|[June 09, 2014]
Fitch Affirms Sul America S.A.'s Ratings; Outlook Stable
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
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
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 compatble 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.
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'
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
National Scale Ratings Criteria
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