Powszechny Zaklad Ubezpiecze? Spólka Akcyjna : Report on the Audit of the Annual Consolidated Financial Statements 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

Report on the Audit of the Annual Consolidated Financial Statements

Opinion

We have audited the accompanying annual consolidated financial statements of Powszechny Zakład Ubezpieczeń Group (the "Group"), whose parent entity is Powszechny Zakład Ubezpieczeń (the "Parent Entity"), which comprise:

• the consolidated statement of financial position as at 31 December 2022; and, for the period from 1 January to 31 December 2022:
• the consolidated profit and loss account;
• the consolidated statement of comprehensive income;
• the consolidated statement of changes in equity;
• the consolidated cash flow statement; and
• the supplementary information and notes

(the "consolidated financial statements").

In our opinion, the accompanying consolidated financial statements of the Group:

• give a true and fair view of the consolidated financial position of the Group as at 31 December 2022 and of its consolidated financial performance and its consolidated cash flows for the financial year then ended in accordance with International Financial Reporting Standards, as adopted by the European Union ("IFRS EU") and the adopted accounting policy;
• comply, in all material respects, with regard to form and content, with applicable laws and the provisions of the Parent Entity's articles of association.

Our audit opinion on the consolidated 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 Consolidated 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 Group 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 ("NCSA"), together with the ethical requirements that are relevant to our audit of the consolidated 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 Group 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 consolidated 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 consolidated 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 15,632 million as at 31 December 2022 and PLN 15,314 million as at 31 December 2021.

Reference to the consolidated financial statements: Note 42.1.1 "Non-life insurance", Note 42.2.1 "Non-life insurance", Note 42.3.1 "Technical provisions in non-life insurance" of the supplementary information and notes to consolidated financial statements.

Key audit matter	Our response
Provisions for outstanding claims and benefits for	Our audit procedures performed with the
MTPL constitute a significant element of	assistance of our actuarial specialists, included
technical provisions presented in the Group's	among others:
liabilities. Our audit focused particularly on	- assessment of the valuation methods of
among others the following:
	provisions for outstanding claims and

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• provisions for the annuities claims that existed until the 31 December 2022 and have been reported to the Group ("the annuities");
• provisions for property and casualty claims that existed until the 31 December 2022 but have not yet been reported to the Group, 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 Parent 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 material impact on the valuation of the annuities and the IBNR. The significant 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 Parent 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.

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;
  • for an assumed change of value of paid annuities (indexation of annuities),

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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 life insurance provision

The carrying value of life insurance provision amounted to PLN 17,014 million as at 31 December 2022 and PLN 16,345 million as at 31 December 2021.

Reference to the consolidated financial statements: Note 42.1.2 "Life insurance", Note 42.2.2 "Life insurance", Note 42.3 "Quantitative data" of the supplementary information and notes to the consolidated financial statements.

Key audit matter	Our response
The life insurance provision is a significant	Our audit procedures, carried out with the
element of technical provisions recognized in the	support of our actuarial specialists, included,
Group's liabilities.	among others:
Valuation of the life insurance provision is	- assessment of the significant assumptions
associated with significant uncertainty regarding	applied by the Parent Entity's Management
the estimates, as it requires the Parent Entity's
Board - technical rates, mortality accident
Management Board to develop professional
and morbidity rates, with reference to legal
judgments and use complex and subjective
and regulatory requirements, including the
assumptions, including those with a long time
applicable financial reporting standards;
horizon. These assumptions are treated as input
- testing the design, implementation and
data for valuation models using actuarial
methods.	operating effectiveness of key controls
Relatively insignificant changes in the significant	embedded in the process of:
assumptions may have a material impact on the	• creating and updating actuarial
valuation of the life insurance provision. The
assumptions;
significant assumptions are technical rates and
• ensuring quality of policy data such as
assumptions about mortality, accident rates and
morbidity.	type of insurance, age and sex of the
In addition, the calculation of the life insurance	insured, sum and period of the
insurance;
provision requires the use of complex formulas
• calculating the life insurance reserve
and creation of calculation tools that may be
incorrectly defined and/ or to which incorrect or	- assessment of the completeness and the
incomplete data or assumptions may be used.	quality of the input data and adequacy of
For the above reasons, the valuation of life	significant assumptions adopted by the
insurance provision was considered by us as a	Parent Entity's Management Board to
key audit matter.	valuation of life insurance provision as at 31
	December 2022, in particular for a technical
	rates, mortality tables, accident and
	morbidity rates by comparison of these
	assumptions to their historical values and
	available forecasts or other statistical and
	market data. The assessment of adequacy
	included the impact of COVID-19 on the
	assumptions, particularly the mortality rates,
	and their inclusion in technical provisions;

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- independently recalculating the life insurance provision as at 31 December 2022, for selected key product groups;

- assessment of the adequacy of the life insurance provisions by comparing to the results of liability adequacy test performed by the Parent Entity's Management Board. Our assessment included the analysis of the appropriateness of the test.

Expected credit losses for loan receivables from clients and provisions for off-balance-sheetliabilities in banking activity

The carrying value of loan receivables from clients in banking activity amounted to PLN 212,693 million as at 31 December 2022 and PLN 215,008 million as at 31 December 2021. The carrying value of impairment allowance for expected credit losses on loan receivables from clients amounted to PLN 14,563 million as at 31 December 2022 and PLN 12.996 million as at 31 December 2021. Provisions for off-balance sheet commitments amounted to PLN 514 million as at 31 December 2022 and PLN 496 million as at 31 December 2021.

Net allowances for expected credit losses in 2022 amounted to PLN -3,068 million, and in 2021 PLN -1,867 million.

Reference to the consolidated financial statements: Note 16 " Movement in allowances for expected credit losses and impairment losses on financial instruments", Note 35 "Loan receivables from customers", Note 39 "Expected credit losses and impairment of financial assets", Note 48 "Provisions" of the additional information and notes to the consolidated financial statements.

Key audit matter	Our response
Loan receivables from clients measured at	Audit procedures conducted with the support of
amortized cost or in fair value through other	our internal credit risk and IT specialists included
comprehensive income are presented including	i.a.:
impairment allowances based on the expected	- assessment of the design and
credit loss model. In the process of estimating
implementation of relevant internal
allowances, there are two main stages -
controls (including general IT system
identification impairment triggers or a significant
controls) applied in the process of
increase in credit risk, and measurement of
estimating allowances for expected
expected credit losses.
credit losses (including monitoring of
The impairment triggers and significant increase
collateral values) as well as testing the
of credit risk are identified mainly on the basis of	effectiveness of these controls;
payment delinquencies, economic and financial	- analysis of the appropriateness of the
standing of the debtor and the current probability
Group's identification of impairment
of default level as compared to the date of initial
triggers and significant increase in credit
recognition of the exposure. Allowances for
risk for the purpose of classification into
expected credit losses are estimated individually
stages, taking into account qualitative
and collectively for homogenous loan portfolios
and quantitative criteria;
with the use of statistical methods on the basis of
the risk parameters. Significant assumptions for	- assessment of the accounting policy for
the portfolio method are risk parameters such as	the recognition of impairment losses on
probability of default (PD), loss given default	loans and advances in terms of
(LGD) or exposure at default (EAD) or criteria/	compliance with the requirements of
allocation thresholds to risk categories (stages),	applicable financial reporting standards;
which are determined for homogeneous groups
of credit receivables based on historical data,

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