Aug. 24 (Bloomberg) -- Porto Seguro SA rallied the most in 10 months after Itau Unibanco Holding SA, Brazil’s largest non- government bank, said it reached an agreement with the insurer to merge the companies’ home and car insurance operations.

Porto Seguro gained 9.4 percent to 17.50 reais in Sao Paulo trading for the biggest advance since Oct. 13. Itau Unibanco increased 0.8 percent to 34.51 reais.

Itau Unibanco will transfer its residential and car insurance portfolio to a new company to be called Itau Unibanco Seguros de Automovel e Residencial SA, the lender and the insurance company said in separate statements to Brazil’s securities regulator today. The new company will have equity of 950 million reais ($520 million).

“It seems a positive agreement for both sides,” said Joao Pedro Brugger, an analyst at Leme Investimentos in Florianopolis, Brazil. “For Itau it’s good as the lender will gain market share in a segment with interesting growth potential. And for Porto Seguro, a partnership with a big bank gives it the possibility to penetrate areas it hasn’t reached.”

The new company will hold 3.4 million vehicles and 1.2 million residences in its portfolio, Itau Unibanco said.

“What we are looking for is scale,” Pedro Moreira Salles, chairman of Itau Unibanco, told reporters in Sao Paulo today. “With this deal we are giving an important step in a business where we are already present.”

Share Issuance

Porto Seguro, based in Sao Paulo, will issue shares equal to 30 percent of the company’s new capital to Itau Unibanco. Porto Seguro’s controlling shareholders will have a 57 percent stake in the holding company to be created, Porto Seguro Itau Unibanco Participacoes SA, while Itau Unibanco will hold the remaining 43 percent, the companies said.

Itau Unibanco’s stake in Porto Seguro will be worth about 1.7 billion reais based on the current market value, Itau Chief Executive Officer Roberto Setubal and Chief Financial Officer Silvio de Carvalho told reporters in Sao Paulo.

Sao Paulo-based Itau Unibanco will name two out of five members of the holding company’s board and another two out of seven members of Porto Seguro’s board.

Porto Seguro will remain listed on the Sao Paulo stock exchange. The company also offers other products such as health, life and transportation insurances, which aren’t part of the Itau agreement.

Itau Unibanco may expand its partnership with Porto Seguro into other kind of insurance, Setubal said.

Porto Seguro announced on Aug. 21 that it ended talks for a possible association with Banco Bradesco SA’s insurance unit.

“Bradesco wanted to share more, and that’s not exactly what we wanted,” Jayme Garfinkel, Porto Seguro’s president, told reporters. The deal with Itau Unibanco was reached in less than two weeks, Garfinkel said.

To contact the reporter on this story: Telma Marotto in Sao Paulo at Tmarotto1@bloomberg.net

Last Updated: August 24, 2009 17:06 EDT