Inexpensive SulAmerica Buoyed by Rising Income: Corporate Brazil

Inexpensive SulAmerica Buoyed by Rising Income
Buildings stand in the skyline of Rio de Janeiro, Brazil. Photographer: Dado Galdieri/Bloomberg

Sul America SA, Brazil’s third-largest health insurer by sales, is also the cheapest, signaling the shares have room to gain as rising incomes and higher employment boost demand for private medical plans.

The insurer, whose controlling shareholders include ING Groep NV, traded at 12 times its estimated annual profit yesterday, data compiled by Bloomberg show. That compares with a ratio of 38 for hospital operator Amil Participacoes SA, 32 for dental-plan provider Odontoprev SA, and 15 for insurer Tempo Participacoes SA.

The $4.9 billion acquisition of Amil by UnitedHealth Group Inc., the No. 1 U.S. health insurer, “shows strong foreign appetite for healthcare providers in Brazil,” Eduardo Nishio, an analyst at Brasil Plural, wrote in a report yesterday. SulAmerica, which is focusing more on health plans and less on auto and property insurance to fuel revenue gains, will benefit from a scarcity of publicly traded providers, he said in an interview.

“The price paid by UnitedHealth for Amil is buoying the entire sector,” Rodolfo Amstalden, an analyst at equity consulting firm Empiricus Research, said in a telephone interview from Sao Paulo. “The outlook for growth in health and dental is extremely favorable. SulAmerica, with 1.92 billion reais ($945 million) of health-care premiums, had significant growth in the third quarter. Looking forward, that’s going to stay strong.”

Shares Rise

Rio de Janeiro-based SulAmerica rose 3.7 percent to 16.59 reais as of 4:37 p.m. in Sao Paulo trading, bringing its year-to-date gain to 12 percent, after reporting third-quarter profit that topped analysts estimates. The benchmark Bovespa index rose 2.3 percent since the start of 2012.

Net income climbed 9 percent to 106.7 million reais, according to an Oct. 30 regulatory filing. That compares with an average estimate of 95.6 million reais from six analysts surveyed by Bloomberg. The company got 69 percent of its premiums from health insurance in the period, up from 66 percent a year earlier.

UnitedHealth’s acquisition of Amil is fueling speculation more health-care companies in Brazil will become takeover targets, Nishio said. Minnetonka, Minnesota-based UnitedHealth said in an Oct. 8 statement it agreed to buy 90 percent of Amil for 30.75 reais a share, 22 percent more than the previous session’s closing price.

“After Amil, everything is possible -- United was very aggressive,” he said by telephone from Sao Paulo. “There’s going to be a lot of consolidation.”

ING Sale

ING, which shares control of SulAmerica with the Larragoiti family, is required to sell its insurance and investment-management businesses before the end of 2013 after it received 10 billion euros ($13 billion) of government aid during the financial crisis. This month, the Amsterdam-based lender agreed to sell its insurance business in Malaysia to AIA Group Ltd. for about 1.3 billion euros.

Victorina de Boer, a spokeswoman for ING, declined to comment in an e-mail. SulAmerica didn’t return e-mails and telephone calls for comment.

U.S. insurers have been on a buying spree in the past 12 months, snapping up smaller rivals as they prepare for reduced profit margins under President Barack Obama’s health-care overhaul.

Public Health

The market for health insurance in Brazil, the world’s largest emerging economy after China, is expanding as incomes rise and unemployment hovers near a record low. That’s allowing more people to choose private doctors and leave the public health system, which serves about 75 percent of the population. Brazilian private insurance membership has surged 14 percent in three years, even as U.S. enrollments dwindled, according to an Aug. 31 research note from Guilherme Assis, a Raymond James Financial Inc. analyst in Sao Paulo.

SulAmerica’s stock gains may be limited as profit margins are being squeezed by rising claims, Gustavo Schroden, an analyst at BES Securities who rates the stock the equivalent of hold, said by phone from Sao Paulo.

“The main problem for SulAmerica is that profit margins in the health insurance sector in general are under pressure right now,” he said. “Claims are increasing, so even with premiums rising as well, they’re just covering higher costs, instead of boosting profits. Since health insurance is SulAmerica’s main line of business, that’s a problem.”

‘Positive Correlation’

The Brazilian health insurance industry, which is “still underpenetrated,” will continue to benefit as employment rises and the population ages, Francisco Kops and Rafael Ferraz, analysts at Banco J. Safra in Sao Paulo, wrote in a note to clients on Oct. 29.

The jobless rate in Brazil fell to a record low of 4.7 percent in December and was 5.4 percent in September, versus 7.5 percent in May 2010, according to the national statistics agency. Unemployment has remained close to historic lows as President Dilma Rousseff’s administration reduced interest rates, cut payroll taxes and increased subsidized credit to businesses to spur economic growth.

“Considering the positive correlation between age and health-care expenditures, demographic trend is in favor of a solid growth for the segment,” the Safra analysts wrote. “We expect unemployment to keep at low levels for the near future, bolstering up health insurance growth.”

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