itch Ratings has assigned, for the first time, Local Currency Long Term Issuer Default Ratings (IDRs) to Bradseg ParticipacOes S.A. (Bradseg) at 'BB' with a Negative Rating Outlook, as well as the National Long-Term Rating of 'AAA(bra)', with a Stable Outlook.

The rating reflects the company's strategic importance to its parent Banco Bradesco, of which it is a core subsidiary.

Key Rating Drivers

Bradseg's ratings are aligned with those of its parent, Banco Bradesco S.A. (Bradesco, Local Currency Long-Term IDR BB/Negative). The Outlook for Bradseg's IDR rating mirrors that of its parent's Long-Term Local Currency IDR, which, in turn remains one notch above Brazil's sovereign rating (Long-Term Local Currency IDR BB-/Negative).

Fitch views Bradseg as a 'core subsidiary' of Bradesco, and therefore its ratings are equalized with those of its parent. This is based on the strategic importance of its Bradseg insurance operations which complement the main retail banking activities, common branding and high contribution of Bradseg to group profits. The insurance holding company has consistently contributed about 26% of the bank's consolidated earnings historically.

The ratings also reflect the company's leading position in the Brazilian insurance market, consistent performance through the cycles, diversified revenue base, strong distribution capacity underpinned by Bradesco's wide agency network and comfortable liquidity and capitalization ratios.

At YE 2021, life and pension segments remained the largest contributors to gross written premiums (47%) in 2021, followed by health (38%), property/casualty (P/C, 8%), and savings bonds (7%). In 2021, premiums written grew by around 11%, Bradseg grew in all business lines. Pension and life premiums grew 12.5%, healthcare 9.4%, P&C 14.8% and Saving Bonds around 4.5%.

The company's leverage indicators are strong and comfortable. Leverage indicators increased in 2021 due to higher premium volume and capital reduction, but remained at favorable levels. Despite this, operational and asset leverage ratio remains strong compared with Fitch's international life insurer company benchmark ranges. At the end of 2021, the indicators were 2.2x and 10.9x, respectively.

The profitability presented by Bradseg in 2021 was better than the previous year, with a ROE of 15%. Despite this, profitability is still below previous years, the ROAE between 2018 and 2021 was 17%. The net income performance was driven by the growth in premiums and the increase in the Financial Result, given the behavior of the economic-financial indices, which absorbed the increase in the Loss Ratio, which was mainly affected by the adverse impacts of the pandemic. However, the company has a solid and consistent record of technical results through the cycles. This reflects its sound underwriting skills, control systems and pricing practices.

In 2021 Bradseg's investment portfolio remained concentrated on Brazilian government securities, which made up 83% of the total exposure. The company's liquidity remains adequate, with all the regulatory minimum liquidity ratios comfortably met.

In applying Fitch's insurance criteria regarding the impact of ownership on Bradseg's ratings, Fitch considered how the ratings would theoretically be impacted under Fitch's bank support criteria. Fitch's insurance criteria are principles based regarding ownership, and the referenced bank criteria was used to help inform Fitch's judgment in applying those principles.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Bradseg's ratings are linked to that of Banco Bradesco. Therefore, any negative change in the bank's ratings would affect the issuer's ratings, as would a change in its willingness to provide support, which Fitch considers highly unlikely.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Bradseg's IDR rating has limited upside potential, as they are equalized to those of Banco Bradesco. Over the medium term, the ratings could benefit from stabilization and eventual improvement of Fitch's assessment of the operating environment for Brazilian banks.

For the national scale rating, this sensitivity is not applicable, given that the National Long-Term rating of Bradseg was affirmed at 'AAA(bra)'.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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