorded uemploymet rate (left-had scale) Professioal activity ratio (right-had scale) 11

14 Prices The Cosumer Price Idex (CPI) i 2007 demostrated a average icrease of 2.5% (4% o a yearly basis), which traslated ito a higher iflatio rate i compariso with The major iflatio boostig factors were food prices (average growth of 5% ad 8.2% o a yearly basis), costs of residetial lease (average growth of 5.6% ad 6.2% o a yearly basis), as well as the costs of trasport, icludig petrol (average growth of 4.1% ad 18.1% o a yearly basis). O the other had, however, the prices of umerous product groups cotiued to show deflatig treds, these iclude, amog others, prices of shoes ad clothig (average decrease of 7.4% ad 7.1% o a yearly basis), household equipmet (average decrease of 1.4% ad 1% o a yearly basis), or audiovisual equipmet (average decrease of 11.5% ad 12.7% o a yearly basis). Icreasig global demad for food ad raw materials, icludig eergy-geeratig oes, resulted i the fact that the impact of globalizatio o the Cosumer Price Idex i Polad ad aroud the world i 2007, demostrated the characteristics of iflatio rather tha deflatio, this tedecy beig a reversal of the coditio i icreased ratio of reduced iflatio or et iflatio (icrease by 2.2% ad 1.5% i 2007, respectively). The Producer Price Idex (PPI) i 2007 icreased by 2.3% o average (the same level i December, o a yearly basis). Eve though the icrease i PPI was similar to that of 2006, some differeces i the price dyamics i particular groups were reported. Prices i the miig idustry icreased by oly 3.1% o average (compared to as much as 15.9% i 2006), i idustrial processig they grew by 1.9% o average (0.7% i 2006), with the prices related to geeratig ad providig water, gas ad electricity icreasig by a average of 4% (6% i 2006). Just as i the case of CPI, the producers prices were uder global pressure with the growig costs of food ad raw materials ad decreasig prices of clothig ad electroic equipmet. Prices i the Polish sector of costructio ad istallatio icreased by 7.8% o average (2.9% i 2006) The price dyamics throughout the year stadig at a level exceedig 8% i the secod half of 2007, idicates a rather limited impact of the US real estate property market crisis ad the advatage of fudametal factors over speculatio i Polad. A itesive icrease i salaries i 2007 (8.7% o average, 9.2% i the busiess sector), cotributed to a growig demad pressure o price growth, which was reflected i the CPI ad PPI iflatio ad the referece iterest rate i Polad, (%) Source: GUS CPI PPI Referece iterest rate (Natioal Bak of Polad) 12

15 Reata Skorża Chief Specialist Sales Office, PZU SA I participate i the implemetatio of such strategic projects as mass sales reform, implemetatio of software supportig the work of isurace agets, revitalisatio of office etwork. I represet PZU SA i the Traiig ad Isurace Itermediatio Committ ee established by the Polish Chamber of Isurace (PIU). For my work for the developmet of Polish isurace market, withi PIU structures, I received a award i 2007 for the occasio of the 15th aiversary of the Polish Chamber of Isurace. 13

16 5.2. Cetralizatio of fiacial supervisio i Polad The Polish Fiacial Supervisio Authority (PFSA), established pursuat to the Act o supervisio of fiacial market of 21 July 2006 (Joural of Laws, No. 157, Item 1119), is resposible for capital market supervisio, isurace ad pesio fuds supervisio ad provides supplemetary supervisio of fiacial coglomerates which ow the supervised etities. As of 1 Jauary 2008, the fiacial supervisio provided by the Polish Fiacial Supervisio Authority icludes bakig supervisio ad supervisio of electroic fuds istitutios, which were formerly performed by the Commissio for Bakig Supervisio. The Polish Fiacial Supervisio Authority itself reports to the Prime Miister The Polish fiacial market i The currecy market The exchage rate of the zloty agaist the dollar was a cotiuatio of a 4-year log tred of appreciatio. The positio of our currecy at the ed of 2007 stregtheed agaist the euro by about 5.5% to the value of 3.60 ad agaist the US dollar by 14.3% to the value of Strog appreciatio of the zloty versus the US dollar was a result of depreciatio of the latter versus the euro by approximately 6.2% to the value of 1.36 at the ed of The treds cocerig the market positio of the zloty, the euro ad the US dollar remaied strog ad distictive throughout all of 2007, ad their dyamics was drive by ecoomic mechaisms, which were favourable for the Polish ad the Europea ecoomy as opposed to the America. O the other had, however, the crisis of the US real estate market ad resultig deterioratig positio of the dollar ecouraged foreig ivestors to udertake log-term ivestmets i the Uited States, which helped to slow dow the itesity of the depreciatio process. Due to the Polish floatig exchage rate regime, the value of the zloty is iflueced by the balace of paymets, which remaied favourable. The structure of the balace of paymets shows stabilizatio of the treds from previous years. I 2007 the curret turover deficit icreased to EUR 11.3 billio (from EUR 8.8 billio i 2006), which costituted 3.7% of GDP; withi this sum the deficit o trade of goods icreased to EUR 8.8 billio (EUR 5.5 billio i 2006), the deficit of icome balace growig to EUR 13.4 billio (EUR 11.5 billio i 2006). O the other had, the surplus i the balace of services icreased to EUR 3.6 billio (EUR 1.7 billio i 2006) with the surplus i the balace of curret trasfers reachig EUR 7.3 billio (EUR 6.5 billio i 2006). The surplus i the capital ad fiacial balace icreased to EUR 25.4 billio (EUR 11.4 billio i 2006), which stemmed from the icrease i the balace of direct ivestmets (eve though the value of foreig ivestmets decreased to EUR 13.7 billio compared to EUR 15.2 billio i 2006, also the value of Polish ivestmets abroad i 2007 dropped to EUR 2 billio from EUR 7.1 billio i 2006), EU trasfers ad foreig credits grated to compaies located i Polad. Short-term capital cotiued to reduce its ivolvemet i Polish treasury bods ad stocks to the balace of EUR 4.5 billio (compared to EUR 2.2 billio i 2006). 14

17 The spot PLN/USD ad PLN/EUR exchage rates, EUR/USD exchage rate ad the real effective PLN rate ( ) Source: Reuters EcoWi PLN EUR /USD Idex EUR/PLN USD/PLN EUR/USD Real effective PLN rate The moey market ad the treasury bod market Alog with the icreasig rate of iflatio the Moetary Policy Coucil tighteed their moetary policy by icreasig the NBP iterest rate fourfold, startig with March 2007 whe the price growth rate was halfway towards reachig the level of NBP iflatio goal (2.5%). Iterest rates were icreased gradually, every 2-3 moths. As a result, the NBP referece iterest rate grew by 100 basis poits ad stood at 5% with the price icrease rate growth of 260 basis poits to 4% at the ed of The pressure o iflatio growth visible throughout 2007 combied with the NBP iterest rate rise expected at the market (also i 2008) were reflected i the icreased market price of moey ad yields o treasury bods. The icrease of yields o bods was higher towards the shorter rather tha the loger ed of the curve. As a result, at the ed of 2007, yields o 12-moth treasury bods icreased by 161 basis poits to 5.85% (iterest rate of a 12-moth deposit for a atural perso icreased by 166 basis poits. to 6.15%), yields o 2-year bods icreased by 163 basis poits to 6.19% ad that of 3-year bods by 156 basis poits to 6.19%. Yields o 4- ad 5-year bods icreased by 128 ad 115 basis poits to 6.16% ad 6.13% respectively, with the yields o 10-year bods icreasig by oly 78 basis poits to 5.97%. Spread of yields o Polish ad Germa bods i 2007 grew i compariso with 2006 for 2-year bods from 65 basis poits to 219 basis poits, ad for 10-year bods from 124 basis poits to 165 basis poits. The shorter ed of the curve was shaped by the policy o iterest rates implemeted by the cetral baks, with the loger ed of the curve becomig more ad more iflueced by the covergece process - the earer Polad is to eterig the euro zoe. 15

18 Yields o treasury bods ad household deposits iterest rate, (%) Source: Reuters EcoWi % Dec. Ja. Feb. Mar. Apr. May Ju. Jul. Aug. Sept. Oct. Nov. Dec. Ja. Feb. Mar. Apr. May Ju. Jul. Aug. Sept. Oct. Nov. Dec. 2-year bods 3-year bods 5-year bods 10-year bods Iterest rates o 12-moth household deposit 12-moths treasury bills The capital market The secod half of 2007, saw the ed of a six-year log boom at the Warsaw Stock Exchage. The less favourable eviromet for the stock exchage i Polad ad aroud the world ought to be explaied, o the oe had, by a lowered level of ivestors trust i fiacial istitutios (which applies to baks i the first place), which icurred losses amoutig to billios of dollars i coectio with the crisis i the US real estate market ad, o the other had, by distortios of share prices i relatio to their real value resultig from a massive iflow of capital to ivestmet fuds. I 2007, the market-wide WIG Idex grew by 10.4% i relatio to It reached the maximum value of 67 thousad i July 2007 before decreasig to 55.7 thousad i December. A similar tred was show by other stock exchage idices. The blue-chip WIG 20 recorded the icrease of 5.2% (3.5 thousad at the ed of the year), with the bidcap ad small eterprise mwig40 risig by 7.9% i 2007 (4 thousad at the ed of the year). Stock exchage idices cotiued to drop i the first moths of 2008 ad the already distorted market stability was additioally affected by the bad coditio of the US ecoomy ad expected domestic iterest rate rises. The year 2007, was successful from the poit of view of ewcomers 81 compaies (icludig 4 foreig) had their IPOs at the stock exchage, which is more tha a twofold icrease agaist the previous year (38 ewcomers i 2006) ad costitutes the secod highest result amog the EU member states ( oly 92 had their stock exchage debut i Lodo). As a result, there were 351 compaies at the Warsaw Stock Exchage, icludig 23 foreig oes. The tradig levels of shares amouted to PLN billio, which was a 46% icrease agaist A sigificat rate of icrease was also observed i relatio to the volume of cotract tradig from 6.4 millio i 2006 to 9.5 millio i 2007 (growth of 33%). The total capitalizatio of compaies offerig their stock at the Warsaw Stock Exchage stood at PLN 510 billio i December 2007, which accouted for 49% of GDP (agaist 41% i 2006).

19 The Warsaw Stock Exchage Idices WIG, WIG20, mwig40 ad swig80, Source: Reuters EcoWi 70,000 65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000 WIG 25,000 20,000 15,000 10,000 5, swig80 mwig40 WIG20 17

20 5.4. The Polish market for isurace ad for pesio ad ivestmet fuds i The isurace market Isurace compaies At the ed of 2007, there were 82 compaies 68 domestic ad 14 iteratioal holdig liceces for isurace operatio i Polad. This umber icluded 35 life-isurers (Segmet I) ad 47 o-life isurers (Segmet II). Isurace compaies based i Polad ad Polish braches of isurers from EU member states ad EFTA member states parties to the EEA agreemet (the ed of 2007) Source: PFSA Activity Isurace compaies based i Polad Public listed Mutual Total Braches of foreig isurers EU /EFTA based Other coutries based Total Total Polish ad iteratioal eterprises Segmet I Segmet II Total The umber of otified isurace compaies from Europea Uio member states ad EFTA coutries grew sigificatly, with the total of 434 compaies expressig their itet to provide services i Polad pursuat to the priciple of freedom i rederig services at the ed of At the same time, 17 Polish compaies declared a willigess to start offerig their isurace services i other EU member states.. Licesed isurace compaies i Polad, Source: PFSA Segmet I life isurace Segmet II property ad casualty isurace

21 Market share A total of 17 life isurers (Segmet I) ad 20 o-life isurers (Segmet II) operatig i Polad icreased their market shares i the course of The PZU Group maaged to maitai the leadig positio, with the share of 28.5% i Segmet I ad 43.8% i Segmet II. Aalogically to the previous years, the year 2007 also saw itesive competitio i both segmets of the isurace market. The gross premium writte of the five major isurace compaies i 2007 accouted for 66% of the premium i life isurace segmet ad 74% of the premium i property ad casualty isurace segmet. Sector performace The total value of gross premium writte i the Polish isurace sector i 2007 amouted to approximately PLN 44 billio, which demostrates a icrease of early 17% i relatio to Segmet I (life isurace) recorded the value of gross premium writte i the amout of approx. PLN 26 billio, which costitutes a icrease of 21% whe compared with Similarly, as i the case of the treds visible i the course of previous years, the rate of growth of smaller compaies was higher tha that demostrated by the top five. The structure of the premium i Segmet I uderwet mior chages 45% of the value of collected premiums came from group isurace with 55% origiatig from idividual isurace premiums. Regular premiums costituted 54% of the overall value, with 46% obtaied from sigle premiums. The Polish isurace market growth measured by gross premiums writte, Source: PFSA Segmet II (property ad casualty isurace) showed a value of gross premium writte of approx. PLN 18 billio, which costitutes a icrease of 11% agaist the previous year. Also i this sector, it was a umber of smaller compaies, rather tha ay of the top five players, which reported the highest rate of growth. b PLN % 35% 30% 25% 20% 15% 10% 5% b PLN % 35% 30% 25% 20% 15% 10% 5% 0 0% 0 0% Segmet I Segmet I growth rate Segmet II Segmet II growth rate 1 Market share i gross premium writte of respective segmet 19

22 As i 2006, the structure of the total gross premium writte i the isurace sector i 2007 demostrated a higher proportio of the collected life isurace premiums (58%) tha the premiums for property ad casualty isurace (42%). Isurace compaies paid out approx. PLN 19.6 billio i gross claims ad beefits, which is a 17% icrease agaist The gross value of beefits paid out i the life isurace segmet stood at PLN 10.4 billio, a icrease of 23% agaist The segmet of property ad casualty isurace issued paymets amoutig to PLN 9.2 billio, which costitutes a 10% icrease i compariso to the precedig year The pesio fuds market The uderwritig results of the etire isurace sector i 2007 stood at PLN 4.6 billio, which is 3% lower tha the results recorded i The life isurace segmet reported uderwritig results of PLN 3.4% (icrease of 6% i relatio to 2006); with the segmet of property ad casualty isurace showig a profit level of PLN 1.2 billio (decrease of 22% agaist 2006). The aggregate et fiacial result of isurace compaies i 2007 amouted to PLN 5.3 billio, which is equivalet to a decrease of 20% i relatio to the previous year. The total assets of all isurace compaies registered i PFSA i 2007 amouted to PLN billio, 64% of which cosisted i ivestmets. The total techical reserves of the sector amouted to PLN 90 billio. Compaies o the ope pesio fuds market There were 15 geeral pesio fud compaies (PTEs) o the Polish market at the ed of The ope pesio fud (OFE) market i Polad, Source: PFSA OFE Number of OFE OFE members (millios) Net assets At the ed of 2007, the ope pesio fuds maaged a total of PLN 140 billio i et assets, which was PLN 23.4 billio or 20% more tha i Net assets of the ope pesio fuds market i Polad betwee 2000 ad 2007 (PLN billio) Source: PFSA

23 Fud members ad trasfers At the ed of 2007, OFEs operatig i Polad had 13.1 millio members, which is approx. 700 thousad (6%) more tha i The total trasfer of pesio fud members i 2007 amouted to 383 thousad 16% more tha i the precedig year, which meas that sice the ed of 2006, 3% of fud members chaged their fuds by the ed of Efficiecy of ivestmet activity ad rate of retur At the ed of the year, the weighted average of OFE accoutig uits was worth PLN 28.55, i.e. early 2% more tha i I 2007, PFSA agai calculated the three-year rate of retur for all OFEs. The weighted average rate of retur for the period of 36 moths aouced i September 2007 was %, which was approximately 7 percetage poits higher tha the correspodig figure the year before. All fuds exceeded the required miimum rate of retur (26.249%) ad the spread betwee the most ad least efficiet fud was about 15%. Top OFEs i terms of the three-year rate of retur withi the period betwee 30 September 2004 to 28 September 2007 (%) Source: PFSA OFE Polsat Pekao OFE AIG OFE ING Natioale-Nederlade Polska OFE Comercial Uio OFE BPH CU WBK Geerali OFE OFE PZU Złota Jesień OFE Pocztylio OFE Skarbiec-Emerytura OFE DOM AXA OFE AEGON OFE Nordea OFE Alliaz Polska OFE Bakowy OFE Weighted average rate of retur % % % % % % % % % % % % % % % % Miimum rate of retur % 0% 20% 40% 60% 21

24 22 Krzysztof Kipert Product Maagemet Office, PZU SA I work i the Product Maagemet Office where I am resposible for motor isurace products. I ca easily say that the uit I work for deals with almost all aspects related to the fuctioig of a isurace product, therefore this job is really iterestig ad oe ca lear ew thigs practically all the time..

25 Fiacial results The total et profit of all ope pesio fuds amouted to PLN billio, which is PLN 97.7 billio (17%) more tha i the precedig year. All compaies i the sector recorded profits at the ed of the year The ivestmet fud market Ivestmet fud compaies ad their assets At the ed of 2007, 34 ivestmet fud compaies were active i the Polish market maagig a total of several hudred ivestmet fuds ad sub-fuds. The year 2007, costituted yet aother year throughout which ivestmet fuds cotiued to develop rapidly, with their et assets i 2007 amoutig to approximately PLN billio, a 35% icrease o the previous year. Net assets maaged by ivestmet fuds i Polad betwee 2000 ad 2007 (PLN billio) Source: PFSA Differet segmets of the ivestmet fud market developed with various degrees of itesity i The aalysis of dyamics of assets value growth i particular groups of ivestmet fud compaies represetig uiform maagemet policies shows that the most profitable i 2007 were those ivestig fuds i shares, as their assets practically doubled, amoutig to more tha PLN 42 billio at the ed of December. Withi those, foreig equity fuds ought to receive special attetio sice, eve though the value of their assets grew fourfold withi oe year, they still cotiue to be oe of the smallest group of fuds i Polad. The year 2007 was also favourable for the developmet of the mixed fuds segmet with their assets icreasig by 41%, reachig the value of approx. PLN 43 billio at the ed of December. 23

26 Net assets of Polish ivestmet fuds i particular segmets at the ed of 2007 (PLN billio) Source: PFSA % % 100% % b PLN % % 36% 60% 40% Equity fuds Balaced fuds 16% Stable growth fus -16% -18% Capital protectio fuds Debt securities fuds 11% Moey market fuds Others Total 20% 0% -20% -40% XI I 2006 XI I 2007 chage i % 5.5. Major evets with a impact o the PZU Group s operatio ad performace i The followig factors affected the operatio ad performace of the PZU Group compaies i 2007: the developmet of the domestic isurace market, whose dyamics sigificatly exceeded the pace of GDP growth, which, i tur, was reflected i the sales rate of PZU SA this dyamics was, however, remarkably lower tha the dyamics of the market (owig to which our market share cotiued to drop), i the segmet of property ad casualty isurace there was a sigificat icrease i the claims ratio related to pheomea associated with atural disasters, which may cotiue due to progressig climate chages; also the amout of damage coected with motor vehicle grew withi the EU territory; moreover, the motor third party liability (OC) premiums were ecumbered with the socalled Religa tax, which will udoubtedly have a massively egative ifluece o fiacial results i 2008, i the segmet of uit-liked life isurace there was a distict absece of busiess coectios with baks, which was additioally visible agaist the backgroud of strog competitive activity of other capital groups combiig isurace ad bakig services, chage i ecoomic situatio o the stock exchage ad the icrease of iterest rates, which were reflected i the results o ivestmet activity of the PZU Group i the last moths of 2007 ad the attitudes of customers towards ivestmet products, multiple reshuffligs i the persoel compositio of the Maagemet Board, which adversely affected the cosistecy of compay maagemet, a high rate of maagemet rotatio (early 50% of all maagemet staff members worked i their positios for less tha a year), sigificat delays ad reorgaizatio of priorities i projects aimed at developmet; expeses o such projects decreased by more tha 44% whe compared with the previous year. A umber of projects from the previous years, cotiued i Two major compaies i the Group udertook to revitalize their distributio etworks by itesifyig recruitmet, traiig ad motivatio programmes for isurace agets as well as maagig their levels of activity ad itroducig career developmet schemes from the momet of recruitmet up to a fully professioal level.

27 PZU SA iitiated the process of itroducig a model of customer service provided by special office-type agecies ad started work o software that would provide support for the agets i cocludig isurace cotracts, desiged to accelerate premium calculatio ad fillig forms so as to facilitate cosumer service i geeral. With respect to claims hadlig, efforts were cotiued to reduce the average claims hadlig time (decrease from 25 to 20 days) by usig the assistace of mobile experts ot oly i the case of motor claims services but also for property claims. Liquidatio of property damage was exteded by the Telepomoc ( TeleAssistace ) service, which is available roud the clock ad eables customers to report damage ad arrage a appoitmet with the liquidator via telephoe. I 2007, the PZU SA Maagemet Board made attempts to boost sales of motor vehicle isurace by employig iovative sales campaigs (cotiuatio of iitiatives started i previous years) targetig both ew customers (imported cars ad isured by other isurace compaies) ad up-sellig (motor accidet isurace [NW], trasfer of discouts from motor third-party liability isurace [OC] to motor ow damage isurace [AC]), developmet of bakig isurace ad participatio i corporate isurace market. Moreover, PZU SA decided that the premiums for the motor third party liability isurace will ot be icreased despite the compulsory Natioal Health Fud cotributio imposed by the law ad usig this fact i marketig campaigs. The assumptio uderlyig this decisio was that the lower premium level might help to slow dow the compay s decreasig market share. The fiacial results from the last quarter of the year, did ot, however, cofirm the assumed dyamics, which could compesate the additioal expeses icurred by PZU SA. The Maagemet Board did ot maage to reduce the rate of market share loss. O 31 December 2007, the Natioal Court Register recorded amedmets i the PZU SA Bylaws passed by the Aual Geeral Meetig o 30 Jue The compay s scope of activity was adjusted to the ameded Isurace activity Act by itroducig provisios eablig the followig: 1) agecy o behalf of or for etities providig bakig services specified i Article 5 items 1 ad 2 of the bakig law act of 29 August 1997 i the course of cocludig cotracts related to these services ad pursuat to the priciples specified i the bakig law act, 2) agecy i sales ad purchasig ivestmet fud uits or foreig ivestmet fud titles, ope ivestmet fuds located i ay of the EU member states or ope ivestmet fuds located i ay of OECD member states other tha EU member states pursuat to the priciples specified i the Ivestmet fuds act of 27 May I 2007, the PZU Życie SA Maagemet Board focused predomiatly o activity aimed at maitaiig its share i the market of protectio group isurace, which costitute the most sigificat ad most profitable field of the compay s activity. The dyamic icrease i the market of idividual isurace products, which was iitiated i the previous year, cotiued with a umber of ew isurace products itroduced. The umber ad complexity of documets required to coclude a isurace agreemet ad eter the isurace scheme was reduced accordig to the suggestios of the distributio etwork employees ad customers, as a result of which rederig services ought to become easier ad faster. The project Zamy się ( We kow each other ), iitiated i 2006 ad desiged to develop ew chaels of commuicatio, i.e. a call cetre ad a website, which make it easier for the isurace programme participats to easily acquire iformatio related to cotract maagemet, was also cotiued. The ultimate isurace service model assumes that group isurace will be hadled with the assistace of a Electroic Isurace Registry System, which allows oe to coclude group isurace cotracts olie with the support of a Telecetre ad could reduce the amout of paper documets ivolved i the whole process. O 1 May 2007 PZU Życie SA bega to coduct the sales of TFI PZU SA ivestmet fud uits. I the first place, the TFI PZU SA products were icluded i the portfolio of the agecies etwork ad as of 1 September 2007 the employees of corporate sales departmet ad etwork maagemet departmet became ivolved i the distributio of TFI PZU SA ivestmet fud uits. All TFI PZU SA ivestmet fuds became icluded i the PZU Życie SA offer. 25

28 5.6. Factors with the potetial ifluece o the PZU Group s operatio i The followig factors are most likely to ifluece the operatio ad performace i 2008: fluctuatios i the rate of growth of the Polish ecoomy, especially the forecasts of reducig the GDP growth rate from 6.5% i 2007 to 5.5% i 2008, growig iflatio, which may lead to Moetary Policy Coucil icreasig basic rate level which will traslate ito higher iterest rate o treasury bods; iflatio itself may affect the costs of compaies operatios, treds at the capital market a remarkable portio of the profits of ivestmet activity depeds o the stock exchage, lower icome o ivestmet activity due to a drop i the prices of shares ad treasury bods evaluated o the basis of market prices the prices of assets are depedet predomiatly o the Polish ecoomic coditio; less favourable ecoomic eviromet may result i decreasig prices of shares ad treasury bods, decrease i the profitability of treasury bods which may adversely affect the profitability of ivestmets ad thus eforce the icrease of techical rates applied by PZU Życie SA, itesified competitive activity i the isurace sector (reduced growth of premium writte as a result of competitive prices, ew isurace compaies, freedom with respect to the choice of isurig compay as provided by the EU) ad chages i the market structure may result i the growth of PZU SA writte premium may appear to be much slower tha the icrease of the etire isurace market, strog product competitio i the ivestmet sector, especially amog compaies offerig alterative ivestmet solutios i relatio to the treds domiat i 2007 (ivestig i products based o ivestmet fuds), extra time eeded to restore the maagemet team ad revive strategic projects, lack of capital coectios with the bakig sector, owig to which the positio of PZU Group i the bacassurace sector is impaired ad the opportuities for egotiatig isurace coditios less favourable, growig popularity of idepedet fiacial advisory services, hece the ecessity to itroduce agets offerig the widest possible product rage, potetial legislative amedmets, particularly i the field of isurace activity ad regulatios cocerig compulsory isurace schemes ad subsidies to volutary agricultural isurace, which may sigificatly modify the property ad casualty isurace system, judicial decisios, which ted to be favourable towards the isurace policy holder i the scope of damage ad exteded scope of isurace compaies liability, owig to which the value of claim coverage i persoal isurace teds to be higher. 26

29 6. THE PZU GROUP ON THE POLISH INSURANCE MARKET 6.1. Structure of the PZU Group As of 31 December 2007, the PZU Group cosisted of 24 etities icorporated as either joit stock or private limited liability compaies. Etities fully cosolidated i the fiacial statemet of the PZU Group for the year closed o 31 December 2007 icluded: Powszechy Zakład Ubezpieczeń SA (PZU SA) the paret compay, Powszechy Zakład Ubezpieczeń a Życie SA (PZU Życie SA) subsidiary, Powszeche Towarzystwo Emerytale PZU SA (PTE PZU SA) subsidiary, PZU Tower Sp. z o.o. subsidiary, Cetrum Iformatyki Grupy PZU SA (CIG PZU SA) subsidiary, OJSC IC PZU Ukraie subsidiary, UAB DK PZU Lietuva subsidiary. Other PZU Group uits were ot icluded ito cosolidatio due to the fact that their fiacial data is isigificat from the poit of view of the overall fiacial results of the PZU Group pursuat to the criteria specified i Article 4 items 1 ad 4 of the Accoutig Act of 29 September 1994 (Joural of Laws No. 76/2002, item 694 with further amedmets). These compaies are recogized i the cosolidated fiacial statemets as cost less impairmet allowaces. UAB PZU Lietuva Gyvybës Draudimas, OJSC IC PZU Ukraie Life Isurace, LLC SOS Services Ukraie, Compay with Additioal Liability Iter-Risk Ukraie, Międzyzakładowe Pracowicze Towarzystwo Emerytale PZU SA (MPTE PZU SA), PZU Asset Maagemet SA, PZU Iteratioal Sp. z o.o., SYTA Developmet Sp. z o.o w likwidacji, Sigma Ivestmets Sp. z o.o., Biuro Likwidacji i Obsługi Szkód Sp. z o.o., Krakowska Fabryka Armatur SA, ICH Ceter SA. Other associates evaluated at cost less impairmet allowaces: Kolej Godolowa Jaworzya Kryicka SA, Nadwiślańska Agecja Ubezpieczeiowa SA, Polskie Towarzystwo Reasekuracji SA, PPW Uiprom SA w upadłości, VIS-Iwestycje SA. The method outlied was applied i reportig: Other subsidiaries valuated at cost less impairmet allowaces: Towarzystwo Fuduszy Iwestycyjych PZU SA (TFI PZU SA), 27

30 The PZU Group structure as of 31 December 2007 Source: the PZU Group PZU SA PZU Życie SA PZU SA 100% Paret compay of the PZU Group PTE PZU SA PZU Życie SA 100% PZU Asset Maagemet SA PZU SA % PZU Życie SA % OJSC IC PZU Ukraie PZU SA % PZU Iteratioal Sp. z o.o % BLOS Sp. z o.o. w likwidacji % TFI PZU SA PZU Życie SA 100% Polish product compaies of the PZU Group PZU Tower Sp. z o.o. PZU SA % PZU Życie SA % CIG PZU SA PZU Życie SA 100% OJSC IC PZU Ukraie Life Isurace PZU SA % PZU Iteratioal Sp. z o.o % OJSC IC PZU Ukraie % UAB DK PZU Lietuva PZU SA % Major service compaies of the PZU Group UAB PZU Lietuva Gyvybës Draudimas PZU SA % Foreig product compaies of the PZU Group The data o the particular PZU SA compaies comes from their idividual fiacial statemets. The PZU Group s results come from the cosolidated fiacial statemet of the PZU Group. The preset report details the performace ad operatio of the major product compaies of the PZU Group. 28

31 6.2. Major busiess etities scope of activity The PZU Group offers comprehesive isurace services with its compaies providig life isurace, property ad casualty isurace ad maagig their customers assets i the form of a ope pesio fud or ivestmet fuds. Powszechy Zakład Ubezpieczeń SA PZU SA is the paret compay of the PZU Group with its core busiess i property ad casualty isurace. It was established as a public compay o 23 December 1991 whe its predecessor, the state-owed eterprise Państwowy Zakład Ubezpieczeń was trasformed ito a commercial compay (pursuat to the Isurace activity act of 28 July 1990, uiform text, Joural of Laws No. 11 item 62 with further amedmets). Powszechy Zakład Ubezpieczeń a Życie SA The core busiess of PZU Życie SA is life isurace. The compay also offers dowry isurace, auity isurace, accidet isurace ad uit-liked isurace policies both for idividuals ad for groups. PZU Życie SA is a subsidiary of PZU SA, which started operatig i 1991 after its life-isurace portfolio was spu off from Państwowy Zakład Ubezpieczeń, still state owed at the time. Powszeche Towarzystwo Emerytale PZU SA PTE PZU SA maages Otwarty Fudusz Emerytaly PZU Złota Jesień ( Golde Autum ope pesio fud) operatig withi the framework of the 2d pillar of the Polish pesio system. PTE PZU SA was established i 1998 as a subsidiary of PZU Życie SA. Towarzystwo Fuduszy Iwestycyjych PZU SA TFI PZU SA maages a group of 11 ivestmet fuds represetig various ivestmet strategies. TFI PZU SA offers products ad services to idividual customers ad istitutios as well as supplemetary savigs plas withi the framework of the 3rd pillar of the Polish pesio system. PTE PZU SA was established i 1999 as a subsidiary of PZU Życie SA. Cetrum Iformatyki Grupy PZU SA CIG PZU SA was established to provide auxiliary services i the hadlig of isurace ad pesio schemes. The compay keeps registers, accouts ad settlemets of ivestmet ad pesio fuds ad offers IT services (such as advice o hardware, software, data aalysis, buildig ad processig databases), call-cetre services, mass pritig, documet processig ad storig ad mailig services. The compay joied the PZU Group i Jue 1998 as a subsidiary of PZU Życie SA. PZU Tower Sp. z o.o. PZU Tower Sp. z o.o. is the Group s SPV established i August 1998 to operate o the real estate property market, develop ad maage real estate property ad ret office space. UAB DK PZU Lietuva i UAB PZU Lietuva Gyvybës Draudimas I the Lithuaia market, the PZU Group offers life isurace ad property ad casualty isurace services uder the PZU Lietuva brad ame. The PZU Group has bee preset i Lithuaia sice February The Lithuaia compaies are subsidiaries of PZU SA. OJSC IC PZU Ukraie i OJSC IC PZU Ukraie Life Isurace Sice 2005, the PZU Group has also bee operatig i the Ukraiia market with its compaies offerig life isurace ad property ad casualty isurace services. The Ukraiia compaies are subsidiaries of PZU SA. PZU Asset Maagemet SA PZU Asset Maagemet SA was icorporated ito the PZU Group i Its core busiess cosists i maagig the portfolio of their customers securities. I 2005 PZU Asset Maagemet SA took over the maagemet of selected asset ad fud portfolios of the PZU Group. 29

32 6.3. Shareholders Owership structure The share capital of PZU SA amouts to PLN 86,352,300 divided ito 86,352,300 registered shares of A ad B series with the omial value of PLN 1 each. PZU SA owership structure as of 31 December 2007 Source: PZU SA Book of Shareholders Others % Eureko B.V % State Treasury % 30

33 Elwira Ostrowska-Graczyk Fiacial Isurace Office Director, PZU SA Experiece i developig ew products for customers from the isurace ad bakig sector combied with the kowledge of methods to implemet, moitor ad maage these products eable me to effectively perform tasks strategic for the fiacial isurace busiess. It is very rewardig to work with the awareess that these particular isurace products have such a high potetial of geeratig ew fields of operatio for PZU, at the same time beig so sesitive to the ifluece of the ecoomic eviromet 31

34 Appropriatio of profit O 30 Jue 2007, the PZU SA Aual Geeral Meetig adopted a resolutio dividig the et profit for the fiacial year closig 31 December 2006 i the amout of PLN 3,280,882, i the followig maer: the amout of PLN 3,260, was allocated to the reserve capital, the amout of PLN 20,000, was trasferred to the Compay Social Beefit Fud PZU SA et profit appropriatio betwee 1998 ad 2006 (PLN millio) Source: PZU SA 3,500 3,000 PZU SA et profit (PLN millio) 2,500 2,000 1,500 1, * * 2006 Reserve capital *icludig retaied profits from previous years Trasfer to Compay Social Beefit Fud Divided 32 Ivestor relatios The priority of the preset PZU SA Maagemet Board cosists i defiig the priciple of corporate goverace particularly i the sphere of good practice, which icludes desigig the cocept of uiform priciples as well as itroducig uiformizatio of procedures applied to iformatio policy. Maitaiig lastig relatios with ivestors ad aalysts activated i 2004 is a absolute ecessity ad costitutes good practice implemeted by PZU SA the largest fiacial istitutio i Cetral ad Easter Europe. Feelig resposible for the icreasig demad for iformatio expressed by participats of capital markets, the PZU Maagemet Board is willig to maitai active cooperatio with them. By regularly providig reliable ad updated iformatio cocerig our operatio, performace ad plas, the PZU Group wishes to supply all participats of the capital market, shareholders ad aalysts with material allowig them to assess the stadig of the compay ad facilitate makig decisios related to it. The Maagemet Board of PZU SA will head for maitaiig the relatioship of dialogue cocerig commetig o the Group s results by orgaizig regular meetigs ad cofereces to preset the compay s operatio ad its results. PZU SA iforms the geeral public about the quarterly ad aual fiacial data of the PZU Group compaies. The PZU SA website features a sectio devoted to ivestor relatios, where iformatio ca be foud cocerig the shareholders, the structure of the Group, operatios of the major compaies ad their fiacial results, the compay ratig, supplemeted with a variety of presetatios ad other types of iformatio potetially useful for ivestors, aalysts ad shareholders.

35 6.4. The directig bodies of major compaies of the PZU Group The followig persos were members of the directig bodies of major compaies of the PZU Group i 2007: PZU SA Maagemet Board Adrzej Klesyk Presidet (sice ) Witold Jaworski Board Member (sice ) Rafał Stakiewicz Board Member (sice ) Heryka Rupik Presidet (sice util , previously Vice-Presidet) Jerzy Kochański Presidet (util ) Wojciech Grzybowski Vice-Presidet (util ) Agata Rowińska Presidet (from util ) Jaromir Netzel Presidet (util ) Beata Kozłowska-Chyła Board Member (from util ) Mirosław Paek Board Member (util ) Jolata Strzelecka Board Member (util ) Piotr Kowalczewski Vice-Presidet (suspeded from his resposibilities sice , dismissed ) Joyce Deriga Board Member (suspeded from her resposibilities sice , dismissed ) PZU SA Supervisory Board Tomasz Gruszecki Chairperso (sice ) Marci Majeraowski Deputy Chairperso (sice , previously Supervisory Board Member) Erst Jase Deputy Chairperso Joaa Karma Secretary (sice , Supervisory Board Member sice ) Maciej Bedarkiewicz Supervisory Board Member (Sice , Secretary util ) Adam Kwiatkowski Supervisory Board Member (sice ) Eryk Zbigiew Pyra Supervisory Board Member Gerard va Olphe Supervisory Board Member Michał Nastula Supervisory Board Member Beata Kozłowska-Chyła Supervisory Board Member (util ) Agata Rowińska Deputy Chairperso (util ) PZU Życie SA Maagemet Board Dariusz Krzewia Presidet (sice , Vice-Presidet sice ) Mirosław Kozłowski Vice-Presidet (sice ) Piotr Kuszewski Vice-Presidet (sice ) PZU Życie SA Supervisory Board Eugeiusz Kowalewski Chairperso Joyce Deriga Deputy Chairperso Krystya Gawlikowska- Supervisory Board Member -Hueckel Jausz Olędzki Supervisory Board Member Ae Ate Sijsma Supervisory Board Member Frederik Hoogerburg Supervisory Board Member Józef Okolski (sice ) Supervisory Board Member (sice ) Jolata Strzelecka Secretary (sice ) PTE PZU SA Maagemet Board Jerzy Kochański Presidet (sice ) Sebastia Bogusławski Vice-Presidet (sice ) Staisław Rataj Vice-Presidet Adrzej Sołdek Vice-Presidet Piotr Rzeźiczak Presidet (sice ) PTE PZU SA Supervisory Board Ludwik Florek Chairperso Beata Kozłowska-Chyła Deputy Chairperso (sice , Jerzy Lipski Piotr Kowalczewski Krystya Dziworska Marek Kaliowski Dariusz Krzewia Mirosław Kozłowski Supervisory Board Member (sice ) Secretary Supervisory Board Member Supervisory Board Member Supervisory Board Member Supervisory Board Member (sice ) Supervisory Board Member (sice ) Jerzy Kochański Deputy Chairperso (util ) Heryka Rupik Deputy Chairperso (sice util , sice Supervisory Board Member ) 33

36 TFI PZU SA Maagemet Board Dariusz Jesiotr Presidet Piotr Góralewski Vice-Presidet (sice ) Maciej Rapkiewicz Board Member Mirosław Kozłowski Jacek Dmowski Jerzy Glac Supervisory Board Member (sice ) Supervisory Board Member Supervisory Board Member Cezary Burzyński Vice-Presidet (util ) TFI PZU SA Supervisory Board Dariusz Krzewia Chairperso (sice ) Beata Kozłowska-Chyła Deputy Chairperso (sice , Supervisory Board Member sice ) Heryka Rupik Chairperso (util ) Tomasz Ryarzewski Chairperso (sice util , previously Supervisory Board Member) Aldoa Wojtczak Deputy Chairperso (util ) 6.5. The PZU Group portfolio of products ad services The PZU Group offers the broadest product rage o the Polish isurace market, which cosists of early 200 isurace products for idividual customers, small ad medium eterprises (SME) ad corporate customers. Alogside property ad casualty isurace ad life isurace, the PZU Group offers a umber of attractive pesio ad ivestmet products Property ad casualty isurace PZU SA The isurace market saw a umber of chages i 2007, icludig the sigificat amedmets i the Civil Code of 10 August 2007 itroducig a modified formula of cocludig isurace agreemets, owig to which all PZU SA products had to be adjusted to ew legal requiremets. Moreover, as of 1 October 2007, isurace compaies are obliged to cover the costs of medical treatmet of road accidet victims i the form of the so-called Religa tax. I 2007, PZU SA cotiued efforts to develop clear customer segmetatio ad developig a rage of products for each group. For the time beig, the compay offers its products to three major market segmets: the idividual customer segmet, SMEs ad the corporate customer. PZU SA provides products spaig all of the 18 statutory isurace classes icludig: motor, property, agricultural, geeral third party liability, accidet ad health, tourist ad fiacial isurace. The idividual customer offer I 2007, PZU SA offered more tha 80 products to this segmet but still cotiued workig to expad ad update the rage of services ad solutios. The core products offered by PZU SA to idividual customers cosist i motor isurace (icludig compulsory motor third party liability [OC] ad motor ow damage [AC]), homeowers/householders isurace ad agriculture isurace. I 2007, PZU SA cotiued to expad the rage of motor isurace products with particular emphasis o upgradig those iteded for ew vehicles. I relatio to the implemetatio of the so-called 5th motor directive, a set of regulatios was itroduced ito Polish law cocerig isurace cotracts cocluded with owers of cars purchased abroad ad to be registered i Polad. I the field of agriculture isurace products the year 2007 saw a umber of product-related ad sales-related activities coected with the itroductio of subsidized isurace of crops ad farm aimals. Moreover, also i 2007, PZU SA expaded the rage of geeral third party liability isurace by compulsory third party liability isurace for the admiistrators of Polish Medical Rescue uits ad compulsory third party liability isurace of persos appoited as bakruptcy admiistrators, isolvecy admiistrators or receivers. I the field of persoal isurace, the most remarkable achievemet cosisted i desigig a tourist isurace product for citizes of foreig coutries applyig for a visa to eter ay of the Schege group member states, icludig Polad. The basic products from the accidet isurace rage (geeral, idividual, Bezpieczy Turysta [Safe Tourist]), icludig assistace services, were largely modified ad will be offered i 2008.

37 SME offer I 2007, PZU SA cotiued to develop the product rage aimed at small ad medium eterprises, which was iitiated i With the itetio of further developmet, havig already lauched PZU Hotel, our compay desiged a ew sector-specific product, PZU Apteka (PZU Pharmacy), which is iteded to provide comprehesive protectio to the most demadig customers represetig this type of busiess activity. Aother group idetified by PZU SA as offerig promisig developmet prospects is law firms. The isurace coverig potetial damage caused by iterruptios of the law firm s activity (Przerwy w działalości kacelarii prawych) costitutes a elaborate protective measure, which perfectly complemets the property ad casualty isurace policy for this customer group. The secod directio i which PZU SA develops the products addressed to the SME sector cosists i the modificatio of available products to match specific customer expectatios. The PZU Doradca (PZU Advisor) isurace package was modified by extedig the isurace protectio scope ad risk assessmet criteria. Every modificatio is implemeted after a i-depth aalysis of the market structure ad SME customers expectatios. Due to its rapid developmet also i the fiacial isurace sector (credit ad bodig), the SME segmet is wiig a icreasig share of the total premium writte. Therefore, i order to satisfy the expectatios of our customers PZU SA itroduced a ew product offerig isurace of commercial loas for the SME sector. I 2007 a remarkable amout of effort was ivested ito raisig awareess of the existece of these products i PZU SA ad demostratig advatages of receivig this type of protectio. The corporate customer offer I the segmet of motor isurace ew aalytical apparatus was itroduced eablig more effective moitorig of the profitability of particular fleet cotracts. Moreover, the compay cotiued the coferece ad traiig series iitiated i 2006 uder the programme etitled Fleet Safety bezpiecze auto firmowe (Fleet Safety Safe Compay Car), which is aimed at promotig safe drivig amog owers of various vehicles. The programme was well received by corporate customers. I 2007, ew geeral terms ad coditios of property isurace i domestic trasport (cargo) were itroduced accompaied by geeral terms ad coditios of yacht isurace. Efforts were udertake to modify isurace products for costructio ad istalmet-related risk. Particular attetio should be draw to the dyamic growth of fiacial isurace products, which was recorded i 2007 with the most powerful ifluece o the growth of premium writte exercised by the bak credit isurace. By virtue of geeral isurace cotracts cocluded with baks, PZU SA isured almost 72 thousad bak-grated credits. Throughout the year, our staff cotiued to work o adjustig these cotracts to the chagig requiremets of the baks cooperatig with PZU SA ad to market coditios. A sigificat icrease i the dyamics of isurace guaratee sales was see i The demad for isurace guaratees, which costitute oe of the elemets idispesable for obtaiig EU subsidies supportig implemetatio of various ivestmet projects, has bee growig alogside geeral improvemet of ecoomic eviromet ad the aticipated iflow of EU fuds of approx. EUR 67 billio betwee 2007 ad With the aim of developig the trade credit isurace offer, a ew product was itroduced i Jauary 2007 amely, export ad domestic trade credit isurace iteded for corporate customers. By the ed of 2007, aother ew isurace of debt product appeared the isurace of due factorig receivables for full factorig with a bak or a factorig istitutio as a isurig party. The itroductio of this type of isurace stems from the eed of PZU SA to improve its market positio i the field of fiacial isurace ad maitaiig a competitive level of the product rage, which requires gradual extesio of fiacial isurace services offered. The PZU Group o-motor isurace products for corporate customers cosist of more tha 30 products icludig, amog others: property isurace, loss of profit isurace, third party liability isurace, egieerig isurace, cargo ad casco isurace ad fiacial isurace. 35

38 Life isurace PZU Życie SA PZU Życie SA offers more tha 60 life isurace products ad packages, both coverig isurace products ad uit-liked products (icludig mai-covers ad riders). The compay offers products from all statutory isurace classes iteded for both idividual ad group customers. Isurace products offered by PZU Życie SA are desiged o the basis of cotiual aalysis of the isurace market i Polad ad aroud the world ad are created to match the real eeds of customers ad their families (they take ito accout both the curret ad aticipated ecoomic ad legal coditio as well as evolvig lifestyles, social treds, etc.). The iovative product rage ad its correspodece with the eeds actually preset i the market costitute the mai guidelies i the process of creatig ew life isurace products. Simultaeously, work is i progress to costatly expad the existig offer by additioal risk factors ad optios. I 2007, the compay udertook measures aimed predomiatly at improvig its positio i the corporate segmet, which, owig to its profitability, couts as the key oe. I the course of implemetig the project of the Cetral Database of Istitutioal Customers (CBKI) potetial customers were carefully idetified, owig to which clear segmetatio could be coducted. The year 2007 was also devoted to adjustig the geeral terms ad coditios of isurace agreemets ito the requiremets arisig from the amedmets i the Civil Code. This process was applied to all items i the product rage. Group isurace The core activity of PZU Życie SA cosists i group isurace products with a regular premium. This type of isurace is iteded primarily for customers who value a broad rage of coverage, such as life isurace supplemeted by accidet, disease ad family riders. These products, kow as the P group products (Group life isurace P ad Group Employee Isurace P Plus ) ad their idividual cotiuatios costitute the best sellig products of PZU Życie SA. The rage of these core products is further exteded by rider products, which guaratee beefit paymet i the case of various life ad health evets. PZU Życie SA also offers group uit-liked isurace products, with the most popular beig the group life isurace with a capital fud kow as Pogoda Przyszłość (Bright Future), which takes the form of a employee pesio programme. I the field of group isurace, the year 2007 maily focused o activities aimed at itesifyig the sales of riders, both i the form of cover isurace ad health isurace. This applied maily to services, which were itroduced i 2006, such as Dodatkowe grupowe ubezpieczeie a wypadek leczeia szpitalego Plus (Group rider i case of hospitalizatio Plus) ad Dodatkowe grupowe ubezpieczeie a wypadek specjalistyczego leczeia (Group rider i case of specialist treatmet). These products are a extesio of a popular group isurace portfolio agaist hospitalizatio ad severe diseases. Idividually cotiued isurace Idividually cotiued isurace are iteded for those customers who may o loger be icluded i group cover isurace schemes, caused most frequetly by termiatio of employmet i a give compay. A broad array of idividually cotiued isurace provides fiacial coverage i the case of evets i the life of the policyholder or their family. The activities of PZU Życie SA i the group of customers idividually cotiuig the isurace programme are meat to match the isurace coditios with chagig customer expectatios i the best possible way. To achieve this ew riders are beig desiged i 2007 the sales of a rider i case of death of the policyholder as a result of a accidet (Dodatkowe ubezpieczeie a wypadek śmierci ubezpieczoego spowodowaej ieszczęśliwym wypadkiem NW Plus). Aother type of rider i case of hospitalizatio as a result of a accidet (Ubezpieczeie dodatkowe leczeia szpitalego astępstw ieszczęśliwego wypadku) was also itroduced, with both products distributed via as well as i traditioal ways i.e. i PZU Życie SA agecies. Idividual isurace As a result of the Civil Code amedmet ad modificatios of other legislative acts cocerig the coclusio of a isurace agreemet, all isurace products had to be adjusted to ew requiremets; therefore i 2007 PZU Życie SA itroduced a umber of alteratios i all geeral terms ad coditios of isurace cotracts. At the same time, the existig product rage of cover isurace was updated, i.e. ew ames were assiged to products, the selectio of marketig products was expaded (ew posters, leaflets, etc.). The rage of products cocerig cover isurace i 2007 icluded edowmet isurace Twoje Marzeia (Your dreams, util July uder the ame Optima), the so-called dowry isurace Uśmiech Dziecka (A Child s Smile, util

39 July uder the ame Futura), whole life isurace Spokój Najbliższych (Peace for Your Family, util July uder the ame Maximum) ad periodic isurace Pewym Krokiem (Sure Footed util July uder the ame Bezpieczy Czas Safe Time). Idividual customers may also decide to purchase oe of the really attractive ivestmet isurace products, amely Idywidualy Program Iwestycyjy Strefa Zysku (Idividual Ivestmet Programme Profit Zoe) ad Fudusz Gotówka (Cash Fud). Idywidualy Program Strefa Zysku is a iovative uitliked product, which allows a lot of flexibility ad gives the participats the chace to maage their ivestmets dyamically ad obtai ivestmet bouses. This product provides a comprehesive ivestmet offer based o 35 ivestmet fuds from the best ivestmet fud compaies (TFIs) operatig i the Polish market (their offer is cosequetly beig developed) ad the PZU Guarateed Fud, which allows obtaiig ulimited profit while securig the ivestmet at the same time (the customers ca be sure that they will receive at least 90% of the highest historical value of the Fud s uit). Aother importat feature of the Guarateed Fud cosists i regular adjustmet of the portfolio compositio to market coditios, which is particularly importat at a time of fiacial market fluctuatio ad meas that at the time of stock exchage boom the Fud icreases the allocatio of the assets ito shares up to 75% (sigificat profits are much more likely to be geerated), while i the case of a egative tred at the stock exchage most operatios of the Fud are based o safe ivestmet istrumets. Cosequetly, regardless of the situatio i the fiacial market, the customers who ivest i the Fud ca derive sigificat profits from their ivestmets. Fudusz Gotówka (Cash) is the oly isurace i the Polish market dedicated to persos who receive beefits from other isurace cotracts, which eables ivestig i, e.g., safe treasury bods by meas of FIO Gotówkowy maaged by TFI PZU SA. Riders I the first quarter of 2007, three ew types of riders icluded i the Strefa Zdrowia (Health Zoe) package were itroduced: Dodatkowe idywiduale ubezpieczeie a wypadek ciężkiej choroby (Idividual rider i case of severe disease), which costitutes the most extesive coverage i case of severe diseases, with the guaratee of a 5-year log isurace coverage at a ualtered premium amout ad o grace period as well as coverage depedet upo sex, which ivolves sex-related diseases (i 2007 there was a extesive social campaig ru by the media ad a umber of NGOs aimed at raisig wome s awareess cocerig the dagers of igorig prophylaxis of uterie cervix cacer PZU Życie SA was at the time oe of few isurace compaies offerig coverage for this cacer type) Dodatkowe idywiduale ubezpieczeie a wypadek operacji chirurgiczej (Idividual rider i case of surgery) the scope of coverage icludes 390 most essetial surgical procedures with the beefit paid out to the customer regardless of the surgery s outcome (i.e. for the pure fact of udergoig a surgical procedure) ad the guaratee of a 5-year log isurace coverage at a ualtered premium amout ad o risk assessmet; Dodatkowe idywiduale ubezpieczeie a wypadek leczeia szpitalego (Idividual rider i case of hospitalizatio) which icludes a very wide scope of coverage (icludig chemotherapy, radiotherapy ad recovery beefit) ad allows the participat to choose amog 4 isurace variats of a differet scope of coverage, guaratee of a 5-year log isurace coverage at a ualtered premium amout ad o risk assessmet. Health isurace I 2007, advacemets i health isurace products focused o the followig areas: products, cooperatio with health care providers, customer service ad moitorig the quality of services, support of sales ad marketig. I the field of products, efforts were cocetrated o hospital isurace uder the Gamma Project, modificatio of out-patiet health isurace accordig to the amedmets i the Civil Code ad aalysis of coverage rate i the Opieka Medycza (Health Care) system i order to modify the system of calculatios ad create a more flexible product rage. I the field of cooperatio with health care providers we have maaged to exted the offer by 23 ew uits ad prolog cotracts with our 22 preset parters. The first stage of hospital purchase procedure was coducted (queries were forwarded to ie hospitals, terms ad coditios of cooperatio were agreed o with four uits). The fial formula of the cotract of cooperatio with hospitals was established alog with drawig up guidelies cocerig services ad reportig as related to health care providers. I the field of customer service ad moitorig the quality of services actios were udertake to implemet, amog other thigs, a reliable system of reportig the activity of the Health Care Ifo lie, which would iclude opiios cocerig the quality of services provided. 37

40 Activities i the field of sales ad marketig support were iteded to develop ad itesify sales services redered through the chaels of distributio dedicated to idividual ad group isurace, particularly with respect to employig Health Care Coordiators to deal with sales. I 2007 the Zdrowie (Health) project was iitiated with the itetio of idetifyig strategic optios of PZU operatio i the health isurace market Bacassurace PZU SA, PZU Życie SA The year 2007, was directed towards cosolidatio ad developmet of curret cooperatio with the leadig Polish baks as well as establishig relatios with ew busiess parters from the bakig sector. The PZU Group offer icluded both products tightly related to bakig services such as credits, loas or bak cards, but also ivestmet isurace (uit-liked products, edowmets, structured products), which received a lot of customer attetio despite the ustable situatio i the fiacial markets. Bacassurace products are tailored to idividual eeds of a particular bak ad offered to the customers of baks the PZU Group cooperates with as available exclusively withi its distributio etwork. I 2007, PZU Życie SA developed cooperatio with past parters, predomiatly PKO BP SA, Milleium Bak SA ad Deutsche Bak PBC SA. A umber of cotacts with ew busiess parters was also cocluded e.g. Bak Pocztowy SA, which is ow offerig life isurace with ivestmet fuds kow as Super Lokata (uit-liked isurace). Oe of the sigificat udertakigs i 2007 cosisted i implemetig, i cooperatio with PKO BP SA, the package of cover isurace for debtors combiig life ad property ad casualty isurace, which secures credit paymet i the case of upredictable evets (property- ad life-related) ad became very popular amog customers. I 2007 a ew modificatio of the ivestmet uit-liked isurace product kow as db Ivest Plus was itroduced i cooperatio with Deutsche Bak PBC SA. This product costitutes the most competitive offer of this type available o the Polish market givig the customer the opportuity to ivest i more tha 80 fuds i three currecies (PLN, USD, EUR) with a wide rage of isurace coverage. I the field of cooperatio with Milleium Bak SA, 2007 saw the cotiued popularity of the ivestmet products implemeted i 2006, with MilleIwestycja as the most successful product Pesio isurace ad products PZU Życie SA, PTE PZU SA, TFI PZU SA Amog its products, the PZU Group also offers pesiorelated plas ad products. Just as i the precedig years, i 2007 PZU Życie SA maaged to maitai the leadig positio i the Idividual Pesio Accouts (IKE) market Last year Idywiduale Koto Emerytale PZU Życie SA (PZU Życie SA Idividual Pesio Accout) was made eve more attractive to its customers by offerig the possibility of trasferrig fuds from the additioal accout to the mai IKE accout ad eablig partial withdrawal of fuds from the additioal accout. Moreover, the product rage of ivestmet fuds i which the IKE fuds ca be allocated to was exteded by three ew uits of TFI PZU SA: FIO Gotówkowy, FIO Akcji Nowa Europa ad FIO Zrówoważoy. A Idividual Pesio Accout (IKE) is also offered by TFI PZU SA, with its product rage of three ivestmet fuds maaged by TFI PZU SA. IKE with ivestmet fuds offers two ivestmet programmes the idividual programme ad the recommeded oe. The recommeded programme allocates the ivested premiums accordig to the algorithm of the percetage share of the ivested fuds i particular uits of TFI PZU SA fuds. The proportio depeds o the customer s age. I the idividual programme, it is the customer who decides about the allocatio of the premium. Idividual customers should also cosider the products of PTE PZU SA, which maages OFE PZU Złota Jesień (Golde Autum PZU Ope Pesio Fud). This fud is offered uder the 2d pillar of the Polish pesio system, which is compulsory for persos bor after Participatio i OFE PZU Złota Jesień may be iitiated by persos who start their first job (primary market) as well as persos who gave up their previous Ope Pesio Fud (secodary market). The PZU Group s offer icludes pesio schemes, such as Pogoda Jesień (Bright Autum) ad group life isurace with a isurace ivestmet fud Pogoda Przyszłość (Bright Future), which is a form of Private Pesio Pla (PPE). These isurace types have for may years ejoyed a stable positio o the market of products eablig accumulatio of fuds ad obtaiig sigificat profit. The PZU Group offers the possibility of joiig a Private Pesio Pla by cotributig premiums to ivestmet fuds maaged by TFI PZU SA. At preset TFI PZU SA maages 72 PPEs for about 65 thousad customers. 38

41 Ivestmet products TFI PZU SA Idividual ad corporate customers of the PZU Group may choose from a wide rage of ivestmet products offered by TFI PZU SA. For the time beig, this icludes 10 ope ivestmet fuds of various ivestmet profiles icludig a umbrella fud, which comprises four sub-fuds opeig the customers way to foreig capital markets. I additio, i 2007, oe closed fud was created kow as FIZ Aktywów Niepubliczych RE I ( RE I Closed Ivestmet Fud for Private Assets ). Apart from ivestmet fuds TFI PZU SA offers a specialized ivestmet programme kow as Pla Iwestycyjy Prestiż (Prestige Ivestmet Pla) ad Compay Ivestmet Programmes. I 2007, TFI itroduced oe ew product i the form of a ope fud kow as PZU FIO Optymalej Alokacji (Optimum Allocatio PZU FIO), which implemets a strategy of active allocatio o the basis of which ivolvemet i particular categories of ivestmets chages, especially with referece to ivestmets, which iclude istrumets of a debt- or share-related ature. The fud is iteded to acquire positive rates of retur throughout the year regardless of the curret ecoomic situatio. Active use of derivative istrumets eables icreasig the rate of retur both i the case of a positive ad egative situatio o the stock market The share of PZU Group compaies i the Polish isurace market i 2007 market positio The PZU Group has for years bee a leader i the Polish isurace market with its share i the market of property ad casualty isurace ad life isurace assessed o the basis of gross premium writte amoutig to 34.9% at the ed of The growth of the market of property ad casualty isurace i 2007 traslated ito improved dyamics of gross premium writte icrease i PZU SA itesive dyamics i the field of o-motor isurace (10.5%), icrease of the premium writte i motor ow damage isurace of 4.8%. Motor third party liability isurace demostrated a cotiuig decrease of premium writte (more tha 3% i relatio to 2006). The share of PZU SA i uderwritig results recorded i the property ad casualty isurace segmet (direct operatio) remais at a very high level. At the ed of 2007, it amouted to 85.3% compared with 86.6% i I the field of o-motor isurace, the share of PZU SA i uderwritig results of direct operatio icreased to 70.9% (agaist 69.9% the previous year). I 2007, as i the year before, PZU SA recorded a positive uderwritig result o compulsory motor third party liability isurace (OC) as opposed to rival compaies (o the chart defied as Others) which have bee reportig a loss i this field for the last two years. With respect to the motor ow damage isurace (AC) sector PZU SA showed a icrease i the share of uderwritig result from 37.1% i 2006 to 58.9% i Asigificat decrease i the market share PZU Życie was see i 2007, eve though the compay maitaied its leadig positio i life isurace market ad a cotiued to be a domiat figure i group isurace products. The market share of PZU Życie SA assessed o the basis of gross premium writte at the ed of 2007 was 28.5%. The share of PZU Życie SA i uderwritig results recorded by the life isurace market at the ed of 2007 was 67.8% i compariso to just over 70% i The share of OFE PZU Złota Jesień i the market of ope pesio fuds measured by the umber of members amouted to 14.9% at the ed of 2007, owig to which it maitaied third positio, which applied also to the et value of assets held by OFE PZU Złota Jesień, which stood at 13.8%. 39

42 40 Bartłomiej Ciesek Specialist Project Maagemet Office, PZU Życie SA My job requires flexibility ad ability to respod to chages speedily. Iterestig thigs are happeig all the time, owig to which I always eed to be ready to demostrate my creativity ad iovative approach. The market keeps ecouragig us to adopt a fresh perspective towards isurace ad fiacial products.

43 Market share of PZU SA i segmet II isurace (direct activity) assessed by gross premium writte ad share i uderwritig result (as of 31 December 2007) Source: PFSA Market share Others 25.7% PZU SA 43.8% HDI Asekuracja TU S.A. 4.7% TU Alliaz Polska S.A. 7.6% STU ERGO Hestia S.A. 8.1% TUiR Warta S.A. 10.1% Share i uderwritig result Others 14.7% PZU SA 85.3% 41

44 Market share of PZU Życie SA i segmet I isurace assessed by gross premium writte ad share i uderwritig result (as of 31 December 2007). Source: PFSA Market share Others 34.5% PZU Życie SA 28.5% TU Alliaz Życie Polska S.A. 6.4% PAPTUŻiR Amplico Life S.A. 7.4% Commercial Uio Polska TUŻ S.A. 12.3% Aego TU a Życie S.A. 10.9% Share i uderwritig result Others 32.2% PZU Życie SA 67.8% 42

45 Market share of OFE PZU Złota Jesień i ope pesio fuds assessed by umber of members ad value of et assets uder maagemet (as of 31 December 2007). Source: PFSA Market share by umber of members Others 30.9% Commercial Uio OFE BPH CU WBK 20.7% Nordea OFE 5.6% ING Natioale- Nederlade Polska OFE 19.7% AIG OFE 8.2% OFE PZU Złota Jesień 14.9% Market share by assets uder maagemet Others 23.4% Commercial Uio OFE BPH CU WBK 26.7% AXA OFE 4.4% AIG OFE 8.2% OFE PZU Złota Jesień 13.8% ING Natioale- Nederlade Polska OFE 23.5% 43

46 6.7. Marketig ad advertisig I 2007, the PZU Group was ivolved predomiatly i marketig campaigs directly supportig the sale of products with the exceptio of the image-buildig December campaig, which was a good opportuity to covey Christmas ad New Year s greetigs to the customers. Promotio of property ad casualty isurace The year 2007 focused o the promotio of property ad casualty isurace products, with particular emphasis o the advertisig projects cocerig the motor isurace segmet. The followig three major advertisig campaigs were coducted: the first oe kow as OC w PZU oswaja emocje (Compulsory motor third party liability isurace i PZU SA cools dow your emotios), which was desiged as a cotiuatio of a campaig iitiated i 2006 ad lasted util the ed of February 2007, associated with a popular iteret cotest. The campaig was aimed at covicig potetial customers of the superior quality of PZU SA products compared to other isurace products available o the market; the secod oe had a tactical purpose of drawig the attetio of curret ad potetial customers to the fact that PZU SA decided ot to icrease the prices of compulsory motor third party liability isurace; the third oe aimed at promotig compulsory motor third party liability isurace i relatio to the 10% discout for ew customers ad 20% discout for the owers of imported vehicles. The last two campaigs were coducted simultaeously o TV, radio ad o the Iteret. I marketig activities promotig property ad casualty isurace products a lot of emphasis was put o the campaig cocerig subsidized agriculture isurace, aimed at raisig awareess of their existece ad appeal amog potetial PZU SA customers. Because of the specific ature of the product, it was importat for the target group to come ito direct cotact with the promotioal activities. The campaig ivolved press advertisemets, articles i agricultural magazies, advertisig spots o the radio as well as participatio i trade fairs ad sector-specific evets. For the purposes of the campaig PZU SA i cooperatio with Polskie Wydawictwo Rolicze published a Praktyczy przewodik po dotowaych ubezpieczeiach rolych (Practical guidebook of subsidized agriculture isurace) which was a accessible ad practical source of iformatio cocerig this type of isurace. I 2007, PZU SA coducted a umber of multidimesioal promotioal campaigs to support the sale of products iteded for the small ad medium eterprises sector. Amog other activities, a series of 20 Jak sprzedawać lepiej (How to sell better) sales cofereces was orgaized, featurig Professor Adrzej Szromik, the Head of the Chair of Commerce ad Market Istitutios of the Cracow Uiversity of Ecoomics. Participats of those cofereces cosisted of preset ad potetial PZU customers as well as PZU SA ad PZU Życie SA salespeople. The promotio of PZU SA fiacial isurace iitiated last year was also cotiued with two advertisig campaigs i the geeral ad specialist press, lauched i sprig ad autum to promote Ubezpieczeie kredytu kupieckiego (trade credit isurace). Moreover, regular press promotioal campaigs were ru throughout the year cocerig Gwaracje ubezpieczeiowe (Isurace guaratees). The Iteret couted as a sigificat commuicatio chael to reach potetial customers of fiacial isurace, hece, advertisemets of PZU products appeared there o a regular basis. Apart from campaigs o atiowide scale umerous locally focused advertisig ad promotioal activities were itroduced alog with regioal sales promotio campaigs based o the etwork of agecies. All of them were iteded to provide support i the sales of particular products. Promotio of life isurace ad other products At the ed of March ad begiig of April 2007, a advertisig campaig etitled Strefa Zysku (Profit Zoe) was coducted i order to raise awareess of attractive uitliked ivestmet products i the PZU product rage. This campaig icluded activities show o TV, i the press ad o the Iteret. I the course of the year the campaig of Strefa Zysku was accompaied by strog BTL support. Ivestmet products were also promoted i the course of ie cofereces devoted to the foreig ivestmet fuds of PZU SFIO Fudusze Zagraicze, which were orgaized for customers ad salespeople i Jue 2007 by PZU Życie SA, TFI PZU SA ad Votobel Asset Maagemet AG. I sprig 2007, a direct marketig campaig was lauched to boost the sale of group life isurace, with its mechaism eablig the PZU Życie SA salespeople to reach key persos i selected compaies. From October, a promotioal campaig was also ru to advertise riders for group employee isurace of the P Plus type, which offered additioal isurace for specialist treatmet, hospitalizatio ad surgical procedures, as well as the programme for spouses ad childre (over 18). 44

47 There was a itesive promotioal activity of health ad health-related isurace products. The icreased sales of Opieka Medycza (Health Care) packages was a result of motivatioal competitios for agets ad full-time staff ad a additioal press campaig i the sprig ad autum periods iteded predomiatly for wome. A advert tailored to specific expectatios of this target group appeared i selected wome s magazies ad o the Iteret, with the latter particularly emphasizig the optio of olie purchase of health isurace. I autum, a direct mailig campaig with MGM (Member- Gets-Member) elemets was coducted targeted at idividual customers of Opieka Medycza (Health Care) with the aim of boostig their loyalty ad wiig ew customers through recommedig the Opieka Medycza (Health Care) brad by preset customers. The itroductio of a rider isurace package kow as Strefa Zdrowia (Health Zoe) was accompaied by a promotioal campaig i the electroic media ad strog BTL support. At the ed of the year, a atiowide advertisig campaig i the press ad Iteret combied with a set of direct marketig activities was lauched to promote Idividual Pesio Accouts (IKE). I 2007, marketig support was used i busiess processes ragig from sales ad service to claims hadlig. The activities were aimed at ot oly preset ad potetial customers but also employees ivolved i the sales ad services related to these products as well as exteral parters of PZU Życie, i.e. agets, persos resposible for the maagemet of group isurace i employig establishmets (factories, compaies, offices), brokers ad baks. Marketig research ad aalyses Marketig research ad aalyses coducted i 2007 by PZU SA ad PZU Życie SA were focused primarily o the study of cosumers expectatios ad prefereces ad assessmet of the quality of services ad customer satisfactio. Data obtaied i the course of the research was used to improve the curret operatio of the compay ad desig log-term strategies. I additio, the customer satisfactio assessmet programme desiged ad implemeted the previous year was cotiued i It comprises five assessmet criteria: rage of products, customer service durig the sales process, customer service i the course of claims hadlig, regular customer service, image ad the level of trust, all of which ted to ifluece the level of customer satisfactio to a large extet. Research cocerig the improvemet of marketig activities focused o the assessmet of cocepts, advertisemet creatio, ad audiece respose to advertisig campaigs; it also diagosed market sesitivity to the character ad directio of sposorig ad prevetive activity. Aalyses of the isurace market icludig the aalysis of the market positio of major PZU compaies were coducted regularly. Iteret presece I compliace with dyamic market treds, olie operatio was importat to the advertisig strategy adopted by the PZU Group i A series of sales campaigs was coducted o the Iteret, i the course of which databases of potetial customers were built ad support provided for other advertisig campaigs. Assistace was also give to the activity of sales represetatives ad persos maagig group isurace. I 2007: fuctioality of the corporate iteret portal of the PZU Group ( was improved, exteded versio of the first assistace cetre for sales represetatives of PZU Życie SA i compaies throughout Polad was created, olie sale of health isurace (applicatio form, olie paymet) at was itroduced ad promoted. Iteret advertisig became a itegral part of promotioal campaigs i the media lauched by the PZU Group. The most sigificat projects were related to the aalysis of customer service quality ad icluded a variety of customer service multilateral aspects. They were coducted with the assistace of diverse methodological models ad research techiques such as mystery shoppig, mystery call, CATI, CAPI ad olie surveys. 45

48 6.8. Major awards for the PZU Group ad its products ad services i 2007 The well-established presece of the PZU Group i the fiacial markets ad i the social, ecoomic, ad cultural life of Polad has bee recogized i umerous awards for the Group s compaies, which were awarded for their ogoig activity, marketig activity ad corporate social resposibility. Awards related to market positio The PZU Group as the most valuable isurace compay i Polad As oe of Polad s 100 most valuable compaies, the PZU Group was raked third i the geeral classificatio of the survey prepared by A.T. Kearey for Newsweek, occupyig the leadig positio i the isurace compay category. The PZU Group as the largest isurace istitutio i Cetral ad Easter Europe The PZU Group was the leader of the Top 50 major isurace compaies survey prepared by Rzeczpospolita ad Deloitte, thus remaiig i the positio of largest isurace compay i Cetral ad Easter Europe. The PZU Group as oe of the leadig major Polish compaies The PZU Group was raked sixth i the survey of Top 500 major Polish compaies published by Rzeczpospolita i Particular PZU Group compaies also achieved high market positios i rakigs. I the survey of 100 major fiacial istitutios i Polad prepared by the Cetre for Socio-Fiacial Research (CBFS) for Gazeta Fiasowa, PZU SA was raked first, maitaiig its positio from the previous year, followed by PZU Życie SA OFE PZU was raked 53rd. Moreover, the PZU Group compaies occupied leadig positios i the rakig of major compaies prepared by the mothly magazie Home & Market. PZU SA was raked third ad PZU Życie SA fourth i their survey of 500 major commercial compaies. Awards for the PZU Group products OFE PZU Złota Jesień The Best Busiess Parter Otwarty Fudusz Emerytaly PZU Złota Jesień (PZU Golde Autum Ope Pesio Fud) received the award for The Best Busiess Parter grated by Home & Market ecoomic magazie. The criteria used by the juries icluded assessmet of operatio ad performace withi a give busiess sector as well as assessmet by other compaies. OFE PZU Złota Jesień (Golde Autum) was particularly appreciated for its stable market positio, high customer service stadards ad the maagemet system that coforms to ISO 9001 stadards. OFE PZU Złota Jesień i TOP 1000 Otwarty Fudusz Emerytaly PZU Złota Jesień (Golde Autum Ope Pesio Fud) received positio o. 184 amog all Europea ivestmet ad pesio fuds i the TOP 1000 survey prepared by reowed Ivestmet & Pesio Europe publishig house. Such high positio of OFE PZU cofirms the strategy ad ivestmet policy represeted by the Fud, which has bee systematically maitaiig the positio of a market leader ever sice it bega its operatio. Europea Medal for Krakowiak Ivestmet Fud This is the third BCC Medal for a TFI PZU SA ivestmet fud. This time the Europea Medal, which couts as a recommedatio of the Office of the Committee for Europea Itegratio ad Busiess Cetre Club for products meetig the highest Europea stadards, was awarded to PZU FIO Akcji Krakowiak (Shares Fud). I previous years the BCC Medal was awarded to PZU FIO Stabilego Wzrostu Mazurek (stable growth fud) ad PZU FIO Papierów Dłużych Poloez (Debt Securities Fud). 46

49 Brad recogitio PZU as oe of the most valuable brads Compaies of the PZU Group were agai classified as most valuable brads i the Marqa 2007 study a survey of the most valuable brads published by Rzeczpospolita. The survey of brad value raked PZU SA third, PZU Życie SA twety-first ad PZU Złota Jesień iety-third. Brad value was assessed from the perspective of fiacial idices related to the value of the compay. I this way, the PZU SA brad value was estimated as PLN 1,803.1 millio, PZU Życie SA as PLN millio, ad PZU Złota Jesień as PLN 87.1 millio. The rakig of leadig brads from the fiacial perspective featured PZU SA also i third positio, followed directly by OFE PZU Złota Jesień (fourth) ad PZU Życie SA (fifth). The results of these three compaies combied would place The PZU Group i the positio of rakig leader. Rakig was assessed accordig to power, defied as the relatioship betwee brad value ad aual icome o sales. PZU i the eyes of studets PZU SA took 10th positio i the atiowide Career with a Employer 2006/2007 rakig, thus becomig classified as oe of the best employers i Polad. The wiers were selected by studets from 125 colleges ad uiversities ad their career advice offices. The assessmet criteria icluded, amog others: compay s active attitude ad popularity, available career paths, type of busiess represeted by the compay, salary ad prestige related with beig employed by the compay. PZU Życie SA was awarded the Studecki Produkt Roku 2007 title (Studet Product of the Year) i the 7th Studecki Produkt Roku cotest i the category of studets security. This survey is based o idetifyig products ad brads most popular amog studets ad is iteded to recogize the most studet-friedly brads at the same time drawig the attetio of compaies to studets as a customer group. PZU as a trusted brad The Europea Trusted Brads 2007 rakig published by Reader s Digest magazie, which is the largest Europea cosumer survey aimed at evaluatig how much trust Europeas have i values, istitutios ad product brads, ad awarded PZU SA with a golde Trusted Brad i the isurace compaies category. PZU as a brad with a high reputatio PZU SA was awarded the title of Brad with a High Reputatio 2007 i the fiacial istitutios category i a idepedet survey of Polish brads reputatio prepared by PremiumBrad, which assesses brad trust, recommedatios, media image, the compay as a employer, social ivolvemet ad the compay as a busiess parter. PZU as the most recogized ad trusted brad The surveys of Most Recogized Brad ad Most Trusted Brad published by Gazeta Fiasowa raked PZU SA first ad PZU Życie SA fifth. 47

50 7. THE DEVELOPMENT OF THE PZU GROUP ORGANIZATION AND INFRASTRUCTURE 7.1. Distributio etwork, distributio chaels ad customer service The PZU Group has the most extesive sales etwork i the Polish isurace market. At the ed of 2007 there were ie regioal braches of PZU SA ad ie regioal braches of PZU Życie SA with overlappig geographical reach. Brach uit borders were coordiated with the admiistrative divisio of the coutry ad their operatig areas were assiged to idividual voivodeships. Brach cetres are located i the followig cities: Gdańsk, Katowice, Kraków, Lubli, Łódź, Pozań, Szczeci, Warszawa ad Wrocław. The distributio etwork of the PZU Group i 2007 cosisted of 354 local brach uits for PZU SA (Ispectorates, Customer Service Cetres, Customer Service Poits) ad 373 Customer Service Poits of PZU Życie SA spread aroud the etire coutry. I 2007 property ad casualty isurace was distributed i the etwork of 7200 tied agecies ad more tha 1800 multi-tied agecies. I the field of motor isurace distributio PZU SA collaborated with 1070 car dealers ad secod-had car outlets. The sale of products for corporate cliets was vested predomiatly i brokers. I 2007 PZU SA collaborated with 784 isurace brokers. Over 5100 isurace agets were actively sellig life isurace i 2007 (icludig 1665 IKE agets sellig idividual pesio plas). I the case of PZU Życie SA products, the role of persos maagig group isurace i particular compaies is importat i relatio to service ad sales processes. The PZU Group bacassurace products ad fiacial isurace products are offered via bakig delivery chaels. I 2007, the PZU Group compaies collaborated with ie baks, icludig: PKO BP SA, Bak Milleium SA, Deutsche Bak PBC SA, Bak Ochroy Środowiska SA ad Bak Gospodarki Żywościowej SA. A cooperatio agreemet was also established with Bak Pocztowy. Bacassurace products ad fiacial isurace products are tailored to the eeds of particular baks. They are offered to the customers of the bak collaboratig with the PZU Group ad ca oly be purchased through its distributio etwork. I 2007, saw the developmet of a team supportig the sale of bak isurace products appoited uder the PZU Group Bacassurace Office. The team is obliged to actively support the distributio of isurace i bak braches of particular regios ad orgaize product traiig with its coordiators offerig day-to-day productrelated assistace to bak employees. Also i 2007 a series of sales- ad product-related, traiig was offered to the employees resposible for the distributio of fiacial isurace i local braches. Moreover, itesive traiig o fiacial isurace products was orgaized for 1400 selected agets. Sales of OFE PZU Złota Jesień pesio fud uits are based o the PZU Group distributio etwork. Agreemets may be cocluded i every brach of the Group, while over 9700 sales represetatives work o ew acquisitios. It is also possible to coclude Złota Jesień fud agreemets olie via the PZU Group Iteret site. TFI PZU SA ivestmet fuds worked maily through the group s distributio chaels. I 2007, TFI PZU SA products were also available i the PZU Życie SA distributio etwork, BRE Group Iteret baks, i the etworks of Elite Fiace & Cosultig ad Expader fiacial advisors, as well as o the Iteret platform of Dom Maklerski AmerBrokers, Dom Maklerski POLONIA NET S.A., Beskidzki Dom Maklerski, Krakowski Bak Spółdzielczy, Iteratioal Risk & Corporate Advisory (IRCA), Secus Asset Maagemet S.A. ad Karlik Group. Additioally, a umber of activities aimed at improvig the efficiecy of distributio chaels were coducted i 2007, such as cotiued work o the fial model of agecy etwork operatio ad implemetatio of a maagemet model for Office-Agecies. Activities aimed at improvig the attractiveess of the PZU SA offer i the dealer s chael ad cosolidatig the compay s positio i this market segmet were also iitiated. The project of software desiged to facilitate work performed by isurace agets ad partially automate hadlig isurace policies was completed ad is ow beig prepared for atiowide implemetatio. 48

51 Agata Książek Chief Specialist Product Maagemet Office, PZU SA I have bee desigig isurace products for may years. For two years ow I have bee workig i agricultural isurace. My job cosists i developig iteral regulatios cocerig isurace maagemet. I also cooperate with our product specialists from various regioal uits, prepare market ad busiess aalyses from the field of agriculture isurace ad hadle calculatios for the Miistry of Agriculture cocerig the sale of subsidized agriculture isuraces. 49

52 The year 2007 saw the completio of a extremely sigificat qualitative modificatio related to the sale of products iteded for idividual customers i local PZU SA braches. This modificatio cosists i the implemetatio of a ew maagemet model i the form of Office-Agecy i more tha 350 PZU SA local braches Ispectorates ad orgaizatioal local structures withi Ispectorate. The most sigificat results associated with the implemetatio of the Office-Agecy model i PZU SA iclude: sales icrease though itesified up-sellig ad crosssellig, sales icrease though itesified up-sellig ad crosssellig, improvemet of the quality of idividual customer service i local braches of PZU SA uits, developmet of local brach agets sales skills through implemetatio of the programme of soft skills sales traiig, uiform terms ad coditios of cooperatio with PZU SA Office-Agecy implemetatio of a effective, motivatioal fiacial model of PZU SA Office-Agecy, which icludes the costs of aget s operatio. The PZU Group uses traditioal chaels of distributio at the same time eterig the market of moder commuicatio alteratives to get close to its customers. PZU Życie SA itroduced a applicatio which allows hadlig group isurace via the iteret, which eables commuicatio betwee the isurace compay ad the policy holder ad facilitates the processes which take place i the course of isurace agreemet duratio sice its coclusio util the momet of payig out the beefits. I 2007 there was a sigificat growth i the sale of idividually cotiued isurace, which could be obtaied owig to exteral chaels of distributio (mailig). Moreover, a remarkable improvemet i the quality of customer service was recorded Claims ad beefits With respect to loss adjustmet the priorities i 2007 cosisted i providig a high stadard of customer service ad reducig the average time eeded for loss adjustmet saw cotiued efforts focused o further improvemet of procedural ad systemic solutios cocerig adjustmet of motor isurace losses (e.g. by implemetig a ew versio of the CSI SLS system ad approval of procedures). Much emphasis was placed o formulatig assumptios ad, subsequetly, itroducig modificatios i the diviso of property loss adjustmet, e.g. a set of assumptios was formulated cocerig the course of the property loss adjustmets process with the assistace of the New Loss Adjustmet Orgaizatio Project (NOLS Project), such as: Mobile Expert (ew priciples of adjusters work orgaizatio), TeleAssistace (Telepomoc) (possibility of reportig losses by telephoe), CSI SLS system (IT system supportig loss adjustmet process). It is ow also possible to report all property losses by telephoe through a specialized cetral uit a Telecetre, which ca be accessed o roud the clock, which udoubtedly costitutes a major coveiece to PZU SA customers. Additioally, at the time of reportig property loss, the PZU SA customer is provided with exhaustive ad clear iformatio cocerig the time of loss examiatio, forms ad documets ecessary for loss adjustmet or activities ecessary to protect the loss from developig or reducig the scope of a existig loss. As a result, the PZU SA customers receive comprehesive ad professioal customer service ad develop a positive image of the compay. As i the case of motor isurace losses, the process of techical maagemet of property loss adjustmet was vested i the group of Mobile Experts (231 of them), who form a team of experts selected through a iteral recruitmet process. Property Mobile Experts ivestigate the loss at a time agreed upo with the customer, hadle the documets ecessary i the loss adjustmet process ad offer advice ad explaatios to the customer. The kowledge ad experiece of Property Mobile Experts combied with the highest quality equipmet, professioal approach to customers ad willigess to meet their expectatios represet what PZU stads for. Additioal support ad improvemet of the whole process of property loss adjustmet (both the techical ad the substative side) is provided by a uiform CSI SLS IT system (which also maages motor isurace losses). The system eables the followig: Moitorig property losses reported ad maaged withi the scope of the etire compay, which is a effective tool for prevetig isurace fraud;

53 Geeratig correspodece templates for customers ad other etities ivolved i the property loss adjustmet process; Remidig adjusters of overdue losses. A sigificat elemet of implemetig modificatios i the divisio of property loss adjustmet cosisted i desigig procedures which would produce a uiform ad systematized course of loss adjustmet clearly defied for the etire compay. Implemetatio of the above-metioed solutios i the divisio of property loss adjustmet will be beeficial through: reduced time eeded for property loss adjustmet, uiformizatio of the property loss adjustmet process withi the etire compay, clear defiitio of tasks ad scope of activity associated with property loss adjusters, reduced costs of property loss adjustmet, reduced amouts of loss adjustmet paymets resultig from frauds improved quality of customer service ad more satisfactio for the PZU SA customers, especially if the umber of cocluded isurace agreemet cotiues to grow steadily. The ext stage of the NOLS Project cosists i puttig forward assumptios related to the persoal loss adjustmet process, i.e. both third liability isurace ad accidet isurace by: specifyig assumptios cocerig the orgaizatio of this process, desigig projects of uiform procedures, determiig fuctioal requiremets for the CSI SLS System with cosideratio of the specific character of persoal loss. Further plas related to the developmet of the NOLS Project are aimed at implemetig the iteret system of reportig loss saw the completio of the aalytical phase of a project aimed at cetralizig ad optimizig the processes of beefits adjustmet i PZU Życie SA. The mai idea behid the project was to develop the best possible processes ad orgaizatio of beefit adjustmets to achieve the followig objectives: reduce costs through more efficiet ad simplified processes of maagig beefit-related claims ad elimiatio of uecessary actios, maitai or improve the customer satisfactio level by reducig the time eeded for beefit adjustmet (this icludes simplificatio of the processes ad more coveiece for customers), icrease cotrol over the process ad uiformizatio of beefit adjustmet procedures. Developmets i the Polish isurace market icrease the role of good orgaizatio of the processes of adjustig beefits related to life isurace as: life isurace market couts as oe of the most dyamically developig segmets of the Polish isurace market, owig to which the umber ad value of paymets to be made icreases, the product structure evolves (growig proportio of more complex isurace packages, presece of medical isurace), due to which the character of tasks delegated to staff durig the beefit adjustmet process chages, high degree of cetralizatio ad automatio of service allow staff to be better prepared for respodig to a icreasig umber ad complexity of claims reported by more demadig customers. Cetralizatio ad optimizatio of beefits adjustmet is particularly importat i the case of PZU Życie SA because the volume of beefits this compay maages eables obtaiig ecoomies of scale with a high degree of cetralizatio itroducig sigificat improvemets without adversely affectig the quality of customer service thereby: allowig oe to achieve maximum levels of persoal expeses due to the ecoomies of scale ad improved effectiveess of staff dealig with beefits adjustmet, reducig the umber of staff required to be qualified ad certified as adjusters ad improvig the moitorig of adjustmet decisios which will curb isurace fraud. A ultimate model of adjustmet i PZU Życie SA is iteded to icorporate chaels of remote commuicatio to receive reported claims. This would imply the key role of customer authorizatio procedure, which could replace the ecessity of provig oe s idetity with a documet, which is presetly the practice i Customer Service Poits. Activities aimed at cetralizig ad facilitatig the processes of beefit adjustmet i PZU Życie SA will cotiue i 2008 i the directio towards: preparig a more detailed model of beefit processes, establishig a cetral IT system to support service-related processes. 51

54 7.3. IT solutios for the PZU Group processes ad other busiess iitiatives The year 2007 saw the cotiuatio of strategic projects iitiated i the previous years. The portfolio of strategic projects became more clearly formulated with the visible distictio betwee the activities aimed at developig orgaizatio ad those desiged to moderize the ifrastructure ad iteral processes. The coditio ecessary to automate the PZU Group processes is the efficiecy of the iformatio ad commuicatio techology (ICT) ifrastructure of PZU SA ad PZU Życie SA, therefore efforts were cotiued to proceed with the moderizatio of the broad etwork for the PZU Group. The year 2007 brought stabilizatio of the Isurer ad SLS cetral systems. The latter was approved for use, exteded by property loss adjustmet service ad implemeted atiowide. The largest iterally established PZU system ot oly became stable but was cosequetly developed. The Isurer system, which uderwet the cetralizatio process last year, was equipped with the modified process of automatic reewal, which costitutes a example of how cetralizatio of the system followed by the cetralizatio of busiess processes ca ehace the efficiecy of PZU SA operatio. Also i 2007 the solutio used to trasfer the motor isurace data to the Isurace Guaratee Fud (UFG) was replaced, which icluded both the itroductio of a ew supplyig system ad, by the so-called iitial supply, eabled catchig up o the backlog. The developmet of the Service Desk was also cotiued through extedig the scope of services by ew applicatios. I 2007 the level of customer satisfactio related to the Service Desk was higher tha 90%, which is a ratio ecoutered oly i very well-developed orgaizatios. With respect to further large-scale plas cocerig IT modificatios i PZU SA (after cetralizatio of the Isurer ad implemetatio of SLS), the fial ad ultimate versio of the system s structure was developed. I additio, the cocept of moderizig the preset system with respect to mass products was developed. I the field of further actios cocerig product systems, the year 2007 was sigificat for completig the migratio of products from the Registers (Rejestry) system to the Isurer system, so that the former could be withdraw. Work was cotiued i order to implemet the ew system for corporate customers isurace (Corpo). The IT solutio for fiacial isurace products (SOUF) was selected ad collaboratio with its provider was established. The iitiative related to implemetatio of the IT system supportig the work of PZU SA isurace agets was also cotiued i 2007 with the pilot tests performed ad preparatios made to coduct atiowide implemetatio. The fiacial beefits i the form of reduced costs of maagig isurace policies are expected i The operatio of Committee for Busiess ad Techology (Komitet Bizesowo-Techologiczy) developed throughout 2007, owig to which co-resposibility of the busiessrelated layer for the compay s techological image ca be promoted. High attedace of represetatives of may busiess groups at the committee meetigs shows that it forms a appropriate area for establishig busiess priorities. Followig the erectio of the Fiacial ad Accoutig Cetre (Cetrum Fiasowo-Księgowe, CFK), which overtook the majority of tasks related to the accoutig of o-isurace costs, the cocept was itroduced to exted the Cetre s scope of activity by dealig with huma resources ad remueratios of particular compay braches. Aalogically, works were coducted i PZU Życie SA uder the ame of Reorgaizacja Struktur Księgowości (Reorgaizatio of Accoutig Structures), aimed at establishig a cetre maagig accoutig of o-isurace costs for the etire compay. Other sigificat projects were also beig developed by PZU SA, such as stadardizatio of customer data collectio ad automatio of the Bous Malus rate calculatio. Additioally, 2007 saw the begiig of the joit project of PZU SA ad PZU Życie SA aimed at stadardizig the opiio formig process ad supportig the work of expert physicias (Cetral Register of Physicias Opiios ad Verdicts). I 2007 PZU Życie SA developed the ultimate busiess processes model, which is a startig poit for their techological trasformatio. The major developmet-orieted objective for PZU Życie SA i 2007 cosisted i cotiued implemetatio of a ultimate structure of the itegrated IT system. 52

55 The portfolio of key busiess iitiatives, with their elemets i the form of IT systems, for was approved. The pla was based predomiatly o the completio of strategic projects such as: GraphTalk A.I.A. (Cetral Product System, curretly the Model Scetralizowaej Obsługi Ubezpieczeń program [Model of Cetralized Isurace Maagemet] used for uit-liked products), the project of Wdrożeie Rejestratora Ubezpieczeń Grupowych (Implemetatio of Group Isurace Registry Egie) the eru system has bee completed ad is ready to be implemeted for a trial period, Cetraly System Prowizyjy (Cetral Commissio System) ad the Ifo Bus project. I 2007 the CROM system (Cetraly Rejestr Opiii Medyczych Cetral Register of Medical Opiios) was itroduced as well as bakig systems for maagig bacassurace products. The Ivest system for ew products with ivestmet fuds was upgraded. The workflow tool was activated for the electroic archive of cotracts, dealig with correspodece ad issues directed to Cetrum Obsługi Ubezpieczeń (the Cetre of Isurace Maagemet) as well as circulatio of costrelated documets withi the compay. Moreover, uder the IT Goverace project, 2007 saw the completio of the secod stage which comprised a more detailed outlie of the medium-term pla of implemetig all IT solutios for PZU Życie SA ad a pla for implemetig all project products. 53

56 8. RISK MANAGEMENT AND CAPITAL MANAGEMENT IN THE PZU GROUP The risk ad capital maagemet system i the PZU Group eables cotrol over risk ad a adequate level of capitalizatio associated with fiacial flexibility, which allows the compay to derive beefits from favourable busiess opportuities Risk maagemet For the risk to be udertake i a cotrolled maer the compay eeds reliable structure ad comprehesive risk maagemet procedures, which eable idetificatio, measuremet ad moitorig the extet to which the PZU Group is exposed to risk Priciples of risk maagemet Risk maagemet i the PZU Group rests upo three mai priciples: Takig cotrolled risks: fiacial stregth ad permaet growth of value costitute a itegral part of the PZU Group busiess strategy. I order to achieve these goals the PZU Group operates uder clearly defied risk policy ad risk cotrol limits; Clearly defied scope of resposibility: the PZU Group operates o the basis of task, competece ad resposibility delegatio with the delegated employees respo- sible for the risks they take ad their motivatioal stimuli tued with the compay s busiess targets; Flexibility i approachig risk: trasparecy ad resposiveess to chagig coditios of the busiess eviromet. The PZU Group popularized the process of sharig kowledge at particular orgaizatioal levels Risk maagemet structure Risk maagemet processes i the PZU Group are maaged by the followig bodies, committees ad orgaizatioal uits: Supervisory Boards, Maagemet Boards, Assets Liabilities Committee of the PZU Group, Committee for Fiacial Isurace ad Guaratee Risk PZU SA, Treasurer s Office (PZU SA/PZU Życie SA), Fiacial Isurace Office PZU SA, Reisurace Office PZU SA, Reisurace Team PZU Życie SA, Actuarial Office PZU SA, Actuarial Office PZU Życie SA, Product Maagemet Office PZU SA, Product Maagemet Office PZU Życie SA, Iteral Audit Office PZU SA, Iteral Audit Office Biuro PZU Życie. The Supervisory Boards defie the priciples ad policy of risk maagemet ad approve the level of risk tolerace for the PZU Group. Maagemet Boards are resposible for implemetig the risk maagemet system o the basis of recommedatios expressed by the followig committees: Assets Liabilities Committee of the PZU Group, which delieates recommedatios related to the maagemet of balace structure i order to provide the PZU Group ad its particular compaies with a appropriate level of security, solvecy ad profitability ad establishes recommedatios cocerig acceptable fiacial risk levels ad guidelies for uits ad etities maagig assets i the PZU Group compaies, Committee for Fiacial Isurace ad Guaratee Risk, which delieates the strategy of PZU SA i relatio to products from the fiacial isurace ad isurace guaratees segmet, grats limits of credit ivolvemet ad moitors the operatio of PZU SA i the field of major fiacial risk related to these isurace products. 54

57 The followig offices are i charge of idetificatio, estimatio ad cotrol of the risks that they assiged with: market risk Treasurer s Office (PZU SA/PZU Życie SA) credit risk Treasurer s Office (PZU SA/PZU Życie SA), Fiacial Isurace Office PZU SA, Reisurace Office PZU SA ad Reisurace Team Życie SA, risk i property ad casualty isurace Actuarial Office PZU SA, Product Maagemet Office PZU SA, Reisurace Office PZU SA, risk i life ad health isurace Actuarial Office PZU Życie SA, Product Maagemet Office PZU Życie SA, Reisurace Office PZU Życie SA, operatioal risk specific uits of the Iteral Audit Office of PZU SA ad PZU Życie SA. Risk maagemet i the PZU Group Supervisory Boards Treasurer s Office PZU SA/PZU Życie SA Maagemet Boards Fiacial Isurace Office PZU SA Assets Liabilities Committee Group PZU Committee for Fiacial Isurace ad Guaratee Risk Actuarial Office PZU SA Reisurace Office PZU SA Actuarial Office PZU Życie SA Reisurace Team PZU Życie SA Product Maagemet Office PZU SA Iteral Audit Office PZU SA Product Maagemet Office PZU Życie SA Iteral Audit Office PZU Życie SA 55

58 Risk areas i the PZU Group Risk maagemet, imprited withi the overall Group maagemet system, is idispesable for strategic plaig i the PZU Group. Apart from strategic risk, there are three risk categories i the PZU Group: basic risks (related to the coducted isurace activity), operatioal risks ad other risks. Basic risks are subdivided i the followig categories: Isurace risk cosists of the risk of icurrig fiacial loss or ufavourable chage i the value of isurace liabilities i coectio with iadequate premium ratig, iadequate assumptios related to the evaluatio ad formatio of reserves as well as possible force majeure evets (atural disasters). Market risk arises as a result of egative ifluece of chagig prices i the fiacial markets o the value of assets ad/or liabilities, such as chagig prices of shares, iterest rates, credit spreads, currecy exchage ratios or real property. Credit risk cosists i the risk of icurrig fiacial loss as a result of decreased credit reliability (drop i credit ratig) ad/or failure to fulfil a commitmet by the PZU Group busiess parters ad/or the busiess parters of beeficiaries of guaraties issued by the PZU Group. Risk classificatio i the PZU Group Basic risks Operatioal risks Other risks Isurace risk Huma resources Risk of fiacig ad solvecy Property ad casualty isurace Life ad health isurace Processes Systems Risk of reputatio Market risk Force majeure evets Shares Iterest rates Currecy exchage rates Credit spread Real property Credit risk Credit ratig migratio Bakruptcy 56

59 Risks classified as operatig risks ad other risks are of secodary importace ad arise i the course of coductig busiess activity. Operatioal risk icludes potetial loss resultig from iadequate or ureliable iteral processes, actios performed by people, systems, force majeure or o-compliace with the provisios of law, which causes sactios o the supervisor s side as well as iability to act i a appropriate maer. Maagig operatioal risk is aimed at dowsizig it to reach a acceptable level, as additioal operatig risk is ot directly related to the opportuity of acquirig additioal profit. The other risks category comprises the risks of fiacig ad solvecy as well as the risk of reputatio. The risk of fiacig ad solvecy stems from the iability of the PZU Group to cover short-term liabilities or icreased costs of acquirig fuds to fiace such liabilities. The risk of fiacig ad solvecy may also arise whe the iflow of cash is higher or lower tha expected or i the case of limited ability to obtai a sigificat icrease o fuds i a short period of time. The risk of reputatio is related to ay evets or actios, which may damage the reputatio of the PZU Group amog its customers ad busiess parters at the same time impedig the compay s effectiveess i operatio. As maitaiig a positive reputatio is a key factor for a compay operatig i the isurace ad fiacial sector, the PZU Group has defied the priciples ad values, adherece to which limits the risk of losig a good reputatio ad which is facilitated by procedures eablig early idetificatio of potetial problems. Maagemet of basic risks Risk appetite ad tolerace of takig risks i the PZU Group has bee defied i the form of limits approved by Supervisory Boards ad Maagemet Boards o the basis of the recommedatios of the PZU Group Assets Liabilities Committee ad the Committee for Fiacial Isurace ad Guaratees Risks PZU SA. Appropriate bodies withi the Group ascribe risk limits to lower orgaizatioal levels. risk of reserves results from iadequate estimatios of the techical reserves level combied with possible fluctuatios of factual loss aroud their mea value because of the stochastic ature of future isurace paymets; risk of catastrophe is related to the occurrece of force majeure evets, such as the atural disasters, pademics or terrorist attacks. The Product Maagemet Office PZU SA ad Product Maagemet Office PZU Życie SA are resposible for the product structure ad premium ratig based o the actuarial ad market risk assessmet. Alog with establishig premium ratigs, simulatios are performed to estimate the isurace results for the comig years. Moreover, the PZU Group coducts regular aalyses of premium adequacy ad portfolio profitability for particular isurace types o the basis of various rakigs ad aalyses, icludig assessmets of uderwritig results o a particular product for a give reportig period, assessmets of product profitability o the basis of the estimated value of isurace portfolios withi the Embedded Value model of calculatio. The frequecy of coductig such aalyses depeds o the dimesio of the product ad possible fluctuatio of the result. I the case of a ufavourable course of isurace, actios are udertake to restore a particular level of profitability, which iclude modificatios of premium ratig or eve chagig the etire profile of the isured risk by meas of modifyig particular provisios of geeral terms ad coditios of isurace. The Actuarial Office of PZU SA ad Actuarial Office of PZU Życie SA maage the risk of techical reserves adequacy by improvig the methodology of their calculatio as well as moitorig processes coected with establishig reserve limits. The policy of creatig reserves i the PZU Group is based o the followig factors: coservative approach to estimatig the amout of techical reserves; the cotiuatio priciple, accordig to which the methodology of creatig techical reserves ought ot to be modified uless special circumstaces arise. Isurace risk maagemet Isurace risk i the PZU Group comprises three types of risks: risk of premiums is based o iadequate estimatios of premium rates ad possible discrepacies betwee the expected level of premiums ad their actual value; 57

60 58 Adrzej Dailuk Deputy Treasurer Treasurer s Office My career i PZU SA started i 2003 i the Fiacial Ivestmets Office where I was ivolved i settig up ad maagig the Derivatives Departmet. I a relatively short period of time we acquire all the ecessary competecies ad become a importat participat i the market of structured products ad derivatives by makig may successful ivestmets. Last year I was offered a opportuity to face aother fasciatig challege as a PZU Group Deputy Treasurer. Treasurer s Office coects asset liability maagemet. This process, called ALM, is particularly importat ad complex i a isurace compay.

61 I the PZU Group the process of estimatig techical reserves is coducted uder the supervisio of the Chief Actuary. Moreover, every year there is a ispectio of reserves coducted by a exteral expert i order to examie the correctess of calculatio. The expert may also coduct the appraisal of isurace portfolios accordig to the Embedded Value calculatio model. The possibility of loss arisig as a result of atural disasters or other force majeure evets poses oe of the greatest threats to the operatio of the PZU Group. I order to provide protectio agaist fiacial loss resultig from atural disasters, the PZU Group moitors areas threateed by their occurrece ad the takes relevat decisios, such as limitig the policy portfolio for a give geographical regio or itroducig amedmets to policies (limits, frachises, exclusio of liability) or a limited scope of coverage for a give product. A sigificat role i catastrophe-related risk maagemet is played by the optimizatio of the reisurace programme through specifyig the level of priority as well as reisurace limits (capacity of the reisurace agreemet), o the basis of results of catastrophic scearios. The PZU Group developed its ow model of catastrophic loss developmet ad itroduced procedures, which allow recordig paymets resultig from catastrophe-related loss i special domais of the system. This model eables moitorig catastrophic risk o a regular basis ad calculatig the probability of a similar type of loss occurrig i future. Market risk maagemet Market risk i the PZU Group comes from two major sources: ivestmet activity of PZU Asset Maagemet SA, sesitivity of the preset value of liabilities to chagig iterest rates. Priciples ad stadards of market risk maagemet were defied i the Statutes of ivestmet activity (Regulamiy działalości lokacyjej) ad Ivestmet objectives ad guidelies (Cele i wytycze iwestycyje). Acceptable scope of market risk is defied by the PZU Group Assets Liabilities Committee i the form of geeral limits pertaiig to ivolvemet i fiacial istrumets. A sigificat role i the process of market risk maagemet is played by the Treasurer s Office (PZU SA/ PZU Życie SA), which maages the strategic portfolios of debt securities i order to moitor the dates o which they are due ad the amout of liabilities at the same time exercisig day-today cotrol over the risk of ivestmet activity ad specifies the amouts of security limits pertaiig to assets for PZU Asset Maagemet SA. O the basis of these limits PZU Asset Maagemet SA defies the structure of risk limits for its ivestmet activity together with the stop loss mechaism referrig to the portfolios whose bechmark is based o absolute rate of retur. The uit that maages the PZU Group assets is resposible for measurig the market risk it geerates. O a daily basis the Treasurer s Office prepares a Report o icurred risk ad ivestmet results (Raport o pooszoym ryzyku i wyikach iwestycyjych), which is the passed forward to the Maagemet Boards PZU SA i PZU Życie SA. The Maagemet Boards of particular compaies assess the risk of ivestmet activity o the basis of fiacial models recommeded by the PZU Group Assets Liabilities Committee, which are desiged to determie the optimum structure of assets o the basis of the aalysis of liabilities with the recogitio of acceptable iadequacy gaps ad risk of solvecy as well as ratios of ivestmet risk for particular types of ivestmets. Credit risk maagemet Exposure of the PZU Group to credit risk is directly related to its ivestmet activity, operatio i the segmet of fiacial isurace ad guaratees ad reisurace cotracts. The PZU Group distiguishes betwee three types of exposure to credit risk: the risk of bakruptcy o the side of the issuer of fiacial istrumets, which the PZU Group ivests i or trades with, e.g. corporate securities; the risk of default i performig a commitmet by the PZU Group s busiess parter, e.g. reisurer or over-thecouter derivative fiacial istrumets; the risk of default i performig a commitmet by the PZU Group s customer towards a third party, e.g. isurace of a trade credit, fiacial guaratee. The priciples of maagig credit risk which stems from ivestmet activity are specified i the Statutes of ivestmet activity (Regulamiy działalości lokacyjej) ad Ivestmet objectives ad guidelies (Cele i wytycze iwestycyje). The PZU Group Assets ad Liabilities Committee specifies the limits of ivolvemet ad the limits of credit risk for the portfolios of credit risk ad defies etities with or through which the PZU Group may make trasactios together with the ivolvemet limits they were ascribed with. Prior to be beig approved by the PZU Group Assets Liabilities Committee, credit limits for particular etities are thoroughly aalyzed by the Treasurer s Office with respect to the etity s fiacial stregth, market positio ad selected qualitative aspects. Moreover, the Treasurer s Office regularly, ad o less ofte tha oce every three moths, examies ad assesses the fiacial coditio of the issuers of fiacial istrumets withi credit risk portfolios. 59

62 The members of Maagemet Boards of PZU SA ad PZU Życie SA are updated o a daily basis by meas of the Report o icurred risk ad ivestmet results (Raport o pooszoym ryzyku i wyikach iwestycyjych) prepared by the Treasurer s Office, which icludes iformatio cocerig the allocatio of specified limits to particular credit risk portfolios. Credit risk related to operatio i the segmet of fiacial isurace ad guaratees cosists primarily i the dager of default by the PZU SA customer i performig commitmets towards third parties. This dager is geerally a result of eterprise failure or ufavourable ifluece of the ecoomic eviromet. A acceptable scope of credit risk related to the operatio of the Fiacial Isurace Office is specified by the Committee for Fiacial Isurace ad Guaratee Risk i the form of credit ivolvemet limits divided ito exposure, product lies ad regioal PZU SA uits. The task of the Fiacial Isurace Office cosists of measuremet ad cotrol of the icurred credit risk through comprehesive assessmet of etity s risk level at the stage of reviewig the applicatio form o the basis of the aalysis of quatitative ad qualitative factors ad trasactio risk as well as i moitorig the fiacial stadig of the customers who were awarded a guaratee or isurace of liabilities. Moreover, the Fiacial Isurace Office regularly moitors the portfolio of fiacial isurace ad guaratees, with respect to exposure to risk, territorial cocetratio or ivolvemet i a sigle etity ad capital group. Operatioal risk maagemet Operatioal risk maagemet costitutes a itegral part of risk maagemet structure i the PZU Group. A sigificat role i the process of operatio risk maagemet is performed by Iteral Audit Offices, which idetify ad assess operatioal risk factors Capital maagemet The Treasurer s Office is resposible for optimum use of the Group s fiacial resources by implemetig a appropriate capital maagemet policy. The priority of the PZU Group is to possess the level of capital which allows it to maitai fiacial stregth eve after icurrig huge loss ad respodig to the capital requiremets of particular compaies of the PZU Group. The Treasurer s Office heads for maitaiig the optimum structure of capital withi the PZU Group, which eables maitaiig fiacial flexibility alog with optimum fiacig costs. Capital adequacy I order to assess capital adequacy the PZU Group estimates the amout of ecoomic capital, i.e. the capital ecessary to cover uexpected loss, ad the calculates the amout of available capital accordig to QIS 3 methodology. As of 31 December 2006 the capital adequacy coefficiet, which is a quotiet of available capital ad estimated ecoomic capital amouted to 603% for the PZU Group, with 495% ad 482% for the Group s major compaies PZU SA ad PZU Życie SA, respectively. Fiacial stregth ratig ad credit ratig The major PZU Group compaies have bee assessed with the fiacial stregth ratig (FSR) ad credit ratig (CR) by the Stadard & Poor s agecy, which has bee workig with the PZU Group sice I 2007 the agecy cofirmed its A-/Negative/ fiacial stregth ad credit ratig of isurace compaies for PZU SA ad PZU Życie SA. The basic factors ifluecig high ratig level ivolve high capitalizatio, very high operatioal results, strog competitive positio i the Polish isurace market ad high level of brad recogitio i Polish society. 60

63 9. REINSURANCE Reisurace policy of the PZU Group The year 2007 saw a cetralizatio of reisurace activities coducted by PZU SA ad PZU Życie SA which eables creatig effective reisurace programmes to protect the isurace portfolios of both compaies ad provides cosistet moitorig of the plaig ad executive processes. The reisurace programme of PZU SA i 2007, which was performed through obligatory agreemets ad facultative reisurace treaties, cosequetly provided security to the core busiess by reducig the risk associated with pheomea which could adversely affect the fiacial coditio of PZU SA. The PZU SA reisurace programme i 2007 cosisted of seve obligatory reisurace treaties, a several doze reisurace agreemets ad several service agreemets supportig sales processes ad risk assessmet. Similar to previous years, PZU SA worked with leadig reisurace compaies (icludig Muich Re, Lloyd s, Haover Re, SCOR Re ad Swiss Re). I 2007, obligatory reisurace treaties were placed with over 30 reisurace compaies. Over 95% of reisurace premiums were ceded to reisurace compaies with Stadard & Poor s ratig of A or above. The reisurace cost as a percetage of premiums ceded to gross premiums writte i 2007 stood at a level similar to the previous year ad amouted to 1.9%. Catastrophe risks As part of the risk accumulatio project, i 2007 PZU SA cotiued to aalyze the scale of the compay s isurace portfolio exposure to the risk of floodig ad hurricaes. The results of this work were used i the reewal process, allowig for egotiatio of better price coditios for a catastrophe treaty. Iward reisurace Similar to previous years, with regard to iward reisurace, PZU SA supported domestic isurace compaies, with both facultative ad obligatory reisurace. I 2007, PZU SA coordiated the process of buildig a reisurace programme ad developig its structure together with UAB DK PZU Lietuva ad OJSC IC PZU Ukraie. The compay also cotiued its ivolvemet i reisurace for its subsidiaries as their reisurer. PZU Życie SA was ot ivolved i iward reisurace i Reisurace i PZU Życie SA i 2007 focused maily o protectig the portfolio agaist the accumulatio of catastrophe-related risks. Additioally, as of 2007 the compay has bee protected agaist extesive loss from idividual policies of high sums isured or agaist accumulatig claims ad beefits from a large umber of policies. Also i 2007 the process of developig ew isurace products based o the kow-how of reisurace experts bega, which may ehace the amout of reisurace cotracts cocluded i the upcomig years. 61

64 10. ASSET MANAGEMENT Activities of PZU Asset Maagemet SA i 2007 Asset maagemet was the oly type of brokerage activity performed by the Compay i Withi this remit, PZU Asset Maagemet SA maaged the assets of basic product compaies of the PZU Group, i.e.: PZU SA, PZU Życie SA, TFI PZU SA fuds, assets of the MPTE fud Słoecza Jesień. The asset portfolio maaged by PZU Asset Maagemet SA As of 31 December 2007, PZU Asset Maagemet SA maaged assets amoutig to PLN 25.6 billio. I 2007, assets uder maagemet grew by 11%. The share of TFI PZU SA s assets i the portfolio rose sigificatly at the ed of 2006 it amouted to 7.1%, while at the ed of 2007 it exceeded 10.1%. The share of PZU SA assets ad PZU Życie SA assets i the portfolio dropped (from 48.9% to 47.3% ad from 43.8% to 42.2%, respectively). I 2007 PZU AM SA bega to maage a ew TFI PZU SA fud PZU FIO Optymalej Alokacji (Optimum/Active Allocatio). Throughout the whole of 2007 works were cotiued to create Real Estate Property Sector Closed Ivestmet Fud, which is scheduled to be lauched i the first half of At the ed of December 2007, the PZU Asset Maagemet SA employed 43 people, icludig seve ivestmet advisor licece holders. Assets maaged by PZU Asset Maagemet SA broke dow ito PZU Group compaies as of 31 December 2007 Source: The PZU Group PZU SA 47.3% PZU Życie SA 42.2% MPTE PZU SA 0.4% TFI PZU SA 10.1% 62

65 11. RATING O 6 August 2007, Stadard & Poor s cofirmed its A /Negative/ ratig for the mai isurace compaies of the Group (PZU SA ad PZU Życie SA). Justifyig its positio i the aalytical report, the agecy cited the strog competitive positio of the PZU Group, its excellet operatig performace ad high capitalizatio, which ehaced the ratig. The most sigificat factor to affect the assessmet i a egative maer was related to the ope questio of the ifluece of political risk o PZU SA operatio, see as a possibility of itervetio ito the compay s activity by its major shareholder, the Polish Treasury, at the time of escalatig coflict betwee shareholders. The isecurity cocerig the shareholders ifluece o the operatio of the PZU Group ad its future developmet perspectives at the time of persoel reshuffles i compositios of major compaies Maagemet Boards was the justificatio the aalysts used for maitaiig a egative ratig positio. Stadard & Poor s stated that if these cocers are elimiated, the ratig outlook should be brought back to stable. This, however, ca oly happe if the followig agecy expectatios are fulfilled: it is expected that PZU SA will cotiue to geerate a very good operatig performace, maitaiig the Combied Ratio at a average level of 95% ad ROE cosiderably higher tha 15%; it is expected that the PZU Group will maitai a high capitalizatio level, as required for AA ratig (i lie with Stadard & Poor s capital model requiremets) ad high quality of fuds, alog with adequate reisurace cover ad reserves level. 63

66 12. DIRECTIONS OF PZU GROUP DEVELOPMENT The Group s strategy ad its implemetatio Curret corporate strategy is the Group Strategy adopted by PZU SA Maagemet Board, PZU Życie SA Maagemet Board, PTE PZU SA Maagemet Board, TFI PZU SA Maagemet Board o 17 November 2007 ad subsequetly approved by PZU SA Supervisory Board o 29 November 2005 ad PZU Życie SA Supervisory Board o 19 December I the years the mai objectives were achieved oly partially ad the implemetatio of selected strategic iitiatives was ot started. Sice 2005 market coditios have chaged ad the fiacial force of the PZU Group is sigificatly greater. Therefore, the preset Maagemet Board of the PZU SA aims to outlie a ew Group strategy as the market leader the major fiacial istitutio i Polad ad i Cetral ad Easter Europe based o defied priorities of coduct as far as crucial markets, cliet groups, distributio chaels ad customer service are cocered. The year 2007 was characterized by a large accumulatio of iitiatives desiged to implemet strategy ad aalyze the possibilities of realizig the visios of the PZU Group for The assessmet of strategic objectives performace level has cofirmed the ecessity of icreasig the dyamics of fulfillig the assumptios of strategic iitiatives ad the eed to verify ad modify of the project portfolio with respect to the completio of strategic aims. Implemetatio of strategy was realized i spheres which are crucial for the amout of icome ad effectiveess of the PZU Group operatio. They iclude: customer orieted sales orgaizatio, foreig expasio, operatig efficiecy, efficiet maagemet. The implemetatio of strategy was coducted both through project iitiatives ad day-to-day operatio of the PZU Group. Customer orieted sales orgaizatio The mai priority cocerig the chages of sales orgaizatio i the PZU Group cosisted i refocusig the emphasis from particular products to customers eeds, followed by itegratio of the PZU sales processes. The tasks dealt with i 2007 were desiged to maitai a high uderwritig result ad eabled the PZU Group to retai its positio as the major Polish isurer. The product portfolio of the PZU Group was tailored to the customers eeds through, for example, developig ew products for the SME sector (i the field of fiacial isurace), ad reorgaizig the rage of products offered by PZU Życie SA ad improvig the completeess of the offer. Particular emphasis was placed o the developmet of products from the bacassurace segmet. Moreover, the project iteded to delieate the strategy of the PZU Group developmet o the health isurace market was iitiated. Efforts were itesified to implemet the model of sales ad maagemet for hospital isurace. Isurace rates offered by the PZU Group were maitaied at a competitive level at the same time retaiig sigificat profitability. O the motor isurace market the PZU Group maaged to resist the tred of price icreasig as a respose to additioal fiscal costs for isurers, thus the rates remaied uchaged. I the year 2007 the PZU Group cotiued itroducig iovatios cocerig orgaizatio, maagemet ad developmet of sales. The most importat modificatios ivolved the revitalizatio of the agecy etwork. Both property ad casualty isurace products ad life isurace products were complemeted with detailed models of maagemet ad operatio of agecy etwork. Moreover, PZU SA implemeted a uiform model of Office-Agecies operatio ad completed the developmet of a IT system aimed at facilitatig the work of agets which was subjected to trial tests. Positive results of these tests made it possible to start workig o the atiowide implemetatio of the system. Works aimed at improvig the activity of the dealers chael were also i progress. Alog with the activities aimed at boostig the effectiveess of traditioal sales chaels, the cocept of the Direct chael of the PZU Group was developed. All activities related to sales ad product developmet were supported with atiowide campaigs such as the oe promotig the compulsory motor third party liability isurace Oswoić emocje (Coolig dow emotios) ad Miej iż zero (Less tha zero) or the advertisig campaig for the Strefa Zysku (Profit Zoe) product. Owig to itesive work ad effort, the PZU Group maaged to maitai the positio of leader i most isurace market segmets. The assessmet of target completio suggests a high potetial of syergy betwee the property ad casualty isurace ad life isurace segmets. 64

67 Operatioal efficiecy Alog with the activities aimed at boostig sales levels, work was coducted to improve service efficiecy, which should be visible through the improved retur o isurace activity ad elevate the levels of satisfactio with respect to both idividual ad istitutioal customers workig with PZU. Oe of the major directios of service improvemet cosisted i cotiued automatio ad cetralizatio of the essetial processes i particular compaies. PZU SA completed the migratio of selected products to the cetralized product system kow as the Isurer. The customer database was stadardized ad cleaed, owig to which uaimous ad comprehesive etries were formed icludig (i the case of idividual customers) possessed products, curret premium rates ad available discouts. At the same time, the cocept of the fiacial isurace maagemet system was worked o, alog with efforts to implemet the maagemet system for isurace for corporate cliets (Corpo). PZU Życie SA cotiued to implemet further activities aimed at creatig a cetralized system for the maagemet of group isurace ad uitliked isurace products. Moreover, a system for automatic registratio of the data pertaiig to the members of group isurace schemes was created ad the trial versio of the solutio was prepared. Aother facility withi the back-office field of PZU Życie SA i 2007 was the implemetatio of the workflow tool eablig electroic maagemet of documets, documet circulatio ad recordig cotracts. Improvemet of isurace maagemet icluded activities aimed at optimizig claims hadlig i property ad casualty isurace ad life isurace. I the field of propertyrelated loss adjustmet, trials were coducted ad ew solutios cocerig adjustmet of persoal property loss itroduced, which are expected to miimize the average time eeded for claims hadlig. I order to facilitate the process of life isurace-related loss adjustmet, the cocept of a cetralized IT system was put forward to maage the claims hadlig process. Also i 2007 a umber of iitiatives aimed at improvig the efficiecy of supportig the core activity of the PZU Group compaies took place. With respect to the PZU SA Fiace ad Accoutig Cetre (CFK), which overtook the majority of tasks cocerig accoutig i the field of costs ot related to isurace activity, a cocept was itroduced to exted its scope of activity by persoel ad remueratio maagemet of particular compay s regioal braches. PZU Życie SA was workig o a aalogical project (Reorgaizatio of Accoutig Structures), o the basis of which a cetre would be established to maage the accoutig of costs ot related to isurace activity for the etire compay. I the field of purchasig policy PZU SA ad PZU Życie SA iitiated joit activities cocerig the establishmet ad implemetatio of a uiform model of a purchasig istitutio, which would allow full exploitatio of the ecoomies of scale ad optimize the costs of purchasig processes i both compaies. Foreig expasio I 2007 the PZU Group focused its foreig expasio o the orgaic developmet of its compaies i Lithuaia ad the Ukraie. Simultaeously, the Cetral ad Easter Europea markets were moitored for possible acquisitios. Operatioal ad formal requiremets of the PZU Group foreig compaies i 2007 required icreasig their share capital, which amouted to LIT 5 millio i UAB PZU Lietuva Gyvybës Draudimas, UAH 150 millio i OJSC IC PZU Ukraie ad UAH 3.5 millio i the case of OJSC IC PZU Ukraie Life Isurace. I 2007 PZU SA cotiued fiacial support for the compay i the Ukraie i order to improve its competitiveess ad assist i solvig the most urget operatioal ad maagerial problems. Day-to-day cooperatio betwee the compaies helped to develop a optimum model of experiece exchage ad the chael of kowledge trasfer betwee Polad ad the Ukraie. Improved efficiecy of the PZU Ukraie maagemet is expected to become visible i the form of a icreased market share. The experiece acquired i the course of maagig foreig compaies eables the PZU Group to cout o favourable prospects of further expasio towards the Cetral ad Easter Europea markets. 65

68 Efficiet maagemet system Upgradig of the maagemet system i 2007 focused o the implemetatio of ew security policy i the PZU Group. Additioally, the revisio of iteral maagemet procedures was iitiated i PZU SA ad PZU Życie SA, which is aimed at adjustig the procedures to corporate eeds ad ehacig their cosistecy i relatio to other provisios as well as elimiatig obsolete procedures which are ot applicable to processes i progress at the momet. PZU Życie SA developed a uiform system of reportig iformatio to the Maagemet Board ad directors of particular uits, owig to which the scope of iformatio is stadardized ad it becomes shorter ad simpler to prepare ad had i reports. As far as IT is cocered, PZU Życie SA itroduced a more detailed model of IT maagemet ad the model of cooperatio betwee IT ad Busiess. What is more, a ew orgaizatioal IT structure was implemeted o the basis of the guidelies i IT Goverace. Additioally, the cocept ad operatioal model of cooperatio betwee PZU Życie SA ad the CIG PZU SA (PZU Group IT Cetre Compay) was lauched. I 2007 the cooperatio betwee IT ad busiess i PZU SA was regulated by the Committee for Busiess ad Techology, which was i charge of maitaiig day-to-day commuicatio of eeds betwee the two spheres. I the field of huma resources, activities were i progress to optimize persoel maagemet processes ad update the tools for huma resources maagemet. A joit project of PZU SA ad PZU Życie SA was iitiated with the itetio of creatig descriptios of areas of resposibility for particular compay positios ad implemetig a itegrated system of resposibility maagemet. Moreover, work o cetralizatio of the persoel maagemet ad remueratio services i the field of property ad life isurace was cotiued New Corporate Goverace I 2007 the Headquarters of PZU SA ad PZU Życie SA saw cotiued operatio of the uified offices, the establishmet of which was brought about by itegratio activities carried out as part of the New Corporate Goverace (NCG) project. Areas of shared services which cover purchasig orgaizatio, marketig, supplies, real estate maagemet, asset maagemet, persoel maagemet ad services for statutory bodies were maaged i a uiform ad cosistet maer withi the etire PZU Group. Similarly, all maagemet procedures were adjusted to uiform formulas i both PZU SA ad PZU Życie SA. O the basis of aalyses coducted i the course of the New Corporate Goverace ad i order to maximize the syergy results, eeds were idetified i relatio to itegratig activities i particular fields of commo services ad corporate fuctios, such as the cocept of a commo cetre of maagemet ad moitorig of shared iformatio ad commuicatio techology (ICT) ifrastructure for PZU SA ad PZU Życie SA. The implemetatio of the PZU Group orgaizatio model based o a two-layered holdig structure will be possible oly after the coflicts betwee shareholders have bee solved ad agreemet reached amog key shareholders i relatio to the ultimate model of the PZU Group maagemet system. O 30 Jue 2007 the Ordiary Geeral Meetig of the PZU SA shareholders adopted a resolutio o the ew model of corporate goverace, thus ecouragig the Maagemet Board to re-aalyze it from the perspective of possible risks for the compay, fiacial profits ad compliace with the provisios of law. Further activities directed at implemetig the best corporate goverace practices i the PZU Group are scheduled to follow i

69 Veroica Di Folco-Zembaczyńska Seior Specialist Advertisig Team Corporate Commuicatio ad Marketig Office Workig i the field of marketig of a compay as big as PZU offers vast opportuities of professioal developmet ad educatio. I always wated to work i the marketig departmet of a big compay. Workig for PZU met my expectatios. Here, I have the chace to cooperate with professioal parters i the course of desigig may iterestig projects ad the effects of my efforts always brig me a lot of satisfactio.. 67

70 12.3. Foreig ivestmets of the PZU Group The PZU Group has bee preset i the foreig isurace markets for 6 years. The year 2007 couted primarily as a period of restructurig of the compaies operatig i Lithuaia (UAB DK PZU Lietuva ad UAB PZU Lietuva Gyvybës Draudimas) ad i the Ukraie (OJSC IC PZU Ukraie ad OJSC IC PZU Ukraie Life Isurace). Polish PZU Group compaies actively participated i the process of developig the foreig compaies. The first project of support for the foreig compaies from the Polish oes was lauched based o the trasfer of best practices, kowledge ad experiece from the selected fields of activity. Oe of the most sigificat evets i the field of foreig ivestmets of the PZU Group cosists i icreasig the share capital of the foreig compaies, which amouted to LIT 5 millio i UAB PZU Lietuva Gyvybës Draudimas, UAH 150 millio i OJSC IC PZU Ukraie ad UAH 3.5 millio i the case of OJSC IC PZU Ukraie Life Isurace. PZU SA is i possessio of all ewly issued shares or acquired a appropriate amout accordig to the percetage share i the capital. The PZU Group will moitor ad aalyze developmets i the foreig markets, with particular attetio to possible acquisitios ad extedig the scope of activity i Cetral ad Easter Europe Operatios of UAB DK PZU Lietuva ad UAB PZU Lietuva Gyvybës Draudimas Losses icurred durig previous years resulted i the fact that the activities of UAB DK PZU Lietuva ad UAB PZU Lietuva Gyvybës Draudimas i 2007 focused o restructurig ad improvemet of their profitability. I order to achieve this, strict cost moitorig procedures were itroduced alog with a ew ivestmet policy ad actios aimed at diversifyig the isurace portfolio ad stabilizatio of loss ratios. The process of restructurig of the retail sales etwork ad itroductio of the cross sellig model of sales were accelerated ad a umber of iitiatives udertake to facilitate the maagemet of policyholders debts ad the developmet of IT systems. I 2008 the Lithuaia compaies are plaig to icrease their market share, at the same time maitaiig the profitability of operatio ad iitiatig ew projects to boost the market positio of the compaies (e.g. automatio of processes, automatic policy reewals, olie sale). Fiacial results ad market positios of UAB DK PZU Lietuva ad UAB PZU Lietuva Gyvybës Draudimas UAB DK PZU Lietuva Gross premium writte i 2007 amouted to LIT millio ad were 43% higher tha the premium i 2006 (LIT 114 millio). Net profit of 2007 reached LIT 4.4 millio, compared to LIT millio i The market share as of the ed of 2007 was 12.5%, makig the compay the third largest property ad casualty isurer i Lithuaia. UAB PZU Lietuva Gyvybës Draudimas Gross premium writte i 2007 amouted to LIT 14.1 millio, 52% up o 2006 (LIT 9.3 millio of premium). Net profit of 2007 amouted to LIT 4 millio compared to LIT -3.9 millio i Market share as of the ed of 2007 was 2%, placig the compay i sixth place i the Lithuaia life isurace market. 68

71 Operatios of OJSC IC PZU Ukraie ad OJSC IC PZU Ukraie Life Isurace The year 2007 was a period of itesive restructurig for the Ukraiia compaies, pertaiig mostly to the reductio of admiistrative costs, improved profitability of the product portfolio ad regulatio of claims ad beefits paymets. O the basis of assumptios cocerig the directios of compay developmet, restructurig was performed i all spheres of activity (maagerial, orgaizatioal, cost-related ad operatioal). The process of optimizig of the curret distributio etwork was iitiated by idetifyig uits which geerate losses, whose costs were the combied with the results they record. I order to provide perspectives for the compaies developmet the revisio of sales outlets was started. Also i 2008 the compaies are plaig to cotiue activities aimed at icreasig cost effectiveess of the regioal uits. Moreover, their plas ivolve achievig a dyamic icrease i the uderwritig result, icreasig their market share ad retaiig a balaced portfolio of isurace products. Fiacial results ad market positios of OJSC IC PZU Ukraie ad OJSC IC PZU Ukraie Life Isurace OJSC IC PZU Ukraie Gross premium writte i 2007 totalled UAH 154 millio, 20% less premiums that were collected i 2006 UAH (184.3 millio). Net profit of 2007 amouted to UAH 1.2 millio agaist UAH millio i The market share reached 3.6% at the ed of 2007, placig the compay thirteeth i the Ukraiia property ad casualty isurace market. OJSC IC PZU Ukraie Life Isurace Gross premium writte i 2007 totalled UAH 15 millio, up 34% o premium i 2006 (UAH 11.2 millio). Net profit of 2007 amouted to UAH -8.2 millio agaist UAH -8.5 millio i The market share reached 2.5% at the ed of 2007, placig the compay teth i the Ukraiia life isurace market Developmet projects ad mai objectives of the PZU Group compaies i 2008 The PZU Group will strive to cosolidate its positio as the leadig fiacial istitutio i Polad ad Cetral-Easter Europe through maitaiig the growth of icome i its core activity. I the field of strategic operatios clear guidelies will be defied with respect to maagig the Group s compaies, icludig the selectio of staff i the supervisory bodies (corporate goverace priciples will be itroduced). Uified structures withi the Group will be promoted ad exteded i order to stadardize the processes, exchage kowledge ad achieve cost syergy. The team of competet professioals will be restored. A ew strategy of the PZU Group will be defied o the basis of priorities for the most sigificat markets, customer groups, distributio chaels ad customer service. Major objectives of PZU SA operatios i 2008 iclude: achievig the total premium writte icrease exceedig 6% ad reducig the pace of market share loss, maitaiig high profitability of the isurace portfolio ad reducig loss ratio through activities aimed at improvig the retur o motor ow damage isurace ad compulsory motor third party liability isurace i the corporate cliet segmet, itroducig ew motor isurace products, modificatios of existig products ad itroducig ew homeowers ad householders isurace ad ew agriculture isurace, further developmet ad improvig the efficiecy of existig distributio chaels, which icludes the establishmet of a cetrally maaged etwork of agets with clearly defied segmets, commissio structure ad appropriate support; at the fial stage this etwork will be workig for the etire group ad usig the cross-sellig opportuities, itroducig direct sale of motor isurace products, maitaiig cooperatio with parters from the bakig sector ad achievig a stable positio i this market, miimizig the icrease of operatig costs by meas of a cetralized, professioal purchasig system for all compaies of the PZU Group, review of project activity i order to verify its usefuless ad profitability for the compay; itroducig a set of actios aimed at improvig customer relatios ad reducig operatig costs, maitaiig appropriate fiacial security ratios ad icreasig the size of ivestmet portfolio possessed by PZU SA while receivig a high retur o ivestmets. 69

72 The year 2008 is iteded to focus o developmet of the rage of products offered by PZU Życie SA i all distributio chaels ad orieted towards the middle class ad mass customers, both with respect to group isurace ad idividual isurace schemes. The plas iclude extedig the ivestmet opportuities by additioal fuds withi the group pesio scheme kow as Pogoda Jesień (Bright Autum), which will allow ivestig the employees fiacial surplus ad creatig a ew rider for cover isurace. New riders will also be offered i the segmet of idividually cotiued isurace. The idividual isurace field will focus maily o structured products, which are to be see as a respose to the ew situatio at the Polish fiacial market. I 2008 the segmet of isurace for corporate ad idividually cotiued cliets will see a umber of activities aimed at maitaiig the strog positio of the compay i the group isurace market. These iclude: ew system of premium ratig of the group employee isurace kow as the P Plus Type, eablig the Corporate Sales Network ad the Agecy Sales Network to offer more attractive coditios i ewly cocluded group isurace cotracts, extedig the scope of resposibility for the Corporate Sales Network ad the Agecy Sales Network, which will allow the compay to react to the requiremets of the market i a quicker ad a more precise way (which ehaces the compay s competitiveess), activities aimed at itesifyig the sales of riders through a atiowide campaig of commissioed sale (e.g. coverage i the case of specialist treatmet, surgical procedures, severe disease), moderizatio of the product rage for small ad medium eterprises PZU Ochroa Plus; itroducig ew isurace schemes desiged accordig to the suggestios of the Agecy Sales Network ad possible premium discouts will additioally emphasize the compay s leadig positio, itroducig a ew rider which will offer ivestmet possibilities withi the cover isurace scheme, revitalizatio of the rider for group isurace kow as Expert, which covers medical cosultatios outside territory of Polad, by extedig the scope of cover without chagig the premium rate, as well as by icreasig customer awareess of the isurace. Health isurace developmet i 2008 cosists i lauchig Opieka Medycza (Health Care) hospital isurace products together with the assistace services for idividuals ad groups. PZU Życie SA is plaig to work o iovative isurace solutios able to attract more ad more demadig bak customers. Efforts will primarily be directed towards developig a iovative ad attractive rage of ivestmet isurace products. The developmet of these products is heavily depedet o agreemets with parters from the bakig sector. The plas of the PZU Group cocerig bacassurace are much more ambitious i 2008 compared to the previous year. The compay wats to implemet them by developig cooperatio with strategic parters as well as cotiued efforts aimed at wiig ew customers. PTE PZU SA is expectig a improvemet of fiacial results i the comig years. As i previous years, this will largely be due to the collectio of premiums ad settlig all liabilities towards the Fud s members for overdue premiums trasferred by Zakład Ubezpieczeń Społeczych as well as maitaiig fiacial disciplie by all compay uits. Sice 26 Jue 2001 Powszeche Towarzystwo Emerytale PZU SA has held the quality certificate which cofirms the adherece to the requiremets of PN-EN ISO 9001:2001 i relatio to the maagemet of the PZU Ope Pesio Fud Złota Jesień. I 2008 the compay plas to maitai the quality certificate, make preparatios for the implemetatio of the MRPI class Itegrated System of Resource Maagemet ad participate i the Polish Quality Award (Polska Nagroda Jakosci) 2009 competitio. All activities udertake by the compay i 2008 will aim at maitaiig ad stregtheig the preset market positio of the PZU Ope Pesio Fud Złota Jesień Złota Jesień (Bright Autum). The compay iteds to achieve these aims by implemetig a ivestmet policy aimed at ehacig the growth i uit s accout value, which, i tur, produces a icrease i the value of the Fud s fiacial resources as well as by efficiet commuicatio with Fud members usig moder ad widely accessible commuicatio chaels (the Iteret, call cetres). I 2008 the compay plas to improve its competitiveess i the idividual isurace segmet by expadig the product rage i both i cover ad ivestmet products ad developig ad improvig sales chaels. 70

73 13. CORPORATE SOCIAL RESPONSIBILITY OF THE PZU GROUP While examiig the PZU Group activity oe should ot overlook the iitiatives which fulfil the priciples of Corporate Social Resposibility (CSR). These operatios cotribute to buildig trasparet relatioships with various groups of busiess parters. The CSR-related activities stem from the persoel policy ad marketig strategy represeted by the PZU Group. The CSR operatios of the PZU Group ivolve health protectio, promotig educatio ad public safety. Patroage of Polish art ad culture has for years bee a strategic directio of sposorship activity of the PZU Group. The PZU Group fiaces its corporate social resposibility ageda usig a prevetative fud ad, to some extet, also sposorship moey. The PZU Foudatio is a importat elemet i this area supportig philathropic activities i the areas of educatio, culture ad the arts, social help ad health care Prevetive activity PZU for safety The prevetive activity of the PZU Group is aimed at miimizig risks to huma life ad health ad protectig persoal property. As i the previous years, the prevetive activity of PZU SA i 2007 focused o improvig road safety, both with respect to drivers ad pedestrias. I 2007 PZU SA also cotiued the prevetative programme Fleet Safety bezpiecze auto firmowe (Fleet Safety) together with Iteret Prasa Media Publishig House ad the Polish Motor Associatio. This is the first project i Polad of this scope aimig to improve fleet driver safety ad reduce geeral fleet operatig costs of compaies. The programme is targeted at compaies with fleets, at maagerial staff ad executives, compay drivers, muicipal compaies ad specialized services. The programme ivolves a series of traiig courses ad educatioal meetigs. Out of cocer for the yougest road users, PZU SA cotiued its educatioal ad prevetative Bezpiecza szkoła z PZU (Safe School with PZU) programme iitiated i This is pricipally iteded to reduce the umber of road accidets ivolvig childre ad teeagers ad mitigate their effects. Several thousad Polish elemetary schools joied the programme. I yet aother of its prevetative programmes Bezpiecze lato z PZU (Safe Summer with PZU), PZU SA ad PZU Życie SA coducted prevetive campaigs i a umber of seaside resorts. Their mai objective was to educate people o how to act i a safe way both i the holiday period ad throughout the whole year. I 2007 PZU SA ad PZU Życie SA doated PLN 20 millio to a ew prevetive Blisko boisko, programme which is coducted together with the Miistry of Sport ad is aimed at orgaizig football pitches covered with sythetic grass (i order to elimiate hard surfaces). The programme is desiged to improve safety i schools ad other educatioal istitutios ad promote a healthy lifestyle. The prevetive activity coducted by PZU SA ad PZU Życie SA iclude cotiued cooperatio with Tatrzańskie Ochoticze Pogotowie Ratukowe (Tatra Volutary Moutai Rescue, TOPR) ad GOPR (Volutary Moutai Rescue). I 2007, as i previous years, PZU SA ad PZU Życie SA made a doatio from the prevetive fud to help pursue the statutory objectives of TOPR ad GOPR. PZU for health I 2007, the PZU Group cotiued a programme fiaced from the prevetio fud called Aktywuj się z PZU Życie (Get Active with PZU Życie) aimed at ecouragig Poles to take up active ad healthy lifestyles, but also to educate the target groups about the beefits of physical activity i the prevetio of chroic diseases ad to promote prevetive attitudes i society. Aktywuj się z PZU Życie cosists of three compoets targeted at differet groups, i.e. compaies with group isurace i PZU Życie SA, primary ad secodary school studets as well as studets ad lecturers of medical colleges. 71

74 13.2. Sposorship activity PZU for culture ad the arts Support for Polish atioal art ad culture has for years bee a strategic directio of the sposorship ad prevetive policy of the PZU Group. PZU has cosequetly participated i the orgaizatio of cultural evets icludig exhibitios, cocerts ad festivals. I 2007 PZU was also ivolved i supportig a umber of prestigious artistic evets. PZU SA ad PZU Życie SA joitly sposored the 11th Ludwig va Beethove Easter Festival, which couted as oe of the most sigificat cultural evets of The festival has for years attracted ethusiasts of classical music from Polad ad abroad. The PZU Group also sposored The Passio of St. Matthew - the cocert of the Muich Choir coducted by Hasjorg Albrecht ad the performace of Carme by Prosper Merimee at the Polish Natioal Opera i Warsaw The PZU Foudatio The PZU Foudatio was established to support activities of o-govermetal orgaizatios aimed at the public beefit. O 9 February 2007, the District Court recorded chages i the PZU Foudatio s Articles of Associatio, with the prior approval of the Foudatio Board ad its foudig body. Accordig to the ew Articles of Associatio, the Foudatio aims to work for public beefit withi the followig areas: 1) social welfare, icludig support for families ad people i difficult situatios ad providig them with equal opportuities, 2) charity work, 3) preservatio of atioal traditios, promotio of Polad s atioal heritage ad creatio of atioal, civic ad cultural idetity, 4) healthcare ad promotio, 5) work for the disabled, 6) support of local commuities, 7) support of atioal miorities, 8) sciece, educatio ad upbrigig, 9) active leisure for childre ad youg people, 10) culture, arts, protectio of cultural heritage ad traditio, 11) promotio of physical culture ad sport, 12) evirometal ad aimal protectio, protectio of atural heritage, 13) public order ad safety ad couteractio of social pathologies, I 2007 PZU Życie SA became a patro of the Year of Staisław Wyspiański. Moreover, the PZU Group sposors prestigious jazz cocerts uder the Era of Jazz series. PZU for sport Likewise, as i previous years, i 2007 the PZU Group supported a umber of sports iitiatives, such as the sposorig of Bieg Życia (Ru for Life) dedicated to the memory of J. Kusociński, 53rd Memorial of J. Kusociƒski i Warsaw, 3rd Iteratioal Cyclig Race, icludig the wome s race aroud Polad, which is the oly iteratioal cyclig evet i Polad etered ito the UCI caledar. 14) life-guard work ad protectio of people, 15) support for victims of catastrophes ad atural disasters, armed coflicts ad wars i Polad ad abroad, 16) promotio ad orgaizatio of volutary work, as log as it relates to the objectives of the Foudatio. Owig to the itroduced statutory amedmets, i 2007 the PZU Foudatio reactivated doatios to atural persos. It is worth emphasizig that the PZU Foudatio costitutes oe of the few orgaizatios offerig help to all persos regardless of age. I 2007, Foudatio activities focused o direct grats allocated to other o-govermetal orgaizatios to fiace various programmes ad projects, ad i parter programmes implemeted i cooperatio with valued social parters. The Foudatio also allocated idividual grats to employees of the PZU Group who foud themselves i difficult life situatios saw the first editio of a subsidy competitio kow as Wypoczyek z Fudacją, (Holiday with the Foudatio), whereby childre ad teeagers uder 18 could participate i summer holiday camps, orgaized by schools ad social orgaizatios ZHP, various societies ad associatios. 72

75 For the first time, the Foudatio s activity was directed towards helpig the victims of atural disasters ad catastrophes, which became a ecessity after July s widstorms deprivig hudreds of people of their homes. Represetatives of the PZU Foudatio travelled to the Częstochowa district where they assessed the losses ad grated fuds for reovatio of the destroyed buildigs. Withi the scope of statutory operatio the PZU Foudatio grated subsidies to o-govermetal orgaizatios which applied for subsidies to implemet their projects The PZU Group as a good employer The PZU Group is oe of the biggest employers i the fiacial sector i Polad. At the ed of 2007, the four mai compaies of the PZU Group employed over 16,000 people. Employees of the PZU Group compaies receive a umber of motivatioal beefits, also i the form of o-fiacial perks. I 2007 PZU Tower Sp. z o.o. joied the Employee Pesio fud Słoecza Jesień (Bright Autum), which is a employee pesio fud established for PZU employees. Pursuat to the uited offices solutios, commo regulatios cocerig work orgaizatio (labour/work code) ad social activity (code of compay social beefit fud) were itroduced i PZU SA ad PZU Życie SA. The structure of employmet broke dow ito the mai compaies of the PZU Group as of 31 December 2007 (records of permaet employees) Source: The PZU Group PZU SA 72.5% PZU Życie SA 26.3% PTE PZU SA 1.0% TFI PZU SA 0.2% Traiig ad professioal developmet system I order to support the busiess chages i the PZU Group, 2007 saw extesio of the traiig system to provide staff with the opportuity to develop their career ad improve qualificatios. The scope of traiig was related primarily to ew products as well as products withi the existig offers of PZU SA ad PZU Życie SA, ad also to optimizig sales techiques ad customer service. Moreover, the Group orgaized traiig sessios related to implemeted IT solutios ad aimed at improvig the qualificatios ad professioal skills of PZU SA ad PZU Życie SA employees. The programme Akademia umiejętości meedżerskich PZU (PZU Academy of Maagerial Skills) was also itroduced to middle-level maagemet staff of PZU SA ad PZU Życie SA, aimed at improvig their professioal qualificatios ad skills. It icluded 101 people. 73

76 Itegrated system of resposibility maagemet I 2007 the project kow as Itegrated system of resposibility maagemet was lauched, o the basis of which PZU SA ad PZU Życie SA will itroduce descriptios of particular positios ad capacity related to them. Descriptios of job positios, which delieate the scope of activities ad limits of rights ad resposibilities as well as required qualificatios, costitute a basis for all huma resources maagemet processes ad will act as their itegratig aget i due course. Iitiatives of this type stem from the priciples of the ew persoel strategy of PZU SA ad PZU Życie SA, the uderlyig priciple of which cosists of improvig the efficiecy of all operatios related to persoel maagemet. Implemetatio of the abovemetioed tools will create a foudatio for further actios aimed at maximizig the efficiecy of staff by meas of a pre-defied model of developmet. Itroducig the solutios metioed above is expected to improve efficiecy i the followig areas: optimizig the compay s orgaizatioal structure, defiig roles ad sigificace related to particular positios, plaig i the field of huma resources by meas of specifyig the staff demads related to strategic projects, recruitig the right cadidates for particular positios, career developmet ad optimum selectio of professioal traiig, matchig the remueratio level with the character of work ad related requiremets, appropriate exploitatio of staff potetial through clarifyig their scope of work. Iteral commuicatio I 2007 the PZU Group saw the cotiuatio of operatios aimed at developig iteral commuicatio tools, i.e. the PZU24 itraet portal ad the related Newsletter Z pierwszej ręki (First Had). Sice it was lauched i 2005, the portal has developed by icorporatig ew PZU Compaies ad ew tools eablig, for example, placig recruitmet ads or searchig through documets or procedures. The ew portal is becomig more ad more fuctioal; it coveys a growig amout of ews idispesable for the daily activities of PZU Group staff. Selected groups of staff from the Headquarters ad particular regioal braches perform the roles of PZU24 editors. The rapid developmet of the PZU24 portal ecouraged its overtakig of the Świat PZU (PZU World) magazie, which, apart from special editios, was oly published i the electroic form i New order was itroduced i the sphere of project commuicatio, with each ew project commuicated ad supported by the iteral PR accordig to the approved commuicatio pla. 74

77 14. THE OVERVIEW OF THE FINANCIAL PERFORMANCE OF THE PZU GROUP AND ITS PARTICULAR COMPANIES Gross premiums writte Gross premiums writte by the PZU Group for life isurace as well as property ad casualty isurace, after cosolidatio adjustmets, amouted to PLN 15,462.0 millio i 2007, 0.1% higher tha i Such results stem from the growth of the premiums i PZU SA ad decrease i PZU Życie SA. PZU SA Total gross premiums writte by PZU SA amouted to PLN 7,982.0 millio i 2007, which represets a growth of 4.0%. Writte premiums for direct isurace totalled PLN 7,916.6 millio, PLN 307 millio more tha i the previous year. Gross premium writte from iward reisurace i 2007 amouted to PLN 65.3 millio, which is PLN 2.4 millio less tha i Motor isurace still formed the domiat item i the PZU SA portfolio represetig 67.4% of writte premiums, which is a drop of 2.1 percetage poits o A sigificat icrease i the share of total gross premium writte occurred i fiacial isurace (0.8 p.p.), other geeral third party liability isurace (0.7 p.p.) ad agriculture isurace (0.5 p.p.). Property isurace accouted for 13.6%, while accidet ad health isurace represeted 6.4% of total writte premiums. Gross premiums writte by PZU SA for direct isurace broke dow ito mai isurace groups (i PLN millio) Source: The PZU Group 4.0% -2.7% 4.8% 6.4% 14.2% 1.1% 21.1% 58.4% -0.7% 1, , , , , , , ,609.6 Total gross premium writte Obligatory Motor Third Party Liability Motor Ow Damage Property Agriculture Accidet Other third party liability Fiacial Other motor chage 75

78 76 Grzegorz Kaliszuk Sales ad Marketig Specialist Sales ad Marketig Departmet, TFI PZU SA My duties i the Sales ad Marketig Departmet iclude orgaizatio ad support of the distributio etwork of ivestmet products as well as geeral marketig of TFI PZU SA ad its products. Cooperatio 0with the best specialists eables me to develop my professioal skills.

79 Structure of gross premiums writte by PZU SA for direct isurace broke dow by mai isurace groups as of 31 December 2007 Source: PZU SA fiacial statemet Property 13.6% Motor Ow Damage 33.2% Accidet 6.4% Agriculture 5.3% Other third party liability 4.8% Other motor 0.7% Fiacial 2.5% Obligatory Motor Third Party Liability 33.5% The umber of isurace cotracts cocluded by PZU SA rose by 2.7% to 45,146.2 thousad. The highest icrease i the amout o gross premium writte ad the umber of isurace cotracts was i the field of fiacial isurace. The premium averaged PLN 175.4, 1.3% more tha i the previous year. PZU Życie SA Gross premiums writte by PZU Życie SA i 2007 amouted to PLN 7,265.8 millio, represetig a 4.3% drop o The reaso was the shrikig sales of isurace through the bak chael (by -41.3%) as well as lower sales of group ivestmet isurace (-17.7%). O the other had, a icreased value of gross premiums writte was reported i idividual products (+24%) ad cover group isurace (+4.2%). A cotiuig dyamic positive tred i the idividual isurace was mostly due to two ivestmet products, Fudusz Gotówka (Cash Fud) ad Strefa Zysku (Profit Zoe). 77

80 Gross premiums writte by PZU Życie SA broke dow by mai isurace groups (i PLN millio) Source: The PZU Group -4.3% 4.2% -17.7% -41.3% 24.0% -33.3% , , , , , ,589.8 Total gross premium writte Cover group isurace Ivestmet group isurace Bacassurace Idividual isurace Old portfolio chage Structure of gross premiums writte by PZU Życie SA broke dow by mai isurace groups as of 31 December 2007 Source: The PZU Group Ivestmet group isurace 4.1% Old portfolio 0.01% Bacassurace 13.2% Idividual isurace 15.5% Cover group isurace 67.2% 78 As a result of a reduced umber of risks for cover ad ivestmet group isurace, idividual isurace ad the old portfolio (closed portfolio) the umber of customers isured i PZU Życie SA i 2007 amouted to 13,792 thousad, a drop of 45 thousad i compariso to 2006.

81 14.2. Claims ad beefits Gross claims ad beefits paid out by the PZU Group i 2007 totalled PLN 9,553.4 millio, 8.6% more tha was paid out i 2006, which was mostly iflueced by icreases reported by two major compaies of the PZU Group. claims stems from icreased paymets i the field of compulsory motor third party liability isurace (especially resultig from loss icurred abroad) ad from property ad agricultural loss resultig from atural disasters. Claims fell i the followig isurace classes: motor ow damage, other motor isurace ad accidet isurace. PZU SA Gross claims paid by PZU SA, icludig loss adjustmet expeses, amouted to PLN 4,512.3 millio i 2007, of which the paymets themselves i virtue of gross claims uder direct isurace (excludig loss adjustmet expeses) accouted for PLN 4,141.4 millio. This represets a icrease of 2.7% o The higher level of paid out Gross claims paid by PZU SA uder direct isurace (excludig the cost of adjustmet ad recourses) broke dow by mai isurace groups (i PLN millio) Source: The PZU Group 2.7% 8.6% -9.7% 22.0% 83.8% -0.2% 18.2% -38.5% -34.7% , , , , , ,033.2 Total claims Obligatory Motor Third Party Liability Motor Ow Damage Property Agriculture Accidet Other third party liability chage Fiacial Other motor With respect to their share, motor isurace domiated with 79.3% of total paymets. A sigificat share was represeted by paymets uder property isurace which accouted for 9.4% of the total, agriculture isurace 5.2%, other geeral third party liability isurace 4.2% ad accidet isurace 3.2%. 79

82 Breakdow of gross claims paid by PZU SA uder direct isurace (excludig adjustmet costs ad recourses) by mai isurace groups as of 31 December Source: The PZU Group Other third party liability 2.6% Accidet 3.2% Other motor 1.3% Fiacial 0.3% Agriculture 5.2% Property 9.4% Motor Ow Damage 38.2% Obligatory Motor Third Party Liability 39.8% There were 1,267.9 thousad claims paid out by PZU SA i 2007, 3.3% less tha i The value of the average claim paid was PLN 3, % more tha i The costs of loss adjustmet (direct ad idirect) icurred by PZU SA i 2007 totalled PLN millio, 6.3% more tha i the previous year. PZU Życie SA Icreased dyamics of paymets i the idividual isurace sector was related to the dyamic developmet of this isurace segmet (particularly i relatio to short-term ivestmet isurace) as well as higher isurace ed-ofterm paymets for uit-liked isurace. Other factors cotributig to icreased amouts of paymets made by the compay iclude higher premiums ad sums isured. The gross loss ratio for the isurace portfolio stood at 67.7%. O accout of gross claims ad beefits, PZU Życie SA paid PLN 4,897.4 millio i 2007 i compariso to PLN 4,276.1 millio i 2006 (14.5% more). Similarly, a icrease of 14.6% was reported i the et value of claims ad beefits paid, which totalled PLN 4,740.4 millio i

83 Net claims ad beefits paid by PZU Życie SA broke dow by mai isurace groups (i PLN millio) Source: The PZU Group 14.6% 4.6% -19.3% 66.9% 58.0% -2.2% , , , ,136.9 Total claims Cover group isurace Ivestmet group isurace Bacassurace Idividual isurace Old portfolio chage The highest proportio i the structure of et claims ad beefits was that of traditioal group isurace ad idividually cotiued (60.4%), idividual isurace (16.5%) ad bacassurace (14.0%). Claims ad beefits paid out from ivestmet group ad idividually cotiued isurace amouted to 6.2% ad those related to the old portfolio 2.9%. Breakdow of et claims ad beefits paid by PZU Życie SA ito mai groups of isurace as of 31 December 2007 Source: The PZU Group Old portfolio 2.9% Idividual isurace 16.5% Bacassurace 14% Ivestmet group isurace 6.2% Cover group isurace 60.4% 81

84 14.3. Costs of isurace activities The costs of the PZU Group s isurace activities, which iclude acquisitio expeses ad admiistrative expeses as well as the positive value of commissios from the cedats ad participatio i the reisurers profits i 2007, amouted to PLN 3,110.5 millio, up 3.8% o The icrease of costs was higher tha the icrease of premium writte (0.1%), which boosted the growth of the cost ratio (share of costs i the gross premium writte) from 19.4% i 2006 to 20.1 % i the preset reportig period. The icrease i the Group s operatig expeses was iflueced by the result of PZU SA (cost icrease of 6.5%) brought about by a drop i reisurers commissio related to the limited reisurace scheme ad icrease of a average commissio level. PZU SA Isurace activities expeses i PZU SA i 2007 amouted to PLN 2,102.1 millio, which is 6.5% more tha i the previous year. The share of isurace activities expeses i the gross premium writte i 2007 stood at 26.3%, which costitutes a icrease of 0.6 pp. A slight icrease i the isurace activities expeses ratio was a derivative of higher acquisitio expeses, related to the higher share of the premium related to the products ad distributio chaels characterized by higher commissio rates together with lower reisurers commissios. Admiistrative expeses i PZU SA decreased by 4.1% maily because of lower project-related expeses. Isurace activities expeses of PZU SA split ito admiistrative expeses ad acquisitios expeses (i PLN millio) Source: PZU SA fiacial statemet -4.1% 18.9% 1, , , Admiistrative expeses Acquisitio expeses* chage *reisurers commissios ad the share i reisurers profits were deducted from acquisitio expeses 82

85 PZU Życie SA Isurace activity expeses i PZU Życie SA i 2007 amouted to PLN millio, which is a drop of 0.7% o The acquisitios expeses decreased by 10.6% i compariso to the year before, which was maily caused by reduced costs of acquisitio i bakig isurace, coected with a decreased sales volume ad modified sales structure. Admiistrative expeses rose by 5.9% ad amouted to PLN millio. This icrease was mostly visible i the fields of remueratio ad IT ad it slightly exceeded the icrease of gross writte premium from the basic product lies. Isurace activities expeses of PZU Życie SA split ito admiistrative expeses ad acquisitios expeses (i PLN millio) Source: PZU Życie SA fiacial statemet 5.9% -10.7% Admiistrative expeses Acquisitio expeses* chage *reisurers commissios ad the share i reisurers profits were deducted from acquisitio expeses The ratio of isurace activities expeses to the gross premium writte recorded by PZU Życie SA i 2007 grew i relatio i 2006 ad amouted to 12.6%. 83

86 14.4. Uderwritig results The gross uderwritig result of the PZU Group trasferred ito the cosolidated profit ad loss accout stood at PLN 3,383.7 millio i 200 (a drop of 4.1% o 2006). A decrease i the total uderwritig result was a result of a lower uderwritig result recorded by PZU SA. PZU SA I 2007 PZU SA recorded the uderwritig result of PLN 1,036.7 millio, which was a drop of 23.9% i relatio to the previous year. The severely decreased result is predomiatly a cosequece of a higher ow share i the reserves as well as a icreased loss ratio of compulsory motor third party liability isurace for the corporate cliet segmet ad property ad agriculture isurace products as a result of atural disasters of A positive uderwritig result was recorded i all major isurace groups apart from other geeral third party liability isurace ad other fiacial isurace products. PZU Życie SA I 2007 PZU Życie SA recorded the uderwritig result of PLN 2,349.4 millio, a icrease of 2.2% i relatio to the previous year. Both the decrease of the gross premium writte ad the icrease of claims ad beefits paid out had a eutral impact o the uderwritig result as both of these factors are coected with ivestmet isurace schemes. The basic product lies maitaied a stable uderwritig result. A slight improvemet i the result which occurred i spite of a sigificat drop i ivestmet icome stemmed from a less itese impact of the chage i techical rates. Uderwritig results of PZU Group, PZU SA ad PZU Życie SA (i PLN millio) Source: The PZU Group,.fiacial statemets -4% -23.9% 3.7% 3, , , , , ,265.5 PZU Group PZU SA PZU Życie SA chage 84

87 Katarzya Klimowicz Director of the Sales ad Marketig Departmet, TFI PZU SA I am predomiatly resposible for coordiatig ad orgaizig the sale of ivestmet fud uits ad moitorig the marketig activity of TFI PZU SA. To my mid, it is the itegrated team of employees which should be perceived as a priority at work, therefore I highly appreciate the possibility of cooperatig with the best specialists from TFI PZU SA ad the PZU Group. 85

88 14.5. Ivestmet activity I 2007, as i precedig years, the PZU Group s ivestmet activities were orieted towards fidig the right match betwee asset ad liability structures, maitaiig a required level of security, profitability ad liquidity of ivestmets. The ivestmet activity i the Group focused predomiatly o securities issued by the State Treasury, i.e. T-bods ad T-bills. The value of PZU Group s ivestmets as of year-ed 2007 amouted to PLN 46,005.9 millio (excludig et assets of uit-liked products worth PLN 3,778.2 millio), which represets a 5.9% icrease o The value of term deposits (bak deposits ad repos) at the ed of 2007 costituted 4.2% of the total value of PZU SA s ivestmet portfolio (agaist 9.7% i 2006). The PZU Group compaies were also active o the listed share market. The percetage of listed equities i the PZU SA ivestmet portfolio shrak from 7.5% i 2006 to 5.7% i I 2007, the icome o PZU Group ivestmet activities amouted to PLN 2,559.9 millio which is a 22.1% growth o the previous year. PZU SA The large proportio of ulisted equities i PZU SA s ivestmet portfolio was maily represeted by PZU Życie SA s shares coveyed i that portfolio, which were valued at PLN 6,697.2 millio as of 31 December 2007 (this represeted 95.9% of the value of the ulisted share portfolio of PZU SA). The proportio of ulisted equities icreased i 2007 to 24.8% (agaist 19.7% i 2006). This was maily due to the higher valuatio of PZU Życie SA shares. Excludig the shares of PZU Życie SA from the PZU SA ivestmet portfolio, safe fiacial istrumets (treasury securities ad deposits) amouted to 88.3% of the portfolio. I 2007 the icome o PZU SA ivestmet activity (excludig the impact of the divided received from PZU Życie SA i 2006 of PLN 1,405.2 millio), tured out slightly worse whe compared to that of 2006 with a decrease of 8.2% to PLN 1,081.9 millio i This drop ca be attributed predomiatly to a less favourable situatio at the stock exchage (a 10.4% icrease i the WIG idex i 2007 agaist 41.6% i 2006) ad higher iterest rates i 2007, which iflueced the valuatio of shares. The rate of retur o the PZU SA ivestmet portfolio, measured as a relatio betwee the ivestmet icome ad the yearly average value of ivestmets, amouted to 4.2% i The total percetage share of securities issued by the State Treasury i the PZU SA ivestmet portfolio at the ed of 2007 amouted to 63.1% agaist 60.1% at the ed of The value of term deposits (bak deposits ad repos) at the ed of 2007 costituted 4.2% of the total value of PZU SA s ivestmet portfolio (agaist 9.7% i 2006). 86

89 Breakdow of PZU SA ivestmet portfolio as of 31 December 2007 Source: PZU SA Listed equities 5.6% Ivestmet fud uits 0.1% Ulisted equities 24.8% No-treasury dept securities 0.8% Bak deposits 2.1% Real estate 1.2% Repo trasactios 2.1% Mortgage loas 0.2% Treasury securities 63.1% PZU Życie SA The total percetage share of the securities issued by the State Treasury i the PZU Życie SA ivestmet portfolio at the ed of 2007 amouted to 77.7% agaist 71.2% at the ed of The value of term deposits (bak deposits ad repos) at the ed of 2007 costituted 7.7% of the total value of PZU SA s ivestmet portfolio ad decreased i relatio to the previous year (13.1% i 2006). I 2007 the icome o PZU Życie SA ivestmet activity stood at PLN 1,571.3 millio, which is PLN millio less tha i 2006 (icludig uit-liked ivestmets). The results of ivestmet activity of PZU Życie SA were iflueced by less itesive jumps of the stock exchage idices ad risig iterest rates, which adversely affected the profitability of treasury securities. Safe fiacial istrumets (treasury securities ad deposits) amouted to a total of 85.4% of the ivestmet portfolio with their share risig by 1.1 pp. 87

90 Breakdow of PZU Życie SA ivestmet portfolio as of 31 December Source: PZU Życie SA Real estate 1.0% Term deposits 7.7% Ulisted equities 3.5% Listed equities 6.1% Mortgage loas 0.6% No-treasury dept securities 1.2% Ivestmet fud uitsi 2.1% Treasury securities 77.7% Fiacial result I 2007 the PZU Group reported PLN 4,469.8 millio i gross cosolidated profit, which was a 3.2% drop o 2006 caused maily by a lower uderwritig result. Net profit at the ed of the reported period amouted to PLN 3,600.4 millio. Fiacial results of PZU Group (i PLN millio) Source: The PZU Group cosolidated fiacial statemet % -2.9% 4, , , ,706.5 Gross profit Net profit chage 88

91 PZU SA PZU SA geerated PLN 1,430.1 millio et profit i 2007, which is 56.4% less tha i the previous year. After elimiatig the impact of last years divided from PZU Życie SA which does ot affect the group s result i the cosolidated fiacial statemet, the decrease amouted to 23.8%. Fiacial results of PZU SA (i PLN millio) Source: PZU SA fiacial statemet -56.4% -23.8% 1, , , ,875.7 Net profit icludig divided Net profit excludig divided chage 89

92 PZU Życie SA Net profit achieved by PZU Życie SA at the ed of 2007 amouted to PLN 2,177.3 millio, 22.2% more tha i This improvemet i fiacial result was maily due to the sigificat growth i the Compay s uderwritig result. Fiacial results of PZU Życie SA (i PLN millio) Source: PZU Życie SA fiacial statemet 12.5% 12.4% 2, , , ,936.3 Gros profit Net profit chage PTE PZU SA PTE PZU SA also reported growig profits. At the ed of 2007, the et profit of the Compay amouted to PLN millio, 22.5% more tha i the previous year. The improvemet i PTE PZU SA s profit was due to the higher results o operatios ad other activities. 90

93 14.7. Techical reserves The PZU Group policy of settig up techical reserves is characterized by a cautious approach. The established reserves meet the requiremets of the Polish law ad regulatios for esurig full coverage of curret ad future liabilities that may arise uder isurace cotracts. Foreseeable evets, which may cotribute to a icrease i liabilities, should be take ito accout whe settig up techical reserves (such as the developmet of isurace awareess, future ecoomic ad legal chages). The PZU Group s balace of gross techical reserves at the ed of 2007, icludig estimated recourses ad recoveries, amouted to PLN 33,988.2 millio (PLN 32,951.1 millio et of the reisurers share). This correspods to a 1.3% growth of the reserves set up compared to 2006 (a growth of 1.8 % et of reisurers share). PZU SA The value of gross techical reserves of PZU SA, icludig estimated recourses ad recoveries as of 31 December 2007 amouted to PLN 12,165.3 millio, 2.2% more tha at the begiig of the reportig period. The icrease was higher i the case of techical reserves et of the reisurers share icludig estimated recourses ad recoveries of PZU SA (3.9%), which is a result of chages i reisurace programme. The level of techical reserves at the ed of 2007 was also iflueced by the decreased techical rate used for calculatig auity reserve, which fell from 1.0% to 0.5%. Gross movemet of all techical reserves i PZU SA i 2007 amouted to PLN millio (PLN millio et of the reisurers share). Techical reserves et of the reisurers share ad cost of movemets i PZU SA reserves (i PLN millio) Source: PZU SA fiacial statemet 3.9% 193.8% 11, , Techical isurace reserves et of reisurers share Costs of movemets i reserves et of reisurers share chage 91

94 PZU Życie SA The value of gross techical reserves of PZU Życie SA at the ed of 2007 amouted to PLN 21,728.0 millio, which is a icrease of PLN millio agaist the 2006 result of PLN 21,458.0 millio. I percetage terms, the Compay s techical reserves grew by 0.1% i The cost of chagig the balace of PZU Życie SA gross reserves i 2006 amouted to PLN millio. Techical reserves et of the reisurers share i PZU Życie SA (i PLN millio) Source: PZU SA fiacial statemet 1% 21, ,458.0 Techical isurace reserves et of reisurers share chage Profitability, fiacial security ad efficiecy ratios of the PZU Group Profitability ratios Source: The PZU Group Ratio Chage Retur o equity (ROE) (%) (et profit/average equity) x 100% Retur o assets (ROA) (%) (et profit/average assets) x 100% Profitability of ivestmet activities (%) (icome o ivestmet activities/ivestmets) Profitability of techical activities (%) (uderwritig result/premium eared et of reisurer s share) x 100% Retur o sales (ROS) (%) (fiacial result/gross premium writte) x 100% p.p p.p p.p p.p p.p. 92

95 PZU Group ow equity icreased to PLN 16,865.0 millio at the ed of The retur o equity (ROE) for the PZU Group reached the value of 23.8% i reported period. Lower value of profitability ratios i compariso to previous years stems from the relatio betwee a lower et result ad sigificatly higher values of ow equity ad total assets of the PZU Group. I spite of a lower ratio of techical profitability the PZU Group compaies maitaied a very high level of fiacial security measured by solvecy ad liquidity ratios. Solvecy ad liquidity ratios fiacial security ratios Source: PZU Group Ratio Chage Solvecy margi i property ad casualty isurace (i PLN millio) 1, , % Solvecy margi i life isurace (i PLN millio) 1, , % Ow fuds to cover solvecy margi i property ad casualty isurace (i PLN millio) 14, , % Ow fuds to cover the solvecy margi i life isurace (i PLN millio) 6, , % Coverage ratio of the solvecy margi with ow fuds i property ad casualty isurace (%) 1,165.6% 1,004.1% p.p. Coverage ratio of the solvecy margi with ow fuds i life isurace (%) 424.2% 297.1% p.p. Guaratee capital i property ad casualty isurace (i PLN millio) % Guaratee capital i life isurace (i PLN millio) % Coverage ratio of guaratee capital with ow fuds i property ad casualty isurace (%) 3,496.9% 3,012.4% p.p. Coverage ratio of guaratee capital with ow fuds i life isurace (%) 891.4% 1,298.5% p.p. Coverage ratio of techical reserves with assets i property ad casualty isurace (%) (assets for coverig reserves/ techical reserves) x 100% 180.9% 169.0% 11.9 p.p. Coverage ratio of techical reserves with assets i life isurace (%) (assets for coverig reserves/ techical reserves) x 100% 116.8% 121.4% -4.6 p.p. The above ratios show that capital requiremets are covered ad that there is a large surplus of ow fuds. Both major PZU compaies icreased the level of solvecy margi coverage with ow fuds, with 1,165.6% i PZU SA ad 424.2% i PZU Życie SA. Therefore, it might be cocluded that the compaies ow fuds guaratee the coverage of liabilities towards all customers. 93

96 94 Krzysztof Zawistowski Operatioal Plaig ad Cotrollig Office I have bee workig for the PZU Group sice For 13 years I was employed i the Reisurace Office, curretly I work as a Coordiator i the Operatioal Plaig ad Cotrollig Office where I am resposible for aalyzig the profitability of isurace products.