Research Update: Sul America Upgraded To 'BBB-' And Sul America Companhia Nacional de Seguros To 'BBB+' Under New Criteria Review Primary Credit Analyst: Suzane M Iamamoto, Sao Paulo (55) 11-3039-9728; suzane.iamamoto@standardandpoors.com Secondary Contact: Angelica G Bala, Mexico City (52) 55-5081-4405; angelica.bala@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 23, 2013 1
Research Update: Sul America Upgraded To 'BBB-' And Sul America Companhia Nacional de Seguros To 'BBB+' Under New Criteria Review Overview Following a review of Brazil-based multiline insurer Sul America Companhia Nacional de Seguros under our revised insurance criteria, we are raising our global scale rating to 'BBB+' from 'BBB' and affirming our 'braaa' national scale rating. We are also raising our global scale rating on the nonoperating holding company, Sul America S.A., to 'BBB-' from 'BB+' and affirming our 'braa+' national scale rating on it. The ratings predominantly reflect our view of the company's "strong" business risk profile and "less than adequate" financial risk profile, based on its highly diverse franchise and "less than adequate" capital and earnings. The stable outlook reflects our expectation that SulAmerica will maintain its competitive position, while continuing to report good operating performance despite strong competition. Rating Action On May 23, 2013, Standard & Poor's Ratings Services raised its global scale counterparty credit rating on Sul America Companhia Nacional de Seguros S.A. (SulAmerica) to 'BBB+' from 'BBB'. Also, we affirmed our 'braaa' national scale rating on SulAmerica. At the same time, we raised our global scale counterparty credit rating on Sul America S.A. (SASA; the holding company) to 'BBB-' from 'BB+'. In addition, we affirmed our 'braa+' national scale rating on SASA. The stand-alone credit profile (SACP) on SulAmerica is 'bbb+'. The outlook is stable. Rationale The ratings reflect our view of SulAmerica's "strong" business risk profile (BRP) and "less than adequate" financial risk profile (FRP), based on our "intermediate risk" Insurance Industry Country Risk Assessment (IICRA) on Brazil's health and property and casualty (P&C) insurance segments and the company's "strong" competitive position. A "less than adequate" capital and earnings, combined with an "intermediate risk" risk position and "less than adequate" financial flexibility result in a "less than adequate" FRP. Our assessment of the company's BRP and FRP indicates an anchor of 'bbb+'. Our enterprise risk management (ERM) and management assessment are consistent with WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 23, 2013 2
the SACP of 'bbb+'. We assess the company's liquidity as "strong." Our IICRA for Brazil's health and P&C insurance sectors indicates an "intermediate risk." This reflects the risk typically faced by the health and P&C insurers operating in the country, and is based on our "intermediate" assessment for both country and industry risks for both insurance sectors. Our country risk score is based on Brazil's economic, political and financial system risks, which derive from our sovereign criteria for the first two risks, and BICRA criteria for the third risk (please see "BICRA On Brazil Remains At Group '4', Outlook On Six Banks Revised To Negative On Increasing Industry And Economic Risk," published March 13, 2013, and "Brazil (Federative Republic of)," published July 16, 2012). Our assessment of "intermediate" industry risk for the health insurance sector reflects its adequate and stable operating performance of for-profit private companies, despite the large presence of nonprofit entities. In our view, the Brazilian insurance market has high barriers to entry, which is a positive factor, as a result of high regulatory requirements and high number of participants, and a large presence of nonprofit companies, which make this sector somewhat unattractive for new entrants. Still, the market has plenty of room to grow. On the other hand, our assessment considers as negative factors the existing regulation over individual premium pricing, where increases have to be approved and follow established limits according to age ranges. Furthermore, while we believe supervision is adequate and there is an extensive regulatory coverage, its track record is relatively weak. Regulation for the healthcare sector is relatively new, as it formally began in 2000 after the creation of the National Health Association. Our assessment of "low" industry risk for the P&C insurance sector is supported by its good and stable profitability levels, adequate underwriting standards, and manageable risk exposures. We also consider that overall potential risks arising from catastrophes are moderate, given the composition of the industry's portfolio and the low incidence of natural disasters in the country. In our view, this sector also has high barriers to entry due to large and well-established participants, and not due to the regulations. We consider that the regulatory oversight and track record are adequate, as it has fostered a satisfactory performance of the sector and increased competition over the past few years. Additionally, the regulator adequately monitors the insurance industry on a regular basis. Overall, the rating on SulAmerica reflects its "strong" competitive position in the Brazilian insurance market. SulAmerica enjoys a good market position in health and auto insurance sectors, although it faces strong competition, especially in the auto segment, where distribution channels from its larger peers is a challenge. Health insurance generates 70% of the company's gross premium written, property and casualty 25%, and life insurance 5%. The health and auto insurance segments represent 90% of the company's total premiums, and position it among Brazil's three largest insurers in both segments. Product diversification has allowed the company to report good operating performance. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 23, 2013 3
The company has "less than adequate" capital and earnings. According to our risk-based capital model (for Latin American and U.S. insurance companies), SulAmerica's capital levels are 12% below the 'BBB' rating level. However, the lack of exposure to catastrophe risks in Brazil and the minimum exposure to equity market volatility in the investment portfolio supports the quality of capital. According our forecast, we assume the company's annual operating profit of at least R$453 million for 2013-2015. We also expect SulAmerica's consolidated return on revenues and return on assets to be about 6%-8% for 2013-2015, with a consolidated combined ratio of less than 101%. We estimate that the company's gross premium written to increase by 15%-20% in 2013 and 2015, mostly fueled by growth in the health and auto insurance segments, without any major change in product mix. In our view, SulAmerica's risk position reflects "intermediate risk," benefiting from the diversity of its investment and insurance risks. The company relies on internal assessments of credit quality. The portfolio, excluding pension, predominantly consists of 'A-' rated Brazilian government bonds (about 74%), private-sector fixed-income securities (22% including corporate bonds and certificates of deposits), equity positions (2%), and other investments (2%). The credit risk in the private sector primarily comprises investment-grade bank certificates of deposits, and the government bonds' very good liquidity supports the company's overall liquidity. The average maturity of SulAmerica's investment portfolio is less than five years, mainly because of the tenor of the government bonds. SulAmerica has "adequate" financial flexibility. The financial leverage ratio was 13% as of year-end 2012, which is somewhat lower than those of its national peers. We assume that financial leverage will remain around 12%, supporting our rating on SASA. We expect fixed-charge coverage to be about 6x-7x amid the challenging business environment and recover to 7x in the medium term. We regard SulAmerica's ERM and governance practices management and governance practices as consistent with the ratings. Our assessment of ERM as "adequate" reflects our view that SulAmerica has adequate enterprise risk management practices that result in prudent policies for underwriting, market, and credit risks, among others. SulAmerica's management and governance is "satisfactory," in our opinion. It has a track record of diligent strategic planning, adequate execution, and relatively conservative and sophisticated financial management. The company's value-based financial policies allow it to allocate capital to more profitable subsidiaries and have led to a groupwide performance orientation. We regard SulAmerica's liquidity as "strong." SulAmerica's investment strategy has historically been very conservative, focusing on quality and liquidity, with limited credit and market risks. The company relies on internal WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 23, 2013 4
assessments of credit quality. Outlook The stable outlook reflects our view that SulAmerica's capital adequacy will remain at current level for the next few years. We also expect the company to maintain its operating performance consistent with our base case and at least a "strong" competitive position. We could lower the ratings if: SulAmerica's capital levels deteriorate to below current adequacy, according our risk-based capital model, if the consolidated combined ratio increases to more than 101%, or if SulAmerica's competitive positions in its core health and auto insurance businesses deteriorate due to a substantially lower market share. The company doesn't maintain its liquidity levels. A positive rating action is unlikely during the next two years. It would require a significant improvement in the economic outlook for the country and the company's stronger-than-expected earnings and capital levels. Ratings Score Snapshot Counterparty Credit Rating BBB+/Stable/-- (SulAmerica Companhia Nacional de Seguros S.A.) Counterparty Credit Rating (SulAmerica S.A.). SACP BBB-/Stable/-- bbb+ BRP/FRP Anchor bbb+ Business Risk Profile Strong (3) IICRA Intermediate risk (3) Competitive Position Strong (3) Financial Risk Profile Less than adequate (6) Capital & Earnings Less than adequate (6) Risk Position Intermediate risk (2) Financial Flexibility Adequate (2) Modifiers 0 ERM and Management 0 Enterprise Risk Management Adequate (4) Management & Governance Satisfactory (2) Holistic Analysis 0 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 23, 2013 5
Liquidity Strong (2) Support 0 Group Support 0 Government Support 0 Related Criteria And Research Insurance Rating Methodology, May 7, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 A New Level of Enterprise Risk Management Analysis: Methodology For Assessing Insurers' Economic Capital Models, Jan. 24, 2011 Ratings List Upgraded To From Sul America Companhia Nacional de Seguros Counterparty Credit Rating BBB+/Stable/-- BBB/Stable/-- Sul America S.A. Counterparty Credit Rating BBB-/Stable/-- BB+/Stable/-- Ratings Affirmed Sul America Companhia Nacional de Seguros Counterparty Credit Rating Brazil National Scale braaa/stable/-- Sul America S.A. Counterparty Credit Rating Brazil National Scale Senior Unsecured braa+/stable/-- braa+ Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 23, 2013 6
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