ZURICH (Bloomberg)—Zurich Financial Services Ltd., Switzerland's largest insurer, agreed to pay as much as $2.1 billion for 51% of Banco Santander S.A.'s insurance business in Brazil, Mexico, Chile, Argentina and Uruguay.

The Zurich-based company will make an initial payment of $1.67 billion, with Santander receiving as much as $420 million over the next 25 years depending on the performance of the unit, the Swiss insurer said Tuesday in an e-mailed statement. Zurich will manage the insurance joint venture.

The acquisition will make the Swiss insurer the fourth-largest in Latin America, after Banco Bradesco S.A., Mapfre S.A. and Itau Unibanco Holding S.A., Zurich said. It will also gain access to more than 5,600 Santander branches and 36 million customers in the region through a 25-year distribution agreement.

“It's an interesting and promising deal, because they achieve scale in the biggest Latin American markets—Mexico, Brazil and Argentina,” said Stefan Schuermann, a Zurich-based analyst with Vontobel Holding A.G. “It's in line with Zurich's focus to grow Asian and Latin American operations.”

The transaction is between 1.9 to 2.1 times book value, according to a presentation on Zurich's website. Last October's bid by Apollo Global Management and CVC Capital Partners Ltd. for Brit Insurance Holdings N.V. was priced at about 1 times book value.

Latin American share

Zurich fell 0.7% to 268.4 Swiss francs ($283.78) as of 1:37 p.m. local time, paring this year's gain to 11%. The 27-member Bloomberg Europe 500 Insurance Index was also down 0.7%. Santander dropped 1% to €8.86 ($12.13) in Madrid trading.

The joint venture will double the contribution of Latin America to about 8% of the company's total revenue and furthers Zurich's strategy of expanding into emerging markets where people are taking out auto or life insurance for the first time. Zurich and Santander would have produced $3.9 billion in gross written premiums plus $2.9 billion in pension contributions in 2010, the Swiss insurer said.

“Santander's Latin American insurance operations offer a rare combination of high growth potential and strong cash flow generation,” Zurich CEO Martin Senn said in Tuesday's statement. The insurer expects to complete the agreement in the first half of this year.

The Swiss company aims to increase the contribution of new business from Asia, the Middle East and Latin America to 30% of the life insurance total by 2013 from the current 15% to 20%, Zurich told investors on Dec. 2.

Boosting earnings

Zurich plans to finance a majority of the payment from existing cash, with the balance financed through the issuance of hybrid debt, Chief Financial Officer Dieter Wemmer told journalists during a conference call.

The acquisition is expected to add to Zurich’s earnings per share immediately and will aid achieving its return-on-equity target of 16% over the medium term, the company said. The new business value for 2010 was estimated at $160 million, Mr. Wemmer said.

The insurer said on Feb. 10 that full-year net income fell 13% to $3.43 billion after agreeing to pay $455 million to settle a U.S. class action lawsuit related to its Farmers Group unit. Operating profit declined by the same margin to $4.9 billion.

The firms will establish Zurich Santander Insurance America S.L. in Madrid to serve as the new holding company for the joint venture, in which Zurich will have management control.

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