OREANDA-NEWS. Fitch Ratings has affirmed the local currency Insurer Financial Strength (IFS) rating of Pacifico Peruano-Suiza Compania de Seguros y Reaseguros S.A. (PPS) at 'BBB-'.

The Rating Outlook is Stable.

KEY RATING DRIVERS
The affirmation of PPS' rating reflects the company's solid balance sheet fundamentals, underpinned by its ample business scope, improved underwriting performance along 2014 and low leverage indicators. Fitch believes that PPS strong position in Peru's insurance industry, solid brand name in the local market, diversified premiums mix and diverse distribution capabilities, as part of Credicorp, provides significant competitive advantages. The ratings are constrained by its narrow geographic focus compared with global insurance peers and still limited operating margins in an industry that constantly face pricing pressures.

PPS encompasses the insurance and health care operations of the Romero group, supported in PPS' subsidiaries Pacifico Vida and Pacifico EPS. The company maintains a solid position in the Peruvian insurance market. PPS' non-life core business, together with its life insurance subsidiary Pacifico Vida recorded a consolidated market share of 23.5% of gross written premiums (GWP) as of September 2014.

The company was able to improve its loss ratio for virtually all of its business segments during 2014, reversing the negative trend that had been observed in its technical results. PPS improved its net loss ratio to 53.7% as of September 2014 from 58.7% as of September 2013, and its combined ratio to 97.8% from 111.1%, leading to a sharp rise in both ROAA (5.9%) and ROAE (15%).

PPS has been exhibiting sustained capital growth, mainly through retained earnings. PPS' low leverage is in line with that of its peers, with a liabilities-to-equity ratio at 1.15x and a net retained premiums-to-equity ratio at 0.51x as of September 2014. The company's outstanding financial obligations amounted to PEN293 million (23.1% of equity) in September 2014, with PEN 173 million in subordinated bonds and PEN 100 million in bank loans. PPS maintains ample interest coverage for its subordinated bonds, with pre-tax earnings-to-subordinated debt interest expenses ratio of 16.7x as of September 2014.

Liquidity is somewhat tight, as subsidiary investments represent a significant proportion of PPS' total assets (28.9% in September 2014), and variable income investments are an important component of financial investments (4.6% of total assets). As of September 2014, PPS registered a 'liquid assets-to-adjusted reserves' ratio of 0.78x and a liquid assets-to-adjusted reserves plus financial debt ratio of 0.53x.

PPS reported an increase in retention levels to 72.6% as of September 2014 as well as adequate reinsurance protection through a diversified reinsurers pool. The company has excess loss and catastrophic protection that adequately protects its retained premiums exposure, limiting their catastrophic exposure to a priority of USD2 million (0.5% of equity as of September 2014), adding voluntary reserves that cover 5x this priority.

RATING SENSITIVITIES
Factors that could lead to a rating upgrade include a sustained improvement and the subsequent stabilization in the combined ratio around 100% and lower underwriting performance volatility, a strengthening in liquidity ratios and reduced volatility in revenues.

Key rating drivers that could lead to a downgrade include a recurring pressure on technical results, a combined ratio sustained above 110%, ROAA dropping to below 1% and/or operating leverage increasing to above 2x, could lead to a downgrade.