UPDATE 2-Banco do Brasil forms insurance unit, may list it
* BB Seguridade unit could be listed next year
* Plan comes as banks build insurance business
* Insurance to grow as household income climbs
* Executive says IPO could bolster share price
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, Nov 26 (Reuters) - Banco do Brasil SA, the nation's largest lender by assets, will sell shares in a newly formed insurance and pension unit as early as next year, seeking to tap growth in an industry where rivals are building up presence.
State-controlled Banco do Brasil grouped all its assets in the pension, insurance and retirement industries into a unit named BB Seguridade. The unit will manage Banco do Brasil's insurance brokerage and insurance services units as well as assets it owns jointly with Spain's Mapfre SA and other partners.
The decision underscores the growing relevance of insurance within the business model of Brazilian banks as record low interest rates, stable household income and a strong job market boost demand for retirement packages and health and auto insurance. Currently, only three out of Brazil's 25 largest insurance companies are listed on the São Paulo stock exchange.
"With the creation of BB Seguridade, Banco do Brasil wants to consolidate all the bank's assets in the segment and run any future expansion inside or outside Brazil, gain scale in that market and attain operational efficiency," Chief Financial Officer Ivan Monteiro said in a statement. "BB Seguridade has to stick to the highest corporate governance standards."
Executives said the move should also help prop up Banco do Brasil's shares, which have shed 4.3 percent this year amid growing concern that government pressure on lenders to boost access to credit and cut borrowing costs will erode profits.
"Our reading is that the company is seen as too much focused in credit-related activities," said Alexandre Abreu, Banco do Brasil's senior vice president for retail banking, in a phone interview. "We believe that a spin-off of the insurance unit will boost value - we think the company is undervalued."
Shares of the Brasilia-based lender jumped as much as 3.5 percent, bucking a 1.2 percent decline in Brazil's benchmark Bovespa stock index on Monday.
The listing of BB Seguridade will also help Banco do Brasil reduce its fundraising needs. Under new regulatory rules for banks that will be implemented in coming years, financial conglomerates must deduct the minimum regulatory capital of an insurance subsidiary to calculate their so called core Tier 1 ratio.
The listing means such deduction will be lower and, in the case that BB Seguridade sell shares at a price above book value, Banco do Brasil would be able to lock up capital gains that could also prop up its capital.
Abreu added that the IPO should help Banco do Brasil gain more operational agility and efficiency, and added that, should the transaction succeeds, other units could be spun off.
"An important development for the bank's organizational structure, with potential impact to the bank's capital structure," Carlos Macedo, a senior analyst with Goldman Sachs Group Inc, said in a note to clients. "Overall, we view this as a positive."
Premiums underwritten, at $60 billion last year, represent only 3 percent of Brazil's gross domestic product -- well below the 14 percent and 12 percent share in Britain and the United States, respectively. Bradesco Seguros, a unit of Banco Bradesco SA, is the country's biggest insurer.
Brazilians spend less than a tenth of what Britons or Americans do on insurance products and, as the middle class grows, insurers and banks are looking to lure new clients by splitting up traditional, costlier policies into separate products.
The move also comes as the insurance industry is the target of increased mergers and acquisitions activity, and growing appeal for healthcare providers is repricing a sector that was chiefly ignored by investors for years.
In October, UnitedHealth Group Inc agreed to pay $4.9 billion to buy control of Amil Participacoes SA, Brazil's largest health insurer and hospital operator. Private-equity firm KKR & Co LP is in preliminary talks to buy Brazilian health insurer Golden Cross Planos de Saúde SA, Valor Econômico newspaper reported on Monday.
Usually an unit IPO allows a controlling shareholder like Banco do Brasil to raise cash from investors while unlocking value from assets that could be run separately from the core business.
Under the plan, BB Seguridade will manage Banco do Brasil's 74.9 percent stake in a personal insurance joint venture with Mapfre, as well as a 74.9 percent stake in a worker retirement venture with Principal Financial Group. BB Seguridade will also add a 66.7 percent stake in a retirement company jointly owned with Icatu Seguros SA and Cia de Seguros Aliança da Bahia SA.
In addition to the consolidation of the insurance business into BB Seguridade, Banco do Brasil also announced that a proposed joint-venture with dental insurer Odontoprev SA and the bank's stake in reinsurer IRB Brasil Re SA would also be consolidated into the unit.
The transaction creating BB Seguridade still depends upon regulatory approval. Abreu said that there is no decision whether the IPO of BB Seguridade would have a primary offer - when the company being listed raises funds that go directly to its coffers.
The secondary portion of an IPO usually helps controlling shareholders raise money from the sale of a part of or all their stake in the company being listed.