News Column

Fitch Affirms Sul America S.A.'s Ratings; Outlook Stable

June 9, 2014

RIO DE JANEIRO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the international and national ratings of Sul America S.A. (SASA) as follows:

--Foreign and local currency long-term Issuer Default Ratings (IDRs) at 'BBB-', Outlook Stable;

--Foreign and local currency short-term IDRs at 'F3';

--National long-term rating at 'AA+(bra)'; Outlook Stable;

--National short-term rating at 'F1+(bra)';

--National long-term rating of BRL500 million debentures due February 2017 at 'AA(bra)';

--National long-term rating of BRL500 million debentures due May 2019 and May 2022 at 'AA(bra)'.

KEY RATING DRIVERS

The affirmation of the ratings reflects SASA's strong franchise that is led by a significant presence in the health and auto segments, its consistent operating performance throughout economic cycles, adequate liquidity and capitalization, and robust risk management practices. SASA's leverage has been increasing in the recent periods, but still remains consistent with the current ratings.

In 2013, premium and contribution growth was a solid 14% (excluding saving bonds) in line with sector growth. The company remained the second and fourth largest insurer in terms of premiums underwritten, in the health and auto segments respectively, at year-end 2013.

In 2013, SASA's net loss ratio remained stable and broadly in line with peer averages. Quarterly net loss ratios are volatile due to seasonality, and, in part, because SASA is able to make adjustments and pricing relatively quickly. Since 2012, SASA has focused more closely on the profitability of its contracts, rather than market share, and also on claim management, which has started yielding positive results in the recent quarters.

Overall performance remained adequate, albeit slightly lower in comparison to 2012 (ROA was 3.1% and 3.5%, in 2013 and 2012, respectively). Combined and operating ratios remained stable (98% and 94.2%, respectively, in 2013, compared to 98.6% and 93.2%, respectively, in 2012, as calculated by Fitch).

Similar to its local peers, SASA's performance is highly sensitive to changes in interest rates. In the second half of 2013 through March 2014, financial income recovered due to the increase in local interest rates. Financial income should remain supportive of profitability in 2014, as a decline in interest rates is unlikely until the end of the year.

SASA's liquidity was slightly lower than previous years, but was still adequate at March 2014 (liquid assets/net technical reserves ratio was 1.08x versus 1.21x at year-end 2012). Liquidity increased with the May 2014 issue of BRL500 million of debentures, but is likely to decline as the principal of existing debt begins amortizing in 2015.

SASA's leverage, measured by the net liabilities/equity ratio, and operating leverage, measured by net earned premiums/equity, is higher than peer averages and continued to rise in 2013 (3.6x and 334%, as calculated by Fitch, respectively). Fitch expects leverage to rise modestly with higher financial debt and continued premium growth until the end of 2014. Leverage ratios are compatible with SASA's ratings, but continued increase could become a negative rating driver in the future.

The regulatory capital ratio (adjusted equity/minimum required capital) of SALIC (SASA's main operating subsidiary) remains adequate. The regulatory ratio declined to 125.7% in 2013 (153.8% in 2012), as a result of rapid premium growth, negative adjustments to securities revaluation reserves, and the acquisition of the capitalization company. The ratio climbed back to 136% as of March 2014, which Fitch views as adequate. Continuation of rapid premium growth is likely to exert downwards pressure to the regulatory capital ratios, unless internal capital generation accelerates.

SASA follows local regulatory requirements to set technical reserves. It did not make any extraordinary adjustments to technical reserves in 2013 or the first quarter of 2014.

In 2013, SASA's shareholder structure underwent a number of changes. These changes did not have any effect on the ratings, as they do not benefit from support. As a result, ING's share in the company fell, and there was an increase in Larragoiti family's direct and indirect (through Sulasapar Participacoes S.A.) share. In addition, International Financial Corporation (IFC) and Swiss Re Direct Investments Company Ltd. (Swiss Re, a subsidiary of Swiss Reinsurance Company Limited) became minority shareholders. In the fourth quarter of 2013, SASA stopped using the ING brand. ING's intention to reduce its stake in SASA has been public since 2010, when it announced that it would sell its insurance, pension, and asset management operations throughout the world.

RATING SENSITIVITIES

Positive Rating Action: Diversification of the premium base, a sustained decline in the operating ratio to below 85%, and a decline in the net earned premiums/equity ratio to below 250%, could lead to an upgrade.

Negative Rating Action: A sustained and material deterioration in profitability, characterized by an ROA below 0.5%; the deterioration of the liabilities/equity ratio to above 4.0x; an increase in the financial leverage (financial debt/equity) to above 25% for a sustained period; a fall in the operating income/interest expense ratio to below 2.0x; or a significant reduction in the holding's liquidity, could negatively affect the ratings.

Additional information available at 'www.fitchratings.com' or 'www.fitchratings.com.br'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013);

--'National Scale Ratings Criteria' (Oct. 30, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833667

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst:

Esin Celasun, +55-21-4503-2626

Director

Fitch Ratings Brasil Ltda.

Praca XV de Novembro, 20 - 401 B

Rio de Janeiro, RJ, Brazil

or

Secondary Analyst:

Rodrigo Salas, +56-2-2499-3309

Senior Director

or

Committee Chairperson:

Julie Burke, CPA, CFA, +1-312-368-3158

Managing Director

or

Media Relations:

Jaqueline Carvalho, Rio de Janeiro, +55-21-4503-2623

jaqueline.carvalho@fitchratings.com

or

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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