LatinFinance - March/April 2015 - 66

INVESTORS
INSURANCE

Peru's growing insurance companies are increasingly diversifying
their investments. Yet finding strong returns in local currency
remains tough. By Rodrigo Amaral

Branching out

lthough demand for their products is mounting fast, Latin
America's insurance companies are having a hard time finding investments to match their
liabilities. In most countries, the reasons are shallow capital markets and tight solvency
rules, including regulations restricting diversification by asset class and geography.
Peru is making progress at providing insurance companies greater freedom to invest
in different assets and to risk money in other countries. The experience of Peru's insurers
illuminates much about the efforts of insurers across the region to improve investment
returns.
"Not too dissimilar to other Latin American markets, Peru has successfully modernized
its retirement and savings systems, and these have grown at an impressive pace in recent
years," says Maxi Rohm, the head of Latin America at Neuberger Berman. "With also
growing but still relatively small local capital markets, Peruvian institutional investors
struggle to find opportunities locally and thus need to allocate capital in international
markets."
Diversifying investment
Rímac Seguros, Peru's largest insurer with assets of 8.1 billion soles ($2.6 billion), as at March
31, 2014, already has 40% of its investment portfolio allocated to securities issued by entities
based in other countries, according to chief investment officer José Martínez Sanguinetti. If
securities issued by Peruvian companies in foreign markets are added to the mix, the ratio
climbs to around 70%.
The exposure of Rímac's investment portfolio to international markets is a result of
several factors, of which the quest of performance is only one.
Peru's economy, despite a shift over recent years towards local currency, remains largely
linked to the dollar. As a result, many policies are still quoted in dollars, especially in the nonlife segment, and it makes sense to match them with dollar-denominated assets.
And although Peruvian borrowers have taken a shine to local borrowing this year, the
country's capital markets still lack depth. Most large investors see few options beyond
government bonds and a few large corporations that issue short-term securities in significant
volume. With the central bank's reference interest rate at 3.25% in February, investors are

66 L ATINFINA NCE.COM - March/April 2015

hardly tempted to hold local bonds much
beyond regulatory requirements.
Rímac, whose financial investment
portfolio was 5.5 billion soles in March
2014, or around 20% of all assets under
management by insurers in Peru according
to Apoyo & Asociados, will therefore keep its
sights set on global markets. The company
closely follows 120 large issuers in 12
different countries, and today has 80 of
those in its portfolio.
"The next step is to increase our allocation
to private debt markets, first in developed
economies and later in less-developed
countries," Martínez says. Rímac is talking
to asset managers to develop partnerships
to invest in syndicated loans, infrastructure
finance and other such transactions abroad.
In the portfolios of Pacífico Seguros,
Rímac's main rival, international bonds
represent 20% of its mainly dollardenominated life insurance investments.
Much of the remainder are dollardenominated bonds issued by Peruvian
borrowers. In fact, Eduardo Tirado, the
insurer's chief investment officer, says that
Peruvian insurers are grappling with a lack
of fixed income securities that can provide
income in soles.
The challenge is compounded by the fact
that some of the insurance industry's fastest
growth rates are in retirement pensions and
annuities, which are most dependent on the
local currency. That's something common
among insurers in several parts of the region.
"The difficulty lies not only in finding a
match between maturities and currencies,
but also [in achieving] satisfactory returns
from investments," says Alfonso Novelo, a
director of analysis at ratings agency AM Best.
Bonds with long enough maturities are still
rare in Latin America. "Derivatives provide
an option. However, the large majority of
participants in this market have not the
required infrastructure or are not allowed
to make this kind of investment."
As the Peruvian population ages, demand

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