Fitch Affirms Sul America S.A. at 'BB-'; Outlook Negative

RIO DE JANEIRO--()--Fitch Ratings has affirmed Sul America S.A.'s (SASA) long-term local and foreign currency Issuer Default Ratings (IDRs) at 'BB-' and its short-term local and foreign currency IDRs at 'B'. The Rating Outlook on SASA's long-term IDRs is Negative and mirrors the Negative Outlook of Brazil's sovereign ratings (long-term IDR 'BB+'/Outlook Negative).

KEY RATING DRIVERS

The affirmation of SASA's ratings reflects its strong franchise led by a significant presence in the health and auto segments, its consistent and adequate operating performance throughout economic cycles, adequate liquidity and capitalization, and robust risk management practices. The rating action also takes into account the constraints posed by Brazil's sovereign ratings on SASA's IDRs, reflecting the full concentration of its operations in Brazil and its large Brazilian government securities holdings (approximately 1.8 times its total equity at September 2015).

SASA posted solid premium growth in its core businesses in the first three quarters of 2015. This enabled it to maintain its ranking as the second and fourth largest insurer in health and auto insurance segments, where its premiums were up 15% and 17%, respectively, compared to September 2014. The Brazilian insurance sector has so far remained resilient to the very weak economic backdrop, characterized by a severe recession, increasing unemployment and inflation, and worsening fiscal performance. Fitch expects sector premium growth to decelerate in 2016 but expects the key credit metrics of SASA, and the insurance sector in general, to remain adequate.

As of September 2015, SASA's profitability remained strong, as evidenced by an operating ratio and an average ROA of 94.6% and 2.9%, respectively (94.1% and 3.1%, respectively, in 2014). Profitability was supported by good technical results and solid financial income.

SASA's leverage, measured by the net liabilities/equity ratio, and operating leverage, measured by net earned premiums/equity, are slightly higher than peer averages in Latin America. At September 2015, these stood at 3.6x and 3.4x, respectively, broadly unchanged from a year ago. Meanwhile, the debt/equity ratio declined to 20.2% at September 2015 from 25.9% in December 2014, as SASA started amortizing its old debt in 2015. Fitch expects leverage to stabilize at the existing levels, but any continued increase could become a negative rating driver in the future.

SASA's liquidity remained adequate at September 2015. Its liquid assets/net technical reserves ratio was 1.08x, broadly unchanged from the 2013-2014 average.

Fitch applied exceptional notching for a ring-fenced regulatory environment between the implied insurance operating company and holding company IDRs. Notching was compressed by one relative to standard notching, as sovereign related risks have so far not affected SASA's key credit metrics, which remain stable and adequate for its ratings.

RATING SENSITIVITIES

In case of an additional downgrade to Brazil's sovereign ratings, SASA's IDRs would be subject to a review that could result in a range of rating actions from affirmation to a two notch downgrade based on Fitch's insurance rating criteria that allows flexibility on how sovereign considerations are factored into insurance rating notching. The ultimate decision would be driven by the rationale for the sovereign rating action and Fitch's view of how this impacts SASA's operating environment, investment risk and overall creditworthiness.

In addition, a sustained and material deterioration in profitability, characterized by an ROA below 0.5%; the deterioration of the liabilities/equity ratio to above 5.0x; an increase in the financial leverage (financial debt/equity) to above 25% for a sustained period; a fall in the interest coverage ratio to below 2.0x; or a significant reduction in the holding's liquidity, could negatively affect the ratings.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999798

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999798

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Esin Celasun
Director
+55-21-4503-2626
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - 401 B,
Rio de Janeiro, RJ, Brazil
or
Secondary Analyst
Rodrigo Salas
Senior Director
+56-2-2499-3309
or
Committee Chairperson
Julie Burke
Managing Director
+1-312-368-3158
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Esin Celasun
Director
+55-21-4503-2626
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - 401 B,
Rio de Janeiro, RJ, Brazil
or
Secondary Analyst
Rodrigo Salas
Senior Director
+56-2-2499-3309
or
Committee Chairperson
Julie Burke
Managing Director
+1-312-368-3158
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com