The bull is getting leaner. After swapping its mutual-funds arm for a stake in BlackRock last year, Merrill Lynch said Tuesday it is selling its life insurance business AEGON of the Netherlands for $1.3 billion.

The billion-dollar deal includes a surplus of $425 million, and will see Merrill Lynch reduce its insurance operations to "core distribution and advisory capabilities." Although the brokerage house will continue to offer insurance products through its financial adviser network, AEGON will own the two companies issuing those products: Merrill Lynch Life Insurance and ML Life Insurance Co. of New York.

Shares in Merrill Lynch fell $1.91, or 2.6%, to $71.56, during afternoon trading in New York, amid a general retreat in financial stocks. Shares in AEGON closed down 1.8%, a 24-euro-cent (32-cent) fall, to 13.06 euros ($17.68) in Amsterdam.

Merrill Lynch's decision mirrors its move in 2006 to boost its flagging investment management operations by joining forces with the more nimble BlackRock. Part of the bank's motivation for slimming down is to stay competitive in complex markets.

"The products are fine," said Chris Hitchings, analyst with Keefe, Bruyette & Woods, of Merrill Lynch's life insurance business. "This was a recognition that it was not going to stay competitive."

Hitchings added that there may have been an element of conflict of interest pushing Merrill to sell the businesses that create its insurance products, while retaining the ability to promote them. "The fact that Merrill Lynch salesmen are selling Merrill Lynch products doesn't click very well," he said.

The purchase will increase the size of AEGON's U.S. subsidiary Transamerica, which the Dutch company acquired in 1999 for $10 billion. Last year the insurer also bought U.S. life insurance specialist Clark for $292 million, but the Merrill Lynch deal is by far the biggest acquisition yet: the bank's life insurance business brought in variable annuity sales of $800 million and held $10 billion in variable annuity assets in 2006.

AEGON said the acquisition would place it in the global top 10 of variable annuities sellers. Last week the insurer reported second quarter sales growth of 9.6% to 9.4 billion euros ($12.8 billion), with a 23.6% decline in net income to 655 million euros ($889.9 million).

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