OREANDA-NEWS. Fitch Ratings has affirmed the Issuer Default Ratings (IDRs), National Ratings and local senior debt ratings of Sul America S.A. (SASA) as follows:

--Foreign and local currency long-term 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)';
--National long-term rating of BRL500 million debentures due May 2019 and May 2022 at 'AA(bra)'.

KEY RATING DRIVERS
The affirmation of the ratings reflects SASA's strong franchise that is 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. SASA's leverage has increased since 2013, but still remains adequate for the ratings.

In 2014, premium and contribution growth was a solid 14%, compared with sector growth of 11%. The company remains the second and fourth largest insurer in terms of premiums underwritten, in health and auto segments, with corresponding market shares at 9.4% and 9.3%, respectively. The economic environment in Brazil has been very weak since 2014, but the Brazilian insurance industry has so far remained resilient and sector premium growth continues to be solid. Fitch expects SASA to grow broadly in line with the market and maintain its leadership in its key businesses in 2015.

SASA's profitability remains adequate. Return on assets (ROA) was 3.1% in both 2014 and 2013, reflecting solid technical results and financial income. In 2014, combined and operating ratios were 98.9% and 94.1%, respectively, broadly unchanged compared with 2013. SASA's closer focus on profitability, rather than market share, and on claim management, has been yielding positive results, and is likely to continue to support earnings.

Similar to its local peers, SASA's financial income and overall profitability is highly correlated with interest rates, as the bulk of its investment portfolio is exposed to variable-rate instruments. However, SASA's interest rate exposure has fallen partially due to the floating rate local debt issuance in 2014. The interest coverage ratio (earnings before interest payments and taxes/interest expense on debt) declined to 6.2x at March 2015 from 14.2x and 16.5x, in 2014 and 2013, respectively, due to higher coupon payments driven by the increase in outstanding debt and higher interest rates and inflation. Therefore, net financial income as a proportion of net earned premiums has not returned to levels observed in previous high interest rate periods. At March 2015 and 2014, financial income corresponded to 5.0% and 4.8% of net earned premiums, respectively, compared to 7.3% in 2011. In the first quarter of 2015 and 2014, the benchmark interest rate SELIC averaged 12.2% and 10.9%, respectively, compared to 11.7% in 2011.

SASA's leverage, measured by the net liabilities/equity ratio, and operating leverage, measured by net earned premiums/equity, remain slightly higher than peer averages in Latin America. At March 2015, these stood at 3.6x and 3.5x, respectively, broadly unchanged from a year ago. Meanwhile, the debt/equity ratio declined 21.4% at March 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.

SASA's liquidity remained adequate at March 2015. Its liquid assets/net technical reserves ratio was 1.10x unchanged from the 2013-2014 average. In 2014, liquidity rose following the May 2014 issue of BRL500 million of debentures, however, as the principal of the old debt began amortizing in 2015, it declined subsequently.

RATING SENSITIVITIES
Positive Rating Action: Diversification of the premium base, a sustained decline in the operating ratio to below 85%, and a decline in the net earned premiums/equity ratio to below 3.0x, could lead to an upgrade, as long as the net liabilities/equity ratio remains below 4.5x.

Negative Rating Action: 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. Further, if new notching criteria proposed by Fitch are made final or if there is a negative rating action on Brazil's sovereign ratings, SASA's ratings may be negatively affected.