Fitch Affirms Sul America S. A. at 'BB-'; Outlook Negative
KEY RATING DRIVERS
The affirmation of SASA's ratings reflects the resilience of its technical results and other credit metrics to the ongoing economic downturn in Brazil, its strong and stable franchise led by a significant presence in the health and auto segments, 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 1.9 times its total capital at June 2016).
SASA posted solid premium and contribution growth of 13% in 2015, compared with sector growth of 12% (both excluding the saving bonds segment). This enabled it to maintain its ranking as the second and fourth largest insurer in health and auto insurance segments, with market shares of 9.5% and 10.3%, respectively, at year-end 2015. In the first half of 2016, SASA's growth slowed down sharply in all segments except health, in line with sector growth. Fitch believes that SASA will maintain its leadership in its key businesses.
SASA's performance remained adequate and stable through June 2016, despite the severe recession that has led to a significant increase in company defaults and deterioration in consumers' purchasing power. Return on average assets (ROAA) was 3.8% in 2015 and 2.3% at June 2016, compared to an average of 3.1% in 2014 and 2013. This was a result of both solid technical results (combined ratio was 99% and 101%, respectively, in 2015 and June 2016) and high financial income.
SASA's leverage, measured by the net liabilities/equity ratio, and operating leverage, measured by net earned premiums/equity, is higher than peer averages in Latin America. At June 2016, these stood at 3.4x and 3.3x, respectively, slightly lower than the levels of a year ago, while financial leverage (debt-to-total capital) fell to 19% in June 2016 from 24% in December 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 June 2016. Its liquid assets/net technical reserves ratio was 1.13x, up from an average of 1.11x in 2015-2014. A bank loan of BRL200 million, raised at end-2015, and proceeds from portfolio sales in 2015, partially offset debt amortizations that started in 2015.
Exceptional notching for a ring-fenced regulatory environment was applied between the implied insurance operating company ratings and holding company IDRs. Notching was compressed by two relative to standard notching, as sovereign-related risks have so far not materially affected SASA's key credit metrics.
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 ROAA below 0.5%; the deterioration of the liabilities/equity ratio to above 5.0x; an increase in the financial leverage to above 25% for a sustained period; a fall in the interest coverage ratio to below 3.0x; or a significant reduction in the holding's liquidity, could negatively affect the ratings.