<PAGE> 1
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED JUNE 30, 1994
COMMISSION FILE NUMBER 33-26322; 33-46827; 33-52254; 33-60290
MERRILL LYNCH LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
ARKANSAS 91-1325756
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
(609) 282-1429
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON 200,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A)
AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE> 2
PART I Financial Information
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- - -------------------------------------------------------------------
BALANCE SHEETS
(Dollars in Thousands)
============================================================================
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1994 1993
-------------- --------------
(Unaudited)
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1994 - $4,337,537; 1993 - $5,369,236) $ 4,294,178 $ 5,597,359
Fixed maturity securities held for trading, at estimated fair value
(amortized cost: 1994 - $149,188; 1993 - $140,635) 142,501 144,035
Equity securities available for sale, at estimated fair value
(cost: 1994 - $18,917; 1993 - $24,424) 20,373 24,970
Equity securities held for trading, at estimated fair value
(cost: 1994 - $19,653; 1993 - $19,694) 19,124 20,585
Mortgage loans on real estate 172,340 191,214
Real estate available for sale 25,784 29,761
Policy loans on insurance contracts 958,823 924,579
-------------- --------------
Total Investments 5,633,123 6,932,503
CASH AND CASH EQUIVALENTS 98,192 122,218
ACCRUED INVESTMENT INCOME 99,241 120,337
DEFERRED POLICY ACQUISITION COSTS 411,198 318,903
FEDERAL INCOME TAXES - DEFERRED 34,373 16,878
REINSURANCE RECEIVABLES 2,444 1,190
RECEIVABLES FROM AFFILIATES - NET 4,823 789
OTHER ASSETS 31,263 21,481
SEPARATE ACCOUNTS ASSETS 5,491,001 4,715,278
-------------- ---------------
TOTAL ASSETS $ 11,805,658 $ 12,249,577
============== ===============
</TABLE>
See notes to financial statements. (Continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- - ------------------------------------------------------------------
BALANCE SHEETS
(Concluded) (Dollars in Thousands)
===============================================================================
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY June 30, December 31,
1994 1993
-------------- --------------
(Unaudited)
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 5,501,091 $ 6,691,811
Claims and claims settlement expenses 23,804 20,295
-------------- --------------
Total policy liabilities and accruals 5,524,895 6,712,106
OTHER POLICYHOLDER FUNDS 27,164 28,768
LIABILITY FOR GUARANTY FUND ASSESSMENTS 26,212 28,083
OTHER LIABILITIES 64,745 68,165
FEDERAL INCOME TAXES - CURRENT 11,017 10,122
SEPARATE ACCOUNTS LIABILITIES 5,476,305 4,715,278
-------------- --------------
Total Liabilities 11,130,338 11,562,522
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 637,590 637,590
Retained earnings 65,345 47,860
Net unrealized investment loss (29,615) (395)
-------------- --------------
Total Stockholder's Equity 675,320 687,055
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 11,805,658 $ 12,249,577
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- - ------------------------------------------------------------------
STATEMENTS OF EARNINGS
(Dollars in Thousands)
==========================================================================
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1994 1993
-------------- --------------
(Unaudited)
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 231,018 $ 313,246
Net realized investment gains (losses) (10,173) 14,504
Policy charge revenue 53,841 43,653
-------------- --------------
Total Revenues 274,686 371,403
-------------- --------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 172,074 251,853
Market value adjustment expense 5,512 7,926
Policy benefits (net of reinsurance recoveries: 1994 - $3,211;
1993 - $4,483) 8,064 6,077
Reinsurance premium ceded 6,993 6,212
Amortization of deferred policy acquisition costs 36,286 45,857
Insurance expenses and taxes 19,016 25,255
-------------- --------------
Total Benefits and Expenses 247,945 343,180
-------------- --------------
Earnings Before Federal Income Tax Provision 26,741 28,223
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 11,017 10,082
Deferred (1,761) (592)
-------------- --------------
Total Federal Income Tax Provision 9,256 9,490
-------------- --------------
NET EARNINGS $ 17,485 $ 18,733
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- - ------------------------------------------------------------------
STATEMENTS OF EARNINGS
(Dollars in Thousands)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------------
1994 1993
-------------- --------------
(Unaudited)
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 108,539 $ 154,040
Net realized investment gains (losses) (5,550) 10,661
Policy charge revenue 28,122 24,095
-------------- --------------
Total Revenues 131,111 188,796
-------------- --------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 81,014 124,046
Market value adjustment expense 781 5,478
Policy benefits (net of reinsurance recoveries: 1994 - $1,707;
1993 - $2,367) 4,398 3,602
Reinsurance premium ceded 3,430 3,468
Amortization of deferred policy acquisition costs 16,873 24,364
Insurance expenses and taxes 9,523 12,148
-------------- --------------
Total Benefits and Expenses 116,019 173,106
-------------- --------------
Earnings Before Federal Income Tax Provision 15,092 15,690
FEDERAL INCOME TAX PROVISION:
Current 2,043 4,777
Deferred 3,220 595
-------------- --------------
Total Federal Income Tax Provision 5,263 5,372
-------------- --------------
NET EARNINGS $ 9,829 $ 10,318
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- - ------------------------------------------------------------------
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands)
=============================================================================
<TABLE>
<CAPTION>
Net
Additional unrealized Total
Common paid-in Retained investment stockholder's
stock capital earnings gain (loss) equity
------------- ------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 $ 2,000 $ 654,717 $ 102,873 $ 2,884 $ 762,474
Dividend to Parent 0 (17,127) (102,873) 0 (120,000)
Net earnings 0 0 47,860 0 47,860
Net unrealized investment loss 0 0 0 (3,279) (3,279)
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1993 2,000 637,590 47,860 (395) 687,055
Net earnings 0 0 17,485 0 17,485
Net unrealized investment loss 0 0 0 (29,220) (29,220)
------------- ------------- ------------- ------------- -------------
BALANCE, JUNE 30, 1994 $ 2,000 $ 637,590 $ 65,345 $ (29,615) $ 675,320
============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- - ------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
==========================================================================
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1994 1993
-------------- --------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 17,485 $ 18,733
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 36,286 45,857
Capitalization of policy acquisition costs (66,463) (30,773)
Depreciation and amortization (2,474) (3,941)
Net realized investment (gains) losses 10,173 (14,504)
Interest credited to policyholders' account balances 172,074 251,853
Benefit for deferred Federal income tax (1,761) (592)
Cash and cash equivalents provided (used) by changes in
operating assets and liabilities:
Accrued investment income 21,096 3,845
Claims and claim settlement expenses 3,509 13,515
Federal income taxes - current 895 10,082
Other policyholder funds (1,604) (1,030)
Liability for guaranty fund assessments (1,871) 1,547
Receivable from affiliates - net (4,034) 2,525
Change in policy loans (34,244) (41,754)
Change in investment trading securities (8,060) (12,198)
Other, net (14,456) 12,726
-------------- --------------
Net cash and cash equivalents provided by operating activities 126,551 255,891
-------------- --------------
INVESTING ACTIVITIES:
Fixed maturity securities sold 546,542 324,739
Fixed maturity securities matured 814,748 1,303,099
Fixed maturity securities purchased (323,072) (1,231,545)
Equity securities available for sale sold 6,972 4,516
Equity securities available for sale purchased 0 (1,497)
Mortgage loans on real estate principal payments received 13,021 7,621
Real estate available for sale - improvements acquired (608) 0
Real estate available for sale sold 5,810 0
Investment in Separate Accounts (14,696) 0
Recapture of investment in Separate Accounts 0 6,388
-------------- --------------
Net cash and cash equivalents provided by investing activities 1,048,717 413,321
-------------- --------------
</TABLE>
See notes to financial statements (continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- - ------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(Concluded) (Dollars in Thousands)
=============================================================================
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1994 1993
-------------- --------------
(Unaudited)
<S> <C> <C>
FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 541,888 218,726
Withdrawals (includes transfers to Separate Accounts) (1,741,182) (917,761)
-------------- --------------
Net cash and cash equivalents used by financing activities (1,199,294) (699,035)
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (24,026) (29,823)
CASH AND CASH EQUIVALENTS:
Beginning of year 122,218 172,124
-------------- --------------
End of period $ 98,192 $ 142,301
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- - ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1994
=================================================================
NOTE 1: BASIS OF PRESENTATION:
Merrill Lynch Life Insurance Company (the "Company") is a wholly-
owned subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG").
The Company is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch & Co."). The Company sells life
insurance and annuity products, including variable life insurance
and variable annuities.
The condensed financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, the unaudited financial statements presented herein
include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial
position and the results of operations in accordance with
generally accepted accounting principles for the periods
presented. Results for the three and six months ended June 30,
1994 and 1993 are not necessarily indicative of annual results.
To facilitate comparison with the current periods, certain
amounts in the prior periods have been reclassified. These
unaudited financial statements should be read in conjunction with
the financial statements and the notes thereto included in the
Company's 1993 Annual Report on Form 10-K ("1993 Report").
The Company paid Federal income taxes of $10.1 million during the
first six months of 1994. The Company did not pay any Federal
income taxes during the first six months of 1993. The Company
paid interest on affiliated borrowings of $0.3 million and $0.2
million for the six months ended June 30, 1994 and 1993,
respectively.
NOTE 2. STATUTORY ACCOUNTING PRACTICES:
The Company maintains its statutory accounting records in
conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of Arkansas and the
National Association of Insurance Commissioners.
Statutory capital and surplus at June 30, 1994 and December 31,
1993, was $377.5 million and $374.2 million, respectively. For
the six months ended June 30, 1994 and 1993, statutory net income
was $5.9 million and $34.1 million, respectively.
NOTE 3. COMMITMENTS:
The Company had previously entered into interest rate swap
contracts for the purpose of minimizing exposure to fluctuations
in interest rates of specific assets held. Termination of these
commitments as of June 30, 1994 would not have a material effect
on the financial condition of the Company.
<PAGE>
Item 2 Management's Narrative Analysis of the Results of
Operations
This Management's Narrative Analysis of the Results of Operations
should be read in conjunction with the accompanying unaudited
financial statements and notes thereto, in addition to the 1993
Financial Statements and Notes to Financial Statements and the
Management's Discussion and Analysis of Financial Condition and
Results of Operations filed in the 1993 Report.
Changes in revenues and expenses in most cases are similar for
the three month and six month periods. Therefore, the discussion
emphasizes the comparison between the six months of 1994 and
1993, with additional information on the three month periods
presented where appropriate.
Business Overview
The Company's earnings are principally derived from two
sources; the net income from investment of fixed rate life
insurance and annuity contract owner deposits less interest
credited to contract owners, commonly known as spread, and fees
charged to variable life insurance and variable annuity contract
owners. The costs associated with acquiring contract owner
deposits are amortized over the period in which the Company
anticipates holding those funds. In addition, the Company incurs
expenses associated with the maintenance of inforce contracts.
Life insurance and annuity deposits received in the first six
months of 1994 increased $323.2 million to $541.9 million, when
compared to the same period in 1993. The increase was primarily
attributable to sales of the Company's variable annuity product.
For all of 1994, approximately $1.892 billion of fixed deferred
annuity liabilities will reach the expiration of their interest
rate guarantee period. This represents approximately 28% of the
Company's policy liabilities and accruals as of December 31,
1993. During the first six months of 1994, approximately $1.316
billion of these fixed deferred annuity liabilities reached the
expiration of their interest rate guarantee period. At the
expiration of an interest rate guarantee period, the contract
owner has an option to either surrender the contract without
incurring a surrender charge, or to "renew" with an adjustment of
the interest crediting rate to the prevailing rate at the time of
renewal. The Company has offered those contract owners electing
to surrender the opportunity to exchange their contract for
either a variable annuity or market value adjusted annuity
contract. The following table summarizes the contract owners'
selections for the first six months of 1994 and for the year
ended December 31, 1993:
<TABLE>
<CAPTION>
1994 1993
-----------------------------
Amount % Amount %
------ ----- ------ ----
(Dollars in Millions)
<S> <C> <C> <C> <C>
Renewed with an adjustment to the
applicable interest crediting rate $ 278 21% $ 273 22%
Exchanged into either the variable annuity
product or the market value adjusted
annuity product offered by the Company 577 44% 453 36%
Surrendered 461 35% 543 42%
------ ----- ------ ----
Total $1,316 100% $ 1,269 100%
====== ===== ======= ====
<PAGE>
The rates of renewal, exchange and surrender experienced are
consistent with management's projections. As of June 30, 1994,
substantially all fixed deferred annuity contracts have reached
the expiration of their initial interest rate guarantee period.
As a result, for the remainder of 1994 and for 1995 it is
anticipated that the lapse experience of the inforce fixed
deferred annuity business will be significantly reduced from the
levels of the preceding two years.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of June 30, 1994, the
Company's invested assets and cash equivalents consist of
approximately 63% liquid or readily marketable securities.
As of June 30, 1994, approximately $346.0 million (7.8%) of the
Company's fixed maturity securities were
considered non-investment grade. The Company defines non-
investment grade as unsecured corporate debt obligations which do
not have a rating equivalent to Standard and Poor's BBB or higher
(or similar rating agency), and are not guaranteed by an agency
of the federal government. Non-investment grade securities are
speculative and are subject to significantly greater risks
related to the creditworthiness of the issuers and the liquidity
of the market for such securities. The Company carefully selects,
and closely monitors, such investments.
Results of Operations
- - ---------------------
For the six month periods ended June 30, 1994 and 1993, the
Company reported net earnings of $17.5 million and $18.7 million,
respectively. For the three month periods ended June 30, 1994 and
1993, the Company reported $9.8 million and $10.3 million,
respectively.
Net investment income and interest credited to policyholders'
account balances for the six months ended June 30, 1994 as
compared to the same period in 1993 have declined by
approximately $82.2 million and $79.8 million, respectively,
resulting in a $2.4 million reduction in interest spread. The
reductions in both net investment income, interest credited to
policyholders' account balances and interest spread is primarily
attributable to the reduction in fixed rate contracts inforce.
The Company experienced net realized investment losses of $(10.2)
million during the current six month period as compared to net
realized investment gains of $14.5 million for the same period
during 1993. During the first six months of 1994 there was
significant volatility in both the equity and debt markets with
ending values generally being lower at June 30, 1994 than they
were at December 31, 1993. Reflecting the general declines in
value, the Company's trading portfolios experienced $11.8 million
of realized and unrealized losses during the current period as
compared to $2.3 million of unrealized gains during the same
period in 1993. As well, dispositions in the available for
sale portfolio resulted in substantially reduced net realized
investment gains during the current six month period as compared
to the same period during 1993.
Policy charge revenue increased approximately $10.2 million
during the current six month period as compared to the same
period in 1993. This is primarily attributable to the increase
in contracts in force of the variable annuity product.
The market value adjustment expense is attributable to the
Company's market value adjusted annuity product. This contract
provision results in a market value adjustment to the cash
surrender value of those contracts which are surrendered before
the expiration of their interest rate guarantee period. Due to
the current lower level of interest rates as compared to the
average guaranteed interest rate of the inforce contracts, this
market value adjustment generally has resulted in an expense to
the Company. The Company's market value adjusted annuity has
experienced a decrease in surrenders during the first six months
of 1994 as compared to the same period during 1993. The decrease
in surrender activity and the recent rise in interest rates has
resulted in the $2.4 million decrease in the market value
adjustment expense.
<PAGE>
Policy benefits increased approximately $2.0 million from $6.1
million for the first six months of 1993 to $8.1 million for the
current six month period. The Company's variable
annuity product includes a contract provision which guarantees a
minimum death benefit. The Company accrues the expected cost of
this benefit and records the expense in policy benefits. The
increase in policy benefits during 1994 as compared to 1993 is
attributable to this accrual and reflects the growth in variable
annuity contracts inforce.
Reinsurance premium ceded increased approximately $0.8 million
from $6.2 million during the first six months of 1993 to $7.0
million for the current period. This increase is primarily
attributable to the increase in average attained age of the
Company's life insurance policyholders. As the average age of the
policyholders increases the cost to the Company of reinsurance
increases.
Amortization of deferred policy acquisition costs declined $9.6
million during the current period as compared to the same period
during 1993. The Company adjusts the amortization of deferred
policy acquisition costs based on realized investment gains
recognized on normal dispositions in the Company's investment
portfolios. The decline in realized investment gains during the
current six month period as compared to the same period during
1993 contributed to the reduction in amortization of deferred
policy acquisition costs. Additionally contributing to the
decrease in amortization is a decline in fixed annuity contracts
inforce partially offset by an increase in the variable annuity
contracts inforce.
Insurance expenses and taxes decreased $6.2 million during the
current six month period as compared to the same period in 1993.
Approximately $1.8 million of the decrease was attributable to a
period to period reduction in the amount of allowances
established for future assessments related to the rehabilitation
of insolvent and/or impaired life insurance companies. The
remaining reduction in expenses is attributable to operational
efficiencies and the completion during 1993 of certain policy
administration system enhancements.
I-1
<PAGE> 3
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
I-2
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY
/s/ JOSEPH E. CROWNE
--------------------------------
Joseph E. Crowne
Senior Vice President and
Chief Financial Officer
Date: August 11, 1994
I-3
</TABLE>
