Powszechny Zaklad Ubezpiecze? Spólka Akcyjna : Report on the Audit of the Annual Financial Statements PZU SA 2022

This document is a free translation of the Polish original. Terminology current in Anglo-Saxon countries has been used where practicable for the purposes of this translation in order to aid understanding. The binding Polish original should be referred to in matters of interpretation.

Independent Auditor's Report

To the General Shareholders' Meeting and Supervisory Board of Powszechny Zakład Ubezpieczeń S.A.

Report on the Audit of the Annual Financial Statements

Opinion

We have audited the accompanying annual financial statements of Powszechny Zakład Ubezpieczeń S.A. (the "Entity"), which comprise:

• the introduction to the financial statements;
• the balance sheet as at 31 December 2022;

and, for the period from 1 January to 31 December 2022:

• the technical account of property and casualty insurance;
• the general profit and loss account;
• the statement of changes in equity;
• the cash flow statement;

and

• the supplementary information and explanations (the "financial statements").

In our opinion, the accompanying financial statements of the Entity:

• give a true and fair view of the financial position of the Entity as at 31 December 2022 and of its financial performance and its cash flows for the financial year then ended in accordance with the accounting act dated 29 September 1994 (the "Accounting Act"), related bylaws and the adopted accounting policy;
• comply, in all material respects, with regard to form and content, with applicable laws and the provisions of the Entity's articles of association;
• have been prepared, in all material respects, on the basis of properly maintained accounting records in accordance with chapter 2 of the Accounting Act.

Our audit opinion on the financial statements is consistent with our report to the Audit Committee dated 29 March 2023.

KPMG Audyt spółka z ograniczoną odpowiedzialnością sp.k.

ul. Inflancka 4A, 00-189 Warsaw, Poland

tel. [phone], fax [phone], [e-mail]

KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp.k., a Polish limited partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee.

Company registered at the District Court	KRS 0000339379
for the capital city of Warsaw in Warsaw,	NIP: 527-26-15-362
12th Commercial Division of the National	REGON: 142078130
Business Register.

Basis for Opinion

We conducted our audit in accordance with:

• International Standards on Auditing as adopted by the National Council of Statutory Auditors as National Standards on Auditing (the "NSA"); and
• the act on statutory auditors, audit firms and public oversight dated 11 May 2017 (the "Act on statutory auditors"); and
• regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC (the "EU Regulation"); and
• other applicable laws.

Our responsibilities under those standards and regulations are further described in the Auditor's Responsibility for the Audit of the Financial Statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence and Ethics

We are independent of the Entity in accordance with International Ethics Standards Board for Accountants International Code of Ethics for Professional Accountants (including International Independence Standards) ("IESBA Code") as adopted by the resolution of the National Council of Statutory Auditors, together with the ethical requirements that are relevant to our audit of the financial statements in Poland and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. During our audit the key statutory auditor and the audit firm remained independent of the Entity in accordance with requirements of the Act on statutory auditors and the EU Regulation.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. They are the most significant assessed risks of material misstatements, including those due to fraud. Key audit matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon we have summarised our response to those risks. We do not provide a separate opinion on these matters. We have determined the following key audit matters:

Valuation of provisions for outstanding claims and benefits for motor third party liability insurance ("MTPL")

The carrying value of gross technical provisions for MTPL amounted to PLN 11,954,605 thousand as at 31 December 2022 and PLN 11,750,286 thousand as at 31 December 2021.

Reference to the financial statements: Note 12.8.3 "Provisions for outstanding claims and benefits", Note 9.2.1 "9.2.1.Gross value of provisions for outstanding claims and benefits", Note 9.3 "9.3 Total provisions for the capitalized value of annuities before discounts and gross allowances" of the supplementary information and explanations "Provisions for the capitalized value of annuities".

Key audit matter	Our response
Provisions for outstanding claims and benefits for	Our audit procedures performed with the
MTPL constitute significant element of technical	assistance of our actuarial specialists, included
provisions presented in the liabilities of the Entity's	among others:

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balance sheet. Our audit focused particularly on among others the following:

• provisions for the annuities claims that existed until the 31 December 2022 and have been reported to the Entity ("the annuities"),
• provisions for property and casualty claims that existed until the
  31 December 2022 but have not yet been reported to the Entity, including provisions for pain and suffer claims ("IBNR").

Valuation of the annuities and IBNR is associated with significant uncertainty regarding estimates, as it requires the Management Board of the Entity to develop professional judgment, as well as complex and subjective assumptions. The uncertainty in estimates is particularly related to the development of bodily injury claims, including annuities, as well as pain and suffer claims, as a result of the lack of comprehensive information on past occurrence of such type of claims that still burden the risk of payment. Moreover, there is a natural uncertainty about the ultimate loss value, which results among others from demographic factors and the lack of detailed legal solutions regulating the amount of pain and suffer claims.

Relatively insignificant changes in the significant assumptions may have a significant impact on the valuation of the annuities and the IBNR. The key assumptions are: claims development ratios, discount rates and assumed mortality.

The calculation of the annuities and IBNR requires the implementation of complex formulas and creation of calculation tools that may not work properly and / or to which may be used incorrect/ incomplete data and/ or assumptions. In addition, there is a number of acceptable actuarial methods for determining the annuities and IBNR (including provisions for pain and suffer claims), for which the assessment of the appropriateness of implementation of particular methods and assumptions requires a significant judgment of the Management Board of the Entity.

For the above reasons the valuation of provisions for outstanding claims and benefits for MTPL was considered by us as a key audit matter.

• assessment of the valuation methods of provisions for outstanding claims and benefits for MPTL applied by Management Board of the Entity, with reference to legal and regulatory requirements, including the applicable financial reporting standards, as well as assessment of the continuity of their application;
• testing of the design, implementation and operating effectiveness of key controls embedded in the process of:
• • establishing and adjusting actuarial assumptions;
  • verification of quality of the data regarding paid and reported claims, used among others in calculation of IBNR;
  • verification of quality of the data (i.e. age and sex of annuitants; amount or type of the annuity used for a calculation of the annuities and IBNR);
• recalculation of significant IBNR and annuities and explanations of all material significant differences in comparison to the calculations made by the Entity's Management Board;
• in the area of the Entity's Management Board's analyses of the historical utilization of IBNR:
• • assessment of the assumptions underlying the analyses;
  • assessment of the results of the analyses;
  • application of the results in our assessment of methods and significant assumptions implemented by the Entity in the valuation of IBNR as at 31 December 2022;
• assessment of the completeness and the quality of input data and the adequacy of significant assumptions adopted by the Entity's Management Board to the valuation of the annuities and IBNR, by analysing changes over time in the value of annuities and IBNR, as well as:
• • for a claim development ratios, by comparison with historical data regarding reported and settled claims;
  • for a discount rate, comparison of the level of discount rate adopted by the Entity to historical return rate of other investment portfolio and available market data and forecasts;

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• for an assumed change of value of paid annuities (indexation of annuities), assessment of results of the analysis of historical changes in amount of paid annuities;

• for adopted mortality tables, comparison to publicly available data regarding annual number of deaths in Poland in each age bucket.

Valuation of the related parties

The carrying value of the shares in related parties amounted to PLN 14.118.751 thousand as at 31 December 2022 and PLN 13.961.463 thousand as at 31 December 2021.

Reference to disclosures in the financial statements: Note 12.2.2 of the introduction to the financial statements " 12.2.2. Ownership interest or shares in related parties", Note 2.4 of the supplementary information and explanations " 2.4 Investments in subordinate entities".

Key audit matter

Our response

As at 31 December 2022, shares in related parties

Our audit procedures, carried out with the support

in the amount of PLN 14.118.751 thousand was

of our internal valuation specialists, included,

recognized in the financial statements of the

among others:

Entity. For each subsidiary, for which goodwill was

- in relation to the models of value in use

recognized in the course of valuation using the

equity method, a test for impairment has been

measurement applied by the Entity's

Management:

performed.

These tests consisted of comparing the carrying

• assessment of whether the models used

amount of a given Cash Generating Unit ("CGU")

by the Entity to estimate the value in use

with its recoverable amount, estimated using the

of individual CGU meet the requirements

value in use, which is present value of estimated

of applicable reporting standards.

future cash flows.

• analysis of the value in use calculation

Estimation of recoverable amount is a complex

models for each CGU - verification of

process which requires the Management Board to

mathematical correctness

and

logical

develop professional judgement, as well as

consistency;

complex and subjective assumptions. Relatively

•

evaluation

of

reasonableness

of

the

insignificant

changes

in

the

significant

adopted discount rates by comparing

assumptions may have a significant impact on the

them to existing the risk-free rates, risk

valuation of the recoverable amount. Significant

margin, beta parameter adapted to the

assumptions

in the process

of the recoverable

specifics of

the

business

of the

tested

amount estimation are: future value of the cash

CGU;

flows, growth

rates in the residual

period

and

•

assessment

of

the forecasted financial

discount rates including

the

risk-free rate,

risk

results of each CGU by comparing them

margin, beta parameter, as well as the market

with budgets drawn up in previous periods

activity analysis from which quotations are derived

for their subsequent implementation;;

to determine the fair value.

•

evaluation

of

reasonableness

of

the

For the above reasons, valuation of shares in

applied growth

rates by

comparing

to

related parties has been considered by us as a

market data within a residual term.

key audit matter.

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Responsibility of the Management Board and Supervisory Board of the Entity for the Financial Statements

The Management Board of the Entity is responsible for the preparation, on the basis of properly maintained accounting records, of financial statements that give a true and fair view in accordance with the Accounting Act, related bylaws, the adopted accounting policy, the applicable laws and the provisions of the Entity's articles of association and for such internal control as the Management Board of the Entity determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Management Board of the Entity is responsible for assessing the Entity's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Management Board of the Entity either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.

According to the Accounting Act, the Management Board and members of the Supervisory Board of the Entity are required to ensure that the financial statements are in compliance with the requirements set forth in the Accounting Act. Members of the Supervisory Board of the Entity are responsible for overseeing the Entity's financial reporting process.

Auditor's Responsibility for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with NSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

The scope of audit does not include assurance on the future viability of the Entity or on the efficiency or effectiveness with which the Management Board of the Entity has conducted or will conduct the affairs of the Entity.

As part of an audit in accordance with NSAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

• identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
• obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity's internal control;
• evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management Board of the Entity;
• conclude on the appropriateness of the Management Board of the Entity's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report on the audit of the financial statements to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report on the audit of the financial statements. However, future events or conditions may cause the Entity to cease to continue as a going concern;

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