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Prudential Financial Inc. has agreed to buy Allstate Corp.'s $16billion variable annuity business through a reinsurancearrangement, the companies announced.

Prudential, Newark, N.J., will pay $580.5 million for thetransaction, subject to changes in market prices by the closingdate, expected to take place by the end of the second quarter. Thedeal must be approved by regulators, the companies note.

The agreement enables Allstate to exit an end of the financialservices business it says has contributed minimally to profits,while for Prudential, it offers an important inroad into previouslyunderserved investment market channels.

Under the arrangement, agents for Allstate, Northbrook, Ill.,will still sell VAs under Allstate's name, but they will bemanufactured by Prudential.

The VAs, with about $16 billion in account values, are currentlymanufactured by Allstate Financial, a business unit that sells lifeinsurance, retirement and investment products. Under the agreement,Prudential would become the exclusive provider of VAs throughAllstate's exclusive agency channel and would take on distributionresponsibilities in the broker-dealer channel.

Allstate Financial would continue to market VAs through banksunder its brand name, but designed by Prudential.

The deal would enable Allstate to devote more resources andcapital to life insurance, fixed annuities and equity indexedannuity products, "where we have scale and significant marketpresence," said Casey Sylla, chairman and president, AllstateFinancial.

The deal calls for Pru-manufactured VA products to continue tobe sold through Allstate's proprietary distribution force, whichconsists of more than 12,000 exclusive agency owners in the U.S.(8,000 of whom are licensed to sell securities) and 1,300 exclusivefinancial service representatives for the next 3 years. After that,Prudential would be a nonexclusive preferred provider for another 2years.

In its announcement, Prudential pointed out the transactionwould help it build relationships in Allstate's nonproprietarydistribution channels, including Morgan Stanley.

"This acquisition greatly increases Prudential's scale in thevariable annuity marketplace," said David Odenath, president ofPrudential Annuities. "We significantly expand our distributionreach in the wirehouse channel while presenting almost no overlapswith our existing independent financial advisors channel."

Not included in the deal: Allstate VA operations and systems,most operating personnel, and certain other assets andliabilities.