Fitch Affirms Pacifico Peruano-Suiza's IFS at 'BBB-'; Outlook Negative.

NEW YORK -- Fitch Ratings has affirmed the international scale Insurer Financial Strength (IFS) rating of Pacifico Peruano-Suiza Compania de Seguros y Reaseguros (PPS) at 'BBB-'. The Rating Outlook is Negative.

PPS' rating reflects its adequate retention levels and solid market share and franchise in Peru. A conservative management also benefits PPS' rating. The rating also considers a recent deterioration of its profitability, capitalization and liquidity levels, which were negatively affected both by non recurring expenses derived from the restructuring process started in 2005, competitive pressures and the effects of a significant earthquake and sizable claims in its mining portfolio, as well as a relatively higher share of variable income securities on its investment portfolio that could result in some volatility in its financial results. A slower-than-expected recovery in PPS's operating performance or a further pressure over capitalization and/or its liquidity could result in a downgrade of its IFS rating.

The significant increase in the net claims ratio (62% in 2006, 74% in 2007) and the burden of some restructuring costs significantly pressured PPS' combined ratio during 2007 up to 126%, still below the market average but worse than the company's average for the last few years. Despite PPS' conservative program, the costs associated with a strong earthquake outside Peru's capital region and the occurrence of two sizable claims related to the local mining industry not only affected PPS' retention levels but also resulted in an increase of its reinsurance program due to the payment of the reinstallation costs of its protections, which explained close to 60% of the increase on net claims during 2007. Also, fierce competition in massive branches resulted in lower prices, and the completion of the last part of the enhancement of the current business plan pressured profitability as well, because during the period nonrecurring variable income gains were limited.

A non-recurring cash dividend of around 97% of 2006's net income not only resulted in an important decrease of PPS' liquidity ratios, but also in an increase of its leverage levels, though those are still in line with market averages. Going forward, a rebound in PPS' profitability levels and a more prudent dividend payout would help to enhance the company's capital and liquidity position in order to sustain the company's expected growth.

PPS operates in all branches, and jointly with Alico (a subsidiary of AIG) controls the largest life insurance company in the country, El Pacifico Vida Compania de Seguros y Reaseguros (Pacifico Vida). Also, PPS operates a health services company. On a consolidated basis, PPS managed close to US$500 million in premiums in 2007, the second largest, with a 37% share of a highly concentrated market.

75% of PPS' capital is in the hands of the Grupo Credicorp (Credicorp), a financial conglomerate that includes Banco de Credito del Peru (BCP, the largest commercial bank in the country) and 20% in control of American International Group (AIG). This strong shareholder structure not only benefits its distribution capabilities, but also results in above-average corporate governance policies and controls that enhance PPS' financial profile.

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