Innovation Plan – RIMAC Investments

To increase profitability of RIMAC investments and reduce its variability in time by modernizing the capital market in Peru and implementing more modern methods for the existing investment selection and allocation.

Innovation presentation

The Investments Innovation Plan consisted of 10 initiatives that increase the expected profitability of our portfolio and at the same time, diversifies risk better. Thanks to them, RIMAC´s investment portfolio will permanently obtain greater income due to these investments and these will experience less variability. In order to implement these initiatives, in most cases, we had to work with regulating entities to modernize the existing regulations.

The process consisted of three stages: Asset Selection, Asset Allocation, and Execution.  Asset Selection (Value Investing Initiative): Consists in the identification of trends that determine the development of global economy in the long term. Then, we established criteria to systematically identify countries favored by this process, the most favored economic sectors and issuing entities in those sectors that have competitive advantages that cannot be replicated, successful operators and high levels of solvency (105 issuers in 14 countries).

Asset Allotment (Factor Investing Initiative): We developed optimization models for our 20 portfolios using “A Risk Factor Approach to Asset Allocation”¹.

Execution (Initiatives: Quantitative Trading, Debts/Claims, Syndicated Loans, Infrastructure, Real Estate, Inka Bonds, Derivatives, Trusts): We have created the necessary financial instruments and vehicles to take advantage of these investment opportunities:

(1) Long-term cross currency interest rate swaps.

(2) Three vehicles that enable to invest in the capital and debt of infrastructure projects worldwide and in syndicated loans of high potential companies in the principal world economies.

(3) A vehicle to purchase accounts payable of the principal companies in Peru “Factoring”.

(4) We structured private bond issuances in Peru for commercial real estate projects.

(5) We built the principal network of hospitals in Peru.

(6) We were the first insurance company in Latin American to invest in “Green Bonds”.

(7) We managed to have several multilateral entities (Kexim, SEK, IFC) issue long-time debts denominated in Soles.

(8) We developed a portfolio management service platform for our shareholders using “Trusts”.

(9) We developed a quantitative trading model.

¹ Clarke, Roger, Harindra de Silva y Robert Murdock. “A factor Approach to Asset Allocation”, 2005.

Uniqueness of the project

In relation to Asset Selection: We are the first insurance company to have a systematic selection process for investment opportunities in bonds, shares, infrastructure, real estate and mutual funds throughout 14 countries worldwide.

In relation to Asset Allotment: We are one of the first insurance companies in the world to have based all its portfolio optimization models on the “Risk Factor Investing” methodology.

In relation to Execution: We were the first institutional investor to invest in infrastructure worldwide in Peru, the first Peruvian insurance company to invest in factoring, the first insurance company in Peru to invest in syndicated loans, the first insurance company in Latin America to invest in Green Bonds; we developed the first private issuances of bonds to finance real estate projects, we structured the longest cross currency interest rate swaps in the history of the country, we managed to have several multilateral entities issue long-term debts in Soles for the first time, we were the first insurance company in Peru to use trusts for offering portfolio management services. We were the first insurance company in Peru to have a quantitative trading model.

The Reason Behind

When this project was launched, RIMAC was confronting a worldwide low investment return setting and there were few risk diversification possibilities in the local capital market. This enabled us to access less efficient market segments worldwide and to increase return without increasing risks (worldwide infrastructure, syndicated loans, value investing, factor investing, and quantitative trading). In the local market, we developed methods and financial instruments that no one had used ever before and which allowed us to diversify our risks and increase profitability at the same time (cross currency interest rate swaps, factoring, green bonds, hospitals, private bond issuances, multilateral entities issuances, portfolio management for our shareholders, factor investing).

Results

In 2012, continuous investment operations amounted to US$85Billion. In 2016, they reached US$117Billion. This represents a 40% increase. The profitability obtained during the last five years increased by 9%. Thanks to the continuation of these initiatives, we expect we can maintain these profitability levels up to 2021 and gradually reduce volatility in our results. Thus, our goal is to reach an investment income of US$200Billion with assets under management of US$ 5Billion.

In 2014, the international risk classifying agency Moody’s improved our rating from Baa3 to Baa2 with a Stable Outlook and has ratified this to date. On the other hand, Fitch maintains our BBB rating with a stable outlook since 2012. We are the only insurance company in Peru to have two international investment grade ratings. Likewise, the local classifying companies Apoyo y Asociados and Equilibrium ratified our A+ category since 2012 to date.