Fitch Affirms Sul America S.A’s Ratings; Outlook to Positive

RIO DE JANEIRO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Sul America S.A.'s (Sasa) ratings and revised their Rating Outlook to Positive from Stable as follows:

--Foreign and Local Currency Long-Term Issuer Default Ratings (IDRs) at 'BB+'; Positive Outlook;

--Foreign and Local Currency Short-Term IDRs at 'B';

--National Long-Term Rating at 'AA(bra)'; Positive Outlook;

--National Short-Term Rating at 'F1+(bra)';

--USD200 million senior notes due February 2012 Foreign Currency Long-Term Rating at 'BB'.

The Positive Outlook on the ratings of Sasa, the holding company of the Brazilian insurance group Sul America Seguros (SAS), reflects the maintenance of good and consistent operating performance despite increasing competition and the termination of an important joint venture with Banco do Brasil S.A. (BdB) in the auto segment in 2010. Sasa's performance has been supported by continued intense commercial business activities through its broad base of local brokers. To strengthen its competitiveness in the retail market and maintain its position in its main business niches, Sasa has also been expanding the number of its partnerships, mainly with financial groups, since SAS is among the few independent insurance groups in Latin America. In addition, the ratings also take into account Sasa's recent acquisitions and coinsurance agreements in the health and auto segments, which are expected to contribute to growth and profitability.

A future upgrade of the ratings will depend on the ability of Sasa to further consolidate the recently expanded distribution network (mostly partnerships). A stable performance in terms of claims ratio and overall profitability would also be needed in order for the Positive Outlook to lead to a rating upgrade. A more conservative approach in terms of leverage and the newly enhanced liquidity levels could also trigger a positive rating action. A deterioration in its operating performance, leverage or liquidity may trigger a change on the Outlook back to Stable, or even negatively affect the ratings depending on the materiality of the deterioration.

SAS has a diversified product mix, highlighted by its strong presence in the health and auto segments in Brazil, which have a high correlation with its operational performance. Its ratings also consider its good controls and constant improvements in its underwriting practices and management of reserves. Furthermore, they reflect expectations for the maintenance of the adequacy of

capital and leverage and satisfactory liquidity ratios, which would enable profitability to remain at satisfactory levels, in line with its international peers, notwithstanding greater competition.

Despite greater focus on risk underwriting which could be detrimental to market share, Sasa maintained strong premium growth in 2010 in its main business segments - a trend that may continue during 2011 based on its expanded distribution network and the expected economic growth in Brazil. Despite the termination of its partnership with BdB, its established and solid franchise and effective commercial business strategies have allowed the entity to continue with its growth strategy without sacrificing prices.

Loss ratio is expected to remain stable in 2011, in line with local peers, despite cautious pricing, cost control and isolated rate adjustments. The combined ratio is expected to stay below 100%, now incorporating the strengthening of reserves and occasional adjustments to its cost structure. This will also include a small contribution from the extension of the back office contract with BdB. Although returns could come under pressure and even decrease in the long term, they are expected to remain favorable in 2011 and compare well with those of its peers, benefiting from growth, good financial earnings and effective cost management.

Sasa's liquid assets were strengthened with the sale of participations and real estate in 2010 and are expected to remain high through 2011/2012, even if SAS intends to take advantage of potential business opportunities and redeem its eurobond issuance. Following the payment of dividends, it stood around BRL800million in May 2011, which was equivalent to nearly 2.3 times total financial indebtedness. Fitch expects that Sasa will maintain sufficient liquidity to support growth independent of potential acquisitions.

Sasa is the second largest health insurance provider in Brazil and the third largest in auto. It is 33.28% controlled by Sulasapar Participacoes (Sulasapar), 21.47% by ING Insurance International BV (ING) and a further 38.40% is the market float. ING's group support was not incorporated into the company's ratings by Fitch. Recently, ING announced that it is reviewing its global strategy and intends to sell its insurance operations. Fitch is monitoring the progress of changes in Sasa's shareholder composition and the possible impacts on its ratings, even though the benefit of ING's support has not been incorporated into the ratings.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Insurance Rating Methodology', March 31, 2011;

--'Life Insurance Rating Methodology', March 31, 2011;

--'Non-Life Insurance Rating Methodology', March 31, 2011;

--'Insurance Industry: Global Notching Methodology and Recovery Analysis', March 31, 2011;

--'Fitch Approach to Rating Insurance Groups', Dec. 14, 2010.

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614266

Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=612905

Non-Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604366

Fitch's Approach to Rating Insurance Groups

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=586765

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Fitch Ratings
Primary AnalystMaria Rita GoncalvesSenior Director
+55-21-4503-2600
Fitch Ratings Brasil Ltda.,
Praca XV Novembro 20 401B, Rio de Janeiro, RJ Brazil
or
Secondary Analyst
Esin Celasun
Associate Director
+55-21-4503- 2600
or
Committee ChairpersonJulie BurkeManaging Director
+1-312-368-3158
or
Media RelationsCindy Stoller+1-212-908-0526
[email protected]

Source: Fitch Ratings