Fitch Upgrades Sul America S.A. IDRs; Outlook Stable

NEW YORK & RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has today upgraded Sul America S.A. ('SASA'), the holding company controlling the Sul America Seguros insurance group activities ('SAS'), foreign and local currency Issuer Default ratings ('IDR') to 'BB' from 'BB-' and affirmed the short-term foreign and local currency ratings of 'B'. At the same time, Fitch has upgraded SASA's senior notes to 'BB-' from 'B+'. Fitch withdraws SASA's senior notes Recovery Rating ('RR') of 'RR5' since recovery ratings are not applied to 'BB' category. The IDRs Rating Outlook remains Stable.

The ratings action reflect SASA's improvement in its asset and liability management policies, mostly at the holding company level, which resulted in adequate liquidity levels and reduced the dependence on cash generation provided by its operational companies. Sul America's Eurobond issuance in February 2007 (USD200 million) and the IPO occurred in Q407, which represented BRL 775 million in capital injection, enabled it to enhance its debt maturity profile, to reduce its overall indebtedness and, also, to lower its financing costs. SASA prepaid BRL 325 million in short-term debt. Better operational results since 2006 also helped all the group companies to increase their cash availability, specially the holding company, decreasing substantially SAS's leverage ratio. Influenced by the cash increase and the debt reduction, the net debt/equity ratio reached -25% in first half 2008 (H108) declining from 53% in 2005. At the holding company level, such ratio improved to -2% in HI08.

SAS also presented consistent enhancements of its operational performance mainly due to the improvements on underwriting and pricing policies adopted since 2004 as well as to the positive trends of the local insurance market. Its claims and combined ratios, adjusted by non-recurring effects related to retroactive health premiums, improved, respectively, from 76% and 102.5% in 2005, to 71% and 99% in June 2008. The enhancement of the liquidity of the operational and holding companies was also reflected on the overall profitability of its investment portfolio, which increased to 7% of gross premiums in H108, from a low 2% in 2005. This positive trend on the financial results of the company has also benefited the operational ratio, which went down to 92% in H108 from 100.5% in 2005.

Going forward, the company expects to further enhance its operational efficiency by further improving its cost control policies. In 2007, the results were impacted in BRL 40 million due to non-recurring IPO expenses. SAS intends to maintain underwriting practices aimed at protecting its loss ratio in times of higher local inflation and volatile financial results. By 2010 the company foresees a reduction on its loss and combined ratios, which Fitch believes relatively feasible, but highly dependent on a stable operating environment and conservative underwriting policies.

Similar to other market players, SAS's business portfolio is highly concentrated in retail branches (auto and health), given the company has posted strong growth on its group health business, compensating the lower activity on its individual health business, which sales were discontinued in 2004. Claims ratios have improved in most business lines, with strong growth and an adequate control on the average cost of claims being key to sustain this trend. The group has gradually increased its distribution agreements, and keeps on counting on more than 26,000 active, independent insurance brokers as its main sales channel, while the joint-venture partnership with Banco do Brasil is still the most relevant one.

SAS is a diversified insurance group operating throughout the Brazilian territory, specially focused on retail lines such as auto, health and life. In auto insurance it was the second largest player, holding a 15% total market share in premiums in December 2007. In the health insurance segment, it was also the second largest player, with a market share of 39% in the same period. Additionally, it ranks third when the total income in the insurance, pension and capitalization activities is considered, with a total market share of 8% in 2007 (9% not considering the capitalization business, segment in which the company does not participate) according to the Superintendencia de Seguros Privados (Susep) and the Agencia Nacional de Saude (ANS) and is the largest independent insurance group in Brazil (not controlled by a bank). SAS is, directly and indirectly, controlled by ING Group (36%) and by Sulasa Participacoes S.A. (18%), which is owned by the Larragoiti Family. Other participations includes 9% of minority shareholders and a 37% free float after the successful IPO concluded in October 2007.

Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(bra)' for National ratings in Brazil. Specific letter grades are not therefore internationally comparable.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.