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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 MARCH 31, 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)
ARKANSAS 91-1325756
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
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
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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.
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PART I Financial Information
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MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1994 1993
------------- -------------
(Unaudited)
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1994 - $4,975,785; 1993 - $5,369,236) $ 5,015,500 $ 5,597,359
Fixed maturity securities held for trading, at estimated fair value
(amortized cost: 1994 - $138,469; 1993 - $140,635) 136,532 144,035
Equity securities available for sale, at estimated fair value
(amortized cost: 1994 - $19,300; 1993 - $24,424) 21,394 24,970
Equity securities held for trading, at estimated fair value
(amortized cost: 1994 - $19,523; 1993 - $19,694) 18,562 20,585
Mortgage loans on real estate 187,854 191,214
Real estate available for sale 30,032 29,761
Policy loans on insurance contracts 936,026 924,579
------------- -------------
Total Investments 6,345,900 6,932,503
CASH AND CASH EQUIVALENTS 78,497 122,218
ACCRUED INVESTMENT INCOME 120,565 120,337
DEFERRED POLICY ACQUISITION COSTS 367,712 318,903
FEDERAL INCOME TAXES - DEFERRED 28,761 16,878
REINSURANCE RECEIVABLES 2,412 1,190
RECEIVABLES FROM AFFILIATES - NET 1,082 789
OTHER ASSETS 31,505 21,481
SEPARATE ACCOUNTS ASSETS 5,149,224 4,715,278
------------- -------------
TOTAL ASSETS $ 12,125,658 $ 12,249,577
============= =============
</TABLE>
See notes to financial statements. (Continued)
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 March 31, December 31,
1994 1993
------------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 6,133,518 $ 6,691,811
Claims and claims settlement expenses 24,391 20,295
------------- -------------
Total policy liabilities and accruals 6,157,909 6,712,106
OTHER POLICYHOLDER FUNDS 21,937 28,768
LIABILITY FOR GUARANTY FUND ASSESSMENTS 25,811 28,083
OTHER LIABILITIES 69,789 68,165
FEDERAL INCOME TAXES - CURRENT 19,096 10,122
SEPARATE ACCOUNTS LIABILITIES 5,149,224 4,715,278
------------- -------------
Total Liabilities 11,443,766 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 55,516 47,860
Net unrealized investment loss (13,214) (395)
------------- -------------
Total Stockholder's Equity 681,892 687,055
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 12,125,658 $ 12,249,577
============= =============
</TABLE>
See notes to financial statements.
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
March 31,
----------------------------
1994 1993
------------- -------------
(Unaudited)
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 122,479 $ 159,206
Net realized investment gains (losses) (4,623) 3,843
Policy charge revenue 25,719 19,558
------------- -------------
Total Revenues 143,575 182,607
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BENEFITS AND EXPENSES
Interest credited to policyholders' account balances 91,060 127,807
Market value adjustment expense 4,731 2,448
Policy benefits (reinsurance recoveries: 1994 - $1,505;
1993 - $2,116) 3,666 2,475
Reinsurance premium ceded 3,563 2,744
Amortization of deferred policy acquisition cost 19,413 21,493
Insurance expenses and taxes 9,493 13,107
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Total Benefits and Expenses 131,926 170,074
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Earnings Before Federal Income Tax Provision 11,649 12,533
FEDERAL INCOME TAX PROVISION (BENEFITS)
Current 8,974 5,305
Deferred (4,981) (1,187)
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Total Federal Income Tax Provision 3,993 4,118
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NET EARNINGS $ 7,656 $ 8,415
============= =============
</TABLE>
See notes to financial statements.
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 7,656 0 7,656
Net unrealized investment loss 0 0 0 (12,819) (12,819)
------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1994 $ 2,000 $ 637,590 $ 55,516 $ (13,214) $ 681,892
============ ============ ============ ============ =============
</TABLE>
See notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1994 1993
------------- -------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 7,656 $ 8,415
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 19,413 21,493
Capitalization of policy acquisition costs (30,763) (13,877)
Depreciation and amortization (1,516) (2,132)
Net realized investment (gains) losses 4,623 (3,843)
Interest credited to policyholders' account balances 91,060 127,809
Provision for deferred Federal income tax (4,981) (1,187)
Cash and cash equivalents provided (used) by changes in
operating assets and liabilities:
Accrued investment income (228) (13,744)
Policy liabilities and accruals 4,096 12,166
Federal income taxes - current 8,974 5,305
Other policyholder funds (6,831) (6,720)
Liability for guaranty fund assessments (2,272) 37
Receivable from affiliates - net (293) (7,255)
Policy loans (11,448) (18,288)
Investment trading securities 2,563 0
Other, net (9,623) 4,983
------------- -------------
Net cash and cash equivalents provided by operating
activities 70,430 113,162
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INVESTING ACTIVITIES:
Fixed maturity securities sold 142,473 151,380
Fixed maturity securities matured 502,891 727,381
Fixed maturity securities purchased (245,474) (795,399)
Equity securities available for sale sold 6,768 182
Equity securities available for sale purchased 0 (75)
Mortgage loans on real estate principal payments received 0 4,829
Real estate available for sale purchased (271) (32)
Investment in Separate Accounts 0 (1,445)
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Net cash and cash equivalents provided by investing
activities 406,387 86,821
------------- -------------
</TABLE>
See notes to financial statements
(continued)
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>
Three Months Ended
March 31,
----------------------------
1994 1993
------------- -------------
(Unaudited)
<S> <C> <C>
FINANCING ACTIVITIES:
Real estate encumbrances paid off 0 (956)
Policyholders' account balances:
Deposits 290,789 63,149
Withdrawals (net of transfers to separate account) (811,327) (409,695)
------------- -------------
Net cash and cash equivalents used by financing activities (520,538) (347,502)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (43,721) (147,519)
CASH AND CASH EQUIVALENTS:
Beginning of year 122,218 172,124
------------- -------------
End of period $ 78,497 $ 24,605
============= =============
</TABLE>
See notes to financial statements
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group,
Inc.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 months ended March 31, 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 no Federal income taxes during the first three
months of 1994 and 1993. The Company paid interest on affiliated
borrowings of $0.1 million and $0.2 million for the three months
ended March 31, 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 ("NAIC").
Statutory capital and surplus at March 31, 1994 and December 31,
1993, was $371.6 million and $374.2 million, respectively. For
the three months ended March 31, 1994 and 1993, statutory net
income was $1.7 million and $12.6 million, respectively.
NOTE 3. COMMITMENTS:
In the normal course of business, the Company enters 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 March 31, 1994
would not have a material effect on the financial condition of
the Company.
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.
Business Overview
The Company's gross 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 three
months of 1994 increased $227.6 million to $290.8 million, when
compared to the same period in 1993. The increase was
attributable to sales of the Company's variable annuity product.
For 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 three months of 1994, approximately $505
million of 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 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
quarter 1994 and for the year ending 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 $ 92 18% $ 273 22%
Exchanged into either the variable annuity
product or the market value adjusted
annuity product 238 47% 453 36%
Surrendered 175 35% 543 42%
------- ----- ------- -----
Total $ 505 100% $1,269 100%
======= ===== ======= =====
</TABLE>
The rates of renewal, exchange and surrender experienced are
consistent with management's projections.
To fund all business activities, the Company maintains a high
quality, high liquidity investment portfolio. As of March 31,
1994, the Company's invested assets and cash equivalents consist
of approximately 63% liquid or readily marketable securities.
As of March 31, 1994, approximately $535 million (10.4%) of the
Company's fixed maturity securities were invested in securities
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 three month periods ended March 31, 1994 and 1993, the
Company reported net earnings of $7.7 million and $12.5 million,
respectively.
Net investment income and interest credited to policyholders'
account balances for the three months ended March 31, 1994 as
compared to the same period in 1993 have both declined by
approximately $36.7 million resulting in no change in interest
spread. The reductions in both net investment income and interest
credited to policyholders' account balances is primarily
attributable to the reduction in fixed rate contracts inforce.
The Company experienced net realized investment losses of $(4.6)
million during the current three month period as compared to net
realized investment gains of $3.8 million for the same period
during 1993. During the first quarter of 1994 there was
significant volatility in both the equity and debt markets with
ending values generally being lower at March 31, 1994 than they
were at December 31, 1993. Reflecting the general declines in
value, the Company's trading portfolios experienced $7.2 million
of realized and unrealized losses during the current period. The
Company did not have any securities designated as trading during
the first quarter of 1993.
Policy charge revenue increased approximately $6.5 million during
the current three 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 decline in interest rates, this market value adjustment has
resulted in an expense to the Company. The Company's market value
adjusted annuity has experienced an increase in surrenders during
the first three months of 1994 as compared to the same period
during 1993. Many of these contract owners have exchanged their
contracts for variable annuity contracts sold by the Company or
its competitors. The increase in surrender activity has resulted
in the $2.3 million increase in the market value adjustment
expense. Offsetting this expense were net realized investment
gains attributable to the sale of investments to fund the
surrenders.
Policy benefits increased approximately $1.2 million from $2.5
million for 1993 to $3.7 million for 1994. 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 reflects the growth in variable
annuity contracts inforce.
Reinsurance premium ceded increased approximately $0.8 million
from $2.8 million during the first three months of 1993 to $3.6
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 $2.1
million during the current period as compared to the same period
during 1993 as a result of a decline in fixed annuity contracts
inforce partially offset by an increase in the variable annuity
contracts inforce.
Insurance expenses and taxes decreased $3.6 million during the
current three month period as compared to the same period in
1993. Approximately $1.0 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.
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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.
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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: May 12, 1994
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