Fitch Ratings has affirmed Pacifico Compania de Seguros y Reaseguros S.A.' (Pacifico) Long-Term Insurer Financial Strength (IFS) Rating at 'BBB+'.

The Rating Outlook is Stable.

The affirmation is based on Pacificos' solid market share, which continues to provide competitive advantages within the local market. The rating action considers the recovery of the company's results, which allowed profitability and leverage indicators to return to the historical trend, placing them within the ranges contemplated in the current rating.

Key Rating Drivers

Solid Business Profile: Pacifico maintains a solid and stable market position that provides it with competitive advantages over other insurers in Peru. Fitch views Pacifico's business diversification and limited risk profile of its products favorably. The competitive position reflects modest geographic diversification, with all business originating in Peru and primarily concentrated in the capital of Lima.

Leverage Normalization: Leverage indicators registered a significant decrease at YE2022 compared to the previous year. Although they still remain slightly above the average of the five years prior to 2021, they tended to historical behavior and were once again within the ranges contemplated by the guidelines of the score factor. The decrease in the indicators was mainly determined by the organic growth of equity, which showed an annual increase of 20.5% as of December 2022.

High Profitability Indicators: After a 2021 widely affected by increased net losses, Pacifico showed a significant recovery in performance indicators in 2022. The favorable results came mainly from technical factors, as a result of both a significant reduction in the net loss rate and the operational growth of the period. Profits from investments decreased but remained a significant contributor to total profits. At the end of 2022, Pacifico registered an ROAE of 25.0% and a combined ratio of 95.9%, which are both comfortably within Fitch's guidelines for the current ratings.

Investment Risk Limited by Sovereign Risk: Pacifico's assets are concentrated in investment assets (72.6% total assets). This portfolio is mainly made up of investments in national bonds with a 'BBB' international rating or its national equivalent. The formula for calculating risky assets incorporates part of the sovereign investment (BBB/Negative), raising it to 65.6% at the end of 2022. Investment in bonds under investment grade and investment in common stock is very low. The rating factor score is constrained by exposure to sovereign or sovereign-related investments, so changes in the sovereign rating would have a direct impact on the score.

Favorable ALM Indicators: Pacifico's Asset liability management (ALM) indicators remain favorable. The duration gap had a slight increase compared to 2021 and is above the average of the last three years (2.2 years 2022). Fitch expects his increase to continue in the next 12 to 18 months as a result of the lower availability of long-term instruments in the local and international markets due to high interest rates.

Moderate Catastrophic-Risk Exposure: The company has limited exposure to counterparty risk, with retention levels remaining above 80% of gross premiums written (GPW). Exposure to catastrophic risk is mitigated through non-proportional reinsurance contracts, with internationally recognized entities with an average Issuer Default Rating above 'BBB+' and with net exposure to catastrophic events representing less than 1% of equity.

RATING SENSITIVITIES

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

Improvements in the industry profile, increasing reserve adequacy sophistication and the adoption of international standards.

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

ROE below 10% and combined leverage higher than 111%.

Net leverage on 5.9x and net premiums written (NPW)/capital greater than 1.7x.

A significant deterioration in asset risk that affects capitalization assessment.

A sovereign rating downgrade below 'BBB-', affecting the IPOE of Peru and also the investment risk credit factor.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond 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

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

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