Fitch Affirms Sul America S.A's International and National Ratings

Fitch Ratings has affirmed the following International and National ratings assigned to Sul America S.A. (Sasa), the holding company of Sul America Seguros (SAS):

--Long-term Foreign Currency Issuer Default Rating (IDR) at 'BB'; Outlook Stable;

--Long-term Local Currency IDR at 'BB'; Outlook Stable;

--Short-term Foreign Currency IDR at 'B';

--Short-term Local Currency IDR at 'B';

--Long-term National Rating at 'AA-(bra)'; Outlook Stable;

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

--USD200 million in senior notes at 'BB-'.

The IDRs and National Ratings assigned to Sasa reflect a strong franchise within the Brazilian insurance sector, conservative underwriting policies and adequate operating performance. However, Sasa's ratings also take into account the concentration of its premium generation in health and auto lines; the possibility that it could lose significant distribution channels, especially in the auto segment; and operating leverage that is still higher than the average for its major competitors, despite a significant reduction since 2007. Sasa's issuance of USD200 million of Eurobonds in February 2007, and its IPO in fourth quarter-2007 (4Q'07), not only enabled a capital injection of BRL775 million, but also allowed improvement of its debt maturity profile, reduction of overall indebtedness and financial costs, and a more consistent operating performance throughout the economic cycle. A larger distribution network and product diversification, in addition to an enhancement of its operating performance could trigger an upgrade of Sasa's ratings. However, any deterioration in SAS's operating performance and/or a substantial increase of leverage could negatively affect its ratings.

The proceeds of the aforementioned IPO not only improved Sasa's debt profile and overall leverage, but also contributed to satisfy the capital requirements in place since 2008. SAS leverage has steadily decreased since 2007, being that the total debt to equity ratio improved to 11.2% in June 2009, compared to a high 76.2% in 2005. Liquid assets more than covered all the holding company's financial debt at the same date. Fitch believes that this situation should continue, at least in the short term, due to the company's good liquidity position. Operating leverage, as measured by net earned premiums/equity, has also declined to 2.7 times (x) in June 2009 from 6.0x in 2005, more aligned with the peer average of 1.8x.

In a way to boost in profitability, on Oct. 6, 2009 Banco do Brasil S.A. (long-term foreign and local currency IDRs of 'BBB-'; long-term national rating of 'AA+(bra)' with a Stable Outlook by Fitch) announced its intention to acquire Sasa's participation in Brasilveiculos Companhia de Seguros (Brasilveiculos), although no price proposal or pre-contract has yet been published. Upon conclusion of the process, which should progress gradually, Sasa's participation in the overall auto business will decrease to around 10% of the total market (currently 16.5%). However, its operational efficiency should not be materially affected, as Brasilveiculos's profile is similar to the company's other businesses. In addition, its leverage ratios should be reduced, while the cash resulting from the sale should allow room for development of other partnerships and higher organic growth over the long term.

The Brazilian insurance market has become more competitive since 2008, due to mergers and partnership agreements between the largest insurers, in particular those affiliated with large financial conglomerates, which have concentrated most of the market. Sasa is part of the group of large, independent insurance companies in Latin America that lack their own banking distribution channels, and will face a major challenge to establish more partnerships for distribution as it faces increased market competition.

Sasa is part of a traditional insurance group in Brazil, which operates in practically all industry segments. According to the Superintendence of Private Insurance (Susep) and the National Agency of Supplemental Health (ANS), it was the second largest insurance company in the country in health and auto lines, with market shares of 35.8% and 16.5%, respectively, in June 2009, and the largest independent insurance group. It relies on around 26,000 active brokers and has been gradually growing its cross sales and partnerships in the distribution of products and services.

Sasa is 32.9% controlled by Sulasapar Participacoes (Sulasapar) and 21.2% by ING Insurance International BV. An amount equal to 8.5% of Sasa's capital is held by affiliated shareholders, which include management, members of the board and other individuals, while the remaining 37.3% is the market float. ING has stated that it is reviewing its global business strategy and intends to sell its insurance operations in the world. Fitch is closely monitoring the development of Sasa's shareholding composition, and its possible impacts on the ratings, although it does not incorporate the benefit of ING's support into the company's ratings.

Fitch's national ratings provide a relative measure of creditworthiness for rated entities in countries where the sovereign's foreign and local currency ratings are below 'AAA'. National ratings are not internationally comparable since the best relative risk within a country is rated 'AAA' and other credits are rated only relative to this risk. They are signified by the addition of an identifier, for the country concerned, such as 'AAA (bra)' for national ratings in Brazil.

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

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