NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the local currency Insurer Financial Strength (IFS) rating of El Pacifico Vida Compania de Seguros y Reaseguros (Pacifico Vida) at 'BBB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Pacifico Vida's IFS rating reflects its strong position in the life insurance segment in Peru (1 with 26.8% - Gross Written Premiums market share as of December 2012), consistent premiums growth for the last several years, historical pricing discipline and the benefits of the insurance and the healthcare business as part of Pacifico Insurance Group (Life, non-life and EPS business).
Pacifico Vida also has a prudent asset/liability management and conservative investment portfolio, which is largely concentrated on fixed income securities. This is partially offset by its geographical concentration in Peru given its focus on its home market and relatively higher leverage ratio.
Fitch considers there is ample room to improve synergies and economies of scale with the insurance business through Pacifico Insurance Group's increasing investment in the health care segment since 2011, which totaled more than US$120 million. Fitch also believes that this investment should help to better diversify Pacifico Group's income flow.
Pacifico Vida has generated favorable profitability in the last several years. This is sustained in an adequate behavior of financial incomes yields, reaching in the last four years an average return-on-equity ratio of 22.4% and an average operating ratio of 79.7%.
The net earnings slowdown reported for the fiscal year end 2012 (-14.7%) was mainly driven by a higher net loss ratio of 69.4% from 61.6% at the end of 2011. This was influenced by; higher net claims in some critical business lines as credit life, personal accidents and group life, and significant reserves adjustment on individual life segment. It is expected that those ratios will come closer to historic averages during 2013 and 2014.
During 2012, gross written premiums increased by 15.8%, above the industry in the life segment (9.2%), mainly driven by credit life (+33.6%), disability and survivor's insurance for 'Administradora de Fondos de Pensiones - AFP's' account holders (+32.2%) and a lesser impact of the annuities slowdown at industry level. In Fitch opinion, Pacifico Vida maintains a well-diversified premiums mix and atomized income flows. However, the new regulation on disability and survivor's insurance for AFP's could cause more volatility in premiums in the short term due to the bidding calls.
Leverage ratios and capital adequacy are consistent with Pacifico Vida's business profile and remain relatively stable for the last three years. This despite the sharp rise of the annuities reserves in the same period (+31.2%). Pacifico Vida reached a liabilities-to-equity ratio of 5.9 times (x) and total-equity-to-liabilities ratio of 7.0x as of December 2012, slightly above previous year but still compares favorably with regional peers, especially considering its relevant annuities reserves stock (60.8% of technical reserves).
Pacifico Vida's investment portfolio shows adequate liquidity and coverage levels in terms of liability duration and currency mismatch. The portfolio also carries limited credit risk with its allocation to Peruvian sovereign debt (IDR of 'BBB'), international investment grade securities and well-regarded domestic fixed income securities.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's perception that intensive competition in the insurance domestic market would not have a material impact in Pacifico Vida's profitability in the medium term. That said, it may have an adverse effect if Pacifico Vida is left out the next bidding call regarding disability and survivor's insurance for AFP's.
Key rating triggers that may lead to an upgrade include a sustainable improvement in company leverage ratios to below 5x and low volatility in earnings. This is especially considering the effect of financial incomes on the bottom line. In addition, a better credit risk profile of its investments over an extended period could favorably affect the rating. Fitch notes that the probability of an upgrade is low given Pacifico Vida's current rating level when compared to Peru's sovereign rating.
Conversely, key rating triggers that may lead to a downgrade include recurrent volatility in earnings and profitability profile for an extended period, increasing leverage ratios over 8x, and a deterioration in its credit risk profile as a result of economic downturns abroad.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research
--'Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance
Rating Methodology — Amended
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