Lima, 3 August 2018

S.B.S. Resolution No. 2972-2018

The Superintendent of Banking, Insurance and
Private Administrators of Pension Funds

WHEREAS:

That, in accordance with the provisions of articles 345 and 347 of the General Law of the Financial System and the Insurance System and Organic Law of the Superintendency of Banking and Insurance, Law No. 26702 and its amending norms, hereinafter the General Law, it corresponds to the Superintendency of Banking, Insurance and Private Administrators of Pension Funds to protect and defend the interests of the public in the field of the financial and insurance systems, safeguarding the economic and financial soundness of the natural and legal persons that make up said systems;

That, articles 311 to 317 of the General Law establish the regime of investments that back the technical reserves, the minimum solvency equity and the guarantee fund of insurance and/or reinsurance companies;

That, by means of SBS Resolution No. 1041-2016, the Regulation of Investments of Insurance Companies was approved, by means of which the regulations governing the investments of insurance companies are updated and minimum requirements that the investments backing the technical obligations of insurance companies must meet are established;

That, as a result of the implementation of the norm, the Superintendency has identified the need to make clarifications with respect to the requirements for certain assets to be eligible automatically or under the notification process; likewise, the procedure for authorization of an instrument is modified, so that it can be applied both to a single instrument and to a group or type of instruments, assets or financial operation established by the Superintendency;

That, likewise, said Regulation establishes the functions of the Risk Unit in the management of the investment process; and, on the other hand, it contemplates investment limits per issuer or counterparty as elements to promote greater diversification of said investments and, in that sense, lower exposure to risks, safeguarding the solvency of insurance companies;

That, it is necessary to modify the aforementioned Regulation to specify that insurance companies must manage the real estate risk to which they are exposed, as well as monitor their indirect exposure to counterparties in lease, usufruct, or other similar contracts over their real estate investments; said indirect exposures must be included in the measurement of the aforementioned limits, and it is necessary to define a method for the estimation of such indirect exposures;

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That, in order to gather the opinions of the public, the prepublication of the draft resolution on the matter was ordered on the electronic portal of the Superintendency, under the provisions of the Thirty-Second Final and Complementary Provision of the General Law and in Supreme Decree No. 001-2009-JUS;

With the approval of the Deputy Superintendencies of Insurance, Risks, Economic Studies and Legal Advice; and,

In use of the powers conferred by numerals 7 and 9 of article 349 of the General Law;

RESOLVES:

Article One.- Modify the Regulation of Investments of Insurance Companies, approved by SBS Resolution No. 1041-2016, in accordance with the following:

1. Incorporate literals u), v) and w) to article 2, in accordance with the following:

"For the application of this Regulation the following definitions are considered:

(…)

u) Real estate for commercial purposes.- These are those real estate properties destined for obtaining income, capital gains or both, outside the residential scope.

v) Derivatives Regulation.- Regulation for the Negotiation and Accounting of Derivative Financial Products in Insurance Companies, approved by SBS Resolution No. 514-2009 and its amendments.

w) Structured Instruments.- They correspond to those combined instruments in which debt instruments (deposits, notes, bonds or similar) are associated with derivative instruments. Likewise, their yield and payment of principal is determined based on the variations observed in the prices of financial assets or derivative financial products".

2. With relation to the eligibility of the real estate referred to in literal g) of article 25, modify the requirement g.3) in accordance with the following text:

"g) Real estate.- Comprises direct investment in land and finished real estate, which meet the following requirements:

(…)

    g.3) Be free of charges and encumbrances, in accordance with the provisions of article 24. The transfer of the real estate in favor of a third party is permitted, under a lease, usufruct or surface right contract, provided that it does not have a purchase option in favor of the counterparty. Easements of passage and occupation or municipal technical charges, if registered on a real estate property, do not affect its eligibility for backing technical obligations."

3. Modify literal b) of article 26, in accordance with the following text:

"Other eligible investments

Article 26.- Investments other than those indicated in article 25 may be considered eligible by the company, provided that they are subject to any of the following processes, with the documentation requirement detailed in article 27:

(…)

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b) Authorization process.- Applicable to new instruments or assets other than those indicated in articles 25 and 28. This procedure is applicable at an individual level for a specific instrument, asset or financial operation, as well as for a group or type of instrument, asset or financial operation. The authorization request must be submitted together with the documentation indicated in article 27. In the case of investments that have received authorization at the group or instrument type level, the company must periodically notify the Superintendency of the specific investments made under said authorization, following the instructions indicated for such case.”

4. Amend subsection f) of article 28, referring to the assets subject to the notification process, in accordance with the following text:

"f) Real estate transferred under a lease, usufruct or surface right contract, with a purchase option in favor of the counterparty.- These correspond to those real estate properties of the company that are transferred under a lease, usufruct or surface right contract, in favor of third parties, with a purchase option at the end of the contract, and that comply with the requirements of subsection g) of article 25 of this Regulation, except for paragraph g.3)."

5. Replace article 27, referring to the supporting documentation for the notification and authorization processes, in accordance with the following text:

"Article 27.- The documentation required for the notification and authorization processes is the following:

a) Legal report regarding the review of the contractual clauses and conditions assumed by the company as a result of the investment. This report must include the favorable opinion on compliance with the conditions established in article 24.

b) Report from the investment unit, referring to the analysis of the investment decision, including an explanation of the suitability of said investment, and its alignment with the company's investment policy.

c) Report from the risk unit, referring to the analysis and support of compliance with the eligibility criteria, the impact on regulatory and internal limits, the valuation methodology to be applied, the assessment of the risks inherent to the investment and the actions taken to manage said risks.

In the case of the authorization process, the report must additionally support each of the following points:

c.1) The assets, including those that are underlying of operations, must have adequate credit quality. For this purpose, compliance with the following conditions must be evidenced, taking into consideration the type of asset:

i) In the case of assets that by market practice or regulatory requirement require to be classified, they must comply with the risk classification requirements set forth in chapter VII.

ii) For financial assets that by market practice do not require to be classified, the counterparty in the corresponding asset must have adequate credit quality. For this purpose, the following are taken into consideration, among other indicators:

    1. The risk classification in other instruments issued by the counterparty, complying with the requirements set forth in chapter VII.

    2. The opinion of specialized third parties on the counterparty's financial statements, which must be audited.

    3. The credit rating that the counterparty has in the credit bureaus of the country where it is incorporated or maintains operations; which must be in

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the normal category, in accordance with the Regulation for the Evaluation and Classification of the Debtor, or its equivalent.

c.2) The assets, including those that are underlying of operations, must be easily realizable at the required moment, without significantly affecting their value. This condition must be evaluated taking into consideration the structure of the company's liabilities, and the specific technical obligation that the asset backs.

c.3) The assets, including those that are underlying of operations, must have reliable sources of price information and/or valuation methodologies, that allow knowing the fair value of the asset.”

d) Copy of the duly signed minutes of the investment committee, in which a favorable opinion on the investment is given, specifically.

e) Copy of the duly signed minutes of the risk committee, in which the approval of the investment is recorded.

f) In case the authorization of the investment has not been delegated to any of the aforementioned committees: copy of the duly signed minutes of the board of directors or of the competent body, where the investment is specifically authorized.

g) Copy of the documentation or information that supports the aforementioned reports.

6. Incorporate as subsection i) of article 28, referring to the assets subject to the notification process, the following text:

"i. Dual currency fixed coupon instruments that comply with the following:

i.1) The instrument must comply with the risk classification requirements set forth in Chapter VII of this Regulation.

i.2) The issuer of the instrument must be incorporated in a State that has an investment grade international risk classification for its long-term debt securities.

i.3) The maturity term of the instrument must be in accordance with the Investment Policy of the group of obligations it must back.

i.4) The price and general characteristics of the instrument must have public information. In case the instrument does not have an observable price, the insurance company must have a valuation methodology as established in Article 11 of the Regulation for the Classification and Valuation of Investments, and this must be validated by an independent third party.

i.5) The prospectus of the instrument must contemplate mechanisms for early redemption by the insurance company.

i.6) The currencies in which the coupons or the principal are settled must be in local currency (Sol), US Dollar or Euro.

i.7) The currency of the instrument is that in which the principal and the flows are contractually denominated. The currency in which payments are settled must not be considered.”

    7. Incorporate as subsection j) of Article 28, referring to assets subject to the notification process, the following text:

"j. Structured instruments with protected capital that comply with the following:

j.1) The authorization referred to in Article 10° of the Derivatives Regulation must be obtained.

j.2) The protected capital must back at least one hundred percent (100%) of the principal payment at the maturity of the structured instrument; likewise, it must comply with the eligibility requirements set forth in subsections b) or c), except subparagraphs c.6) and c.7), of Article 25° of this Regulation.

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j.3) The maturity term of the structured instrument must be in accordance with the Investment Policy of the group of obligations it must back, and in no case may it exceed 7 years. Additionally, it must be consistent with the maturity terms of the instruments that constitute the protected capital and the yield component.

j.4) If the company makes the early redemption of the structured instrument and is contractually obligated to be the direct counterparty of the derivative financial instrument, it must divest from said derivative in order not to exceed the scope of the specific authorization to invest in structured instruments.”

8. Incorporate as subsection f) of Article 35, the following text:

(…)

f) Structured instruments with protected capital”

9. Incorporate Article 19A° "Real estate risk management" according to the following text:

"Real estate risk management

Article 19A°.- The company is subject to the provisions established in the "Regulation for real estate risk management in insurance companies", approved by SBS Resolution No. 2840-2012, for real estate risk management.

In addition to the functions described in Article 16° of this Regulation, the Risk Unit must comply with the following functions:

a) Monitor the management and valuation of its real estate according to the guidelines and requirements established in the Investment Classification and Valuation Regulation, approved by SBS Resolution No. 7034-2012 and its amending norms.

b) Have early warning indicators to identify risks that affect investments in real estate or other real estate investments.

c) Report, at least quarterly, on the findings made regarding the monitoring of the real estate sector, investments in real estate or other real estate investments of the company and their associated risks.

d) In the case of investments in real estate that generate exposures through lease, usufruct or other similar contracts:

d.1) Propose to the Risk Committee the guidelines for selecting the counterparties in said contracts, based on prudential requirements, such as credit risk, financial strength, debtor classification or others that the company considers.

d.2) Ensure that the files referred to in Article 21° of this Regulation, in relation to investments in real estate, include updated documentation that supports the contract negotiation process and the final selection of the counterparty.

d.3) Propose and implement internal exposure limits to said counterparties.

d.4) Ensure compliance with the policies established in subsection c) of Article 4° of this Regulation in the case of the aforementioned counterparties, as well as identify other possible conflicts of interest of the company with respect to said counterparties, proposing the updating and implementation of said policies.”

    10. Amend Article 32° "Consideration of indirect exposures for the application of limits" according to the following text:

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"Consideration of indirect exposures for the application of limits

Article 32°.- In certain cases the investments that back technical obligations are in turn exposed to the risks and benefits of rights or assets underlying said investments. In these cases, in measuring the limits indicated in Articles 33°, 34°, 37° and 38° of the Regulation, companies must consider indirect exposures to such underlying rights or assets as if they were direct investments.

The provisions of the preceding paragraph apply to investments that meet the following criteria:

Indirect exposures obtained through investment in:	% of technical obligations they back	Materiality of the investment
a) Participation certificates of mutual funds or investment funds; or instruments issued by trust estates, special purpose companies or similar investment vehicles.	> 1% of technical obligations	Greater than or equal to 5% of the total assets of the fund or estate.
b) Instruments representing securitized assets	> 1% of technical obligations	Greater than or equal to 5% of the total assets of the trust estate or of the notional.
c) Instruments issued by trust estates or other investment vehicles, whose purpose is investment in real estate securities; or investments in real estate or other real estate investments subject to lease or usufruct contracts (or similar)	> 0.1% of technical obligations	The totality of exposures must be taken into account
d) Others indicated by the Superintendence.	> 1% of technical obligations	Set by general rule.

It should be noted that companies must carry out the task of identifying indirect exposures that in turn arise from the assets underlying the investments described in the previous table, as many times as necessary, so that the ultimate risk factor associated with the aforementioned limits is identified, provided that the materiality criteria defined above are exceeded.

In the case of indirect exposures arising from lease or usufruct contracts on real estate investments, the estimation of such exposures must be carried out following the method described in Annex 3 "Method for estimating indirect exposure in lease or usufruct contracts on real estate investments or other real estate investments" of this Regulation. This method must also be applied to the contracts underlying other real estate investments (trust estates or other investment vehicles). It should be noted that in both cases the totality of indirect exposures with counterparties is considered, provided that the investments in the real estate involved or the

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instruments issued by the real estate investment vehicles referred to in subsection c) of the preceding table exceed 0.1% of the company's technical provisions. The result obtained from the sum of all indirect exposures with a counterparty (issuer or economic group) arising from the aforementioned contracts, as well as from contracts underlying other real estate investments, must be considered for the application of limits."

11. Incorporate the seventh final and transitory provision, in accordance with the following text:

"SEVENTH.- Adaptation of dual-currency fixed-coupon instruments

Companies that have acquired dual-currency fixed-coupon instruments, and such acquisition was made before the effective date of SBS Resolution No. -2018, must take into consideration the following:

1 If the requirements set forth in subsection i) of article 28 are met, companies must submit the corresponding supporting documentation within a period no greater than thirty (30) calendar days counted from the effective date of the aforementioned Resolution.

2 If the requirements set forth in subsection i) of article 28 are not met, companies must submit an adaptation plan, duly supported and approved by their board of directors, within a period no greater than ninety (90) calendar days, counted from the effective date of the aforementioned Resolution."

12. Incorporate the eighth final and transitory provision, in accordance with the following text:

"EIGHTH.- Treatment of indirect exposure to lease or usufruct contracts on real estate investments or other real estate investments

If the indirect exposures from investments referred to in subsection c) of article 32 of this Regulation produce excesses in the measurement of the limits set forth in articles 33, 34, 37 and 38, companies must submit an adaptation plan duly supported and approved by their board of directors, within a period no greater than that for the delivery of information corresponding to the close of December 2018."

13. Incorporate Annex 3 "Method for estimating indirect exposure in lease or usufruct contracts on real estate investments or other real estate investments", in accordance with the following text:

"ANNEX 3 Method for estimating indirect exposure in lease or usufruct contracts on real estate investments or other real estate investments

Insurance companies must follow the method described in this Annex to estimate their exposure with a counterparty through a lease, usufruct or other contract that generates rents in favor of the company, on a property owned by it or over which it holds real rights. This method must also be applied when the real estate investment vehicles in which the companies participate have underlying lease, usufruct or other contracts of the same nature.

In this sense, it should be noted that indirect exposures are generated with lessees or usufructuaries or other types of counterparties in a contract that generates rents for the company, in the following cases:

i)
Real estate investments: real estate owned by the company or over which it holds real rights, on which the company enters into lease or usufruct contracts (or similar).

ii) Indirect real estate investments: real estate investments through investment vehicles (for example, instruments issued by a trust estate or participation certificates of a real estate investment fund), whose underlying assets are real estate that is leased or granted in usufruct (or similar).

General Formula

The value of the company's exposure with a counterparty "c" in a property "i" is equal to:

Ec = αc * Vi

Where:

Ec : Value in soles of the company's exposure with counterparty "c", at the cut-off date, generated by a lease, usufruct or other contract that generates rents, on property "i".

αc : Share of the contract with counterparty "c", on property "i". It must be calculated based on the valuation model used for the investment in the aforementioned property. It is understood that on different areas of the same property "i", the company may maintain contracts with different counterparties.

Vi : Value in soles of the company's investment in property "i", at the cut-off date, in accordance with the provisions of the Regulation for the Classification and Valuation of Investments.

Calculation of the Share of the Contract on the Property

The value of the variable “αc” must be calculated based on the model used for the valuation of the investment in property “i”, in accordance with the Regulation for the Classification and Valuation of Investments.

a) Cost Model

In the case of investments in properties valued according to the cost model, “αc” is equal to:

αc = (Ac / AT) * Fc

Where:

Ac : Sum of the covered areas and uncovered areas of property “i”, measured in square meters, transferred to counterparty “c” under lease, usufruct or another contract that generates income in favor of the company.

AT : Sum of the total covered areas and uncovered areas of property “i”.

Fc : Temporary adjustment factor, measures the remaining term with respect to the total extension of the contract with counterparty “c”. It must be calculated as the ratio corresponding to the number of remaining months of the contract at the reporting date divided by the total number of months originally established in the contract. A value must be considered

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equal to 1 in the following cases: (i) when the remaining term of the contract is greater than 15 years, (ii) when the contract has been renewed uninterruptedly and the total accumulated period between the original contract and its extensions is greater than 15 years. In the latter case (ii), the factor remains equal to 1 until the termination and non-renewal of the contract.

The accounting of the common areas of the property must be consistent between “Ac” and “AT“. In that sense, if “Ac” does not include the portion of the common areas of property “i” corresponding to counterparty “c”, then “AT” must also not include the common areas.

b) Fair Value Model In the case of investments in properties valued according to the fair value model, “αc” is equal to:

αc = VPc / VPT

Where:

VPc : Sum of the present value of the net income flows from expenses, arising from the contract with counterparty “c”, on property “i”.

VPT : Sum of the total present value of the net income flows from expenses, arising from the contracts with all counterparties in property “i”.

The valuation criteria must be consistent. In that sense, the discount rate used for each counterparty must be the same as that used in the valuation of the property in question. Likewise, the flows must be adjusted by the respective vacancy rate, in line with the application of the fair value model of the Regulation for the Classification and Valuation of Investments of Insurance Companies.

If, for any reason, the fair value of the property is required to be determined by appraisal and said value corresponds to a function of the area of the property, “αc” must be calculated following the guidelines applicable to the cost model, described in the previous section”.

Value of the exposure when the majority of counterparties belong to the same economic group

For a property “i”, if the participation of the counterparties belonging to the economic group of the insurance company is equal to or greater than 70%, it must be considered that the entirety of property “i” generates indirect exposure with the company's economic group. Therefore, the value of the exposure with the economic group will be equal to the value of the investment in property “i”, in accordance with the Regulation for the Classification and Valuation of Investments.

Article Second.- Incorporate procedure No. 177 “Authorization for other investments eligible for the backing of technical obligations” into the Single Text of Administrative Procedures – TUPA of the Superintendency of Banking, Insurance and AFP approved by SBS Resolution No. 1678-2018 and amendments, in accordance with the text attached to this Resolution, which is published on the institutional portal: www.sbs.gob.pe.

Article Third.- This resolution shall enter into
force as of the day following its publication in the Official Gazette El Peruano, with the exception of the provisions set forth in numeral 10 of Article First, which enters into force as of the information corresponding to the close of the month of December 2018.1

Register, communicate and publish,

SOCORRO HEYSEN ZEGARRA
Superintendent of Banking, Insurance and
Private Administrators of Pension Funds

[1] Errata published on 9 August 2018.

SUPERINTENDENCY OF BANKING, INSURANCE AND AFP Republic of Peru