Zurich To Buy Santander Latam Insurance Ops: 3rd Update
ZURICH –Zurich Financial Services AG Tuesday underlined that it is expecting future growth to come from emerging markets, as it entered a deal worth up to $2.09 billion to buy a majority stake in Banco Santander SA’s insurance operations in Latin America.
The deal gives Zurich Financial access to the Spanish bank’s network of 5,600 branches, through which its policies will be sold as part of a 25-year distribution agreement. It significantly expands the Swiss insurer’s presence in Brazil, Mexico, Chile, Argentina and Uruguay, and renders it the fourth-largest insurer in Latin America.
Santander’s insurance operations will become part of a newly established holding company, Zurich Santander Insurance America, which will be based in Madrid. Zurich will own 51% of the new entity, while Santander will own the remaining 49%. The combined operation would have reported $3.9 billion in gross written premiums and $2.9 billion in pension contributions last year.
The euro zone’s largest bank by market capitalization expects to book a capital gain of $1.21 billion on the deal, boosting its capital base as it grapples with a housing market downturn in Spain.
Santander also needs some additional cushion as it digests recent acquisitions–it spent EUR5.5 billion last year to buy assets in Germany, Poland and the U.K. Santander is planning an initial public offering of it’s U.K. unit later this year. It has long said its insurance operations were non-core assets, and has been seeking to sell Latin American insurance operations for some years now. It already sold some insurance businesses in Colombia, Peru and Puerto Rico, although it still retains its Spanish and Portuguese insurance units.
Zurich is initially paying $1.67 billion for 80% of the deal value. Payments for the remaining 20% will be spread out over 25 years, and will be made every five years if certain, unspecified, profit goals are reached.
Zurich had also carried out a string of smaller deals last year aimed at strengthening its presence in fast-growing markets. In 2010, Zurich entered a distribution agreement with Fortis Bank AS in Turkey, bought local insurers in Lebanon and Indonesia and participated in the share issue of a Chinese life insurer.
“Growth prospects are strong in the region,” said Michael Klien, an insurance analyst with Nomura in London. Insurance penetration is still low in Latin America, amounting to around 3% of gross domestic product, compared to around 10% in Western Europe, he said.
Zurich is committed to increase its presence in rapidly growing emerging markets, but also expects mature markets, in particular the U.S., to continue growing, Chief Executive Martin Senn told journalists.
Zurich said it will pay the majority with existing cash and raise the rest of the money with a hybrid debt issue. The acquisition should be immediately accretive to Zurich’s earnings per share and have a minimal impact on its solvency calculations.
Zurich and Santander aim to close the transaction by the first quarter of 2012.
“This deal is highly attractive to Zurich shareholders as it improves the growth profile of the company, the price paid is attractive and the dividend paying ability is not jeopardized,” added Nomura’s Klien, who has a buy rating on the stock.
Santander expects lower insurance earnings from the sale to be offset by higher fees from increased insurance sales.
“The bank clearly feels that an insurance specialist will be better placed to develop this business,” said CreditSights analyst John Raymond.
Shares of Zurich and Santander fell in the midst of a broad sell-off of European stocks on mounting geopolitical tensions.
At 1240 GMT, Zurich shares were down 0.6% at CHF268.70 in Zurich, while in Madrid, Santander’s shares were down 0.9% to EUR8.88.
