1 Management Report 22
Table of Contents EVOLUTION Relevant Facts Private pension system reform Other relevant events Commercial Results Investment Results Financial Results Income Administration and sales expenses Other income and expenses Balance sheet Legal and Corporate Issues Balance sheet Profit and loss statement DIRECTORS AND 2
366 thousand members joined the system The national economy s good performance in 22 led to significant growth in the volume of new affiliations to the Private Pension System (SPP), which totaled 366 thousand new members. This represented an increase of 16.6% compared to 21. 3
THE EVOLUTION OF THE PRIVATE The strengthening observed in the national economy in 22 led to significant growth in the volume of new affiliations to the Private Pension System (SPP). In this context, an additional 366 thousand members joined the system, which represents 16.6% growth with regard to 21. The number of active affiliates in the SPP increased 6.9% YoY, to total 5.3 million. Growth in the Peruvian economy in 22 amounted over than 6%. This good result and dynamism contributed to an increase in the number of contributing clients. As such, at year-end, there were 2.4 million contributors to the SPP (which represents 17.4% growth YoY). The number of active contributors in 22 was equivalent to 47% of the total number of affiliates, which represents a 45% increase with regard to the previous year. The volume of contributions of pension fund affiliates reached US$ 2,536 million in 22, which constituted an increase of 21.0% YoY. At the end of 22, funds under management in the Peruvian SPP totaled US$ 37,967 million, which represented an increase of 25.1% YoY. Although the international markets were highly volatile in 22, the good evolution of emerging countries sustained growth in the region and Peru was once again a significant contributor to this performance. Our economy s indicators have remained solid this year due to good investment flows and growth in internal demand. In terms of the profitability of investments in the SPP, over the last year (December 22/December 21) the system reported a nominal yield of 12.44% for fund 1, 11.78% for fund 2, and 10.63% for fund 3. With regard to financial results, in 22 the SPP reported revenue of US$ 422.6 million, which represents growth of 19.2% with regard to the previous year. This was attributable to the new affiliates that have joined the system; continuous growth in the national economy; positive employment indicators; and a revaluation in the Nuevo Sol. Operating expenses increased 11.4% to total US$ 223.6 million due to higher expenses for administrative personnel and the sales force, which has increased to capture new clients. The SPP s operating income totaled US$ 199.1 million, which represents a 29.4% increase with regard to 21 s figure. It is important to note that these results, which are expressed in dollars, incorporate the effect of an appreciation in the local currency, which hovered around 5% in 22. Finally, net income was US$ 146.8 million, which represents a 27.5% increase with regard to 21. 4
Private Pension System: Main indicators End of period 22 21 20 Affiliates (thousands) 5,268 4,928 4,642 % variación (1) 6.9% 6.2% 4.1% New affiliations (thousands) 366 314 220 % variation (1) 16.6% 42.5% 11.8% Contributors (thousands) (2) 2,426 2,067 1,936 % variation (1) 17.4% 6.8% 9.6% Sales Force 1,008 1,142 1,149 % variation (1) -11.7% -0.6% 1.9% Funds under management (US$ millions) 37,967 30,360 31,077 % variation (1) 25.1% -2.3% 29.7% Voluntary Contributions (US$ millions) 230.4 2.9 267.6 % variation (1) 13.0% -23.8% 34.4% Collections (US$ millions) (3) 2,536 2,094 1,822 % variation (1) 21.1% 14.9% 14.1% Income (US$ millions) Operating Expenses (US$ millions) Operating Income (US$ millions) Net Income (US$ millions) 422.6 354.6 299.8 223.6 200.7 176.7 199.1 153.9 123.1 146.8 115.1 85.9 Source: SMV and information from the Superintendencia de Banca, Seguros y AFP. (1) Variation with regard to the previous year. (2) Annual average number of contributors. In 22, information available as of September. (3) Collections: Corresponds to total deposits in the period for obligatory and voluntary contributions. 5
63% tops the previous year s figure Prima AFP s commercial actions in 22 continued to focus on capturing new affiliates. These efforts allowed us to incorporate 140 thousand new members, which tops the previous year s figure by 63%. 6
1. Relevant Events In 22, the company s commercial activities focused on capturing new clients; strengthening relations with our affiliates; and adapting to the changes generated by the Law to Reform the SPP. In July 22, the Peruvian Government passed the Law to Reform the Private Pension System (Law 299) to contribute to the development and strengthening of the pension area of the social security system by increasing the competitiveness and efficiency of the SPP and reducing administrative costs, among other aspects. SPP Reform: The most relevant changes brought about by the aforementioned law include: The Affiliate Tender: A tender process will be held every two years to choose the AFP that will be in charge of affiliating new workers to the SPP. Under this system, the new affiliates who enter the SSP will be obligatorily assigned to the AFP that has won the 1 tender and must remain with this company for 24 months. In the period prior to the first tender, and with the objective of creating price competition among the AFP, an assignment process was created to grant the exclusive right to affiliate new workers during the period running from October 22 to January 23 to the AFP that offered the lowest commission scheme. As such, on September 13, 22, Prima AFP won the Assignment Tender, which made it the only AFP in the system that was authorized to capture new affiliates during the months of October, November, and December of the same year and January 23. On December 20, 22, the first tender of new affiliates to the SSP was held and was won by a new participant in the system. According to the norm, the workers who join the Private Pension System between February, 23 and January 31, 25 will affiliate to this new AFP in the Peruvian market. Nevertheless, the winning AFP is new to the system and needs time to implement its operations over the next few months. As such, the law stipulates that Prima AFP will continue to affiliate new contributors to the system until the new AFP is ready to begin operations. This will allow Prima AFP to temporarily continue to capture new affiliates, which will subsequently increase its client base. 2. Change in the scheme to charge management fees: The period to move from a scheme that calculates commissions based on flows to one based on balances has been set at 10 years to gradually align the interests of the AFP with those of their affiliates. At the end of December 22, Prima AFP presented its new commission scheme: Commission based on flow: 1.60% rate applied to the affiliates monthly remuneration. This commission is currently in effect. Mixed commission: composed of a flow-based commission of 1.51%, which is applied to the affiliates monthly remuneration, plus a commission of 1.90% a year, which is applied to the new balance generated after February 23 for new affiliates and April 23 for current clients. Current affiliates must choose between the flow-based commission and the mixed-commission scheme by March 31, 23. 7 (1)Unless: (i) this AFP's profitability is below the benchmark defined by SBS; (ii) the company declares insolvency, is dissolved, bankrupt or in the process of being liquidated; or (iii) another AFP offers a lower management fee.
3. 4. 5. 6. Joint tender across the SPP for insurance for survivors, disability and burial costs. This collective policy will be awarded to the insurance company that presents the best economic proposal. A Zero Fund, or a Capital Protection Fund, will be created to ensure stable growth and low volatility. This fund will aim to maintain the value of the affiliates assets after the age of 65. Regulation for this initiative is still pending. Measures were established to expand coverage (pending regulation), such as: The obligatory affiliation to the pension system of self-employed workers under the age of 40. A Social Pension System will be created for workers and managers of micro businesses who are under the age of 40 and perceive monthly incomes up to 1.5 times the Minimum Wage. Under this system, workers will receive a 2 contribution from the State up to a set rate or for an amount equivalent to the affiliate s contributions. Change relative to employers, service management, changes to accounting rules (income deferral), and operating 3 processes at the AFP, among others. The aspects of the Reform that aim to expand coverage and ensure operating efficiencies are noteworthy and will transfer benefits to the company s different interest groups and help preserve the integrity of the Private Pension System. Other relevant events: In terms of investments of funds under management, the year 22 was marked by an improvement in the financial markets. The world s stock exchanges, and primarily those located in emerging countries, posted positive returns, which in turn improved the yields of funds under management. Peru, which boasts solid macroeconomic fundamentals as well as monetary and fiscal stability, was one of the region s top performers with regard to growth this year. This has generated an increase in investment flows; growth in consumer and business confidence; and a encouraging outlook for the years to come. Prima AFP strives to manage the risks that may affect the company s ability to meet its objectives. In 22, improvements were made in loan risk processes to control the counterparty risk to which funds under management may be exposed. We also implemented improvements in processes and methodologies for market risk, which ensures we have the necessary tools to take effective investment decisions. Finally, we continued our efforts to evaluate operating risks relative to critical processes in an environment marked by change and a need to adapt to new rules. In 22, Prima AFP was recertified by ISO 90:2008 for all of it processes (we achieved recertification for the ISO obtained in 2009, which expired in November 2009). This year, the System for Quality Management focused on analyzing our processes to clearly identify the scope, purpose and inter-relation between the same to draw up a process map that accurately represents internal operating. The progress that was made in terms of process knowledge and ordering helped guide the analysis of necessary changes in internal operations and provided important data for the ISO recertification process. This recertification is evidence of our on-going effort to continuously improve our System for Quality Management and satisfy our clients. 8 (2) The State will gradually contribute until it reaches the equivalent of 4% of the micro business employee s salary. The graduality of this rate, and the maximum period that set rate will reach the 4% top, has yet to be established. (3) The efficiency of operating processes refers to the centralization and possibility of outsourcing advisory and sales force services.
In 22, Prima AFP continued to lead the market in terms of SPP s main indicators, including: total funds under management, volume of contributions of new contributors and total value of the affiliates RAM (monthly remuneration base). Next, we present the results of the systems main indicators. The contribution level of Prima AFP s affiliates remained solid with an average adjusted contribution rate of 57.5% in January-October 22, which tops the 53.3% reported by the system, according to the information provided by the Superintendencia de Banca, Seguros y AFP (this indicator excludes affiliates that have not made contributions during their time in the SPP). In terms of obligatory collections amounts, Prima AFP once again took the lead in the SPP with a 32.8% share of total collections. This year, the collections volume increased 21.0% (measured in US Dollars). Fee income from funds under management depends on our affiliates remuneration levels. According to estimates based on our revenues and management fee, Prima AFP s remuneration base grew in 22. If we extend the analysis to include the SPP, we estimate that our market share for this indicator was around 32.4% at the end of 22. The funds under management at Prima AFP at the end of 22 totaled US$ 11,964 million, which represents 31.5% of the total amount managed by the SPP. In this context, Prima AFP currently boasts the highest level of funds under management in the system. The volume of voluntary contributions under management increased in 22 to close the year at US$ 98 million with a market share of 44.1% Prima AFP: Main indicators and market share Prima AFP 22 System 22 Share % 22 Prima AFP 21 System 21 Share % 21 Affiliates - Thousands (1) New Affliations - Thousands (2) Sales Force (1) Funds under Management - US$ millions (1) Collections - US$ millions (2) Voluntary Contributions - US$ millions RAM - US$ millions (3) 1,339 5,268 25.4% 1,2 4,928 24.4% 141 366 38.4% 86 314 27.5% 447 1,008 44.3% 275 1,142 24.1% 11,964 37,967 31.5% 9,486 30,360 31.2% 833 2,536 32.8% 688 2,094 32.9% 98 223 44.1% 86 2 42.2% 663 2,4 32.4% 535 1,660 32.2% Source: Superintendencia de Banca, Seguros y AFP; SMV (1) At the end of the period (2) Accumulated to period (3) Monthly affiliate remuneration, income calculation base. Prima AFP estimates, based on average income over the past 4 months. 9
Commercial Results In 22, Prima AFP s commercial actions continued to focus on capturing new affiliates. This has led to more than 140 thousand new affiliations, which represents an increase of 63% YoY. It is important to note that Prima AFP, as the winner of the tender to assign affiliates, was the only AFP in the system that was authorized to capture new affiliates in the last quarter of the year. Sustained growth was evident in the total of the monthly insurable remuneration of our affiliates (RAM) in 22 and by year-end this indicator had increased 24.0% YoY. This growth was attributable to our solid client base, which continues to consolidate following the incorporation of new affiliates. All of this is unfolding in a framework of sustained economic growth, which generates jobs and improves salary levels. In terms of services in 22, Prima AFP offered its affiliates online conferences to provide them with timely information to resolve their doubts about the economic juncture, Prima AFP s investment strategy, and the profitability of its funds. Along the same lines, and with the objective of providing better service, Prima AFP installed modules for rapid customer service in its main agencies nationwide. This gives our affiliates and pensioners the opportunity to quickly and easily access their information in a completely safe and confidential manner. Our agency network includes 17 locations nationwide. At each of these locations, our team is prepared to provide our affiliates with the service they have come to expect. To develop a closer relationship with our affiliates, we have strengthened our presence in the social networks, and Facebook in particular, through Prima AFP and AFPconversa. The latter portal was created by Prima AFP to inform and educate affiliates and non-affiliates about the Private Pension System. This tool has become an additional channel for customer service, information and interaction with affiliates and non-affiliates. In this way, we are able to answer questions about Prima AFPand the SPP on a daily basis. Currently, we have 160,000 fans in our social network. Our objective is to provide better customer service and increase the population s knowledge and understanding of the SPP. Additionally, we provide our affiliates and their employers an online chat service to provide immediate answers to their questions. It is important to mention that Prima AFP schedules annual conferences for the employers of its affiliates to keep them abreast of changes relative to the SPP and provide information on the main issues that affect the system and human resource management. The objective is to ensure client fidelity and keep them informed and up-to-date. Additionally, the prestigious British publication World Finance, which specializes in economics, finance and business in the global ambit gave Prima AFP, for the third time consecutive, the World Finance Pension Funds Award 22 as the best AFP in Peru. Prima AFP obtained this prize due to its outstanding management of risks and investments, its dedication to customer service and its permanent efforts to keep its affiliates informed. Additionally, according to the results of the Annual Survey of Business Leadership conducted by Ipsos Apoyo Opinión y 4 Mercado, 45% of the executives surveyed believe that Prima AFP is the best AFP in the system, well above the average system. 10 (4) The universe considered is composed of the TOP 1,500 private companies that work in Peru. The sample is composed of 235 managers: 162 in Lima and 73 in the aforementioned cities. The study was conducted through personal interviews. The study s fieldwork was conducted between August 20th and October 12th of 22.
Investment Results As previously mentioned, the year 22 was marked by an improvement in the financial markets. 5 According to the MSCI indexes, the global stock exchanges grew 13.44% YoY. This growth was driven by the emerging markets, which reported profitability of 15.15%. The Peruvian stock market posted 5.94% profitability during 22, which is slightly higher than the figure of 5.43% posted by the Latin American stock exchanges. Considerable volatility was evident on the local scene due to the sovereign risk in Europe, weak economic recovery in the USA and a possible deceleration in Chinese production. The trajectory of the local stock market followed the evolution of the country s main metals including gold, copper, silver and zinc; all of these commodities posted positive returns in 22. The value of Prima AFP s funds under management increased 26.1% in 22 to total US$ 11,964 million at the end of the year. The profitability indicators for Prima AFP funds under management were positive. In the last 12 months (December 22 / December 21), the results were 12.0%, 12.4% and 11.5% for funds 1, 2 and 3, respectively. If we extend the period of evaluation to 6 years (December 22 / December 2006), Prima AFP s fund 2, which currently represents 66.0% of its total funds under management, reported an annualized nominal yield of 8.8% while SPP s average was 8.2%. It is important to note that Prima AFP s fund 2 was once again the system s top performer. 11 (5) MSCI: Morgan Stanley Capital International
Investment Results Prima AFP: Annualized nominal returns indicators Annualized results from investments Prima AFP System Fund 1 Profitability (1 year) Profitability (6 years) Fund 2 Profitability (1 year) Profitability (6 years) Fund 3 Profitability (1 year) Profitability (6 years) Dec-12 12.0% 12.4% 7.4% 7.5% 12.4% 11.8% 8.8% 8.2% 11.5% 10.6% 8.7% 9.0% Source: Superintendencia de Banca, Seguros y AFP. Due to market volatility, there were variations in 22 in the relative weight of each fund in the total portfolio managed by Prima AFP. In this context, fund 3 s share fell from 24.2% to situate at 23.4% at the end of 22; the majority of the affiliates who changed funds migrated to fund 1. Prima AFP: Managed portfolio to December 22 and 21 (US$ million) Dec-12 Share % Dec-11 Share % Fund 1 1,272 10.6% 9 9.5% Fund 2 7,897 66.0% 6,289 66.3% Fund 3 2,795 23.4% 2,295 24.2% Total US$ millon 11,964 100.0% 9,486 100.0% Source: Superintendencia de Banca, Seguros y AFP. 12
Investment Results The investments that Prima AFP makes with its funds under management contribute significantly to national development. Our funds under management are invested in the country s main companies and are used for important development projects in the sectors of energy (electricity distribution, hydroenergy, and hyrdocarbons), transporation (road networks), telecommunications and the agriculture sector. At the end of December 22, more than US$ 1,000 million was invested in companies and infrastructure projects throughout the country. Below, we present the structure of each fund at the end of December 22 according to asset class: Prima AFP Found 1 structure by asset class, as of December 22 (%) 3.5% 6.3% 6.6% Long term fixed income Local equity revenues Short term fixed income Foreign equity income Operations in transit + Current account 18.6% 65% Prima AFP Found 2 structure by asset class, as of December 22 (%) 7.1% 1.7% Long term fixed income Local equity revenues Short term fixed income Foreign equity income Operations in transit + Current account 24% 50.3% 16.9% Prima AFP Found 3 structure by asset class, as of December 22 (%) Long term fixed income Local equity revenues Short term fixed income Foreign equity income Operations in transit + Current account 48.8% 2.1% 17.3% 3.3% 28.5% Source: Superintendencia de Banca, Seguros y AFP. 13
Financial Results In 22, Prima AFP reported fee income for US$ 117.2 million and earnings of US$ 38.2 million. These figures were possible due to growth in our income base and strict control of operating expenses. Income Fee income was US$ 117.2 million in 22, which represents a 12.2% increase with regard to 21. This growth was possible given our solid income base, which is composed of the total of all of our affiliates remunerations. Prima AFP s management fee is applied to remuneration base. New affiliates also boosted income this year. The income generated by these new captures, which were assigned to the company through the tender process, posted an increase that will be progressively evident in the months to come. Additionally, the 5% appreciation (approx.) in the local currency had an impact on income denominated in US Dollars. Administrative and sales expenses Expenses for personnel totaled US$ 35.1 million, which represents a 25.4% increase with regard to 21. This growth was primarily attributable to commercial efforts to capture new affiliates and changes in accounting to reflect the requirements of the Law to Reform the SPP. Administrative expenses, excluding personnel, totaled US$ 26.6 million, which represents a 2.5% decrease YoY. This figure included US$ 8.5 million for depreciation and amortization. This decrease is attributable to a decrease in amortization charges for intangibles linked to the acquisition of Unión Vida in 2006. In 22, this amortization was US$ 4.4 million. Other income and expenses At the end of 22, other income and expenses posted a result of -US$ 0.6 million, which represents a 64% increase with regard to the figure reported in 21 (-US$ 1.5 million). This result is due to the US$ 3.6 million in earnings that was generated by the sale of its main office site to Pacifico Vida in 22. General Balance Prima AFP reported a cash position of US$ 51.6 million at year-end. This level is associated with Prima AFP S move to sell real estate to Pacifico Vida for US$ 13.6 million as well as earnings generated by its business. A portion of these financial resources will be used to reduce the company s share capital, in accordance with measures that were approved at the General Shareholders Meeting in November 22. The temporary cash surpluses reported during the year were held in bank deposits. 14
Financial Results Legal reserves, which correspond to shares held in funds as a guarantee in the case of fluctuations in profitability with regard to the competition, increased in 22. At the end of the year, the asset level was situated at US$ 1.6 million whereas shareholders equity reported net unrealized gains for US$ 37.1 million. Prima AFP S financial debt matures in 26. In this regard, the company s payment schedule is in keeping with its objective to optimize the company s debt/capital structure. In the month of December 22, debt was assumed for US$ 2.1million to finance mid-term investments in software and fixed assets. At the end of December 22, Prima s bank debt totaled US$ 28.5 million, which is similar to the balance reported at the end of December 21. At year-end, Prima AFP reported an asset level of US$ 310.8 million, liabilities for US$ 141.7 million, and net shareholders equity of US$ 169.1 million. Prima AFP: Main Financial Indicators (US$ thousands) 1/ 22 21 Revenues General expenses Net earnings 117,157 1,380 (78,971) (71,984) 38,186 32,396 Total Assets Total Liabilities Net Equity 310,821 270,242 141,713 92,311 169,108 177,931 1/ IFRS 15
Legal and Shareholders Issues At the General Shareholders Meeting held on March 30, 22, a new Board was appointed. The delegates to the Board are: 1. Walter Bayly Llona, who was elected to serve as President on the Board Session held on March 30, 22 2. Ruben Loaiza Negreiros 3. Alvaro Correa Malachowski 4. Gianfranco Ferrari de las Casas 5. Fernando Dasso Montero 6. Pedro Rubio Feijoo 7. Rodolfo Javier Otero Nosiglia In the Board Session on March 22, 22, Julissa Echecopar Yllanes was appointed to serve as Manager of Finance and Administration, replacing Sandra Holme Bowdin, who is moving on to new projects in Credicorp. On May, 22, Renzo Ricci Cocchella became General Manager of Prima AFP, replacing Ruben Loaiza Negreiros, who now sits on the Board as Vice President. Additionally, as of May, 22, Jaime Vargas Galdos was named Manager of the Commercial Division, replacing Renzo Ricci Cocchella. On November, 22, Claudia Noriega Pacora was appointed Manager of the Division of Risks, replacing Gonzalo Podestá Haustein, who will be working on new projects in Credicorp. At the General Shareholders Meeting held on November 05, 22, an agreement was reached to increase the number of board members from seven (7) to (8) and named Alfredo Thorne Vetter as an Independent Director. Additionally, at the General Shareholders Meeting held on November 05, 22, an agreement was reached to partially modify Prima AFP s statutes to reduce share capital by S/. 67,340,000 (which is equivalent to US$ 26.3 million) by returning the contributions of the shareholder Grupo Crédito S.A. through the amortization of 67,340 shares with a nominal value of S/. 1,000 each. Subsequently, the company s share capital fell from US$ 97.7 million to US$ 71.4 million. At the Board Meeting held on November 19, 22, Eduardo De la Piedra Higueras was named an independent director, replacing Rodolfo Javier Otero Nosiglia, who presented his resignation. 16
US$ 117.2 millon In 22, Prima AFP reported fee income of US$ 117.2 million and earnings of US$ 38.2 million (IFRS results), both result of growth in our income base and prudent expense controls. 17
Balance Sheet Assets Cash Legal reserves Fixed Assets Intangibles Goodwill Other assets Income tax differed 22 21 (US$ thousands) (US$ thousands) 51,642 15,708 1,550 88,319 3,5 13,893 64,525 70,265 44,594 44,594 43,867 34,386 627 3,076 Total assets 310,821 270,242 Liabilities Deposits and obligations Bank debt Income tax differed 6 Other liabilities 766 814 28,468 28,295 27,878 27,690 84,600 35,511 Total liabilities 141,713 92,311 Net equity Capital Legal reserves and others Unrealized earnings Cummulative results Annual results 71,433 97,707 8,517 5,7 37,108 25,970 13,863 16,842 38,186 32,396 Total net equity 169,108 177,931 Total liabilities and net equity 310,821 270,242 18 (6) At the end of December 22, Prima's liabilities include a reduction in capital for US$ 26.3 million through a reimbursement of contributions to Grupo Credito, S.A. This payment was made in February 23.
Profit and Loss Statement Financial revenues Interests on bank deposits 22 21 (US$ thousands) (US$ thousands) 968 550 968 550 Financial expenses Interests on bank and correspondents' loans Net interest income Other income Fees Other income (1,714) (1,548) (1,714) (1,548) (746) (998) 118,123 105,494 117,157 1,380 966 1,114 Operative expenses Personnel expenses Administrative expenses Depreciation and Amortization Other expenses (60,798) (56,799) (35,109) (28,008) (18,079) (18,152) (8,542) (9,147) 932 (1,492) Exchange rate translation result 153 (176) Income before income tax 56,733 47,521 Income tax (18,547) (15,125) Net Income 38,186 32,396 19
DIRECTORS AND 20
Board of Directors President Vice President Director Director Director Director Director Director Walter Bayly Llona Ruben Loaiza Negreiros Alvaro Correa Malachowski Fernando Dasso Montero Gianfranco Ferrari De Las Casas Pedro Rubio Feijoo Alfredo Thorne Vetter Eduardo De la Piedra Higueras Management General Manager Commercial Manager Investment Manager Risk Manager Finance and Administration Manager Operations Manager IT Manager Legal Manager Human Resources Manager Renzo Ricci Cocchella Jaime Vargas Galdos José Antonio Roca Voto-Bernales Claudia Noriega Pacora Julissa Echecopar Yllanes Julio Bravo Torrontegui Guillermo Beingolea Vingerhoets Claudia Subauste Uribe Carla Barrionuevo Gómez-Morón 21