Oct. 6 (Bloomberg) -- Banco do Brasil SA, Latin America’s largest lender, may form a “strategic” alliance with Spain’s Mapfre SA to create the largest life-insurance company in Brazil.

Banco do Brasil’s partnership with Spain’s biggest insurer would give it a 16 percent market share, making it the second- biggest insurer in Brazil, the federally controlled lender said. As part of its expansion, the bank also said today it is separating its insurance business into two units and may buy Sul America SA’s stake in Brasilveiculos.

The Brasilia-based bank aims to boost earnings from insurance operations to 25 percent in five years from the current 12 percent to 15 percent, President Aldemir Bendine said in Sao Paulo today.

Banco do Brasil is expanding further into insurance to offset pressure on margins from lower interest rates and rising competition from rival banks. Fitch Ratings said insurance has “significant potential” in Brazil. The industry, worth 96.2 billion reais ($55 billion) in premiums, is the biggest in Latin America and represents about 3.3 percent of gross domestic product, Fitch said in a July 6 report.

“The share of insurance in our results increased from 10 percent to about 15 percent but other competitors have up to 35 percent coming from insurance so it’s more than necessary to revisit our model,” Paulo Rogerio Cafarelli, Banco do Brasil’s vice president for new businesses, told reporters in Sao Paulo.

Overseas Expansion

Hobbled by the worst recession in 60 years in its home market, Mapfre is seeking to diversify by expanding in overseas markets including the U.S., Brazil and Turkey. The international division may account for 60 percent of Mapfre’s business in five years, Esteban Tejera, the insurer’s general manager, said in an interview last month.

Mapfre shares climbed as much as 9.4 percent before closing in Madrid at 3.24 euros, a gain of 6.4 percent. Banco do Brasil shares fell 1.3 percent to 30.45 reais in Sao Paulo trading. Brazilian banks fell before Banco Santander’s Brazil unit starts selling shares tomorrow in what is expected to be the biggest initial public offering of 2009.

Banco do Brasil’s alliance with Mapfre may be announced within 60 days, Bendine said. Banco do Brasil will have a minority voting stake in the partnership, he said.

The partnership may expand beyond Brazil, Bendine and Mapfre’s chairman Jose Manuel Martinez said.

“International expansion should be the goal of any big company and once we have this partnership here it will be easy to replicate it elsewhere,” Martinez said.

Reorganization

Banco do Brasil also said it may buy Sul America’s stake in Brasilveiculos. The local insurance company has 60 percent of Brasilveiculos total shares and 30 percent of the voting capital, the bank said.

The bank is reorganizing its insurance business into two units, BB Seguros Participacoes SA and BB Alianca Participacoes SA. BB Seguros will have stakes in Brasilprev Seguros e Previdencia SA, Brasilveiculos Cia. de Seguros, Brasilcap Capitalizacoes SA and Brasilsaude Cia. de Seguros, while BB Alianca will wholly own Cia. de Seguros Alianca do Brasil, the lender said.

Banco do Brasil wants to boost its stake in companies where it shares control with partners, Bendine said.

Rival Banks

Banco Bradesco SA, the country’s second-largest non- government bank and the leading bank in the insurance business in Brazil, had 36 percent of its earnings from insurance in the second quarter. Itau Unibanco Holding SA, Brazil’s largest non- government bank, in August reached an agreement with Porto Seguro SA to merge the companies’ home and car insurance operations.

Brazil’s benchmark lending rate is at a record low of 8.75 percent after seven months of cuts. Banco do Brasil posted return on equity of 33.2 percent in the second quarter, down from 40.8 percent in the third quarter of 2005, when the benchmark rate was as high as 19.75 percent. Bradesco’s return on equity fell to 23.7 percent in the second quarter after reaching 28.4 percent in 2005.

To contact the reporter on this story: Telma Marotto in Sao Paulo at tmarotto1@bloomberg.net;

Last Updated: October 6, 2009 16:23 EDT