In a development that significantly alters the face of Latin Americas insurance market, Swiss insurer Zurich Financial Services (ZFS) and Spanish banking group Banco Santander have agreed a 25-year strategic distribution arrangement on the continent.
As a key element of the alliance, for $1.67bn, ZFS is to acquire a 51% stake in Santanders life insurance, pension and general insurance operations in Brazil, Mexico, Chile, Argentina and Uruguay.
In addition, over the 25-year term of the distribution agreements there is an earn-out mechanism for achieving specific profit performance targets and a mechanism that would protect against possible underachievement.
Following completion of the deal a new company, Zurich Santander Insurance America, will be established in Madrid, Spain to serve as the holding company for the jointly owned companies.
ZFS will have management control over the joint venture which intends to fully consolidate. Santander will be a 49% shareholder.
The alliance with Santander will provide ZSF with access to over 5,600 bank branches and an additional 36m customers in the region.
ZSF noted that Latin America is one of the most attractive insurance markets globally as it combines a young and growing population of 590m people with a low penetration of financial services.
In addition, ZSF pointed out that bancassurance is an important and developing distribution channel in Latin America. For example, in Brazil, the largest insurance market in Latin America, bank distribution accounted for 40% of total insurance volumes in 2009.
Commenting on the deal, ZFS CEO Martin Senn termed it "another milestone" in the implementation of ZFS strategy in emerging-market life and general insurance markets.
"Santanders Latin American insurance operations offer a rare combination of high growth potential and strong cash flow generation," Sen added.
Senn continued that the alliance will significantly expands ZFS presence in Latin America and will contribute to its target of achieving a business operating profit after tax return on equity of 16% over the medium term.
On a pro forma basis, a combination of Zurichs and Santanders operations in Latin America in 2010 would have produced gross written premium income $3.9bn and pension contributions of $2.9bn. In 2010, gross written premium income of Santanders Latin American operations increased by 32% compared with 2009 to $1.9bn.
Of this total, some 68% came from life protection products, 2% from savings products and 30% from general insurance products.
In 2010, all pension business was generated by Santanders Previdência unit in Brazil which reported assets under management of $10.5bn.
Santanders Latin American insurance operations delivered a net profit in 2010 of $328m, a return on equity of 17% and ended the year with shareholders equity of $1.9bn.
According to ZFS, the combination of its and Santanders operations in 2010 would have increased Latin Americas contribution to ZFS revenue from 4% to 8% .
The new arrangement would also see the contribution of emerging markets to its global life units new business value rise to about 35%.
On an annual premium equivalent basis, ZFS reported new business premium income from its Global Life unit of $3.7bn in 2010, an increase of 4% compared with 2009.
ZFS intends to finance a majority of the deal with Santander from existing cash resources, with the balance financed through issuance of hybrid debt.
ZFS anticipates the acquisition will be immediately accretive to its earnings per share.