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Pacífico Compañía de Seguros y Reaseguros S A : Fitch Affirms Pacifico Seguros' Ratings at 'BBB+'; Outlook Stable

04/30/2020 | 08:42am

Fitch Ratings has affirmed Pacifico Compania de Seguros y Reaseguros S.A. (Pacifico Seguros) Insurer Financial Strenght (IFS) at 'BBB+' with Stable Rating Outlook.


The rating action follows Fitch's annual review of Pacifico Seguros but also considers Fitch's current assessment of the impact of the coronavirus pandemic, including its economic impact, under a set of ratings assumptions described below. These assumptions were used by Fitch to develop pro-forma financial metrics for Pacifico Seguros that Fitch compared with both ratings guidelines defined in its criteria, and relative to previously established Rating Sensitivities for Pacifico Seguros.


The rating action considered the company's strong business profile, outstanding financial performance, and capitalization and leverage ratios aligned to Fitch guidelines for the current rating. The rating also considers the insurance industry profile and operating environment (IPOE) in Peru, which has been strengthened by the implementation of international standards, but remains less sophisticated and developed than other markets in the region.


KEY RATING DRIVERS


Pacifico Seguros is the second leading company in the Peruvian insurance market with a market share of 26%. Fitch considers the operational scale of the insurance company and its business profile, which allows it to sustain strong competitive advantages. However, Fitch's view of diversification and business risk is somewhat constrained by the high concentration in Peru's capital.


Performance indicators remain favorable, benefiting mainly from financial income associated with the management of long-term liabilities. The operating metrics are adequate for the business mix; however, operating profitability represents a challenge in the current scenario of the coronavirus pandemic where increases in claims costs and reductions in sales are expected.


Fitch performed pro forma calculations incorporating assumptions related to potential cost increases, as well as a set of assumptions related to interest rate levels, reductions in the market value of investment securities. Fitch's pro forma analysis has a modest but manageable impact on financial results and leverage.


Pacifico Seguro maintains moderate operating leverage, aided by a limited dividend distribution policy and positive results. Financial leverage remains stable; however, the use of short-term bank financing could be needed given the lower premium income expected in the coming months.


Investment portfolio is concentrated in low risk instruments. The structure is balanced between instruments for ALM and liquidity to respond to short term liabilities. ALM and asset liquidity indicators are favorable to Fitch guidelines for the current rating.


KEY ASSUMPTIONS


Assumptions for Coronavirus Impact:


Fitch used the following key assumptions, which are designed to identify areas of vulnerability, in support of the pro-forma ratings analysis discussed above:


Decline in key stock market indices by 35% relative to Jan. 1, 2020;


Increase in two-year cumulative high yield bond default rate to 16%, applied to current non-investment-grade assets, as well as 12% of 'BBB' assets;


A COVID-19 infection rate of 5% and a mortality rate (as a percent of infected) of 1%.


RATING SENSITIVITIES


The ratings remain sensitive to any material change in Fitch's Rating Case assumptions with respect the coronavirus pandemic. Periodic updates to Fitch's assumptions are possible given the rapid pace of changes in government actions in response to the pandemic, and the pace with which new information is available on the medical aspects of the outbreak. A discussion of how ratings would be expected to be affected under a set of Stress Case assumptions is included at the end of this section to help frame sensitivities to a severe downside scenario.


Factors that could, individually or collectively, lead to negative rating action/downgrade:


A material adverse change in Fitch's Ratings Assumptions with respect to the coronavirus impact;


A sustained decline in ROAE below 10%, an increase in net leverage above 5.4x or a material deterioration in asset quality.


Factors that could, individually or collectively, lead to positive rating action/upgrade:


A material positive change in Fitch's Ratings Assumptions with respect to the coronavirus impact;


A positive rating action is prefaced by Fitch's ability to reliably forecast the impact of the coronavirus pandemic on the financial profile of both the Peruvian insurance industry and Pacifico Seguros;


Upgrades are mainly linked to the improvements in the industry profile. Increasing reserve adequacy sophistication and the adoption of international standards would improve the rating. Significant improvements in the business profile (size and diversification) and sustained increases in operating results could drive into a rating upgrade.


Stress Case Sensitivity Analysis


Fitch's Stress Case assumes a 60% stock market decline, two-year cumulative high yield bond default rate of 22%, high yield bond spreads widening by 600 basis points and more prolonged declines in government rates, heightened pressure on capital markets access, a COVID-19 infection rate of 15% and mortality rate of 0.75%, an adverse non-life industry-level loss ratio impact of 7 percentage points for COVID-19 claims partially offset by a favorable 2 points for auto/motor, a one notch lower sovereign rating;


The implied rating impact under the Stress Case would be affirmation.


BEST/WORST CASE RATING SCENARIO


International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.


REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING


The principal sources of information used in the analysis are described in the Applicable Criteria.


ESG CONSIDERATIONS


The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.


RATING ACTIONS


ENTITY/DEBT RATING PRIOR


Pacifico Compania de Seguros y Reaseguros S.A. Ins Fin Str BBB+ Affirmed BBB+


VIEW ADDITIONAL RATING DETAILS


Additional information is available on www.fitchratings.com


(C) 2020 Electronic News Publishing, source ENP Newswire

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