Fitch Ratings has revised the Rating Watch on Sul America S.A. (SASA) Long-Term Issuer Default Ratings (IDR) and National Long-Term Rating to Positive from Evolving.

The Positive Watch reflects Fitch's view of a rating advantage based on the business combination with Rede D'Or. The ratings were previously on Rating Watch Evolving due to downward pressures related to the sovereign.

Key Rating Drivers

The Positive Watch reflects Fitch's expectation that once the incorporation is complete, SASA's ratings should reflect the potential ownership of Rede D'Or and the synergies between the companies, which can benefit SASA's ratings under a group credit approach. In the event of the non-approval of the business transaction agreement between SASA and Rede D'or, or the cancellation of either parties' plans to proceed with the transaction, Fitch will likely remove the ratings from Positive Watch and affirm them.

The rating actions follow the announcement of the revision of Brazil's Sovereign Rating outlook from Negative to Stable, which also reflects the direct influence and high importance on the profile of the insurance sector and operating environment and in the insurer's ratings.

SASA's ratings were on Rating Watch Evolving prior to the sovereign rating outlook review. The Evolving Watch also reflected the direct influence and high importance of Brazil's sovereign rating outlook on the insurance industry profile and operating environment. The Evolving Watch also reflected the company's significant exposure to sovereign and other non-investment grade bonds, which in turn, negatively affect Fitch's assessment of SASA's investment and asset risk and capitalization and leverage credit factors.

Fitch expects SASA's insurance and asset management operations will continue to operate independently as a subsidiary of the group, given the different dynamics of the business. The transaction will join the largest hospital network to one of the major independent insurers in the country with a focus on health. The combination between the two companies is based on strategic pillars focused on the expansion and alignment of their health ecosystems, including the health, dental, life, pension, and investment businesses.

RATING SENSITIVITIES

Fitch will resolve the Positive Watch when the incorporation receives the necessary approvals and actually takes place. At that time, the resolution of the Positive Watch on SASA will consider Fitch's view on consolidated credit strength and SASA's strategic importance to Rede D'Or. The ratings analysis will weigh the implications of the transaction for SASA in several key areas, including underwriting and operating strategy, business growth, capital management and risky asset allocation.

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

International Scale

The ratings could be upgraded upon closing should Fitch view Rede D'Or's consolidated credit quality to be superior to SASA's current ratings and decide to apply uplift to SASA's ratings based on its strategic importance to Rede D'Or;

An improvement in Brazil's industry profile and operating environment, driven by an improvement in country risk and a stronger financial market development, which would lead to an improvement in Fitch's assessment of SASA's business profile, investment and asset risk and capitalization and leverage credit factors;

National Scale

The approval of the business combination transaction agreement between SASA and Rede D'Or by relevant authorities;

A positive change in Fitch's perception of SASA's creditworthiness with respect to other Brazilian entities rated on the national scale;

An improvement in Brazil's industry profile and operating environment, driven by an improvement in country risk and a stronger financial market development;

A sustained improvement on SASA's technical profitability and leverage, measured by a combined ratio and a net leverage ratio below its previous three year-end average ratios;

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

International Scale

The non-approval of the business transaction agreement between SASA and Rede D'or, or the cancellation of either parties' plans to proceed with the transaction, in which case Fitch will likely remove the ratings from Positive Watch and affirm them.

If Fitch decides that SASA's strategic importance to Rede D'Or is not sufficient to provide any ratings uplift;

A downgrade in Brazil's sovereign rating (BB-/Stable), which would lead to a worsening of Fitch's assessment of the insurance industry profile and operating environment, which would also deteriorate SASA's business profile, investment and asset risk, and capitalization and leverage credit factors;

A sustained and material deterioration in profitability and leverage, measured by an ROAE below 8% and a FLR above 31%.

National Scale

The non-approval of the business transaction agreement between SASA and Rede D'or, or the cancellation of either parties' plans to proceed with the transaction, in which case Fitch will likely remove the ratings from Positive Watch and affirm them.

An adverse change in Fitch's perception of SASA's business profile and creditworthiness with respect to other Brazilian entities rated on the national scale;

A sustained and material deterioration in technical profitability, measured by a combined ratio above its previous three year-end average ratios.

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

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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