OREANDA-NEWS. 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
The affirmation of Pacifico Vida's rating reflects the company's strong position in Peru's life insurance industry as well as its key part for Credicorp's insurance business. The entity has a diversified premium mix, competitive profitability performance underpinned by an adequate underwriting profile and financial management. Pacifico Vida's investment portfolio maintains a moderate credit risk profile and controlled volatile exposure. This is partially offset by its geographical concentration in Peru given its focus on its home market and its relatively higher leverage ratio.

Pacifico Vida has a solid position in Peru's life insurance segment, reaching a 10.96% share of the total insurance market and a 21.19% of life insurance gross written premiums (GWP). Similar to the rest of the market, the company's business is primarily concentrated in Lima, although there is a positive trend in geographic diversification, leading to favorable growth prospects in the medium term. The company is a subsidiary of Pacifico Peruano-Suiza Compania de Seguros (PPS), and is a key part of Credicorp Ltd (Credicorp), one of the largest financial conglomerates in Peru, which favors the entity's growth potential through cross-selling and commercial synergies. PPS consolidated market share reached 23.48% of total GWP as of September 2014.

Pacifico Vida's profitability remains strong and competitive compared with the Peruvian insurance industry average as well as regional peers. The net income-to-average assets ratio (ROAA) reached 3%, while the operating ratio was 76.2% as of September 2014. The volatility observed in the main profitability ratios is due to both the large proportion of annuities (which require higher reserve constitution) within the company's total business, as well as volatility in financial revenues.

The relative importance of disability and survival insurance within the pension funds' (AFPs), combined with the seasonal nature of the bidding process, resulted in a 9.3% decline in Pacifico Vida's GWP during the first 3 quarters of 2014. The rest of the company's segments grew 15.8%, below the industry (17.2%), while Pacifico Vida was awarded a portion of the recent AFP's bidding for 2015, which will result in a significant rebound in premiums and market share in this segment.

The liabilities-to-equity ratio has been increasing, reaching 6.74x in September 2014, after peaking at 7.11x in March 2014. While Pacifico Vida has historically maintained above-industry-leverage ratios and these continue to be adequate and consistent with the ample weight of annuity reserves, the cushion has narrowed relative to the upper ranges defined by Fitch. The higher leverage is primarily the result of the increase in annuities GWP and the negative impact that unrealized gains have had on equity starting in 2013.

Pacifico Vida's investment portfolio has adequate liquidity, prudent assets/liability management, and a controlled exposure to credit risk. The bulk of the investment portfolio is concentrated in fixed-income securities (89.5%), leading to a stable investment yield and controlled volatility. However, the share of higher risk investment securities (unrated securities or those with relatively low national scale ratings of 'BBB+' or below) is worth monitoring, considering the shallow liquidity of the secondary market of private fixed income issuances in Peru.

RATING SENSITIVITIES
Factors that could lead to an upgrade include a sustainable improvement in Pacifico Vida's leverage ratios; lower earnings volatility, mainly in terms of financial earnings; and a better investment credit risk profile over an extended period of time.

Factors that could lead to a downgrade include recurrent volatility in earnings and profitability, continued underwriting pressures due to intense competition, leverage ratios consistently above 7x and/or higher risk investments securities-to-equity ratio above 60%.