AMSTERDAM — Dutch insurance and investment products provider Aegon NV said late Monday it signed an agreement to acquire Merrill Lynch units Merrill Lynch Life Insurance Co. and ML Life Insurance Co. for $1.3 billion, including excess surplus cash of $425 million, resulting in a net transaction value of $875 million.
Under the terms of the deal, Merrill Lynch will enter into a strategic partnership to distribute Aegon's insurance and investment products.
Aegon plans to integrate the two businesses into its primary U.S. retail unit, Transamerica Life Insurance Co., which generates nearly 75% of Aegon's earnings.
Like many of the bigger insurers in Europe, Aegon has been trying to strengthen its distribution platform through joint ventures. In the last year it struck partnerships in Spain, Romania, Taiwan, India and Japan.
The deal will propel Aegon into the top ten sellers of variable annuities through wirehouses and broker/dealers, a growing sales channel for these popular retirement products.
Analysts said the transaction makes sense for Aegon, which focuses on life insurance and pensions and is one of Europe's largest listed life insurers.
Petercam's Ton Gietman said it will allow Aegon to grow its life insurance business more quickly, after losing ground previously. Petercam rates Aegon hold.
Carlo Ponfoort at AEK in Amsterdam says the deal also means the two companies will be working more closely in other fields and calculates that after this buy, valued by him at roughly EUR1 billion and a share repurchase program for the same amount, Aegon will have no remaining excess capital on its balance sheet. AEK has no rating on Aegon.
"Aegon has clearly chosen the U.S. for further growth," Ponfoort says, adding that the Dutch insurer "is becoming more and more an American company with Dutch activities as well".
"Both companies anticipate substantial benefits for clients arising from this partnership including increased breadth of product offerings and enhancements to existing products," Aegon and Merrill Lynch said late Monday.
"This acquisition provides the framework for a strong strategic relationship with Merrill Lynch, creating a significant opportunity to grow the sales of the Merrill Lynch Investor Choice Variable Annuity while jointly building and branding new and innovative products for our clients," said Pat Baird, president and chief executive of Aegon USA, Inc.
The acquisition is scheduled to close during the fourth quarter and will have a "marginally positive" effect on Aegon's earnings-per-share. Aegon plans to finance the deal using excess capital and said the it will not alter its recently announced EUR1 billion share repurchase program.
The two life insurance subsidiaries of Merrill Lynch had approximately $800 million of variable annuity sales in 2006, and around $10 billion of variable annuity assets at year-end 2006.
Merrill Lynch will record a significant gain on the sale during the fourth quarter, though it did not give a figure. The deal will be a mild positive for 2008 EPS, the company said. It will have a positive impact on its return on equity in 2008.
Michiel van Katwijk, executive vice president of Aegon told Dow Jones Newswires that the two companies will generate additional value of new business for Aegon, a number used by life insurers to indicate future profit. However, Van Katwijk added that Aegon's targeted value of new business of EUR1.1 billion for 2010 was on an organic basis. He said this will be reviewed "later this year."
Van Katwijk added that Merrill Lynch's life insurance business mainly targets retail clients in the U.S. but has some companies as customers as well.
"Not only will our clients benefit from Transamerica's scale and risk management expertise, but this strategic relationship will also allow us to jointly develop innovative insurance and investment products as well as pursue new business and distribution opportunities," said Robert J. McCann, president of Merrill Lynch's Global Private Client Group, in the Monday press release.
Aegon on Aug. 9, reported second-quarter net profit of EUR655 million and announced the start of a EUR1 billion share repurchase program that should be completed by the end of the year.
The company, based in the Hague, The Netherlands, said it sees no material impairments on its investments in U.S. subprime mortgages. Aegon's exposure to the U.S. market for subprime mortgages is $4.5 billion, "only 2% of our general accounts," and is nevertheless of a "pretty high quality," Chief Executive Don Shepard said last week.
At 0852 GMT Aegon shares were down EUR0.23 or 1.7%, at EUR13.07, while the AEX index is down 0.6%.
