RIO DE JANEIRO & NEW YORK--()--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)'.
The affirmation of the ratings reflects SASA's strong franchise led by a significant presence in the health and auto segments; its consistent and favourable operating performance throughout economic cycles, good liquidity, adequate and stable capitalization and the continued enhancements in its risk management practices.
An upgrade of SASA's ratings will depend on its ability to further consolidate the recently expanded distribution network, to diversify its premium base and lower its leverage as measured by the liabilities to capital ratio. However, a sustained and material deterioration in its operating performance, capitalization or leverage, or a significant reduction on its liquidity may negatively affect the ratings.
SASA is a multi-line insurer with a strong presence in the health and auto segments, where it was the second and the fourth largest insurer in Brazil as of June 2012. Despite heavy competition, it has maintained its market share in all segments and expanded its position with retail clients. Growth in total, health/dental and auto premiums was 14%, 19% and 4%, respectively, between September 2011 and September 2012.
SASA's profitability deteriorated slightly through the first nine months of 2012 driven by an increase in the loss ratio of core segments and a decline in financial income. This performance was consistent with industry trends. These results were partially offset by lower administrative expenses and acquisition costs. The resulting combined and operating ratios of 100.9% and 95.6%, respectively, as of September 2012, are in line with those of similarly rated insurers in Latin America.
SASA's overall net loss ratio increased to 77.9% as of September 2012, (74.7% in 2011 and 71.2% in 2010) due to increased costs, as well as higher frequency of thefts in the auto segment. However, third-quarter loss ratios were considerably better in all segments. Given seasonal factors, Fitch expects there will be further improvement in overall results as of year-end 2012.
Similar to its competitors, SASA's financial income has fallen throughout 2012 due to the significant decrease in the local interest rates. Further volatility is expected in financial income given the company's concentration in floating-rate fixed income instruments. However, Fitch does not expect this to be material to the ratings in the short-term.
Favorably, Fitch does not expect SASA to post additional technical reserves following the update of the regulatory reserve calculation effective at year-end 2012. The new guidelines are expected to require insurance companies to calculate reserves on a fair-value basis, utilizing the new lower interest rate levels in the country. Fitch believes SASA has sufficient cushion of unrealized gains in its investment portfolio (more than BRL350 million as at September 2012).
SASA's liquidity was further boosted in the first quarter of 2012 with the issuance of BRL500 million five-year debentures. The proceeds were partially used to pay back the Eurobonds which matured in February 2012. Despite higher claims, liquidity remains comfortable with liquid assets-to-technical reserves ratio at 1.15x at September 2012 (1.20x at YE11).
SASA's capitalization is considered adequate. Operating leverage ratio, as measured by the liabilities-to-capital ratio was 3.53x as of September 2012, which is slightly higher than its peers. However, Fitch believes that leverage will remain stable in the medium term given the expectation for adequate results and prudent dividend policy.
In 2Q'12, SASA announced that it would acquire 83.27% of the capital of Sul America Capitalizacao S.A. (Sulacap), a subsidiary of its indirect parent. Sulacap, with capital of BRL192 million as at September 2012, has a solid position in the fast growing and relatively high margin capitalization (a product similar to savings bonds) segment. Fitch views this transaction as providing a small but diversifying contribution to SASA's overall results.
SASA is 32.8% owned by Sulasapar Participacoes (Sulasapar), 21.2% by ING Insurance International BV (ING), 6.8% by individuals, 1.9% by the treasury of the company and a further 37.3% is in market float. ING is currently in the process of divesting its global insurance operations. To date, ING has sold all Latin American insurance holdings, except Brazil, to Grupo Suramerica. Fitch will continue to monitor changes in SASA's shareholder composition and the possible impacts on its ratings. ING support is not factored into Fitch's SASA ratings.
Additional information available at 'www.fitchratings.com' or 'www.fitchratings.com.br'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Oct. 18, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended