Administradora de Fondos de Pensiones-Provida, S.A. (PVD)

 
Annual Reports

  • 20-F (Apr 30, 2014)
  • 20-F (Apr 30, 2013)
  • 20-F (Apr 27, 2012)
  • 20-F (May 23, 2011)
  • 20-F (May 18, 2010)
  • 20-F (May 7, 2009)

 
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PROVIDA PENSION FUND ADMINISTRATOR 20-F 2006


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

Mark One  
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Date of event requiring this shell company report ______.

Commission file number: 001-13406

Administradora de Fondos de Pensiones Provida S.A.
(Exact name of Registrant as specified in its charter)
 
Provida Pension Fund Administrator Inc.
(Translation of Registrant’s name into English)

Republic of Chile
(Jurisdiction of incorporation or organization)

Avenida Pedro de Valdivia 100
Santiago, Chile
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:    
Title of each class   Name of each exchange on which registered
Common Stock, without nominal (par) value   New York Stock Exchange*
American Depositary Shares each representing fifteen shares of Common Stock,   New York Stock Exchange  
without nominal (par) value    


* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
  Securities registered or to be registered pursuant to Section 12(g) of the Act:   [None]
  Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:   [None]
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Common Stock, without nominal (par) value — 331,316,623 Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   o Yes  x No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.   o Yes  x No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.    
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes  o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):    
Large Accelerated Filer o Accelerated Filer x Non-accelerated Filer o
Indicate by check mark which financial statement item the registrant has elected to follow.   o Item 17   x Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes  x No
 






TABLE OF CONTENTS


        Page
 
 
INTRODUCTION    
ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   3
ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE   3
ITEM 3.   KEY INFORMATION   3
ITEM 4.   INFORMATION ON THE COMPANY   8
ITEM 4A.   UNRESOLVED STAFF COMMENTS   32
ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS   32
ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   45
ITEM 7.   MAJOR SHAREHOLDERS AND TRANSACTIONS WITH RELATED PARTIES   50
ITEM 8.   FINANCIAL INFORMATION   54
ITEM 9.   THE OFFER AND LISTING   54
ITEM 10.   ADDITIONAL INFORMATION   59
ITEM 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   67
ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   68
ITEM 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   68
ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE   68
    OF PROCEEDS   68
ITEM 15.   CONTROLS AND PROCEDURES   68
ITEM 16.   [RESERVED]   69
ITEM 16A.   AUDIT COMMITTEE FINANCIAL EXPERT   69
ITEM 16B.   CODE OF ETHICS   69
ITEM 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES   69
ITEM 16D.   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   69
ITEM 16E.   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED   70
    PURCHASERS   70
ITEM 17.   FINANCIAL STATEMENTS   70
ITEM 18.   FINANCIAL STATEMENTS   70
ITEM 19.   EXHIBITS   70

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PRESENTATION OF INFORMATION

     In this annual report, references to “US$”, “US dollars” and “dollars” are to United States dollars, references to ThUS$ are thousands of US dollars and MUS$ are millions of US dollars, references to “pesos” or “Ch$” are to Chilean pesos, references to “Ch$ million” or “MCh$” are to million Chilean pesos, and references to “UF” are to Unidades de Fomento. The Unidad de Fomento (“UF”) is a unit of account that is linked to, and is adjusted daily to reflect changes in the Chilean consumer price index. At December 31, 2005, one UF was equivalent to Ch$17,974.81. Percentages and certain dollar and peso amounts contained herein have been rounded for ease of presentation. Unless otherwise indicated, the exchange rate used to translate peso amounts into dollars appearing throughout this annual report is the Dolar Observado (the Observed Exchange Rate) reported by the Banco Central de Chile (the “Central Bank”) on December 31, 2005, which was Ch$512.50 = US$1.00. These translations should not be construed as representations that the peso amounts actually represent such dollar amounts or could be converted into dollars at the rates indicated or at any other rate. Peso amounts presented herein in terms of “constant” Chilean pesos are expressed in pesos as of December 31, 2005, by adjusting year by year inflation.

     The terms “AFP Provida”, “Provida”, “BBVA Provida” and “the Company”, unless the context otherwise indicates, refers to Administradora de Fondos de Pensiones Provida S.A. References to “AFP” or “AFPs” refer to private pension fund administrators in general.

     The term “Authority” and “SAFP” means the Superintendency of Pension Fund Administrators, the principal regulator of Chile’s pension system.

     The term “billion” means one thousand million (1,000,000,000).

     In this annual report and related to Provida’s business, the term “affiliate” means a client that has made contributions at least once to his individual capitalization account, while “cotizante” or “contributor” means an affiliate periodically makes pension contributions. The term “individual capitalization account (ICA)” means for each affiliate the account where he maintains his mandatory savings invested in shares of the selected pension fund until the age of retirement.

FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 20-F contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this Annual Report on Form 20-F and include statements regarding intent, belief or current expectations of our officers or our management with respect to (i) our asset growth and financing plans, (ii) trends affecting our financial condition and results of operations, (iii) the impact of competition and regulations, and (iv) our exposure to various types of market risks, such as interest rate risk, foreign exchange rate risk and market price risk. Forward-looking statements include known and unknown risks and uncertainties and are indicated by words such as “anticipate”, “believe”, “expect”, “intend”, “risk”, “could”, “may”, “seeks”, and similar words and phrases and the negatives and variations thereof. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those described in such forward-looking statements in this Annual Report on Form 20-F, including, without limitation, “Business Overview”, “Operating and Financial Review and Prospects” and “Quantitative and Qualitative Disclosures About Market Risk”.

     Some factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this Annual Report on Form 20-F include, but are not limited to: general economic conditions in Chile and Latin America and the other countries in which we have significant business activities or investments, including the United States; the monetary and interest rate policies of the Central Bank; unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices; changes in Chilean and foreign laws, regulations and taxes; changes in competition and pricing environments; natural disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; technological changes; changes in consumer spending and saving habits; and our success in managing the risks involved in the foregoing.

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     The forward-looking statements contained in this document speak only as of the date of this report, and we do not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART I

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     Not Applicable.

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not Applicable.

Item 3. KEY INFORMATION

A. Selected Financial Data

     The following table presents selected financial data and operating information for Provida as of the dates and for each of the periods indicated. The 2002, 2003, 2004 and 2005 financial information is derived from our audited financial statements as of December 31, 2002, 2003, 2004 and 2005 included herein.

     The audited consolidated financial statements have been prepared in accordance with Chilean GAAP, which differs in certain significant aspects to U.S. GAAP. Note 41 to the audited consolidated financial statements provides a description of the main differences between Chilean GAAP and U.S. GAAP and a reconciliation of net income for the years ended December 31, 2003, 2004 and 2005 and shareholders’ equity as of December 31, 2004 and 2005, between Chilean GAAP and U.S. GAAP.

     Pursuant to Chilean GAAP, the financial data in the following table for all periods are restated in constant Chilean pesos as of December 31, 2005. See Note 2 to the Audited Consolidated Financial Statements.

    As of and for the Twelve Months ended December 31,
   
    2001 (7)   2002 (7)   2003 (7)   2004   2005   2005
    (In millions of Ch$ and thosands of US$)(1)(2)
    Un-audited                                
    (6)                                



















INCOME STATEMENT DATA   Ch$     Ch$     Ch$     Ch$     Ch$     US$  



















Chilean GAAP:                                    
Operating revenues   110,827     113,392     121,818     127,411     139,618     272,425  
Operating cost and expenses   (79,492 )   (75,397 )   (89,753 )   (94,989 )   (93,961 )   (183,338 )
Income from operations   31,335     37,995     32,065     32,423     45,656     89,086  
Non-operating expenses – net   11,785     2,034     10,557     2,792     (2,141 )   (4,177 )
Income taxes   (13,167 )   (3,717 )   (8,636 )   (6,988 )   (8,702 )   (16,979 )
Extraordinary items   2,437        -          -          -        -          -  
Net income   32,390     36,312     33,986     28,227     34,813     67,927  
Earning per share and per ADS (3) (4)                                    
Income from operations per share   94     115     96     97     138     0.27  
Net income per share   97     110     103     85     105     0.20  
Dividends per share and per ADS (4) (5)   76     88     82     77     95     0.18  
Dividends per share and per ADS (in US$) (4) (5)   0.10     0.12     0.12     0.12     0.18          -  



















US GAAP:                                    
Operating revenues   106,884     109,795     120,199     126,237     139,618     272,425  
Operating cost and expenses   (82,271 )   (9,877 )   (87,019 )   (90,832 )   (98,124 )   (191,461 )
Income from operations   24,613     29,919     33,180     35,404     41,494     80,964  
Non-operating expenses – net   37,631     7,555     14,673     8,384     2,874     5,608  
Income taxes   (16,800 )   (3,758 )   (10,285 )   (8,412 )   (8,678 )   (16,933 )
Net income   45,444     33,716     37,567     35,376     35,689     69,637  
Earning per share and per ADS (3) (4)   137     102     113     107     108     0.208  
 
Weighted average number of shares outstanding   331,317     331,317     331,317     331,317     331,317        
(in thousands)                                    

3





     

    As of and for the Twelve Months ended December 31,
   
    2001 (7)     2002 (7)     2003 (7)     2004     2005     2005  
    (In millions of Ch$ and thosands of US$)(1)(2)
    Un-audited                                
    (6)                                



















INCOME STATEMENT DATA   Ch$     Ch$     Ch$     Ch$     Ch$     US$  



















BALANCE SHEET DATA                                    



















Chilean GAAP:                                    
Current assets   8,727     10,409     16,104     16,415     16,639     32,466  
Mandatory investment   80,389     85,152     97,963     109,130     117,708     229,674  
Property, plant and equipment   26,391     25,358     27,416     26,789     25,723     50,191  
Total assets   228,710     233,035     245,742     243,743     248,610     485,093  
Total shareholders’ equity   172,120     183,764     183,509     179,339     185,634     362,213  



















US GAAP:                                    
Current assets   10,931     10,409     16,104     16,415     16,639     32,466  
Mandatory Investment   80,389     85,152     97,963     109,130     117,708     229,674  
Property, plant and equipment   26,391     25,358     27,416     26,789     25,723     50,191  
Total assets   210,484     211,275     245,742     243,743     248,610     485,093  
Total shareholders’ equity   174,250     185,609   182,058     186,816     193,495     377,551  




















(1) Except per share and per ADS data.
(2) Amounts stated in US dollars as of December 31, 2005 or for the twelve months ended December 31, 2005 have been translated at the observed Exchange Rate of Ch$512.50 per US$1.00.
(3) Earning per share and per ADS data have been calculated on the basis of the weighted average number of shares outstanding during the year.
(4) Calculated on the basis of one share per ADS.
(5) Dividends per share and per ADS in Chilean pesos represent actual dividends paid adjusted for inflation to December 31, 2005. Dividends per share and per ADS in US dollars have been calculated based on the Chilean pesos paid and the Observed Exchange Rate as of each date of payment.
(6) On January 22, 2004, the Company received a written communication from the Superintendency of Pension Funds Administrators requiring a restatement of the Company’s Chilean GAAP financial statements to more clearly match expenses and revenue related to changes in casualty rate experience for the disability and survival pension insurance premium. Certain restatements for the year ended December 31, 2001 were made by the Company related to the US GAAP correction of errors as disclosed by our US GAAP footnote. These numbers are un-audited.
(7) On January 25, 2005, the Superintendency of Pension Fund Administrators through its Note N° 1,886 stated that the financial revenues from the life and disability insurance contract in the period should be classified as other operating revenues and were appropriately reclassified for the years ended December 31, 2001, 2002, 2003 and 2004.

Exchange Rate Information

     The following table sets forth, for the periods and dates indicated, certain information concerning the exchange rate between the Chilean peso and the US dollar. Such rates are provided only for the convenience of the reader and are not necessarily the rates used by the Company in the preparation of the audited consolidated financial statements included in this annual report. No representation is made that the Chilean peso could have been, or could be, converted into US dollars at the rates indicated below or at any other rate.

    Chilean pesos per US$1.00
Yearly amounts   Average rate



2001   634.94
2002   688.94
2003   691.54
2004   609.55
2005   559.86




Nominal Rate of Exchange
(Chilean pesos per US dollar)







    Monthly        
Months   Average   High   Low







December 2005   514.33   518.63   509.70
January 2006   524.48   535.36   512.50
February 2006   525.70   532.35   516.91
March 2006   528.77   536.16   516.75
April 2006   517.33   526.18   511.44
May 2006   520.79   532.92   512.76








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     Source: Central Bank.

B. Capitalization and Indebtedness

     Not Applicable.

C. Reasons for the Offer and Use of Proceeds

     Not applicable.

D. Risk Factors

In addition to the information contained in this annual report, prospective investors should carefully consider the risks described below and the other information contained in this annual report. Provida’s business, financial condition or results of operations could be materially adversely affected by any of these risks.

The economic situation in Chile significantly affects Provida’s results

     The main source of Provida’s operating revenues stems from the monthly fees charged to its contributors for mandatory contributions made in their individual capitalization account, which are compulsory for every salaried worker as long as there is a labor contract in force. They represent 88.5% of the total operating revenues for the year ended on December 31, 2005. As a consequence, the economic situation in Chile related to growth activity indicators and employment conditions significantly affects the Company’s results.

     In fact, macroeconomic conditions have repercussions on the financial capacity of employers and/or entrepreneurs which might produce a drop in the number of employee-contributors or a lack of capacity for creating new jobs as well as increasing the taxable income of workers. Therefore, both variables –number of employee-contributors and average salaries, determine the salary base of the contributors and affect the Company’s results. An increase in the unemployment rate negatively affects Provida’s results and, depending on its magnitude, the impact could be significant.

     Additionally, Provida’s financial condition and operational results could also be adversely affected by changes in economic policies by the Chilean Government, political or economic developments in Chile or those affecting Chile. Changes in development of the Chilean economy could adversely affect Provida’s ability to develop its business strategy.

Pension Funds are global investors, which are affected by the economies of neighboring countries as well as by worldwide economic development

     Pension Funds such as those managed by Provida are global investors and are therefore, affected by both the economies of neighboring countries as well as worldwide economic factors. In recent years, pension fund returns have been subject to volatility in international and local financial markets. Foreign investments represent 30.8% of the total of Provida’s assets under management for the year ended on December 31, 2005. The worldwide economy could affect Provida’s returns obtained on mandatory investment and therefore its income.

Provida’s returns in foreign companies’ investments could be affected by changes in the regulatory environment, the exchange rates and the economic situation of the countries where they are located

     Provida through its subsidiary Provida Internacional S.A. (“Provida Internacional”) maintains equity interests in private pension fund administrators operating in Peru, Ecuador, Mexico and the Dominican Republic representing 20.5% of Provida’s net income for the year ended on December 31, 2005. These foreign administrators are highly regulated which generates certain stability. However, Provida can not ensure that legal modifications in those countries where these subsidiaries are located could not affect its results. Further, given the high correlation between the results of the pension business and the economic conditions in the countries where the company operates, a change in the economic situation of those countries could affect Provida’s results.

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     Likewise, in accordance with the accounting policies, particularly Technical Bulletin N° 64 issued by the Chilean Institute of Accountants, devaluation of domestic currencies against the US dollar and the evolution of the latter with respect to the Chilean currency could adversely affect the equity in income of foreign affiliated companies recognized by Provida and therefore their respective return.

Provida has limitations on significantly increasing its market position

     Provida has maintained a leading position in the private pension system since its inception, which has currently led to market share over 40% in terms of clients and over 30% in terms of associated salary base. Given its market position and its relative size, it is highly probable that competitors will take steps towards attracting participants from Provida persuading them to transfer their funds and make contributions to other Pension Fund Administrators (“AFPs”) limiting Provida from significantly increasing its market share. A decrease in Provida’s client portfolio could have a negative impact on its operating revenues.

Provida is limited in its ability to improve the performance of its Pension Funds

     In addition to being associated with the leading position described above, Provida’s assets under management are very large with respect to the local capital market and the pension fund industry’s, totaling MCh$11,805,530 (US$23.3 billion) as of December 2005. The latter reduces Provida’s flexibility to significantly modify its portfolio structures, and consequently to improve the return offered to affiliates. Additionally, in situations of instability or uncertainty in the markets, Provida’s reactive capacity is likely to be limited. In this context, Provida cannot ensure that it will be able to maintain a sufficient rate of return on its Pension Funds to attract new affiliations or decrease the number of affiliate transfers. Any decrease in Provida’s client portfolio could have a negative impact on its operating revenues.

     Additionally, if Provida’s pension fund returns do not achieve the legal minimum return established by law, due to any instability or uncertainty as was described above, the Company could lose part of its Mandatory Reserve to cover this difference. See “Item 4. Information on Provida – B. Business Overview – Principal Activities -Investment Services”. This portion must be replenished in a maximum term of 15 days to fulfill the legal requirement to maintain a reserve equal to 1% of the value of each pension fund under management and to continue with its business with the consequent reduction in the Company’s equity.

Provida operates in a competitive environment

     In the 90s and before the merger and acquisitions process that reduced the number of AFPs in Chile, competitiveness in the Industry was evidenced through large sales forces and a high number of transfers among AFPs, with the obvious impact on sales expenses. Such situation reached its peak in 1997, when the Authority implemented regulatory changes aimed at formalizing the transfer process. As a result, the industry adopted a strategy focused on fee competition, transferring savings in commercial expenses on to affiliates through the gradual reduction of fees charged. Any further reduction in fees could have a negative impact on Provida’s operating revenues.

Despite a recent trend towards moderate deregulation of its industry, Provida continues to operate in a highly regulated market in which its flexibility to manage its business is limited

     Provida’s operations are regulated by the Pension Law and, to the extent applicable, Chilean corporation law. The Pension Law defines the line of business of pension fund administrators, so Provida is only permitted to engage in the administration of its Pension Funds and the rendering of related benefits. Furthermore, it is authorized to establish local affiliated corporations that may complement its line of business or invest in Pension Fund Administrators or entities located in other countries whose lines of business are related to pension matters.

     Regarding Pension Fund investments, Provida must invest such assets in accordance with the types of instruments and within the ranges of assets and maximum percentages allocated per investment and fund types authorized by the Pension Law.

     In addition, the Pension Law requires each AFP to maintain a minimum reserve fund called Mandatory Investment equal to 1% of the value of each pension fund under management. Also, it must provide a minimum real

6






return over investment for each of its pension funds based on a weighted average of the real return by all pension funds in the AFP system in a 36-month period. However, through the implementation of the Multiple Funds, the minimum return requirement has been designated in accordance with different portfolio composition, giving those with a higher component of variable income and therefore higher volatility (funds Type A and B) a larger margin to achieve the requirement. In fact, if a fund’s annualized real return for a certain period of time were, in a specific month, lower than the minimum return, the Administrator must cover the difference within a 5-day period. To do so, the Company is permitted to apply funds from the mandatory investment, and in that event, such amount must be refunded in 15 days. If an AFP fails to observe either the minimum reserve fund requirement or the minimum return requirement, it will eventually be dissolved in accordance with the Pension Law.

Provida’s business and results of operations may be affected by changes in laws, regulation or Chilean government’s proposals

     Government authorities and members of parliament have been discussing modifications in order to improve the private pension system. One suggestion is to increase the pension coverage to include self-employed workers, which could increase the casualty rate of Provida’s client portfolio since these potential clients have a different contribution profile. Other suggested modification would permit the entrance of new participants, such as banks and insurance companies, to the private pension system. This measure, if adopted, would increase the number of Provida’s competitors. In addition, the Authority seeks to make the fees charged by AFPs easier to compare with other fees charged by other entities in the fund administration business. The latter could result in a change of fee structure of AFP’s affecting Provida’s operating revenues.

     As described in “Item 4. Information on the Company - Business Overview-New Legal Developments” a Commission designated by the new government is currently discussing proposals intended to improve the pension system, related to increasing (i) competition in the pension industry allowing the entrance of new participants to administer the pension funds in order to reduce fees charged to affiliates, (ii) both pension coverage and social security to self-employed workers, as well as, to improve pension coverage and social security for dependent workers; and (iii) the flexibility of the rules to pension fund investments in order to obtain the highest returns.The Company does not anticipate that in the near future the implementation of these changes in the law will have a material impact on its financial portfolio.

     Future changes in laws or regulations in Chile may have a negative effect on AFP Provida’s financial results.

Life and Disability Insurance is the main component of operating expenses so an increase in the casualty rate of a client’s portfolio, or future changes in the market conditions or in the assumptions of our predictive model, could materially adversely affect the Company’s results of operations

     Provida by law is obligated to provide life and disability benefits to its affiliates and is required to obtain insurance to support this obligation. Provida's insurance policy covers its life and disability payment obligations above a certain casualty rate level that is negotiated with the insurance company. Provida pays all casualties up to the maximum rate specified in the contract (1.10% under a contract with BBVA Seguros de Vida S.A. in effect from August 1, 2003 to December 31, 2004 and 1.27% under a contract with BBVA Seguros de Vida S.A. in effect from January 1, 2005 for an undefined term). In addition, if the insurance company were to be unable to meet its obligations under the insurance contract, Provida would be required to make the payments that would otherwise have been covered by the insurance company. Therefore, fluctuations in Provida's estimates of what the actual casualty rate will be for any given period—which determine the expenses and provisions Provida will be required to record—significantly affect Provida's results of operations. If Provida used different assumptions to calculate the casualty rate, our results of operations could be materially adversely affected. See “Item 4—Information on the Company—Business Overview—Primary Expenses” and “Item 5—Operating and Financial Review and Prospects—Critical Accounting Policies—Accounting of Life and Disability Insurance Costs,” for more information on how we estimate the casualty rate.

Provida is exposed to the credit risk of its insurers such that the risk of failure of an insurer to pay any required shortfall amount is borne by Provida

     Under Provida’s 2004 and 2005 insurance policies, the insurer was required to cover all life and disability benefits in excess of 1.10% and 1.27% respectively, of the aggregate taxable income of Provida’s affiliates. However, if the insurer were not able to make any required payments to affiliates, Provida would be responsible for such payments. Accordingly, Provida is exposed to the credit risk of the insurer, to the extent of claims not paid

7






prior to any bankruptcy, dissolution, or winding up (or similar event) of the insurance company that would render it unable to satisfy its obligations under the insurance contract. The occurrence of any of the foregoing could cause Provida to bear material additional costs which could materially affect Provida’s results.

Item 4. INFORMATION ON THE COMPANY

A. History and Development

     Administradora de Fondos de Pensiones Provida S.A. is a corporation formed under the laws of Chile. Its deed of incorporation was executed on March 3, 1981 and was registered in the Registry of Commerce in Santiago of Chile, on April 6, 1981, under number 6,060 subsection 3,268. Provida’s by-laws specify that the Company shall have duration of one hundred years, beginning on the date on which its existence was authorized. Provida’s registered office is located at Av. Pedro de Valdivia 100, 16th floor, Providencia, Santiago, Chile. Provida’s telephone number at that location is (56-2) 351-1200. Provida’s internet address is www.bbvaprovida.cl.

     Provida is the largest and one of the oldest private pension fund administrators operating in the Republic of Chile and has occupied a leading position in the Chilean private pension industry since its inception. As of December 31, 2005, Provida is the largest of the six AFPs operating in Chile in terms of the number of affiliates, contributors, assets under management (“AUM”), affiliates’ salary base and number of branch offices. The Chilean private pension system was created in May 1981, when Decree Law 3,500 of November 13, 1980 (the “Pension Law”) was implemented to replace the prior social security system.

     At the end of the 90s and in order to reinforce its competitive position, Provida, like other major AFPs, engaged in a merger process with smaller and less efficient AFPs in an attempt to increase market share and achieve economies of scale. Provida purchased and merged with AFP Unión and AFP Protección S.A. in 1998 and 1999, respectively. Management considers the above mergers as successful given that Provida sustained an increase in its market shares through these acquisitions. In figures, the latter is reflected by the increase in market share from 29% before the merger to approximately 40% in terms of affiliates and from 20% to approximately 30% in terms of assets under management.

     Additionally, since 1993, Provida started to take part in the process of establishing private pension systems in other countries in Latin America. At the end of the 90s Provida had equity interests in AFPs in Peru, Ecuador, Mexico, El Salvador and Colombia through its affiliate Provida Internacional. In 1999, BBVA Group purchased a controlling interest in Provida and since 2001 the Company has participated with BBVA Group under a joint strategy to boost the pension holdings together in Latin America.

      In 2001, Provida sold its 14.45% interest in the Mexican company AFORE Profuturo S.A. de C.V., a sale that allowed Provida to complete the consolidation of its strategic position in Mexico, along with the BBVA Group after the purchase of a 7.5% stake in AFORE Bancomer S.A. de C.V. (“AFORE Bancomer”). Additionally, during September 2001, Provida became the owner of 100% of the shares of AFP Génesis S.A. (“AFP Génesis”), a leader in the Ecuadorian fund management industry, through the purchase of 75% of the company that was owned by Filanbanco. Since then, AFP Génesis’ financial statements have been consolidated with those of Provida.

     In 2003, Provida sold its 20% equity interest in AFPC Porvenir S.A. in Colombia to AFPC Porvenir’s controlling shareholder, the Sarmiento Group. This decision was based on the facts that the Colombian market has matured in the context of changes in regulations and Provida did not have management control of the company while the BBVA Group had a controlling position in another AFPC in Colombia (AFPC Crecer). In conjunction with this transaction, Provida acquired a 100% stake in AFP Porvenir S.A. in the Dominican Republic from the Sarmiento Group and its minority shareholders, a transaction that contemplated the future merger of AFP Porvenir with BBVA Crecer, the AFP of the BBVA Group in that country. In April 2004, a 30% stake in AFP Porvenir in the Dominican Republic was sold to the local investor Group “Grupo Progreso” and the merger of this company with BBVA Crecer AFP was consummated in September 2004. Currently Provida holds a 35% equity interest in BBVA Crecer AFP.

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     Finally, in October 2004, Provida Internacional sold its 19% equity interest in AFP Crecer in El Salvador to Fondo Universal S.A. de C.V, a transaction that was triggered by a mature market with moderate growth perspectives.

     During 2005, there were no significant events regarding Provida’s investments, either local and foreign.

     Regarding local investments, Provida became an important shareholder of Value Depositary Center (“DCV”) and PreviRed.com, the latter being an electronic collection company for pension contributions. Furthermore, a consortium composed of all AFPs was awarded the administration of Unemployment Insurance through a new company called Administradora de Fondos de Cesantía de Chile S.A. (“AFC”) in January 2002.

     In local terms, it is worth noting important improvements implemented from 2002 onwards in the Pension Fund Industry starting with Voluntary Pension Saving and Multiple Funds. The mechanisms of Voluntary Pension Savings (“APV”) starting March 1, 2002, were modified by providing new incentives for additional retirement savings, also allowing other financial institutions different from the AFPs to administer them. At the end of 2002, about 277,000 people had contracted APV plans, whereas at December 2005 the number of administered accounts had grown 56% to 432,000. In this context based on figures provided by the Authority, the AFPs continue to lead this market with a market share of 76% in assets under management and 80% in number of accounts, followed by insurance companies with 9% and 12% of market share in each variable. Regarding market share within the AFP industry, Provida has 35% of the administered accounts and 17% of the associated funds at December 2005.

     The Multiple Pension Funds law, partially in effect since March 2002 and in full effect since August 1, 2002, increased from two to five the number of investment portfolios offered to affiliates from AFPs in connection with pension savings (funds Types A, B,C, D and E). The affiliates can freely choose among any of these alternatives under some restrictions. The difference among the funds stem from the percentage of variable income invested, allowing AFPs to widen the range of investment alternatives offered with respect to voluntary pension savings. In this way, AFPs are able to offer a better inducement of diversification to their clients and therefore to be more competitive with the other players in this new business.

     Additionally, and given that the start-up of the multiple fund system coincided with a recovery in the stock markets both in Chile and abroad, the recovery benefited affiliates who opted to be in funds with a higher percentage in variable income. For example, as of December, 2005, the fund Type A, which has the highest concentration of shares (up to 80% of the portfolio), earned in real terms an average annual return of 15.6% from its inception. Likewise, the fund Type B, which has a maximum investment level in shares of 60%, also had a favorable return with an average annual return of 10.2% in real terms from its inception. The fund Type C, which consists of more than half of all pension savings (53%), reached in real terms an average annual return of 10.0% from its inception, whereas funds Type D and E, having higher percentages in fixed income instruments experienced an average annual return of 5.4% and 5.9% in real terms from their inception, respectively.

     After more than two years since the Multiple Fund system was created, the fund Type C managed by Provida has continued to represent the highest amount of assets (51.8% of the total assets under management at the close of 2005) while the other funds have reached significant sizes after voluntary changes and massive transfers since September 2002 (fund Type A: 11.0%, fund Type B: 21.9%, fund Type D: 13.2% and fund Type E: 2.1%, as a percentage of the total assets under management at the close of 2005).

     The following chart shows the real returns obtained by the funds administered by Provida since the Multiple Fund startup and over last year:

    From the Multiple Fund start-up   Annual
    (September 2002 – December 2005)   (December 2004 – December 2005)





Fund Type A   63.14%   11.20%
Fund Type B   36.53%   6.74%
Fund Type C   24.67%   4.28%
Fund Type D   17.51%   2.59%
Fund Type E   8.36%   1.19%






Source: Based on value of shares of the pension funds managed by Provida and SAFP.

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Capital Expenditures and Divestitures

     Capital expenditures for the last three years totaled Ch$12.6 billion (approximately US$25 million) mainly related to the acquisition of 100% interest of AFP Porvenir in the Dominican Republic and investments in properties and equipment. Divestitures for the last three years totaled Ch$29.5 billion (approximately US$58 million) mainly related to the sale of equity interests in AFPC Porvenir in Colombia and AFP Crecer in El Salvador. “See History and Development”.

     In 2003, BBVA Provida acquired a 100% total stake in AFP Porvenir S.A. in the Dominican Republic for MCh$7,893 (US$15.4 million) from the Sarmiento Group. This transaction was financed by the sale of 20% of Provida’s equity interest in AFPC Porvenir S.A. in Colombia for MCh$13,735 (US$26.8 million), to the same Sarmiento Group. “See History and Development”.

     In 2004, BBVA Provida sold its 30% interest held in AFP Porvenir in the Dominican Republic to Grupo Progreso S.A. and Progreso Compañía de Seguros S.A. for MCh$2,768 (US$5.4 million). Additionally, BBVA Provida sold its 19% stake in AFP Crecer in El Salvador to Sociedad Fondo Universal S.A. de C.V. for MCh$6,253 (US$12.2 million). Finally, the Company’s capital expenditures were related to investments in fixed assets according to the normal requirements of the business operation and to a capital increase in the Dominican Republic. “See History and Development”.

     In 2005, Provida’s capital expenditures were related to capital increases in connection with local affiliates’ requirements –Unemployment Fund Administrator and Previred.com and investments in normal fixed assets in the course of business. Regarding capital uses, these are referred to the sale of fixed assets basically computer equipment.

     The following table set forth information corresponding to capital expenditures and divestitures for the twelve month-period ended on December 30, 2003, 2004, 2005 and the first quarter as of March 31, 2006.

    For the twelve months
ended December 31,
  For the first quarter
ended March 31,
 
   
 
 
    (In million of constant Ch$
as of December 31, 2005)
  (In million of constant Ch$
as of March 31, 2006)
 
    2003   2004   2005   2006  













Capital Expenditures   (10,901 )   (454 )   (1,233 )   (136 )
Divestitures   17,834     11,636     10     1  














     There has been no indication of any public takeover offer by any third party in respect of BBVA Provida’s shares, nor has there been any indication by BBVA Provida of any public takeover in respect of any other companies’ shares, in either the last or current fiscal year.

B. Business Overview

     Principal Activities

     The AFPs are required by law to be single - purpose companies. The services they provide include the collection of affiliate contributions, the management of individual capitalization accounts, the investment of affiliate contributions into the Pension Funds managed by the AFP, the allowance of life and disability benefits for affiliates and the administration of specified defined pension and retirement benefits. AFPs are required to enter into insurance contracts with licensed Chilean life insurance companies whereby these companies insure the obligation of the AFP to provide life and disability benefits.

     In order to commence operations, an AFP must have a minimum capital equal to UF 5,000 (approximately US$175,000), which increases based on the number of affiliates up to UF 20,000 (approximately US$700,000) for AFPs with over 10,000 affiliates.

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     Provida is the largest and one of the oldest AFPs operating in Chile and has occupied a leading position in the private pension industry since its inception. Chilean AFPs are regulated pursuant to Law Decree 3,500 (the “Chilean pension law”) and are regulated by the Superintendency of Pension Fund Administrators (the “SAFP”). AFPs are authorized by law to provide the following services:

- collection and management of contributions made by affiliates;
- investments of affiliate contributions in pension funds managed by the AFP;
- provide life and disability benefits for affiliates; and
- provide an senior pension for affiliates.

     Collection and Management of Contributions Made by Affiliates

     The services provide by AFPs include the collection and management of mandatory contributions, voluntary savings and voluntary pension savings made by its affiliates.

     Regarding mandatory contributions and in accordance with the Pension Law, each dependent worker and affiliate of Provida must contribute 10% of his taxable salary into his individual capitalization account. Such contributions are deducted from the affiliate’s salary and are used to purchase shares of some of five types of Funds that Provida manages. These Funds are entities, legally separated from Provida as a Pension Fund Manager Company. The option to choose among five alternatives of Funds was the result of legal changes made to Law Decree 3,500 implemented in August 2002. Until that date, it was only possible to choose between two funds with certain restrictions according to affiliate’s age.

     Provida collects monthly mandatory contributions that are withheld from the salaries of Provida’s affiliates by their employers, and those contributions from Provida’s self-employed affiliates. Those monthly contributions are credited into each affiliate’s individual capitalization account. In the case of dependent workers, each employer must provide to Provida a monthly payroll listing all its employees who are affiliates of Provida identifying the payments being made on behalf of each employee for pension contributions, both mandatory and voluntary. Self-employed workers prepare and submit their own payrolls. Each payroll, together with checks or cash for the aggregate amount, must be submitted to a Provida branch office or a designated collection agent. Checks and cash are deposited in banks and payrolls are destined to the operation center in Santiago for processing. Each AFP also administers a separate private indemnity account in the fund for household workers, such as housekeepers.

     Additionally, Provida offers to its affiliates the option to establish a voluntary savings account into which they may deposit additional funds to be invested in the elected pension fund. The affiliate may make deposits into the account as often as desired and is able to make withdrawals four times a year. Provida maintains the account in the Pension Fund’s register regardless of the balance.

     Finally and in connection with voluntary pension savings, they correspond to additional amounts of contributions that each worker may add to improve his future pension. The maximum voluntary monthly contribution with tax benefits associated is UF50 (approximately US$1,750). If these funds are withdrawn for uses other than pension, this amount will be charged a higher tax rate applicable to each particular case.

     AFPs are entitled to charge a fee over assets under management and for collection of such funds for other institutions. Currently, Provida charges an equivalent to a monthly fee of 0.56% on an annual basis over total funds and has established a fee of Ch$1,250 regarding fund transfer towards other financial institutions.

Investment Services

     The general investment policy of the Pension Funds is determined by Provida’s Board members and is administered by an Investment Committee comprised of the Chief Executive Officer, Chief Investment Officer and the Risk Division Manager. Also, the Internal Auditor, the General Counsel and executives from the Investment Area attend without the right to vote. The Investment Committee approves eligible companies in which the Pension Funds may invest and establishes investment limits in different types of securities within legally prescribed limits. Professionals of the Investment Area are in charge of implementing the investment policy.

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     The objective of Provida’s investment policy is to maximize profitability for its affiliates in the current regulatory framework and according to strict criteria of risk controls. In addition, since the Multiple Funds’ start-up, the affiliates’ preferences regarding their risk exposure are also considered.

     This policy seeks to add value through the strategic assignment of different kinds of assets -variable and fixed income- based on a fundamental analysis of both local and foreign stock markets. For this, Provida’s Investment Area has two management divisions -Variable Income and Fixed Income- and one Research Department. Both managers and the head of department have full-time research analysts with experience in areas of investing, economics, and securities. Provida also has external advisory services provided by domestic and international consultants who provide advice to the Investment Area on tendencies and developments affecting the value of current and potential investments.

     In Chile, all secondary market trading by AFPs must be executed in the formal trading markets either through the Securities Exchange or a competitive bidding process. Provida’s Investment Control Department, which is part of the Accounting and Consolidation Division of the Company, validates investments each day before entering into them. Additionally, this department has the obligation of disclosing to the SAFP a daily report with all investment activities.

     In February 2002, a legal modification to Law Decree 3,500 introduced Multiple Funds’ portfolios. Starting on August 1, 2002, each AFP must hold four funds denominated Type B, Type C, Type D and Type E, and may hold an additional fund named Type A. All AFPs incorporated the five types of funds and the first contributions to these funds were made on September 27, 2002.

     The main difference among them is the permitted portion invested in variable income securities. The fund Type A has the highest concentration in variable income while fund Type E does not have any variable income component. The balance of mandatory contributions, deposits by agreement, voluntary pension contributions and voluntary savings may be invested in two different fund types at the same time. As established in law 19,010 the indemnity account must remain in the same fund where the mandatory contributions exist.

     A description of the permitted investment limits in variable income instruments for each of the fund types as well the permitted funds for each of the affiliate types is described below:

Investment limits in variable income instruments

    Maximum   Minimum





Fund Type A   80%   45%
Fund Type B   60%   25%
Fund Type C   40%   15%
Fund Type D   20%   5%
Fund Type E   Not allowed   Not allowed







Multiple Funds allowable selections

        Men from 56 years old and       
    Men up to 55 years old and      women from 51 years old not    
    women up to 50 years old   pensioned   Pensioned affiliates







Fund Type A   Allowed   Not allowed   Not allowed
Fund Type B   Allowed   Allowed   Not allowed
Fund Type C   Allowed   Allowed   Allowed
Fund Type D   Allowed   Allowed   Allowed
Fund Type E   Allowed   Allowed   Allowed








     According to the law, if, at the ages of 56 and 51, men and women respectively who have their mandatory contribution and/or their indemnity account in fund Type A do not make any choice regarding the destination of their mandatory pension funds, these are gradually transferred to fund Type B.

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     Moreover, if the affiliate does not voluntarily choose a fund, the mandatory contributions are assigned and modified by law according the affiliate’s age:

  • Men and women younger than 35 to fund Type B;
  • Men between 36 and 55 and women between 36 and 50 to fund Type C; and
  • Men older than 56 and women older than 51 to fund Type D.

    Regarding the fund transfer method for the aforementioned cases, the procedure is the following:

  • Upon reaching the age designated above, 20% of funds are transferred to the corresponding fund.
  • After a year of reaching the age designated above, 40% of funds are invested in the corresponding fund.
  • After two years, 60%.
  • After three years, 80%.
  • Finally, after four years, 100%.

     For affiliates who apply to programmed withdrawal and deferred life annuities, the transfer of 100% of their saving to fund Type D is established, thereafter, being able to opt for any fund among the permitted alternatives.

     After more than two years since the Multiple Fund’s inception, fund Type C managed by Provida continues to have the highest proportion of assets (51.8% at December 2005) while fund Types A, B and D managed by the Company have reached significant sizes after the voluntary changes and massive transfers recorded from September 2002 as observed in the following table:

Assets under management of Provida

    September 2002     December 2005
    Million Chilean Pesos   % of the total   Million Chilean Pesos   % of the total











Fund Type A   94,379   0.4 %   5,266,979   13.7 %
Fund Type B   187,852   0.7 %   8,476,281   22.1 %
Fund Type C   24,383,049   97.3 %   18,949,920   49.5 %
Fund Type D   152,178   0.6 %   4,783,328   12.5 %
Fund Type E   250,028   1.0 %   836,169   2.2 %











Total   25,067,486   100.0 %   38,312,676   100.0 %











Source: SAFP                    

     Under the Pension Law, each pension fund is a separate legal entity from the AFP, immune to the AFP’s financial situation. In the event of the AFP’s bankruptcy, the SAFP assumes control of the fund, giving affiliates 90 days to transfer funds in their individual capitalization accounts to another AFP. At the end of that period, the fund custodian appointed by the SAFP transfers all remaining accounts to another fund that the custodian designates.

     The Pension Law establishes that each AFP must maintain a reserve denominated Mandatory Investment equal to 1% of the value of each pension fund under management. The mandatory investment is calculated in accordance with instructions issued by the SAFP, and corresponds to the value of each pension fund two days prior to calculation. Since June 1995, the Pension Law has required AFPs to invest this mandatory investment in shares of the respective pension fund managed by the AFP. This legislation is aimed at eliminating potential conflicts of interest that could arise between investment decisions relating to a portfolio held as AFP’s reserves and those relating to the portfolio where pension funds are invested.

     The mandatory investment’s purpose is to provide a guarantee in the event that the performance of a specific pension fund drops below the required minimum level of return. Currently, for pension funds Type C, D and E this level is the lesser of (a) the weighted average annual real return for the last 36 months of the same type of all pension funds in the system less 2% and (b) 50% of the weighted average annual real return for the last 36 months of the same type of all pension funds in the system. The minimum return for pension funds Type A and B is the lesser of (a) the weighted average annual real return for the last 36 months of the same type of all pension funds in the system less 4% and (b) 50% of the weighted average annual real return for the last 36 months of the same type of all pension funds in the system.

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     The average annual real return is calculated by the SAFP according to a weighted formula established by law. If, for a certain month, the pension fund’s annual real return on investment falls below the minimum return, the difference is compensated first from the pension fund’s own reserve for fluctuation on investment returns. If this procedure is not sufficient, then the remaining difference is covered by the AFP’s mandatory investment.

      A pension fund’s reserve for fluctuation on returns is a reserve that is created if there are excess of returns on fund investments over specific levels. Excess returns on investment arise when, for pension funds Type C, D and E, this level is the higher of (a) the weighted average annual real return for the last 36 months of the same type of pension funds in the system plus 2% and (b) 50% over the weighted average annual real return for the last 36 months of the same type of pension funds in the system. The level for pension funds Type A and B is the higher of (a) the weighted average annual real return for the last 36 months of the same type of pension funds in the system plus 4% and (b) 50% over the weighted average annual real return for the last 36 months of the same type of pension funds in the system. Since the beginning of the operation of the pension system, only one AFP has generated sufficient excess returns to create a fluctuation reserve.

     In the event that the pension funds managed by an AFP fail to fulfill the required minimum level of investment return, the AFP is required to cover the difference within five days of such determination by the SAFP. If reserves are used to fund any deficit in the required return, the AFP must replenish them within fifteen days thereafter. If a deficit is not covered or if reserves are not replenished, the AFP will be liquidated by the SAFP.

     Life and Disability Benefits

     As required by the Pension Law, Provida has contracted insurance to cover its obligation to provide life and disability benefits to affiliates. The selection of the insurance company is determined through a competitive bidding process open to all licensed Chilean life insurance companies and is designed to provide the required coverage on the best terms available.

     If an affiliate dies or becomes disabled before the legal age of retirement (60 and 65 years old for women and men, respectively) and before accumulating sufficient funds in his or her individual capitalization account to support payment to the affiliate or his or her beneficiaries of the pension benefits required by the Chilean pension law, the AFP has an obligation to make up the shortfall in the affiliate’s individual capitalization account. Under the Chilean pension law, each AFP is required to obtain an insurance policy with a licensed life insurer to provide coverage for this obligation. For more information on the costs associated with this insurances, see “– Primary Expenses”.

     Senior Pension Benefits

     Under the Pensions Law, each AFP must provide specific senior pension benefits to its affiliates who meet legal requirements for retirement. Affiliates may retire and receive an senior pension by reaching the age determined by law (60 for women and 65 for men), or before that time, if the affiliate has fully financed a pension equal or superior than 50% of the monthly average taxable salary for the last ten years, reaching at least a monthly amount equal to 110% of the legal minimum pension. By the implementation of the Life Annuity Law, in full effect at August 19, 2004, these percentages increase gradually in a target period of six years from 50% to 70% and from 110% to 150% respectively. The above originated with the intention of increasing the level of pension received and stopping the trend observed in workers some years ago of receiving pensions before the legal age, encouraged by the possibility of obtaining a safe income in the case of those workers who were unemployed or having two incomes (compensations and pensions).

     The Chilean government guarantees a minimum level of senior pensions for all AFP’s affiliates who have contributed for at least 20 years (including any year contributed under the former system) having reached the age stipulated by the law. In the event that the affiliate’s contributions into his individual capitalization account together with the amount paid pursuant to any recognition bond do not meet these minimum levels, the AFP pays the pension from the affiliate’s individual capitalization account until the account is depleted.

     At retirement, the affiliate chooses among three options for receiving his pension benefits: an immediate life annuity, a deferred life annuity, or a programmed withdrawal plan. In the first case, the affiliate selects a life insurance company, which shall pay the affiliate a monthly fixed rent (i.e., an annuity) for the rest of his life in

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exchange for transferring the total amount in his individual capitalization account. For the affiliates that elect this alternative, the life insurance company must offer a pension equal or superior to the minimum pension effective at retirement. In the second case, the affiliate contracts a life annuity plan with the life insurance company to start receiving benefits in a specific date in the future. Thus, the excess of funds is kept in the individual capitalization account for a temporary pension that covers the period from when the individual selects this option until the annuity payment begins. In the third case, the affiliate keeps his funds accrued in his individual capitalization account in the AFP and receives a monthly pension in accordance with a pre-established formula that considers the historical pension fund return and the rates offered by the insurance companies, as well as life expectancies. The amount of the affiliate’s monthly pension under the programmed withdrawal plan is recalculated every twelve months based on the surplus amount in the individual capitalization account of the affiliate and the variables described above. In the event that such amounts fall below the minimum pension level, the Government’s guaranty starts operating if it applies. If the affiliate chooses a programmed withdrawal plan, it is possible to switch him to life annuity plan. However, if an affiliate elects to transfer savings from his individual capitalization account to a life insurance company to receive life annuity benefits, the affiliate may no longer return to the programmed withdrawal plan.

     All pension obligations that an AFP must pay through programmed withdrawals from the individual capitalization account are expressed in shares of pension funds managed by the AFP. Insurance annuity amounts are expressed in UF and are thus indexed to reflect the impact of inflation. The AFP has no financial obligations once the annuity is purchased. In the case of the bankruptcy of companies that are providing insurance annuities, the Chilean government guarantees 100% of this obligation up to the legal minimum pension amount and 75% of the pensions over the minimum pension up to UF45 (approximately US$1,580).

     In addition to senior pensions, those affiliates who have financed with their individual capitalization accounts an adequate amount to generate a pension superior than 70% of their monthly average taxable salary during the last ten years and exceeding 120% of the legal minimum pension are entitled to withdraw and freely use all surpluses after the corresponding tax rate was applied. By the implementation of the Life Annuity Law, this last percentage is going to rise from 120% to 150% in a target period of six years. This requirement was increased to direct this kind of savings to finance pensions.

     Primary revenues.

     The most significant source of operating revenues for Provida is the monthly fee charged to affiliates in connection with deposits into individual capitalization accounts. Under the Pension Law, an AFP is permitted to charge a fee for (i) mandatory contributions into a mandatory pension account to fund the affiliate’s old age pension, (ii) voluntary savings withdrawals, (iii) transfer of account balances to another AFP, (iv) payments of programmed withdrawals and (v) management and transfers of voluntary pension savings. All AFPs currently charge fees in connection with (i), (iv) and (v) above. Provida began charging a fee in connection with (iv) and (v) above in July 2000 and in March 2002, respectively. Additionally Provida began to charge a fee in connection with (ii) above, in May 2006. Only one of Provida’s competitors charges a fee in connection with (ii) above.

     In accordance with the Pension Law, each AFP is allowed to set the fees it charges to its affiliates or pensioners. In connection with fees for mandatory contributions into the pension account, the Pension Law establishes that each AFP must apply the same fee levels to each of its affiliates. Affiliates who are not entitled to receive life and disability benefits are excluded, so they are charged a lower fee, reflecting lower costs to Provida. The fees for programmed withdrawal pension payments must be the same for each pensioner.

     Although there is no legal limit on the fees that an AFP may charge, competitive pressures have resulted in a limited range of fees charged by the different AFPs, with no significant difference between them.

     The AFPs earn fees in connection with the collection of contributions to affiliates’ individual capitalization accounts and the administration of individual capitalization accounts: in 2005, MCh$123,559, or 88.5% of Provida’s total operating revenues, was fee income received for providing these, and complementary, services. Almost all of the fee income results from charges levied on affiliates’ monthly contributions to their individual capitalization account. Gains on mandatory investments required by the Chilean pension law accounted for an additional MCh$ 9,755, or 6.9% of Provida’s total operating revenues in 2005.

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     Mandatory Contributions. Fee structure is one of the most competitive aspects of the AFP industry. Under the Pension Law, each AFP may determine whether to charge a fixed fee, a variable fee that is a percentage of the salary used to calculate the mandatory pension contribution or a combination of both types of fees. Variable fees are charged as a percentage of an affiliate’s monthly gross wages that is subject to 10% of the salary base (up to UF60 per month). Five out of six AFPs, including Provida, charge a fixed fee in combination with a variable fee, while the remaining AFP charges only a variable fee.

     The uniform fee requirement has limited the flexibility to reward longer term or higher income contributors with lower fees than those applied to newer and/or smaller accounts. Although changes to this rule have been proposed on several occasions, Provida cannot ensure that a change will be adopted which would allow Provida to reward longer term or higher income contributors through lower fees.

     SAFP Circulars 998 and 999, released in November 1997, intended to rationalize the commercial expenses stemming from transfers, and implied that AFPs would have to reorient their strategies to fee competition by reducing the variable fee levels (partially offset by higher fixed fees). The fee composition published by the administration of mandatory contributions is shown in the following table:

    Monthly Fees for Mandatory Contributions
   
    2001   2002   2003   2004   2005
    Variable   Fixed   Variable   Fixed   Variable   Fixed   Variable   Fixed   Variable   Fixed
    %   Ch$   %   Ch$   %   Ch$   %   Ch$   %   Ch$





















   Provida   2.25   390   2.25   390   2.25   390   2.25   390   2.25   390
   Industry High   2.55   1,000   2.55   1,000   2.55   1,000   2.55   790   2.55   695
   Industry Low (*)   2.09   390   2.09   390   2.09   390   2.09   390   2.23   320
   Industry Average   2.26   532   2.26   532   2.26   532   2.35   543   2.37   557
Source: SAFP                                        
(*) Minimum fixed fee among AFPs charging this kind of fee. 

     During the first five months of 2006, changes have been recorded in the fee structure with respect to the information at December 2005 shown in the previous table. In May 2006, Provida increased its variable fee from 2.25% to 2.39% of the salary base and reduced its fixed fee from Ch$390 to Ch$0, while AFP Santa María increased its variable fee from 2.29% to 2.42% of salary base and reduced its fixed fee from Ch$695 to Ch$450.

     Because of Provida’s size, the cost of managing each affiliate’s account is significantly below the industry average, allowing management to believe that it can continue to effectively compete at a lower fee level than most of its competitors. The following chart presents certain comparative information regarding average monthly costs of administered contributors’ accounts for the years 2001 to 2005:

Monthly Administrative Cost per Contributor

For the twelve months ended December 31,
(In constant (Ch$)
    2001   2002   2003   2004   2005











Provida   1,946   1,745   1,862   1,919   2,134
The Second lowest cost AFP   2,553   2,187   2,468   2,350   2,293
Average of the five largest AFPs   2,634   2,634   2,777   2,678   2,853











Source: Based on annual Uniform and Codified Statistic Form (FECU), for all AFPs.

     The variable fees are paid in addition to the amount contributed to the pension account. Fixed fees are charged against the balance of each contributor in the month the contribution was made. For example, an affiliate with a monthly salary of Ch$100,000 must contribute Ch$10,000. With the 2005 Provida variable fee rate of 2.25% of the salary base, the total monthly fee collected by Provida on such an account would be a variable fee of Ch$2,250 plus a fixed fee of Ch$390 deducted from the contributor’s individual mandatory pension account. Variable fees are paid directly by the employer or self-employed worker at the same time as the pension contribution.

     Programmed Withdrawals. In connection with fees for payments of programmed withdrawals, all AFPs charge a variable fee that is a percentage of the amount of pensions paid to the affiliates. Between 1999 and 2001, all

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AFPs in the industry announced the establishment of fees for payments of programmed withdrawals with such fees currently ranging from a low of 1.00% to a high of 1.25% of the pension.

     Voluntary Pension Savings. AFPs, like other authorized institutions, also offer affiliates the option to establish a voluntary pension savings account in which affiliates make monthly deposits previously determined to improve their future pensions. According to the law, AFPs are allowed to charge a fee over assets under management, and fees are currently in a range between 0.47% and 0.59% on annual basis. Since September 2005, Provida charges a fee of 0.56% on an annual basis over voluntary pension funds. Additionally to the above, the regulation permitted to charge fees on fund transfers collected for other institutions and Provida established a fee of Ch$1,250 for each operation (approximately US$2.4).

     The fees can be changed at any time upon three months’ notice to affiliates, the SAFP and the public. The following table sets forth the fee rates charged by Provida for each of the last three years and the current period:

Fee rates charged by Provida

    As of December 31,   March 31,

    2003   2004   2005   2006













Fee charged on monthly contributions (for affiliates who are entitled to                        
receive life and disability insurance)(*):                        
         Fixed fee (in Ch$)   390     390     390     390  
         Variable fee   2.25 %   2.25 %   2.25 %   2.25 %
Fee charged on payments of programmed withdrawals:                        
         Fixed fee (in Ch$)   0     0     0     0  
         Variable fee   1.00 %   1.00 %   1.00 %   1.00 %
Fee charged for voluntary pension savings management:                        
         Fixed fee (in Ch$)   0     0     0     0  
         Variable fee (annual basis over AUM)   0.49 %   0.49 %   0.56 %   0.56 %
Fee charged for voluntary pension savings transfers:                        
         Fixed fee (in Ch$)   1,250     1,250     1,250     1,250  
         Variable fee   0.00 %   0.00 %   0.00 %   0.00 %
Ratios of fixed and variable fees to total fee income:                        
         Fixed fee on monthly contributions   6.4 %   6.2 %   6.1 %   5.7 %
         Variable fee on monthly contributions   92.5 %   92.6 %   92.8 %   93.1 %
         Variable fee on payments of programmed withdrawals   0.8 %   0.8 %   0.8 %   0.7 %
         Variable fee on voluntary pension savings   0.2 %   0.3 %   0.4 %   0.4 %
         Fixed fee on voluntary pension savings transfers   0.0 %   0.0 %   0.0 %   0.0 %















(*) Affiliates who have reached retirement age or who are receiving a disability benefit are not entitled to receive life and disability benefits and are charged lower fees.

     The AFPs charge fees on active accounts into which contributions are made. Accordingly, the number of contributors, as well as their average salaries, and not the number of affiliates, determine the monthly fee revenues of each AFP. At December 31, 2005, Provida had the largest market share of contributors among all AFPs (40.0%) and, according to the Company ’s estimates, also the largest market share of monthly salary base (32.0%) . There are some factors that result in each AFP having a larger number of affiliates than contributors. In March 2006, according to labor force information, approximately 7.9% of Chile’s labor force, and therefore a similar percentage of affiliates, was unemployed. In addition, self-employed affiliates are not obligated to contribute every month, regardless whether they receive a salary in a specific month. The number of contributors is also influenced by the seasonal nature of many important industries in Chile, such as fishing, agriculture and tourism.

     Finally, starting in May 2006, Provida charges a fee for voluntary savings withdrawals of $1,475 per transaction.

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     Primary expenses

     As mentioned previously, AFPs are required by the Chilean pension law to obtain insurance to cover their obligation to provide life and disability benefits to their affiliates. In 2005, life and disability insurance premium expenses accounted for MCh$47,362, or 50.4% of Provida’s total operating expenses. Payroll expenses for administrative and sales personnel accounted for MCh$25,641, or 27.3% of Provida’s total operating expenses.

     Under the Chilean pension law, AFPs must provide life and disability benefits to affiliates or their beneficiaries in the event of death or disability of the affiliates prior to their retirement, excluding casualties associated with illnesses or professional accidents since these risks are covered by employers.

     Affiliates are eligible for these benefits if:

  • they are salaried workers and either (a) they were current contributors to an account with an AFP at the time of the disability or death or (b) they have made at least one contribution in the last year and that contribution was preceded by at least six monthly contributions in the last twelve months, or

  • they are self-employed and made a contribution in the month prior to the disability or death (the Chilean pension law does not require self-employed workers to make monthly contributions).

     Disability benefits are given to those affiliates who have not reached the legal age of retirement (60 and 65 years old for women and men, respectively) and have received an initial or a final qualification by a medical commission (respectively an “initial disability determination” and a “final disability determination”) designated by the SAFP as having their working capacity diminished by at least 50%, as follows:

  • Affiliates with a partial disability, defined as experiencing a loss of between one-half and two-thirds of their working capacity, are entitled to receive a pension equal to 50% of their prior income, which is defined as their monthly average taxable income for the last ten years, or for the latest period during which they worked, as adjusted for inflation.

  • Affiliates with total disability, defined as experiencing a loss of more than two-thirds of their working capacity, are entitled to receive a pension equal to 70% of their prior income.

     The medical commission makes both the initial disability determination, which qualifies an affiliate for the temporary pension, and the final disability determination three years after the initial determination.

     With the implementation of the Life Annuity Law in effect since August 19, 2004, the amount of pension to be received by unemployed affiliates has been modified, going from 35% to 50% of the average taxable salary for partial disability. In the case of total disability, the amounts will go from 50% to 70% of the average taxable salary. These modifications started in the same date that the law is enacted.

     Survival benefits are granted to legal beneficiaries of affiliates who die before reaching the legal age of retirement. Benefits are established as a percentage of the affiliate’s prior income. The applicable percentage depends primarily on the family status of the beneficiaries: for a spouse with no children the percentage is 42.0%; for a spouse with children, 35.0%, plus, for each child up to 18 years of age, 10.5% (through age 24 for students and until death for disabled children).

     If the disabled or deceased affiliate’s individual capitalization account does not contain the amount of funds (the “required pension amount”) that will be necessary in order to pay, over the applicable number of years, the required pension, the insurer (under its contract with the AFP) must record a provision in respect of its obligation to make up the shortfall (the “shortfall payment”) in three years when the final disability determination is made. In order to calculate the shortfall, the insurer must take into account the three years of temporary pension payments that will be received by the affiliate following the initial disability determination. As further described below, the insurer makes these calculations at the moment of the initial disability determination, which is three years prior to the point in time when the insurer would be required to make the shortfall payment if a final disability determination is made.

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     The insurer calculates the shortfall payment at the time of the initial disability determination (the “initial disability amount determination”) on the basis of the information available to it at that time, including regarding current annuity rates and the amount of funds in the affiliate’s individual capitalization account. If a final disability determination is made, the insurer updates the initial disability amount determination based on the new information available to it at such time.

     Under the insurance policy in force, Provida pays the insurer a “temporary rate,” currently equal to 0.70% of the aggregate taxable income of all of Provida’s affiliates, which is intended to provide the insurer with a portion of the funds it will be required to pay to affiliates for life and disability benefits. Provida also pays the insurer a fixed monthly management fee, which in 2005 was MCh$39 per month, that is not considered an advance on payments the insurer will be required to make to affiliates. In 2005, Provida’s aggregate payments to the insurer of the temporary rate and the monthly management fee were an aggregate of MCh$35,106.

     In the first quarter of each year, Provida and the insurer compare the funds paid by Provida for the prior fiscal year under the temporary rate to the sum of (i) the funds actually paid by the insurer to affiliates or his or her beneficiaries and (ii) the amount estimated by the insurer that it will be required to pay disabled affiliates once final determinations of disabled status are made by the medical commission referred to above (the sum of (i) and (ii) is referred to herein as the “casualty rate”). If the casualty rate is greater than the temporary payments, Provida pays the insurer the difference, up to a maximum amount based on the maximum casualty rate (the percentage of the aggregate taxable income of all of Provida’s affiliates) included in the insurance contract, which in 2005 was 1.27% . Provida has no obligation to pay the insurer for a casualty rate that exceeds the maximum rate. Monthly premiums will be paid during the entire contract’s coverage duration with a temporary premium of 0.70% . The Administrator’s participation in the surplus will be 100% if the casualty rate is equal or lower than 1.27% . If the casualty rate is less than the temporary rate, the insurer would rebate the difference to Provida (this has not occurred in the past eight years). For fiscal year 2005, the additional payment made by Provida to the insurer as a result of the comparison of the temporary rate to the casualty rate was MCh$19,641.

     Since January 1, 2005, Provida has maintained a life and disability insurance contract of indefinite term with BBVA Seguros de Vida S.A. Under Provida’s 2005 insurance policy, the insurer is required to cover all life and disability benefits in excess of 1.27% of the aggregate taxable income of Provida’s affiliates. However, if the insurer were not able to make any required payments to affiliates, Provida would be responsible for such payments. Accordingly, Provida is exposed to the credit risk of the insurer, to the extent of claims not paid prior to any bankruptcy, dissolution, or winding up (or similar event) of the insurance company that would render it unable to satisfy its obligations under the insurance contract.

     In the past, rebates of funds paid by the insurer under applicable insurance contracts represented a significant source of revenues for Provida due to the fact that the casualty rate of the client portfolio was lower than the temporary premium paid monthly to the insurance company. However, since the middle of 1999, a period when Chile experienced unemployment rates of over 10% (significantly higher than the average observed rate of 6.2% in 1998), the casualty rate started to increase to levels over the temporary premium paid monthly.

     In each of the five years prior to and including 2005, Provida has been required to make payments to the insurer that have exceeded the casualty rate communicated to us by the insurer for each such year because the actual payments ultimately made by the insurer to disabled affiliates corresponding to such year have exceeded the communicated casualty rate. Beginning in 2004, under Chilean GAAP, Provida developed a predictive model to allow it to make more accurate provisions respect to the disability and beneficiary payments that it believes the insurer will be required to make such that Provida’s total provisions at year end would more closely align with the future payments Provida will be required to make to the insurer. The basic thesis of Provida’s predictive model is to attempt to use, at the time it makes provisions, the information it believes will be applicable three years later at the time a final determination of the required disability payment amount is made. This approach contrasts with that taken by insurance companies, which do not adjust the variables they use to project the amounts that they will be required to pay.

     As a consequence, Provida’s results recognize the projected casualty rate at the close of each year under the current policy, through the application of the predictive model described above. As a result, the Company maintains better correlated revenues and expenses for the period.

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     By law, the selection of an insurance company is determined through a competitive bidding process open to all licensed Chilean life insurance companies and is designed to provide the required coverage on the best terms available. Provida is entitled to set the bid parameters for its competitive bidding process. In its competitive bid request, Provida has specified a maximum premium rate and a temporary premium rate. The maximum rate is the top percentage that the Company would have to pay to the insurer for coverage, regardless of whether the casualty rate experienced among Provida’s contributors were higher.

     Since January 1, 2005, Provida maintains a life and disability insurance contract of indefinite duration with BBVA Seguros de Vida S.A. The maximum casualty rate is expressed as a percentage of the affiliates’ taxable compensation (1.27%) for affiliates under the contract. Monthly premiums will be paid over contract’s term with a temporary premium of 0.70%. The Administrator’s participation in the surplus will be 100% if the casualty rate is equal to or lower than 1.27%.

     The Company makes yearly true-ups to the insurance company related to the shortfall to finance casualty costs until the final settlement of this contract that will occur 48 months after the end of the expiration date, which is extendable for up to 2 years upon mutual assent, with annual true-ups between the temporary premium and the casualty rate that will take place on March 31 of each year from 2006 onwards. In addition, the contract contemplates monthly payments to be calculated with a provisional rate of 0.70% applied to the total compensation and monthly taxable income of the affiliates plus a fixed monthly premium of UF 2,150 for the contract coverage period.

     Under current laws, this contract was awarded in accordance with a bidding process the result of which was released in La Tercera newspaper on November 30 and December 1 and 2, 2004.

     The previous life and disability policy ran from August 1, 2003 to December 31, 2004 and has entered into with BBVA Seguros S.A. Premiums had a maximum casualty rate of 1.10% expressed as a percentage of the contributing participants’ taxable compensation, with monthly premium paid throughout the contract’s term at a temporary premium rate of 0.70%. Upon settlement, Provida’s participation in the surplus will be 100% if the casualty rate is equal to or lower than 1.10% and greater than 0.85% of the participants’ taxable compensation; 90% if the casualty rate is equal to or less than 0.85%. Additionally, the contract established monthly payments calculated at a provisional rate of 0.70% applied to the total of compensation and monthly taxable income of the affiliates on a one-month lag plus a monthly fixed premium of UF 2,150 for the contract coverage period.

     In March 2005, Provida began to make yearly true-ups to the insurance company related to the shortfall to finance casualty costs. The final settlement of this contract will occur on December 31, 2008, which is extendable for up to 2 years upon mutual assent. Payment of provisional premiums and one month lagged premiums are due on the 20th of each month.

     The insurance policy prior to the BBVA Seguros policy ran from August 1, 2001 to July 31, 2004, with ING Seguros de Vida S.A. (formerly Aetna Chile Seguros de Vida S.A.). Under this policy premiums were expressed as a percentage of the contributing participants’ taxable compensation; variable, and adjusted according to the effective casualty rate. The adjustment was calculated when the effective casualty rate was less than the maximum contract rate, by comparing all monthly payments to a maximum of 0.95% of taxable compensation, less the corresponding participation in the surplus according this contract. All values were expressed in UF. Provida’s participation in the surplus will be 100% if the casualty rate is equal to or lower than 0.95% and greater than 0.80% (the cut rate) of the participants’ taxable compensation. If the casualty rates are equal to or less than 0.80%, Provida will also have the right to an additional participation of 90% of the surplus for the amount that is below 0.80%. In addition, the contract specified monthly payments calculated with a provisional rate of 0.70%, applied over the total compensation and monthly taxable income contributed in the preceding month and a fixed monthly premium of UF 2,200.

     The insurance policy, which was from August 1, 2001 to July 31, 2003, with ING Seguros de Vida S.A. (formerly Aetna Chile Seguros de Vida S.A.) established that premiums are expressed as a percentage of the contributing participants’ taxable remuneration; are variable, and are adjusted on the basis of the effective casualty rate. This adjustment is calculated given that the effective casualty rate was less than the maximum contract rate, by comparing all monthly payments to a maximum of 0.95% of taxable remuneration, less corresponding bonuses for

20






lower casualties. All values are expressed in UF. Provida’s participation in the surplus will be 100% if the casualty rate is equal to or lower than 0.95% and greater than 0.80% (the cut rate) of the participants’ taxable remuneration; if the casualty rates are equal to or less than 0.80%, Provida will also have the right to an additional participation of 90% of the surplus for the amount that is below 0.80%, all values expressed in UF. In addition, the contract specifies monthly payments calculated with a provisional rate of 0.70%, applied over the total remuneration and monthly taxable income contributed in the preceding month and a fixed monthly premium of UF 2,200. Likewise, one month lagged premiums are established in the collection month equivalent to 70% of the temporary settlements.

     In March 2003, Provida began to make yearly true-ups to the insurance company related to the shortfall to finance casualty costs. The final settlement of this contract will take place on January 31, 2008, which is extendable for up to 2 years upon mutual assent.

     Between August 1, 1999 and July 31, 2001, another contract was in place with ING Seguros de Vida S.A. (formerly Aetna Chile Seguros de Vida S.A.), under the same conditions as the previous agreement, except the fixed premium was UF 3,920 monthly. In this agreement, the participation system considered that if the casualty rate was equal to or less than 0.85%, the premium for the AFP was 90% of the excess.

     In March 2001, Provida began to make yearly true-ups to the insurance company related to the shortfall to finance casualty costs. The final settlement of the previous agreement took place on January 31, 2006, but it was extended for one year upon mutual assent.

     Between August 1, 1997 and July 31, 1999, another contract was in place with with ING Seguros de Vida S.A. (formerly Aetna Chile Seguros de Vida S.A.), under the same conditions to the previous contract, except the fixed premium was UF 2,150 monthly and the maximum rate was 0.80%. The bonus for favorable casualty rates was 100% if the casualty rate was in the range of 0.80% to 0.63% of taxable remuneration. If the casualty rate was equal to or less than 0.63% there was a participation in 90% of the surplus produced.

     The final settlement of this contract was made on March 31, 2006.

     The following tables set forth the cost of casualties, the payments to the insurance company and the provisions for unfavorable casualty rates of each insurance contract at December 31, 2005:

 Provisions

        Casualty Costs        
          incurred by the    Payments made    Provisions for
Insurance Company   Coverage Period   Insurance   to the Insurance   unfavorable
        Company   Company   casualty rate
       




        (in millions of constant Ch$)





ING Seguros de Vida S.A.   Aug 1997- Jul 1999   47,043   46,780   (263.4)
ING Seguros de Vida S.A.   Aug 1999- Jul 2001   72,448   72,164   (284.3)
ING Seguros de Vida S.A.   Aug 2001- Jul 2003   91,178   78,940   -
BBVA Seguros de Vida S.A.   Aug 2003- Dec 2004   66,625   59,826   (6,799)
BBVA Seguros de Vida S.A.   Jan 2005- Indefinite   42,217   34,577   (8,185)










     In addition to the rebate system, Provida’s current insurance contract stipulates that BBVA Seguros de Vida S.A. must pay Provida a monthly interest payment in the first quarter of each year. The monthly interest payment is calculated by applying the return rate of the insurance company portfolio previously defined in the contract, charged on the difference between (i) the sum of the premiums paid to BBVA Seguros de Vida S.A. minus all paid casualties that stemmed from Provida’s client portfolio and (ii) rebates received or paid by Provida during the contract period. The monthly interest payment compensates Provida for the float that BBVA Seguros de Vida S.A. enjoys on the premium amounts that are not used to cover casualties.

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     Principal Markets

     Chile

     As was mentioned previously, Provida is the largest and one of the oldest AFPs operating in Chile and has occupied a leading position in the private pension industry since its inception.

     Provida’s leading position is shown in the following table regarding market share in the most relevant variables as of December 31, 2005:


    Pension               Operating   Operating   Net
Market Share   Funds   Affiliates   Contributors   Revenues   Income   Income



















Provida   31.2 %   42.3 %   39.1 %   32.5 %   37.4 %   38.4 %
Habitat   23.9 %   23.9 %   26.5 %   23.9 %   27.9 %   28.5 %
Cuprum   17.8 %   6.6 %   9.5 %   16.2 %   20.5 %   20.2 %
Santa Maria   11.6 %   13.0 %   12.1 %   11.8 %   3.0 %   4.2 %
Bansander   11.7 %   8.7 %   8.8 %   11.4 %   14.5 %   14.5 %
Planvital   3.8 %   5.5 %   4.0 %   4.2 %   (3.3 )%   (5.8 )%



















System   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %



















Source: Based on information provided by the Authority and on annual Uniform and Codified Statistic Form (FECU), for all AFPs.

     The private pension system in Chile has matured and currently, there are six AFPs operating in a highly regulated environment. By law, no company in Chile other than an AFP may provide pension benefits of a similar nature, with the only exception related to voluntary pension savings the management of which has been opened to other authorized institutions since March 2002.

     In the middle of the 90s the private pension system reached its peak totaling 21 AFPs, although currently it has only 6 AFPs, as a consequence of the merger and acquisition process to achieve efficiency gains, adding the regulatory changes aimed at formalizing the process of transfers of clients. In March 2004, the last merger in the system took place, between AFP Planvital with AFP Magister maintaining the name of AFP Planvital.

     A new competitive factor arose in the industry from the Multiple Funds’ implementation, the larger number of choices in which to invest their pension savings led affiliates to start requiring higher levels of information to make the most appropriate decisions based on their age and risk profile. Therefore, the pension advisory services granted by AFPs became more important.

     The returns reached by the five funds during 2005 and since the Multiple Funds’ implementation have recorded positive levels, registering the best returns from those funds which have the highest concentration of shares, such as fund Type A and B. One of the most remarkable aspects it is that the difference between the returns of fund Type A and C since the inception of the Multiple Funds, has ascended to 38%. Despite the short time since the Multiple Funds implementation, it is noticeable that the decision of which of the funds must be elected is very important for affiliates. As a result, the importance of the advisory services granted by AFP as a competitive tool was confirmed.

     At April 30, 2006 Provida obtained the following returns and its respective rankings in terms of annual real returns for each fund managed:

    Annual real return   Provida’s ranking






Fund Type A   13.15 %   3
Fund Type B   10.04 %   5
Fund Type C   7.54 %   4
Fund Type D   4.83 %   6
Fund Type E   2.44 %   4






Source: SAFP          

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      Moreover, in 2001, the Chilean government approved a set of measures to liberalize the capital market. One of these measures, related to voluntary pension savings, came into force in March 2002 and granted new saving incentives and allowed their administration by financial institutions other than AFPs. In this context, while competitors have the advantage of offering a larger variety of products since AFP investments are limited by law (although the Multiple Funds extended the limits), the AFPs stand out in terms of low costs according to fees reported by the different participants. At December 31 2005, Provida recorded the highest number of APV accounts in the industry with 121,097 active accounts representing a market share of 35.1%. At the same date, the funds in APV accounts reached MCh$126,355 recording a growth of 18.4% in dollar terms with respect to last year.

     Provida also faces competition for voluntary savings contributions from various financial institutions and intermediaries such as banks, insurance companies and investment companies. Because Provida does not currently charge a fee on voluntary savings account deposits, the development of this product has not been considered as basic to the Company’s commercial strategy. As of December 31, 2005, the overall number of voluntary savings accounts in the AFP industry ascended to 812,639 which represent a total amount of MCh$401,100. At the same date, Provida had 330,586 accounts with funds for MCh$74,782 representing a market share of 40.7% and 18.6% respectively.

     Additionally, in 2005, Provida continued to develop its plan to maintain its broad customer base and to promote client loyalty. For this and considering the dynamism and competitiveness evidenced by the market, in 2005 the Company especially focused on improving “then current” services and implementing some new ones. The latter was intended to enhance excellent service quality, as well as establish and fulfill high assistant standards for customers in each channel. Provida believes it will be able to successfully achieve its target segments and, at the same time, maintain its customers’ loyalty. Therefore, with the intention to satisfy each customers’ pension needs, Provida has implemented programs to solve its own challenges as well as those ones imposed by the Industry. See “Item 4. Information on Provida – B. Business Overview – Marketing and Sales”.

     As a complement the Company’s activities, with the support of BBVA Group, Provida participates in the Value Depositary Center (shareholding of 23.14%), PreviRed.com (shareholding of 37.87%) and the Unemployment Funds Administrator (shareholding of 37.80%).

     In this regard, and since the law for the administration of the Unemployment Insurance in Chile was passed in 2001, the consortium composed of all AFPs of the industry was awarded the administration of such insurance for 10 years, implying the management of both the Unemployment Fund and the Solidarity Unemployment Fund, as well as the granting and administering of the benefits established in the Unemployment Insurance law, thus, providing a solution for all unemployed workers, mostly in low economic growth periods. According to the available information, after 39 months of operations (from October 2002 to December 2005), the workers affiliated with this system amounted to 3,941,173, while in December 2005 the AFC paid 65,880 workers unemployment benefits for a total amount of Ch$5,756 million. As of December 2005, the unemployment assets under management reached Ch$333,911 million.

     International

     Because of the success of the private pension system in Chile, a number of other Latin American and European countries have adopted substantially similar private pension systems. Currently, private pension systems are also in place in Peru, Colombia, Argentina, Uruguay, Bolivia, Mexico, El Salvador, Costa Rica, Panama, the Dominican Republic, Croatia and Poland. In addition, Ecuador, Paraguay, Venezuela, Brazil and Guatemala are also considering the adoption of a private and mandatory pension system.

     The Pension Law states that the “sole objective” of each AFP is limited to the administration of pension funds and the provision of related benefits. However, the Pension Law allows an AFP to invest, through a subsidiary created by the AFP for such purposes, in foreign companies whose purpose is to grant social security benefits in other countries.

     In May 1995, Provida amended its by-laws to allow for the creation of a subsidiary, Provida Internacional, whose objective is to invest in companies in countries other than Chile with the purpose of granting social security benefits in those countries.

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     International Strategy. As of December 31, 2005 the BBVA Group, with Provida’s participation, is the largest pension group in Latin America, with almost 12 million affiliates and more than US$45 billion in assets under management. Provida’s international strategy has focused on investment efficiency and new pension projects in Latin America together with the BBVA Group. Provida’s strategy is to act as a consultant to local AFPs in those countries with large pension markets with the expectation of generating fees for advisory services, while in countries with smaller pension markets Provida will actively seek new investments in local AFPs.

     According to the latter, during the recent years, certain changes in foreign subsidiaries investment portfolio were carried out to boost the pension franchise with BBVA Group as described in “Item 4. History and Development”. A description of Provida’s foreign investments are as follows:

     Peru-AFP Horizonte. Provida Internacional holds a 15.87% equity interest in AFP Horizonte in Peru, where it is present since 1993. In 2005, this affiliate generated profits of MCh$1,897 for Provida Internacional, representing a decrease of 7.5% (MCh$153) with respect to 2004 mainly sustained by the appreciation of the Chilean peso against the dollar, since net income is received in dollars by Provida Internacional, reaching an increase of 4.3% or US$151,000. This result was mainly supported by higher collection levels due to a higher average number of contributors (+6.9%) and higher gains on mandatory investments during the period. As of December 31, 2005, AFP Horizonte had 956,541 affiliates and US$2,378 million in assets under management equivalent to market shares of 26% and 25% respectively that situates it in first place in terms of affiliates and in second place regarding assets under management.

     Ecuador-AFP Génesis. The initial investment in AFP Genesis was made in 1995 and Provida Internacional held 25.00% equity interest until September 2001 when it acquired the remaining 75.00% of the shares held by Filanbanco, thus, it became the sole shareholder of that affiliate with 100.00% of the shares. In 2005, this affiliate contributed MCh$783 representing an increase of 68.8% (MCh$319) with respect to the amount recorded in 2004. This result was mainly sustained by higher fee income due to the increase in both the number of contributors (+10.8%) and assets under management (+34.2%), which were partially offset by higher expenditures in administration and depreciation. In terms of market share, AFP Genesis leads the market with 133,315 affiliates and US$27 million in assets under management representing market shares of 88% and 78% respectively, that is, the main pension fund administrator in a market where it is not mandatory yet.

     Mexico. In November 2000, Provida Internacional purchased of 7.5% of equity interest of AFORE Bancomer in Mexico, a company that has become the investment with the highest earnings for Provida Internacional due to its market position, size and good performance. In figures, this affiliate generated profits of MCh$4,562 in 2005 equivalent to 63.9% out of the total contributed by foreign investments representing an increase of 9.1% (MCh$382) with respect to the result recorded last year. As of December 31, 2005, AFORE Bancomer had 4,287,401 affiliates and assets under management of US$10,257 million equivalent to market shares of 12% and 19% respectively situating it in second place in the market in both relevant variables.

     El Salvador. Provida Internacional was present in the market through AFP Crecer in El Salvador since 2000 until October 2004 holding a 19.00% equity interest. As a consequence, in 2005 Provida Internacional did not receive profits from this affiliate, which meant a decrease of MCh$721 with respect to 2004.

     The Dominican Republic. Provida Internacional has been a participant in the market through AFP Crecer since October 2004 with a 35.00% equity interest. This ownership arises from the merger of AFP Crecer and AFP Porvenir. Provida Internacional was present in AFP Porvenir since September 2003 until April 2004 holding 100% of the shares. Later on, from May 2004 until September 2004, Provida had a 70% equity interest at which time a 30% stake was sold to the local investor Progreso Group. At September 2004, BBVA Group held 70% equity interest (prior to the sale of 30% of its interest to the Progreso Group as well) in AFP Crecer, thus, when the merger was carried out, Provida Internacional and BBVA Group held 35% equity interest in each of them and the remaining 30% was held by Progreso Group. In terms of figures, AFP Crecer recorded a loss of MCh$102 since it had not yet reached break-even point. As was forecasted, the merger of the two AFPs resulted in a company with a higher level of operations and a better market position, which improved the growth perspectives of this investment in the medium and long term. As of December 31, 2005 AFP Crecer had 398,965 affiliates with assets under management for a total of US$89 million, figures that represent market shares of 31% and 23% respectively, situating it in second place in the market in both relevant variables.

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     The following table describes the total equity income of Provida’s related companies, both foreign and local, for the last three financial years:

    For the twelve months ended December 31,
   
                      2005  
    2003     2004     2005     US$ (in  
    MCh$     MCh$     MCh$     millions)  













Net Income Provida   33,986     28,227     34,813     67  
– Net Income excluding gains of affiliated companies (*)   26,549     22,927     29,418     57  
– Equity in income of foreign affiliated companies (*)   8,434     6,583     6,357     12  
– Equity in loss of local affiliated companies   (997 )   (1,283 )   (962 )   (2 )
 
Equity in Gain of Affiliated Companies/Net Income   21.9 %   18.8 %   15.5 %   15.5 %















(*) Gains on affiliated companies do not include entities consolidated with Provida (AFP Genesis in Ecuador in all the periods and AFP Porvenir in the Dominican Republic in fiscal year 2003).

Marketing and Sales

     As is the case with all AFPs, Provida’s activities are limited to offering only those products and services permitted under the Pension Law. As a result, Provida seeks to maximize its income by attracting and retaining affiliates as well as by offering the possibility to make voluntary pension contributions and to receive payments under a defined pension withdrawal program.

     Provida obtains its affiliates mainly through its sales force, which targets potential clients who may be interested in changing their pension savings administration as well as new workers who enter in the labor market for the first time and need to be mandatory affiliated to the AFP System as dependent workers. The same sales force also performs tasks aimed at retaining the affiliate’s portfolio, foreseeing client transfers that might be induced by competitors’ sales agents. Provida also captures affiliates through its wide network of pension service centers without sales agents’ intervention.

     As the largest AFP in the Chilean private pension system, Provida seeks to capitalize on its brand name recognition to attract new affiliates and retain existing affiliates. Management believes that Provida’s prestige stems from its consolidated leading position over time, as well as the culmination of the integration process in the BBVA Group, a conglomerate leader in the Latin American private pension fund system, which led to a corporate image change in March 2001 profiling it as a member of the BBVA Group companies. Moreover, Provida believes that its marketing efforts, including direct marketing and other promotional activities, permit the Company to reinforce its strong presence in the market and to support the objective of attracting new affiliates and retaining the current portfolio through its sales force and its pension service centers.

     In terms of transfers among AFPs, Provida’s marketing and sales strategy in 2005 focused on capturing high-quality transfers, improving the sales agents’ productivity in order to optimize the marketing and sales expenditures. In order to appropriately support such strategy, the contracts of sales agents were modified by introducing new parameters regarding incentive payments in order to focus the transfers to lower casualty rate segments. Additionally, the Company has focused on profitable affiliation segments that have allowed optimizing the future growth possibilities in its core business. As of December 2005, Provida recorded an aggregate amount of 113,722 new affiliations (3.9% of affiliates at the close of the period), which represents a market share of 38.1%.

     Provida also mails periodic information, develops promotional activities to highlight the technological capabilities and the quality of its services rendered as well as provides additional services by making its facilities available for community use.

     Regarding marketing and sales strategy with a greater competitiveness in the new business segment, APV, Provida started focusing its efforts on capturing clients interested in making voluntary pension contributions, which implied opening new accounts for pension saving plans. This marketing and sales strategy was developed by a sales force specially trained in this new product, having additional advertising support in written media and supportive elements for different distribution channels. Today marketing and sales emphasis is centered in affiliate transfers

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having voluntary pension savings, accordingly, marketing and sales campaigns are directed at entities that offer these savings plans in order to attract their clients to Provida. The opening of specialized centers in voluntary pension savings permits the Company to provide personalized assistance to preferential clients, rendering integral advisory services by highly trained professionals. Additionally, the Multiple Funds have also represented an opportunity to take steps towards obtaining client loyalty by delivering an integral advisory service that allows clients to plan and optimize their decisions about savings, both mandatory and voluntary, in light of their future pension and tax benefits.

     Therefore, with the intention to satisfy each customers’ pension needs, Provida has implemented programs to solve its own challenges as well as those imposed by the Industry. First, the redesign of commercial and distribution processes aimed at offering specialized assistance, including branch offices implied the following allowance of services:

  • Specialized branch offices: they offer integral and personalized advisory in pension matters such as voluntary pension savings, benefits of the systems and pension inquiries.

  • BBVA Express branch offices: they offer fast transactions such as certificates, saving withdrawals, interest calculation, Provida and AFC contribution payments, pension payments and AFC formalities.

  • Integral Branch Offices: they offer in the same place services granted by specialized and express branch offices as described above.

  • Specialized Centers for APV: initially located only in Santiago, offer complete advisory services.

     As of December 2005, network offices are distributed throughout the country in 72 pension service centers and integral branch offices, 45 BBVA Express and 15 specialized centers. Approximately 12.1% of the branches are located in the north region, 24.3% in the central-north region, 19.7% east of Santiago, 12.1% west of Santiago, 15.9% in the south-center region and 15.9% in the south region. The offices have a uniform style nationwide and vary in size according to the needs of the zone where they are located and their previously defined profile.

     Regarding the Internet, a new Web site has been implemented; including new services and improving the old ones offered to customers in order to become a “virtual branch office” for all clients. They highlight the interactive portfolio view, a financial simulator to get information regarding distribution and election of pension funds, a financial portal, a news portal and service maps to locate the nearest service center.

     Besides, telephone assistance service has been further improved by increasing the number of operators and implementing new tools to furnish better assistance to customers.

     Regarding e-mail information, the Company has an efficient program to send pension matters, financial news, bulletins, information of general interest, to affiliates subscribed to receive this service. Also, this channel discloses all new services implemented by Provida for its affiliates.

     The innovations implemented in 2005 are the mobile text message service through which affiliates may request pension information that will be received through their mobile phones, e-mails or fax in a fast and safe manner. This is a unique service throughout the industry, which supports Provida’s purpose to offer the highest quality service for its customers.

     All the above makes evident the Company’s special effort to seek and develop new communication channels basically technological and remote in order to reach its customers under the premise “We are where you are”. The market has encouraged this strategy by awarding the Company the highest innovation appraisal according to an Adimark’s research on the market’s perception of AFPs in the second quarter of 2005.

     Additionally, the implementation of a technological change called “Unified Platform” implemented in Chile for all the AFP of BBVA Group will permit us to disseminate the pension information to benefit affiliates in real-time. In addition, it will allow us to evaluate our own personnel as to proficiency, in knowledge as well as service.

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     On balance, Provida has evidenced strong service during the period, not only to further improve its largest branch offices throughout the industry but also to strengthen its leading position by developing new communication channels, being recognized by the market and affiliate loyalty.

     Sales Force. Provida has generally maintained a sales force that enables it to sustain its dominant market share. In a competitive context, after the mergers and acquisitions of small AFPs into larger ones, Provida reached a maximum of 3,142 sales agents (December 1997), at which time the Authority decided to increase the requirements to the transfer process to reduce the aggregate cost for the affiliates in the system. In fact, variable fees charged by Provida decreased by 21.1% (2.85% to 2.25%) from December 1997 to December 2005, as well as the number of sales agents decreased by 82.5%.

     Provida’s sales force evolution in the latest years is as follows:

    As of December 31
   
    2003   2004   2005










Number of sales agents   625     555     550  
% variation with respect to previous year   -4.1 %   -11.2 %   -0.9 %
% market share   24.6 %   24.3 %   23.4 %










Source: Based on annual Uniform and Codified Statistic Form (FECU) for all the AFPs.            

     The following chart compares the relative sizes of Provida’s sales force with those of its competitors as of December 31, 2003, 2004, 2005 and March 31, 2006:

Total AFP Sales Force (percentage)

          As of December 31,         As of March 31,
    2003   2004   2005   2006













Provida   24.61 %   24.33 %   23.42 %   24.66 %
Bansander   16.93 %   13.81 %   16.10 %   15.76 %
Habitat   12.05 %   14.51 %   13.80 %   14.40 %
Santa Maria   14.84 %   14.90 %   16.87 %   13.34 %
Cuprum   14.02 %   18.11 %   16.74 %   18.14 %
Planvital   17.55% (*)   14.34 %   13.07 %   13.70 %













Total AFP Sales force (number of                        
   sales agents)   2,540     2,281     2,348     2,271  













(*) Sum of market share of AFP Magister and AFP Planvital
Source: Based on annual Uniform and Codified Statistic Form (FECU), for all AFPs.


     Unlike some of its competitors, Provida has not focused its marketing efforts on any specific industry or region. Each sales agent is assigned to cover certain businesses within a specific geographic coverage area. Sales personnel have visiting programs aimed at covering different businesses, companies and institutions in order to present Provida to new workers to achieve their incorporation, as well as to encourage affiliates to transfer from other AFPs. During regularly scheduled visiting programs, salespersons emphasize Provida’s size, longevity, industry prominence and reputation for quality of customer service in attracting affiliates, reinforcing the concepts of experience, capability and trust.

     In relation to affiliate transfers among AFPs, during fiscal years 2003, 2004 and 2005, the number of transfers in the industry increased by 4%, decreased by 16% and increased by 3% with respect to the previous year, respectively, reaching approximately 249,000, 209,000 and 215,000, respectively, or 6% of average contributors in 2005. The recent evolution is only a reflection of an increase in the number of eligible participants in the market that in figures reached an average increase of 6% in contributors during 2005.

     Regarding Provida’s transfers of affiliates, the Company increased the number of transfers subscribed to in 2005 by 5.4% with respect to 2004, totaling 64,955 cases. Furthermore, Provida has continued to emphasize the capture of new affiliations, a strategy that allows it to continue optimizing the possibilities of future growth of its recurrent business, capturing 113,722 new affiliations in 2005, which represented more than 38% of market share based on SAFP information.

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     Provida’s sales and marketing expenditures in the fiscal year 2003 reached Ch$10.4 billion, for the fiscal year 2004 they reached Ch$9.2 billion and for the fiscal year 2005 they reached Ch$8.7 billion. Provida has pursued a policy aimed at rationalizing the number of transfers and sales expenditures. Consequently, sales and marketing expenditures as a percentage of fee income was 9.7%, 8.3%, and 7.1% in fiscal years 2003, 2004 and 2005, respectively.

     Government Regulation

     All AFPs are subject to extensive and continuous regulatory reviews. The principal authorities regulating AFP in Chile are the Superintendency of AFP, the Central Bank, the Superintendencia de Valores y Seguros “Superintendency of Securities and Insurance” (the “SVS”) and the Rating Commission. The AFPs are primarily subject to the Pension Law and to the Corporation Law. The principal regulator is the SAFP; however, AFPs are also regulated by the Central Bank, which by law is required to set the limit on permitted investment for AFPs within the range established by the Pension Law. In addition, AFPs that are listed on a stock exchange are regulated by the SVS, which controls the securities and insurance industries. Finally, the Rating Commission determines whether securities qualify as acceptable for pension funds investment.

     The Superintendency of AFP (SAFP)

     General. The SAFP, an independent governmental agency under the supervision of the Ministry of Labor and Social Security, is in charge of supervising and controlling the AFP. The SAFP authorizes the creation of the new AFPs and mergers of the existing ones and has broad powers to interpret and enforce legal and regulatory requirements. Furthermore, in cases of non-compliance, the SAFP has the ability to impose sanctions, such as censures and fines and in extreme cases, it may order the liquidation of an AFP. In addition, any amendment of an AFP’s by-laws such as capital increase is subject to the SAFP’s approval.

     Frequently during the year, SAFP officers inspect the AFPs’ facilities and examine their records. The AFPs are required to submit their quarterly financial statements to the SAFP and provide periodically detailed information on their operations. The annual report of an AFP that includes financial statements for the fiscal year and its independent auditors’ opinion must be submitted to the SAFP for review before March 1 of the following year.

     Limitations on Types of Activities. According to the Pension Law, the corporate purpose of an AFP is unique and exclusive: to administer pension funds and to provide related benefits. The above includes collecting mandatory and voluntary contributions made by affiliates to the pension funds, to credit these contributions to each individual capitalization account and to invest those contributions in securities according to the rules established by the Pension Law.

     Legal amendments introduced to the Pension Law in March 1994 allowed AFPs, upon prior formal approval by the SAFP to set up affiliated companies in Chile that may: (i) provide services related to the AFP’s business to companies operating abroad and (ii) invest in foreign companies managing pension funds or in foreign companies whose business is related to pension matters abroad. Additionally, the AFPs were authorized to form subsidiaries intended to invest in companies that act as depositaries of securities. Following this authorization, all AFPs participated in the formation of Inversiones DCV S.A., where Provida has a 23.14% stake.

     The Unemployment Insurance Law enacted on May 2001 authorized AFPs to participate in the tender on the Unemployment Insurance administration and, if applicable, to set up an affiliated company that administrates the Unemployment Funds. This society is also subject to supervision by SAFP. The Unemployment Insurance Management tender bases were published in November 2001 and all AFPs participated as a consortium that was finally awarded the insurance management for 10 years presenting the best offer in terms of technical and economic issues. Provida participates in the new Company “Unemployment Funds Administrator of Chile S.A.” formed in March 2002, with a 37.8% stake.

     Insurance. Each AFP is obligated by the Pension Law to provide life and disability benefits to each affiliate. The SAFP establishes regulations in connection to the AFPs’ insurance contracts.

     Reserves. The Pension Law establishes that each AFP must maintain a reserve fund (“Mandatory Investment”) equal to 1% of the pension funds under management. According to the Pension Law, if an AFP records

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more than two breaches of this rule within a six-month period it will result in the AFP’s liquidation. The mandatory investment is calculated in accordance with instructions issued by the SAFP over the pension fund value two days before the calculation.

     Dissolution and Liquidation of the AFP. Any AFP that fails to cover the difference between the legal minimum actual return of pension funds and the actual return obtained, or that does not replenish the mandatory investment within the established time limits, will be dissolved under the Pension Law.

     Once the AFP is dissolved or declared bankrupt its affiliates have ninety days to transfer themselves to another AFP. If an affiliate does not do so, a receiver appointed by the SAFP must transfer the affiliate’s individual account balances to another AFP under certain rules.

     If an AFP must be dissolved for any reason, the liquidation of that AFP will be carried out by the SAFP. For those purposes, the SAFP is vested with all necessary legal powers to liquidate the assets of such AFP.

     In accordance with the Pension Law, the Chilean Government guarantees the contributions made to an AFP. If an AFP is liquidated and the remaining funds are not enough to cover the minimum return required, the Government will pay the difference.

     Fund Investment Controls. The Pension Law limits the investment options of a pension fund. The sole objective to invest with the pension funds’ sources is to obtain an adequate return and maintain their security. Any instrument, other than securities issued by the Chilean Government, the Central Bank and Chilean Government agencies, and within certain margins, equity securities instruments qualified to be purchased for a pension fund, must be previously approved by the Rating Commission.

     The Central Bank is responsible for establishing maximum investment limits of pension funds by type of securities and by issuer within certain defined ranges. The Central Bank cannot establish minimum investment limits.

     Conflicts of Interest. Directors, officers and all employees involved in the investment process must file a report to the SAFP disclosing their investments in eligible securities and cannot use information related to the pension fund investments for their own or a third party’s benefit. By law, the AFP or the people mentioned above must indemnify the pension fund for any damage caused to it by the misuse of confidential information.

     Requirement of Funds Minimum Return. The Pension Law establishes that each AFP must ensure that each month the actual return for the immediately preceding thirty-six months of each managed pension fund will not be lower than a specific minimum return calculated according to a formula established by law. This requirement has been in effect since November 1, 1999 a date from which the performance period was incremented by one month every month until reaching thirty-six months by October 2002, as where previously the performance period was twelve months. In February 2002, Law 19,795 on Multiple Funds introduced another amendment to the requirement of funds minimum return by establishing differences according to the investment portfolio profile. The original funds (Types C and E) and additionally fund Type D maintained the same requirement, while for funds Type A and B the requirement was more flexible given their higher concentration in variable income.

     The Central Bank

     The Central Bank is an autonomous legal entity created by the Chilean Constitution. It is subject to the Central Bank Act and, to the extent applicable and not inconsistent, also to the laws and regulations applicable to the private sector. It is governed and administered by a Board of Directors composed of five members appointed by the President of the Republic and requiring a “special majority” vote of the Chilean Senate to be elected.

     The Central Bank is responsible for, among other issues, monetary policy and exchange controls in Chile. Appropriate registration of a foreign investment in Chile grants the investor access to the Formal Exchange Market. Foreign investments can be registered with the Foreign Investment Committee under Decree Law N° 600 or can be registered with the Central Bank under the Central Bank Act. Additionally, the Central Bank is responsible for establishing maximum investment limits of pension funds by type of securities and by an issuer within certain defined ranges, but it cannot establish minimum investment limits.

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     The Superintendency of Securities and Insurance (SVS)

     The SVS is an independent governmental agency that supervises, regulates and controls the Chilean capital markets. As an open corporation listed on the Chilean stock exchanges, Provida is subject to the supervision, regulation and control of the SVS.

     The Rating Commission

     The Rating Commission is constituted by the Superintendent of pensions, securities and banks as well as AFP industry representatives. Its main objective is to determine whether securities qualify as acceptable for pension fund investment.

     New Legal Developments

     Pension Benefits. The law 19,934 published on February 21, 2004, in force since August 19, 2004, introduced several modifications to the Pension Law such as the creation of electronic system for consultations and pension amounts offers, modification of anticipated pension requirements as well as new coverage percentage of the life and disability insurance.

     Advisory Presidential Council to Pension Reform. Under the new Chilean government installed in March, 2006, a presidential advisory council was formed for the pension reform (known as Marcel Commission) composed of 15 advisors designated by the President whose main task shall be to develop proposals intended to improve the pension system. To perform its duty, the Council has met with a wide participant spectrum related to the pension system, national experts and Chilean nationals in order to analyze different views of the current pension system.

     The Council has an advisory character, thus, its proposals will be considered by political authorities who finally will become responsible for publishing the reform’s initiatives, establishing priorities and conducting legal and administrative reforms to be materialized. Finally, the National Congress will analyze the legal initiative submitted by the Government in the course of the legislative process. On June 30, 2006 the Council shall submit its definite research to the Government who will send the corresponding bill to the National Congress during the second quarter of the year.

     Thus far, the main proposals made by the different participants who have taken part in the Council’s discussions and hearings are related to (i) increase competition in the pension industry allowing the entrance of new participants to administer the pension funds in order to reduce fees charged to affiliates, (ii) increase both pension coverage and social security to self-employed workers, as well as, improve pension coverage and social security for dependent workers; and (iii) the flexibility of the rules delineating pension fund investments in order to obtain the highest returns.

C. Organizational Structure

     Provida was integrated into the BBVA Group in July 1999. At December 31, 2005 the BBVA Group had 1.0 million shareholders with presence in 38 countries and more than 94,000 employees worldwide that serve over 35 million clients through a network of more than 7,000 branches. Within the pension fund business, the BBVA Group is a leader in Latin America, managing assets for US$45 billion (MCh$23,062,500) and providing services to almost 12 million people. In Chile, the BBVA Group, through Provida, manages assets for US$23 (MCh$11,941,250) billion in a highly competitive market in which Provida is the leader.

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     The following chart sets forth the significant related companies comprising Provida’s corporate structure:

D. Property, Plants and Equipment

     Since 1981, Provida’s strategy has included the development of a nationwide branch network, which currently includes 132 branch offices located throughout the country and the Company began to lease more space during the last three years as a result of the redefinition process of branch offices according to the project “shared networks” in conjunction with BBVA Chile S.A which turned into an extensive branch office network. Therefore, the number of owned branch offices was 41 as of March 2006.

     In order to spread its corporate image to the public, each newly built or remodeled branch office is uniformly decorated. In March 2001, Provida completed its integration into the BBVA Financial Group with a complete change of Company image, thus making the Provida brand consistent with most of BBVA’s other Latin American interests. This process involved the design of a new branch employee uniform and color scheme, which was implemented throughout the entire branch office network.

     The principal property that Provida owns is its 18-story headquarters building, known as the BBVA Tower, located in the east commercial neighborhood of Santiago. The total square meters arise to 13,014.18. The BBVA Tower houses all staff units of Provida, where as Operation Area operates at downtown Santiago. Since 2003, it became BBVA Group’s corporate building in Chile, renting spaces to staff departments of BBVA Chile S.A.

     The important improvements implemented in 2002 in the Pension System with the introduction of Voluntary Pension Savings and the Multiple Funds as well as the growing demand for interactive services through the Internet, have produced a marked evolution in the needs and requirements of affiliates. This development obviously affects the diversity of services granted by areas of technology and operations to the commercial area and branch office network to satisfy the growing and new demands of customers.

     As part of the reorganization program and the Company’s new technology initiated in the second half of 2004, the AFP has implemented a stabilizing and improving plan in the first quarter of 2005. The latter with the intention to use, as much as possible, the advantages offered by this new technology. It is important to stress that services have been activated through the use of remote channels such as mobile phones -to grant information to its

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customers-, the creation of new products in Provida’s website and dispatch account statements by e-mail. From the Company’s view, this new technology has allowed an increase in information processing, thus improving from the second half of 2005, the speed and percentage accreditation numbers, transference of higher assistance autonomy to service centers and increment of information security levels.

Item 4A. UNRESOLVED STAFF COMMENTS

     Provida received a comment letter from the Division of Corporation Finance of the SEC on September 16, 2005. The comments were issued with respect to the Commission's review of the Company’s Form 20 F for the year ended December 31, 2004. In addition to other matters, the letter included comments relating to the Company’s accounting and disclosure for life and disability insurance cost, estimates of the casualty rate in respect of operating results and differences between Chilean and U.S. accounting principles. Provida responded to this letter on January 12, 2006 and received an additional comment letter from the Commission on March 14, 2006, to which Provida again responded on May 18, 2006. We have made additional disclosures in this current Form 20 F that reflect comments raised in the letters. See “Item 4. Information on Provida – Business Overview – Primary Expenses”, “Item 5. Operating and Financial Review and Prospects – Critical Accounting Policies – Accounting of Life and Disability Insurance Cost” and “Item 18. Financial Statements.”

     However, as of the date of the filing of this Form 20 F, the Commission continues to review the Company’s responses to the letters and thus the comments therein remain unresolved.

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results

U.S. GAAP Reconciliation

     The principal differences between Chilean GAAP and U.S. GAAP as they relate to Provida’s net income are the inclusion of price level restatement effects, the minimum dividends and the reversal of amortization of goodwill. For a more detailed explanation of these differences between Chilean GAAP and U.S. GAAP, see Note 41 to the audited consolidated financial statements.

     Provida’s net income under Chilean GAAP was Ch$33,986 million for fiscal year 2003, Ch$28,227 million for fiscal year 2004 and Ch$34,813 million for fiscal year 2005 as compared to net income under U.S. GAAP of Ch$37,576 million for fiscal year 2003, Ch$35,376 million for fiscal year 2004 and Ch$35,512 million for fiscal year 2005. Net income under U.S. GAAP was 10.5% higher than under Chilean GAAP in 2003, 25.3% higher than under Chilean GAAP in 2004 and 2.0% higher than under Chilean GAAP in 2005.

     Total shareholders’ equity under Chilean GAAP as of December 31, 2004 and 2005 was Ch$179,339 million and Ch$185,634 million, respectively, as compared to total shareholders’ equity under U.S. GAAP as of December 31, 2005 and 2004 of Ch$186,816 million and Ch$193,317 million, respectively (or 4.1% and 3.5% higher, under U.S. GAAP than under Chilean GAAP, respectively).

Critical Accounting Policies

     Financial Reporting Release N° 60, released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of the financial statements. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, which would potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies in the preparation of our Chilean GAAP financial statements are limited to those described below. It should be noted that in many cases, Chilean GAAP specifically dictates the accounting treatment of a particular transaction, with no need for management’s judgment in their application. Additionally, significant differences can exist between Chilean GAAP and U.S. GAAP, as explained in the section U.S. GAAP Reconciliation and Note 41 to the audited consolidated financial statements. Also, there are areas in which management’s judgment in selecting available alternatives would not produce materially different

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results. For a summary of significant accounting policies and methods used in the preparation of the financial statements, see Note 2 to the audited consolidated financial statements.

      Accounting of Life and Disability Insurance Cost

     According to the Pension Law, Provida has obtained insurance to cover its obligation to provide life and disability benefits to affiliates to the extent that these benefits may not be covered by the funds in the affiliate’s individual capitalization account and the State Guarantee, when applicable. See “Item 4. Information on the Company – Business Overview –Primary Expenses.”

     Since 1999, Provida has been required to make payments to the insurer that have exceeded the casualty rate communicated to us by the insurer for each such year because the actual payments ultimately made by the insurer to disabled affiliates corresponding to such year have exceeded the communicated casualty rate. In this regard, in January 2004, the Superintendency of Pension Fund Administrators, issued instructions about provisions to be included in the year 2003 in connection with higher casualty rates. Furthermore, at the close of the fiscal year 2003 Provida made provisions for 100% of the contract balances of the insurance company corresponding to previous contracts, which had been paid by March 2004. (See Note 34c of Financial Statements).

     Provida has, through experience, concluded that the insurer's calculations regarding the required amounts to provision in respect of future disability payments underestimate the actual amounts that the insurer will be required to pay. Though SAFP rules do not require AFPs to make additional provisions for any amounts that the AFP estimates the insurer or it will be required to pay, AFPs may make such provisions to the extent supported by available evidence. Provida has developed its predictive model to more accurately forecast the amounts that will be required to be paid to disabled affiliates once their final disability determination is made. The basic thesis of Provida's predictive model is to attempt to use its best estimate, at the time of the initial disability determination, the information it believes will be applicable as to disability status, family composition, rate of return over the three years on the disable contri bution to date, etc. This approach contrasts with that taken by insurance companies, which use only information that reflects a disabled persons current status. The provisions recommended by our predictive model represent our best estimates of our required future payments and these are the actual provisions that we record in our financial statements. (We reconcile the disability payment information we receive from the insurer against the claim information we have received from affiliates (or their beneficiaries) on a monthly basis in order to confirm that the information that the insurer provides to us is consistent with the claim information we have received. If this information contains errors, we address it with the insurer).

     In this regard, under the accounting criterion, if the casualty rate calculated by the model is less than that calculated and maintained by the insurance company, the amounts established in the contract will be used. By contrast, if the casualty rate of the model were lower than those in the insurer’s balance, the amount to be provisioned would be the latter as established as a minimum under current law. Because of the current low three-year forward rates, which would normally be used by Provida in our predictive model to discount the three years worth of payments disbursed during the temporary disability period, the casualty rate estimated by the model are lower than the amounts in the insurer’s balance sheet and therefore, the insurer’s amounts were used as the basis to record provisions.

     The following is a description of the key information used by Provida in its predictive model and how such information contrasts with the information used by insurance companies:

  • Discount rates: In order to calculate the required pension amount, a stream of pension payments must be discounted back to the date of calculation using an interest rate specified under the Chilean pension law. The interest rate required to be used is the market rate for annuities. At the date of the initial disability amount determination, the insurer uses the current market rate for such an annuity. Provida, however, uses the 3 year forward rate for the 10 year government bond (there is no market for forward rates for annuities) and adds a premium to account for the risk that the 10 year bond will behave differently than the annuity. Provida currently uses a discount rate of 4%, which is based on the current rate on 10 year government bonds of 3.23% and a risk premium of 0.75%. To the extent that 4% is lower than the current annuity rate used by the insurer, Provida’s provisions will exceed the insurer disability provisions. See paragraph above for a description of the accounting under the opposite conditions.

  • Affiliate’s family composition: As mentioned above, an affiliate’s family composition affects the disability pension amount to which the affiliate is entitled. At the time of the initial disability amount determination, the insurer uses family information that was collected at the time the affiliate first entered the pension system, which, in many cases, can be significantly outdated. Such family information used by the insurer
33





    often does not reflect intervening events, such as marriage and childbirth. By contrast, in its predictive model, Provida assumes that the family composition of a disabled affiliate is consistent with the average family composition for its entire universe of affiliates. Since affiliates are more likely to be unmarried and without children when they enter the pension system, this assumption generally increases (relative to the insurance company’s estimates) the provisions Provida makes in respect of future disability payments.

  • Frequency of casualties: Provida generally assumes that the number of disabled affiliates will grow year-to year at the same rate as the expected growth of the overall affiliate portfolio, which has been an average of 6% in the past 3 years. This correlation between growth in the number of disabled affiliates and growth in the overall affiliate portfolio has existed in the prior 5 years. By contrast, insurers do not incorporate expected growth rates in their affiliate portfolios when estimating future disability payments.

  • Returns on Affiliates’ Individual Capitalization Accounts: Affiliates have a positive balance in their individual capitalization accounts, and this balance will earn investment income over the three years following the initial disability amount determination until the final disability determination is made. The insurer’s calculations do not take into account that the affiliate’s individual capitalization account will grow over such three year period. Provida’s predictive model assumes that the individual capitalization account will grow in line with the historical average growth rate (6%) of the largest of the five funds in which affiliates are permitted to contribute. This fund represented more than 50% of the aggregate disabled affiliate invested funds in 2005. Taking into account such projected growth of the affiliate’s individual capitalization account generally reduces (relative to the insurance company’s estimates) the provisions, Provida makes in respect of future disability payments.

  • Death of disabled affiliate: A certain percentage of affiliates that receive an initial disability entitlement determination die prior to the final determination of their disability. Since beneficiary benefits are lower than disability payments, this percentage can significantly influence the amount of disability payments that are ultimately required to be made. The insurer assumes that no disabled affiliates will die prior to the final determination of their disability. Provida, however, based on historical experience, assumes that 10% of such affiliates will die prior to such time. Taking into account that 10% of disabled affiliates will die prior to the final determination of their disability generally reduces (relative to the insurance company’s estimates) the provisions Provida makes in respect of future disability payments.

     Through the application of the predictive model described above, the provisions taken by Provida in respect of future payments to the insurer more closely reflect the actual payments Provida will be required to make, thereby allowing Provida’s revenues and expenses to be more closely correlated in any given period. We review the inputs of the predictive model at least every quarter and make any change to such input that we consider appropriate at such time.

     Finally, the SAFP released Circular Note N° 3,228 requiring a reversal of retained earnings at the beginning of the period to record with the consequent increase in the cost of life and disability insurance premium in fiscal year 2004 by incorporating expense adjustments from previous years.

     This analysis below estimates the potential changes in fair value, cash flows and earnings based on a hypothetical 15% change (increase or decrease) in interest rates, frequency of casualties and pension funds returns. The Company believes that a 15% change (increase or decrease) in these market rates and prices is reasonably possible in the near-term. In performing this analysis, the Company used market rates at December 31, 2005 to reprice its invested assets and other financial instruments. The sensitivity analysis is an estimate and should not be viewed as predictive of the Company’s future financial performance.

 






  2005  
Worst
Scenario
Base
Scenario (*)
Best
Scenario








Discount Rate 3.4%   4.0%   4.6%  
Frequency 6.9%   6.0%   5.1%  
Rate of return on ICA’s 5.1%   6.0%   6.9%  








Projected Casualty Rate 1.09%   0.97%   0.86%  








Total Provisions (MCh$)   $17,013 $11,779 $6,980








(*) The base case is the casualty rate estimated by the predictive model, which is lower than the amounts in the insurer’s balance sheet and therefore, the insurer’s amounts were used as the basis to record provisions.

     We believe that our critical accounting policies under the U.S. GAAP do not differ from the Chilean GAAP policy above.

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Introduction to Provida’s Operating Results

     The following discussion should be read in conjunction with the audited consolidated financial statements of Provida and its subsidiaries, and the Notes thereto included elsewhere in this annual report. See Item 19.

     In accordance with Chilean GAAP, all financial information regarding Provida contained in this report, unless otherwise indicated, has been restated in constant Chilean pesos as of December 31, 2005 to recognize the effects of changes in the general purchasing power of the Chilean currency. See Note 2 to the audited consolidated financial statements.

     Provida is the largest AFP in Chile, providing pension fund management and various related services. These services are limited to those permitted for AFPs under the Pension Law and its revenues are largely dependent on the level of fees charged to its affiliates. As a consequence, Provida’s operating results are dependent on the general level of economic activity in Chile and, in particular, on the number of workers who affiliate with Provida and make monthly contributions as well as the amount of their salaries subject to contributions. Given that during 2005 the Chilean economy evidenced good performance, Provida estimates that growth in the number of workers in Chile and their aggregate salaries will maintain an upward trend, although not necessarily at the same rate as in the past. Because of its large market share, the broad geographic coverage of its branch network and its sales activities, and the diversity of its affiliates, Provida believes that its revenues are not dependent on any one sector of the economic activity.

     The principal sources of operating revenues for Provida (See “Item 4. Information on the Company –Business Overview –Primary Revenues.”) are the variable and fixed fees it charges to its contributors in connection with deposits of their monthly mandatory contributions. Therefore, the operating revenues of Provida can be materially impacted by any combination of significant changes in fee rates, in the number of contributors or in gross wages. From December 1999, Provida has charged a variable fee of 2.25% over each contributor’s salary and a fixed fee of nominal Ch$390 per month discounted from the contributor’s accounts. Additionally and related to voluntary pension savings, Provida established a nominal fee of Ch$1,250 for each operation of funds transfers to other institutions and a monthly fee of 0.56% for voluntary pension savings management. Although sales efforts are relevant factors in competition, Provida believes that fees and quality of service have become the most important factors.

     Another significant source of revenues is the gain on mandatory investment. Gains generated from mandatory investment belong to the AFP but do not necessarily result in increased cash flow because as the pension fund grows so do the reserve requirements imposed on the mandatory investment.

     In the past, an additional source of revenues was rebates received from life and disability insurance contracts. Rebates had the most significant effect on operating revenues in the first quarter of the year, which is when the insurance companies make partial settlements on the most recent contracts, in the event that the casualty rate was lower than the temporary rate paid by the AFP. In addition to the rebate system, Provida’s insurance contracts stipulate that the insurance companies must pay Provida a monthly interest payment, which compensates Provida for the float that insurance companies enjoy on the premium amounts that are not used to cover casualties. These payments are recognized on a monthly basis according to accrual criteria and are accounted as other operating revenues.

     The most significant components of Provida’s operating expenses are salaries, of both administrative and sales staff, administrative expenses and the cost of life and disability insurance. The latter component has become the most relevant (representing more than 50% of the Company’s operating expenses) since casualty rates began to increase and the expenses associated with attracting new affiliates have began to decrease. In addition, Provida considers that it is the most efficient provider of services in terms of costs in the industry, having the lowest administrative cost per contributor since its inception. See “Item 4. Information on Provida – Business Overview –Primary Expenses.”

     The main sources of Provida’s non-operating income (expenses) are: its equity in the earnings or losses of its investments in foreign pension fund administrators, goodwill amortization due to investments in foreign pension

35





fund administrators and local acquisitions, interest expenses and the effect of inflation and foreign exchange exposure as measured by the price-level restatement.

     Inflation produces losses, due to the net liability exposure of the Company. See “Item 5. Operating and Financial Review and Prospects – Impact of Inflation and Price Level Restatement.”

     The following table sets forth the composition of Provida’s operating revenues and expenses for the periods indicated:

    For the twelve months ended
December 31,
 








REVENUES:   2003   2004   2005










Fee income   87.4 %   87.8 %   88.5 %
Gains on mandatory investment   8.6 %   8.7 %   7.0 %
Other operating revenues   2.7 %   2.6 %   3.7 %
Interest income   1.3 %   0.9 %   0.8 %










TOTAL OPERATING REVENUES   100.0 %   100.0 %   100.0 %











    For the twelve months ended
December 31,










EXPENSES:   2003   2004   2005










Administrative personnel remuneration   18.9 %   17.5 %   18.9 %
Sales personnel remuneration   10.6 %   9.1 %   8.4 %
Directors’ remuneration   0.1 %   0.1 %   0.1 %
Marketing expense   0.8 %   0.6 %   0.9 %
Data processing expense   0.9 %   0.9 %   2.4 %
Administrative expense   11.3 %   12.7 %   13.8 %
Depreciation   1.9 %   1.7 %   2.1 %
Amortization   0.0 %   0.0 %   0.9 %
Other operating expenses   2.1 %   2.0 %   2.1 %
Life and disability insurance   53.4 %   55.4 %   50.4 %










TOTAL OPERATING EXPENSES   100.0 %   100.0 %   100.0 %










     The following table sets forth certain additional monthly average information relating to the operations of Provida for the periods indicated:






 
  Monthly Averages  





 
  2003   2004   2005  





 
Number of contributors   1,413,179   1,440,094   1,479,230  
Administrative employees   1,064   1,051   1,030  
Sales personnel   634   566   540  

Source: SAFP

Operating Results

   Operating Results for the years ended December 31, 2005 and 2004

      Operating Revenues

     Operating Revenues rose by 9.6% from MCh$127,432 for fiscal year 2004 to MCh$139,618 for fiscal year 2005, due to an increase of MCh$11,739 (10.5%) in fee income and a positive variation of other operating revenues that increased by MCh$1,797 (53.6%) due to faster clearance of those Company’s fess that were collected by

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mistake by other AFPs and higher other operating revenues of MCh$1,776 (39.2%). Lower gains on mandatory investments partially offset all the favorable performance mentioned above, with a negative variation of MCh$1,329 or 12.0%.

     The 10.5% increase in fee income from MCh$111,820 for fiscal year 2004 to MCh$123,559 for fiscal year 2005, was the result of higher level of contributions credited in the clients ICAs during the year that, in accrued terms, grew by 7.3% with respect to 2004. The growth differential over last year between fees and collection stems from higher efficiency in the accreditation process for collection in the affiliates’ individual accounts, which is a legal requirement to charge the associated fees, as well as the successful recovery of leftovers (unidentified contributions received from affiliates) generated in 2004 due to the implementation of “Unified Platform”. This technological change that was developed in Chile for all the AFPs of BBVA Group, implied strict parameters in the accreditation process of contributions, which during its launching step affected the level of fees charged by the Company.

     Likewise, fees received on the administration of voluntary pension savings (APV) have slightly increased as a share of the total of fee income during 2005, not yet representing an important percentage (0.4% versus 0.3% in 2004); but having experienced an increment of 26.0% or MCh$91.4 with respect to the last year, which was basically sustained by higher average volumes of administered funds (+20.5% with respect to 2004) and the rise of the variable commission from 0.49% per year to 0.56% per year over administered funds (in force since September 2005).

     With respect to the number of clients, Provida has maintained its leading position in the pension fund industry with market shares around 40%, where the total of contributors was 1,479,723 at December 2005.

     Gains on mandatory investments decreased by 12.0% from MCh$11,084 in fiscal year 2004 to MCh$9,755 in fiscal year 2005, because the positive results obtained by local stock markets in 2005 were lower than the remarkable returns exhibited in 2004 (2005: IPSA +9.4%, IGPA +2.7% v/s 2004: IPSA +21.0%, IGPA +22.2%), in addition to the lower results generated by the local fixed income portfolio due to the rise of interest rates. In figures, the weighted average nominal return of pension funds reached 9.20% in 2005, which negatively compared with the 11.46% reached in 2004.

     Other Operating Revenues in fiscal year 2005 increased by 39.2% or MCh$1,776 compared to fiscal year 2004, due to revenues from the multiple affiliations’ clearance process and higher revenues obtained by AFP Genesis in Ecuador.

      Operating Expenses

     Total Operating Expenses decreased 1.1% from MCh$94,987 for fiscal year 2004 to MCh$93,963 for fiscal year 2005, mainly stemming from lower costs of life and disability (L&D) insurance premiums due to lower provisions for unfavorable casualty rate and lower sales force payroll expenses, partially offset by higher administrative personnel payroll expenses and other operating expenses.

     Administrative personnel payroll expenses for fiscal year 2005 reached MCh$17,730, increasing 6.7% or MCh$1,112 with respect to fiscal year 2004, mainly because of higher severance payments stemming from staff reductions made during the year given the efficiency gains contemplated in the Company’s 2005-2006 strategic project, and implementation of new technology. Additionally, the variable compensation (awards and commissions) increased because of certain pension executives’ incorporation in to the variable compensation framework, and a higher expense in profit sharing bonuses due to the higher profit recorded in the period. Regarding the administrative staff, the average of fiscal year 2005 decreased 2.0% compared with the fiscal year 2004, from 1,051 employees in 2004 to 1,030 in 2005. At the close of both periods administrative staff fell from 1,042 to 1,001 workers equating to a 3.9% decline.

     Sales personnel payroll expenses decreased by 8.5% from MCh$8,645 for fiscal year 2004 to MCh$7,911 for fiscal year 2005 mainly due to a drop in commissions related to the change in the sales agents’ labor contract that implied lower average rates paid for transfer production since the goals for productivity were linked to strict biometric (age, gender, beneficiaries, among others) parameters, as a way of managing the portfolio’s casualty rate. The above was partially offset by a transition bonus in relation to the implementation of the new contract, and higher

37





awards associated with the commercial incentive trip. The average number of sales agents in fiscal year 2005 reached 540 workers, representing a drop of 4.5% compared with fiscal year 2004. Regarding the headcount at the close of each period, the sales force decreased from 555 to 550 salespeople, registering a drop of 0.9%.

     Given the low current rates, at historical levels under 3% (determining a high cost for casualty reserves) the insurance company’s balances are used to determine the minimum amount to be provisioned. (See Note 8 to the Financial Statements for an explanation of when insurance company information versus internal predictive model is used to provision the life and disability obligation).

     In this way, the cost of provisions for higher casualty rate in 2005 corresponded to the contract that contemplates January/December 2005. However, the casualty rate model contemplates a lower cost of casualties since the forward rate of instruments with a similar duration to life annuities reflects a future growing trend, and therefore, lower effective costs of disability casualties at their settlement (3 years later).

     Life and disability insurance premium expenses decreased from MCh$52,623 in fiscal year 2004 to MCh$47,362 in fiscal year 2005, representing a drop of MCh$5,261 or 10.0% compared to fiscal year 2004. This positive variation is basically explained by lower provisions for unfavorable casualty rate of MCh$8,431 (See paragraph below), were partially offset by a higher cost regarding temporary premium of MCh$3,170 associated with the contribution growth.

     In 2004, all the necessary provisions required were recorded to cover the estimated total cost for casualty rate of contracts of previous periods as well as those currently in force. According to the predictive model internally developed, these provisions were MCh$8,490 (in Chilean pesos as of December 2005), and in the Company’s opinion they should have been accounted against shareholders’ equity as they were costs incurred in previous periods. The Superintendency of Pension Funds instructed us to record these provisions in the income of 2004, which explains the higher cost in 2004 compared to 2005. In any case, should this adjustment be isolated, provisions would have increased by only MCh$58 (0.5%) in comparison to 2004, although the increasing portfolio is covered by the insurance. The latter occurred in view of a downward trend of the number of disability requests, effect partially offset by the lower interest rates to discount the casualty reserves.

     The remaining operating expenses increased by 22.6% or MCh$3,859 from MCh$17,101 for fiscal year 2004, to MCh$20,960 for fiscal year 2005, a deviation mainly affected by higher costs in data processing expenses MCh$1,399, administration MCh$995 and depreciation and amortization that together recorded a higher expense of MCh$1,186.

     The higher computer expenses (data processing) mostly corresponded to expenses associated with the technological development “AFP Unified Platform” and the externalization of maintenance service intended to seek better conditions of efficiency.

     The higher administrative expenses were basically associated with the redesign of the commercial and distribution model implemented by the Company as part of the commercial strategy to improve assistance to the customer, and increase efficiency. For this, the branches were modified according to different requirements, separating the sales and the pension advisory service from the transactional component. Consequently, the latter implied higher expenses for the externalization of processes such as collection, pension payments and saving withdrawals, as well as an increase in costs related to more enhanced level of infrastructure that in figures totaled 132 branch offices in 2005.

     Consequently, our needs for investment in assets in order to successfully make the commercial strategy (infrastructure for headquarters and branch network) and the technological development “AFP Unified Platform” (software license) happen negatively affected the level of expenses of depreciation and amortization during the period.

      Operating Income

     Due to the favorable evolution of fee income and other operating revenues, accompanied by lower operating expenses, the operating income significantly increased by MCh$13,210 or 40.7% from MCh$32,445 for fiscal year 2004 to MCh$45,655 for fiscal year 2005.

38






     Non-operating income (expenses) net

     Non-operating income (expenses) decreased from an income of MCh$2,770 in fiscal year 2004 to a loss of MCh$2,140 in fiscal year 2005, representing a variation of MCh$4,910.

     This result was partly explained by a lower other non-operating income (exepenses) net of MCh$3,272, due to gains generated by sales of interests in equity-method investees in 2004. The lower result attained on the price level restatement of MCh$1,650 also contributed to this result basically lower gains in exchange rate stemming from the dollar debt with Provida Internacional (appreciation of the Chilean peso against the dollar of 8.1% in fiscal year 2005) and the application of a higher inflation over the Company’s net liability exposure (3.6% in fiscal year 2005 versus 2.5% in fiscal year 2004).

     The above was partially offset by the lower result of the amortization of goodwill (MCh$281) where the appreciation of the Chilean peso against the dollar explained the savings with respect to the last year, since it implied a lower amount in pesos in the amortization of the goodwill associated with foreign investments.

     Finally, the results of Related Companies increased from MCh$5,300 in fiscal year 2004 to MCh$5,396 in fiscal year 2005. This positive deviation was the result of the better performance of the electronic collection company PreviRed.com that contributed MCh$382. On the contrary, the foreign affiliates recorded a negative result of MCh$225 basically due to the exclusion of AFP Crecer’s results in El Salvador, sold in October 2004, and the negative effect of the Chilean peso appreciation against the dollar in the comparative periods. Isolating the effect of the exclusion of AFP Crecer’s results, the earnings on foreign investments had increased 8.5%.

      Income Tax

     Income tax increased from MCh$6,988 in fiscal year 2004 to MCh$8,702 in fiscal year 2005, a higher tax expense of MCh$1,714 (24.5%) . This deviation stems from higher earnings generated in the period and the consequent higher expenses of Ch$777, as well as higher deferred taxes of MCh$894. It is important to point out that deferred taxes are recorded on a discounted basis for the gains on mandatory investment. The tax authority has allowed the projection of this last obligation and discounting it at a rate of a Central Bank’s instrument, which has evidenced a downward trend during fiscal year 2005.

      Net Income

     Net income rose from MCh$28,227 for fiscal year 2004 to MCh$34,813 for fiscal year 2005, representing a real increase of 23.3% or MCh$6,586.

      Operating Results for the years ended December 31, 2004 and 2003

      Operating Revenues

     Operating Revenues increased by 5.0% (4.6%) from MCh$121,818 for fiscal year 2003 to MCh$127,432 for fiscal year 2004, due to an increase of MCh$5,370 (5.0%) in fee income and MCh$671 (6.4%) in gains on mandatory investment. The above was partially offset by lower financial revenues and lower rebates from the life and disability (L&D) insurance contracts of MCh$444 (27.4%).

     Fee income increased by 5.0% from MCh$106,451 for fiscal year 2003 to MCh$111,820 for fiscal year 2004, as a result of higher collection levels observed in the period. In fact, total collection for 2004 increased by 8.9% in actual terms with respect to last year, a growth higher than fee income due to the implementation of a technological change called “Unified Platform” implemented in Chile for all the AFP of BBVA Group at the end of July. The latter implied a delay in the accreditation process of collection in the affiliates’ individual accounts, which is a legal requirement to charge associated fees. So, lower levels of effectiveness in the accreditation process of contributions affected the revenues recognized for mandatory savings. Therefore, the Company took measures to correct this delay, implementing special tasks to recover leftovers (contributions received from affiliates not identified) generated by the Unified Platform start up. The accreditation process of collection will be stabilized in 2005 due to the adjustments introduced in the development of this new technology.

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     Moreover, revenues from fees charged by deposit of mandatory contributions that represent 98.8% of total fee income received by the Company increased by 4.9% in a framework where Provida has maintained its leading position in the pension fund industry with market share over 40% in terms of clients with a total number of contributors of 1,451,298 as of December 2004.

     Regarding voluntary pension savings (APV) (whose legal modifications came into force in March 2002) though it does not represent an important percentage of Provida’s fee income (0.3%) given the system of charging fees based on assets under management, this vehicle has experienced an important increase in both administered fund volumes and revenues. As of December 2004, the APV funds administered by Provida were MCh$110,534, representing an increase of 23.3% with respect to the same period last year, while fee income was MCh$352, an amount 50.5% higher than the figure recorded in fiscal year 2003. With respect to market share in the AFP industry, Provida has 33.5% of the administered accounts and 18.1% of assets under management. According to the information available about the APV market as a whole, the AFPs held 84.7% of administered accounts and 81.3% of the associated funds as of December 2004.

     Gains on mandatory investment increased by 6.4% from MCh$10,413 in fiscal year 2003 to MCh$11,084 in fiscal year 2004, due to the higher average assets under management. In addition, the pension funds in 2004 showed positive returns originated by the good performance recorded by both the local stock market (IPSA +21.0%, IGPA +22.2%) and foreign markets (Dow Jones +3.2%, Nasdaq +8.6%, MSCI US Value +12.2%, MSCI Europe ex UK +19.2%, Nikkei 11.8%, AC Far East ex Japan +14.2%, MSCI LA +34.8%,) . This was not enough to equal the remarkable return exhibited by stock markets in 2003, and as a consequence, the weighted average nominal return of the pension funds of 11.46% in 2004 was lower than the weighted average nominal return of 12.27% in 2003.

     Other Operating Revenues in fiscal year 2004 decreased by 8.6% or MCh$426 compared to fiscal year 2003, mainly due to lower interest income from the L&D insurance contracts of MCh$444. Additionally, the period recorded lower earnings of MCh$300 for services rendered for AFC (Unemployment Funds Administrator). Both effects were partially offset by higher revenues from additional contributions as a result of the clearance process of multiple affiliations among AFP (MCh$109) and higher revenues (fees) from the consolidation of AFP Génesis in Ecuador (MCh$214).

      Operating Expenses

     Total Operating Expenses increased by 5.8% from MCh$89,752 for fiscal year 2003 to MCh$94,987 for fiscal year 2004 mainly due to an increase in life and disability insurance premiums as a result of adjustments for higher casualty rate experienced by contracts with pending settlements. To the above, higher administrative expenses added primarily stemming from the redesign of the marketing and distribution model, which resulted in the restructuring of branch offices network and the consequent outsourcing of certain processes. The latter was partially offset by lower administrative and sales compensations resulting from a lower number of employees and less sales activity in the period, respectively.

     Administrative personnel payroll expenses for fiscal year 2004 reached MCh$16,618, decreasing by 1.9% or MCh$328 with respect to fiscal year 2003. Behind this, is the Company’s emphasis on the higher efficiency of the administrative staff, which led to a reduction in the number of employees through an unusual retirement plan in force in the first half of 2003. In figures the average number of administrative personnel fell from 1,064 in 2003 to 1,051 in 2004.

     As a consequence, the period recorded savings in terms of compensations and benefits associated with a lower number of personnel and lower severance payments since, unlike 2003, no significant severance payments were recorded. In addition, there were new incentive factors for productivity that reduced awards levels and lowered expenses related to seniority awards. Since fiscal year 2003 this benefit began to be recognized over the vesting period and not only when seniority was reached. The accrued effect of this accounting change was recorded in May 2003.

     The number of staff at the close of the period increased by 0.4% from 1,038 employees in December 2003 to 1,042 in December 2004 as a result of the redesign of the marketing and distribution model implemented in the second half of 2004. The latter led to a redefinition of sales staff and the creation of executives specialized in

40





pension advisory who, based on their characteristics and profiles, are members of the administrative staff. Moreover, such increase was offset by a reduction in the sales agent headcount.

     Sales personnel payroll expenses decreased 9.5% from MCh$9,556 for fiscal year 2003 to MCh$8,645 for fiscal year 2004. This was due to the lower sales activity during the period that resulted in a decrease of commission paid and non-recurring incentives for transfers. Additionally, fiscal year 2004 recorded savings in compensations and benefits resulting from the reduction of sales agents during the year as a consequence of the commercial redefinition. The above was partially offset by higher costs in severance payments arising from the aforementioned sales force adjustment.

     The adjustments to the sales staff was in response to a strategy to reorient resources towards pension advisory and maintain as traditional sales agents those with a highly productive level in terms of transfers. The average number of sales agents decreased from 634 in 2003 to 566 in 2004 implying a fall of 10.8%, while at the close of each period, it decreased from 625 at December 2003 to 555 at December 2004, a fall of 11.2% .

     Life and disability insurance premium expenses increased from MCh$47,914 in fiscal year 2003 to MCh$52,623 in fiscal year 2004, representing an increase of MCh$4,709 or 9.8% over the previous year. This increase is the result of higher provisions related to casualty rate of MCh$3,390 and higher provisional premiums of MCh$1,364 stemming from a higher salary base of clients recorded in the period. With respect to provisions for higher casualty rate, in the total amount of MCh$23,250 (Note 20 to the audited consolidated financial statements), MCh$8,490 corresponded to L&D insurance contracts prior to 2004. See “Item 5. Operating and Financial Review and Prospects – Critical Accounting Policies – Accounting of Life and Disability Insurance Cost.”

     The remaining operating expenses increased by 11.5% or MCh$1,765 from MCh$15,336 for fiscal year 2003 to MCh$17,101 for fiscal year 2004. This is due to higher administrative expenses of MCh$1,864 mainly related to the redesign of the distribution model implemented by the Company, which implied that the number of branch offices increased by 57.1% from 84 offices as of December 2003 to 132 as of December 2004. In addition, higher costs for external services related to collection and pension payment, as well as higher expenses related to leased spaces, were also recorded as a consequence of the aforementioned redesign. “Item 4. Information on Provida – Business Overview – Marketing and Sales – General.” Lower marketing expenses of MCh$145 as a result of less publicity and savings in direct marketing partially offset the above.

      Operating Income

     Consequently operating income reached MCh$32,445 in 2004, representing an increase of MCh$379 or 1.2% with respect to 2003, since the favorable increases in fee income and gains on mandatory investment were partially offset by the higher aforementioned expenses.

      Non-operating income (expenses) net

     Non-operating income (expenses) net decreased from an income of MCh$10,557 in fiscal year 2003 to an income of MCh$2,770 in fiscal year 2004, representing a negative deviation of MCh$7,787, mainly resulting from lower gains from the sale of related companies and the lower income from equity participation in related companies.

     With respect to transactions of related companies, in fiscal year 2003 Provida sold its 20% stake in AFPC Porvenir in Colombia generating gains of MCh$9,117, while in fiscal year 2004 the Company sold its entire equity participation in AFP Crecer in El Salvador and its 30% stake in AFP Porvenir in the Dominican Republic, transactions that together generated a profit for MCh$2,957.

     The results of related companies decreased from MCh$7,437 in fiscal year 2003 to MCh$5,300 in fiscal year 2004, representing a negative variation of MCh$2,137 (28.7%) . At the international level, the affiliates generated lower results of MCh$1,851 for Provida, mainly due to the exclusion of the results of sold companies: AFPC Porvenir in Colombia in September 2003 and AFP Crecer in El Salvador in October 2004. In addition, the results of related companies were negatively affected by the Chilean peso appreciation with respect to the dollar (6.13%) and the operating losses by AFP Porvenir in the Dominican Republic prior to the merger with AFP Crecer. Locally, AFC and PreviRed.com recorded higher losses since they have not yet reached a break-even point.

41





     Furthermore, the price level restatement results evolved favorably from an income of MCh$228 in fiscal year 2003 to a gain of MCh$344 in fiscal year 2004, representing a positive deviation of MCh$116. Even though in the period the inflation applied over the Company’s non-monetary net liability exposure was higher (2.5% as compared to 1.0% applied in fiscal year 2003), such effect was more than offset by higher gains stemming from exchange rate exposure given the appreciation effect of the Chilean peso with respect to the dollar over the mercantile account in dollars maintained with Provida Internacional.

      Income Tax

     Income tax decreased from MCh$8,636 in fiscal year 2003 to MCh$6,988 in fiscal year 2004, representing a lower expense of MCh$1,648 (19.1%) since fiscal year 2003 included the tax of the sale of AFPC Porvenir in Colombia for MCh$2,800. Excluding the latter, the expense on income tax increased by MCh$1,152 in connection with the higher prevailing tax rate (17% in fiscal year 2004 versus 16.5% in fiscal year 2003).

      Net Income

     Net Income decreased from MCh$33,987 for fiscal year 2003 to MCh$28,227 for fiscal year 2004, representing a decrease of 16.9% or MCh$5,760.

Impact of Inflation and Price-Level Restatement

     Provida is required under Chilean GAAP to restate non-monetary assets and liabilities, profits and loss accounts in order to reflect the effect of changes in the purchasing power of the Chilean currency. During inflationary periods, monetary assets and liabilities generate losses or gains, respectively, in purchasing power. Non-monetary assets and liabilities are restated so as to correct the effect of inflation and remain constant in real terms for both periods. See Notes 2 and 30 to the audited consolidated financial statements.

     Non-monetary assets and liabilities are generally restated using the CPI. Monetary assets and liabilities are typically not adjusted because their value is eroded by inflation.

     For practical reasons, the price-level restatement of trading securities is not accounted separately from the gain or loss on such securities. Accordingly, the net loss from changes in purchasing power of the currency does not include the gain that would have been separately recognized if price-level restatement on trading securities had been accounted for separately prior to restating trading securities to fair values.

     In terms of the inflation impact on Provida’s results, inflation effects produce losses as a consequence of the Company’s net liability exposure.

     The following table sets forth the calculation of the net effect resulting from the changes in the purchasing power of the Chilean currency:

 








  As of, and for the twelve months ended
December 31,
 








  (in millions of constant Ch$)
 








  2003   2004   2005










Shareholders’ equity   2,038   3,939   5,560
Other assets   (1,263 )   (2,572 )   (3,490 )
Premises and equipment   (318 )   (888 )   (1,179 )
Liabilities   307   83   16
Accumulated depreciation   59   166   246
Profit and loss accounts   3   522   763










Net loss (gain) from changes in the purchasing power of the currency   826   1,250   1,916











42





B. Liquidity and Capital Resources

Overview

     Our principal uses of funds are for life and disability insurance expenditures, dividend payments, mandatory investments and the payment of short-term and long-term liabilities. We have historically met these requirements by using cash generated from our operations, as well as through short-term and long-term debt. We believe that these sources of funds, together with our cash and cash equivalents, will be sufficient to enable us to meet our currently contemplated capital and debt service requirements. Due to the nature of our business, we benefit from significant cash flows related to fees received from our customers regarding mandatory and voluntary pension savings, which we estimate will continue in the same terms. The growth of our customer portfolio, as expected, will continue to increase our working capital requirements and we believe we are well positioned to finance such requirements.

     In 2004, due to the positive net cash from our operating activities and the sale of certain interest in related companies, we increased our cash and cash equivalent in the amount of MCh$2,277 million, despite the fact that our net cash from our financing activities was negative in the amount of MCh$31,759, largely due to payment of loans.

     In 2005, our cash and cash equivalent increased in the amount of MCh$280 million (US$546 thousands) since the positive net cash from our operating activities were destined to financing and investments activities, using our cash and cash equivalents in our commitments.

     In 2006, we expect our major cash needs to include:
  • repayment or refinancing of short-term contractual obligations in the amount of MCh$6,000 (US$11.7 million);

  • budgeted capital expenditures of MCh$830 (US$1.6 million); and

  • budgeted cash dividends of approximately MCh$18,000 (US$35 million).

     We expect to meet these cash requirements in 2006 through a combination of:

  • existing cash resources and cash flow to be generated from our operations in 2006; and

  • additional short-term and long-term debt that we will incur as necessary.
Sources and Uses of Funds

     Cash and Working Capital. At December 31, 2005, we had negative net working capital in the amount of MCh$40,915 (US$79.8 million), compared with negative net working capital of MCh$42,021 at December 31, 2004. We typically have had a negative working capital position because of our main need of financing are the mandatory investments, which is not considered as current assets. Additionally, we are used to financing our needs with short-term financial debt and we maintained during the year provisions related to the unfavorable casualty rate to be paid to the insurer in the first quarter of the following year. However, a negative working capital position does not affect our ability to obtain financing.

     Net Cash Provided by Operations. Net cash provided by operations in 2005 was MCh$40,901 (US$79.81 million), representing an increase as compared to MCh$12,830 regarding net cash provided by operations in 2004. Funds provided by operations consist principally of funds from fee income paid by our customers.

     Net Cash Provided (Used) in Investing Activities. Net cash used in investing activities was MCh$1,354 (US$2.6 million) for 2005, a variation of MCh$7,198 compared to net cash provided in investing activities in 2004. The principal uses for investing activities in 2005 were MCh$5,889 (US$11.5 million) for the purchase of mandatory investments shares and MCh$1,766 (US$3.4 million) for investments in related companies.

     Net Cash Used in Financing Activities. In 2005, our financing activities included MCh$39,352 (US$76.8 million) of which Ch$150,930 million (US$294.5 million) are generated from the issuance of debt. These amounts were

43





offset by MCh$168,102 (US$328.0 million) for repayment of bank borrowings, MCh$19,446 (US$37.9 million) for repayments of accounts due to related companies and MCh$17,278 (US$33.7 million) in dividends paid.

C. Off-balance Sheet Arrangements

     There are no off-balance sheet arrangements that could have any material effect on Provida’s results.

D. Tabular Disclosure of Contractual Obligations

     The following table represents Provida’s contractual obligations and commercial commitments as of December 31, 2005:

  Total   Less than 1 year   1-3 years   3-5 years   After 5 years  











 
Contractual Obligations          
Operating leases   4,623   950   1,469   1,469   735  
Unconditional purchase obligation   31,382   5,230   10,461   10,461   5,230  
Other long term obligations (Life and Disability Insurance)   315,876   47,622   101,035   109,280   57,940  












Total Contractual Obligation   351,881   53,802   112,965   121,209   63,904  












Commercial Commitments          
Syndicated loan - Local banks   136,493   22,749   45,498   45,498   22,749  
Lease contracts   731   81   162   101   387  












Total Commercial Commitments   137,224   22,830   45,659   45,599   23,136  












     The Company’s operating leases are mainly related to branch offices, none of whom individually represent a significant contractual obligation.

     Unconditional purchase obligations are related to permanent service contracts. Since most of them are connected with the Company’s level of activity, it is expected that the minimum commitment for this concept for the following years would be the same as for 2005. See Note 31 to the audited consolidated financial statements.

     Provida’s most material contractual obligation (registered and representing 100% of “Other long-term obligations”) stems from the life and disability insurance policy signed with BBVA Seguros de Vida S.A. The expenses required in connection with this obligation are determined using our predictive model through only year 6 in light that it is too difficult to predict macroeconomic variables that period. Even through year 6, if material assumptions used in our predictive model were significantly changed, these expenses and therefore our liquidity may materially differ.

     Provida’s capital leases and financial obligations are basically connected with long term obligations aimed at financing mergers and acquisitions of other AFPs during years 1998 and 1999. See Notes 15 and 16 to the audited consolidated financial statements.

     The use of the banks overdrafts required to finance business operations generates interest expenses by applying a variable interest rate agreed upon between both parties. As of December 31, 2005, the unused lines of credit amounted to MCh$50,093. See Note 15 to the audited consolidated financial statements.

44





Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Managers

     Provida’s Directors and Executive Officers as of December 31, 2005 are as follows:

Directors (1)(4)   Position   Current Position
Held Since
  Term of
Expiration







Gregorio Villalabeitia Galarraga   Chairman of the Board of Directors   2005   2007
Miguel Angel Poduje Sapiaín(3)   Vice - Chairman   1999   2006
Juan Prado Rey-Baltar   Director   2005   2007
Julio Gilsanz Arrola(2)   Director   2002   2006
Fernando Léniz Cerda(3)   Director   1997   2006
José María Ayala Vargas(3)   Director   2003   2006
Alberto Pulido Cruz   Director   1999   2007

(1) None of the above mentioned Directors and Executive Officers individually owns one percent or more shares of the Company.
(2) In the Board of Directors’ meeting held on January 26, 2006, it was informed that Director Mr. Julio Gilsanz Arrola had presented his resignation to his position for personal reasons. The Board of Directors unanimously accepted Mr. Gilsanz’s resignation and designated Mr. Gustavo Alcalde Lemarie as Director of Provida.
(3) In the Board of Directors’ meeting held on April 18, 2006, it was informed that Directors Mr. Miguel Angel Poduje, Mr. Fernando Léniz and Mr. José María Ayala had decided not to apply again to the post of Vice President and Directors in the Shareholders meeting that took place on April 21, 2006.
(4) The Board of Directors was renewed in the Ordinary Shreholders ’meeting held on April 21, 2006. The new Directors for the following two years were designated as it follows: Mr. Gregorio Villalabeitia, Mr. Juan Prado, Mr. Carlos Pla, Mr. Gustavo Alcalde, Mr. Alberto Pulido, Mrs. Ximena Rincón and Mr. José Antonio Viera-Gallo. In the Board of Directors Meeting held on May 23, 2006, Mr. Gregorio Villalabeitia and Mr. Gustavo Alcalde were elected as President and Vice President of the Board of Directors, respectively.

Executive Officers(1)   Position   Current Position
Held Since
  Term of
Expiration







Gustavo Alcalde Lemarie (2)   Chief Executive Officer   1996   N/A
Jorge Matuk Chijner (2)   Vice Chief Executive Officer   2005   N/A
Juan Carlos Reyes Madriaza   Chief Operation Officer   1998   N/A
Joaquín Cortez Huerta   Chief Investment Officer   1996   N/A
Carlo Ljubetic Rich   Chief Commercial Officer   2000   N/A
Gonzalo Pizarro Sironvalle   Human Resources Manager   2003   N/A
María Paz Yáñez Macías   Planning & Control Division Manager   2002   N/A
Gabriel Galaz González   Accounting & Consolidation Division Manager   2002   N/A
Alexia Cornejo Moreno   Operational and Market Risk Division Manager   2005   N/A
Arnaldo Eyzaguirre Miranda   Auditor   2003   N/A
Andrés Veszpremy Schilling   General Counsel   2002   N/A








(1) None of the above mentioned Directors and Executive Officers individually owns one percent or more shares of the Company.
(2) In the Board of Directors’ meeting held on January 26, 2006, it was informed that the Chief Executive Officer Mr. Gustavo Alcalde Lemarie had presented his resignation to his position for personal reasons. The Board of Directors unanimously accepted Mr. Alcalde’s resignation and designated Mr. Jorge Matuk Chijner as the Chief Executive Officer of Provida.
  N/A: Not applicable

Board of Directors

     Gregorio Villalabeitia Galarraga is the Chairman of the Board and has been a Director of Provida since 2005. He received a degree in law and economics from the University of Deusto in San Sebastián, Spain.

     Miguel Angel Poduje Sapiaín was the Vice-Chairman of the Board of Provida from 1999 until April 21, 2006. He received his law degree from the Catholic University of Chile.

45





     Juan Prado Rey-Baltar holds the position of Director of Provida since 2005. He received an economics degree from the Universidad del País Vasco, Spain.

     Julio Gilsanz Arrola was a Director of Provida from 2002 until January 26, 2006. He received a law and economics degree from the University of Deusto in San Sebastián, Spain.

     Fernando Léniz Cerda was a Director of Provida from 1997 until April 21, 2006. He obtained a civil engineering degree from the University of Chile.

     José María Ayala Vargas was a Director of Provida from 2003 until April 21, 2006. He obtained his law degree from the University of Barcelona, Spain.

     Alberto Pulido Cruz has been a Director of Provida since 1999. He received a law degree from the Catholic University of Chile.

Executive Officers

     Gustavo Alcalde Lemarie was Chief Executive Officer from 1996 until January 26, 2006. He received his commercial engineering degree from the University of Chile.

     Jorge Matuk Chijner was the Assistant CEO from 2005 until January 26, 2006, when he took the position of CEO. Mr. Matuk received a business administration degree from the Catholic University of Peru.

     Juan Carlos Reyes Madriaza has been Chief Operation Officer since 1998. From 1994 to 1998 he served as Production Division Manager in Provida. He received a mathematics civil engineering degree from the University of Chile.

     Joaquín Cortez Huerta has been Chief Investment Officer since 1996. He received a commercial engineering degree from the Catholic University of Chile and a Master of Arts in economics from the University of Chicago.

     Carlo Ljubetic Rich has been Chief Commercial Officer since 2000. He received an industrial engineering degree from University of Santiago of Chile.

     Gonzalo Pizarro Sironvalle has been Human Resources Manager since 2003. He received an industrial engineering degree from the Catholic University of Chile.

     María Paz Yáñez Macías has been Planning & Control Division Manager since 2002. She received a commercial engineering degree from the Catholic University of Chile.

     Gabriel Galaz González has been Accounting & Consolidation Division Manager since 2002. He is a university graduate in mathematics and physics from the University of Santiago of Chile.

     Alexia Cornejo Moreno has been Operational and Market Risk Division Manager since 2005. Ms. Cornejo previously held the position of Operational Control Manager. She received her degree as Accounting Auditor from the University of Talca, Chile.

     Arnaldo Eyzaguirre Miranda has been the auditor in charge of the Controller Division since 2003. He received commercial engineering degree from the Metropolitan Technological University of Chile and his Public Accountant-Auditor degree from the Central University of Chile.

     Andrés Veszpremy Schilling has been General Counsel since 2002. He received the degree of Laws from University of Chile, the degree of lawyer from the Supreme Court of Chile and a Master of Laws in International Legal Studies from the American University in the United States of America.

46





B. Compensation

      In 2005, the total compensations paid to each director of Provida was as follows:

                      Directors   Per Diem



  (in thousands of constant $Ch as of
December 31, 2005)



Miguel Angel Poduje Sapiaín   32,090
Fernando Léniz Cerda   16,045
Alberto Pulido Cruz   16,045



Total   64,180



     The per diem compensation paid by Provida to all Directors in fiscal year 2005 was MCh$64, a 2.8% decrease year on year. The aggregate compensation of Provida’s executive staff during fiscal year 2005, including 22 managers (area and division) and 30 department chiefs, was MCh$2,295.

     Severance payments made during 2005 to all executives who left the Company for different reasons totaled MCh$526.

     The plan of variable incentives known as “Direction Oriented to Results” (DOR) which was firstly implemented for managers during the year 2000 and extended to department chiefs in 2001 has been in force. This evaluation system is focused on the employees’ reaching previously defined objectives during the period. DOR is composed mainly of three aspects: achievements of goals established in numerical terms (figures); achievements of goals not established in numerical terms, but related to tasks and responsibilities; and discretionary evaluation aimed at reinforcing aspects in terms of efforts and external environmental factors which can affect worker’s performance.

C. Board Practices

     Provida follows the corporate governance policies and guidelines established under Chilean laws. We are administered by a Board of Directors that meets once a month and which in conformity with the current Company’s by-laws, comprises seven members who are elected in the annual ordinary shareholders’ meeting for a two year term. Cumulative voting is permitted for the election of Directors. Under Chilean law, a company’s executive officers may not serve as such company’s directors. As a result, our board consists entirely of “non-management” directors.

     There are no Service Contracts of Directors with the Company or with any of its subsidiaries to provide benefits upon termination of employment.

D. Directors Committee

     According to the Law N° 19,705 passed in December 2001, which regulates public share offers and establishes regulations on interest conflicts; and Circular 1,526 of February 2001 issued by the SVS, the concept of a “Directors Committee” was created. At our Board of Directors’ meeting held on May 29, 2001, Provida elected the members for its first committee, starting meetings on the same date. This committee assumed functions entered into by the former Audit Committee, but under Chilean law, the individuals on this committee are not required to be independent. With respect to the listing requirements that apply to our committees under the NYSE, see “Item 9. The Offer and Listing– Markets– Significant Differences between our Corporate Governance Practices and NYSE Corporate Governance Standards”.

     Among the responsibilities of the Committee are the proposal of external auditors; examination of reports prepared by the external auditing firm; approval of additional services granted by the external auditing firm; analysis of reports made by the Controller Division of Provida; analysis of resolutions and notes issued by regulatory organizations and the approval of transactions with related parties.

     During fiscal year 2005, the Board of Directors did not incur any expenses, except for compensations to its members.

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     In January 2005, Mr. Jesús María de las Fuentes submitted his resignation as Director and as a member of the Directors Committee, being replaced by Mr. Juan Prado. In the Board of Director’s meeting held on May 17, 2005, and given the Director’s renewal occurred in the ordinary shareholder’s meeting held on April 29, 2005, the Directors Committee was renewed. From that date and until April 21, 2006, the Directors Committee was conformed by Mr. Fernando Léniz Cerda (the financial expert), Mr. Alberto Pulido Cruz and Mr. Juan Prado Rey-Baltar. The Committee held 9 meetings in which also participated the Chief Executive Officer Mr. Gustavo Alcalde Lemarie, the Auditor Mr. Arnaldo Eyzaguirre Miranda and General Counsel Mr. Andrés Veszpremy Schilling as Secretary. In some of the meetings the partners of the external auditing firm Deloitte were invited.

     At the Board of Director’s meeting held on May 23, 2006, and given the Director’s renewal approved at the ordinary shareholder’s meeting held on April 21, 2006, the Directors Committee was renewed. The current members are Mr. Gustavo Alcalde – described as a financial expert by the Board of Directors –, Mr. Alberto Pulido and Mr. Juan Prado. In the Directors Committee held on June 22, 2006, Mr. Gustavo Alcalde was designated as the president of the Directors Committee.

      In 2005, the total fees paid to each director for their participation in Directors Committee was as follows:

Directors   Fees
  (in thousands of constant $Ch as of
December 31, 2005)



Fernando Léniz Cerda   3,159
Alberto Pulido Cruz   3,553



Total   6,712




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      E. Employees

     The following chart sets forth Provida’s organizational structure and related numbers of employees for major operating areas as of March 31, 2006:


     The daily operations of Provida are supervised by the Chief Executive Officer. The General Counsel, the Auditor, the Human Resources Manager, the Planning & Control Manager, the Accounting & Consolidation Manager and the three Area Managers of Provida report directly to the Chief Executive Officer. The Area Managers or Officers are: (i) the Chief Commercial Officer, (ii) the Chief Investment Officer, and (iii) the Chief Operation Officer. Although each of these persons manages a distinct area or division of Provida, they coordinate many of their day-to-day activities. Provida’s executive officers are appointed by the Board of Directors and hold the position at its discretion.

     As of December 31, 2005, Provida had 1,551 employees, of which 550 employees were members of the sales force, representing 35% of its total staff. As of December 31, 2004, Provida had 1,597 employees, of which 555 were members of the sales force, representing 35% of its total staff. As of December 31, 2003, Provida had 1,663 employees, of which 625 employees were members of the sales force, representing 38% of its total staff.

Labor Relationships

     Provida has good relations with its employees and its labor unions, and has never experienced a strike or walk out.

49





     Provida’s workers are represented by two labor unions. El Sindicato Nacional de Trabajadores de AFP Provida (“Labor Union N° 1”) was established in 1986 and is the oldest one. At March 31, 2006 its membership constituted 39.5% of the Company’s labor force, of which 510 were sales agents and the rest corresponded to administrative staff. The second labor union, El Sindicato Nacional de Trabajadores Administrativos de AFP Provida (“Labor Union N° 2”) was established in 1997 and represents only administrative employees. At March 31, 2006 its members represent 33.8% of the Company’s employees.

     In October 2004, a new collective bargaining agreement was presented. The result was a new agreement between the two parties with Labor Union N° 2 and Labor Union N° 1. These agreements will be in effect until December 31, 2006 and January 31, 2007, respectively.

F. Share Ownership

      The shares registered on behalf of Directors and Executives are the following:

Name of Shareholder                                                                        Position   Number of Shares of
Common Stock Owned






Juan Carlos Reyes M. and spouse   Officer   86,779  
Carlo Ljubetic Rich   Officer   28,589  
Miguel Angel Poduje Sapiaín   Director   5,250  
Mario Picero Castro   Manager   1,905  

Item 7. MAJOR SHAREHOLDERS AND TRANSACTIONS WITH RELATED PARTIES

A. Major Shareholders

     The Administradora de Fondos de Pensiones Provida S.A. is a publicly traded Corporation with an equity divided into 331,316,623 common shares of only series, nominative cases and without nominal value; instrument that grants such right of vote to each one of the shareholders. Since July 1, 1999, Provida is controlled by its principal shareholder BBVA Pensiones Chile S.A., with a participation of 51.62% in the capital stock, which indirectly wholly owned by Banco Bilbao Vizcaya Argentaria. S.A. The balance of the subscribed and paid shares distributed among small local and foreign investors including Directors and Executive Officers of Provida with an individual participation lower than 1%.

      At December 31, 2005, shares were distributed as it follows:

Name of Shareholder   Number of Shares of
Common Stock Owned
  Percentage
Ownership







BBVA Pensiones Chile S.A. (1)   171,023,573     51.619 %
The Bank of New York (2)   84,509,310     25.507 %
Directors and Executive Officers   122,523     0.037 %


(1) Corporation constituted in Chile whose major shareholder is Banco Bilbao Vizcaya Argentaria – Spain.
(2) Depositary Bank of ADS Banco de Chile as an acting custodian.
 
B. Related Party Transactions

     Article 89 of the Chilean Corporation Law requires that a Chilean company’s transactions with related parties be on a market basis or in similar terms to those usually prevailing in the market. Directors and executive officers breaching Article 89 are liable for losses resulting from such breach. Furthermore, the Chilean Corporate Law –Article 44–provides that any transaction in which a Director has a personal interest or is acting on behalf of a third party may be approved only when the Board of Directors has been informed of this fact, and such transaction has similar terms to those prevailing in the corresponding market. Resolutions approving such transactions must be disclosed to the Company’s shareholders in the next Shareholders’ meeting. Breaching Article 44 may result in administrative or criminal penalties and public liability to the Company, shareholders or third parties that may have losses as a result of such breach. In certain circumstances, Provida has entered into transactions with related parties

50





or with entities that have relationships with certain of its Directors. All of these transactions have been made in compliance with the requirements of Articles 44 and 89 of Corporate Law.

     During recent years, Provida has entered into transactions with companies under common ownership, including BBVA Pensiones Chile S.A., BBVA Corredores de Bolsa S.A., Banco Bilbao Vizcaya Argentaria Chile S.A. (BBVA Chile), BBVA Compañía de Seguros de Vida S.A., Servicios de Administración Previsional S.A., Sociedad Administradora de Fondos de Cesantía de Chile S.A. and BBVA Bancomer Servicios S.A.

      BBVA Pensiones Chile S.A. is the main shareholder of Provida. The transactions with this entity in 2005 were related to the licensing from BBVA Pensiones Chile S.A. of the software used in most operational and administrative processes (Plataforma Unificada) and its maintenance services, both corrective and developing, of the new Unified Platform to be used in the Maintenance Center of BBVA Pensiones Chile S.A. Additionally, this entity leased Provida’s real estate until 2004.

     BBVA Corredores de Bolsa S.A. is a subsidiary of BBVA Chile S.A. BBVA Group is the main shareholder of both Provida and BBVA Chile S.A. The transactions with this entity are financial services rendered to Provida.

     BBVA Chile S.A. There is a relationship through the major common shareholder BBVA Group. The transactions with this entity are lease contracts, services of collection, savings withdrawals and pension payments, overdraft lines and loans.

     BBVA Compañía Seguros de Vida S.A. There is a relationship through the major common shareholder BBVA Group. In 2003, BBVA Compañía de Seguros de Vida S.A. was awarded the bidding of Provida’s life and disability insurance for a coverage period of 17 months from August 2003 until December 2004. In a new bidding process BBVA Compañía de Seguros de Vida S.A. was again awarded Provida’s life and disability insurance contract for an undefined time from January 1, 2005.

     Servicios de Administración Previsional S.A. In March 2002, Provida assumed a mercantile current account agreement with PreviRed.com, a company in which Provida has a 37.9% equity interest. As per this agreement Provida loaned to PreviRed.com UF12,852 (approximately US$400,000), with a monthly interest to be established on the basis of the average of the last 5 days of the corresponding month of the TIP (Average Interest Rate), as informed by the Central Bank for non-index loans with maturity between 30 and 89 days. Such contract expired on December 31, 2003 and was renewed 50% at the end of 2007 and the remaining at the end of 2008. Additionally, PreviRed.com rendered electronic collection services to Provida.

     Sociedad Administradora de Fondos de Cesantía Chile S.A. Provida has a 37.8% equity interest and has guaranteed debt in the amount of UF 400,000 (MCh$2,718) of its equity-method investee. The debt was incurred so that Administradora de Fondos de Cesantía de Chile S.A., could comply with certain requirements of the Unemployment Insurance Administration which may include, but are not limited to standby letters of credit. The guarantee expires in January 2012.

     BBVA Bancomer Servicios S.A. There is a relationship through the major common shareholder BBVA Group. Starting 2005, this entity began to render services regarding processing of the Company’s and Pension Funds’ data in the Processing Center BBVA Bancomer Services in Mexico.

     For fiscal years 2004 and 2005, the detail of the related companies transactions are disclosed in footnote 32 b) of the Financial Statements.

      As of March 31, 2006 the detail of the related companies transactions are as follows:

















        Amount of transactions   Effect on income (charge) credit
Company   Transaction     Mar-05   Mar-06     Mar-05 Mar-06
















BBVA Pensiones Chile S.A.   Pending Balance   MCh$       MCh$   (38 )
  Lease   MCh$   32     MCh$   32
  Software Purchase   MCh$     3,303   MCh$   (221 )
  Software Maintenance (CMA)   MCh$     536   MCh$   (536 )

51






















        Amount of transactions   Effect on income (charge) credit
Company   Transaction     Mar-05   Mar-06     Mar-05 Mar-06
















BBVA Corredores de            
     Bolsa S.A.   Financial services   MCh$   20   19   MCh$   (20 ) (19 )
BBVA Chile S.A.   Lease branches, BBVA            
  Tower   MCh$   388   408   MCh$   388 408
  Lease branches          
  Huerfanos-Banderas   MCh$   185   182   MCh$   (185 ) (182 )
  Common Charges          
  (rented property)   MCh$   17   66   MCh$   (17 ) (66 )
  Common Charges          
  (leased property)   MCh$   109   113   MCh$   109 113
  Pension payments   MCh$   134   130   MCh$   (134 ) (130 )
  Collection Contract   MCh$   320   325   MCh$   (320 ) (325 )
  Overdrafts and          
  Borrowings   MCh$   11,895   14,050   MCh$   (167 ) (197 )
  Saving withdrawals          
  services   MCh$   62   63   MCh$   (62 ) (63 )
  Current Accounts   MCh$   158   256   MCh$   (7 ) (10 )
BBVA Compañía de            
     Seguros de Vida S.A.   Paid premiums   MCh$   11,850   9,493   MCh$   (11,850 ) (9,493 )
  Provision   MCh$   14,597   13,995   MCh$  
Servicio de Adm.            
     Previsional S.A.   Collections services   MCh$   48   83   MCh$   (48 ) (83 )
  Current account          
  borrowings   MCh$   260   270   MCh$   2 5
  Password          
  administration fee   MCh$   14   10   MCh$   (14 ) (10 )
  Data processing fee   MCh$   3   5   MCh$   (3 ) (5 )
  Folder transfer fee   MCh$     3   MCh$   (3 )
Administradora de            
     Fondos de Cesantía   Technological support            
     Chile S.A.   services   MCh$   78   94   MCh$   78 94
  Technological advisory            
  and services   MCh$       MCh$  
  Current account          
  borrowing   MCh$   384   284   MCh$  
BBVA Bancomer
     Servicios S.A.
  Data Processing   US$ (in
millions)
  248   502   MCh$   (248 ) (502 )
















     During the fiscal year 2005, the Board of Directors approved the following operations with related parties; all of them are adjusted to similar equity conditions to those ones usually prevailing in the market:

Board of Directors on January 18, 2005
  • Sub lease of real estate of 1,000 m2 in the office located at 350 Morande Street to BBVA Chile for a monthly amount equivalent to UF 350.

  • Rental of real estate of 72 m2 in the first floor of the building located at 1,234 Huérfanos Street to BBVA Chile for a monthly amount equivalent to UF 46.8.

  • Amendment of the Contract subscribed to August 20, 2002 with Unemployment Funds Administrator of Chile S.A (AFC) regarding fees charged by AFPs to AFC by different services rendered.

  • Amendment of the Contract subscribed to May 25, 2001 with PreviRed.com regarding fees charged to AFPs for services rendered.
Board of Directors on March, 3, 2005
  • Rental of real estate of 88.88 m2 located on Apoquindo Street at the corner of El Golf Street from BBVA Chile for a monthly amount equivalent to UF 79.99.

  • Extension of test agreement with BBVA Chile until June 30, 2005 approved during the Board of Director’s meeting held on December 16, 2003 regarding services related to pension payments and collection of mandatory, voluntary and delayed contributions and related status reports.
52





Board of Directors on March, 14, 2005
  • Free license of trademark use with Banco Bilbao Vizcaya Argentaria S.A. (“BBVA”) in accordance with the Board of Directors’ meeting held on May 28, 2002, BBVA Group has recorded the trademark BBVA Provida AFP. Later on, the trademark “BBVA Provida adelante” was registered. BBVA has the intention to formally authorize Provida to use such trademarks by granting a free license.

  • Reimbursement expenditure agreement with Banco Bilbao Vizcaya Argentaria S.A. of Spain (“BBVA”). Through the agreement, AFP Provida S.A. (“Provida”) is required to reimburse to BBVA expenditures regarding travel, transportation and allowances to BBVA’s personnel required by Provida to stay in Chile in order to obtain cooperation regarding projects, organization, systems and technology transfer among other activities of Provida’s interest.
Board of Directors on June 21, 2005
  • Rental of real estate of 184.77 m2 located at 810 Prat Street, Valparaíso, from BBVA Chile for a monthly amount equivalent to UF 73.83.

  • Rental of real estate of 45.06 m2 located at 130 E. Ramirez Street, Valparaíso, from BBVA Chile for a monthly amount equivalent to UF 9.

  • Rental of real estate of 197.11 m2 located at 1,194 Condell Street, Valparaíso, from BBVA Chile for a monthly amount equivalent to UF 59.13.
Board of Directors on September 27, 2005
  • Rental of real estate of 42.28 m2 located at 1,389 Padre Hurtado Avenue, Vitacura, Santiago, from BBVA Chile for a monthly amount equivalent to UF 19.80.

  • Rental of real estate of 22.80 m2 located at 2,880 Isidora Goyenechea Street, Las Condes, Santiago, from BBVA Chile for a monthly amount equivalent to UF 12.3.

  • Rental of real estate of 32.20 m2 located at 2,815 Apoquindo Avenue, Las Condes, Santiago, from BBVA Chile for a monthly amount equivalent to UF 26.73.

  • Rental of real estate of 156.05 m2 located at 3,640 Apoquindo Avenue, Las Condes, Santiago, from BBVA Chile for a monthly amount equivalent to UF 156.05.

  • Rental of real estate of 60.71 m2 located at 735 San Antonio Street, Santiago, from BBVA Chile for a monthly amount equivalent to UF 24.28.
Board of Directors on November 22, 2005
   
  • Services rendering contract from BBVA Chile for savings withdrawal payments and delayed contribution payments for an amount of UF 0.0035 for each transaction up to a maximum of 25,000 transactions in a month.
     
      For each transaction exceeding that amount a tariff of 0.00295 will be applied.
     
  • In connection with the acquisition and implementation of the Technological Unified Platform, the transactions contracted are as follows:
     
     
  • Acquisition and implementation of Technological Unified Platform for a unique and total amount of €7,259,000 including taxes.
     
     
  • Corrective and norm-developing maintenance services of the new Unified Platform to be performed in the Maintenance Center of BBVA Pensiones Chile S.A. for an amount of US$729,242 in 2005 and US$3,467,000 in 2006 plus taxes. The maintenance service will be permanent for an indefinite period and its cost will be reviewed once a year in connection with AFP Provida’s requirements.
     
     
  • Processing of the Company’s and Pension Funds’ data in the Processing Center BBVA Bancomer Services trust fund N°47433-8 S.A. in Mexico for an amount of US$1,508,400 in 2005 and US$2,584,000 in 2006 plus taxes. The services rendering will be permanent for an indefinite period and its cost will be reviewed once a year in connection with the number of requirements (transactions) estimated to be performed by the society.
     
    53





    Board of Directors on January 26, 2006
    • Amendment of the contract subscribed with AFC to decrease compensation for services rendered to Provida in connection with the following clauses: (i) 10.1 clause decreasing from UF26 to UF16; (ii) 10.2 clause decreasing from UF0.038557 to UF0.023381 and (iii) 10.2 clause letter b) from UF 0.73042 to UF 0.056342.

    • Sub lease of real estate of 45.02 m2 located at 3,023 Los Trapenses Avenue to AFP Provida from BBVA Chile for a monthly amount equivalent to UF 14.86.

    • Rental of real estate of 184 m2 located at 61 Arturo Prat Street, Rengo to BBVA Chile for a monthly amount equivalent to UF 34.96.
    Board of Directors on April 18, 2006
    • Sub-contract services from PreviRed.com of electronic collection service of INP (Normalization Pension Institute) according to contract subscribed to September 1, 2005, through which Provida will obtain 4% of collected by PreviRed.com.

    • Transactions with BBVA, Chile such as purchase and sales of foreign currency, derivative operations, term-deposits, paper leasing and other.

    C. Interests of Experts and Counsel

          None.

    Item 8. FINANCIAL INFORMATION

    A. Consolidated Statements and Other Financial Information

         See “Item 3. Key Information – Selected Financial Data” and “Item 18. Financial Statements” for financial statements and other financial information filed with this annual report.

    Dividends and Dividend Policy

         At the ordinary shareholders’ meeting in April 2003, the Board of Directors informed its intention of paying annual dividends for the twelve months ended on December 31, 2003 not exceeding 80% of Provida’s net income, a proposal that was ratified during the shareholders’ meeting that took place on April 30, 2004. Likewise, in such meeting, the Board of Directors reported its intention of paying annual dividends for the twelve months ended December 31, 2004 for an aggregate amount equivalent to 90% of Provida’s net income, a proposal that was ratified in the shareholders’ meeting on April 29, 2005. Finally, in such shareholder’s meeting, the Board of Directors announced its intention of paying annual dividends for the twelve months ended December 31, 2005 for a total amount equivalent to 90% of Provida’s net income, a proposal that was ratified in the Shareholder’s meeting on April 21, 2006.

    Dividends per share of each respective period
    (in Ch$ as of December 31, 2005)








      2003 2004 2005








    Total dividend   82.06 76.67 94.57
    Dividend ratio (1)   80 % 90 % 90 %









    (1)  Annual dividends for the corresponding annual net income.

    B. Significant Changes

         None.

    Item 9. THE OFFER AND LISTING

    A. Offer and Listing Details

         Provida estimates that during 2005, its common stock was traded on approximately 97% of the trading days of the Santiago Stock Exchange. The table below shows, for the periods indicated, the quarterly high and low trading prices in pesos of common stock listed on the Santiago Stock Exchange and the quarterly high and low

    54





    trading prices expressed in dollars per ADS on the New York Stock Exchange. See “Presentation of Information” for the exchange rates applicable during the periods set forth below.

        Santiago Stock Exchange
    Ch$ per share (1)
      NYSE
    US$ per ADS (2)
     











    Period     High   Low   High   Low  











    2001          











    1st Quarter     965.00   780.00   24.45   20.40  
    2nd Quarter     1,005.00   920.00   24.45   22.64  
    3rd Quarter     1,220.00   1,000.00   27.16   22.70  
    4th Quarter     1,170.00   1,050.00   27.50   23.34  











    2002          











    1st Quarter     1,175.00   1,005.00   26.61   22.76  
    2nd Quarter     1,130.00   1,015.00   25.10   22.54  
    3rd Quarter     1,110.00   980.00   22.84   20.16  
    4th Quarter     1,115.00   1,035.00   23.80   22.09  











    2003          











    1st Quarter     1,130.00   1,090.00   23.09   21.62  
    2nd Quarter     1,190.00   1,085.00   25.00   22.30  
    3rd Quarter     1,150.00   1,090.00   25.07   23.67  
    4th Quarter     1,120.00   1,033.00   28.21   24.88  











    2004          











    1st Quarter     1,185.00   1,050.00   29.48   26.80  
    2nd Quarter     1,235.00   1,079.00   29.95   25.00  
    3rd Quarter     1,130.00   1,040.00   27.00   24.30  
    4th Quarter     1,189.90   965.00   28.00   24.60  











    2005          











    1st Quarter     1,040.00   966.90   27.95   24.51  
    2nd Quarter     1,036.00   940.00   27.15   24.05  
    3rd Quarter     1,075.00   960.00   30.15   25.20  
    4th Quarter     1,055.00   935.00   30.24   27.10  











    2006          











    1st Quarter     1,000.00   930.00   29.10   25.80  
    December     1,020.00   935.00   29.25   27.10  
    January     1,000.00   940.00   29.10   26.09  
    February     990.00   950.00   28.80   27.00  
    March     970.00   930.00   27.90   25.80  
    April     940.00   910.00   27.40   26.25  
    May     946.00   870.00   27.49   25.10  












    (1)  Pesos per share reflect the nominal closing price at the trade date.
     
    (2)  Each ADS represents 15 shares.
     
    Source: Santiago Stock Exchange – Official Quotations Bulletin.

         As of May 31, 2006 the closing trading price for Provida’s common stock in the Santiago Stock Exchange was Ch$905.00 per share or US$25.52 per ADS, with each ADS representing fifteen shares of the Common Stock, converted at the Observed Exchange Rate of Ch$531.87 = US$1.00 in the same date.

         On March 31, 2006 the closing trading price for the ADS on the New York Stock Exchange was US$26.65 per ADS.

          It is not possible for Provida to determine the proportion of ADSs beneficially owned by American persons.

    B. Plan of Distribution

         Not applicable.

    55






    C. Markets

    General

         The Chilean stock markets are sophisticated and developed, reflecting the particular economic history and development of Chile. The Chilean government’s policy of privatizing state-owned companies, implemented during the 1980s, led to an expansion of private share ownership, resulting in an increase in the importance of stock markets in Chile that are regulated by the SVS. Certain elements of Chile’s stock markets, including pension fund investors, are highly regulated with respect to investment and compensation criteria, even though Chile’s stock markets are generally less regulated than U.S. stock markets with respect to disclosure requirements and information use.

    History and Description

         The Santiago Stock Exchange was established in 1893 and is a private company whose equity consists of 48 shares with 48 shareholders. As of December 31, 2004, 279 companies had shares listed on the Santiago Stock Exchange. The Santiago Stock Exchange is Chile’s most important exchange and accounts for approximately 87.4% of all equity traded in Chile. Approximately 12.1% of equity trading is conducted on the Chilean Electronic Stock Exchange, an electronic trading market that was created by banks and brokerage houses, non-members of the Santiago Stock Exchange. The remaining 0.1% of equity is traded on the Valparaiso Stock Exchange.

         Equities, investment funds shares, fixed-income securities, short-term and money market securities, gold and US dollars are traded on the Santiago Stock Exchange. In 1991, the Santiago Stock Exchange initiated a futures market with two instruments: US dollar futures and Selective Shares Price Index (the “IPSA”) futures and, in 1994, a stock options market was opened. Equities are traded through an electronic system called Telepregón that operates continuously from 9:30 to 16:30. The Electronic Stock Exchange of Chile operates continuously from 9:30 to 16:30 on each business day.

         There are two share price indexes for the Santiago Stock Exchange: the General Share Price Index (“IGPA”) and the Selective Share Price Index (“IPSA”). The IGPA is calculated using the prices of more than 180 issues and is broken into five main sectors: banks and finance, farming and forest products, mining, industrial, and miscellaneous. The IPSA is a major company index, currently including the 40 most traded stocks. Shares included in the IPSA are weighted according to the share’s value traded, and represent, more than 60% of the entire market capitalization. Currently Provida’s common stocks are included in the IGPA and the IPSA.

          The table below summarizes recent value and performance indicators for the Santiago Stock Exchange:

    As of:   Market
    Capitalization (1)
      Annual Trading
    Volume (1)
    IGPA
    Index (2)
    IPSA
    Index (2)










      (US$ billion)   (US$ million)
    December 31, 2001   56.0   4,110.7 110.08 131.40
    December 31, 2002   48.1   3,399.1 102.37 111.06
    December 31, 2003   53.7   7,544.2 149.62 164.90
    December 31, 2004   63.7   7,270.1 182.78 199.52
    December 31, 2005   76.0   20,364.1  187.76 218.17












    (1) US dollar equivalents for the year-end stock market capitalization and trading volume figures are translated at the Observed Exchange Rate for the last day of such period.
     
    (2) Index base = 100 on December 31, 1996.

    Source: Santiago Stock Exchange.

    Volatility

         The IPSA has increased at an annualized real rate of 8.5% (with a standard deviation of 27.6%) for the period between December 31, 1998 and December 31, 2004. During 2004, the IPSA grew by 18.2% in real terms. As the table below shows, swings in market performance are often dramatic and reflect the high level of volatility characteristic of the Santiago Stock Exchange:

    56





      Real Annual % Change in
      Year   IGPA Index IPSA Index







      2001   8.0 6.3
      2002   (9.6 ) (17.8 )
      2003   44.6 46.9
      2004   19.3 18.2
      2005   (0.9 ) 5.5







    Source: Santiago Stock Exchange.

    Liquidity

         As of December 31, 2004 and 2005, the aggregate market value of equity securities listed on the Santiago Stock Exchange reached to US$63.7 billion and US$75.9 billion, respectively. The ten companies with the largest equity on the Santiago Stock Exchange represented approximately 55% and 69% of the IPSA index market capitalization in 2003 and 2004, respectively. The average monthly trading volumes for the years ended December 31, 2004 and 2005, were US$1,087.0 million and US$1,697.0 million, respectively.

    Foreign Ownership

         Foreign investment in Chile is governed by Decree Law N° 600 and by the Central Bank Act. See “Item 10. Additional Information—Exchange Controls.” Until May 2000, it was not possible to remit capital outside Chile less than one year from the date of investment if it was governed either by Decree Law N° 600 or by the Central Bank Act, although earnings could be remitted at any time. The Central Bank during its meeting held on May 11, 2000, decided to finish this restriction on capital outflows. Capital and earnings, however, must be remitted through the Formal Exchange Market.

         Notwithstanding the above, an investment in Chilean shares by foreigners through an ADS program is regulated by the Central Bank Act and by Chapter XXVI, which does not require a withholding period before remitting capital or earnings abroad. Even though Chapter XXVI was repealed on April 2001, it is still applicable for foreign investment contracts executed before that date. See “Item 10. Additional Information—Exchange Controls.”

         Foreign capital investment funds (“FCIF”) are ruled by Law N° 18,657, and are permitted to receive preferential tax treatment. FCIFs are required to obtain a favorable report issued by the SVS, in case capital may not be remitted earlier than five years after the investment is made, although earnings may be remitted at any time. An FCIF may hold a maximum of 5% of shares of a specific company, although this might be increased if the company issues new shares. Furthermore, no more than 10% of an FCIF’s assets may be invested in a specific company’s stock, and no more than 25% of the current outstanding shares of any listed company may be owned by FCIFs, taken together.

    Market Information

         Since November 16, 1994, Provida’s American Depositary Shares (the “ADS”) have been listed on the New York Stock Exchange under the symbol “PVD”. Until August 25, 1999, each ADS represented one share of Common Stock, while after the increase in Provida’s paid-in capital it came to represent fifteen shares of Common Stock. Until February 7, 1996, the ADSs were guarded by The Chase Manhattan Bank N.A. as depositary. Since that date, Provida’s ADSs have been guarded by the Bank of New York as the successor depositary (the “Depositary”).

         During the fiscal year 2005, a total of 170,885,639 of Provida’s common stocks was jointly traded in Chilean Stock markets (the Santiago Stock Exchange, the Valparaiso Stock Exchange and the Electronic Stock Exchange) and the New York Stock Exchange, equivalent to 51.6% of the shares of common stocks.

         In the Chilean stock market a total of Ch$129,619 million was traded, lower in 24% than the figure recorded last year, and a total of US$75 million was traded in New York, higher in 22% than last year. In total about Ch$168,000 million was traded, equivalent to 188% of the Company’s paid-in capital.

    57





      The breakdown by each Stock Exchange for the fiscal year 2005 is as follows:

    • A total of 38,710,562 common stocks of Provida were traded in the Santiago Stock Exchange for a total of Ch$38,859 million. The average price reached Ch$1,004 per share.

    • A total of 90,287,324 common stocks of Provida were traded in the Electronic Stock Exchange for a total of Ch$90,603 million.

    • A total of 159,253 common stocks of Provida were traded in the Valparaiso Stock Exchange for a total of Ch$157 million.

    • A total of 2,781,900 ADR (1 ADR represents 15 common stocks) were traded in the New York Stock Exchange for a total of US$75 million.

         Provida estimates that during 2005, its common stocks were traded on approximately 97% of the trading days on the Santiago Stock Exchange.

    Significant differences between our Corporate Governance Practices and NYSE Corporate Governance Standards.

         As a “foreign private issuer” (as defined under the United States Securities Exchange Act of 1934, as amended) that is listed on the New York Stock Exchange (“NYSE”), Provida is required by the NYSE to provide a brief general summary of the significant ways in which our corporate governance standards, which are dictated by Chilean corporate law, differ from those followed by U.S. companies under NYSE listing standards.

         We are a listed company of which more than 50% of the voting power is held by another company, BBVA Pensiones Chile S.A., which owns 51.6% of our outstanding voting shares, and are therefore a “Controlled Company” under the Section 303A of the NYSE Listed Company Manual. This means that we are exempt from compliance with the requirements of Sections 303A.01, 303A.04 and 303A.05 of the NYSE Listed Company Manual. We have chosen to take advantage of this exemption and are thus not required to maintain independent directors, a nominating/corporate governance committee composed entirely of independent directors or a compensation committee composed entirely of independent directors under these NYSE rules.

         With respect to the remaining provisions of Section 303A of the NYSE Listed Company Manual that do apply to us, the following chart indicates the significant ways in which our corporate governance practices differ from those required of U.S. companies under such rules:

    NYSE Listed Company Manual Requirement for U.S. Issuers Provida Corporate Governance Standard under Chilean Law
    Section 303A.01 requires companies to maintain independent directors, as defined in Section 303A.02. Under Section 303A.00 of the NYSE Listed Company Manual, we are permitted to follow Chilean law in lieu of this requirement. Under Chilean Law, our Directors Committee has assumed the functions of our former audit committee and its members are not required to be independent.
    Section 303A.01 requires that non-management directors must meet at regularly scheduled executive sessions without management. Under Section 303A.00 of the NYSE Listed Company Manual, we are permitted to follow Chilean law in lieu of this requirement. Under Chilean law, a company’s executive officers may not serve as such company’s directors. As a result, our board consists entirely of “non-management” directors, making separate meetings unnecessary.
    Under Section 303A.06, the audit committee must satisfy the requirements of rule 10A-3 of the Exchange Act. Our Directors Committee satisfies the 10A-3’s exemption for board of auditors (or similar body) or statutory auditors committee that meets certain criteria enumerated therein. See “Item 16D. Exemptions from

    58

     






    NYSE Listed Company Manual Requirement for U.S. Issuers Provida Corporate Governance Standard under Chilean Law
      the Listing Standards for Audit Committees”.
    Under Section 303A.07, certain companies are subject to additional requirements for their audit committees. Under Section 303A.00 of the NYSE Listed Company Manual, we are permitted to follow Chilean law in lieu of this requirement. Under Chilean law, our Directors Committee has assumed the functions of our former audit committee and it not required to meet these additional requirements.
    Under Section 303A.08, shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto. Under Section 303A.00 of the NYSE Listed Company Manual, we are permitted to follow Chilean law in lieu this requirement. Under Chilean law, our compensation policies do not provide for equity compensation. Thus, shareholder votes are not currently necessary. However, shareholders would nonetheless not be entitled to vote if we chose to implement an equity compensation plan in the future.
    Under Section 303A.09, listed companies must adopt and disclose corporate governance guidelines. Under Section 303A.00 of the NYSE Listed Company Manual, we are permitted to follow Chilean law in lieu of this requirement. We follow the rules regarding adoption and disclosure of corporate governance guidelines established by Chilean Law.
    Under Section 303A.10, listed companies must adopt and disclose a code of business conduct and ethics for directors and employees, and promptly disclose any waivers of the code for directors or executive officers. Under Section 303A.00 of the NYSE Listed Company Manual, we are permitted to follow Chilean law in lieu of this requirement. However, we nonetheless have a code of conduct which governs our business conduct and ethics for directors and employees. See “Item 16B. Code of Ethics.”

    D.  Selling Shareholders

         Not Applicable.

    E.  Dilution

         Not Applicable.

    F.  Expenses of the Issue

         Not Applicable.

    Item 10.  ADDITIONAL INFORMATION

    A.  Share Capital

         Not Applicable.

    B.  Memorandum and Articles of Association

         Organization and Register

         Provida is a Corporation organized under Chilean laws. The Company’s deed of incorporation was executed on March 3, 1981 and was subscribed to in the Registry of Commerce of Santiago on April 6, 1981, on number 6,060,

    59





    section 2,913. The last modification of the Company’s by-laws was approved in the extraordinary shareholders’ meeting held on April 30, 2004, in which the number of Directors was reduced to seven. The current Company’s bylaws have been filed as an exhibit to this annual report.

         Purpose

         The Company’s amended and restated by-laws (“Social by-laws”) – Article 4 – establishes its corporate purpose as follows: “The Company’s exclusive purpose is (i) to manage the Pension Funds established by law; (ii) to provide and administer the benefits established in the Decree Law 3,500 from 1980 and its amendments and those specifically authorized by other present or future legal dispositions; (iii) to constitute and/or participate, complementing its line of business, in affiliate corporations pursuant to Article 23 and 23 bis of said Decree Law 3,500; (iv) to carry out activities authorized by law constituting and/or participating in affiliated companies or united corporations authorized by law and/or by the Superintendency of Pension Fund Administrator as agreed to, and (v) constitute and/or participate in corporations constituted as securities custody companies referred to in Law 18,876”.

         Board of Directors

         Provida’s management is vested in its Board of Directors. According to the Company’s by-laws, the Board of Directors comprises seven members, who may be reelected. They hold their positions for two years and after this time new elections are held. The Board of Directors holds ordinary meetings once a month. The quorum to hold meetings is full attendance of its members, and all resolutions require unanimous approval.

    (a) There are no provisions in the Company’s by-laws relating to the power of directors or officers to vote on a proposal in which there is or might be a conflict of interest. However, under the Chilean law, the Board of Directors must decide previously whether a transaction fulfills equity conditions similar to those currently effective in the market and if it is deemed impossible to determine those conditions, the Board may approve or reject the transaction or appoint two experts requesting that they issue a report on that transaction. In the last case, Directors with interests shall be excluded from all the Board’s decisions related to such transaction.
     
    (b) The aggregate compensation of the Board of directors is fixed at the ordinary shareholders’ meeting.
     
    (c) There are no provisions in the Company’s by-laws relating to the borrowing powers of the directors.
     
    (d) There are no provisions in the Company’s by-laws setting forth age limits or retirement requirements for directors and officers.
     
    (e) As per the Company’s by-laws, Directors do not need to be Company’s shareholders to be appointed.
     
          Shares

         The Company’s share capital is divided into 331,316,623 ordinary shares of the same series. Each ordinary share entitles the holder thereof to one vote and to share in any distributions in proportion to the number of shares that they own. The Ordinary shares’ holders have the right to subscribe for new shares that may be issued by the Company from time to time in proportion to the shares they hold at the time of the increase.

    (a) There are no provisions in the by-laws setting forth a time limit for dividend entitlements to lapse. All shares are entitled to the same dividend payments. However, in accordance with the rule currently in force, if five years pass since a dividend was available for a shareholder and its subscription price has not been received, the dividend will go to the Chilean Fire Department.
     
    (b) There are no provisions in the by-laws concerning staggered intervals for the reelection of directors or permitting or requiring cumulative voting.
     
    (c) All shares have the right to participate in the Company’s net income. According to its by-laws, the Company is required to distribute annually a cash dividend to all shareholders in proportion to the shares of at least thirty- percent of each fiscal year’s net income.
     
    60





    (d) In case of liquidation that would be carried out by the SAFP, managed pension funds would also be liquidated. Pursuant to the law, all shares have the same right to be distributed with any surplus in case of the Company’s liquidation after having settled all pending debts.
     
    (e) There are no redemption provisions in the by-laws.
     
    (f) There are no sinking fund provisions in the by-laws.
     
    (g) All Company shares are issued and fully paid. Consequently, shareholders are not subject to further capital requirements.
     
    (h) There are no provisions in the Company’s by-laws discriminating against any existing or prospective holder of such securities as a result of such shareholder owning a substantial number of shares.

         In order to modify the shareholders’ rights, the by-laws must be amended to reflect such modification. By-laws can be amended only through a resolution passed at the extraordinary shareholders’ meeting.

         According to the by-laws, shareholders’ meetings can be ordinary or extraordinary. The ordinary shareholders’ meeting must take place within four months from the close of each fiscal year. Any other general shareholders’ meeting is an extraordinary meeting. Generally, the Board of Directors calls the shareholders’ meeting; however, it can be called by the SAFP, other institutions authorized by law or by shareholders representing at least 10% of the issued and fully paid shares. Notification of the meeting must be published in a newspaper of general circulation, in the domicile of the Company three times during three different days.

          The by-laws do not describe any limitation on the rights to own Company’ shares.

         There are no provisions in the by-laws governing the ownership threshold above which shareholder ownership must be disclosed. Nevertheless, in accordance with the law, if a controller shareholder had 66.66% of the capital stock of the society, he would be forced to make a public offering (“OPA”) for the rest of shareholders, within a period and form established by law.

         There are no provisions in the by-laws imposing more stringent conditions than those required by law to change the capital of the Company.

    The Company’s by-laws are incorporated by reference herein. See Exhibit 1.1.

    C.  Material Contracts

          Provida has not entered into any material contracts other than in the ordinary course of business.

    D.  Exchange Controls

         The Central Bank is responsible for, among other issues, monetary policy and exchange controls in Chile. Appropriate registration of a foreign investment in Chile grants the investor access to the Formal Exchange Market. Foreign investments can be registered with the Foreign Investment Committee under Decree Law N° 600 or can be registered with the Central Bank under the Central Bank Act. The latter is an organic constitutional law requiring a “special majority” vote of the Chilean Congress to be modified.

         Foreign Investment Contract (the “Contract”) among the Central Bank, Provida and the Depositary pursuant to the Central Bank Act – Article 47 – and Chapter XXVI – Compendium of Foreign Exchange Regulations – of the Central Bank (“Chapter XXVI”), which addressed the issuance of ADSs by a Chilean company. On April 16, 2001, the Central Bank approved a series of amendments to the Compendium of Foreign Exchange Regulations, thereby establishing an entirely new regime. The new Compendium represents the culmination of a deregulation process, which has resulted in the elimination of many of the exchange restrictions established in the former Compendium. Chapter XXVI has been repealed. Notwithstanding the aforementioned, the applicable law that governs the Contract is that in force at the execution of the Contract. Therefore, for the purpose of the Contract, Chapter XXVI is still applicable.

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         Absent the Foreign Investment Contract, under applicable Chilean exchange controls regulation, investors might not be granted access to the Formal Exchange Market for the purpose of converting from pesos to dollars and repatriating from Chile the amounts received with respect to deposited shares or shares withdrawn from deposit on surrender of ADSs (including amounts received as cash dividends and proceeds from the sale in Chile of the underlying shares and any rights arising therefrom). The following is a summary of certain provisions contained in the Foreign Investment Contract. This summary does not purport to be complete, and is qualified in its entirety by reference to Chapter XXVI, before the amendments established by the Central Bank on April 16, 2001, and the Foreign Investment Contract.

         Under Chapter XXVI and the Foreign Investment Contract, the Central Bank agreed to grant to the Depositary, on behalf of ADS holders, and to any investor not residing or domiciled in Chile who withdraws shares upon delivery of ADSs (such shares being referred to herein as “Withdrawn Shares”), access to the Formal Exchange Market to convert pesos to dollars (and remit such dollars outside of Chile) in respect of shares represented by ADSs or Withdrawn Shares. This includes amounts received as (a) cash dividends, (b) proceeds from the sale in Chile of Withdrawn Shares subject to receipt by the Central Bank of a certificate from the holder of the Withdrawn Shares (or from an institution authorized by the Central Bank) that such holder’s residence and domicile are outside Chile and a certificate from a Chilean stock exchange (or from a brokerage or securities firm established in Chile) that such Withdrawn Shares were sold on a Chilean stock exchange, (c) proceeds from the sale in Chile of rights to subscribe for additional shares, (d) proceeds from the liquidation, merger or consolidation of a company and (e) other distributions, including without limitation those resulting from any re-capitalization, as a result of holding shares represented by ADSs or Withdrawn Shares. Transferees of Withdrawn Shares were not entitled to any of the foregoing rights under Chapter XXVI unless the Withdrawn Shares were re-deposited with the Depositary. Under certain circumstances, investors receiving Withdrawn Shares in exchange for ADSs had the right to re-deposit such shares.

         Chapter XXVI provided access to the Formal Exchange Market in relation to dividend payments qualified upon a company’s certification to the Central Bank that such dividend payment has been made and any applicable tax has been withheld. The Chapter XXVI also provided access to the Formal Exchange Market in relation to the sale of withdrawn shares or its distributions thereon. This is conditional upon receipt by the Central Bank of certification from the Depositary that such shares were withdrawn in exchange for ADSs and receipt of a waiver benefit of the Foreign Investment Contract until such withdrawn shares were re-deposited.

         Chapter XXVI and the Foreign Investments Contract provided that a person who brought foreign currency into Chile to purchase shares with the benefit of the Foreign Investments Contract must convert it into pesos on the same date and had 5 days within which to invest in shares in order to receive the benefits of the Foreign Investments Contract. If such person decided during that period not to acquire shares, the person could access the Formal Exchange Market to reacquire dollars, provided that the applicable request was presented to the Central Bank within 7 days of the initial conversion into pesos. Shares acquired as described above could be deposited for ADSs and receive the benefits of the Foreign Investment Contract, subject to receipt by the Central Bank of a certificate from the Depositary that such deposit was effected and that the related ADSs were issued and receipt by the Custodian of a declaration from the person making such deposit waiving the benefits of the Foreign Investment Contract with respect to the deposited shares. Both previously mentioned periods were modified by the Central Bank on September 20, 1995. Formerly, the period was 60 days for converting into pesos and 90 days from the initial conversion for informing the Central Bank that the person did not acquire shares of Common Stock and reacquired Dollars.

         On July 3, 1995 the Central Bank modified regulations applicable to persons bringing foreign currency into Chile aimed at acquiring Chilean pesos to purchase securities. Under these regulations such persons should (i) establish a non interest bearing deposit with the Central Bank for a one year term in an amount equal to 30% of the foreign currency brought into Chile or (ii) pay an overcharge to the Central Bank at the moment foreign currency was converted into pesos for an amount equal to interest applied to such deposit at a rate of 12 months LIBOR plus 4% for one year. The Central Bank regulations did not apply to persons bringing foreign currency into Chile for the purpose of purchasing securities from the issuer thereof as part of a capital increase (primary offering) by the issuer. Effective September 17, 1998, this 30% withholding requirement was reduced to 0%. Finally, the Central Bank decided to eliminate this regulation.

         Access to the Formal Exchange Market under any of the circumstances described above was not automatic. Pursuant to Chapter XXVI, such access required the approval of the Central Bank based on a request presented

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    through a banking institution established in Chile. The Foreign Investment Contract determines that had the Central Bank not acted on such request within seven banking days, the request could be deemed approved.

         Under current Chilean law, the Foreign Investment Contract cannot be unilaterally modified by the Central Bank. However, no assurance can be given that additional Chilean restrictions applicable to ADS holders on underlying shares’ disposal or the repatriation of the proceeds from such disposition could not be imposed in the future, nor can there be any assessment of the duration or impact of such restrictions if they were imposed.

    E. Taxation

         Chilean Tax Considerations

         In accordance with D.L. 824, 1974 on Tax Income, updated in April 2002, Foreign Investors domiciled and resident abroad are affected by an additional tax with a rate of 35% calculated on the net dividend, which is withheld and paid by the disbursement officer on behalf of the investor. This tax is paid off in April of the following year to which the dividend payment has been recorded, considering that taxes paid by the society in respect to gains obtained during the previous fiscal year (First Category Tax), constitute a credit in favor of the investor. If the withheld tax for each dividend was higher than the tax in the definitive liquidation, the disbursement officer should ask for the corresponding repayment of the surplus to the Internal Revenue Service to generate the payment for The Bank of New York and later distribution to the holders of ADS subscribed to the date of payment of each dividend.

          The First Category Tax is effective according to the following:

      Fiscal year 2003   Rate 16.5%  
      Fiscal Year 2004   Rate 17.0%  
      Fiscal Year 2005   Rate 17.0%  

         Capital Gains. Gains from the sale or exchange of ADSs (or ADRs evidencing ADSs) outside of Chile are not subject to Chilean taxation. The deposit and withdrawal of shares in exchange for ADSs will not be subject to any Chilean taxes.

         Gains recognized on a sale or exchange of shares (as distinguished from sales or exchanges of ADSs representing such shares) will be subject to both the First Category Tax and the Withholding Tax (the former being creditable against the latter) if: (i) the foreign holder has held the shares for less than one year since exchanging ADSs for the shares, (ii) the foreign holder acquired and disposed of the shares in the ordinary course of its business or as a regular trader of shares or (iii) the foreign holder transfers shares of Common Stock to a related person, as defined in the Chilean Tax Law. In all other cases, gains on the disposition of shares will be subject only to the First Category Tax.

         The tax basis of shares received in exchange for ADSs is the acquisition value of the shares. The valuation procedure set forth in the Deposit Agreement, which values shares that are being exchanged at the highest price they were traded on the Santiago Stock Exchange on the date of the exchange. Consequently, the conversion of ADSs into shares and the immediate sale of such shares for the value established under the Deposit Agreement do not generate a gain subject to taxation in Chile.

         The exercise of preemptive rights relating to the shares is not subject to Chilean taxation. Any gain on the sale or assignment of preemptive rights relating to the shares is subject to both the First Category Tax and the Withholding Tax (the former being creditable against the latter).

         Other Chilean Taxes. No Chilean inheritance, gift or succession taxes apply to the transfer or disposition of ADSs by a foreign holder, but such taxes generally do apply to the transfer at death or by gift of shares by a foreign holder. No Chilean stamp, issue, registration or similar taxes or duties apply to foreign holders of ADSs or shares.

    U.S. Federal Income Tax Considerations

         The following is a discussion of material U.S. federal income tax consequences of purchasing, owning and disposing of ordinary shares or ADSs, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire such securities. The discussion applies only if you hold ordinary shares or ADSs as capital assets for tax purposes and it does not describe all of the tax consequences that may be relevant to holders subject to special rules, such as:

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    • certain financial institutions;


    • insurance companies;


    • dealers or traders in securities or foreign currencies;


    • persons holding ordinary shares or ADSs as part of a hedge, straddle, conversion transaction or other integrated transaction;


    • persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;


    • partnerships or other entities classified as partnerships for U.S. federal income tax purposes;


    • persons liable for the alternative minimum tax;


    • regulated investment companies;


    • real estate investment trusts;


    • tax-exempt organizations;


    • persons holding ordinary shares or ADSs that own or are deemed to own ten percent or more of our voting stock; or


    • persons who acquired our ADSs or shares pursuant to the exercise of any employee stock option or otherwise as compensation.

         This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. It is also based in part on, and assumes that each obligation under, the Deposit Agreement will be performed in accordance with its terms. Please consult your own tax advisers concerning the U.S. federal, state, local and foreign tax consequences of purchasing, owning and disposing of ordinary shares or ADSs in your particular circumstances.

         The discussion below applies to you only if you are a “U.S. Holder.” A “U.S. Holder” is a beneficial owner of ordinary shares or ADSs that is, for U.S. federal tax purposes:

    64






     

    • a citizen or resident of the United States;


    • a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or


    • an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

         The U.S. Treasury has expressed concerns that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits for United States holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the analysis of the creditability of Chilean taxes and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by parties to whom the ADSs are released. The discussion herein assumes that if you hold ADSs, you will be treated as the holder of the underlying shares represented by those ADSs for U.S. federal income tax purposes. Assuming such treatment, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.

         Taxation of Distributions

         Subject to the passive foreign investment company rules described below, distributions paid on ADSs or shares, other than certain pro rata distributions of common shares, will be treated as a dividend to the extent paid out of current or accumulated earnings and profits (as determined under United States federal income tax principles). Subject to applicable holding period requirements and the discussion above regarding concerns expressed by the U.S. Treasury, dividends paid to non-corporate U.S. Holders in taxable years beginning before January 1, 2011 will be taxable at a maximum rate of 15%. U.S. Holders should consult their own tax advisors regarding the implications of this new legislation in their particular circumstances. The amount of a dividend will include any amounts withheld by us or our paying agent in respect of Chilean taxes. The amount of the dividend will be treated as foreign source dividend income to you and will not be eligible for the dividends received deduction generally allowed to U.S. corporations under the Code.

         Dividends paid in Chilean pesos will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your (or in the case of ADSs, the depositary’s) receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. You may have foreign currency gain or loss if you do not convert the amount of such dividend into U.S. dollars on the date of its receipt.

         Subject to applicable limitations that may vary depending upon your circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, Chilean income taxes withheld from dividends on ordinary shares or ADSs may be creditable against your U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules governing foreign tax credits are complex and, therefore, you should consult your own tax advisor regarding the availability of foreign tax credits in your particular circumstances. Instead of claiming a credit, you may, at your election, deduct such otherwise creditable Chilean taxes in computing your taxable income, subject to generally applicable limitations under U.S. law.

    65





         Sale or Other Disposition of Ordinary Shares or ADSs

         Subject to the passive foreign investment company rules described below, for U.S. federal income tax purposes, gain or loss you realize on the sale or other disposition of ordinary shares or ADSs will be capital gain or loss, and will be long-term capital gain or loss if you held the ordinary shares or ADSs for more than one year. The amount of your gain or loss will be equal to the difference between your tax basis in the ordinary shares or ADSs disposed of and the amount realized on the disposition. Such gain or loss will generally be U.S. source gain or loss for foreign tax credit purposes.

         Passive Foreign Investment Company Rules

         The Company believes that it was not a “passive foreign investment company” (“PFIC”) for United States federal income tax purposes for 2005. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, goodwill and less than 25 percent owned equity investments) from time to time, and since there is a significant uncertainty as to the characterization of certain reserve denominated “Mandatory Investments” required to be held by the Company, there can be no assurance that the Company will not be considered a PFIC for 2005 or any other taxable year. If the Company were treated as a PFIC for any taxable year during which a U.S. Holder held an ADS or an ordinary share, certain adverse consequences could apply to the U.S. Holder.

         If the Company were treated as a PFIC for any taxable year, gain recognized by a U.S. Holder on a sale or other disposition of an ADS or ordinary share would be allocated ratably over the U.S. Holder’s holding period for the ADS or ordinary share. The amounts allocated to the taxable year of the sale or other exchange and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge would be imposed on the amount allocated to such taxable year. Further, any distribution in respect of ADSs or ordinary shares in excess of 125 percent of the average of the annual distributions on ADSs or ordinary shares received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, would be subject to taxation as described above. Certain elections may be available (including a mark to market election) to U.S. Holders that may mitigate the adverse consequences resulting from PFIC status.

         In addition, if we were to be treated as a PFIC in a taxable year in which we pay a dividend or in the prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to non-corporate holders would not apply.

         Information Reporting and Backup Withholding

         Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and to backup withholding unless (i) you are a corporation or other exempt recipient or (ii) in the case of backup withholding, you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.

          The amount of any backup withholding from a payment to you will be allowed as a credit against your United States federal income tax liability and may entitle you to a refund, provided that the required information is furnished to the Internal Revenue Service.

         INVESTORS SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF ADSs OR SHARES.

    F.  Dividends and paying agents

         Not Applicable.

    G.  Statement by experts

         Not Applicable.

    H.  Documents on display

         None.

    I.  Subsidiary information

         Not Applicable.

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    Item 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We are exposed to impacts from foreign currency, fluctuations interest rate changes, mandatory investments fluctuations and changes in the value long term obligations in connection with the life and disability insurance. In the normal course of our business, we actively manage our exposures to changes in foreign currency interest rates, the fair market value of our mandatory investments and our life and disability obligation.

         The following discussion about our risk management includes forward-looking statements that involve risks and uncertainties. Actual results could differ from those projected in the sensitivity analysis (See Item 5 –Operating Results- Critical Accounting Policies). In addition to the inherent risks related to the operations of our business, we face material risk exposure in connection with market value of our life and disability long term obligation.

          Foreign Currency Exchange Rate Risk

         As a product of its investment in Provida Internacional, Provida is exposed to minor foreign exchange rate risk associated with the subsidiaries of that company. Provida has invested about US$ 90 million in foreign affiliates, which represents 18% of its net income.

         The devaluation of domestic currencies against the US dollar and the evolution of the latter with respect to the Chilean currency could adversely affect the equity participation income recognized by Provida and therefore their respective return. Notwithstanding, this risk could be covered by taking forward contracts, if Provida considers it necessary.

    Interest Rate Risk

         As a product of working capital needs the Company can be exposed to a minor interest rate risk originated by lines of credit financing. Regarding current leasing obligations, there is no interest rate risk given that the interest rates are pre-defined (fixed) in the respective contracts.

    Mandatory Investments

         Provida’s main investment is the Mandatory Investment constituted by law and is equivalent to one percent (1%) of the Pension Funds under management. Provida should maintain this one percent invested in shares of each kind of them. It represents around the 50% of total assets, and given the volatility evidenced by local and foreign markets, where the pension funds are invested, gains on mandatory investments have represented certain risk for the stability of the Company’s results.

         In order to mitigate the above, and in consideration that the main risks are associated with foreign and local stock markets, fixed income rates and foreign exchange rates, Provida takes into consideration the use of derivatives for hedging its exposure. Although, at the closing of 2005, Provida did not have any hedge operation, in April 2006 the Company started to hedge the interest rate exposure.

    Life and Disability Benefits

         Life and Disability Insurance is a long term obligation, since the committed benefit for disabled affiliates is rendered three years after the initial disability determination with the final disability determination. See Item 4. Information on Provida. Business Overview. Primary Expenses.

         In quantitative terms, the AFP must replenish the shortfall payment equivalent to the difference between the affiliate’s savings in his individual capitalization account and the benefits granted by law. These benefits corresponds to the present value of the life annuity pension (equivalent 70% or 50% of the affiliate taxable income for the last ten years) discounted by the life annuities rates in force at the moment of the payment. As a consequence, the evolution of such interest rates is a risk factor in light of the impact they have in the final value of the payment of the AFP’s obligation.

         Regarding the interest rate risk, and even when there is no forward market in Chile for annuity interest rate does not exist, the Company has concluded that there is a government instrument that has sufficient correlation with life annuities, permitting to hedge that exposure. In fact is part of the financial management policy to determine the right

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    moment to take hedge operations. Considering that currently the government instrument has evidenced a rising trend of its interest rates, management considers that this is not the right moment to take an interest rate hedge.

    Item 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

          Not applicable.

    PART II

    Item 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

         To Provida’s knowledge, there has been no material default in the payment of principal or interest or any other material default not cured within 30 days relating to indebtedness of Provida or any of its subsidiaries.

    Item 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

         None.

    Item 15.  CONTROLS AND PROCEDURES

         As of December 31, 2005, A.F.P. Provida S.A., under the supervision and with the participation of the A.F.P. Provida S.A. management, including the Chief Executive Officer, our Planning and Control Manager and our Account and Consolidation Manager, performed an evaluation of the effectiveness of the A.F.P. Provida S.A.’s disclosure controls and procedures. A.F.P. Provida S.A.’s management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. Based on this evaluation, A.F.P. Provida S.A.’s Chief Executive Officer, Planning and Control Manager and our Account and Consolidation Manager concluded that A.F.P. Provida S.A.’s disclosure controls and procedures are effective to ensure A.F.P. Provida S.A. can gather, analyze and disclose information in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms.

         There has been no change in A.F.P. Provida S.A.’s internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, A.F.P. Provida S.A.’s internal control over financial reporting. We have committed, and will continue to commit, considerable resources to our efforts to improve and strengthen our internal controls. In particular, the following is worth noting:

    • We are continuing our efforts to be able to comply on a timely basis with the requirements of Section 404 of the Sarbanes-Oxley Act, with which we must begin to comply under the SEC rules in the annual report for our first fiscal year ending on or after July 15, 2006. All departments concerned within our organization are continuing their documentation and have begun, and in some cases, completed testing activities.

    • We have developed and adopted additional uniform control standards that are applicable to all of our continuing operations and cover a variety of topics.

    • Our management assessment of internal controls is projected to be completed by July 31, 2006, with audit procedures commencing thereon.

         On May 17, 2005, the Board of Directors determined that Mr. Fernando Léniz, a member of the Directors Committee, met the requirements of an “directors committee financial expert” set forth in Item 16A of Form 20-F. On May 23, 2006, the Board of Directors determined that Mr. Gustavo Alcalde, a new member of the Directors Committee, met the requirements of an “audit committee financial expert”.

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    Item 16.   [RESERVED]

    Item 16A.   AUDIT COMMITTEE FINANCIAL EXPERT

         During 2005, Mr. Fernando Léniz, a member of the Directors Committee, met the requirements of an “audit committee financial expert” in accordance with SEC rules and regulations, as determined by the Board of Directors of Provida in that he had an understanding of Chilean GAAP, the ability to assess the general application of Chilean GAAP in connection with the accounting for estimates, accruals and reserves, experience analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our consolidated financial statements, an understanding of internal controls over financial reporting, and an understanding of audit committee functions. All three members of our Audit and Control Committee have experience overseeing and assessing the performance of A.F.P. Provida S.A and its consolidated subsidiaries and our external auditors with respect to the preparation, auditing and evaluation of our consolidated financial statements. Since May 23, 2006, in the Board of Directors meeting Mr. Gustavo Alcalde, was elected as a new member of the Audit Committee, meeting such requirements as determined by the Board of Directors of Provida.

    Item 16B.  CODE OF ETHICS

         A.F.P. Provida S.A. has adopted a code of ethics that is applicable to all persons performing functions of any kind as employees of Provida. Such document is called “Código de Conducta del Grupo BBVA” (“BBVA Group Code of Conduct”), and it applies to all officers and employees of all subsidiaries of the BBVA Group all over the world. A copy of the code can be obtained from Group BBVA’s internet home page, www.bbva.com. Also, a copy will be provided to any person without charge upon request made in writing to: Corporate Secretary and General Counsel, Administradora de Fondos de Pensiones Provida S.A., Avenida Pedro de Valdivia 100, Santiago, Chile.

    Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

          Amounts paid to the auditors for statutory audit and other services were as follows:

      2004   2005  
      MCh$   MCh$  



    Audit Services    
    – Statutory audit   88.8   122.6  
    – Audit-related regulatory reporting      



    Tax Fees    
    – Compliance Services      
    – Advisory Services      



    All Other Services      



    Total   88.8   122.6  



         Statutory audit: Consists of fees billed for professional services rendered for the audit of our consolidated financial statements that are provided by Deloitte & Touche in connection with statutory and regulatory filings or engagements, and attest services.

         Audit-related regulatory reporting: Consists of fees billed for assurance and related services that are specifically related to the performance of the audit and review of our filings under the 1933 Act.

         Auditors are pre-approved by the Audit committee. The selection of external auditors is subject to approval by shareholders at the Annual Shareholders’ Meeting. All proposed payments have been presented to our Audit Committee, which has determined that they are reasonable and consistent with internal policies.

    Item 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

          None.

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    Item 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

          In 2005, neither Provida nor any of its affiliates purchased any of Provida’s equity securities.

    PART III

    Item 17.  FINANCIAL STATEMENTS

          Provida’s Audited Consolidated Financial Statements have been prepared in accordance with Item 18 hereof.

    Item 18.  FINANCIAL STATEMENTS

          See our consolidated financial statements beginning on Page F-1.

    Item 19.  EXHIBITS

    1.1   By-laws of A.F.P. Provida S.A. (English translation)(1)
     
    8.1   List of Subsidiaries
     
    12.1   Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
     
    12.2.1   Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
     
    12.2.2   Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
         
    13.1   Section 1350 Certification of the Chief Executive Officer
     
    13.2.1   Section 1350 Certification of the Chief Financial Officer
         
    13.2.2   Section 1350 Certification of the Chief Financial Officer
     

    (1) Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2004, filed on July 15, 2005.
       

     

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         The Registrant certifies that it meets all of the requirements for filing on Form 20-F and that is has duly caused and authorized the undersigned to sign this annual report on its behalf.

    Administradora de Fondos de Pensiones Provida S.A.
         
    By: /s/ Jorge Matuk Chijner
     
      Name: Jorge Matuk Chijner  
      Title: Chief Executive Officer 
    Dated: June 28th, 2006.



    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A.
    CONSOLIDATED FINANCIAL STATEMENTS

    CONTENTS

        Page
         
    Report of independent registered public accounting firm   F-2
    Audited consolidated financial statements:  
               Consolidated balance sheets at December 31, 2004 and 2005   F-3
               Consolidated statements of income for each of the three years in the period    
                   ended December 31, 2005   F-5
               Consolidated statements of cash flows for each of the three years in the period    
                   ended December 31, 2005   F-6
               Notes to the consolidated financial statements   F-8

    Ch$ - Chilean pesos
    MCh$ - Millions of Chilean pesos
    US$ - United States dollars
    ThUS$ - Thousands of United States dollars
    UF - A UF is a daily-indexed, peso-denominated monetary unit. The UF rate is set daily
      in advance based on the previous month’s inflation rate.

    F-1





    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

    To the Shareholders of
       
    Administradora de Fondos de Pensiones Provida S.A.

    We have audited the consolidated balance sheets of Administradora de Fondos de Pensiones Provida S.A. and subsidiaries (“the Company”) as of December 31, 2004 and 2005 and the related consolidated statements of income and of cash flows for each of the three years in the period ended December 31, 2005, all expressed in millions of constant Chilean pesos. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

    We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the Company’s management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Administradora de Fondos de Pensiones Provida S.A. and its subsidiaries as of December 31, 2004 and 2005 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in Chile.

    Accounting principles generally accepted in Chile vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of net income for each of the three years in the period ended December 31, 2005 and the determination of shareholders equity as of December 31, 2004 and 2005, to the extent summarized in Note 40 to the consolidated financial statements. Our audits also comprehended the translation of constant Chilean pesos amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2.o. Such U.S. dollar amounts are presented solely for the convenience of readers in the United States of America.

    /s/ Delloite Touche Tohmatsu
    Santiago, Chile


    June 22, 2006

    F-2




    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    CONSOLIDATED BALANCE SHEET

    (Restated for general price-level changes)









      As of December 31,
      2004 2005 2005
      (Note 2.o)








      MCh$ MCh$ ThUS$








    Assets  
    Current Assets  
    Cash   1,859 3,403 6,640
    Time deposits (Note 4)   557 466 909
    Marketable securities (Note 5)   1,268 97 189
    Receivables from Pension Fund   669 1,204 2,349
    Receivables from Insurance Companies (Note 8)   3,164 5,699 11,120
    Receivables from the State (Note 8)   24 23 45
    Receivables and notes due from related companies (Note 9)   1,256 1,168 2,279
    Fees receivable (Note 7)   2,691 2,189 4,271
    Miscellaneous Receivables, net (Note 10)   2,546 1,626 3,173
    Accounts receivable   342 444 866
    Inventories   55 66 129
    Recoverable Taxes, net (Note 22)   968
    Prepaid expenses (Note 11)   109 83 162
    Deferred Income Taxes (Note 22)   511 171 334








    Total Current Assets   16,019 16,639 32,466








    Mandatory Investment  
    Mandatory Investment – Fund type A   7,325 12,643 24,669
    Mandatory Investment – Fund type B   23,079 25,803 50,347
    Mandatory Investment – Fund type C   59,918 61,164 119,344
    Mandatory Investment – Fund type D   15,947 15,629 30,496
    Mandatory Investment – Fund type E   2,861 2,469 4,818








    Total Mandatory Investment (Note 6)   109,130 117,708 229,674








    Property, Plant and Equipment, net  
    Land   5,039 5,039 9,832
    Buildings and Infrastructure   18,287 18,288 35,684
    Equipment, furniture and fixtures   2,347 2,229 4,349
    Other Fixed Assets   9,553 8,744 17,062
    (Less) Accumulated Depreciation   (8,437 ) (8,577 ) (16,736 )








    Total Property, Plant and Equipment, net (Note 12)   26,789 25,723 50,191








    Other Assets  
    Investment in related companies (Note 13)   12,763 13,648 26,630
    Goodwill, net of accumulated amortization of MCh $53,075 and MCh $58,090 at December 31, 2004 and 2005, respectively (Note 13)   76,526 69,625 135,854
    Receivable and notes due from related companies (Note 9)   312 231 451
    Other Assets (Note 14)   2,119 1,501 2,929
    Intangibles   - 4,418 8,620
    Amortization of intangibles, excluding goodwill   -   (884 ) (1,725 )








    Total Other Assets   91,720   88,539 172,759








    Total Assets   243,658   248,609 485,090








    The accompanying notes are an integral part of these consolidated financial statements.

    F-3






    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    CONSOLIDATED BALANCE SHEET

    (Restated for general price-level changes)









      As of December 31,
      2004 2005 2005
      (Note 2.o)








      MCh$ MCh$ ThUS$








    Liabilities and Shareholders’ Equity  
    Current Liabilities  
    Obligations with banks and financial institutions (Note 15)   20,417 22,749 44,388
    Dividends payable   235 199 388
    Accounts payable   2,118 1,871 3,651
    Notes and accounts due to related companies (Note 16)   4,788 9,342
    Accounts payable to National Health Fund (Note 17)   523 429 837
    Pensions payable   465 647 1,262
    Collections to be cleared (Note 8)   869 48 94
    Accounts payable to insurance companies (Note 8)   1,788 1,211 2,363
    Accrued expenses (Note 19)   26,523 20,495 39,990
    Withholdings (Note 18)   3,003 2,127 4,150
    Withholdings from pensioners (Note 17)   1,450 1,559 3,042
    Income tax (Note 22)   222 433
    Other current liabilities (Note 20)   649 1,209 2,359








    Total Current Liabilities   58,040 57,554 112,299








    Long-Term Liabilities  
    Long-term provisions (Note 19)   1,958
    Long-term deferred taxes (Note 22)   3,389 4,231 8,256
    Other long-term liabilities (Note 21 and 23)   932 1,190 2,322








    Total Long-Term Liabilities   6,279 5,421 10,578








    Commitments and Contingencies (Note 34)  








    Shareholders’ Equity  
    Paid-in Capital   89,665 89,665 174,956
    Additional Paid-in Capital   128 129 252
    Other reserves   (4,974 ) (8,405 ) (16,402 )
    Retained earnings   94,520 104,245 203,407








    Total Shareholders’ Equity (Note 24)   179,339 185,634 362,213








    Total Liabilities and Shareholders’ Equity   243,658 248,609 485,090








    The accompanying notes are an integral part of these consolidated financial statements.

    F-4






    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    CONSOLIDATED BALANCE SHEET

    (Restated for general price-level changes)











      For the years ended December 31,
      2003 2004 2005 2005
      (Note 2.o)










      MCh$ MCh$ MCh$ ThUS$










    Operating Revenues:  
    Fee income (Note 7 and 35)   106,451 111,820 123,559 241,091
    Gain on mandatory investments (Note 6)   10,413 11,084 9,755 19,034
    Other operating revenues (Note 25)   4,954 4,528 6,304 12,300
    Total Operating Revenues   121,818 127,432 139,618 272,425










    Operating Expenses:  
    Administrative personnel payroll expenses   (16,946 ) (16,618 ) (17,730 ) (34,595 )
    Sales personnel payroll expenses (Note 35)   (9,556 ) (8,645 ) (7,911 ) (15,436 )
    Directors’ fees (Note 27)   (88 ) (75 ) (71 ) (139 )
    Selling and marketing expenses   (761 ) (617 ) (816 ) (1,592 )
    Data processing expenses   (810 ) (881 ) (2,280 ) (4,449 )
    Administrative expenses   (10,166 ) (12,028 ) (13,023 ) (25,411 )
    Depreciation (Note 12)   (1,672 ) (1,635 ) (1,938 ) (3,781 )
    Amortization   (884 ) (1,725 )
    Life and disability insurance premium expenses (Note 8 and 35)   (47,914 ) (52,623 ) (47,362 ) (92,414 )
    Other operating expenses (Note 29)   (1,839 ) (1,865 ) (1,948 ) (3,800 )
    Total Operating Expenses   (89,752 ) (94,987 ) (93,963 ) (183,342 )










    Net Operating Income   32,066 32,445 45,655 89,083










    Non-Operating Income (Expenses):  
    Gain on financial investments   58 38 39 76
    Equity participation income of related companies (Note 13)   7,437 5,300 5,396 10,529
    Amortization of goodwill (Note 13)   (5,302 ) (5,296 ) (5,015 ) 3,703
    Other non-operating income (Note 26)   10,164 4,495 1,898 (9,785 )
    Interest expenses (Note 28)   (1,444 ) (1,166 ) (1,533 ) (2,991 )
    Other non-operating expenses (Note 29)   (584 ) (944 ) (1,619 ) (3,159 )
    Price-level restatement, net (Note 30)   (826 ) (1,250 ) (1,916 ) (3,739 )
    Foreign exchange gain (loss)   1,054 1,593 610 1,190
    Net Non-Operating Income   10,557 2,770 (2,140 ) (4,176 )










    Income before income taxes   42,623 35,215 43,515 84,907










    Income Taxes (Note 22)   (8,636 ) (6,988 ) (8,702 ) (16,980 )










    Net Income   33,987 28,227 34,813 67,927











    The accompanying notes are an integral part of these consolidated financial statements.

    F-5




    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    Notes to the Consolidated Financial Statements











      For the years ended December 31,
      2003 2004 2005 2005
      (Note 2.o)










      MCh$ MCh$ MCh$ ThUS$










    Cash Flow from Operating Activities:  
    Fee income - received   103,198 114,199 134,066 261,592
    Proceeds on investments - received   1,478 467 20 39
    Other operating revenues   6,467 6,937 8,510 16,605










    Total operating revenues   111,143 121,603 142,596 278,236










    Payroll expenses   (28,833 ) (25,344 ) (28,944 ) (56,476 )
    Selling and marketing - expenditures   (9 ) (42 ) (127 ) (248 )
    Data processing expenses   (22 ) (35 ) (67 ) (131 )
    Administrative expenses   (10,085 ) (13,884 ) (8,839 ) (17,247 )
       
    Life and disability insurance expenses   (35,800 ) (47,789 ) (60,311 ) (117,680 )
    Other operating expenses   (292 ) (6,438 ) (3,407 ) (6,648 )










    Total operating expenses   (75,041 ) (93,532 ) (101,695 ) (198,430










    Net cash provided by operating activities   36,102 28,071 40,901 79,806










    Cash Flow from Financing Activities:  
    Dividends paid   (24,964 ) (17,136 ) (17,278 ) (33,713 )
    Bank borrowings   140,342 150,672 150,930 294,498
       
    Repayment of bank borrowings   (166,105 ) (169,137 ) (168,102 ) (328,004 )
    Repayment of accounts due to related companies   (8,741 ) (4,013 ) (19,446 ) (37,943 )
    Other financing   13,197 9,764 4,040 7,883
    Other   (121 ) (1,909 ) 10,504 20,496










    Net cash (used in) financing activities   (46,392 ) (31,759 ) (39,352 ) (76,783 )










    Cash Flow from Investing Activities:  
    Sale of marketable securities   91 1,432 323 630
    Sale of mandatory investments   13,809 2,788 3,058 5,967
    Sale of investments in related companies   17,250 6,631
    Collection of accounts receivable from related companies  
    Collection of other accounts receivable from related companies   11,487 635 315 615
    Other proceeds from investments   266 811 2,924 5,705
    Additions to premises and equipment   (1,201 ) (199 ) (42 ) (82 )
    Purchase of marketable securities   (468 ) (272 ) (531 )
    Purchase of mandatory investments   (17,134 ) (5,447 ) (5,889 ) (11,491 )
    Investments in related companies   (9,700 ) (255 ) (1,766 ) (3,446 )
    Loans to related companies   (1,361 ) (84 )
    Other   (2,778 ) (5 ) (10 )










    Net cash provided by (used in) investing activities   10,729 5,844 (1,354 ) (2,643 )










    Total net positive cash flow for the period   439 2,150 195 380










    Effect of inflation on cash and cash equivalents   (733 ) 121 85 166










    Increase (decrease) in cash and cash equivalents   (294 ) 2,277   280   546  










    Cash and cash equivalents at beginning of period   1,606 1,312   3,589   7,003  










    Cash and Cash Equivalents at end of period   1,312 3,589   3,869   7,549  










    Supplemental cash flow information:                  










    Cash paid during this year for:                  










    Interest   654   826   486   949  










    Taxes   -   1,080   970   1,892  










    The accompanying notes are an integral part of these consolidated financial statements.

    F-6






    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    Notes to the Consolidated Financial Statements











      For the years ended December 31,
      2003 2004 2005 2005
      (Note 2.o)










      MCh$ MCh$ MCh$ ThUS$










    RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO NET INCOME FOR THE YEAR  
    Net Income for the year   33,987 28,227 34,813 67,927










    Deduct debits (credits) to income which do not represent cash flows   (4,173 ) (430 ) 2,904 5,667










    Depreciation and amortization for the period   6,974 6,931 6,953 13,567
    Gain on mandatory investments   (10,413 ) (11,084 ) (9,755 ) (19,034 )
    Accrued fee income   (3,254 ) (2,379 ) 10,507 20,501
    Life and disability insurance expenses   10,203 4,759 (9,413 ) (18,367 )
    Loss from disposal of property, plant and equipment   (18 ) (2 )
    Income from sale of investments  
    Equity participation income of related companies   (7,437 ) (5,300 ) (5,396 ) (10,529 )
    Price-level restatement, net   826 1,249 1,916 3,739
    Foreign exchange gain (loss)   (1,054 ) (1,593 ) (610 ) (1,190 )
    Other operating funds   6,989 8,702 16,980










    Decrease (increase) in Current Assets   (1,112 ) (814 ) 1,846 3,602










    Accounts receivable from pension funds, insurance companies and State   (703 ) (978 ) (2,566 ) (5,007 )
    Inventories   6 (13 ) (11 ) (21 )
    Other current assets   (415 ) 177 4,423 8,630










    Increase (decrease) in Current Liabilities   7,400 1,088 1,337 2,610










    Notes payable, accounts payable and miscellaneous creditors   934
    Collections to be cleared, accrued reimbursement collections by employers and participants for payments in excess   (23 ) (821 ) (1,602 )
    Funds insurance companies and other AFPs   6,512 760 1,357 2,648
    Accounts payable to National Health Fund, Pension  
    Income tax   (49 ) 333 482 940
    Pensions payable   26 (392 ) (766 )
    Other accounts payable related to non operating results   (5 ) 712 1,390










    Net Cash provided by Operating Activities   36,102 28,071 40,901 79,806










    The accompanying notes are an integral part of these consolidated financial statements.

    F-7






    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    Notes to the Consolidated Financial Statements

    NOTE 1. THE COMPANY

    Administradora de Fondos de Pensiones Provida S.A. (“Provida”, “BBVA Provida” or the “Company” or the “Administration”) is a publicly traded company incorporated on March 3, 1981. It is subject to the Superintendency of Securities and Insurance (SVS) and the Superintendency of Pension Funds Administrators (SAFP).

    The sole object of Provida is to administer Provida’s pension funds types A, B, C, D and E and to administer the provision of related benefits, in accordance with Law Decree (“D.L.”) 3,500 and modifications. Accordingly, Provida is regulated by the SAFP. As of 1994, in accordance with Laws 19,301 and 18,876, Provida is allowed to create subsidiaries and to invest in companies that act as depositories of securities.

    The main difference among the five types of funds is the portion invested in variable income securities. Fund Type A is the most concentrated in variable income, while Type E fund does not have any variable income component.

    The Company’s controlling shareholder is BBVA Pensiones Chile S.A., which is controlled by the BBVA Group.

    NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    a.  Basis of Presentation – The consolidated financial statements have been prepared in accordance with regulations issued by the SAFP, SVS and accounting principles generally accepted in Chile, (“Chilean GAAP”). The consolidated financial statements include certain reclassifications and additional disclosures in order to conform more closely to the form and content of the financial statements required by the United States Securities and Exchange Commission.

    The preparation of financial statements in conformity with Chilean GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

    b.  Basis of Consolidation – The consolidated financial statements include the accounts of Administradora de Fondos de Pensiones Provida S.A. (“Provida”, “BBVA Provida” or the “Company”) and the following subsidiaries:

    Subsidiary 2003
    % 
    2004
    %
    2005
    %




    Provida Internacional S.A. 99.999860 99.999860 99.999860
    AFP Génesis S.A. de Ecuador 99.999994 99.999994 99.999994
    AFP Porvenir de República Dominicana 99.999840   0.000000   0.000000

    F-8





    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    Notes to the Consolidated Financial Statements

    All significant transactions and balances between the companies have been eliminated in consolidation.

    As of January 1, 2001, the subsidiary Provida Internacional S.A. maintains its accounting records in US dollars in accordance with Chilean GAAP. For consolidation purposes, these financial statements in dollars have been converted into Chilean pesos using the exchange rate as of the balance sheet date.

    In accordance with Technical Bulletin N°64 of the Chilean Association of Accounts, permanent foreign investments established in countries defined by Technical Bulletin N°64 as being unstable, whose activities do not constitute an extension of the parent company’s operations are controlled and measured in US dollars. Differences between the Chilean peso and the United States (US) dollar exchange rate variation and fluctuations in the Chilean Consumer Price Index (CPI) are accounted for as a charge or credit to the equity reserve account called “Accumulated translation adjustment”. This rule corresponds to all US dollar functional currency subsidiaries (A.F.P Genesis S.A. Ecuador and A.F.P. Porvenir - Dominican Republic).

    c.  Price-Level Restatement (Monetary Correction) – The consolidated financial statements are prepared on the basis of general price-level accounting in order to reflect the effect of changes in the purchasing power of the Chilean peso during each year. At the end of each reporting period, the consolidated financial statements are stated in terms of the general purchasing power of the Chilean peso using changes in the Chilean Indice de Precios al Consumidor (Consumer Price Index, or “IPC”) as follows:

    • Non-monetary assets, liabilities, and shareholders’ equity accounts are restated in terms of year-end purchasing power.

    • Monetary items are not restated as such items are, by their nature, stated in terms of current purchasing power in the financial statements.

    • The price-level restatement credit or charge in the income statement represents the monetary gain or loss in purchasing power from holding assets and liabilities exposed to the effects of inflation.

    • All the accompanying consolidated financial statements have been restated in constant Chilean pesos of general purchasing power on December 31, 2005 (“constant pesos”) applied under the “prior month rule” as described below, to reflect changes in the IPC from the financial statement dates to December 31, 2005. This updating does not change the prior years’ statements or information in any way except to update the amounts to constant pesos of similar purchasing power.

     

    F-9




    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    Notes to the Consolidated Financial Statements

    The general price-level restatements are calculated using the official consumer price index of the Chilean Instituto Nacional de Estadísticas (National Statistics Institute, or “INE”) and are based on the prior month rule, in which the inflation adjustments are based on the consumer price index at the close of the month preceding the close of the respective period or transaction. The IPC index is considered by the business community, the accounting profession and the Chilean government to be the index which most closely complies with the technical requirement to reflect the variation in the general level of prices in the country and, consequently, is widely used for financial reporting purposes in Chile.

    The values of the Chilean IPC used for price-level restatement purposes are as follows:

      December 31,
    Year Index (*) Change in index



    2003 114.44 1.0%
    2004 117.28 2.5%
    2005 121.53 3.6%



    (*)   Index as of November 30 of each year, under prior month rule described above

    The price-level restated consolidated financial statements do not purport to represent appraised values, replacement cost, or any other current value of assets at which transactions would take place currently and are only intended to restate all non-monetary financial statement components in terms of local currency of a single purchasing power and to include in the net results for each year the gain or loss in purchasing power arising from the holding of monetary assets and liabilities exposed to the effects of inflation.

    d. Foreign Currency Translation – Balances in foreign currency have been translated at the year-end exchange rate. Indexed balances have been adjusted according to the readjustment index of the balance or as agreed to for this purpose.

    Assets and liabilities denominated in foreign currency and UF (an inflation index-linked unit of account) and the investments in foreign related companies, have been translated into Chilean pesos at the following year-end exchange rates:

        As of December 31,
    Currency   2003   2004   2005
      Ch$   Ch$   Ch$







    United States Dollar   593.80   557.40   512.50
    UF (Unidad de Fomento)   16,920.00   17,317.05   17,974.81







    e.  Financial Investments – Time deposits are stated at cost plus accrued interest and UF or US dollar indexation adjustments, as applicable.

    F-10




    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    Notes to the Consolidated Financial Statements

    Marketable securities: The Company, as part of its trading activities maintains marketable securities, which mainly consist of commercial paper, mutual fund units, and corporate bonds which are recorded at market value.

    Mandatory Investments: Provida must achieve a minimum return on the pension funds’ assets, as required by D.L. 3,500, or compensate for any shortfall. To ensure the maintenance of each funds’ value, Provida is required to maintain a 1% investment in the amount of the corresponding pension fund under Chilean law. In addition to this amount, the Company may maintain up to a 0.02% investment in the pension funds’ assets, which is presented as other current assets. Should the minimum return by fund not be maintained, the Company is required to use the proceeds from its mandatory investments to reimburse the pension fund for the shortfall. Should the shortfall exceed such proceeds, the Company would be required to purchase additional units in the pension fund to maintain its 1% participation.

    Inventories: This item includes application forms and stationary items which are recorded at cost.

    f.  Property, plant and equipment – These have been valued at price-level restated cost. Depreciation has been determined using the straight-line method over the estimated useful lives of the assets.

    Capital lease assets are recorded at present value, which is calculated using the sum of contracted monthly installments plus the purchase option at the interest rate implicit in the respective contract. The related obligations are included in “Other current liabilities and other long-term liabilities” in the consolidated balance sheets, net of deferred interest costs. Assets obtained under financial contracts are not the legal property of the Company until it decides to exercise the related purchase option. Therefore, the Company cannot freely dispose of them.

    Capital lease assets are depreciated using the straight-line method over the estimated useful lives of the assets.

    Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term.

    g.  Investments in Related Companies – Investments made prior to January 1, 2004 in the equity securities of entities over which the Company exerts significant influence are accounted for under the equity method. This method consists of allocating the respective proportion of the equity of the issuer to the Company’s “Investment in related companies” account with any excess of the cost over the company’s equity in the book value of the net assets of the investee recorded as goodwill and any variation in such equity recognized on a proportional basis, as stipulated in Circular 368 of the Superintendency of Securities and Insurance and Technical Bulletin No.42 of the Chilean Association of Accountants.

    F-11




    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    Notes to the Consolidated Financial Statements

    Investments made after January 1, 2004 in the equity securities of entities over which the Company exerts significant influence are valued at their fair value, revaluing the assets and liabilities of the investee, as stipulated in circular No.1697 of the Superintendency of Securities and Insurance (“SVS”) and Technical Bulletin No.72 of the Chilean Association of Accountants. Subsequent to their acquisition, the respective proportion of the equity of the issuer to each Company’s investment is recognized as equity method income (loss).

    h.  Goodwill – Goodwill results from differences between the carrying value of assets and liabilities acquired and the acquisition cost at the purchase date. Amortization is recorded using the straight-line method over 20 years.

    The balances of goodwill and negative goodwill, determined as explained above, were generated prior to the issue of Official Circular No. 1,697 by the SVS and the Technical Bulletin No.72 by the Chilean Association of Accountants, effective as of January 1, 2004, which states that the determination will be calculated based on the difference between the acquisition cost and the fair value of the assets acquired and the liabilities assumed.

    i.  Income tax and deferred taxes – Provida recognizes its income tax obligations in accordance with the tax laws of the respective countries in which it operates. Deferred taxes arising from those items have been recorded as established in Technical Bulletin No. 60 (“BT60”) of the Chilean Institute of Accountants. Deferred taxes are recorded on of temporary differences between the book and tax basis of assets and liabilities using the enacted tax rates in effect at the estimated time of reversal. In addition, deferred tax asset is recognized for tax loss carryforwards.

    j.  Employee Vacations – The cost of employee vacations as established in Technical Bulletin No. 47, is recorded on an accrual basis monthly.

    k.  Staff severance indemnities and profit-sharing agreement – Indemnities agreed upon in the respective collective bargaining agreements are valued at the current value of the obligation calculated at current salary rates. The Company has also recorded a liability for profit-sharing in accordance with the related contract with certain employees.

    l.  Revenue Recognition – Fee income from the Pension Fund is recognized when all the activities relating to the administration of the Pension Fund have been completed. In accordance with instructions issued by the SAFP, fee income is not recognized for the Pension Funds’ individual account administration until the contributions have been deposited.

    m.  Software Applications – Software acquired in the form of software packages which are recorded in Other property, plant and equipment have been valued at price-level restated cost. This software is being amortized using the straight-line method over the estimated useful lives of the software. The useful life is 4 years. No internally developed software has been capitalized in the last ten years.

    F-12




    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    Notes to the Consolidated Financial Statements

    n.  Forward Foreign Exchange Contracts – As of December 31, 2003, the Company maintains forward contracts to cover the risks of fluctuation in foreign exchange. Such contracts were considered speculative contracts. These derivative instruments were stated at market value in accordance with Boletín Técnico No. 57 (Technical Bulletin) of the Chilean Institute of Accountants.

    o.  Convenience translation to US dollars – BBVA Provida maintains its accounting records and prepares its consolidated financial statements in Chilean pesos. The US dollar amounts disclosed in the accompanying financial statements are presented solely for the convenience of the reader using the observed exchange rate for December 31, 2005 of Ch$512.50 per US$1. This translation should not be taken to mean that the Chilean peso amounts actually represent, have been, or could be, converted into U.S. dollars at such a rate or at any other rate.

    p.  Cash and cash equivalents – Cash and cash equivalents are defined under Technical Bulletin No. 50, and include certain investments defined under Technical Bulletin 50.

    Cash flows from operating activities include all cash flows from operations, including fees from clients, payments to suppliers and personnel remuneration. In addition to the above, cash flows related to taxes, interest paid, financial income and, in general, all cash flows not otherwise defined as financing or investing activities are considered to be operating in nature. This concept is broader than the operating income used in the consolidated statement of income.

    q.  Reclassification – Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s method of presentation.

    NOTE 3. CHANGES IN ACCOUNTING POLICIES

    During 2005, there were no changes in accounting policies form the prior year that would have a significant impact on these consolidated financial statements.

    NOTE 4. TIME DEPOSITS

    Investments in time deposits have been made with Banco de Chile in the year 2005 and Banco de Crédito in the year 2004. The overnight deposits correspond to transactions with Brown Brothers Harriman Co. The amounts are detailed below:

             As of December 31,  
      2004    2005   
      MCh$   MCh$  





     
    Time deposits   246   305  
    Time deposits (Genesis Subsidiary Ecuador)   285   137  
    Overnight deposits (US$ checking account)   26   24  





     
    Total   557   466  





     

    The time deposits have original maturity dates of less than 90 days.

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    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    Notes to the Consolidated Financial Statements

    NOTE 5. MARKETABLE SECURITIES

        As of December 31,
        2004   2005
        MCh$   MCh$





    Marketable securities:        
         Mutual funds (fixed income securities)   1,173   -
         Bonds issued by Chilean Government agencies   70   71
         Commercial paper   25   26





    Total   1,268   97





    NOTE 6. MANDATORY INVESTMENT

    In order to guarantee the capacity of the Company to cover the pension funds minimum return which is established by formula under the law, as stipulated in Article 37 of D.L.3,500, and in conformity with Article 40 of the same legal regulation, the Administrator must maintain an asset known as Mandatory Investment equivalent to one percent (1%) of each Pension Fund.

    The mandatory investment’s purpose is to provide a guarantee in the event that the performance of a specific pension fund drops below the required minimum level of return. Currently, for pension funds Type C, D and E this level is the lesser of (a) the weighted average annual real return for the last 36 months of the same type of all pension funds in the system less 2% and (b) 50% of the weighted average annual real return for the last 36 months of the same type of all pension funds in the system. The minimum return for pension funds Type A and B is the lesser of (a) the weighted average annual real return for the last 36 months of the same type of all pension funds in the system less 4% and (b) 50% of the weighted average annual real return for the last 36 months of the same type of all pension funds in the system.

    If a fund’s annualized real return for a certain period of time were to be, in a specific month, lower than the minimum return, the Company must cover the difference within a 5 day-period. To do so, the Company is permitted to apply funds from the mandatory investment, and in that event, such amount must be refunded in 15 days. If a pension fund administrator (“AFP”) fails to observe either the minimum reserve fund requirement or the minimum return requirement, it will eventually be dissolved in accordance with the Pension Law.

        As of December 31,
        2004   2005
        MCh$   MCh$





         Pension Funds - Type A   7,325   12,643
         Pension Funds - Type B   23,079   25,803
         Pension Funds - Type C   59,918   61,164
         Pension Funds - Type D   15,947   15,629
         Pension Funds - Type E   2,861   2,469





    Total   109,130   117,708





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    ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES

    Notes to the Consolidated Financial Statements

    As of December 31, 2004, the Mandatory Reserve is MCh$109,130. This amount consists of funds type A, B, C, D and E pension fund Mandatory Reserves of MCh$7,325, MCh$23,079, MCh$59,918, MCh$15,947 and MCh$2,861, respectively. These amounts are equivalent to pension fund shares of 457,780.04, 1,653,972.81, 4,166,929.62, 1,276,195.44 and 182,171.31 respectively, based on the value of the shares as of December 31, 2004.

    As of December 31, 2005, the Mandatory Reserve is MCh$117,708. This amount consists of Types A, B, C, D and E pension fund mandatory reserves of MCh$12,643, MCh$25,803, MCh$61,164, MCh$15,629 and MCh$2,469, respectively. These amounts are equivalent to pension fund shares of 709,096.69, 1,729,136.21, 4,071,299.36, 1,216,890.77 and 155,046.09 respectively, based on the value of the Shares as of December 31, 2005.

    The Mandatory Reserve investment in pension funds generated net income of MCh$10,413, MCh$11,084 and MCh$9,755 during the years ended December 31, 2003, 2004 and 2005, respectively, from recognizing the variation in the value of the Shares for book purposes. These amounts are shown in the Consolidated Statements of Income as "Gain on mandatory investments." The return of the pension funds administered by Provida annually for the last three years are as follows:

        As of December 31,
       




        2003   2004   2005
           %   %   %







    Pension Funds - Type A   27.09   12.73   11.20
    Pension Funds - Type B   16.06   9.98   6.74
    Pension Funds - Type C   10.56   8.82   4.28
    Pension Funds - Type D   8.47   6.60   2.59
    Pension Funds - Type E   3.30   5.18   1.19







    NOTE 7. FEE INCOME

    In conformity with D.L.3,500 dated 1980, the Administrator receives compensation based on commissions paid by participants.

    These commissions are designed to finance the Administrator, including the administration of the Pension Funds, the cost of the record keeping of individual accounts, of the old age pension systems, of disability and survival pensions and benefits which are guaranteed by the State. These amounts also provide funds for the insurance premiums which cover differences in the necessary capital to finance disability and survival pensions and the sum of the accumulated capital of each participant plus the fund recognition bonuses, if applicable, and administration costs of the other services which are established by law.

    In accordance with current regulations, commissions on monthly contributions are recognized at the time that the contributions are received in the participants’ personal accounts.

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    ADMINISTRADORA DE FONDOS DE