Merrill Lynch & Co. Inc. said the deal to sell its insurance units to Aegon NV would allow Merrill to exit the less profitable business of manufacturing variable annuities while retaining some revenue from a distribution arrangement with the Dutch insurer.
"We felt that we could find real value in distribution, and that if we found the right partner to manufacture with us and be a partner of ours, it would make sense," Robert J. McCann, the president of Merrill Lynch's global private client group, said Tuesday. "The insurance business is capital-intensive and has lower return on equity if you don't do it in scale."
Mr. McCann said the New York company had been reviewing the profitability of Merrill Lynch Life Insurance Co. and ML Life Insurance Co. since January of last year.
"We were never going to have size and scale," he said, and "the need to be a manufacturer was not strategically important."
Under the $1.3 billion deal, announced Monday, the variable annuity product that Merrill manufactured, Investors Choice, would be owned by Aegon Transamerica unit and distributed through Merrill's branches. Aegon would also gain the chance to sell its own products through Merrill's branches. Merrill "will be an important sales channel for us," said Gregory Tucker, a vice president of corporate communications for Aegon. "We really hope that this will be a platform for future product development."
Last year just 13% of Merrill's $6.4 billion in variable annuity sales came from products manufactured by the two units. A Merrill spokeswoman said the two insurance lines had a return on equity in the low double digits last year, and high single digits in 2005. Aegon, meanwhile, sold $3.4 billion worth of variable annuity products in 2006, and in the first half of this year its revenue from variable annuities rose 27%, to $1.9 billion, from a year earlier. The United States is its largest market.
One analyst said the deal is a good move.
"This provides an opportunity for Merrill to continue to sell the product, but to take advantage of Transamerica's underwriting and marketing availability," said Kenneth Kehrer, director of Kehrer-Limra in Princeton, N.J. "For Transamerica, this is a real leg up in the wire-house channel."
Mr. McCann said Merrill will focus on distributing insurance products, including Aegon's. "We're going to stay active in distribution," he said. "It's a growing business, and an important product to be able to offer our clients as we work with them on their financial planning."
Merrill manages client assets of $1.7 trillion.
Merrill still has some proprietary investment products but it has been thinning its offerings. Last year, it swapped its proprietary mutual funds with BlackRock Inc. in exchange for a 49% stake in the company.
"We're always looking at our business and the most effective use of our capital," he said. "It's not a stop-and-start process. The private client, wealth management business is one that we think is a growth business, and we are going to be looking for different ways to grow it even more quickly."
The all-cash deal is expected to close this year.
