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A significant portion of the instruments are investment grade (73%), which reflects the bank’s prudent policy to concentrate portfolio investment in instruments with a good risk profile.  

Asset Administration

The total of deposits and AuM include investments such as proprietary mutual funds and financial instruments in custody. The total of these funds increased 4.7% QoQ and 22.4% YoY.

AuM increased 6.9% QoQ and 52% YoY, reflecting an upward trend. This is attributable to direct investments in international markets stemming from market recovery and the subsequent increase in the value of these investments and AuM.

Deposits fell a mere 0.1% QoQ but reflected a 15.7% contraction YoY, attributable to the fact that clients have migrated from deposits to structured products, funds and direct investments that ASHC manages and holds in custody.

 

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VI. Prima AFP

During 2Q10, PRIMA’s commercial activity evolved in a stable environment. Efforts continued to focus primarily on capturing new affiliations and less emphasis was placed on obtaining transfers, which is in line with the company’s commercial policy. The number of affiliations in 2Q10 increased QoQ while transfers declined.

At the end of the second quarter and for the first time in its history, PRIMA ranked first in market share for funds under management in the system (30.9%). The company also maintained a solid position in terms of contribution collections, reporting a 31.8% share of total collections, and performed well in terms of voluntary contributions’ management, where it achieved a 42.4% share.  

Quarterly main indicators and market share

		PRIMA 2Q10				System 2Q10				Part. 2Q10 %				PRIMA 1Q10				System 1Q10				Part. 1Q10 %
Affiliates			1,098,912				4,540,512				24.2	%			1,088,878				4,500,531				24.2	%
New affiliations (1)			12,534				47,785				26.2	%			12,093				48,522				24.9	%
Funds under management US$ million			7,657				24,807				30.9	%			7,722				25,086				30.8	%
Collections US$ million (1)			141				442				31.8	%			136				428				31.8	%
Voluntary contributions US$ million (2)			86				203				42.4	%			89				212				42.2	%
RAM US$ million (3)			407				1,270				32.0	%			388				1,213				32.0	%

Source: Superintendencia de Banca, Seguros y AFP

(1) Accumulated to the Quarter.

(2) Available data as of May 2010.

(3) PRIMA AFP estimates: average of aggregated income during the last 4 months excluding special collections and voluntary contribution fees

Commercial Results

The level of new affiliations and transfers in 2Q10, similar to previous periods, was around 15,000 (approximately 12,500 new affiliations and 2,500 transfers). This result is in line with PRIMA’s commercial policy and represents a 4% increase in new affiliations and a 13% decrease in the volume of transfers with regard to last quarter. It is important to mention that the net result for affiliations and transfers (entry and exit) generated a positive balance in terms of the company’s RAM and surpassed 1Q10’s result.  The RAM level continued to reflect an upward trend, which helped PRIMA maintain market leadership with a 32.0% share in the system.

At the end of the second quarter, PRIMA’s funds under management totaled US$ 7,657 million. This represents 30.9% of total funds under management in the system and places PRIMA in first position with regard to market share for this indicator.  

Investments

The financial markets were volatile during the second quarter, which was reflected in the slight reduction in the managed portfolio at the end of June. Profitability at twelve months (June 2010 / June 2009) was 5.41%, 15.97% and 20.29% for funds 1, 2 and 3 respectively. These results indicate that PRIMA is ranked first in terms of funds 2 and 3 and third with regard to fund 1.

Pension funds are long term in nature. With this in mind, if we look at the 4-year period from June 2006 to June 2010, PRIMA’s accumulated profitability was 36.44%, 64.74% and 98.68% for funds 1, 2 and 3, respectively. In this scenario, PRIMA is ranked first in terms of profitability in funds 2 and 3 and second place in fund 1. If we extend analysis to include the time period ranging from the system’s start-up (16 years ago) to the end of June 2010, the private pension system achieved an average nominal annualized yield of 13.14% and 8.49% in real terms.   

 

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During 2Q10, provisions for income tax and employee profit sharing totaled US$ 2.8 million. A slight appreciation in local currency generated a translation result and deferred liability adjustment of –US$ 75 thousand, which are basically attributable to the exchange rate’s effect on income tax provisions. In this scenario, PRIMA’s net income in the second quarter was US$ 5.9 million, which is slightly lower than 1Q10’s result.

At the end of June 2010, PRIMA reported an asset level of US$ 242.4 million. Shareholders’ equity during this period was US$ 155.9 million and liabilities totaled US$ 86.4 million.

The table below contains a summary of PRIMA’s financial results:

														Change %
Main financial indicators (US$ thousand) (1)		2Q10				1Q10				2Q09				QoQ				YoY
Income from commissions			20,943				20,494				18,728				2.2	%			11.8	%
Administrative and sale expenses			(8,984	)			(8,826	)			(8,230	)			1.8	%			9.2	%
Depreciation and amortization			(2,465	)			(2,467	)			(2,347	)			-0.1	%			5.0	%
Net operating income			9,494				9,201				8,151				3.2	%			16.5	%
Other income and expenses, net			(736	)			(629	)			(958	)			17.0	%			-23.2	%
Employee profit sharing and income tax			(2,826	)			(2,405	)			(2,224	)			17.5	%			27.1	%
Net income before translation results			5,932				6,166				4,969				-3.8	%			19.4	%
Translations results and deferred liabilities			(75	)			(220	)			(305	)			-65.7	%			-75.3	%
Net income			5,857				5,946				4,664				-1.5	%			25.6	%
Total assets			242,363				245,996				229,305				-1.5	%			5.7	%
Total liabilities			86,417				94,573				86,481				-8.6	%			-0.1	%
Net shareholders' equity			155,945				151,423				142,824				3.0	%			9.2	%

(1) IFRS

 

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VII.  El Pacífico Peruano Suiza and Subsidiaries

Grupo Pacifico

Pacifico Group, comprised of property and casualty insurance (PPS), life insurance (PV) and health insurance (EPS), reported earnings of US$ 16.5 million in 2Q10, which largely exceeded the US$ 12.1 million registered in 1Q10 and the US$12.7 million reported in 2Q09.

The underwriting result in 2Q10 was US$ 27.8 million, which represents a 61.7% increase QoQ and an increase of 86.4% in 2Q09’s result of US$ 14.9MM. In fact, 2Q10’s result was among Pacifico Group’s best in several quarters. Favorable evolution in 2Q10 is attributable primarily to:

i)  An excellent underwriting result in general insurance (PPS), which is to a large extent attributable to higher net earned premiums in 2Q10 of  US$ 51.1MM as compared to US$ 45.1MM in 1Q10. Though higher premium volumes were supported by the seasonality of the insurance business with regard to policy renewal in the second quarter of the year, the significantly better performance is strongly related to improvements in risk selection and underwriting of business lines with high retained premiums. This helped reduce the loss ratio from 54.4% in 1Q10 to 49.0% in 2Q10; and

ii)  The outstanding contribution made by the life insurance business (PV), which reported an improved 60.4% loss ratio in 2Q10 vs.75.4% in 1Q10.

Financial income remained stable in 2Q10 and reached US$20.9 million while the figures for 1Q10 and 2Q09 were US$ 21.6 million and US$ 20.1 million, respectively.

General expenses totaled US$ 25.1 million, which represents an almost 10% increase with regard to the US$ 22.9 million reported in 1Q10. This is primarily due to: i) higher uncollectible reinsurance reserves in general insurance (PPS), ii) increase in payroll expenses for new hires in property and casualty insurance (PPS) as well as for iii) an increase in third party services in the life insurance business (PV).

This improved performance led to the stronger contribution to Credicorp of US$ 12.5 million in 2Q10, largely exceeding the US$ 8.5 million obtained in 1Q10 and the earnings of US$ 9.7 million reported in 2Q09.

US$ Thousand		Net earnings																Adjustment for				Total Contribution
Period		PPS				PV*				EPS				PGA*				consolidation				to BAP
2Q09			5,730				5,347				1,684				12,748				(3,063	)			9,685
3Q09			9,530				4,263				(540	)			13,277				(3,189	)			10,088
4Q09			9,093				6,495				783				16,283				(3,911	)			12,372
1Q10			5,774				4,810				1,673				12,095				(3,603	)			8,492
2Q10			8,095				6,502				1,872				16,475				(3,957	)			12,518
QoQ			40	%			35	%			12	%			36	%		n.a.					47	%
YoY			41	%			22	%			11	%			29	%		n.a.					29	%

* After deducting minority interest

Pacífico General Insurance (PPS)

Net earnings in 2Q10 of US$ 8.1 million reflect a close to 40% increase in bottom line contribution vs. US$ 5.8 million in 1Q10 and US$ 5.7 million in 2Q09. This result makes the P&C business one of the top performers within the group.

 

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The strong increase in earnings in 2Q10 vs. 2Q09 reflects the better underwriting results, which are attributable to 10.7% YoY growth in net earned premiums and a significant YoY drop in the loss ratio from 64.0% to 49.0% in 2Q10.

Technical Results by Business Unit

		2Q10																1Q10																2Q09
US$ millon		Vehicle Insurance				Private Health Insurance				P&C				TOTAL PPS				Vehicle Insurance				Private Health Insurance				P&C				TOTAL PPS				Vehicle Insurance				Private Health Insurance				P&C				TOTAL PPS
Net premiums earned			20.6				15.2				15.3				51.1				19.8				14.7				10.6				45.1				19.2				13.1				13.8				46.2
Underwriting results			7.7				3.9				6.5				18.1				7.5				3.4				2.1				13.0				3.7				2.5				3.5				9.7
Loss ratio			41.8	%			66.2	%			41.8	%			49.0	%			39.6	%			68.4	%			62.6	%			54.4	%			60.5	%			73.5	%			60.0	%			64.0	%
Underwriting results / net earned premiums			37.5	%			25.5	%			42.6	%			35.5	%			38.0	%			23.2	%			19.4	%			28.8	%			19.1	%			18.9	%			25.4	%			20.9	%

·

The underwriting result for Vehicle Insurance was US$ 7.7 million in 2Q10, which represents an increase over 1Q10’s result of US$ 7.5 million.

The underwriting result for the Auto line was US$ 6.4 million in 2Q10, which fell with regard to 1Q10 due primarily to an increase in unearned premium reserves and higher claims, which increased from 38.5% in 1Q10 to 43.9% in 2Q10. Nevertheless, it is important to mention that even with this increase the ratio stands below the market average, which is approximately 47%1.

The Statutory Auto Liability Insurance line (SOAT) achieved an underwriting result of US$ 1.3 million in 2Q10, which tops the earnings of US$ 0.8 million reported in 1Q10. This result is attributable to a reduction in reserves for old claims and better risk selection.

·

In 2Q10, the Private Health Insurance business obtained an underwriting result of US$ 3.9 million, which tops the US$ 3.4 million reported in 1Q10 and the US$ 2.5 million obtained in 2Q09. The net earned premium grew 3.2% QoQ and 16% YoY. Results have improved significantly due to a drop in the loss ratio from 73.5% in 2Q09 to 66.2% in 2Q10 thanks to more efficient claims management, premium adjustments and new conditions for certain products.

·

General Insurance (P&C) demonstrated an increase of US$ 4.8 million in net earned premiums with regard to 1Q10 and an increase of US$ 1.5 million with regard to 2Q09. This is due primarily to higher policy renewal levels, which occur seasonally during the second quarter of the year.

The overall loss ratio fell from 62.6% in 1Q10 to 41.8% in 2Q10. The measures taken to continuously improve the portfolio are reflected in these results, which were particularly strong in the Cargo and Inland Marine, Hull and Ocean Marine and Fidelity Bond lines. The loss ratios for all these lines dropped with regard to 2Q09.

The aforementioned factors allowed the company to improve its underwriting result in 2Q10 by US$ 4.4 million QoQ and US$ 3.0 million YoY. This result is partially attributable to a better selection of risks and underwriting conditions in lines with high retained premiums.

 

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PPS’s net financial income was US$ 6.4 million in 2Q10 compared with US$ 5.9 million in 1Q10. This is due to dividend payments this quarter as well as higher interest income.  

Pacífico Vida (PV)

Pacifico Vida was also a strong performer this Q as net earnings before minority interest of US$ 10.5 million in 2T10,  surpassed 1Q10’s earnings of US$ 7.8 million by 35%.

The underwriting result in 2Q10 of US$ 4.3 million starkly contrasts with the US$ 0.8 million loss in 1Q10. This is primarily attributable to: i) a lower loss ratio during the second quarter of the year, which fell from 75.4% in 1Q10 to 60.4% in 2Q10 and ii) an increase in the net earned premium which reached US$ 39.8 million in 2Q10 compared to US$ 36.3 million in 1Q10 and US$ 29.4 million in 2Q09.

Pacífico Vida

(US$ MM)

Products		Total Premiums												Change %
US$ million		2Q10				1Q10				2Q09				QoQ				YoY
Individual life			14.0				13.7				12.0				2.2	%			16.5	%
Individual annuity			12.9				14.2				9.6				-9.3	%			34.7	%
Disability & survivor (Pension)			11.3				10.7				7.7				6.2	%			47.6	%
Credit life			7.2				6.6				5.4				10.1	%			34.0	%
Personal accidents			2.9				2.9				2.7				1.4	%			10.1	%
Group life (Law)			2.4				2.8				2.3				-13.9	%			4.4	%
Group life			4.3				3.6				3.8				21.1	%			13.4	%
Limited workers compensation			2.6				3.2				2.3				-19.8	%			10.8	%
TOTAL			57.6				57.6				45.7				0.1	%			26.1	%

The QoQ decrease in net financial income, which dropped from US$15.6 million in 1Q10 to US$ 14.4 million in 2Q10, can be explained by a decrease in the valuation of securities available for sale and investment reclassification.

General expenses in 2Q10 increased 9.3% with regard to 1Q10, reporting a total of US$ 8.8 million.

After deducting the US$ 4.0 million in minority interest corresponding to Alico, net earnings in the life segment in 2Q10 totaled US$ 6.5 million.

 

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Pacífico Salud (EPS)

In 2Q10, EPS also showed improved performance with the net earned premium reaching US$ 34.8 million, which represents 1.7% growth QoQ and 14.8% YoY. Furthermore, its underwriting result reflects a better risk and cost management and reached US$ 5.3 million, up 6% from 1Q10 results and up 60% from 2Q09 results.

Consequently, net earnings in 2Q10 reached US$ 1.9 million to top the US$ 1.7 million obtained last quarter and in 2Q09.

As is the case with PPS’s Private Health Insurance business, it is important to point at the significant reduction in the loss ratio, which was 78.4% in 2Q10 vs. 82.8% in 2Q09.  

These results indicate that the company has maintained its upward trend by efficiently managing claims and engaging in on-going negotiation with service providers.

 

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VIII. Economic Outlook

Economic Activity

Estimates indicate that the economy grew at an annual rate of 9.5% in 2Q10, which is the highest figure recorded in the last six quarters. In non-seasonal terms, recovery grew at a slightly slower pace in 1Q10 although it continues to outpace the levels registered during the crisis.

Economic dynamism is not homogenous across sectors. For example, it is estimated that the construction, manufacturing and commercial sectors grew 20.9%, 15.1% and 11.1% respectively in 2Q10 while fishing and mining fell 24.0% and 2.9%. The rapid recovery of the manufacturing sector, driven by the non-primary manufacturing, continues to stand out. This indicates a strong rebound following the contraction reported in 2009 (-8.5%) and demonstrates that the sector has experienced rapid growth this year (9.9% in 1Q10 and 16.5% in 2Q10).

By spending type, estimates indicate that growth in 2Q10 was driven by private investment and consumption, which reflects the same scenario observed in the years prior to the international crisis in 2009. The rest of the GDP components by spending type behaved positively. This was especially true of public investment, whose dynamism this year is attributable to the bi-annual fiscal stimulation plan.  The outlook for year-end indicates that private spending components will continue to be dynamic and private investment, which is expected to grow despite the electoral cycle, will be particularly strong. This cycle, although particularly extensive in 2010 (presidential, regional and local), does not appear to pose a significant political risk. Private investment is expected to grow, primarily in the mining and hydrocarbons sector; construction will increase its rate of expansion due primarily to activity in the country’s interior, where housing construction is expected to grow along with the penetration of commercial chains.

Construction is expected to remain the most dynamic productive sector, driven by public infrastructure and private projects.  Despite current international turbulence, the local economy’s rebound, coupled with that of our commercial partners (well diversified), is expected to help manufacturing reverse the decline experienced in 2009. If this holds true, the economy should grow 7.0% and forecasts may be revised upward.  

Gross Domestic Product and Internal Demand

(Annualized percentage variation)

 

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External Sector

 

Growth in imports (33.1% vs. 19.4% in the previous quarter) is due to dynamism in investment and local industrial consumption.  Inputs and capital goods imports are thought to have increased significantly. Growth in the former was driven by an increase in fuel prices but higher import volumes, particularly for iron and steel, also had an impact.

 

In 2010, to the extent that global recovery consolidates and continues to be driven by dynamic emerging markets, it is estimated that the trade balance will close the year with a surplus of US$ 6.7 billion and international reserves of US$ 36.6 billion, which exceeds the figure reported at the end of 2009 (US$ 30.9 billion).

Exports and Imports

(3 month moving average annual % var.)

Prices and Exchange Rate

At the end of 2Q10, annual inflation was 1.6%. Although this reflects a clear upward trend, it is still within the Central Bank’s target range (2% +/- 1pp) and is in line with expectations. Underlying inflation interrupted the declining trajectory evident since last year and has remained steady at 1.8% since March. The evolution observed in inflation is consistent with an outlook in which wholesale prices, specifically for imported products, reported a modest increase in May in particular due to a recovery in internal demand and the increase in fuel prices.

Accumulated inflation in the first six months of the year was 5.8%, which is primarily attributable to the dynamic in play during the first few months of the year. In this scenario, analysts forecast that inflation will be 2.5%, which is within the target range. Given the high growth forecasted for the Peruvian economy, this expectation would imply that the monetary authority will be very committed to ensuring its inflation target.

Although the dollar is weakening due to an increase in investors’ appetite for risk, it is important to emphasize that the downward pressures on the exchange rate have continued both in Peru and in emerging countries in general. The exchange rate at the end of 2Q10 was S/. 2.839, which means that there was virtually no change in last quarter’s figure.  Thus far this year, the downward pressures on the exchange rate have accentuated but the active intervention of the Central Bank, which was meant to regulate appreciation, has cushioned the impact. Information from July, for example, shows a record daily purchase amount of US$ 493 MM.

 

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