PZU Group’s asset and liability structure

At yearend 2017, consolidated equity hit PLN 37,601 million, up from the end of 2016 (120.1% growth). The growth in consolidated equity pertained mainly to non-controlling interests that in connection with commencement of Pekao’s consolidation in June 2017, among other factors, reached PLN 22,979 million, increasing more than five-fold from the end of 2016. Equity attributable to the parent company’s shareholders rose by PLN 1,624 million compared to the end of the previous year – as an effect of the net result attributable to the parent company generated in 2017, partially offset by of the distribution of profit for 2016, including the allocation of PLN 1,209 million as a dividend.

The largest component of liabilities and equity as at the end of 2017 was financial liabilities, which increased significantly compared to the end of 2016 from 47.9% to 70.7%, primarily due to the commencement of Pekao’s consolidation. The value of this item reached PLN 224,507 million and included in particular:

• liabilities to clients of PLN 198,163 million (predominantly by virtue of deposits held by Pekao SA and Alior Bank; an increase in current and term deposits by PLN 149,458 million compared to December 2016);
• liabilities under sell-buy-back transactions of PLN 1,167 million in 2017 compared to PLN 178 million in 2016;
• liabilities on the issue of own debt securities amounting to PLN 9,567 million, including:
• PLN 3,821 million on bonds, of which EUR 850 million are Eurobonds issued via the wholly-owned subsidiary PZU Finance AB;
• PLN 4,498 million on deposit certificates issued by Bank Pekao and Alior Bank;
• PLN 1,248 million on covered bonds issued by Bank Pekao.
• subordinated debt of PLN 5,319 million. The value of this item increased compared to the end of 2016 due to the issue of subordinated debt by PZU on 30 June 2017 for the total amount of PLN 2.25 billion, by Pekao in October 2017 for the amount of PLN 1.25 billion and by Alior Bank in October 2017 for the amount of PLN 600 million. SECTION 8.3 DEBT FINANCING

As at the end of 2017, the value of technical provisions was PLN 44,558 million, which accounted for 14.0% of liabilities and equity (PLN +2,364 million compared to the end of 2016). The movement in this item resulted in particular from:

• higher provision for unearned premiums in non-life insurance and resulting mainly from increased sales of motor insurance in Poland;
• higher provisions for unit-linked life insurance products if the policyholder bears the investment risk because of sales exceeding surrenders and a high positive investment result;
• higher mathematical provisions in continued business associated with the indexation of sums insured and the higher average age of the insureds.

The balance of other liabilities and provisions at the end of 2017 was PLN 10,739 million compared to PLN 5,988 million at the end of 2016. The contributors to this increase included, among others, liabilities toward banks on account of payment documents settled in interbank clearing systems in the amount of PLN 2,125 million and liabilities on account of outstanding transactions on financial instruments in the amount of PLN 1,772 million.

Structure of PZU Group’s liabilities and equity (%)

Cash flow statement

At the end of 2017, net cash flow reached PLN 5,343 million, PLN 4,863 million more than in the previous year. This growth was caused, in particular, by net cash flows on operating activity.

Material off-balance sheet items

At the end of 2017, the value of contingent liabilities stood at PLN 58,978 million. This major increase compared to the previous year resulted from business development in the banking segment, including the commencement of Pekao’s consolidation. The value of contingent liabilities granted to the clients of Alior Bank and Bank Pekao was PLN 57,836 million. The balance of the PZU Group’s contingent liabilities consisted in particular of PLN 14,536 million in contingent liabilities by virtue of overdraft limits and credit cards, PLN 29,586 million in tranche-based loans and PLN 7,574 million in awarded guarantees and sureties.

Moreover, the balance of contingent liabilities included guarantees for the underwriting of securities in the amount of PLN 3,492 million (bonds covered by Pekao’s underwriting).