Zurich in $1.67 Billion Deal with Santander for Latin American Distribution

February 22, 2011

Zurich Financial Services Group announced that it has signed a Memorandum of Understanding (MOU) with Banco Santander SA to enter into a 25-year strategic distribution arrangement in Latin America.

Zurich said that as part of the transaction, it will acquire a 51 percent participation in the life insurance, pension and general insurance operations of Santander in Brazil, Mexico, Chile, Argentina and Uruguay.

Zurich said it “will pay $1.67 billion for its 51 percent participation in the insurance operations including the respective distribution agreements. 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.”

“This alliance with Banco Santander is another milestone in the implementation of Zurich’s emerging-market strategy in both Global Life and General Insurance,” commented Zurich CEO Martin Senn. “It significantly expands our presence in Latin America with a well-established insurance business. Santander’s Latin American insurance operations offer a rare combination of high growth potential and strong cash flow generation.

“This alliance is clearly aligned with our strategic objectives. It will increase our share in emerging markets, significantly grow Global Life’s new business value as well as help to expand our General Insurance business in those areas where we can do so profitably,” he continued. “It will contribute to achieving a business operating profit after tax return on equity of 16 percent over the medium term, and growing cash flow to support our policy of paying an attractive and sustainable dividend.”

Zurich noted that, if it had combined with Santander in Latin America last year it would have “produced $3.9 billion in gross written premiums plus $2.9 billion in pension contributions. This transaction will further diversify the Group’s business mix, increasing on a pro forma basis Latin America’s contribution to the Group’s top line to about 8 percent from currently 4 percent, as well as increasing emerging markets’ contribution to Global Life’s new business value to about 35 percent.”

The alliance gives Zurich “access to over 5,600 bank branches and an additional 36 million customers in the region,” said the bulletin.

Part of the plan calls for the formation of Zurich Santander Insurance America, S.L., in Madrid “to serve as the new holding company for the jointly owned companies. Zurich will have management control over the joint venture, which Zurich intends to fully consolidate. Santander will continue to be a 49 percent shareholder. This demonstrates its commitment to and strong interest in jointly developing and growing the insurance business.

“As part of the transaction, each local insurance company will enter into exclusive bank distribution agreements with Santander’s respective local banking unit, subject to local regulatory requirements. Products to be sold through Santander’s extensive distribution network include life protection, savings, pension and general insurance products. The distribution agreements will have an initial term of 25 years.”

Zurich said it “intends to finance a majority of the up-front payment from existing cash resources, with the balance financed through the issuance of hybrid debt. The acquisition is expected to be immediately accretive to Zurich’s earnings per share. On a pro forma basis, the transaction will have a minimal impact on Zurich’s solvency calculations and will be cash flow positive.” The two companies plan to complete the transaction by the end of the first half.

Source: Zurich Financial Services

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