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Itau to Sell Insurance Unit to Swiss ACE for $684 Million

Zacks Equity Research

Itau Unibanco Holding S.A. (ITUB), the largest non-government bank in Brazil, has inked a deal to sell its corporate insurance division Itau Seguros Solucoes Corporativas SA (“ISSC”). Global insurance company ACE Limited (ACE) will buy this high-risk unit for around 1.52 billion reais ($684 million).

This divestiture echoes Itau’s recent policy of focusing on the profitable core banking business. It will also help, Zurich, Switzerland-based ACE to emerge as the biggest property and casualty insurer in Brazil.

The deal, subject to some customary approvals, is expected to be completed in first-quarter 2015.

By selling ISSC, which offers coverage mainly to the oil & gas and infrastructure sectors, Itau expects a pre-tax earnings boost of around 1.1 billion reais ($497 million). Management of insurance business in these risky sectors requires a huge capital base and may put pressure on the balance sheet of Itau. Apart from promoting the core banking business, Itau’s decision to vend the insurance division might have dawned from the need to de-stress the balance sheet as well as comfortably meet Basel III capital requirements. Itau has been shifting its focus to the lower-risk markets for quite some time as evident from its expansion in mortgages and payroll loans.

Acquisition of ISSC may prove to be a masterstroke for ACE. In 2013, ISSC boasted gross premium written of 2 billion reais along with a market share of 18%. Moreover, ACE has managed to clinch a business, which was previously eyed by many insurance giants such as HDI of Germany and AXA of France.   
In fact, Brazil has recently become an important market for insurance business. High-risk corporate insurance business in Brazil is expected to grow at a rapid pace over the coming years and only the specialized are better positioned to adequately exploit this opportunity. Therefore, ACE will be able to complement its Brazilian business in a meaningful way through this acquisition.

Itau currently carries a Zacks Rank #3 (Hold).

Some better-ranked foreign banks include Banco Bradesco S.A. (BBD) and BBVA Banco Franc (BFR). Both these stocks sport a Zacks Rank #1 (Strong Buy).

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