2.4 Changes in the scope of consolidation and structure of PZU Group

2.4.1 Business combinations

Detailed accounting principles concerning the settlement of the acquisition transactions are presented in point 5.4.

In 2016, PZU Group acquired the basic activity of Bank BPH and 4 entities providing medical services.

Acquisition of the Core Business of Bank BPH is compliant with the growth strategy of Alior Bank that projects development based on organic growth and acquisitions, in conjunction with high return on equity. As a result of the acquisition of the Core Business of Bank BPH, Alior Bank was promoted to the 9th place among the largest banks in Poland in terms of asset held. The transaction brought Alior Bank closer to the realization of a strategic goal which is joining the group of 5–6 largest banks in Poland in the next couple of years.

The acquisition of entities rendering health care services (in 2016: Centrum Medyczne Cordis sp. z o.o., Polmedic sp. z o.o., SPMP, and Artimed) has aimed to supplement PZU Group’s offer concerning health services and insurance. Development of the offer regarding health care services and health insurance is one of the key elements of the strategy pursued by PZU Group. Provision of some services in own institutions will allow for the increase in competitiveness of PZU Group on this market. The goodwill recognized in the consolidated financial statements is an outcome of the planned growth of this segment of services and the volume of benefits generated by health insurance whilst increasing the profitability of those services, as a result of leaving part of the margin in PZU Group.

2.4.1.1 Acquisition of the core business of Bank BPH

On 31 March 2016, Alior Bank (a subsidiary of PZU) signed with GE Investment Poland sp. z o.o. (GEIP), DRB Holdings B.V. and Selective American Financial Enterprises, LLC (together, “the Sellers of Bank BPH”) a sale of shares and division agreement concerning the purchase of the core activity of the bank (“Sale of Shares and Division Agreement”).

The Sale of Shares and Division Agreement covered:

acquisition of the shares constituting a significant share in Bank BPH from the Sellers of Bank BPH by Alior Bank;
division of Bank BPH, which is pursuant to Article 529 §1 point 4 of the Code of Commercial Companies, performed through transferring the core activity of Bank BPH to Alior Bank (“the Division”) and
issue of new Alior Bank shares for the Bank BPH shareholders indicated in the plan of the division (i.e. excluding Alior Bank and the Sellers of Bank BPH and their related parties).

According to the Sale of Shares and Division Agreement, Alior Bank purchased the Core Activity of Bank BPH. The acquisition took place on 4 November 2016, the date of registering by the registry court the increase in Alior Bank share capital in relation to the division of Bank BPH.

Price

In the current report as at 2 August 2016, Alior Bank informed about determining the adjusted acquisition price of the Core Activity of Bank BPH in the amount of PLN 1,160 million. The price was established on the basis of the book value of net assets of the Core Business of Bank BPH less intangible assets as at 30 June 2016.

As a result of the call and compulsory purchase, Alior Bank paid also PLN 305 million to minority shareholders of Bank BPH.

Hence, the price paid for the Core Business of Bank BPH amounted in total to PLN 1,465 million.

The final settlement between Alior Bank and the Sellers of Bank BPH is based on the book value of net assets of the basic activity of Bank BPH minus intangibles as at 4 November 2016.

This was used by Alior Bank to assess the right to return of the previously made payment of PLN 93 million from the Sellers of Bank BPH. Furthermore, Alior Bank assessed the right to return of the previously made payment for adjustment of net assets to the level equivalent to Tier 1 ratio of 13.25% to the amount of PLN 52 million. The arrangement are being made between the parties to the transaction and as the result the parties will confirm the book value of net assets of the Core Business of Bank BPH less intangible assets. To the date of the consolidated financial statements, the parties have not reached the final settlement of the transaction. Provided that no agreement is made in this matter by the agreed date, the Agreement for Sale of Shares and Division sets forth that discrepancies between Alior Bank and the Sellers of Alior Bank be settled by an expert, that is an auditing company appointed in accordance with the provisions of the Agreement for Sale of Shares and Division. The decision made by the expect shall be valid for both parties.

Transaction terms

The transaction was financed with the public issue of new Alior Bank shares with the observance of pre-emptive right.

The realization of the transaction was conditional upon the fulfillment of the following conditions precedent:

obtaining the approval of the relevant anti-trust authority (the approval was obtained on 23 June 2016);
obtaining appropriate consents or decisions of PFSA by Bank BPH, Alior Bank and GEIP (the consents were obtained on 19 July 2016, 25 July 2016, 4 August 2016, and 9 August 2016);
approving and signing the plan of division by Bank BPH and Alior Bank (which took place on 29 April 2016);
adoption of a resolution concerning the increase in capital through the issue of new shares by the General Shareholders’ Meeting of Alior Bank (the resolution was adopted on 5 May 2016);
registering by the registry court the increase in Alior Bank share capital (the registration took place on 24 June 2016);
adoption of a resolution concerning the approval of the Division by the General Shareholders’ Meeting of Alior Bank (the resolution was adopted on 29 July 2016);
obtaining specific tax interpretations related to the Division (the interpretation was received on 28 July 2016).

On 30 June 2016, Alior Bank, acting under Article 539 §1 and 2 of the Code of Commercial Companies, in relation to Article 402 (1) for the second time announced the planned division of Bank BPH. In accordance with the share exchange parity determined in the Plan of Division, 0.44 of Alior Bank share was to be granted and allocated to a shareholder of Bank BPH (with the exception of GE shareholders) for a single Bank BPH share (“Share Exchange Parity”), subject to the adjustment related to the dilution of Alior Bank share capital resulting from the public offer of Alior Bank in observance with pre-emptive right before the date of the Division. Taking into account the above-mentioned adjustment related to the dilution of Alior Bank share capital, the Share Exchange Parity was determined as 0.51 (rounded number).

On 24 August 2016, the transaction of purchase of Bank BPH under the call announced by Alior Bank was settled. The final price per share in the call amounted to PLN 31.19.

On 26 August 2016, the agreement between Alior Bank and GE shareholders came into effect, which is specified in Article 87 Section 1 Point 5 of the Act on Offering (“Agreement”) with regard to the purchase of Bank BPH shares as a result of a request made to all other shareholders of Bank BPH to sell all shares they hold in Bank BPH pursuant to Article 82 of the Act on Offering (“Compulsory Buyout”).

The Agreement came into force as a result of the request made by Alior Bank to GE Shareholders on 25 August 2016 to take agreed action in order to perform the Compulsory Buyout.

When the Agreement became effective, Alior Bank and GE shareholders jointly exceeded the threshold of 90% of the total number of votes at the general shareholders’ meeting of Bank BPH.

Control over the Core Business of Bank BPH

During the transitional period (“Transitional Period”) between the end of the Call and the date of registering the increase in the share capital of Alior Bank in relation to the Division by the registry court (“Division Date”), Alior Bank did not execute any rights arising from Bank BPH shares without prior consent of the Sellers of Bank BPH expressed in writing, subject to the exceptions set forth in the Sale of Shares and Division Agreement. In the Transitional Period, the Sellers of Bank BPH remained the referential shareholders of Bank BPH. While executing the above, Alior Bank did not appoint its representatives as members of the management and supervisory bodies of Bank BPH during the Transitional Period.

Obtaining control took place on the Date of the Division, that is, 4 November 2016.

Initial purchase price allocation of the Core Business of Bank BPH SA

Due to the fact that no all elements of settlement between Alior Bank and Sellers of Bank BPH are known, the below purchase price allocation is of a provisional nature. The measurement period shall not exceed 12 months from the acquisition date, i.e. 4 November 2017.

Fair value of the acquired assets and liabilities at the acquisition date	Initial settlement
Intangible assets	48
Tangible fixed assets	271
Financial assets	13,577
Available for sale	301
Measured at fair value through profit or loss	3,691
Loans, including receivables from clients due to credits	9,585
Cash	1,043
Other assets	271
New intangible assets identified during the acquisition, including:	42
- customer relations	42
Total assets	15,252
Financial liabilities, including:	13,166
Derivative instruments	38
Liabilities to banks	370
Liabilities to clients	12,534
Liabilities arising from bank securities	224
Other provisions	121
Other liabilities	137
- including liability arising from unfavorable (generating charges) property lease agreements.	19
Total liabilities	13,424
Fair value of the acquired net assets	1,828

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Calculation of gain from bargain purchase	Provisional settlement
Consideration transferred	1,465
Contingent consideration, including:	(145)
Right to the return of a part of previously transferred consideration due to the adjustment of net assets to the level equivalent to Tier 1 ratio of 13.25%	(52)
Right to the return from shareholders of GE group of a part of previously transferred consideration due to adjustment of purchase price	(93)
Fair value of net identifiable assets	(1,828)
Gain from bargain purchase	508

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Before recognizing the gain from bargain purchase in the consolidated financial statements, the reassessment was made to verify if all of the assets acquired and all of the liabilities assumed were correctly identified, in order to ensure that the measurements appropriately reflect consideration of all information available as of the acquisition date. Considering the provisional character of the purchase price allocation, the value of the gain can be subject to change in the future until the final price allocation has been made. An adjustment, if any, will be recognized retrospectively.

Gain from bargain purchase that results from negotiating a favorable purchase price was recognized in the consolidated statement of profit or loss under "Other operating income".

The purchased Core Business of Bank BPH will form a single CGU along with Alior Bank.

2.4.1.2. Acquisition of Alior Bank

Under the preliminary share purchase agreement signed on 30 May 2015 concerning the sale of Alior Bank's shares, PZU acquired 17,818,473 shares of Alior Bank from Alior Lux S.à.r.l. & Co. S.C.A. and 500,00 Alior Bank’s shares from Alior Polska sp. z o.o., i.e. 18,318,473 shares in total, representing 25.19% of both the share capital of Alior Bank and the total number of votes at the General Meeting of Shareholders of Alior Bank.

Price per share amounted to PLN 89.25 and the acquisition cost of the shares amounted to PLN 1,635 million in total.

The acquisition of the first tranche was settled on 12 October 2015, the second – on 18 December 2015, and the third tranche of the transaction was settled on 11 March 2016. Between 12 October 2015 and 18 December 2015, PZU Group did not exercise control over Alior Bank, but it had a significant influence, and, as a result, Alior Bank was considered an associate at that time. Following the acquisition of the second tranche, PZU Group gained control over Alior Bank, and, as a result, since 18 December 2015 the bank has been subjected to consolidation along with its subsidiaries.

Final purchase price allocation of the acquisition of shares of Alior Bank

The purchase price allocation of the acquisition of shares of Alior Bank as at the acquisition date was accounted for on the basis of the data prepared as at 31 December 2015. There were no significant differences in the accounting data between 18 December 2015 (the control acquisition date) and 31 December 2015.

The consolidated financial statements contain the final fair value of the acquired assets and liabilities (loan portfolio in particular).

Upon the calculation of goodwill, the carrying amounts of assets and liabilities of Alior Bank have been remeasured to fair value and intangible assets and liabilities, which have not been hitherto recognized as assets by Alior Bank, have been identified:

trademark;
customer relations;
liabilities arising from unfavorable (generating charges) property lease agreements.

The final settlement of the transaction based on the fair value of the acquired assets and liabilities is presented below.

Fair value of the acquired assets and liabilities at the acquisition date	Provisional settlement	Adjustment	Final settlement
Intangible assets	282	-	282
Property, plant and equipment	229	-	229
Financial assets	35,844	(77)¹⁾	35,767
Other receivables	484	-	484
Cash	2,090	-	2,090
Other assets	439	20²⁾	459
New intangible assets identified during the acquisition, including:	300	-	300
- trademark	100	-	100
- customer relations	200	-	200
Total assets	39,668	(57)	39,611
Financial liabilities	35,921	-	35,921
Other liabilities	568	29	597
- including liability arising from unfavorable (generating charges) property lease agreements.	-	29	29
Non-controlling interest	1	-	1
Fair value of net assets acquired	3,178	(86)	3,092

1) Amount adjustment results from the final determination of the fair value of credit receivables portfolio of Alior Bank.
2) Amount adjustment results from the determination of the value of deferred tax assets concerning the measurement of credit receivables and liability arising from unfavorable (generating charges) property lease agreements.

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Calculation of goodwill	Provisional settlement	Adjustment	Final settlement
Consideration transferred (tranche II and III) - in cash	988	-	988
Value of non-controlling interest (a 70.78% share in fair value of Alior Bank net assets)	2,250	(61)	2,189
Fair value of shares held at the acquisition date	661	-	661
Fair value of net identifiable assets of Alior Bank	(3,178)	86	(3,092)
Goodwill	721	25	746

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The company’s goodwill will not decrease the taxable income.

Increase of cash balance of PZU Group by PLN 2,090 million is recognized under “increase in cash inflows due to the acquisition of entities and changes in the scope of consolidation” line in the consolidated cash flows statement.

2.4.1.3. Acquisition of shares in health care companies

Centrum Medyczne Cordis sp. z o.o.

On 1 February 2016, PZU Zdrowie SA acquired 7,312 shares in Centrum Medyczne Cordis sp. z o.o., representing 100% of the share capital of Centrum Medyczne Cordis sp. z o.o. and 100% of votes at the General Shareholders’ Meeting with a nominal value of PLN 50 each.

Since the acquisition date, which is 1 February 2016, CM Cordis sp. z o.o. has been subjected to consolidation.

Polmedic sp. z o.o. and SPMP

On 30 November 2016, PZU Zdrowie SA acquired 145 shares in Polmedic sp. z o.o., representing 100% of the share capital and 100% of votes at the General Shareholders’ Meeting with a nominal value of PLN 521 each.

PZU also became an indirect owner of 40 shares of SPMP with a nominal value of PLN 1,250 each, representing 100% of the share capital, which entitles to 100% of votes at the General Shareholders’ Meeting.

Since the acquisition date, which is 30 November 2016, Polmedic sp. z o.o. and SPMP have been subjected to consolidation.

Artimed

On 21 December 2016, PZU Zdrowie SA acquired 100 shares of Artimed, representing 100% of the share capital and 100% of votes at the General Shareholders’ Meeting with a nominal value of PLN 500 each.

Since the acquisition date, which is 21 December 2016, Artimed has been subjected to consolidation.

Purchase price allocation for the acquisitions of health care companies

The purchase price allocation of the acquisitions of shares in subsidiaries were carried out based on data concerning these entities collected as at 31 January 2016 (Centrum Medyczne Cordis sp. z o.o.), 30 November 2016 (Polmedic sp. z o.o. and SPMP), and 31 December 2016 (Artimed).

During the calculation of goodwill, assets and liabilities were measured at fair value.

Fair value of the acquired assets at the acquisition date	Final settlement
Intangible assets	1
Property, plant and equipment	3
Financial assets	2
Receivables	4
Deferred tax assets	2
Other assets	1
Total assets	13
Liabilities	4
Share in fair value of the net assets acquired	9
Fair value of consideration transferred – in cash	41
Calculated goodwill	32

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The company’s goodwill will not decrease the taxable income.

2.4.1.4. Acquisition of SKOK by Alior Bank

In 2016, Alior Bank acquired two SKOKs (Cooperative Savings and Credit Unions). As at the acquisition date, Alior Bank assumed all rights and obligations of the acquired unions (pursuant to Article 74c section 4 of the Act on Cooperative Savings and Credit Unions).

The acquisitions did not entail a payment made by Alior Bank. This process was conducted with financial support provided by BGF pursuant to Article 20g of the Bank Guarantee Fund Act. Alior Bank received support from BGF in a form of a subsidy to cover the difference between the value of acquired equity rights and the value of liabilities arising from guaranteed funds on depositors’ accounts.On 26 January 2016, PFSA made a decision on taking over Kasa Oszczędnościowo-Kredytowa im. Stefana Kard. Wyszyńskiego (“SKOK Wyszyńskiego”) by Alior Bank. On 27 January 2016, Alior Bank assumed management over the assets of SKOK Wyszyńskiego, and as of 1 March 2016 it took over SKOK Wyszyńskiego.

On 26 April 2016, PFSA issued a decision concerning taking over Powszechna Spółdzielcza Kasa Oszczędnościowo-Kredytowa in Knurów (“Powszechna SKOK”) by Alior Bank. As of 27 April 2016, Alior Bank assumed management of Powszechna SKOK’s assets. On 1 June 2016, Powszechna SKOK was taken over by Alior Bank as an acquirer.

Settlement of acquisition of SKOK

Fair value of the acquired assets and liabilities at the acquisition date
Financial assets	136
Other assets	2
Total assets	138
Liabilities to clients guaranteed by BGF	200
Other liabilities	10
Fair value of net assets acquired	(72)

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Calculation of goodwill
Price paid	-
Fair value of net assets acquired	(72)
Estimated subsidy from BGF	62
Goodwill	10

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Goodwill was generated in the part not covered by the BGF subsidy (mainly trade liabilities), which was immediately written-off.

2.4.1.5. Financial data of the acquired entities

The following table presents financial data concerning the Core Activity of Bank BPH included in the consolidated statement of profit or loss. The data have been prepared in accordance with IFRS and they relate to the period in which the Core Activity of Bank BPH was controlled by PZU Group (4 November 2016 – 31 December 2016). Due to their irrelevance, the data concerning other entities acquired in 2016 (Centrum Medyczne Cordis sp. z o.o., Polmedic sp. z o.o., SPMP, and Artimed) have not been included.

Consolidated statement of profit or loss	The Core Activity of Bank BPH
Revenue from commissions and fees	45
Net investment income	97
Net result on realization and impairment losses on investments	(12)
Net change in the fair value of assets and liabilities measured at fair value	4
Other operating income	26

Costs of commissions and fees	(27)
Interest expense	(12)
Administrative expenses	(111)
Other operating expenses	(312) ¹⁾
Operating profit (loss)	(302)
Gross profit (loss)	(302)
Income tax	52
Net profit (loss)	(250)
- profit (loss) attributable to owners of the parent entity		(73)
- profit (loss) attributable to non-controlling interest		(177)

1) including the costs of integration borne until 31 December 2016 in the amount of PLN 37 million and the cost of restructuring provision in the amount of PLN 268 million.

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2.4.1.6. Consolidated statement of profit or loss, including acquired entities

The following table presents income and profit of PZU Group, including the financial data of the acquired subsidiaries calculated as if the acquisition date for all combinations performed throughout the year was the beginning of the financial year.

Consolidated statement of profit or loss	1 January- 31 December 2016
Gross written premiums	20,219
Reinsurers' share in gross written premiums	(431)
Net written premiums	19,788
Change in net unearned premiums reserve	(1,163)
Net earned premiums	18,625

Revenue from commissions and fees	1,033
Net investment income	4,691
Net result on realization and impairment losses on investments	(995)
Net change in the fair value of assets and liabilities measured at fair value	336
Other operating income	1,518

Insurance claims, benefits, and change in technical provisions	(12,888)
Reinsurers' share in claims, benefits, and change in technical provisions	156
Net insurance claims and benefits	(12,732)

Costs of commissions and fees	(420)
Interest expense	(833)
Acquisition costs	(2,613)
Administrative expenses	(3,398)
Other operating expenses	(2,163)
Operating profit	3,049
Share in net financial result of companies measured using the equity method	(3)
Profit before tax	3,046
Income tax	(589)
Net profit, including:	2,457
- profit attributable to owners of the parent entity	1,959
- profit (loss) attributable to non-controlling interest	498

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2.4.2. Changes in the scope of consolidation of investment funds

The assumptions made by PZU Group upon consolidation of investment funds have been presented in point 6.1.1.

Due to the loss of control over the funds of PZU Akcji Rynków Wschodnich and PZU FIZ Akcji Focus, the consolidation was ceased on 1 July 2016. It resulted in the reduction of cash balance of PZU Group by PLN 7 million (in “decrease in cash inflows due to changes in the scope of consolidation” line in the consolidated cash flow statement).

Due to gaining control over the funds of PZU FIZ Forte, the funds have been subjected to consolidation since 1 July 2016. As a result, the increase in cash balance of PZU Group by PLN 32 million has been recognized (under “increase in cash inflows due to the acquisition of entities and changes in the scope of consolidation” line in the consolidated cash flows statement.

In addition, the following newly-established funds have been subjected to consolidation: PZU FIO Globalny Obligacji Korporacyjnych (since 30 May 2016), PZU Telekomunikacja Media Technologia (since 7 September 2016), PZU Dłużny Aktywny (since 26 October 2016), and PZU FIZ Aktywów Niepublicznych Witelo Fund (since 30 November 2016).

2.4.3. Purchase of shares of Lietuvos Draudimas AB

On 27 September 2016, the District Court in Vilnius approved of the compulsory purchase of Lietuvos Draudimas AB shares from the minority shareholders. The judgment of the court came into force as of 27 October 2016. Since 14 November 2016, PZU has been an official owner of 188 shares of Lietuvos Draudimas AB with the nominal value of EUR 14.48. The purchase price amounted to EUR 237.16 per share, that is, EUR 45 thousand for all the shares.

2.4.4. Międzyzakładowe Pracownicze Towarzystwo Emerytalne SA

On 9 June 2016, Międzyzakładowe Pracownicze Towarzystwo Emerytalne PZU SA in liquidation was deleted from the National Court Register.

2.4.5. Sale of Armatura Tower sp. z o.o.

On 16 June 2016, Armatura Kraków SA sold all shares in Armatura Tower sp. z o.o., which constituted a joint-venture. The loss of PLN 8 thousand resulting from the sale of Armatura Tower sp. z o.o. shares is recognized in the consolidated statement of profit or loss under “Net result on realization and impairment losses on investments”.

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2.4 Changes in the scope of consolidation and structure of PZU Group

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