8. Capital management

On 3 October 2016 PZU Supervisory Board adopted a resolution to approve the PZU Group's capital and dividend policy for 2016-2020 (“Policy”).

In accordance with the Policy, the PZU Group endeavors to do the following:

• manage capital effectively by optimizing the usage of capital from the PZU Group’s perspective;
• maximize the rate of return on equity for the parent company’s shareholders, in particular by maintaining the level of security and retaining capital resources for strategic growth objectives through acquisitions;
• ensure sufficient financial means to cover the PZU Group’s liabilities to its clients. 

The capital management policy rests on the following principles:

• the PZU Group’s capital management (including excess capital) is conducted at the level of PZU as the parent company;
• sustain target solvency ratios at the level of 200% for the PZU Group, PZU and PZU Życie (according to Solvency II);
• maintain the PZU Group’s financial leverage ratio at a level no higher than 0.35;
• ensure funds for growth and acquisitions in the coming years;
• PZU will not issue any new shares for the duration of this Policy.

The PZU Group and PZU dividend policy assumes that:

• the dividend amount proposed by the PZU Management Board for the financial year is determined on the basis of the PZU Group’s consolidated financial result attributable to the parent company, where:
• no more than 20% will be earmarked as retained earnings (supplementary capital) for goals associated with organic growth and innovations as well as execution of growth initiatives;
• no less than 50% is subject to payment as an annual dividend;
• the remaining part will be paid in the form of annual dividend or will increase retained earnings (supplementary capital) if in the given year significant expenditures are incurred in connection with execution of the PZU Group Strategy, including in particular, mergers and acquisitions;

subject to the items below;

• according to the PZU Management Board’s plans and risk and solvency self-assessment of the parent company, the own funds of the parent company and the PZU Group following the declaration or payment of a dividend will remain at a level that will ensure fulfillment of the conditions specified in the capital policy;
• when determining the dividend the regulatory authority’s recommendations concerning dividends will be taken into consideration.

External capital requirements

According to the Insurance Activity Act, the calculation of the capital requirement is based on market, actuarial (insurance), counterparty insolvency, catastrophic and operational risks. Assets, liabilities and as a consequence own funds covering the capital requirement are measured at fair value. The capital requirement is calculated in accordance with the standard formula at the level of the entire PZU Group.

Pursuant to art. 412 section 1 of the Insurance Activity Act, the PZU Group is obligated to prepare and disclose an annual solvency and financial condition report at the group level drafted in accordance with the principles of Solvency II. The 2016 report published on 30 June 2017 is available online at https://www.pzu.pl/relacje-inwestorskie/informacje- https://www.pzu.pl/relacje-inwestorskie/informacje-finansowe. For the 2017 report, the publication deadline is no later than 24 weeks after the year end, i.e. in practice until 18 June 2018. Pursuant to art. 290 section 1 of the Insurance Activity Act, a solvency and financial condition report of an insurance company is audited by an audit firm.

Irrespective of the above, some PZU Group entities are obligated to comply with their own capital requirements imposed by the relevant legal regulations.