Fitch Ratings has affirmed El Pacifico Peruano-Suiza Compania de Seguros y Reaseguros S.A.'s (PPS) Insurer Financial Strength (IFS) rating at 'BBB-'. The Rating Outlook is Stable.
The rating affirmation reflects PPS' solid position in a highly competitive non-life insurance market, well-diversified premiums mix and adequate capitalization levels. This is partially offset by its dependence on Peru's insurance industry, weak operating performance, and its higher asset exposure to investment in subsidiaries.
PPS is focused on the non-life insurance segment (13.77% of gross written premiums [GWP] at June 2012) but also is the holding company of Pacifico Insurance Group, which as a whole had 26.12% of total insurance GWP in Peru at June 2012. The company is part of Grupo Credicorp, one of the largest financial conglomerates in Peru, representing strong growth potential in terms of cross-selling strategies and massive distribution channels through Banco de Credito del Peru and AFP Prima.
PPS' subsidiaries (Pacifico Vida, IFS rated 'BBB', Outlook Stable by Fitch, and Pacifico EPS) are a core part of its insurance business; both strongly positioned in the Peruvian market, and complement PPS' financial flexibility through its ability to distribute dividends. As part of Pacifico Insurance Group's expansion strategy into the health care business, PPS recently bought - through Pacifico EPS - a number of health care entities (mainly private hospitals) for approximately PEN305 million. Fitch considers there to be ample room to improve business synergies and economies of scale, providing, also, better diversity of its income flow.
Despite PPS' favorable GWP trend, its combined ratio has deteriorated since March 2011, mainly driven by pricing pressure due to strong competitiveness, which has had a negative impact on its net loss ratio (63.4% for the first half of 2012 compared to an average of 50.2% in the 2009-2011 period). Fitch considers that the correcting actions undertaken by its management, including changes to its reinsurance program, will allow PPS to recover its combined ratio to less than 100% in the next 12 months.
Given the volatility of its combined ratio, PPS' net income is highly dependent on its financial earnings, mainly provided by its investments in subsidiaries (49.2% of financial earnings as of June 2012), allowing the company to reflect competitive profitability ratios and preserve its conservative leverage ratio, despite the trend in its underwriting results.
PPS' leverage ratios remain stable (liabilities-to-equity ratio of 1.04x at June 2012), in spite of the recent subordinated debt issuance (with no equity content under Fitch rating criteria) but aided by its still high profitability. Nevertheless, the burden of PPS' investments in subsidiaries still undermines the flexibility of its capital base in stress periods, considering that equity participations have limited liquidity and are subject to capital rules given their insurance operating business.
PPS' investment portfolio, which backs its technical reserves, has been prudently managed in terms of credit risk allocation and diversification according to its liability-matching needs (duration and currency). Its securities investment portfolio holds mainly fixed income securities (70.3% as of June 2012); however, PPS' additionally maintains a portfolio in unaffiliated variable income securities, mainly common shares and investment funds (21.2% of total investment portfolio, 0.13x of its equity), which could influence earnings volatility.
Key rating triggers that may lead to an upgrade include sustainable improvement on PPS combined ratio, lower volatility in earnings, and better liquidity ratios over an extended period could favorably affect the rating.
Key rating triggers that may lead to a downgrade include a decrease on its overall profitability with an ROAA below 1% and/or a substantial increase of its leverage ratios (financial debt above 20% and operating leverage above 2x.)
Fitch has affirmed the following rating:
El Pacifico Peruano-Suiza Compania de Seguros y Reaseguros S.A.
--IFS at 'BBB-'.
The Rating Outlook is Stable.
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' (Sept. 22, 2011).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018
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