TEXT-S&P summary: PZU Group

(The following statement was released by the rating agency)

Sept 28 -

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Summary analysis -- Powszechny Zaklad Ubezpieczen S.A. ------------ 28-Sep-2012

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CREDIT RATING: Country: Poland

Local currency A/Stable/--

Primary SIC: Fire, marine, and

casualty

insurance

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Credit Rating History:

Local currency Foreign currency

16-Jul-2009 A/-- --/--

21-Jul-2004 A-/-- --/--

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Rationale

The ratings on Polish non-life insurer Powszechny Zaklad Ubezpieczen S.A. (PZU S.A.) and Polish life insurer Powszechny Zaklad Ubezpieczen na Zycie S.A. (PZU Zycie) reflect the companies' status as core entities of Poland-based composite insurance group PZU. The ratings are supported by the group's strong competitive position, strong operating performance, and strong capitalization, in Standard & Poor's Ratings Services' view. These strengths are partly offset, however, by concentration of investments in Polish government securities and an ongoing need to modernize.

PZU has a strong competitive position, owing to its significant position in the Polish insurance market, unrivaled distribution capabilities, and high brand recognition among the Polish population. Moreover, PZU has successfully transformed its strong competitive position into a strong operating performance consistently above the market average. This is reflected in a five-year average return on equity (ROE) of about 20% in 2011, a five-year combined ratio of about 95%, and a new business margin of 2.0% (based on present value new business premiums) in 2011. Our base-case assumption for 2012 and 2013 includes premium growth of 3%-5% and maintenance of PZU's leading market position in Poland, a combined ratio of about 97%-98%, a net income of about Polish zloty (PLN) 2.4 billion (about EUR570 million), and an ROE of 18%-20%.

PZU's capitalization is strong, in our view, reflecting extremely strong capital adequacy. We anticipate that capital adequacy will remain at least very strong, even against the group's plans for a high dividend payout of 50%-100% of net profits and its international expansion goals. Further supporting factors are strong capital quality, adequate reserving, and a conservative reinsurance program.

Rating constraints, in our view, are that PZU invests predominantly in Polish government securities, and that regulation limits the amount of overseas investments. Consequently, we believe that PZU's abilities to invest in assets of appropriate duration for its life insurance liabilities and to diversify its investment portfolio are restricted.

We also think that PZU still needs to modernize, including its information-technology systems and its product and customer-relationship management. However, in our view, the current management has demonstrated its execution ability and is well placed to continue implementing these initiatives, which are paramount to PZU maintaining its competitive position.

The ratings on PZU are based on our assessment of the group's stand-alone credit profile (SACP). However, we also regard PZU as a government-related entity (GRE) because the Ministry of the Treasury of the Republic of Poland (foreign currency A-/Stable/A-2; local currency A/Stable/A-1) is its main shareholder. In our opinion, there is a "moderately high" likelihood that the government of Poland would provide timely and sufficient extraordinary support to PZU in the event of financial distress. This assessment is based on our view of PZU's "important" role for and "strong" link with the Polish government. Nevertheless, the ratings on PZU do not benefit from any uplift because of its GRE status, according to our GRE methodology, because our assessment of PZU's SACP is in line with the local currency rating on Poland.

Outlook

The stable outlook reflects our expectation that PZU will maintain its strong competitive position and generate a strong operating performance through the cycle.

A negative rating action on the local currency ratings on Poland could trigger similar rating actions on PZU due to its large exposure to sovereign debt and its geographic business focus on Poland.

We could raise the ratings on PZU if we raised the local sovereign rating on Poland and PZU meets our expectations on competitive position and operating performance, with capital adequacy in the 'AA' range.

Related Criteria And Research

-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

-- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

-- Group Methodology, April 22, 2009

-- Interactive Ratings Methodology, April 22, 2009