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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
Commission File Nos. 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Scudders Mill Road
Plainsboro, New Jersey 08536
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(Address of Principal Executive Offices)
(609) 282-1429
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(Registrant's telephone no. including area code)
Securities registered pursuant to Section 12(b) or 12(g) of the Act: None
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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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ X ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date.
Common 200,000
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DOCUMENTS INCORPORATED BY REFERENCE
Preliminary Prospectus included in Post-Effective
Amendment No. 1 to Registrant's registration statement on Form S-1, filed
March 31, 1994, pursuant to the Securities Act of 1933, File No. 33-60290
-- incorporated by reference into Parts I and II of this report on Form
10-K.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION J(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM
WITH THE REDUCED DISCLOSURE FORMAT.
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PART I
Item 1. Business.
The Registrant is an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc., a corporation whose common stock is traded on
the New York Stock Exchange. The information set forth under the caption
"A. History and Business" in the preliminary prospectus contained in
Post-Effective Amendment No. 1 to Registrant's registration statement,
filed March 31, 1994, pursuant to the Securities Act of 1933, File No.
33-60290 (the "Prospectus"), is incorporated herein by reference.
Item 2. Properties.
The information set forth under the caption "J.
Properties" in the Prospectus is incorporated herein by reference.
Item 3. Legal Proceedings.
The information set forth under the caption "Legal
Proceedings" in the Prospectus is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
Information called for by this item is omitted pursuant
to General Instruction J. of Form 10-K.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Registrant is a wholly-owned subsidiary of Merrill
Lynch Insurance Group, Inc. ("MLIG"), which is an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. MLIG is the sole record holder of
Registrant's shares. Therefore, there is no public trading market for
Registrant's common stock.
On December 20, 1993, the Registrant paid a $44,988,000
ordinary dividend and a $75,012,000 extraordinary dividend to MLIG. The
Registrant received approval from the Arkansas Insurance Commissioner
prior to the declaration and payment of the extraordinary dividend. No
other cash dividends have been declared on Registrant's common stock at
any time during the two most recent fiscal years. Under laws applicable
to insurance companies domiciled in the State of Arkansas, the
Registrant's ability to pay dividends on its common stock is restricted.
See Note 5 to the Registrant's financial statements.
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Item 6. Selected Financial Data.
Information called for by this item is omitted pursuant
to General Instruction J. of Form 10-K.
Item 7. Management's Narrative Analysis of Results of Operations.
The information set forth under the caption "C.
Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Prospectus is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements of Registrant are set forth in
Part IV hereof and are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not applicable.
PART III
Information called for by items 10 through 13 of this
part is omitted pursuant to General Instruction J. of Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements and Exhibits.
(1) The following financial statements of the Registrant are
filed as part of this report:
a. Independent Auditors' Report dated February 28, 1994.
b. Balance Sheets at December 31, 1993 and 1992.
c. Statements of Earnings for the Years Ended December 31,
1993, 1992 and 1991.
d. Statements of Stockholder's Equity for the Years
Ended December 31, 1993, 1992 and 1991.
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e. Statements of Cash Flows for the Years Ended
December 31, 1993, 1992 and 1991.
f. Notes to Financial Statements for the Years
Ended December 31, 1993, 1992 and 1991.
(2) The following exhibits are filed as part of this
report as indicated below:
2.1 Merrill Lynch Life Insurance Company Board of
Directors Resolution in Connection with the
Merger between Merrill Lynch Life Insurance
Company and Tandem Insurance Group, Inc.
(Incorporated by reference to Exhibit 2.1, filed
September 5, 1991, as part of Post-Effective
Amendment No. 4 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
2.2 Plan and Agreement of Merger between Merrill
Lynch Life Insurance Company and Tandem
Insurance Group, Inc. (Incorporated by
reference to Exhibit 2.1a, filed September 5,
1991, as part of Post-Effective Amendment No. 4
to the Registrant's registration statement on
Form S-1, File No. 33-26322.)
3.1 Articles of Incorporation of Merrill Lynch Life
Insurance Company. (Incorporated by reference
to Exhibit 3.1 to the Registrant's registration
statement on Form S-1, File No. 33-26322, filed
January 3, 1989.)
3.2 By-Laws of Merrill Lynch Life Insurance Company.
(Incorporated by reference to Exhibit 3.2 to the
Registrant's registration statement on Form S-1,
File No. 33-26322, filed January 3, 1989.)
3.3 Articles of Amendment, Restatement and
Redomestication of the Articles of Incorporation
of Merrill Lynch Life Insurance Company.
(Incorporated by reference to Exhibit 3(c) to
the Registrant's registration statement on Form
S-1, File No. 33-46827, filed March 30, 1992.)
3.4 Amended and Restated By-Laws of Merrill Lynch
Life Insurance Company. (Incorporated by
reference to Exhibit 3(d) to the Registrant's
registration statement on Form S-1, File No.
33-46827, filed March 30, 1992.)
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4.1 Group Modified Guaranteed Annuity Contract,
ML-AY-361. (Incorporated by reference to
Exhibit 4.1, filed February 23, 1989, as part of
Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.2 Individual Certificate, ML-AY-362.
(Incorporated by reference to Exhibit 4.2, filed
February 23, 1989, as part of Pre-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S- 1, File No. 33-26322.)
4.2a Individual Certificate, ML-AY-362 KS.
(Incorporated by reference to Exhibit 4.2a,
filed March 9, 1990, as part of Post-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S- 1, File No. 33-26322.)
4.2b Individual Certificate, ML-AY-378.
(Incorporated by reference to Exhibit 4.2b,
filed March 9, 1990, as part of Post-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.3 Individual Tax-Sheltered Annuity Certificate,
ML-AY-372. (Incorporated by reference to
Exhibit 4.3, filed February 23, 1989, as part of
Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.3a Individual Tax-Sheltered Annuity Certificate,
ML-AY-372 KS. (Incorporated by reference to
Exhibit 4.3a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.4 Qualified Retirement Plan Certificate,
ML-AY-373. (Incorporated by reference to
Exhibit 4.4 to the Registrant's registration
statement on Form S-1, File No. 33-26322, filed
January 3, 1989.)
4.4a Qualified Retirement Plan Certificate, ML-AY-373
KS. (Incorporated by reference to Exhibit 4.4a,
filed March 9, 1990, as part of Post-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
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4.5 Individual Retirement Annuity Certificate,
ML-AY-374. (Incorporated by reference to
Exhibit 4.5 to the Registrant's registration
statement on Form S-1, File No. 33-26322, filed
January 3, 1989.)
4.5a Individual Retirement Annuity Certificate,
ML-AY-374 KS. (Incorporated by reference to
Exhibit 4.5a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.5b Individual Retirement Annuity Certificate,
ML-AY-375 KS. (Incorporated by reference to
Exhibit 4.5b, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.5c Individual Retirement Annuity Certificate,
ML-AY-379. (Incorporated by reference to
Exhibit 4.5c, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.6 Individual Retirement Account Certificate,
ML-AY-375. (Incorporated by reference to
Exhibit 4.6, filed February 23, 1989, as part of
Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.6a Individual Retirement Account Certificate,
ML-AY-380. (Incorporated by reference to
Exhibit 4.6a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.7 Section 457 Deferred Compensation Plan
Certificate, ML-AY-376. (Incorporated by
reference to Exhibit 4.7 to the Registrant's
registration statement on Form S-1, File No.
33-26322, filed January 3, 1989.)
4.7a Section 457 Deferred Compensation Plan
Certificate, ML-AY-376 KS. (Incorporated by
reference to Exhibit 4.7a, filed March 9, 1990,
as part of Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
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4.8 Tax-Sheltered Annuity Endorsement, ML-AY-366.
(Incorporated by reference to Exhibit 4.8 to the
Registrant's registration statement on Form S-1,
File No. 33-26322, filed January 3, 1989.)
4.8a Tax-Sheltered Annuity Endorsement, ML-AY-366
190. (Incorporated by reference to Exhibit
4.8a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.9 Qualified Retirement Plan Endorsement,
ML-AY-364. (Incorporated by reference to
Exhibit 4.9 to the Registrant's registration
statement on Form S-1, File No. 33-26322, filed
January 3, 1989.)
4.10 Individual Retirement Annuity Endorsement,
ML-AY-368. (Incorporated by reference to
Exhibit 4.10 to the Registrant's registration
statement on Form S-1, File No. 33-26322, filed
January 3, 1989.)
4.10a Individual Retirement Annuity Endorsement,
ML-AY-368 190. (Incorporated by reference to
Exhibit 4.10a, filed March 9, 1990, as part of
Post- Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.10b Individual Retirement Annuity Endorsement, ML009.
(Incorporated by reference to Exhibit 4(j)(3) to
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-60290, filed March 31, 1994.)
4.11 Individual Retirement Account Endorsement,
ML-AY-365. (Incorporated by reference to
Exhibit 4.11 to the Registrant's registration
statement on Form S-1, File No. 33-26322, filed
January 3, 1989.)
4.11a Individual Retirement Account Endorsement, ML-
AY-365 190. (Incorporated by reference to
Exhibit 4.11a, filed March 9, 1990, as part of
Post- Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.12 Section 457 Deferred Compensation Plan
Endorsement, ML-AY-367. (Incorporated by
reference to Exhibit 4.12 to the Registrant's
registration
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statement on Form S-1, File No. 33-26322, filed
January 3, 1989.)
4.12a Section 457 Deferred Compensation Plan
Endorsement, ML-AY-367 190. (Incorporated by
reference to Exhibit 4.12a, filed March 9, 1990,
as part of Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
4.13 Qualified Plan Endorsement, ML-AY-369.
(Incorporated by reference to Exhibit 4.13 to
the Registrant's registration statement on Form
S-1, File No. 33-26322, filed January 3, 1989.)
4.13a Qualified Plan Endorsement, ML-AY-448.
(Incorporated by reference to Exhibit 4.13a,
filed March 9, 1990, as part of Post-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
4.14 Application for Group Modified Guaranteed
Annuity Contract. (Incorporated by reference to
Exhibit 4.14 to the Registrant's registration
statement on Form S-1, File No. 33-26322, filed
January 3, 1989.)
4.15 Annuity Application for Individual Certificate
Under Modified Guaranteed Annuity Contract.
(Incorporated by reference to Exhibit 4.15 to
the Registrant's registration statement on Form
S-1, File No. 33-26322, filed January 3, 1989.)
4.16 Form of Company Name Change Endorsement.
(Incorporated by reference to Exhibit 4.16,
filed September 5, 1991, as part of
Post-Effective Amendment No. 4 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
10.1 Management Services Agreement between Family
Life Insurance Company and Merrill Lynch Life
Insurance Company. (Incorporated by reference
to Exhibit 10.1 to the Registrant's registration
statement on Form S-1, File No. 33-26322, filed
January 3, 1989.)
10.2 General Agency Agreement between Merrill Lynch
Life Insurance Company and Merrill Lynch Life
Agency, Inc. (Incorporated by reference to
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Exhibit 10.2, filed February 23, 1989, as part
of Pre-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-26322.)
10.3 Service Agreement among Merrill Lynch Insurance
Group, Inc., Family Life Insurance Company and
Merrill Lynch Life Insurance Company.
(Incorporated by reference to Exhibit 10.3,
filed March 13, 1991, as part of Post-Effective
Amendment No. 2 to the Registrant's registration
statement on Form S- 1, File No. 33-26322.)
10.3a Amendment to Service Agreement between Merrill
Lynch Insurance Group, Inc. and Merrill Lynch
Life Insurance Company. (Incorporated by
reference to Exhibit 10(c) to Post-Effective
amendment No. 1 to the Registrant registration
statement on Form S-1, File No. 33-60290, filed
March 31, 1994.)
10.4 Indemnity Reinsurance Agreement between Merrill
Lynch Life Insurance Company and Family Life
Insurance Company. (Incorporated by reference
to Exhibit 10.4, filed March 13, 1991, as part
of Post-Effective Amendment No. 2 to the
Registrant's registration statement on Form S-1,
File No. 33- 26322.)
10.5 Assumption Reinsurance Agreement between Merrill
Lynch Life Insurance Company, Tandem Insurance
Group, Inc. and Royal Tandem Life Insurance
Company and Family Life Insurance Company.
(Incorporated by reference to Exhibit 10.6,
filed April 24, 1991, as part of Post-Effective
Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
10.6 Amended General Agency Agreement between Merrill
Lynch Life Insurance Company and Merrill Lynch
Life Agency, Inc. (Incorporated by reference to
Exhibit 10(g) to the Registrant's registration
statement on Form S-1, File No. 33-46827, filed
March 30, 1992.)
10.7 Indemnity Agreement between Merrill Lynch Life
Insurance Company and Merrill Lynch Life Agency,
Inc. (Incorporated by reference to Exhibit
10(h)
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to the Registrant's registration statement on
Form S-1, File No. 33-46827, filed March 30,
1992.)
10.8 Management Agreement between Merrill Lynch Life
Insurance Company and Merrill Lynch Asset
Management, Inc. (Incorporated by reference to
Exhibit 10(i) to the Registrant's registration
statement on Form S-1, File No. 33-46827, filed
March 30, 1992.)
10.9 Amendment No. 1 to Indemnity Reinsurance
Agreement between Family Life Insurance Company
and Merrill Lynch Life Insurance Company.
(Incorporated by reference to Exhibit 10.5,
filed April 24, 1991, as part of Post-Effective
Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-26322.)
25.1 Power of attorney of Joseph E. Crowne.
(Incorporated by reference to Exhibit 25(a) to
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-60290, filed March 31, 1994.)
25.2 Power of attorney of David M. Dunford.
(Incorporated by reference to Exhibit 25(b) to
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-60290, filed March 31, 1994.)
25.3 Power of attorney of John C.R. Hele.
(Incorporated by reference to Exhibit 25(c) to
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-60290, filed March 31, 1994.)
25.4 Power of attorney of Allen N. Jones.
(Incorporated by reference to Exhibit 25(d) to
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-60290, filed March 31, 1994.)
25.5 Power of attorney of Barry G. Skolnick.
(Incorporated by reference to Exhibit 25(e) to
Post-Effective Amendment No. 1 to the
Registrant's registration statement on Form S-1,
File No. 33-60290, filed March 31, 1994.)
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25.6 Power of attorney of Anthony J. Vespa.
(Incorporated by reference to Post-Effective
Amendment No. 1 to the Registrant's registration
statement on Form S-1, File No. 33-60290, filed
March 31, 1994.)
28.1 Preliminary prospectus contained in
Post-Effective Amendment No. 1 to Registrant's
registration statement, filed March 31, 1994,
pursuant to the Securities Act of 1933, File No.
33-60290.
(3) Not applicable.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last
quarter of the fiscal year ended December 31, 1993.
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INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . .
Balance Sheets at December 31, 1993 and 1992 . . . . . . . . . . . . . .
Statements of Earnings for the Years Ended December 31,
1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Stockholder's Equity for the Years Ended
December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . .
Statements of Cash Flows for the Years Ended December 31,
1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements for the Years Ended December 31,
1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . . . . . .
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SIGNATURES
Pursuant to the requirements of Section 15(d) 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
------------------------------------
(Registrant)
Date: March 29, 1994 By: /s/ Joseph E. Crowne
---------------- ------------------------------------
Joseph E. Crowne
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this Report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
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<S> <C> <C>
/s/ Anthony J. Vespa March 29, 1994
-------------------- Chairman of the Board, --------------------
Anthony J. Vespa President and Chief
Executive Officer
/s/ Joseph E. Crowne March 29, 1994
-------------------- Director, Senior Vice --------------------
Joseph E. Crowne President, Chief Financial
Officer, Chief
Actuary and Treasurer
/s/ Barry G. Skolnick March 29, 1994
-------------------- Director, Senior Vice -------------------
Barry G. Skolnick President and General
Counsel*
/s/ David M. Dunford March 29, 1994
-------------------- Director and Senior Vice -------------------
David M. Dunford President
/s/ John C.R. Hele March 29, 1994
-------------------- Director and Senior Vice -------------------
John C.R. Hele President
/s/ Allen N. Jones March 29, 1994
-------------------- Director -------------------
Allen N. Jones
</TABLE>
*Signing in his own capacity and as Attorney-in-Fact.
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SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report covering the Registrant's last fiscal year or
proxy material has been or will be sent to Registrant's security
holder.
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Location
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<S> <C> <C>
2.1 Merrill Lynch Life Insurance Company Board Incorporated by reference to Exhibit 2.1,
of Directors Resolution in Connection with filed September 5, 1991, as part of Post-
the Merger between Merrill Lynch Life Effective Amendment No. 4 to the
Insurance Company and Tandem Insurance Registrant's registration statement on
Group, Inc. Form S-1, File No. 33-26322.
2.2 Plan and Agreement of Merger between Incorporated by reference to Exhibit 2.1a,
Merrill Lynch Life Insurance Company and filed September 5, 1991, as part of Post-
Tandem Insurance Group, Inc. Effective Amendment No. 4 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
3.1 Articles of Incorporation of Merrill Lynch Incorporated by reference to Exhibit 3.1
Life Insurance Company. to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
3.2 By-Laws of Merrill Lynch Life Insurance Incorporated by reference to Exhibit 3.2
Company. to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
3.3 Articles of Amendment, Restatement and Incorporated by reference to Exhibit 3(c)
Redomestication of the Articles of to the Registrant's registration statement
Incorporation of Merrill Lynch Life on Form S-1, File No. 33-46827, filed
Insurance Company. March 30, 1992.
3.4 Amended and Restated By-Laws of Merrill Incorporated by reference to Exhibit 3(d)
Lynch Life Insurance Company. to the Registrant's registration statement
on Form S-1, File No. 33-46827, filed
March 30, 1992.
</TABLE>
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<TABLE>
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4.1 Group Modified Guaranteed Annuity Incorporated by reference to Exhibit 4.1,
Contract, ML-AY-361. filed February 23, 1989, as part of Pre-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.2 Individual Certificate, ML-AY-362. Incorporated by reference to Exhibit 4.2,
filed February 23, 1989, as part of Pre-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.2a Individual Certificate, ML-AY-362 KS. Incorporated by reference to Exhibit 4.2a,
filed March 9, 1990, as part of Post-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.2b Individual Certificate, ML-AY-378. Incorporated by reference to Exhibit 4.2b,
filed March 9, 1990, as part of Post-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.3 Individual Tax-Sheltered Annuity Incorporated by reference to Exhibit 4.3,
Certificate, ML-AY-372. filed February 23, 1989, as part of Pre-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
</TABLE>
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<S> <C> <C>
4.3a Individual Tax-Sheltered Annuity Incorporated by reference to Exhibit 4.3a,
Certificate, ML-AY-372 KS. filed March 9, 1990, as part of Post-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.4 Qualified Retirement Plan Certificate, ML- Incorporated by reference to Exhibit 4.4
AY-373. to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
4.4a Qualified Retirement Plan Certificate, ML- Incorporated by reference to Exhibit 4.4a,
AY-373 KS. filed March 9, 1990, as part of Post-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.5 Individual Retirement Annuity Certificate, Incorporated by reference to Exhibit 4.5
ML-AY-374. to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
4.5a Individual Retirement Annuity Certificate, Incorporated by reference to Exhibit 4.5a,
ML-AY-374 KS. filed March 9, 1990, as part of Post-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.5b Individual Retirement Annuity Certificate, Incorporated by reference to Exhibit 4.5b,
ML-AY-375 KS. filed March 9, 1990, as part of Post-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
</TABLE>
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<TABLE>
<S> <C> <C>
4.5c Individual Retirement Annuity Certificate, Incorporated by reference to Exhibit 4.5c,
ML-AY-379. filed March 9, 1990, as part of Post-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.6 Individual Retirement Account Certificate, Incorporated by reference to Exhibit 4.6,
ML-AY-375. filed February 23, 1989, as part of Pre-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.6a Individual Retirement Account Certificate, Incorporated by reference to Exhibit 4.6a,
ML-AY-380. filed March 9, 1990, as part of Post-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.7 Section 457 Deferred Compensation Plan Incorporated by reference to Exhibit 4.7
Certificate, ML-AY-376. to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
4.7a Section 457 Deferred Compensation Plan Incorporated by reference to Exhibit 4.7a,
Certificate, ML-AY-376 KS. filed March 9, 1990, as part of Post-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.8 Tax-Sheltered Annuity Endorsement, ML-AY- Incorporated by reference to Exhibit 4.8
366. to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
</TABLE>
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<TABLE>
<S> <C> <C>
4.8a Tax-Sheltered Annuity Endorsement, ML-AY- Incorporated by reference to Exhibit 4.8a,
366 190. filed March 9, 1990, as part of Post-
Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.9 Qualified Retirement Plan Endorsement, ML- Incorporated by reference to Exhibit 4.9
AY-364. to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
4.10 Individual Retirement Annuity Endorsement, Incorporated by reference to Exhibit 4.10
ML-AY-368. to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
4.10a Individual Retirement Annuity Endorsement, Incorporated by reference to Exhibit
ML-AY-368 190. 4.10a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.10b Individual Retirement Annuity Endorsement, Incorporated by reference to Exhibit
ML-009. 4(j)(3) to Post-Effective Amendment No. 1
to the Registrant's registration statement
on Form S-1, File No. 33-60290, filed
March 31, 1994.
4.11 Individual Retirement Account Endorsement, Incorporated by reference to Exhibit 4.11
ML-AY-365. to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
</TABLE>
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<TABLE>
<S> <C> <C>
4.11a Individual Retirement Account Endorsement, Incorporated by reference to Exhibit
ML-AY-365 190. 4.11a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.12 Section 457 Deferred Compensation Plan Incorporated by reference to Exhibit 4.12
Endorsement, ML-AY-367. to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
4.12a Section 457 Deferred Compensation Plan Incorporated by reference to Exhibit
Endorsement, ML-AY-367 190. 4.12a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.13 Qualified Plan Endorsement, ML-AY-369. Incorporated by reference to Exhibit 4.13
to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
4.13a Qualified Plan Endorsement, ML-AY-448. Incorporated by reference to Exhibit
4.13a, filed March 9, 1990, as part of
Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
4.14 Application for Group Modified Guaranteed Incorporated by reference to Exhibit 4.14
Annuity Contract. to the Registrant's registration statement
on Form S-1, File No. 33-26322, filed
January 3, 1989.
</TABLE>
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<PAGE> 21
<TABLE>
<S> <C> <C>
4.15 Annuity Application for Individual Incorporated by reference to Exhibit 4.15
Certificate Under Modified Guaranteed to the Registrant's registration statement
Annuity Contract. on Form S-1, File No. 33-26322, filed
January 3, 1989.
4.16 Form of Company Name Change Endorsement. Incorporated by reference to Exhibit 4.16,
filed September 5, 1991, as part of Post-
Effective Amendment No. 4 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
10.1 Management Services Agreement between Incorporated by reference to Exhibit 10.1
Family Life Insurance Company and Merrill to the Registrant's registration statement
Lynch Life Insurance Company. on Form S-1, File No. 33-26322, filed
January 3, 1989.
10.2 General Agency Agreement between Merrill Incorporated by reference to Exhibit 10.2,
Lynch Life Insurance Company and Merrill filed February 23, 1989, as part of Pre-
Lynch Life Agency, Inc. Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
10.3 Service Agreement among Merrill Lynch Incorporated by reference to Exhibit 10.3,
Insurance Group, Family Life filed March 13, 1991, as part of Post-
Insurance Company and Merrill Lynch Life Effective Amendment No. 2 to the
Insurance Company. Registrant's registration statement on
Form S-1, File No. 33-26322.
10.3a Amendment to Service Agreement between Incorporated by reference to Exhibit 10(c)
Merrill Lynch Insurance Group and to Post-Effective Amendment No. 1 to the
Merrill Lynch Life Insurance Company. Registrant's registration statement on
Form S-1, File No. 33-60290, filed
March 31, 1994.
</TABLE>
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<TABLE>
<S> <C> <C>
10.4 Indemnity Reinsurance Agreement between Incorporated by reference to Exhibit 10.4,
Merrill Lynch Life Insurance Company and filed March 13, 1991, as part of Post-
Family Life Insurance Company. Effective Amendment No. 2 to the
Registrant's registration statement on
Form S-1, File No. 33-26322.
10.5 Assumption Reinsurance Agreement Incorporated by reference to Exhibit 10.6,
Between Merrill Lynch Life Insurance filed April 24, 1991, as part of Post-
Company, Tandem Insurance Group, Inc. and Effective Amendment No. 3 to the
Royal Tandem Life Insurance Company and Registrant's registration statement on
Family Life Insurance Company. Form S-1, File No. 33-26322.
10.6 Amended General Agency Agreement between Incorporated by reference to Exhibit 10(g)
Merrill Lynch Life Insurance Company and to the Registrant's registration statement
Merrill Lynch Life Agency, Inc. on Form S-1, File No. 33-46827, filed
March 30, 1992.
10.7 Indemnity Agreement between Merrill Lynch Incorporated by reference to Exhibit 10(h)
Life Insurance Company and Merrill Lynch to the Registrant's registration statement
Life Agency, Inc. on Form S-1, File No. 33-46827, filed
March 30, 1992.
10.8 Management Agreement between Merrill Lynch Incorporated by reference to Exhibit 10(i)
Life Insurance Company and Merrill Lynch to the Registrant's registration statement
Asset Management, Inc. on Form S-1, File No. 33-46827, filed
March 30, 1992.
10.9 Amendment No. 1 to Indemnity Reinsurance Incorporated by reference to Exhibit 10.5,
Agreement between Family Life Insurance filed April 24, 1991, as part of Post-
Company and Merrill Lynch Life Insurance Effective Amendment No. 3 to the
Company. Registrant's registration statement on
Form S-1, File No. 33-26322.
</TABLE>
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<PAGE> 23
<TABLE>
<S> <C> <C>
25.1 Power of attorney of Joseph E. Crowne. Incorporated by reference to Exhibit 25(a)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60290, filed March
31, 1994.
25.2 Power of attorney of David M. Dunford. Incorporated by reference to Exhibit 25(b)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60290, filed March
31, 1994.
25.3 Power of attorney of John C.R. Hele. Incorporated by reference to Exhibit 25(c)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60290, filed March
31, 1994.
25.4 Power of attorney of Allen N. Jones. Incorporated by reference to Exhibit 25(d)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60290, filed March
31, 1994.
25.5 Power of attorney of Barry G. Skolnick. Incorporated by reference to Exhibit 25(e)
to Post-Effective Amendment No. 1 to the
Registrant's registration statement on
Form S-1, File No. 33-60290, filed March
31, 1994.
25.6 Power of Attorney of Anthony J. Vespa. Incorporated by reference to Exhibit 25(f)
to Post-Effective Amendment No. 1 to the
Registrant's
</TABLE>
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<PAGE> 24
<TABLE>
<S> <C> <C>
registration statement on Form S-1, File
No. 602890, filed March 31, 1994.
28.1 Preliminary prospectus contained in Post-
Effective Amendment No. 1 to Registrant's
registration statement, filed March 31,
1994, pursuant to the Securities Act of
1933, File No. 33-60290.
</TABLE>
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<PAGE> 1
Exhibit 28.1
<PAGE> 2
PROSPECTUS
MAY 1, 1994
MERRILL LYNCH ASSET ISM
GROUP MODIFIED GUARANTEED ANNUITY CONTRACT
ISSUED BY
MERRILL LYNCH LIFE INSURANCE COMPANY
Home Office: Little Rock, Arkansas 72201
Service Center: P.O. Box 44222, Jacksonville, Florida 32231-4222
4804 Deer Lake Drive East, Jacksonville, Florida 32246
Phone: (800) 535-5549
OFFERED THROUGH
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
The group contract described in this Prospectus (the "Contract") is issued by
Merrill Lynch Life Insurance Company ("Merrill Lynch Life") and is designed to
provide annuity payments in connection with retirement plans that may or may not
qualify for special federal income tax treatment under the Internal Revenue
Code. The Contract permits participants to make one or more single premium
payments to be accumulated at a guaranteed rate or rates of interest depending
upon the Guarantee Period or Periods selected by the participant. A certificate
of participation (the "Certificate") will be issued for each single premium.
Guarantee Periods currently range from one to ten years. At the end of any
Guarantee Period the accumulated value may be reinvested for one or more new
Guarantee Periods at the current interest rates then offered by Merrill Lynch
Life. A WITHDRAWAL MADE PRIOR TO THE END OF A GUARANTEE PERIOD WILL BE SUBJECT
TO A MARKET VALUE ADJUSTMENT, WHICH COULD HAVE THE EFFECT OF EITHER INCREASING
OR DECREASING THE PARTICIPANTS' ACCOUNT VALUES.
Eligible members of a group, including account holders of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, may become participants under the Contract.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
DEFINITIONS............................................................................ 3
CAPSULE SUMMARY OF THE CONTRACT........................................................ 5
MERRILL LYNCH LIFE INSURANCE COMPANY................................................... 7
DESCRIPTION OF THE CONTRACT............................................................ 7
A. GENERAL....................................................................... 7
B. PREMIUMS...................................................................... 7
C. SELECTING THE GUARANTEE PERIOD................................................ 7
D. SUBACCOUNT AND ACCOUNT VALUES................................................. 8
E. SUBACCOUNT TRANSFERS.......................................................... 8
F. FIXING GUARANTEED INTEREST RATES.............................................. 9
G. WITHDRAWALS................................................................... 9
H. MARKET VALUE ADJUSTMENT....................................................... 10
I. WITHDRAWAL CHARGE............................................................. 11
J. PAYMENT ON DEATH.............................................................. 12
K. ANNUITY PROVISIONS............................................................ 13
L. OTHER PROVISIONS.............................................................. 14
DISTRIBUTION OF THE CONTRACTS.......................................................... 15
FEDERAL TAX CONSIDERATIONS............................................................. 16
PREMIUM TAXES.......................................................................... 21
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 PROVISIONS............................. 21
MORE INFORMATION ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY............................ 21
A. HISTORY AND BUSINESS.......................................................... 21
B. SELECTED FINANCIAL DATA....................................................... 23
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................... 23
D. REINSURANCE................................................................... 29
E. CONTRACT OWNER ACCOUNT BALANCES............................................... 29
F. INVESTMENTS................................................................... 29
G. COMPETITION................................................................... 30
H. CERTAIN AGREEMENTS............................................................ 30
I. EMPLOYEES..................................................................... 30
J. PROPERTIES.................................................................... 30
K. STATE REGULATION.............................................................. 31
DIRECTORS AND EXECUTIVE OFFICERS....................................................... 32
EXECUTIVE COMPENSATION................................................................. 33
LEGAL PROCEEDINGS...................................................................... 35
LEGAL MATTERS.......................................................................... 35
EXPERTS................................................................................ 35
REGISTRATION STATEMENT................................................................. 35
FINANCIAL STATEMENTS OF MERRILL LYNCH LIFE INSURANCE COMPANY........................... 36
APPENDIX............................................................................... A-1
</TABLE>
------------------------
No person has been authorized to give any information or to make any
representation other than that contained in this Prospectus in connection with
the offer contained in this Prospectus and, if given or made, such information
or representation must not be relied upon as having been authorized. This
Prospectus does not constitute an offer of, or solicitation of an offer to
acquire, any Contracts or Certificates thereunder offered by this Prospectus in
any jurisdiction to anyone to whom it is unlawful to make such an offer or
solicitation in such jurisdiction.
2
<PAGE> 4
DEFINITIONS
account value: The sum of all subaccount values.
annuitant: The person on whose continuation of life annuity payments may
depend.
annuitant's beneficiary: The person to whom payment is to be made upon the
death of the annuitant.
annuity: A series of predetermined periodic payments.
annuity date: The date shown in the Certificate on which payment of an annuity
under the Contract will commence.
beneficiary: The person to whom payment is to be made on the death of the
participant or annuitant. There may be both a participant's beneficiary and an
annuitant's beneficiary if the participant is not an annuitant.
Certificate: An individual certificate of participation issued by Merrill Lynch
Life to each participant as evidence of his or her rights and benefits under the
Contract.
certificate anniversary: Each anniversary of the certificate date.
certificate date: The date on which a Certificate is issued under the Contract.
certificate year: The year starting on the certificate date or a certificate
anniversary and ending on the day immediately prior to the next certificate
anniversary.
co-annuitant: If two persons are named as annuitants in the Certificate, each
is a co-annuitant. In that case, "annuitant" means the co-annuitants, and death
of the annuitant refers to the death of the last co-annuitant.
Contract: The Contract described in and offered by this Prospectus.
Guarantee Period: The period of years for which a rate of interest is
guaranteed to be credited to a subaccount.
Market Value Adjustment: A positive or negative adjustment made to subaccount
value. It is applied on withdrawal of all or part of the subaccount value prior
to the end of the Guarantee Period. If the annuity date is prior to the end of a
Guarantee Period, the Market Value Adjustment is also applied at the annuity
date, except under certain circumstances. In addition, a Market Value Adjustment
is applied in the event of payment on the death of the participant or annuitant
prior to the annuity date unless the combined Market Value Adjustments of all
affected subaccounts would reduce the participant's account value. (See "Market
Value Adjustment" on page 10.)
Maximum Guarantee Period Option: An option to have subaccount values
automatically transferred to a subaccount with a Guarantee Period equal to the
longest Guarantee Period then offered by Merrill Lynch Life which (i) does not
exceed the length of the participant's longest Guarantee Period immediately
prior to transfer and (ii) ends on or prior to the annuity date. If the
participant's annuity date is less than one year from the date of transfer, the
subaccount value will be transferred to a subaccount with a one year Guarantee
Period.
net account value: The sum of all net subaccount values.
net subaccount value: The subaccount value after adjustment for any Market
Value Adjustment and withdrawal charge applied in connection with a full
withdrawal, annuitization or the payment of death benefits on the death of the
participant or annuitant prior to the annuity date.
nonqualified certificate: A Certificate issued in connection with a
nonqualified plan.
nonqualified plan: A retirement plan other than a qualified plan.
participant: The individual participating under the Contract to whom a
Certificate has been issued.
participant's beneficiary: The person to whom payment is to be made upon the
death of the participant.
qualified certificate: A Certificate issued in connection with a qualified
plan.
3
<PAGE> 5
qualified plan: A retirement plan that receives favorable tax treatment under
Section 401, 403, 404, 408, 457 or any similar provision of the Internal Revenue
Code.
subaccount: An account maintained for a participant corresponding to a
specified interest rate and Guarantee Period selected by the participant.
subaccount value: An amount equal to that part of a single premium allocated by
a participant to a subaccount, or any reinvestment in a subaccount, plus
credited interest, as adjusted for any prior withdrawals, Market Value
Adjustments and withdrawal charges.
withdrawal charge: A charge deducted from subaccount value upon a withdrawal
made prior to the end of a Guarantee Period.
4
<PAGE> 6
CAPSULE SUMMARY OF THE CONTRACT
THE CONTRACT
This Prospectus describes a group modified guaranteed annuity contract (the
"Contract") issued by Merrill Lynch Life. The Contract may be purchased by any
employer, entity or other organized group acceptable to Merrill Lynch Life. The
Contract is a group allocated contract, which means that specific accounts are
maintained for each individual within the group ("participant"). A Certificate
is issued to each participant summarizing his or her rights and benefits under
the Contract. Values and benefits provided under the Contract, including annuity
payments, are funded by the general assets of Merrill Lynch Life.
The Contract may be issued pursuant to nonqualified retirement plans or plans
qualifying for special tax treatment as "H.R. 10" plans, Individual Retirement
Annuities or Accounts, corporate pension and profit-sharing plans, Tax-Sheltered
Annuities or Section 457 deferred compensation ("Section 457") plans.
APPLICATION AND PREMIUMS
The applicant must complete and return a Contract application to Merrill Lynch
Life's Service Center. Merrill Lynch Life reserves the right to reject any
application. One Certificate will be issued for each single premium payment made
under the Contract. The minimum single premium is $5,000.
THE SUBACCOUNTS
One or more subaccounts are maintained for each participant. The minimum which
may be allocated to a subaccount is $5,000. A subaccount is established for each
specified interest rate and Guarantee Period selected by the participant. A
Guarantee Period is the period of years for which a rate of interest is
guaranteed. Currently, the participant may select Guarantee Periods of from one
to ten years. Merrill Lynch Life may, at its discretion, offer additional
Guarantee Periods.
At the end of a Guarantee Period, subaccount value for that Guarantee Period
will be transferred to one or more subaccounts designated by the participant. If
Merrill Lynch Life does not receive notice from the participant designating the
subaccounts to which the subaccount value is to be transferred, the subaccount
value will be transferred automatically to a subaccount with a one year
Guarantee Period unless the Maximum Guarantee Period Option is chosen. If the
Maximum Guarantee Period Option has been chosen, the subaccount value will be
transferred to a new subaccount with a Guarantee Period equal to the longest
Guarantee Period then offered by Merrill Lynch Life which (i) does not exceed
the length of the participant's longest Guarantee Period immediately prior to
transfer and (ii) ends on or prior to the annuity date.
CHARGES
Merrill Lynch Life makes no deductions from each single premium. Except for the
Market Value Adjustment described below, the only charge made is a withdrawal
charge in the event all or part of a net subaccount value is withdrawn. However,
no withdrawal charge is made for a withdrawal at the end of a Guarantee Period
if Merrill Lynch Life receives written notice of the withdrawal prior to the end
of the Guarantee Period. The withdrawal charge is equal to six months of
interest on the amount withdrawn based on the guaranteed interest rate of the
subaccount from which the withdrawal is made. No withdrawal charge is imposed in
the event of payment upon the death of the annuitant or participant or upon the
commencement of annuity payments. Premium taxes, if any, will be deducted from
the net account value at the annuity date.
MARKET VALUE ADJUSTMENT
A Market Value Adjustment is applied to any withdrawal from a subaccount prior
to the end of its Guarantee Period. It will also be applied at the annuity date
with respect to any subaccount having a Guarantee Period not ending on the
annuity date unless (i) the combined Market Value Adjustments of all affected
subaccounts would reduce the participant's account value and (ii) annuity
payments will be made for at least ten years or a life contingency or life
expectancy annuity option has been chosen. In addition, a Market Value
Adjustment
5
<PAGE> 7
will be applied in the event of payment upon the death of the participant or
annuitant prior to the annuity date unless the combined effect of the Market
Value Adjustments of all affected subaccounts would reduce the account value.
The amount of the Market Value Adjustment is determined in accordance with the
formula set forth on page 11 and may be positive or negative.
ANNUITY PAYMENTS
Annuity payments will start on the annuity date. The participant selects the
annuity date and an annuity payment option. Each participant may select a
different annuity date or annuity payment option later.
On the annuity date the net account value, less any applicable premium taxes, is
multiplied by Merrill Lynch Life's then current annuity purchase rates to
determine the amount of each annuity payment. The net account value is the sum
of all net subaccount values. In determining the net account value, a Market
Value Adjustment may be applied. If the net account value on the annuity date is
less than $5,000, Merrill Lynch Life may pay the net account value in a lump sum
in lieu of annuity payments. For tax consequences of a lump sum payment, see
"Federal Tax Considerations--Partial Withdrawals and Surrenders" on page 17. If
any annuity payment would be less than $50, Merrill Lynch Life may change the
frequency of payments to intervals that will result in payments of at least $50.
PAYMENT ON DEATH
If either the participant or the annuitant (if other than the participant) dies
prior to the annuity date, Merrill Lynch Life will pay to the participant's
beneficiary or annuitant's beneficiary, as applicable, the greater of the
account value or the net account value on the date of payment. In determining
the net account value, no withdrawal charge will be applied.
If the participant dies after the annuity date, any amounts remaining unpaid
will be paid to the participant's beneficiary pursuant to the same method of
distribution in force at the date of death. If the annuitant dies after the
annuity date, the annuitant's beneficiary may choose either to have any
guaranteed amounts remaining unpaid continue to be paid for the amount or period
guaranteed or to receive the present value of the remaining guaranteed payments
in a lump sum.
WITHDRAWALS
The participant may withdraw all or part of the net account value prior to the
earlier of the annuity date or the death of the annuitant. For partial
withdrawals, the withdrawal must be at least $500, the remaining subaccount
value of each subaccount, after adjustment for any Market Value Adjustment and
withdrawal charge, must be at least $1,000, and the remaining account value must
be at least $5,000. Withdrawals from qualified plans may be restricted. (See
"Qualified Plans" on page 19.) Withdrawals may have federal income tax
consequences, including a 10% penalty tax on the amount withdrawn. (See "Federal
Tax Considerations-- Penalty Tax on Certain Withdrawals" on page 18.)
REPORTS TO PARTICIPANTS
At least once each year prior to the annuity date, participants will be sent a
report outlining their account value, subaccount values, Guarantee Periods,
withdrawal charges and Market Value Adjustments, if any, applied during the
year. The report will not include financial statements.
FREE LOOK RIGHT
When the participant receives the Contract, it should be reviewed carefully to
make sure it is what the participant intended to purchase. Generally, within ten
days after the participant receives the Certificate, he or she may return it for
a refund. Some states allow a longer period of time to return the Certificate.
The Certificate must be delivered to Merrill Lynch Life's Service Center or to
the Financial Consultant who sold it for a refund to be made. Merrill Lynch Life
will then refund to the participant all premiums paid into the Certificate. The
Certificate will then be deemed void from the beginning.
6
<PAGE> 8
MERRILL LYNCH LIFE INSURANCE COMPANY
Merrill Lynch Life Insurance Company ("Merrill Lynch Life") is a stock life
insurance company organized under the laws of the State of Washington in 1986
and redomesticated under the laws of the State of Arkansas in 1991. Merrill
Lynch Life is an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch"), a corporation whose common stock is traded on the New York
Stock Exchange.
Merrill Lynch Life's home office is in Little Rock, Arkansas. The Service
Center's address and phone number are P.O. Box 44222, Jacksonville, Florida
32231-4222, (800) 535-5549.
All communications concerning the Contract and Certificate should be addressed
to Merrill Lynch Life's Service Center.
DESCRIPTION OF THE CONTRACT
A. GENERAL
The Contract is a group allocated contract pursuant to which specific accounts
are maintained for each participant. The Contract may be issued to any employer,
entity or other organized group acceptable to Merrill Lynch Life. The Contract
may be issued in connection with either qualified or nonqualified plans.
Qualified plans include "H.R. 10" plans, Individual Retirement Annuities or
Accounts, corporate pension and profit-sharing plans, Tax-Sheltered Annuities
and Section 457 deferred compensation plans.
An eligible member of a group to which a Contract has been issued may become a
participant by completing an application and forwarding payment of a single
premium to Merrill Lynch Life's Service Center. The application is subject to
Merrill Lynch Life's acceptance.
The rights and benefits of a participant are summarized in the Certificate.
Provisions of the Contract are controlling. All such rights and benefits may be
exercised without the consent of the contract owner. However, provisions of any
plan in connection with which the Contract has been issued may restrict a
person's eligibility to participate under the Contract, the minimum or maximum
amount of the single premium, and the participant's ability to exercise the
rights and/or receive the benefits provided under the Contract. Merrill Lynch
Life reserves the right to terminate a Contract as to eligible members of the
group not accepted as participants at the time of termination.
Contracts have been issued to Asset Group Trust (Sussex Trust Company,
Georgetown, Delaware, Trustee) as Contract holder for a group comprised of
account holders of Merrill Lynch, Pierce, Fenner & Smith Incorporated. Contracts
covering the same group have also been issued directly to Merrill Lynch, Pierce,
Fenner & Smith Incorporated. Participation under this group is not permissible
in some states.
B. PREMIUMS
One Certificate will be issued for each single premium paid under the Contract.
Only one Certificate will be issued to any one person on a given day. The single
premium must be at least $5,000. If the amount of any single premium is more
than $500,000, Merrill Lynch Life reserves the right to limit the amount of the
premium. The premium will be allocated to one or more subaccounts as selected by
the participant. The minimum allocation to a subaccount is $5,000. Merrill Lynch
Life will confirm its receipt of the payment and the subaccounts established for
the payment. The Certificate does not permit the payment of additional premiums.
An application for a separate Certificate must accompany each single premium.
C. SELECTING THE GUARANTEE PERIOD
The participant may select one or more Guarantee Periods for each single premium
or portion thereof. Merrill Lynch Life has discretion to determine the number of
Guarantee Periods it will offer. Currently it offers Guarantee Periods ranging
from one to ten years. Currently, the participant may select any of the ten
Guarantee Periods. Merrill Lynch Life will establish a subaccount corresponding
to each specified interest rate and Guarantee Period selected. Once a Guarantee
Period has been selected, it cannot be changed. Amounts
7
<PAGE> 9
cannot be transferred from one subaccount to another prior to the end of the
Guarantee Period. The participant may, however, withdraw amounts from a
subaccount, subject to the restrictions described below and a Market Value
Adjustment and withdrawal charge. (See "Market Value Adjustment" on page 10 and
"Withdrawal Charge" on page 11.) Withdrawals may have federal income tax
consequences, including a 10% penalty on amounts withdrawn. (See "Federal Tax
Considerations--In General" on page 17.)
D. SUBACCOUNT AND ACCOUNT VALUES
A participant's account value is the sum of all of his or her subaccount values.
Each subaccount value is equal to the amount the participant allocated to the
subaccount (either as part of the single premium or as part of the reinvestment
of subaccount value at the end of a Guarantee Period), plus the interest
credited thereto at the guaranteed rate, as adjusted for any prior withdrawals,
Market Value Adjustments or withdrawal charges. Merrill Lynch Life offers a
guaranteed interest rate for each subaccount. The participant is credited with
the guaranteed interest rate in effect on the date Merrill Lynch Life receives
his or her premium or reinvestment. The guaranteed interest rate will be
credited to the subaccount daily (except on a February 29th) to yield the quoted
guaranteed interest rate. Interest will be compounded annually on each
certificate anniversary.
E. SUBACCOUNT TRANSFERS
At the end of a subaccount's Guarantee Period, the participant may transfer
amounts in that subaccount to one or more new subaccounts with new Guarantee
Periods of any length then offered by Merrill Lynch Life. Interest rates for the
subaccounts to which transfers are made are guaranteed to be the same as the
initial guaranteed interest rates being offered at the time of transfer on new
Certificates.
Merrill Lynch Life will notify the participant of his or her right to transfer
amounts to new subaccounts at least 30 days prior to the end of the Guarantee
Period. Prior to the end of the current Guarantee Period, the participant may
advise Merrill Lynch Life of the new subaccounts to which the subaccount value
is to be transferred. The minimum amount that can be transferred to any one
subaccount is the lesser of (i) $5,000 or (ii) the total subaccount value at the
time of transfer. No withdrawal charge or Market Value Adjustment is applied in
connection with such transfers. If timely instructions are not received, Merrill
Lynch Life will transfer the subaccount value to a new subaccount with a
one-year Guarantee Period, unless the Maximum Guarantee Period Option has been
chosen by the participant. Subject to contractual and federal tax restrictions,
the participant may change his or her annuity date so that the Guarantee Period
of the new subaccount will end on or prior to the annuity date. (See "Annuity
Provisions--Change of Annuity Date or Annuity Option" on page 13.)
The Maximum Guarantee Period Option may be selected at any time prior to the end
of a Guarantee Period. If it has been chosen, at the end of a subaccount's
Guarantee Period the subaccount value will be transferred to a new subaccount
with a Guarantee Period equal to the longest Guarantee Period then offered by
Merrill Lynch Life which (i) does not exceed the length of the participant's
longest Guarantee Period immediately prior to transfer and (ii) ends on or prior
to the participant's annuity date. Under this option, if the subaccount value
cannot be transferred to the longest Guarantee Period in which the participant's
account value is invested immediately prior to transfer because such Guaranteed
Period would end after the participant's annuity date, the subaccount value will
be transferred to a subaccount with the next longest Guarantee Period then
offered by Merrill Lynch Life that ends on or prior to the participant's annuity
date. For example, assume that the Maximum Guarantee Period Option is chosen,
that a transfer occurs on March 1, 1995, that the participant's annuity date is
on August 1, 2000, and that the longest Guarantee Period in which the
participant's account value is invested is five years. If Merrill Lynch Life is
then offering a five year Guarantee Period, the subaccount value will be
transferred to a subaccount with a five year Guarantee Period since the
Guarantee Period will end prior to August 1, 2000. If, however, the longest
Guarantee Period in which the participant's account value is invested is six
years or more, the subaccount value will be transferred to a subaccount with a
five year Guarantee Period (or, if Merrill Lynch Life is not then offering a
five year Guarantee Period, the longest Guarantee Period of less than five years
then offered by Merrill Lynch Life) since a subaccount with a Guarantee Period
of six years would end after August 1, 2000. If the participant's
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<PAGE> 10
annuity date is less than one year from the date of transfer, Merrill Lynch Life
will transfer the subaccount value to a subaccount with a one year Guarantee
Period.
F. FIXING GUARANTEED INTEREST RATES
Merrill Lynch Life has no specific formula for establishing the guaranteed
interest rates for the different Guarantee Periods. The determination made will
be influenced by, but not necessarily correspond to, interest rates available on
fixed income investments which Merrill Lynch Life may acquire with the amounts
it receives as premiums under the Contracts. These amounts will be invested
primarily in investment-grade fixed income securities including: securities
issued by the United States Government or its agencies or instrumentalities,
which issues may or may not be guaranteed by the United States Government; debt
securities that have an investment grade, at the time of purchase, within the
four highest grades assigned by Moody's Investor Services, Inc. (Aaa, Aa, A or
Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally
recognized rating service; mortgage-backed securities collateralized by real
estate mortgage loans, or securities collateralized by other assets, that are
insured or guaranteed by the Federal Home Loan Mortgage Association, the Federal
National Mortgage Association or the Government National Mortgage Association,
or that have an investment grade at the time of purchase within the four highest
grades described above; other debt instruments; commercial paper; and cash or
cash equivalents. Participants will have no direct or indirect interest in these
investments. Merrill Lynch Life will also consider other factors in determining
the guaranteed rates, including regulatory and tax requirements, sales
commissions and administrative expenses borne by Merrill Lynch Life, general
economic trends and competitive factors. MERRILL LYNCH LIFE'S MANAGEMENT WILL
MAKE THE FINAL DETERMINATION OF THE GUARANTEED RATES IT DECLARES. MERRILL LYNCH
LIFE CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE INTEREST RATES.
G. WITHDRAWALS
Subject to certain conditions, a participant may withdraw all or part of his or
her net account value or net subaccount value prior to the earlier of the
annuity date or the death of the annuitant upon written notice received at
Merrill Lynch Life's Service Center before the annuity date. Withdrawals may
have federal income tax consequences, including a 10% penalty tax. (See "Federal
Tax Considerations--In General" on page 17.) For full withdrawal, the withdrawal
notice must be accompanied by the Certificate. Under qualified plans,
withdrawals may be permitted only in circumstances specified in the plan, the
consent of the participant's spouse may be required, and under Tax-Sheltered
Annuities and certain Section 401 plans, withdrawals attributable to
contributions made pursuant to a salary reduction agreement may be made only
after the participant reaches age 59 1/2 and in other limited circumstances.
(See "Qualified Plans" on page 19.)
Partial withdrawals must be at least $500, and the net subaccount value
remaining after the withdrawal must be at least $1,000, unless the entire
subaccount value is withdrawn. The remaining account value must be at least
$5,000. Otherwise, the partial withdrawal will not be permitted. The participant
must specify the subaccounts from which the withdrawal is to be made. If two or
more subaccounts from which the withdrawal is to be made have the same Guarantee
Period, the participant must first withdraw from the subaccount with the
shortest period of time remaining in its Guarantee Period until that subaccount
has been depleted.
The amount of the withdrawal will be paid to the participant, and any Market
Value Adjustment will be made to, and any withdrawal charge will be deducted
from, the subaccounts from which the withdrawal is made. Immediately after a
partial withdrawal, the subaccount value will equal the subaccount value prior
to the withdrawal, plus or minus any applicable Market Value Adjustment, minus
any applicable withdrawal charge, and minus the amount withdrawn. In the case of
a request to withdraw the entire amount from a subaccount, the participant
receives the net subaccount value (which reflects any adjustments to the
subaccount value for the withdrawal charge and Market Value Adjustment applied
in connection with such withdrawal). Upon such full withdrawal, the subaccount
value is reduced by the amount withdrawn as well as any applicable withdrawal
charge, and the Market Value Adjustment is applied, thereby reducing the
subaccount value to zero. (See "Market Value Adjustment" on page 10 and
"Withdrawal Charge" on page 11.) The tables which appear in the Appendix
illustrate the effect of a full withdrawal from a subaccount on the subaccount
value.
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<PAGE> 11
H. MARKET VALUE ADJUSTMENT
The Contract provides for the imposition of a Market Value Adjustment,
determined by application of the formula described below, in three
circumstances. First, whenever the participant makes a withdrawal from a
subaccount, other than one made at, and for which Merrill Lynch Life has
received written notice prior to, the end of such subaccount's Guarantee Period,
a Market Value Adjustment will be made.
Second, a Market Value Adjustment will be applied at the annuity date with
respect to any subaccount having a Guarantee Period not ending on or prior to
the annuity date, except that no Market Value Adjustment will be made if (i)
combined Market Value Adjustments of all affected subaccounts would reduce the
participant's account value and (ii) annuity payments will be made for at least
ten years or a life contingency or life expectancy annuity option has been
chosen. Thus, if at the annuity date a Market Value Adjustment, when applied to
all subaccounts, would increase the participant's account value, it will be made
with the result that the amount of the annuity payments payable to the
participant will be increased. If the Market Value Adjustment would reduce the
participant's account value, it will be made only if the participant elects an
annuity option providing for payments of less than ten years and not involving a
life contingency or life expectancy.
Third, a Market Value Adjustment is applied in the event of payment upon the
death of the participant or the annuitant prior to the annuity date unless the
combined Market Value Adjustments of all affected subaccounts would reduce the
participant's account value.
Because of the market value adjustment provision of the Contract, the
participant bears the investment risk that the guaranteed interest rates offered
by Merrill Lynch Life at the time the participant makes a withdrawal from a
subaccount or starts receiving annuity payments may be higher than the
guaranteed interest rate of the subaccount to which the Market Value Adjustment
is applied, with the result that the participant's subaccount value may be
substantially reduced.
The Market Value Adjustment will depend on the remaining time in the Guarantee
Period of the subaccount from which the withdrawal is made or to which the
adjustment is being applied and on the relationship between the guaranteed
interest rate of the subaccount from which the withdrawal or payment, as
applicable, is made to the guaranteed interest rates offered on new Certificates
at the time the Market Value Adjustment is applied. The Appendix contains tables
which illustrate the application of the Market Value Adjustment in the context
of full withdrawals from a hypothetical subaccount. The Market Value Adjustment
may result in either an increase or decrease in subaccount value, depending on
the relationship of (1) the current guaranteed interest rate for a period equal
to the time remaining in the subaccount, which rate is interpolated from the
rates currently offered by Merrill Lynch Life for subaccounts with Guarantee
Periods closest to such period, to (2) the guaranteed interest rate for the
subaccount. If the current guaranteed interest rate of (1) above is lower than
the guaranteed rate of (2), application of the Market Value Adjustment will
result in an increase in subaccount value; if (1) is higher than (2),
application of the Market Value Adjustment will result in a decrease in
subaccount value. If the adjustment is positive, the additional amount will be
credited to the subaccount. If negative, the amount of the adjustment will be
deducted from the subaccount value and will be retained by Merrill Lynch Life
for its own benefit.
The amount of the Market Value Adjustment is based on the relationship of the
guaranteed interest rates offered on new Certificates issued at the time the
Market Value Adjustment is applied to the guaranteed interest rate credited to
the subaccount from which the withdrawal or payment, as applicable, is made. If
the remaining period of time in the Guarantee Period is a whole number of years,
Merrill Lynch Life uses the guaranteed interest rate currently offered by it for
a Guarantee Period equal to the number of remaining years. If the remaining
period of time in the Guarantee Period is not a whole number of years, the
interest rate is derived from the guaranteed interest rates currently offered
for the Guarantee Periods nearest the remaining period of time. This derivation
is by straight line interpolation, except where the remaining period of time is
less than one year, in which case Merrill Lynch Life uses the current guaranteed
rate for a Guarantee Period of one year. For example, if the remaining period is
5.75 years, the interpolated guaranteed interest rate will be equal to the sum
of one-fourth of the five year rate and three-fourths of the six year rate. If
the five year rate
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<PAGE> 12
were 4.6% and the six year rate were 4.8%, the interpolated rate would be 4.75%,
4.6% times .25 plus 4.8% times .75.
The amount of the market value adjustment is determined from the following
formula:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1 + B n/365
A X [ 1- ( -------- ) ]
1 + C
</TABLE>
where "A" is (i) the amount withdrawn from the subaccount, in the case of a
partial withdrawal, or (ii) the net subaccount value, in the case of (a) a full
withdrawal from a subaccount, (b) a payment made due to the death of the
participant or annuitant prior to the annuity date, or (c) annuitization, "B" is
the current guaranteed interest rate that Merrill Lynch Life is offering for a
subaccount with a Guarantee Period of a duration of years equal to "n"/365 or
that is interpolated for "n"/365 based on the guaranteed interest rates offered
for subaccounts nearest "n"/365, "C" is the guaranteed interest rate for the
subaccount, and "n" is the remaining number of days in the Guaranteed Period of
the subaccount from which the withdrawal is made or to which the adjustment is
applied.
For example, assume that a withdrawal of $20,000 is made from a subaccount with
2,099 days (5.75 years) remaining in the Guarantee Period and a guaranteed
interest rate of 4.5%. Assume also that the guaranteed interest rates currently
offered for Guarantee Periods of 5 and 6 years are 4.6% and 4.8%, respectively.
"B" is equal to 4.75%, the sum of 4.8% times .75 and 4.6% times .25. To
calculate the Market Value Adjustment Merrill Lynch Life divides the sum of 1
and "B", 1.0475, by the sum of 1 and the guaranteed interest rate for the
affected subaccount, 1.045. The resulting figure, 1.0023923, is then taken to
the "n"/365 power, or 5.75 (2,099/365), which is 1.0138341. 1.0138341 is
subtracted from 1 and the resulting figure, -.0138341, is multiplied by the
amount of the withdrawal, $20,000, to give -$276.69. Since this figure is a
negative number, it is subtracted from the remaining subaccount value together
with any applicable withdrawal charge. If "B" had been 4.25%, instead of 4.75%,
the Market Value Adjustment would have been +$273.56, which would have been
added to the remaining subaccount value.
The greater the difference in interest rates, the greater the effect of the
Market Value Adjustment. If in the above example "B" had been 7%, 8%, and 9%,
the Market Value Adjustment would have been -$2,912.27, -$4,171.18 and
- -$5,486.70, respectively. The Market Value Adjustment is also affected by the
remaining period in the Guarantee Period of the subaccount from which the
withdrawal is made, which is "n" in the formula. Thus, if in the first example
above "n"/365 were 2.5 or 1.5, the Market Value Adjustment would be -$119.83 or
- -$71.81, respectively. Tables showing the impact of the Market Value Adjustment
and withdrawal charge on hypothetical full withdrawals are set forth in the
Appendix.
I. WITHDRAWAL CHARGE
A withdrawal charge is imposed if the participant makes a withdrawal from a
subaccount other than at the end of a subaccount's Guarantee Period. No
withdrawal charge is imposed if a withdrawal is made at the end of a Guarantee
Period where prior written notice was received at Merrill Lynch Life's Service
Center. The charge is equal to six months of interest computed on the net
account value withdrawn based on the guaranteed interest rate of the subaccount
from which the withdrawal is made. Thus, if the guaranteed interest rate is 5%
per year, the withdrawal charge will be 2.5%. The amount of the charge remains
the same whether or not six months' interest has been credited to the
subaccount. For a full withdrawal, the withdrawal charge will be deducted from
the amount withdrawn; for a partial withdrawal, the charge will be deducted from
the remaining value of the subaccounts from which the withdrawal was made.
Withdrawal charges do not apply to annuity payments or to any payment made due
to the death of the annuitant or participant.
The application of the withdrawal charge may be illustrated by the following
example. Assume a partial withdrawal of $7,000 made from two subaccounts, one
with a Guarantee Period of five years and a guaranteed interest rate of 4.5%,
the other with a Guarantee Period of three years and a guaranteed interest rate
of 3.65%, and each having a subaccount value of $5,000. Assume further that the
participant directs that the partial
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<PAGE> 13
withdrawal should be taken from the subaccount having the five year Guarantee
Period to the maximum extent possible and the remainder taken from the
subaccount having the three year Guarantee Period. Assume also that the Market
Value Adjustment applied to the five year Guarantee Period operates to reduce
its value by 22.75% and that the adjustment applied to the three year Guarantee
Period operates to reduce its value by 17%. The maximum withdrawal that can be
taken from the subaccount with the five year Guarantee Period is $4,000, since
the Market Value Adjustment applied to the $4,000 withdrawal reduces the
subaccount value by $910 (22.75% of $4,000) and the withdrawal charge of $90
(4.5% divided by 2, times $4,000) exhausts the remaining subaccount value. The
remaining portion of the requested withdrawal, $3,000 is deducted from the
subaccount with the three year Guarantee Period. Also deducted from that
subaccount are the Market Value Adjustment applicable to the $3,000 withdrawal,
$510 (17% of $3,000), and the withdrawal charge, $54.75 (3.65% divided by 2
times $3,000), resulting in a remaining subaccount value of $1,435.25.
J. PAYMENT ON DEATH
Death Prior to the Annuity Date. Subject to the rights of a participant's
surviving spouse in certain circumstances (described below), if the participant
or the annuitant (under a Contract where the participant is not an annuitant)
dies prior to the annuity date, Merrill Lynch Life will pay to the participant's
beneficiary or the annuitant's beneficiary, as applicable, the greater of the
account value or the net account value on the date of payment (the "death
benefit"). If the participant designates a co-annuitant, the death of the
annuitant occurs when both annuitants are deceased. In determining the net
account value, no withdrawal charge will be applied. Payment will be made upon
receipt by Merrill Lynch Life of proof of the death of the participant or
annuitant, as applicable (e.g., certified copy of death certificate), and,
subject to the special rules applicable to any participant's death (discussed
below), will be made in a lump sum unless an annuity option is chosen.
In the event of a participant's death, the death benefit generally must be
distributed within five years of the death of the participant. The participant's
beneficiary may, however, elect to receive the death benefit pursuant to a
payment option under which payments commence within one year of the
participant's death and which does not extend beyond the life expectancy of the
beneficiary. In addition, if the surviving spouse of a deceased participant is
the participant's beneficiary, the spouse may choose to become the participant
and to continue the Certificate in force on the same terms as before the
participant's death, in which event no death benefit is paid upon the death of
the deceased participant, and the spouse thereafter shall be the annuitant. If
the Certificate names more than one participant, the death of the participant
will be deemed to occur when the first participant dies.
If the participant is not the annuitant, the participant may irrevocably elect,
prior to the annuitant's death and prior to the annuity date, to continue the
Certificate in force in the event of the annuitant's death prior to the annuity
date on the same terms as before the annuitant's death. If the participant makes
this election, no death benefit is paid upon the death of the annuitant, and the
person designated by the participant at the time of the election shall become
the annuitant upon the death of the original annuitant prior to the annuity
date. This option is available only if the participant is a natural person or
the Certificate is issued in connection with a plan entitled to special tax
treatment under Sections 401 or 408 of the Internal Revenue Code.
If a beneficiary does not survive the participant or annuitant, as applicable,
the estate or heirs of the beneficiary have no rights under the Contract. If no
beneficiary survives the participant or annuitant, payment will be made to the
participant, if living, and if the participant is not living, to the
participant's estate.
If the participant is not an individual, the primary annuitant as determined in
accordance with Section 72(s) of the Internal Revenue Code (i.e., the individual
the events in the life of whom are of primary importance in affecting the timing
or amount of distributions under the Contract) will be treated as the
participant for purposes of these distribution requirements, and any change in
the primary annuitant will be treated as the death of the participant.
Death After the Annuity Date. If the participant dies after the annuity date,
any amounts remaining unpaid will be paid at least as rapidly as under the same
method of distribution in force at the date of death. If the annuitant dies
after the annuity date, the annuitant's beneficiary may choose either to have
any guaranteed amounts remaining unpaid continue to be paid for the amount or
period guaranteed or to receive the present
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<PAGE> 14
value of the remaining guaranteed payments in a lump sum. (See "Annuity
Provisions" below.) The present value will be determined using the interest rate
on which annuity payments were determined, and will be less than the sum of the
remaining guaranteed payments. If the annuitant's beneficiary dies while
guaranteed amounts remain unpaid, the present value of the remaining payments
will be paid in a lump sum to the beneficiary's estate.
K. ANNUITY PROVISIONS
General. Annuity payments will be paid to the participant and will commence on
the annuity date. The participant may or may not be the annuitant. The
participant designates the annuitant in the Certificate application and may
later change the annuitant upon written notice to Merrill Lynch Life. The
participant may also designate a co-annuitant, in which case the death of the
annuitant is deemed to occur when both co-annuitants are deceased.
The amount of monthly annuity payments, other than payments made pursuant to the
qualified plan option, will be determined by applying the net account value at
the annuity date, less any premium taxes, to the annuity option chosen using
Merrill Lynch Life's then current annuity rates. Those rates are guaranteed to
be no less favorable than the minimum guaranteed annuity rates shown in the
annuity tables contained in the Contract. Premium taxes imposed by states and
local jurisdictions currently range from 0% to 5% depending on the tax treatment
of the Contract. In determining the net account value, a Market Value Adjustment
will be applied to any subaccount if the annuity date is prior to the end of the
Guarantee Period for that subaccount unless (1) the combined effect of the
Market Value Adjustments applied to all affected subaccounts would reduce the
account value and (2) annuity payments under the option selected will be made
for at least ten years or a life contingency or life expectancy annuity option
has been chosen.
Selection of Annuity Date and Annuity Options. The participant may select the
annuity date and an annuity option in the Certificate application. If the
participant does not select an annuity date, the annuity date will be the first
day of the next month after the annuitant's 75th birthday and the annuity option
will be a life annuity with a 10 year guarantee. The annuity date must be the
first day of a calendar month. It may not be later than the first day of the
next month after the annuitant's 85th birthday. (For qualified Certificates, the
annuity date generally may not be later than April 1 of the calendar year after
the calendar year in which the annuitant attains age 70 1/2.)
Change of Annuity Date or Annuity Option. The participant may change the
annuity date or the annuity option on written notice received at Merrill Lynch
Life's Service Center at least 30 days prior to the current annuity date.
Changes of the annuity date are subject to federal tax restrictions. (See
"Federal Tax Considerations" on page 16.)
Annuity Options. The participant may select any one of the following annuity
options or any other option satisfactory to the participant and Merrill Lynch
Life. For qualified Certificates, certain restrictions may apply.
PAYMENTS OF A FIXED AMOUNT: Equal payments in the amount chosen will be
made until the net account value applied under this option is exhausted.
The period over which payments are made must be at least five years.
PAYMENTS FOR A FIXED PERIOD: Payments will be made for the period chosen.
The period must be at least five years.
*LIFE ANNUITY: Payments will be made for the life of the annuitant.
Payments will cease with the last payment due prior to the annuitant's
death.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 OR 20 YEARS: Payments will be
made for the guaranteed period chosen (10 or 20 years) and as long
thereafter as the annuitant lives.
LIFE ANNUITY WITH GUARANTEED RETURN OF NET ACCOUNT VALUE: Payments will be
made until the sum of the annuity payments equals the net account value
applied under this option, and as long thereafter as the annuitant lives.
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<PAGE> 15
*JOINT AND SURVIVOR LIFE ANNUITY: Payments will be made during the
lifetimes of the annuitant and a designated second person. Payments will
continue as long as either is living.
QUALIFIED PLAN OPTION: This option is available only under qualified
Certificates. It is not available under Section 457 plans. Payments may be
based on (a) the life expectancy of the annuitant, (b) the joint life
expectancy of the annuitant and his or her spouse, or (c) the life
expectancy of the surviving spouse if the annuitant dies before the annuity
date. Payments will be made annually. Each payment will be equal to the net
account value on the first day of the calendar year divided by applicable
current life expectancy based on Internal Revenue Service regulations. Each
subsequent payment will be made on the anniversary of the annuity date.
Interest will be credited at Merrill Lynch Life's then current rate for
this option. The rate will not be less than that shown in the Contract. On
death of the measuring life or lives, any unpaid net account value will be
paid to the beneficiary in a lump sum.
*THESE OPTIONS ARE LIFE ANNUITIES UNDER WHICH IT IS POSSIBLE FOR THE PARTICIPANT
TO RECEIVE ONLY ONE ANNUITY PAYMENT IF THE ANNUITANT (OR THE ANNUITANT AND A
DESIGNATED SECOND PERSON) DIES AFTER THE FIRST PAYMENT, OR TO RECEIVE ONLY TWO
ANNUITY PAYMENTS IF THE ANNUITANT (OR THE ANNUITANT AND A DESIGNATED SECOND
PERSON) DIES AFTER THE SECOND PAYMENT, AND SO ON.
Minimum Annuity Payments. Annuity payments will be made monthly unless the
participant chooses less frequent payments or the qualified plan option,
provided that if any payment would be less than $50, Merrill Lynch Life may
change the frequency so payments are at least $50 each. If the net account value
to be applied at the annuity date is less than $5,000 ($3,500 for certain
qualified Certificates), Merrill Lynch Life may elect to pay that amount (not
less than the account value) in a lump sum. (For tax consequences of a lump sum
payment, see "Federal Tax Considerations" on page 16.)
Annuity Rates. Annuity rates will be no less favorable than those shown in the
annuity tables contained in the Contract. Those tables show the minimum
guaranteed amount of each monthly payment for each $1,000 applied according to
the age and sex of the annuitant at the annuity date. The tables are based on
the 1983 Table "a" for Individual Annuity Valuation with current mortality
adjustments. When required by law, Merrill Lynch Life will use annuity tables
that do not differentiate on the basis of sex.
The Contract contains a formula for adjusting the age of the annuitant based on
the annuity date for purposes of determining minimum monthly annuity payments.
If the annuity date is prior to the year 2000, there is no age adjustment. If
the annuity date is between the years 2000 and 2009, the annuitant's age is
reduced by one year. For each decade thereafter, the annuitant's age is reduced
one additional year. The maximum age adjustment is four years.
An age adjustment results in a reduction in the minimum monthly annuity payments
that would otherwise be made. Therefore, if the rates Merrill Lynch Life is
using are the minimum rates shown in the annuity tables contained in the
Contract, it may be advantageous for the participant to designate an annuity
date that immediately precedes the date on which an age adjustment would occur
under the Contract. For example, the annuity payment rates in the annuity tables
for an annuitant with an annuity date in the year 2010 are the same as those for
an annuity date twelve months earlier, even though the annuitant is one year
older, because the new decade results in the annuitant's age being reduced by an
additional year. Current annuity rates, unlike the guaranteed rates, do not
involve any age adjustment.
Proof of Age, Sex and Survival. Merrill Lynch Life may require satisfactory
proof of the age, sex or survival of any person on whose continued life any
payment under the Certificate depends.
L. OTHER PROVISIONS
Beneficiary. The beneficiary is the person or persons named in the Certificate
application to whom payment is to be made upon the death of the participant or
annuitant. If the participant is not the annuitant, the participant may name one
beneficiary to receive payment on death of the participant and a different
beneficiary to receive payment on death of the annuitant. If the participant is
the annuitant, the participant's
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<PAGE> 16
beneficiary and the annuitant's beneficiary must be the same. Unless a
beneficiary has been irrevocably designated, the participant's beneficiary may
be changed while the participant is alive, and the annuitant's beneficiary may
be changed while the annuitant is alive. The change of a beneficiary who was
named by the participant irrevocably may only be made with the consent of the
beneficiary. The estate or heirs of a beneficiary who dies prior to the
participant or annuitant have no rights under the Contract. If no beneficiary
survives the participant or annuitant, payment will be made to the participant,
if living, or to the participant's estate if the participant has died. Certain
restrictions may apply in the case of qualified Certificates.
Assignment. Upon notice to Merrill Lynch Life, the participant may make a
collateral assignment of his or her rights under the Contract by transferring
the participant's Certificate to a creditor as a security for a debt. If the
Contract is issued pursuant to a qualified Plan, the participant's rights under
the Contract may not be assigned, pledged or transferred, unless permitted by
law. A collateral assignment does not change ownership of the Certificate. The
rights of a collateral assignee have priority over the rights of a beneficiary.
A collateral assignment may have federal income tax consequences. (See "Federal
Tax Considerations--Transfers, Assignments, or Exchanges of a Certificate" on
page 19.)
Notices and Elections. All notices, changes and choices the participant makes
under the Contract must be in writing, signed by the proper party and received
at Merrill Lynch Life's Service Center to be effective. The selection of
subaccounts in which the subaccount value at the end of a Guarantee Period is to
be invested or from which partial withdrawals are to be made may be made by
telephone. In addition, choices regarding the Maximum Guarantee Period Option,
pursuant to which Merrill Lynch Life transfers subaccount values in the absence
of instructions from a participant, may be made by telephone. Merrill Lynch Life
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. These procedures may include, but are not limited to,
possible recording of telephone calls and obtaining appropriate identification
before effecting any telephone transactions. In the absence of reasonable
procedures, Merrill Lynch Life may be liable for any losses due to unauthorized
or fraudulent instructions. Notices, changes and choices relating to
beneficiaries will take effect as of the date signed unless Merrill Lynch Life
has already acted in reliance on the prior status.
Amendment of Contract and Certificates. Merrill Lynch Life may amend the
Contract and the Certificates at any time as may be necessary to conform to any
applicable law, regulation or ruling issued by a government agency.
Deferral of Payments. All sums payable by Merrill Lynch Life are payable at its
Service Center. Merrill Lynch Life may require return of a Certificate prior to
making payment. Merrill Lynch Life may defer payments of partial or full
withdrawals for up to six months.
Free Look Right. When the participant receives the Contract, it should be
reviewed carefully to make sure it is what the participant intended to purchase.
Generally, within ten days after the participant receives the Certificate, he or
she may return it for a refund. Some states allow a longer period of time to
return the Certificate. The Certificate must be delivered to Merrill Lynch
Life's Service Center or to the Financial Consultant who sold it for a refund to
be made. Merrill Lynch Life will then refund to the participant all premiums
paid into the Certificate. The Certificate will then be deemed void from the
beginning. If a participant exercises his or her free look right, that
participant may not submit another application with the same annuitant for
ninety days.
Guarantee of Contracts and Certificates. The federal government or its
instrumentalities does not guarantee the Contracts or Certificates. Merrill
Lynch Life backs the guarantees associated with the Contracts and Certificates.
DISTRIBUTION OF THE CONTRACTS
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is the principal
underwriter of the Contract. It was organized in 1958 under the laws of the
state of Delaware and is registered as a broker-dealer under the Securities
Exchange Act of 1934. It is a member of the National Association of Securities
Dealers, Inc. ("NASD"). MLPF&S' principal business address is World Financial
Center, 250 Vesey Street, New York, New York 10281.
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<PAGE> 17
Contracts are sold by registered representatives (Financial Consultants) of
MLPF&S who are also licensed through various Merrill Lynch Life Agencies
("MLLA") as insurance agents for Merrill Lynch Life. Merrill Lynch Life has
entered into a distribution agreement with MLPF&S and companion sales agreements
with MLLA through which agreements the Contracts are sold and the Financial
Consultants are compensated by MLLA and/or MLPF&S. The maximum commission paid
to the Financial Consultant is 3.2% of each premium. In addition, the maximum
compensation paid to the Financial Consultant for each reinvestment is 2.8% of
account value reinvested. Commissions may be paid in the form of non-cash
compensation.
The maximum commission Merrill Lynch Life will pay to the applicable insurance
agency to be used to pay commissions to Financial Consultants is 7% of each
premium. In addition, the maximum compensation Merrill Lynch Life will pay to
the applicable insurance agency to be used to pay compensation to Financial
Consultants for reinvestment is 4.8% of account value reinvested.
MLPF&S may arrange for sales of the Contract by other broker-dealers who are
registered under the Securities Exchange Act of 1934 and are members of the
NASD.
FEDERAL TAX CONSIDERATIONS
INTRODUCTION
The following discussion is general and is not intended as tax advice.
This discussion is not intended to address the tax consequences resulting from
all of the situations in which a person may be entitled to or may receive a
distribution under the Contract. Any person concerned about these tax
implications should consult a competent tax adviser before initiating any
transaction. This discussion is based upon Merrill Lynch Life's understanding of
the present federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of the
continuation of the present federal income tax laws or of the current
interpretation by the Internal Revenue Service. Moreover, no attempt has been
made to consider any applicable state or other tax laws.
MERRILL LYNCH LIFE DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY
CONTRACT OR CERTIFICATE ISSUED THEREUNDER OR ANY TRANSACTION INVOLVING THE
CONTRACTS OR CERTIFICATES.
The Contract may be purchased on a non-qualified tax basis ("non-qualified
Contract") or purchased and used in connection with plans qualifying for
favorable tax treatment ("qualified Contract"). The qualified Contracts were
designed for use by individuals whose premium payment is comprised solely of
proceeds from and/or contributions under retirement plans which are intended to
qualify as plans entitled to special income tax treatment under Section 401(a),
403, 404, 408, or 457 of the Internal Revenue Code. The ultimate effect of
federal income taxes on the amounts held under a Contract, on annuity payments,
and on the economic benefit to the participant, the annuitant, or the
beneficiary depends on the type of retirement plan, on the tax and employment
status of the individual concerned and on Merrill Lynch Life's tax status. In
addition, certain requirements must be satisfied in purchasing a qualified
Contract with proceeds from a tax qualified plan and receiving distributions
from a qualified Contract in order to continue receiving favorable tax
treatment. Therefore, purchasers of qualified Contracts or Certificates issued
thereunder should seek competent legal and tax advice regarding the suitability
of a Contract for their situation, the applicable requirements, and the tax
treatment of the rights and benefits of a Contract. The following discussion
assumes that qualified Contracts are purchased with proceeds from and/or
contributions under retirement plans that qualify for the intended special
federal income tax treatment.
TAXATION OF MERRILL LYNCH LIFE
Merrill Lynch Life is taxed as a life insurance company under Part I of
Subchapter L of the Internal Revenue Code. The assets underlying the Contracts
will be owned by Merrill Lynch Life. The income earned on such assets will be
income to Merrill Lynch Life.
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<PAGE> 18
TAX STATUS OF THE CONTRACT
Merrill Lynch Life believes that the Contract will be treated as an annuity
contract and that Merrill Lynch Life will be treated as owning the assets
supporting the Contract for federal income tax purposes. Merrill Lynch Life,
however, reserves the right to modify the Contract as necessary to prevent the
contract owner or participant from being considered the owner of the assets
supporting the Contract for federal tax purposes.
Furthermore, in order to be treated as an annuity contract for federal income
tax purposes, Section 72(s) of the Internal Revenue Code requires any
non-qualified Contract to provide that (a) if any participant dies on or after
the annuity commencement date but prior to the time the entire interest in the
Certificate has been distributed, the remaining portion of such interest will be
distributed at least as rapidly as under the method of distribution being used
as of the date of that participant's death; and (b) if any participant dies
prior to the annuity commencement date, the entire interest in the Certificate
will be distributed within five years after the date of the participant's death.
These requirements will be considered satisfied as to any portion of the
participant's interest which is payable to or for the benefit of a "designated
beneficiary" and which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of that
participant's death. The participant's "designated beneficiary" (referred to
herein as the "participant's beneficiary") is the person designated by such
participant as a beneficiary and to whom the participant's interest in the
Certificate passes by reason of death and must be a natural person. However, if
the participant's "designated beneficiary" is the surviving spouse of the
participant, the Certificate may be continued with the surviving spouse as the
new participant. Solely for purposes of applying the provisions of Section 72(s)
of the Code, when non-qualified Contracts are held by other than a natural
person, the death of the annuitant is treated as the death of the participant.
The non-qualified Contracts contain provisions which are intended to comply with
the requirements of Section 72(s) of the Internal Revenue Code, although no
regulations interpreting these requirements have yet been issued. Merrill Lynch
Life intends to review such provisions and modify them if necessary to assure
that they comply with the requirements of Internal Revenue Code Section 72(s)
when clarified by regulation or otherwise.
Other rules may apply to qualified Contracts.
THE FOLLOWING DISCUSSION ASSUMES THAT THE CONTRACTS WILL QUALIFY AS ANNUITY
CONTRACTS FOR FEDERAL INCOME TAX PURPOSES.
FEDERAL TAX CONSIDERATIONS
a. In General
Section 72 of the Internal Revenue Code governs taxation of annuities in
general. Merrill Lynch Life believes that a participant who is a natural person
generally is not taxed on increases in the value of a Contract until
distribution occurs by withdrawing all or part of the account value (e.g.,
partial withdrawals and surrenders) or as annuity payments under the annuity
option elected. For this purpose, the assignment, pledge, or agreement to assign
or pledge any portion of the account value (and in the case of a qualified
Contract, any portion of an interest in the qualified plan) generally will be
treated as a distribution. The taxable portion of a distribution (in the form of
a single sum payment or an annuity) is taxable as ordinary income.
A participant in any annuity contract who is not a natural person generally must
include in income any increase in the excess of the Contract's account value
over the "investment in the contract" (discussed below) during the taxable year.
There are some exceptions to this rule and a prospective participant that is not
a natural person may wish to discuss these with a competent tax adviser.
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<PAGE> 19
The following discussion generally applies to Contracts whose participants are
natural persons.
b. Partial Withdrawals and Surrenders
In the case of a partial withdrawal or surrender under a qualified Contract or
Certificate issued thereunder, under Section 72(e) of the Internal Revenue Code
a ratable portion of the amount received is taxable, generally based on the
ratio of the "investment in the contract" to the participant's total accrued
benefit or balance under the retirement plan. The "investment in the contract"
generally equals the portion, if any, of any premium payments paid by or on
behalf of any individual under a Contract which was not excluded from the
individual's gross income. For Contracts issued in connection with qualified
plans, a participant's "investment in the contract" can be zero. Special tax
rules may be available for certain distributions under qualified Contracts.
In the case of a partial withdrawal under a non-qualified Contract before the
annuity date, under Internal Revenue Code Section 72(e) amounts received are
generally first treated as taxable income to the extent that the account value
immediately before the partial withdrawal (increased by the net excess, if any,
of the sum of all Market Value Adjustments that increase any subaccount value
over the sum of all Market Value Adjustments that decrease any subaccount value
which result from the partial withdrawal) exceeds the "investment in the
contract" at that time. Any additional amount withdrawn is not taxable.
It is important to note that the Contract is an integrated annuity contract and
that therefore in determining the extent to which a withdrawal from one
subaccount is taxable, the account value and "investment in the contract" for
the entire Contract, not just the subaccount from which the withdrawal is made,
will be taken into account.
In the case of a surrender under a non-qualified Contract, under Section 72(e)
amounts received are generally treated as taxable income to the extent the net
amount received exceeds the "investment in the contract" at that time.
c. Annuity Payments
Although tax consequences may vary depending on the annuity option elected under
the Contract, under Internal Revenue Code Section 72(b), generally gross income
does not include that part of any amount received as an annuity under an annuity
contract that bears the same ratio to such amount as the investment in the
contract bears to the expected return at the annuity date. In this respect
(prior to recovery of the investment in the contract), there is generally no tax
on the amount of each payment which represents the same ratio that the
"investment in the contract" bears to the total expected value of the annuity
payments for the term of the payments; however, the remainder of each income
payment is taxable. In all cases, after the "investment in the contract" is
recovered, the full amount of any additional annuity payments is taxable.
d. Penalty Tax on Certain Withdrawals
In the case of a distribution under a non-qualified Contract, there may be
imposed a federal penalty tax equal to 10% of the amount treated as taxable
income. In general, however, there is no penalty tax on distributions: (1) made
on or after the date on which the participant attains age 59 1/2; (2) made as a
result of death or disability of the participant; (3) received in substantially
equal periodic payments over the life or life expectancy of the participant (or
joint life or life expectancy of the participant and a designated beneficiary).
In certain circumstances, other exceptions may apply. Other tax penalties may
apply to certain distributions under a qualified Contract.
e. Taxation of Death Benefit Proceeds
Amounts may be distributed from a Contract because of the death of the
participant, the annuitant, or the coannuitant. Generally, such amounts are
includable in the income of the recipient as follows: (1) if distributed in a
lump sum, they are taxed in the same manner as a full surrender of the Contract,
as described above, or (2) if distributed under an annuity option, they are
taxed in the same manner as annuity payments, as described above.
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f. Transfers, Assignments, or Exchanges of a Certificate
A transfer of ownership of a Certificate, the designation of an annuitant, payee
or other beneficiary who is not also the participant, or the exchange of a
Certificate may result in certain tax consequences to the participant that are
not discussed herein. A participant contemplating any such transfer, assignment,
or exchange of a Certificate should contact a competent tax adviser with respect
to the potential tax effects of such a transaction.
g. Multiple Contracts or Certificates
All non-qualified annuity Contracts or Certificates issued thereunder entered
into after October 21, 1988 that are issued by Merrill Lynch Life (or its
affiliates) to the same owner during any calendar year are treated as one
annuity Contract for purposes of determining the amount includable in gross
income under Section 72(e) of the Internal Revenue Code. In addition, the
Treasury Department has specific authority to issue regulations that prevent the
avoidance of Section 72(e) through the serial purchase of annuity Contracts or
otherwise. Congress has also indicated that the Treasury Department may have
authority to treat the combination purchase of an immediate annuity Contract and
a separate deferred annuity Contract as a single annuity Contract under its
general authority to prescribe rules as may be necessary to enforce the income
tax laws.
h. Withholding
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. As of January 1, 1993, Merrill Lynch Life is generally required
to withhold on distributions under qualified Contracts.
i. Other Tax Consequences
As noted above, the foregoing discussion of the federal income tax consequences
under the Contract or Certificate issued thereunder is not exhaustive and
special rules are provided with respect to other tax situations not discussed in
this Prospectus. Further, the federal income tax consequences discussed herein
reflect Merrill Lynch Life's understanding of current law and the law, or its
interpretation by the Internal Revenue Service, may change. Federal estate and
state and local income, estate, inheritance, and other tax consequences of
ownership or receipt of distributions under a Contract depend on the individual
circumstances of each participant or recipient of the distribution. A competent
tax adviser should be consulted for further information.
QUALIFIED PLANS
The Contract is designed for use with several types of qualified plans. These
retirement plans may permit the purchase of the Certificates to accumulate
retirement savings under the plans. Adverse tax or other legal consequences to
the plan, to the participant or to both may result if the Certificate is
assigned or transferred to any individual as a means to provide benefit
payments, unless the plan complies with all legal requirements applicable to
such benefits prior to transfer of the Certificate. The tax rules applicable to
participants in qualified plans, including restrictions on contributions and
benefits, taxation of distributions, and any tax penalties, vary according to
the type of plan and the terms and conditions of the plan itself. Various tax
penalties may apply to contributions in excess of specified limits, aggregate
distributions in excess of $150,000 annually, distributions that do not satisfy
specified requirements, and certain other transactions with respect to qualified
plans. Therefore, no attempt is made to provide more than general information
about the use of the Contracts with the various types of qualified plans.
Participants, annuitants, and beneficiaries are cautioned that the rights of any
person to any benefits under qualified plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. Some retirement plans are subject to distribution and other
requirements that are not incorporated into Merrill Lynch Life's administration
procedures. Owners, participants, and beneficiaries are responsible for
determining that
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contributions, distributions and other transactions with respect to the
Certificates comply with applicable law. Following are brief descriptions of the
various types of qualified plans in connection with which Merrill Lynch Life
will issue a Contract. When issued in connection with a qualified plan, a
Contract will be amended as necessary to conform to the requirements of the
Internal Revenue Code.
H.R. 10 Plans
The Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly
referred to as "H.R. 10," permits self-employed individuals to establish
qualified plans for themselves and their employees. In order to establish such a
plan, a plan document, often in prototype form preapproved by the Internal
Revenue Service, is adopted and implemented by or for the self-employed person.
Purchasers of Contracts for use with H.R. 10 Plans should seek competent advice
regarding the suitability of the proposed plan documents and of the Contract to
their specific needs.
Individual Retirement Annuities and Individual Retirement Accounts
Section 408 of the Internal Revenue Code permits eligible individuals to
contribute to an individual retirement program known as an Individual Retirement
Annuity or Individual Retirement Account (each hereinafter referred to as
"IRA"). Also, distributions from certain other types of qualified plans may be
"rolled over" on a tax-deferred basis into an IRA. Sales of the Certificates for
use with or as IRAs may be subject to special disclosure requirements of the
Internal Revenue Service. Purchasers of the Contract for use with or as IRAs
will be provided with supplemental information required by the Internal Revenue
Service or other appropriate agency. Such purchasers will have the right to
revoke their purchase within 7 days of the earlier of the establishment of the
IRA or their purchase. Purchasers should seek competent advice as to the
suitability of the Contract and Certificate for use with or as IRAs.
Corporate Pension and Profit Sharing Plans
Section 401(a) of the Internal Revenue Code permits corporate employers to
establish various types of retirement plans for employees. Such retirement plans
may permit the purchase of the Contracts in order to provide benefits under the
plans. Corporate employers intending to use the Contracts in connection with
such plans should seek competent advice.
Tax-Sheltered Annuities
Section 403(b) of the Internal Revenue Code permits public school employees and
employees of certain types of religious, charitable, educational and scientific
organizations specified in Section 501(c)(3) of the Internal Revenue Code to
purchase annuity contracts and, subject to certain limitations, exclude the
amount of premiums from gross income for tax purposes. These annuity contracts
are commonly referred to as "Tax-Sheltered Annuities." Premiums excluded from
gross income will be subject to FICA taxes. Purchasers using the Contracts or
Certificates as Tax-Sheltered Annuities should seek competent advice as to
eligibility, limitations on permissible amounts of premiums and tax consequences
on distribution. Withdrawals under Tax-Sheltered Annuities which are
attributable to contributions made pursuant to salary reduction agreements are
prohibited unless made after the participant attains age 59 1/2, upon the
participant's separation of service, upon the participant's death or disability,
or for an amount not greater than the total of such contributions in the case of
hardship.
Section 457 Deferred Compensation ("Section 457") Plans
Under Section 457 of the Internal Revenue Code, employees and independent
contractors who perform services for tax-exempt employers may participate in a
Section 457 plan of their employer allowing them to defer part of their salary
or other compensation. The amount deferred and any income on such amount will
not be taxable until paid or otherwise made available to the employee.
The maximum amount that can be deferred under a Section 457 plan in any tax year
is ordinarily one-third of the employee's includable compensation, up to $7,500.
Includable compensation means earnings for services
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rendered to the employer which is includable in the employee's gross income, but
excluding any contributions under the Section 457 plan or a Tax-Sheltered
Annuity. During the last three years before an individual attains normal
retirement age additional "catch-up" deferrals are permitted.
The deferred amounts will be used by the employer to purchase Certificates under
the Contracts. Certificates will be issued to the employer, and all account
values will be subject to the claims of the employer's creditors. The employee
has no rights or vested interest in the Contract or Certificate and is only
entitled to payment in accordance with the Section 457 plan provisions. Present
federal income tax law does not allow tax-free transfers or rollovers for
amounts accumulated in a Section 457 plan except for transfers to other Section
457 plans in certain limited cases.
PREMIUM TAXES
Various states, municipalities and jurisdictions impose a premium tax on annuity
premiums when they are received by an insurance company. In other jurisdictions,
a premium tax is paid on the contract value on the annuity date.
Merrill Lynch Life will pay these taxes when due, and a charge for any premium
taxes imposed by a state, local government or jurisdiction will be deducted from
the contract value on the annuity date. Premium tax rates vary from jurisdiction
to jurisdiction and currently range from 0% to 5%.
Premium tax rates are subject to change by law, administrative interpretations,
or court decisions. Premium tax amounts will depend on, among other things, the
participant's state or jurisdiction of residence, Merrill Lynch Life's status
within that state or jurisdiction, and the premium tax laws of that state or
jurisdiction.
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 PROVISIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes fiduciary, prohibited transaction and other requirements with respect to
employee benefit plans to which it applies. In certain circumstances these
requirements may be applicable to the management of an insurance company
account. Merrill Lynch Life believes that the account established for the
Contracts is a guaranteed contract separate account within the meaning of
Prohibited Transaction Class Exemption 81-82 and that assets attributed to the
account will not be treated as "plan assets" under regulations promulgated by
the Department of Labor. Prior to purchasing a Contract or Certificate, however,
the fiduciary responsible for investments of a plan subject to ERISA should
become fully informed regarding the relevant terms of the Contract, including
the market value adjustment and withdrawal charge, and should take account of
the anticipated liquidity needs of the plan in determining whether to purchase
the Contract or Certificate.
MORE INFORMATION ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY
A. HISTORY AND BUSINESS
Merrill Lynch Life was incorporated under the laws of the State of Washington on
January 27, 1986 by Family Life Insurance Company ("Family Life") which at the
time was an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch"). Merrill Lynch Life is engaged in the sale of life insurance
and annuity products. During 1986 and 1987 its insurance activities were limited
as Merrill Lynch Life sought to obtain licenses from various jurisdictions to
conduct life insurance and annuity business. Merrill Lynch Life commenced the
public sale of insurance products in 1988. The products introduced during 1988
consisted of single premium and flexible premium annuity contracts.
Effective December 28, 1990, Merrill Lynch Life entered into an indemnity
reinsurance agreement with Family Life (the "Family Life agreement"), whereby
Merrill Lynch Life agreed to indemnify Family Life for all of its liabilities
under life insurance and annuity contracts issued by it and distributed by
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"). As a result of
the Family Life agreement, Merrill Lynch Life received from Family Life
$2,361,197,000, representing the value of the statutory reserve liabilities
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attributable to such contracts, excluding variable annuity contracts, less a
ceding commission payable to Family Life. In March of 1991, Family Life and
Merrill Lynch Life entered into an assumption reinsurance agreement. Under the
terms of the assumption reinsurance agreement, as state regulatory approvals are
obtained, these contracts become direct contract owner obligations of Merrill
Lynch Life. At various dates during 1991, Merrill Lynch Life and two affiliates
Tandem Insurance Group, Inc. ("Tandem") and Royal Tandem Life Insurance Company
(now named ML Life Insurance Company of New York), assumption reinsured
substantially all of the contracts under the Family Life agreement. Merrill
Lynch Life transferred to the two affiliates assets approximately equal to the
statutory reserve liabilities attributable to the contracts assumption reinsured
by them. Contracts not assumed remain subject to the Family Life agreement, and
Merrill Lynch Life is responsible for the servicing of these contracts. Those
contracts assumed by Tandem subsequently became contracts of Merrill Lynch Life
as a result of the merger of Tandem with and into Merrill Lynch Life, as
described below.
On June 12, 1991, Family Life was sold to Financial Industries Corporation, and
contemporaneously Merrill Lynch Life became a direct wholly owned subsidiary of
Merrill Lynch Insurance Group, Inc. ("MLIG"), an indirect wholly owned
subsidiary of Merrill Lynch.
On August 30, 1991, Merrill Lynch Life redomesticated from the State of
Washington to the State of Arkansas and is subject to primary regulation by the
Arkansas Insurance Department.
On October 1, 1991, Tandem Insurance Group, Inc. ("Tandem"), an affiliate of
Merrill Lynch Life, was merged with and into Merrill Lynch Life. Tandem, which
at the time of its organization in 1952 was named Cornbelt Insurance Company,
had various names and was under various ownership until 1986. Tandem became a
wholly owned subsidiary of Tandem Financial Group, Inc. ("TFG") on July 31,
1986, and in October 1989, Merrill Lynch purchased the remaining interest in TFG
and became its sole shareholder. At that time, TFG and Tandem became indirect
wholly owned subsidiaries of Merrill Lynch. On September 6, 1990, TFG changed
its name to Merrill Lynch Insurance Group, Inc.
On December 31, 1990, pursuant to an indemnity reinsurance and assumption
agreement entered into on November 14, 1990 by Tandem and Royal Tandem Life
Insurance Company, Tandem and Royal Tandem Life Insurance Company reinsured on a
100% indemnity basis all variable life insurance policies ("reinsured policies")
issued by Monarch Life Insurance Company ("Monarch Life") and sold through an
affiliate of MLPF&S. As a result, Tandem became obligated to reimburse Monarch
Life for its net amount at risk with regard to the reinsured policies. In
connection with the indemnity reinsurance agreement, assets of approximately
$553 million supporting general account reserves were transferred from Monarch
Life to Tandem.
On various dates during 1991, Tandem and Royal Tandem Life Insurance Company
assumed the reinsured policies, wherever permitted by appropriate regulatory
authorities, replacing Monarch Life. In connection with the assumption, separate
account assets and reserves associated with the reinsured policies of
approximately $2,625 million were transferred to Tandem. The aggregate face
amount of the reinsured policies assumed by Tandem was approximately $6,200
million.
Information pertaining to contract owner deposits, contract owner account
balances, and capital contributions can be found in Merrill Lynch Life's
financial statements which are contained herein.
Merrill Lynch Life is currently licensed in 49 states, the District of Columbia,
the Virgin Islands, and Guam. During 1993, life insurance and annuity sales were
made in all states Merrill Lynch Life was licensed in, with the largest
concentration in Florida, 16%, California, 13%, and Texas, 13%, as measured by
total contract owner deposits.
Merrill Lynch Life's insurance products are sold primarily by licensed agents
affiliated with Merrill Lynch Life Agency, Inc. and other life insurance
agencies affiliated with MLPF&S. Insurance sales will be made by career life
insurance agents whose sole responsibility is the sale and servicing of
insurance and by Financial Consultants of MLPF&S who are also licensed as
insurance agents. At December 31, 1993, approximately 11,445 agents affiliated
with Merrill Lynch Life Agencies were authorized to act for Merrill Lynch Life.
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B. SELECTED FINANCIAL DATA
The following selected financial data for Merrill Lynch Life should be read in
conjunction with the financial statements and notes thereto included in this
Prospectus.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA*
FOR THE PERIODS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Investment Income..... $ 586,461 $ 712,739 $ 787,603 $ 465,866 $ 352,651
Earnings Before Federal
Income Tax.............. $ 72,775 $ 25,667 $ 14,068 $ 39,784 $ 39,155
Net Earnings.............. $ 47,860 $ 17,031 $ 11,608 $ 23,977 $ 25,589
Total Assets.............. $12,249,577 $11,783,961 $12,241,054 $8,806,682** $4,603,433
Stockholder's Equity...... $ 687,055 $ 762,474 $ 741,314 $ 648,452 $ 348,933
</TABLE>
- ---------------
* The financial information presented herein has been restated to reflect the
merger of Tandem with and into Merrill Lynch Life.
** If business derived from the indemnity reinsurance agreement were excluded,
total assets in 1990 would have been $6,310,069.
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Financial Statements and Notes
to Financial Statements included herein.
Business Environment
The current business environment remains challenging for the life insurance
industry. Major modifications to state regulations based on model laws of the
National Association of Insurance Commissioners ("NAIC"), and the process of
NAIC state accreditation are being debated and implemented by the NAIC.
Competition remains keen as innovative products are introduced to the
marketplace. Interest rates have fallen over the previous three years reaching
historically low levels during 1993. Additionally, during 1993, increases in
both corporate and individual federal income tax rates were adopted.
Both the increase in the marginal individual income tax rates and the current
interest rate environment have resulted in individual investors seeking higher
tax deferred returns than are currently available with traditional interest
sensitive products. The insurance industry has responded with variable life
insurance and variable annuity products that provide insurance features similar
to those of traditional interest sensitive products, but with the opportunity to
achieve comparatively higher returns through diversified investing in mutual
fund portfolios.
The current interest rate environment has spurred debt refinancings in both the
institutional and individual sectors. Directly related to this refinancing
activity has been an increased use of the call feature on corporate bonds and
accelerated principal repayments of mortgage-backed securities. Holders of these
securities have reinvested cash proceeds into the historically low yield curve.
This effect, coupled with the increase in the corporate federal income tax rate,
will contribute adversely to net earnings in the industry.
Summary
During 1991, Merrill Lynch Life changed its strategic marketing emphasis from
sales of fixed interest rate life insurance and annuity products to sales of
variable life insurance, variable annuity and market value adjusted annuity
products. Beginning in 1991 and continuing into 1993, Merrill Lynch Life
developed both variable life insurance and variable annuity products and
proceeded to obtain regulatory approvals to market these products. Merrill Lynch
Life began sales of its variable annuity product during the second quarter of
1992 in those jurisdictions in which it had regulatory authority. Deposits
received from the sales of this product were
23
<PAGE> 25
$1.348 billion and $169 million for 1993 and 1992, respectively. For 1993 and
1992, approximately $649 million and $80 million, respectively, of deposits were
a result of internal transfers from Merrill Lynch Life's fixed rate annuity
products. The remaining change in sales volume is reflective of the product
being available in more jurisdictions in 1993 as compared to 1992, and the
popularity of variable annuity products during 1993.
During 1993 and 1992, Merrill Lynch Life had approximately $1.269 billion and
$1.300 billion, respectively, of fixed deferred annuities which reached the
expiration of their interest rate guarantee periods. 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. Merrill Lynch Life 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 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
------------- -------------
AMOUNT % AMOUNT %
------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Renewed with an adjustment to the applicable interest
crediting rate.............................................. $ 273 22% $ 195 15%
Exchanged into either the variable annuity product or the
market value adjusted annuity product....................... 453 36% 325 25%
Surrendered................................................... 543 42% 780 60%
------ --- ------ ---
Total............................................... $1,269 100% $1,300 100%
------ --- ------ ---
------ --- ------ ---
</TABLE>
The rates of renewal, exchange and surrender experienced are consistent with
management's projections. The increase in contracts exchanging into Merrill
Lynch Life's available annuity products is primarily attributable to the
variable annuity product being more widely available in 1993 than it was in
1992. The increase in renewals during 1993 as compared to 1992 is attributable
to the minimum contractual rate available on the fixed deferred annuity products
approximating or exceeding the crediting rates available on Merrill Lynch Life's
market value adjusted annuity product.
During 1994, Merrill Lynch Life has $1.892 billion of fixed deferred annuities
which will reach the expiration of their interest rate guarantee periods (see
"Liquidity and Capital Resources," page 26). Merrill Lynch Life is anticipating
increases in sales volume of its variable annuity and variable life insurance
products. Partially offsetting these increases is an anticipated decrease in
sales volume of Merrill Lynch Life's market value adjusted annuity.
Merrill Lynch Life has been strategically migrating from underwriting interest
sensitive, general account products to underwriting variable, separate account
products. Such products address the need of the consumer to diversify insurance
related invested assets through the use of mutual fund portfolios and unit
investment trusts with the associated insulation of a separate account. Since
the contract owner assumes most investment risks with variable products, the
conventional risks of a general account such as interest rate risk,
asset/liability matching and asset default risk are not borne by Merrill Lynch
Life. Since Merrill Lynch Life does not bear those risks, capital needs should
be significantly reduced. In this regard, Merrill Lynch Life has developed a
comprehensive capital management plan which will continue to provide appropriate
levels of capital for the risks which Merrill Lynch Life assumes, but will allow
Merrill Lynch Life to reduce its absolute level of surplus. As a first step in
implementing this plan, on December 20, 1993, Merrill Lynch Life paid a $45
million ordinary dividend and a $75 million extraordinary dividend to MLIG.
Merrill Lynch Life received approval from the Arkansas Insurance Commissioner
prior to the declaration and payment of the extraordinary dividend.
Effective December 31, 1993, Merrill Lynch Life has adopted Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS No. 115") (See Note 1 of the Notes to
Financial Statements). SFAS No. 115 requires that certain invested assets be
carried at estimated fair value with the difference between fair value and
amortized cost being recorded in stockholder's equity as a component of net
unrealized gain (loss). The Securities and Exchange Commission has additionally
announced that companies should adjust other assets and liabilities that would
be adjusted
24
<PAGE> 26
had the unrealized holding gains or losses been realized with corresponding
credits or charges reported directly to stockholder's equity. The effect of
adopting SFAS No. 115 was a $228 million increase in the carrying value of fixed
maturity securities offset by a $36 million decrease in deferred policy
acquisition charges and a $193 million increase in policyholders' account
balances. The impact of SFAS No. 115 on stockholder's equity was minimal. These
adjustments will ultimately be recorded in the statement of earnings at the time
of sale of the investments or withdrawal of the contract owners' liability.
Additionally, normal amortization of deferred policy acquisition costs will be
unaffected.
During 1993, Merrill Lynch Life established an investment trading portfolio with
an objective of maximizing total return subject to Merrill Lynch Life's quality
guidelines. Investments in the portfolio consist primarily of marketable fixed
maturity and equity securities. Merrill Lynch Life records these securities at
estimated fair value with the change in the difference between estimated fair
value and amortized cost being recorded in net realized investment gains
(losses). At December 31, 1993, Merrill Lynch Life had $165 million invested in
this portfolio. During 1993, the portfolio contributed $19 million to earnings.
FINANCIAL CONDITION
At December 31, 1993, Merrill Lynch Life's assets were $12.250 billion, or $466
million higher than the $11.784 billion at December 31, 1992. Approximately $192
million of the increase was a result of adoption of SFAS No. 115. The remainder
of the increase was primarily attributable to sales of Merrill Lynch Life's
variable annuity product partially offset by surrenders of Merrill Lynch Life's
fixed rate annuity products. As Merrill Lynch Life strategically changes its
marketing efforts from the sale of fixed rate products to the sale of variable
products, Merrill Lynch Life's assets will be reallocated between the general
account and its separate account. As of December 31, 1993 and 1992, Merrill
Lynch Life's percentage of separate accounts assets to total assets was 38% and
27%, respectively. Merrill Lynch Life anticipates that the percentage of
separate accounts assets to total assets will continue to increase.
Merrill Lynch Life maintains a conservative investment portfolio. Merrill Lynch
Life's investment in equity securities, mortgages and real estate are
significantly below the industry average. Additionally, Merrill Lynch Life's
investment in non-investment grade bonds approximates the industry average. The
following schedule identifies Merrill Lynch Life's general account invested
assets by type:
<TABLE>
<S> <C>
Investment Grade Fixed Maturity Securities............................................ 78%
Policy Loans.......................................................................... 13%
Non-Investment Grade Fixed Maturity Securities........................................ 5%
Mortgage Loans on Real Estate......................................................... 3%
Equity Securities..................................................................... 1%
Real Estate........................................................................... 0%
---
100%
---
---
</TABLE>
Merrill Lynch Life's investment in collateralized mortgage obligations ("CMO")
and mortgage-backed securities ("MBS") accounts for approximately 37% and 50% of
Merrill Lynch Life's investment in fixed maturity securities as of December 31,
1993 and 1992, respectively. At December 31, 1993 and 1992, approximately 41%
and 73%, respectively, of Merrill Lynch Life's CMO and MBS holdings were fully
collateralized by the Government National Mortgage Association, the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation.
Merrill Lynch Life held at December 31, 1993 and 1992 approximately $174 million
and $220 million, respectively, of principal only strips, interest only strips
and residuals. CMOs and MBS securities are structured to allow the investor to
determine, within certain limits, the amount of interest rate risk, prepayment
risk and default risk which the investor is willing to accept. It is the level
of risk that the investor is willing to accept that determines the degree to
which the yields on CMOs and MBS securities will exceed the yields which can be
obtained from similarly rated corporate securities.
The historical low interest rate environment has resulted in Merrill Lynch Life
experiencing increases in both calls of corporate bonds and accelerated
principal repayments of mortgage-backed securities during both 1993 and 1992.
During 1993 approximately $2.077 billion or 64% of proceeds from disposal of
bonds was
25
<PAGE> 27
attributable to calls and mortgage backed security repayments. The net cash
inflows from the investment portfolios, including interest, calls, repayments
and maturities, have been reinvested at lower yields than the investments from
which the cash inflow was generated.
During 1993 eight commercial mortgage loans with a carrying value of $30 million
were foreclosed upon by Merrill Lynch Life. The carrying values approximate the
fair values of the properties. This compares with one foreclosure during 1992
with a carrying value of $3 million. The increase in foreclosures was
anticipated by Merrill Lynch Life and the carrying value of the mortgages
foreclosed upon had previously been adjusted. Merrill Lynch Life anticipates
further foreclosures in its commercial real estate portfolio. Substantially all
Merrill Lynch Life's investments in mortgage loans have balloon payments due at
the expiration of their loan term. It is anticipated that for those loans where
the securitized property is performing well in its market, the mortgage will be
fully satisfied at the maturity date as the borrower obtains alternative
financing. For those loans where the securitized property is not performing well
in its market, it is anticipated that the borrowers will be unable to obtain
alternative financing. Merrill Lynch Life will determine on an individual loan
basis the appropriate actions to maximize the return on its investment,
including both restructurings and foreclosures. Merrill Lynch Life continues to
carry reserves for future potential losses from mortgage loans.
As of December 31, 1993, Merrill Lynch Life had 130,099 life insurance and
annuity contracts in-force with interest rate guarantees. The estimated average
rate of interest credited on behalf of contract owners was 6.45% during 1993.
The liabilities related to insurance contracts with interest rate guarantees
were supported by invested assets with an estimated effective yield of 8.25%
during 1993.
During 1991, and to a lesser extent 1992, there were certain highly publicized
life insurance insolvencies. Merrill Lynch Life has utilized public information
to estimate what future assessments it will incur as a result of these
insolvencies. At December 31, 1993 and 1992, Merrill Lynch Life had accrued an
estimated liability for future guaranty fund assessments of $28 million and $27
million, respectively. Merrill Lynch Life regularly monitors public information
regarding insurer insolvencies and will adjust its estimated liability where
appropriate. (See Note 9 of the Notes to the Financial Statements for more
information concerning guaranty fund assessments.)
Liquidity and Capital Resources
Merrill Lynch Life's liquidity requirements include the payment of sales
commissions and other underwriting expenses and the funding of its contractual
obligations for the life insurance and annuity contracts it has in force.
Merrill Lynch Life has developed and utilizes a cash flow projection system and
regularly performs asset/liability duration matching in the management of its
asset and liability portfolios.
As previously noted, during 1994, Merrill Lynch Life will have $1.892 billion of
fixed deferred annuities reaching the expiration of their interest rate
guarantee periods. Merrill Lynch Life anticipates that approximately 80% of
these liabilities will either externally surrender or exchange into Merrill
Lynch Life's variable annuity or market value adjusted annuity products. In
either circumstance, Merrill Lynch Life will require cash to fund the surrender
benefit or the transfer of the liability to a separate account. During 1991, in
anticipation of the liquidity needs required to fund the surrenders and
exchanges experienced during 1993 and 1992 and anticipated for 1994, Merrill
Lynch Life initiated a program whereby the duration of its investment portfolio
was shortened and the quality of the investment portfolio improved. This program
was substantially completed during 1991.
Merrill Lynch Life anticipates funding the cash requirements of the projected
policy surrenders and exchanges utilizing cash from operations, normal
investment maturities and anticipated calls and repayments, consistent with 1992
and 1993. As of December 31, 1993 Merrill Lynch Life had $4.699 billion of cash,
short-term investments and investment grade publicly-traded bonds which could be
liquidated if funds were required.
In order to continue to market life insurance and annuity products, Merrill
Lynch Life must meet or exceed the statutory capital and surplus requirements of
the insurance departments of the states in which it conducts business. Statutory
accounting practices differ from generally accepted accounting principles in two
major respects: under statutory accounting practices, the acquisition costs of
new business are charged to expense;
26
<PAGE> 28
and the required additions to statutory reserves for new business in some cases
may initially exceed the statutory revenues attributable to such business. These
practices result in a reduction of statutory income and surplus at the time of
recording new business.
The NAIC has developed and implemented, effective December 31, 1993, the Risk
Based Capital ("RBC") adequacy monitoring system. The RBC calculates the amount
of adjusted capital which a life insurance company should have based upon that
company's risk profile. The NAIC has established four different levels of
regulatory action with respect to the RBC adequacy monitoring system. Each of
these levels may be triggered if an insurer's total adjusted capital is less
than a corresponding level of RBC. (See Note 5 of the Notes to Financial
Statements for a complete explanation of these levels.) As of December 31, 1993,
based on the RBC formula, Merrill Lynch Life's total adjusted capital level was
279% of the minimum amount of capital required to avoid regulatory action.
Merrill Lynch Life believes that it will be able to fund the capital and surplus
requirements of projected new business from current statutory earnings and
existing statutory capital and surplus. If sales of new business significantly
exceeds projections, Merrill Lynch Life may have to look to its parent and other
affiliated companies to provide the capital or borrowings necessary to support
its current marketing efforts. Merrill Lynch Life's future marketing efforts
could be hampered should its parent and/or affiliates be unwilling to commit
additional funding.
Results of Operations
Merrill Lynch Life'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 the charges imposed on variable life insurance and variable annuity
contracts. The costs associated with acquiring contract owner deposits are
amortized over the period in which Merrill Lynch Life anticipates holding those
funds. In addition, Merrill Lynch Life incurs expenses associated with the
maintenance of in-force contracts.
1993 compared to 1992
Merrill Lynch Life recorded net earnings of $48 million and $17 million for 1993
and 1992, respectively.
Net investment income and interest credited to policyholders' account balances
for 1993 as compared to 1992 have declined by approximately $126 million and $92
million, respectively, resulting in a net decline in interest spread of $34
million. The decline in interest spread is attributable to the low interest rate
environment and a declining block of fixed rate life insurance and annuity
contracts, partially offset by adjustment of the guaranteed interest crediting
rate to the prevailing rate on those contracts which have reached the end of
their interest rate guarantee period.
Merrill Lynch Life experienced net realized investment gains of $63 million
during 1993 as compared to net realized investment losses of $(30) million for
the same period during 1992. Approximately $28 million of the increase in net
realized investment gains was attributable to sales of investments to fund
surrenders of Merrill Lynch Life's market value adjusted annuity product. The
investment trading portfolio contributed $8.0 million of investment gains during
1993. During 1993 and 1992 Merrill Lynch Life established $14 million and $41
million, respectively, of valuation allowances for invested assets. The
remaining $30 million increase in realized investment gains is attributable to
normal trading activity in Merrill Lynch Life's investment portfolios.
Policy charge revenue increased approximately $14 million during 1993 as
compared to 1992 primarily as a result of an increase in the number of variable
annuity contracts in-force due to current sales volume.
The market value adjustment expense is attributable to Merrill Lynch Life'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 Merrill Lynch Life. Merrill Lynch Life's market value adjusted
annuity has experienced an increase in surrenders during 1993 as
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<PAGE> 29
compared to 1992. Many of these contract owners have exchanged their contracts
for variable annuity contracts sold by Merrill Lynch Life or its competitors.
The increase in surrender activity has resulted in the $25 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 $5 million from $12 million for 1992 to
$17 million for 1993. Merrill Lynch Life'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 1993 as compared to 1992 is attributable
to this accrual and is reflective of the growth in variable annuity contracts
in-force.
Merrill Lynch Life adjusts the amortization of deferred policy acquisition costs
based on realized investment gains recognized on normal trading activity in
Merrill Lynch Life's investment portfolios. The $21 million increase in
amortization of deferred policy acquisition costs is primarily attributable to
the increase during 1993 in realized investment gains.
Insurance expenses and taxes decreased $25 million during 1993 as compared to
1992. Approximately $16 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. Also, beginning in 1991, Merrill Lynch Life began initiatives to
review and modify its policy administration systems with the aim of establishing
cost and operational efficiencies and improving customer service. One of the
major projects associated with these initiatives was completed during the second
quarter of 1993, resulting in a $3 million reduction in systems development
expenses, as compared to 1992. The remaining reduction in expenses is a result
of operational efficiencies.
During 1993 the Federal corporate income tax rate was increased from 34% to 35%.
The increased rate was utilized in revaluing the deferred tax asset and resulted
in a $631,000 decrease in the deferred tax provision.
1992 compared to 1991
Merrill Lynch Life recorded net earnings of $17 million and $12 million for 1992
and 1991, respectively.
Net investment income declined approximately $75 million during 1992 as compared
to 1991. The decline in net investment income was attributable to multiple
factors including the 1991 shortening of the investment portfolio duration, the
reduction in total investments as a result of contract surrenders, and the
current interest rate environment.
Net realized investment losses increased $8 million from $22 million during 1991
to $30 million during 1992. During 1992, Merrill Lynch Life established a $41
million valuation allowance on the mortgage loans on real estate portfolio. This
valuation allowance was partially offset by net gains on the sale of fixed
maturity securities.
Interest credited to contract owners' account balances declined $93 million
during 1992 compared to 1991 as a result of contract surrenders and the
resetting of interest rates on contract renewals.
During 1992 and 1991, Merrill Lynch Life underwrote life insurance and annuity
products of approximately $217 million and $437 million, respectively. The
decrease was attributable to management's decision to significantly de-emphasize
sales of fixed rate products. As discussed previously, the product development
and regulatory approvals for the variable products were in progress during 1992
and substantially completed during 1992. The unavailability of the variable
products during a portion of 1992 as well as not having the variable products
approved by the regulatory authorities in all jurisdictions in which Merrill
Lynch Life does business significantly impacted Merrill Lynch Life's marketing
efforts for that period.
Segment Information
Merrill Lynch Life's operations consist of one business segment, which is the
sale of life insurance and annuity products. Merrill Lynch Life is not dependent
upon any single customer, and no single customer accounted for more than 10% of
its revenues during 1993.
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<PAGE> 30
Inflation
Merrill Lynch Life's operations have not been materially impacted by inflation
and changing prices during the preceding three years.
D. REINSURANCE
Portions of life insurance risks are reinsured with other companies. Merrill
Lynch Life has reinsurance agreements with a number of other insurance companies
for individual life insurance. The maximum retention on any one life is
$500,000.
E. CONTRACT OWNER ACCOUNT BALANCES
Merrill Lynch Life records on its books liabilities for life insurance and
annuity products which are equal to the full accumulation value of such
contracts plus a mortality provision for life insurance products, which will be
sufficient to meet Merrill Lynch Life's contract obligations at their maturities
or in the event of a participant's death.
F. INVESTMENTS
Merrill Lynch Life's assets must be invested in accordance with applicable state
laws. These laws govern the nature and quality of investments that may be made
by life insurance companies and the percentage of their assets that may be
committed to any particular type of investment. In general, these laws permit
investments, within specified limits and subject to certain qualifications, in
federal, state, and municipal obligations, corporate bonds, preferred or common
stocks, real estate mortgages, real estate and certain other investments. All of
Merrill Lynch Life's assets, except for separate account assets supporting
variable products, are available to meet its obligations under the Contracts.
Merrill Lynch Life makes investments in accordance with investment guidelines
that take into account investment quality, liquidity and diversification, and
invests assets supporting Contract guarantees primarily in investment grade
fixed income assets such as mortgage-backed securities, collateralized mortgage
obligations and corporate debentures. At December 31, 1993 invested assets
supporting Contract guarantees consisted of $5,597 million of fixed maturity
securities available for sale, $144 million of fixed maturity securities held
for trading, $925 million of policy loans, $191 million of mortgage loans on
real estate, $25 million of equity securities available for sale, $21 million of
equity securities held for trading and $30 million of real estate.
At December 31, 1993, approximately 69% of Merrill Lynch Life's invested assets
and cash equivalents supporting Contract guarantees consisted of liquid or
readily marketable securities.
At December 31, 1993, approximately $1,615 million was invested in fixed
maturity securities rated BBB by Standard and Poor's (or similar rating agency).
Fixed maturity securities rated BBB may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
is the case with higher rated fixed maturity securities.
At December 31, 1993, approximately $279 million (4.9%) of Merrill Lynch Life's
fixed maturity securities was invested in securities considered non-investment
grade. Merrill Lynch Life defines non-investment grade as unsecured corporate
debt obligations which do not have a rating equivalent to Standard and Poor's
(or similar rating agency) BBB or higher 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. Merrill Lynch Life
carefully selects, and closely monitors, such investments.
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<PAGE> 31
G. COMPETITION
Merrill Lynch Life is engaged in a business that is highly competitive because
of the large number of stock and mutual life insurance companies and other
entities marketing insurance products. There are approximately 2,100 stock,
mutual and other types of insurers in the life insurance business in the United
States, a number of which are substantially larger than Merrill Lynch Life.
H. CERTAIN AGREEMENTS
Investment Management Agreement
Merrill Lynch Life has entered into an investment management agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"), a subsidiary of Merrill Lynch,
pursuant to which MLAM provides investment management and related accounting
services with respect to Merrill Lynch Life's publicly traded investments.
Merrill Lynch Life pays a fee to MLAM for these services. Merrill Lynch Life
paid reimbursements of $2.8 million, $3.7 million and $3.3 million during 1993,
1992 and 1991, respectively, to MLAM for such services.
Service Agreement
Merrill Lynch Life and MLIG are parties to a service agreement pursuant to which
MLIG has agreed to provide certain data processing, legal, actuarial,
management, advertising and other services to Merrill Lynch Life. Expenses
incurred by MLIG in relation to this service agreement are reimbursed by Merrill
Lynch Life on an allocated cost basis. Charges billed to Merrill Lynch Life by
MLIG pursuant to the agreement were $55.8 million, $63.3 million and $78.3
million for the years ended December 31, 1993, 1992 and 1991, respectively.
General Agency Agreement
In addition, Merrill Lynch Life has entered into a general agency agreement with
Merrill Lynch Life Agency, Inc. ("MLLA") pursuant to which registered
representatives of MLPF&S who are also Merrill Lynch Life's licensed insurance
agents solicit applications for contracts issued by Merrill Lynch Life. MLLA is
paid commissions for the contracts sold by such agents. Commissions paid to MLLA
by Merrill Lynch Life under the general agency agreement were $67.1 million,
$25.2 million and $27.9 million during 1993, 1992 and 1991, respectively. (See
"Distribution of the Contracts" on page 15.)
I. EMPLOYEES
Merrill Lynch Life, as a result of its Management Services Agreement with MLIG,
has no direct employees. Instead, various management services are provided by
MLIG, as described above under "Service Agreement". The cost of these services
is allocated to Merrill Lynch Life.
Certain officers of Merrill Lynch Life are also officers of ML Life Insurance
Company of New York and their salaries are allocated between the two companies.
(See "Directors and Executive Officers" on page 32.)
J. PROPERTIES
Merrill Lynch Life's home office is located in Little Rock, Arkansas. In
addition, personnel performing services for Merrill Lynch Life pursuant to its
Management Services Agreement operate in MLIG office space. MLIG subleases
office space in Jacksonville, Florida to Merrill Lynch Insurance Group Services,
Inc. ("MLIGS"), an affiliate of MLIG. MLIGS also subleases certain office space
in Springfield, Massachusetts from Monarch Life Insurance Company. MLIG occupies
certain office space in Plainsboro, New Jersey through Merrill Lynch. An
allocable share of the cost of each of these premises is paid by Merrill Lynch
Life through the service agreement with MLIG.
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<PAGE> 32
K. STATE REGULATION
Merrill Lynch Life is subject to the laws of the State of Arkansas governing
insurance companies and to the regulations of the Arkansas Insurance Department
(the "Insurance Department"). A detailed financial statement in the prescribed
form (the "Annual Statement") is filed with the Insurance Department each year
covering Merrill Lynch Life's operations for the preceding year and its
financial condition as of the end of that year. Regulation by the Insurance
Department includes periodic examination to determine contract liabilities and
reserves so that the Insurance Department may certify that these items are
correct. Merrill Lynch Life's books and accounts are subject to review by the
Insurance Department at all times. A full examination of Merrill Lynch Life's
operations is conducted periodically by the Insurance Department and under the
auspices of the National Association of Insurance Commissioners.
In addition, Merrill Lynch Life is subject to regulation under the insurance
laws of all jurisdictions in which it operates. The laws of the various
jurisdictions establish supervisory agencies with broad administrative powers
with respect to various matters, including licensing to transact business,
overseeing trade practices, licensing agents, approving contract forms,
establishing reserve requirements, fixing maximum interest rates on life
insurance contract loans and minimum rates for accumulation of surrender values,
prescribing the form and content of required financial statements and regulating
the type and amounts of investments permitted. Merrill Lynch Life is required to
file the Annual Statement with supervisory agencies in each of the jurisdictions
in which it does business, and its operations and accounts are subject to
examination by these agencies at regular intervals.
The National Association of Insurance Commissioners ("NAIC") has approved and
recommended for adoption and implementation several regulatory initiatives
designed to improve the surveillance and financial analysis regarding the
solvency of insurance companies in general. These initiatives include the
development and implementation of a risk-based capital formula for determining
adequate levels of capital and surplus. The risk-based capital formula may be
adopted by the various states in which Merrill Lynch Life is licensed, but the
ultimate context and timing of any statutes and regulations adopted by the
states cannot by determined at this time. It is anticipated that the new
standards will have no significant effect upon Merrill Lynch Life. For
additional information about the risk-based capital adequacy monitoring system
and Merrill Lynch Life, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources," page 26.
In addition, many states regulate affiliated groups of insurers, such as Merrill
Lynch Life, and its affiliates, under insurance holding company legislation.
Under such laws, inter-company transfers of assets and dividend payments from
insurance subsidiaries may be subject to prior notice or approval, depending on
the size of the transfers and payments in relation to the financial positions of
the companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for contract owner losses
incurred by other insurance companies which have become insolvent. Most of these
laws provide that an assessment may be excused or deferred if it would threaten
an insurer's own financial strength. For information regarding Merrill Lynch
Life's estimated liability for future guaranty fund assessments, see Note 9 of
Notes to Financial Statements.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of Merrill Lynch Life are
subject to various federal securities laws and regulations. In addition, current
and proposed federal measures which may significantly affect the insurance
business include regulation of insurance company solvency, employee benefit
regulation, removal of barriers preventing banks from engaging in the insurance
business, tax law changes affecting the taxation of insurance companies and the
tax treatment of insurance products and its impact on the relative desirability
of various personal investment vehicles.
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<PAGE> 33
DIRECTORS AND EXECUTIVE OFFICERS
Merrill Lynch Life's directors and executive officers and their positions with
the Company are as follows:
<TABLE>
<CAPTION>
NAME (AGE) POSITION(S) WITH THE COMPANY
- --------------------------------------------- ---------------------------------------------
<S> <C>
Anthony J. Vespa (52)........................ Chairman of the Board, President, and Chief
Executive Officer
Joseph E. Crowne (47)........................ Director, Senior Vice President, Chief
Financial Officer, Chief Actuary, and
Treasurer
Barry G. Skolnick (42)....................... Director, Senior Vice President, General
Counsel, and Secretary
David M. Dunford (45)........................ Director, Senior Vice President, and Chief
Investment Officer
John C. R. Hele (35)......................... Director and Senior Vice President
Allen N. Jones (51).......................... Director
Robert J. Boucher (48)....................... Senior Vice President, Variable Life
Administration
</TABLE>
Each director is elected to serve until the next annual meeting of shareholders
or until his or her successor is elected and shall have qualified. Some
directors have held various executive positions with insurance company
subsidiaries of the Company's indirect parent, Merrill Lynch & Co., Inc. The
principal positions of the Company's directors and executive officers for the
past five years are listed below:
Mr. Vespa joined Merrill Lynch Life in February 1994. From February 1991 to
February 1994, he held the position of District Director and First Vice
President of Merrill Lynch, Pierce, Fenner & Smith Incorporated. From September
1988 to February 1991, he held the position of Senior Resident Vice President of
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Mr. Crowne joined Merrill Lynch Life in June 1991. From January 1989 to May
1991, he was a Principal with Coopers & Lybrand.
Mr. Skolnick joined Merrill Lynch Life in November 1990. He joined Merrill
Lynch, Pierce, Fenner & Smith Incorporated in July 1984. Since May 1992, he has
held the position of Assistant General Counsel of Merrill Lynch & Co., Inc. and
First Vice President of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Prior to May 1992, he held the position of Senior Counsel of Merrill Lynch &
Co., Inc.
Mr. Dunford joined Merrill Lynch Life in July 1990. He joined Merrill Lynch,
Pierce, Fenner & Smith Incorporated in September 1989. Prior to September 1989,
he held the position of President of Travelers Investment Management Co.
Mr. Hele joined Merrill Lynch Life in December 1990. He joined Merrill Lynch,
Pierce, Fenner & Smith Incorporated in August 1988.
Mr. Jones joined Merrill Lynch Life in June 1992. Since May 1992, he has held
the position of Senior Vice President of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. From June 1992 to February 1994, he held the position of Chairman
of the Board, President, and Chief Executive Officer of Merrill Lynch Life .
From January 1992 to June 1992, he held the position of First Vice President of
Merrill Lynch, Pierce, Fenner & Smith Incorporated. From January 1991 to January
1992, he held the position of District Director of Merrill Lynch, Pierce, Fenner
& Smith Incorporated. Prior to January 1991, he held the position of Senior
Regional Vice President of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Mr. Boucher joined Merrill Lynch Life in May 1992. Prior to May 1992, he held
the position of Vice President of Monarch Financial Services, Inc. (formerly
Monarch Resources, Inc.).
No shares of Merrill Lynch Life are owned by any of its directors or executive
officers, as it is a wholly owned subsidiary of Merrill Lynch Insurance Group,
Inc. The directors and executive officers of Merrill Lynch Life,
32
<PAGE> 34
both individually and as a group, own less than one percent of the outstanding
shares of common stock of Merrill Lynch & Co., Inc.
EXECUTIVE COMPENSATION
Certain executive officers and directors of Merrill Lynch Life are also
executive officers and directors of ML Life Insurance Company of New York ("ML
of New York"), and the salaries of all such individuals are allocated between
Merrill Lynch Life and ML of New York.
COMPENSATION TABLES AND OTHER INFORMATION
The following tables set forth information with respect to the former Chief
Executive Officer and the four most highly compensated executive officers of
Merrill Lynch Life as to whom the total annual salary and bonus for the fiscal
year ended December 31, 1993 paid by Merrill Lynch Life exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
AWARDS(1) PAYOUTS
----------------------- ---------
RESTRICTED LONG-TERM
ANNUAL COMPENSATION STOCK SECURITIES INCENTIVE
-------------------------- AWARDS UNDERLYING PLAN ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (2)(3)(4) OPTIONS PAYOUTS COMPENSATION
- ---------------------------------- ---- -------- -------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allen N. Jones 1993 $ 68,700 $288,900 $ 44,138 4,077 $ 0 9,733(6)
Chairman of the Board, President 1992 0 400,273 120,915 7,224 0 0
and Chief Executive Officer
(June 1992 through February 1994)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph E. Crowne 1993 109,800 219,600 32,940 1,017 0 5,766(6)
Senior Vice President, Chief 1992 134,195 200,601 39,619 794 0 1,621
Actuary and Chief Financial 1991 68,000 91,000 36,697 855 0 0
Officer (Since June 1991)
David M. Dunford 1993 159,950 173,660 41,130 1,270 0 5,143(6)
Senior Vice President, Chief 1992 160,650 131,779 39,471 791 0 2,636
Investment Officer 1991 166,000 118,000 38,328 893 0 0
Robert J. Boucher 1993 107,000 192,600 38,520 1,190 0 6,583(6)
Senior Vice President, Variable 1992 69,404 119,930 39,520 792 0 2,139
Life Administration (Since May
1992)
Barry G. Skolnick 1993 84,150 153,000 51,638 1,591 0(5) 5,701(6)
Senior Vice President, General 1992 81,167 88,269 49,604 986 12,018 2,491
Counsel 1991 92,000 95,000 37,104 865 0 0
</TABLE>
- ---------------
(1) Awards were made in January or February of the succeeding fiscal year for
performance in the year indicated.
(2) Amounts shown are for awards granted in February 1994 for performance in
1993, in February 1993 for performance in 1992, and in February 1992 for
performance in 1991. Awards shown include equal numbers of Restricted
Shares and Restricted Units. All awards have been valued for this table
using closing prices of Common Stock of Merrill Lynch & Co. on the
Consolidated Transaction Reporting System on the dates of grant of such
awards; the closing price on February 1, 1994, the date of the grant for
performance in 1993, was $43.875. Such shares and units generally have four
year vesting periods, but can vest earlier upon the achievement of specific
cumulative, after-tax return on equity ("Cumulative ROE") goals.
Specifically, shares and units granted in February 1994 may vest at the end
of the 1995 or 1996 fiscal year upon the achievement of a Cumulative ROE of
60%; shares and units granted in February 1993 may vest at the end of the
1994 or the 1995 fiscal year upon the achievement of a Cumulative ROE of
45%. Shares and units granted in 1992 vested at the end of the 1993 fiscal
year based on the achievement of a Cumulative ROE of 40%.
(3) Dividends are paid on unvested Restricted Shares and dividend equivalents
are paid on unvested Restricted Units. Such dividends and dividend
equivalents are equal in amount to the dividends paid on shares of Merrill
Lynch & Co. Common Stock.
33
<PAGE> 35
(4) The number and value of Restricted Shares and Restricted Units held by
executive officers named in the table as of December 31, 1993 are as
follows: Mr. Jones (1,806 shares and 1,806 units--$151,704); Mr. Crowne
(592 shares and 592 units--$49,728); Mr. Dunford (590 shares and 590
units--$49,560); Mr. Boucher (590 shares and 590 units--$49,560); and Mr.
Skolnick (741 shares and 741 units-- $62,244). These amounts do not include
Restricted Shares and Restricted Units awarded in 1994 for performance in
1993.
(5) Amount shown consists of cash payments, under Merrill Lynch & Co.'s
now-expired ROE Incentive Compensation Plan, made in 1992 based on the
return on equity achieved by Merrill Lynch & Co. in 1991.
(6) Amounts shown for 1993 consist of the following: (i) contributions made in
1993 by Merrill Lynch Life to accounts of employees under the 401(k)
Savings and Investment Plan--Mr. Jones ($687), Mr. Dunford ($1,371), Mr.
Boucher ($1,284) and Mr. Skolnick ($1,148); (ii) allocations made in 1993
to accounts of employees under the defined contribution retirement program
(including allocations and cash payments made because of limitations
imposed by the Internal Revenue Code)--Mr. Jones ($9,046), Mr. Crowne
($3,021), Mr. Dunford ($3,772), Mr. Boucher ($5,299) and Mr. Skolnick
($4,554); and (iii) contributions made in 1993 to account of employee under
the Employee Stock Purchase Plan--Mr. Crowne ($2,745).
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
FISCAL OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME YEAR(1) GRANTED FISCAL YEAR ($ PER SHARE) DATE(2) VALUE(3)
- ------------------------------- ------- ---------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allen N. Jones................. 1993 4,077 .09% $40.625 1/26/2004 $ 48,068
Joseph E. Crowne............... 1993 1,017 .02% $40.625 1/26/2004 11,990
David M. Dunford............... 1993 1,270 .03% $40.625 1/26/2004 14,973
Robert J. Boucher.............. 1993 1,190 .03% $40.625 1/26/2004 14,030
Barry G. Skolnick.............. 1993 1,591 .03% $40.625 1/26/2004 18,758
</TABLE>
- ---------------
(1) Reflects awards made in January 1994 for performance in 1993. Does not
include awards made in January 1993 for performance in 1992; these awards
were reflected in Merrill Lynch Life's Prospectus for the Contracts dated
May 1, 1993.
(2) All options are exercisable as follows: 25% after one year, 50% after two
years, 75% after three years, and 100% after four years.
(3) Valued using a modified Black-Scholes option pricing model. The exercise
price of each option ($40.625) is equal to the average of the high and low
prices on the Consolidated Transaction Reporting System of a share of
Merrill Lynch & Co. Common Stock on January 26, 1994, the date of grant. The
assumptions used for the variables in the model were: 27% volatility (which
is the volatility of the Common Stock for the 36 months preceding grant); a
6.03% risk-free rate of return (which is the yield as of January 26, 1994
(the date of grant) on a U.S. Strip Treasury zero-coupon bond expiring in
February 2004); a 2% dividend yield (which was the dividend yield on the
date of grant); and a 10-year option term (which is the term of the option
when granted). A discount of 25% was applied to the option value yielded by
the model to reflect the non-transferability of employee options. The actual
gain executives will realize on the options will depend on the future price
of the Common Stock and cannot be accurately forecast by application of an
option pricing model.
34
<PAGE> 36
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allen N. Jones................ 0 $ 0 0 0 0 $ 0
Joseph E. Crowne.............. 0 0 428 2,870 5,283 28,826
David M. Dunford.............. 2,423 91,091 447 7,767 5,888 181,224
Robert J. Boucher............. 0 0 72 1,800 888 15,634
Barry G. Skolnick............. 580 15,927 433 4,429 5,345 68,478
</TABLE>
- ---------------
(1) This valuation represents the difference between $42.00, the closing price
of Merrill Lynch & Co. Common Stock on December 31, 1993 on the Consolidated
Transaction Reporting System, and the exercise price of these options.
Directors of Merrill Lynch Life receive no compensation in addition to their
compensation as officers of Merrill Lynch Life.
LEGAL PROCEEDINGS
There is no material pending litigation to which Merrill Lynch Life is a party
or of which any of its property is the subject, and there are no legal
proceedings contemplated by any governmental authorities against Merrill Lynch
Life of which it has any knowledge.
LEGAL MATTERS
The organization of Merrill Lynch Life, its authority to issue the Contracts,
and the validity of the form of the Contracts have been passed upon by Barry G.
Skolnick, Merrill Lynch Life's Senior Vice President and General Counsel.
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on certain
matters relating to federal securities laws.
EXPERTS
The financial statements of Merrill Lynch Life for each of the three years in
the period ended December 31, 1993 included in this Prospectus have been audited
by Deloitte & Touche, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing. Deloitte & Touche's
principal business address is 1633 Broadway, New York, New York 10019-6754.
REGISTRATION STATEMENT
Registration statements have been filed with the Securities and Exchange
Commission under the Securities Act of 1933 that relate to the Contract. This
Prospectus does not contain all of the information in the registration
statements as permitted by Securities and Exchange Commission regulations. The
omitted information can be obtained from the Securities and Exchange
Commission's principal office in Washington, D.C., upon payment of a prescribed
fee.
35
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying balance sheets of Merrill Lynch
Life Insurance Company (the "Company"), a wholly-owned subsidiary
of Merrill Lynch Insurance Group, Inc., as of December 31, 1993
and 1992, and the related statements of earnings, stockholder's
equity, and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company at
December 31, 1993 and 1992, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, in 1993 the
Company changed its method of accounting for certain investments
in debt and equity securities to conform with Statement of
Financial Accounting Standards No. 115.
/s/Deloitte & Touche
February 28, 1994
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
BALANCE SHEETS
AS OF DECEMBER 31, 1993 AND 1992
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
ASSETS 1993 1992
- ------ ---- ----
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1993 - $5,369,236; 1992 - $334,638) $ 5,597,359 $ 335,916
Fixed maturity securities held for trading, at estimated fair value
(amortized cost: 1993 - $140,635) 144,035 0
Fixed maturity securities to be held to maturity, at amortized cost
(estimated fair value: 1992 - $6,713,831) 0 6,449,981
Equity securities available for sale, at estimated fair value
(cost: 1993 - $24,424; 1992 - $31,598) 24,970 33,186
Equity securities held for trading, at estimated fair value
(cost 1993 - $19,694) 20,585 0
Mortgage loans on real estate 191,214 264,966
Real estate available for sale
(accumulated depreciation: 1993 - $850; 1992 - $321) 29,761 12,847
Policy loans on insurance contracts 924,579 834,461
------------- -------------
Total Investments 6,932,503 7,931,357
CASH AND CASH EQUIVALENTS 122,218 172,124
ACCRUED INVESTMENT INCOME 120,337 138,797
DEFERRED POLICY ACQUISITION COSTS 318,903 373,214
FEDERAL INCOME TAXES - DEFERRED 16,878 19,982
REINSURANCE RECEIVABLES 1,190 856
RECEIVABLES FROM AFFILIATES - NET 789 0
OTHER ASSETS 21,481 19,864
SEPARATE ACCOUNTS ASSETS 4,715,278 3,127,767
------------- -------------
TOTAL ASSETS $ 12,249,577 $ 11,783,961
============= =============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1993 1992
- ------------------------------------ ---- ----
LIABILITIES:
<S> <C> <C>
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 6,691,811 $ 7,804,447
Claims and claims settlement expenses 20,295 7,565
------------- -------------
Total policy liabilities and accruals 6,712,106 7,812,012
OTHER POLICYHOLDER FUNDS 28,768 14,637
LIABILITY FOR GUARANTY FUND ASSESSMENTS 28,083 27,104
OTHER LIABILITIES 68,165 16,790
FEDERAL INCOME TAXES - CURRENT 10,122 30,010
PAYABLE TO AFFILIATES - NET 0 2,638
SEPARATE ACCOUNTS LIABILITIES 4,715,278 3,118,296
------------- -------------
Total Liabilities 11,562,522 11,021,487
------------- -------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 637,590 654,717
Retained earnings 47,860 102,873
Net unrealized investment gain (loss) (395) 2,884
------------- -------------
Total Stockholder's Equity 687,055 762,474
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 12,249,577 $ 11,783,961
============= =============
</TABLE>
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 586,461 $ 712,739 $ 787,603
Net realized investment gains (losses) 63,052 (29,639) (21,957)
Policy charge revenue 95,684 81,653 82,745
----------- ----------- -----------
Total Revenues 745,197 764,753 848,391
----------- ----------- -----------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account
balances 454,671 546,979 638,984
Market value adjustment expense 30,816 6,229 1,198
Policy benefits (reinsurance recoveries: 1993 - $6,004;
1992 - $5,555; 1991 - $6,328) 17,030 12,066 9,537
Reinsurance premium ceded 12,665 12,457 12,765
Amortization of deferred policy acquisition costs 109,456 88,795 93,391
Insurance expenses and taxes 47,784 72,560 78,448
----------- ----------- -----------
Total Benefits and Expenses 672,422 739,086 834,323
----------- ----------- -----------
Earnings Before Federal Income
Tax Provision 72,775 25,667 14,068
----------- ----------- -----------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 20,112 28,549 42,919
Deferred 4,803 (19,913) (40,459)
----------- ----------- -----------
Total Federal Income Tax Provision 24,915 8,636 2,460
----------- ----------- -----------
NET EARNINGS $ 47,860 $ 17,031 $ 11,608
=========== =========== ===========
</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
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
Net
Additional unrealized Total
Common paid-in Retained investment stockholder's
stock capital earnings gain (loss) equity
-------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1991 $ 2,000 $ 572,321 $ 74,234 $ (103) $ 648,452
Capital contribution 82,396 82,396
Net earnings 11,608 11,608
Net unrealized investment loss (1,142) (1,142)
BALANCE, DECEMBER 31, 1991 2,000 654,717 85,842 (1,245) 741,314
Net earnings 17,031 17,031
Net unrealized investment gain 4,129 4,129
-------- ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1992 2,000 654,717 102,873 2,884 762,474
Dividend to Parent (17,127) (102,873) (120,000)
Net earnings 47,860 47,860
Net unrealized investment loss (1) (3,279) (3,279)
-------- ----------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1993 $ 2,000 $ 637,590 $ 47,860 $ ( 395) $ 687,055
======== =========== ========== =========== =============
</TABLE>
(1) Asset gains less adjustment of policyholders' account balances
and deferred policy acquisition costs (See Note 1).
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
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 47,860 $ 17,031 $ 11,608
Adjustments to reconcile net earnings to net
cash and cash equivalents provided (used)
by operating activities:
Amortization of deferred policy acquisition
costs 109,456 88,795 93,391
Capitalization of policy acquisition costs (91,189) (39,146) (149,440)
Depreciation and amortization 1,142 (16,033) (25,417)
Net realized investment (gains) losses (63,052) 29,639 21,957
Interest credited to policyholders' account balances 454,671 546,979 638,984
Provision for deferred Federal
income tax 4,803 (19,913) (40,459)
Cash and cash equivalents provided (used) by
changes in operating assets and liabilities:
Accrued investment income 18,460 6,018 (9,271)
Policy liabilities and accruals 12,730 7,775 101,521
Federal income taxes - current (19,888) 14,955 44,782
Other policyholder funds 14,131 12,826 (25,035)
Liability for guaranty fund assessments 979 16,439 10,665
Payable to Family Life Insurance Company 0 0 (28,224)
Policy loans (90,118) (126,925) (88,362)
Investment trading securities (145,972) 0 0
Other, net 49,425 (26,296) (30,343)
------------ ------------- -------------
Net cash and cash equivalents provided
by operating activities 303,438 512,144 526,357
------------ ------------- -------------
</TABLE>
(Continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
- ------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(Concluded) (Dollars In Thousands)
==============================================================================
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Fixed maturity securities sold 571,337 1,281,705 4,005,959
Fixed maturity securities matured 2,776,992 2,206,447 746,273
Fixed maturity securities purchased (1,866,857) (2,806,416) (5,142,471)
Equity securities available for sale purchased (8,983) (17,843) (67,348)
Equity securities available for sale sold 6,451 44,188 20,768
Mortgage loans on real estate principal payments received 35,561 8,548 5,977
Mortgage loans on real estate acquired (674) (853) (740)
Real estate available for sale purchased 0 (340) (22,706)
Real estate available for sale sold 7,408 178 25,000
Interest rate swaps sold 0 2,302 0
Recapture of investment in Separate Accounts 29,389 0 0
Investment in Separate Accounts (20,000) (3,841) 0
------------ ------------- -------------
Net cash and cash equivalents provided (used)
by investing activities 1,530,624 714,075 (429,288)
------------ ------------- -------------
FINANCING ACTIVITIES:
Paid-in capital from parent 0 0 82,396
Dividend paid to parent (120,000) 0 0
Affiliated notes payable (3,427) (83,200) 18,794
Policyholders' account balances:
Deposits 814,314 217,410 436,564
Withdrawals (net of transfers to Separate Accounts) (2,574,854) (1,338,034) (772,811)
Net cash and cash equivalents used ------------ ------------- -------------
by financing activities (1,883,967) (1,203,824) (235,057)
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (49,906) 22,395 (137,988)
CASH AND CASH EQUIVALENTS
Beginning of year 172,124 149,729 287,717
------------ ------------- -------------
End of year $ 122,218 $ 172,124 $ 149,729
============ ============= =============
</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
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting: 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 which
comprise one business segment. The primary products that the
Company currently markets are immediate annuities, market value
adjusted annuities, variable life insurance and variable
annuities. The Company is currently licensed to sell insurance
in forty-nine states, the District of Columbia, the U.S. Virgin
Islands and Guam. The Company markets its products solely
through the Merrill Lynch & Co. retail network.
On June 12, 1991, the Company's former parent, Family Life
Insurance Company ("Family Life"), was sold to a non-affiliated
entity. Immediately prior to this sale, Family Life, through a
dividend, transferred its 100% ownership interest in the
Company to its parent MLIG. (See Note 8).
On October 1, 1991, Tandem Insurance Group, Inc. ("Tandem"), a
wholly-owned subsidiary of MLIG, was merged with and into the
Company. This merger has been accounted for as a combination
of entities under common control. The assets, liabilities,
stockholder's equity, earnings and cash flows as presented in
these financial statements are reported on a combined
historical basis for all periods presented.
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles for
stock life insurance companies.
Revenue Recognition: Revenues for the Company's interest
sensitive life, interest sensitive annuity, variable life and
variable annuity products consist of policy charges for the
cost of insurance, deferred sales charges, policy
administration charges and/or withdrawal charges assessed
against policyholder account balances during the period.
Policyholders' Account Balances: Liabilities for the Company's
universal life type contracts, including its life insurance and
annuity products, are equal to the full accumulation value of
such contracts as of the valuation date plus deficiency
reserves for certain products. Interest crediting rates for the
Company's fixed rate products are as follows:
Interest sensitive life products 4.0% - 8.8%
Interest sensitive deferred annuities 2.4% - 9.0%
Immediate annuities 4.0% - 10.0%
These rates may be changed at the option of the Company,
subject to minimum guarantees, after initial guaranteed rates
expire.
Liabilities for unpaid claims equal the death benefit for those
claims which have been reported to the Company and an estimate
based upon prior experience for those claims which are
unreported as of the valuation date.
<PAGE>
Reinsurance: Effective during 1992, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 113
"Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts" ("SFAS No. 113"), which requires that
reinsurance receivables and prepaid reinsurance premium ceded
be reported as assets. SFAS No. 113 eliminates the practice by
insurance enterprises of reporting assets and liabilities
relating to reinsured contracts net of the effects of
reinsurance. The impact of adopting SFAS No. 113 was not
material.
In the normal course of business, the Company seeks to limit
its exposure to loss on any single insured life and to recover
a portion of benefits paid by ceding reinsurance to other
insurance enterprises or reinsurers under indemnity reinsurance
agreements, primarily excess coverage and coinsurance
agreements. On life insurance contracts which the Company is
currently marketing, the maximum amount of mortality risk
retained by the Company is $500,000 on a single life.
Indemnity reinsurance agreements do not relieve the Company
from its obligations to policyholders. Failure of reinsurers
to honor their obligations could result in losses to the
Company. The Company regularly evaluates the financial
condition of its reinsurers so as to minimize its exposure to
significant losses from reinsurer insolvencies. The Company
holds collateral under reinsurance agreements in the form of
letters of credit and funds withheld totaling $1,024,000 that
can be drawn upon for delinquent reinsurance recoverables.
As of December 31, 1993, the Company had life insurance in-
force which was ceded to other life insurance companies of
$2,005,191,000.
Deferred Policy Acquisition Costs: Policy acquisition costs
for life and annuity contracts are deferred and amortized based
on the estimated future gross profits for each group of
contracts. These future gross profit estimates are subject to
periodic evaluation by the Company, with necessary revisions
applied against amortization to date.
Policy acquisition costs are principally commissions and a
portion of certain other expenses relating to policy
acquisition, underwriting and issuance, which are primarily
related to and vary with the production of new business.
Certain costs and expenses reported in the statements of
earnings are net of amounts deferred. Policy acquisition costs
can also arise from the acquisition or reinsurance of existing
in-force policies from other insurers. These costs include
ceding commissions and professional fees related to the
reinsurance assumed.
Included in deferred policy acquisition costs are those costs
related to the acquisition by assumption reinsurance of
insurance contracts from unaffiliated insurers. The deferred
costs will be amortized in proportion to the future gross
profits over the anticipated life of the acquired insurance
contracts utilizing an interest methodology.
In December 1990, the Company entered into an assumption
reinsurance agreement with a non-affiliated insurer (See Note
6). The acquisition costs relating to this agreement are being
amortized over a twenty-year period using an effective interest
rate of 9.01%. This reinsurance agreement provides for payment
of contingent ceding commissions based upon the persistency and
mortality experience of the insurance contracts assumed. Any
payments made for the contingent ceding commissions will be
capitalized and amortized using an identical methodology as
that used for the initial acquisition costs. The following is
a reconciliation of the acquisition costs for the reinsurance
transaction for the three years ended December 31,:
<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Beginning balance $ 150,450 $ 160,235 $ 24,294
Capitalized amounts 6,987 6,060 156,641
Interest accrued 13,136 15,401 14,071
Amortization (30,926) (31,246) (34,771)
---------- ---------- ----------
Ending balance $ 139,647 $ 150,450 $ 160,235
========== ========== ==========
</TABLE>
The following table presents the expected amortization of these
deferred acquisition costs over the next five years. The
amortization may be adjusted based on periodic evaluation of
the expected gross profits on the reinsured policies.
1994 $18,732,000
1995 17,840,000
1996 16,056,000
1997 12,488,000
1998 8,925,000
Investments: Effective December 31, 1993, the Company has
adopted SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS No. 115"). In compliance
with SFAS No. 115, the Company classified its investments in
fixed maturity securities and equity securities in two
categories, each separately identified:
Available for sale securities include both fixed maturity
and equity securities. These securities may be sold for the
Company's general liquidity needs, asset/liability
management strategy, credit dispositions and investment
opportunities. These securities are carried at estimated
fair value with unrealized gains and losses included in
stockholder's equity (net of tax). If a decline in value of
a security is determined by management to be other than
temporary, the carrying value is adjusted to the estimated
fair value at the date of this determination and recorded
in the net realized investment gains (losses) caption of
the statement of earnings.
Trading securities represent securities that are managed
with an investment objective to maximize total return
subject to the Company's quality guidelines. Investments in
this portfolio will consist primarily of marketable fixed
maturity and equity investments. These securities are
carried at estimated fair value with unrealized gains and
losses included in the statement of earnings. The debt and
equity securities classified as trading securities as of
December 31, 1993 were acquired in 1993 and immediately
classified as trading securities in compliance with SFAS
No. 60 "Accounting and Reporting by Insurance Enterprises",
prior to the adoption of SFAS No. 115.
SFAS No. 115 allows fixed maturity securities to be carried at
amortized cost if the Company has both the ability and positive
intent to hold these securities to maturity. The Company has
determined that it can not guarantee that it will not have the
need or opportunity to sell any particular security in its
investment holdings. As such, the Company did not utilize this
classification as of December 31, 1993.
In compliance with a recent Securities and Exchange Commissions
("SEC") staff announcement, the Company has recorded certain
adjustments to deferred policy acquisition costs and
policyholders' account balances in conjunction with its
adoption of SFAS No. 115. The SEC requires that companies
adjust those assets and liabilities that would have been
adjusted had the unrealized investment gains or losses from
securities classified as available for sale actually been
realized with corresponding credits or charges reported
directly to shareholder's equity. Accordingly, deferred policy
acquisition costs have
<PAGE>
been decreased by $36,044,000 and
policyholders' account balances have been increased by
$193,233,000 as of December 31, 1993.
As of December 31, 1992, the Company classified its investments
in fixed maturity securities as either "to be held to maturity"
or "available for sale." Fixed maturity securities to be held
to maturity are stated in the balance sheets at amortized cost.
Fixed maturity securities available for sale are stated at
estimated fair value. The net unrealized gain and loss on these
securities are reflected as a component of stockholder's
equity.
For fixed maturity securities, premiums are amortized to the
earlier of the call or maturity date, discounts are accrued to
the maturity date and interest income is accrued daily.
Realized gains and losses on the sale or maturity of the
investments are determined on the basis of identified cost.
Fixed maturity securities may contain securities which are
considered high yield. The Company defines high yield fixed
maturity securities as unsecured corporate debt obligations
which do not have a rating equivalent to Standard and Poor's
(or similar rating agency) BBB or higher, and are not
guaranteed by an agency of the federal government. Probable
losses are recognized in the period that a decline in value is
determined to be other than temporary.
Mortgage loans on real estate are stated at unpaid principal
balances net of valuation allowances. Such valuation allowances
are based on the decline in value expected by management to be
realized on in-substance foreclosures of mortgage loans and on
mortgage loans which management believes may not be collectible
in full. In establishing valuation allowances management
considers, among other things, the estimated fair value of the
underlying collateral.
The Company has previously made mortgage loans collateralized
by real estate and direct investments in real estate. The
return on and the ultimate recovery of these loans and
investments are generally dependent on the successful
operation, sale or refinancing of the real estate. In many
parts of the country, current real estate markets are
characterized by above-normal vacancy rates, a lack of ready
sources of credit for real estate financing, reduced or
declining real estate values, and similar factors.
The Company employs a system to monitor the effects of current
and expected real estate market conditions and other factors
when assessing the collectability of mortgage loans and the
recoverability of the Company's real estate investments. When,
in management's judgment, these assets are impaired,
appropriate losses are recorded. Such estimates necessarily
include assumptions, which may include anticipated improvements
in selected market conditions for real estate, which may or may
not occur. The more significant assumptions management
considers involve estimates of the following: lease, absorption
and sales rate; real estate values and rates of return;
operating expenses; required capital improvements; inflation;
and sufficiency of any collateral independent of the real
estate.
Resulting from the Company's management and valuation of its
mortgage loans on real estate, management believes that the
carrying value approximates the fair value of these
investments.
During 1993 the Financial Accounting Standards Board issued
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan"
("SFAS No. 114"). SFAS No. 114 requires that for impaired
loans, the impairment shall be measured based on the present
value of expected future cash flows discounted at the loan's
effective interest rate or the fair value of the collateral.
Impairments of mortgage loans on real estate are established as
valuation allowances and recorded to net realized investment
gains (losses). SFAS No. 114 must be adopted for fiscal years
beginning after December 15, 1994. The Company has decided
not to early adopt this statement. The Company estimates
that the impact on both financial position and earnings
from adopting SFAS No. 114 would be immaterial.
Real estate available for sale, including real estate acquired
in satisfaction of debt subsequent to its acquisition date, is
stated at depreciated cost less valuation allowances and
estimated selling costs.
<PAGE>
Depreciation is computed using the
straight-line method over the estimated useful lives of the
properties, which generally is 40 years.
Policy loans on insurance contracts are stated at unpaid
principal balances. The Company estimates the fair market value
of policy loans as equal to the book value of the loans.
Policy loans are fully collateralized by the account value of
the associated insurance contracts, and the spread between the
policy loan interest rate and the interest rate credited to the
account value held as collateral is fixed.
Fair Value of Financial Instruments: Beginning in 1992, the
Company adopted SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments", which requires companies to report the
fair value of financial instruments, for certain assets and
liabilities both on and off - balance sheet.
Federal Income Taxes: The results of the operations of the
Company are included in the consolidated Federal income tax
return of Merrill Lynch & Co.. The Company has entered into a
tax-sharing agreement with Merrill Lynch & Co. whereby the
Company will calculate its current tax provision based on its
operations. Under the agreement, the Company periodically
remits to Merrill Lynch & Co. its current federal tax
liability.
Effective the first quarter 1992, the Company adopted SFAS No.
109, "Accounting for Income Taxes" ("SFAS No. 109") which
requires an asset and liability method in recording income
taxes on all transactions that have been recognized in the
financial statements. SFAS No. 109 provides that deferred
taxes be adjusted to reflect tax rates at which future tax
liabilities or assets are expected to be settled or realized.
Previously, the Company accounted for income taxes in
accordance with SFAS No. 96, "Accounting for Income Taxes."
The effect of adopting SFAS No. 109 was not material.
Separate Accounts: The Separate Accounts are established in
conformity with Arkansas insurance law, the Company's
domiciliary state, and under such law, if and to the extent
provided under the applicable insurance contracts, assets held
in the Separate Accounts equal to the reserves and other
contract liabilities with respect to the Separate Accounts may
not be chargeable with liabilities that arise from any other
business of the Company. Separate Accounts assets may be
subject to General Account claims only to the extent the value
of such assets exceeds the Separate Accounts liabilities.
Assets and liabilities of the Separate Accounts, representing
net deposits and accumulated net investment earnings less fees,
held for the benefit of policyholders, are shown as separate
captions in the balance sheets. Assets held in the Separate
Accounts are carried at quoted market values.
The carrying value for Separate Accounts assets and liabilities
approximates the estimated fair value of the underlying assets.
Postretirement Benefits Other Than Pensions: During the fourth
quarter 1992, the Company adopted SFAS No. 106, "Employer's
Accounting for Postretirement Benefits Other Than Pensions"
("SFAS No. 106"). SFAS No. 106 requires the accrual of
postretirement benefits (such as health care benefits) during
the years an employee provides service. Prior to 1992, the
cost of these benefits were expensed on a modified pay-as-you-go
basis when such cost was allocated from MLIG as a component of
the Company's operating expenses. The effect of adopting SFAS
No. 106 was not material.
Statements of Cash Flows: For the purpose of reporting cash
flows, cash and cash equivalents include cash on hand and on
deposit and short-term investments with original maturities of
three months or less.
The carrying amounts approximate the estimated fair value of
cash and cash equivalents.
Reclassifications: To facilitate comparisons with the current
year, certain amounts in the prior years have been
reclassified.
<PAGE>
NOTE 2. INVESTMENTS
The amortized cost (original cost for equity securities) less
valuation allowances and estimated fair value of investments in
fixed maturity securities and equity securities as of December
31 are:
<TABLE>
<CAPTION>
1993
----
Amortized
Cost less Gross Gross Estimated
Valuation Unrealized Unrealized Fair
Allowances Gains Losses Value
------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate securities $ 3,181,667 $ 159,233 $ 18,440 $ 3,322,460
Mortgage-backed securities 2,015,328 79,645 3,998 2,090,975
U.S. Treasury securitiesand obligations of
U.S. government corporations and
agencies 159,329 10,887 126 170,090
Obligations of states and political
subdivisions 12,912 922 0 13,834
------------ ------------ ------------ ------------
Total fixed maturity securities available
for sale $ 5,369,236 $ 250,687 $ 22,564 $ 5,597,359
============ ============ ============ ============
Equity securities available for sale:
Common stocks $ 4,481 $ 577 $ 657 $ 4,401
Non-redeemable preferred stocks 19,943 757 131 20,569
------------ ------------ ------------ ------------
Total equity securities available for sale $ 24,424 $ 1,334 $ 788 $ 24,970
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1992
----
Amortized
Cost less Gross Gross Estimated
Valuation Unrealized Unrealized Fair
Allowances Gains Losses Value
------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities to be held to
maturity:
Corporate securities $ 3,052,333 $ 134,016 $ 7,721 $ 3,178,628
Mortgage-backed securities 3,292,132 141,387 5,215 3,428,304
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies 97,976 1,798 1,396 98,378
Obligations of states and political
subdivisions 7,540 981 0 8,521
------------ ------------ ------------ ------------
Total fixed maturity securities to be
held to maturity $6,449,981 $ 278,182 $ 14,332 $ 6,713,831
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1992
----
Amortized
Cost less Gross Gross Estimated
Valuation Unrealized Unrealized Fair
Allowances Gains Losses Value
------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate securities $ 134,675 $ 6,648 $ 938 $ 140,385
Mortgage-backed securities 117,248 3,316 8,337 112,227
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies 74,109 916 560 74,465
Obligations of states and political
subdivisions 8,606 233 0 8,839
------------ ------------ ------------ ------------
Total fixed maturity securities
available for sale $ 334,638 $ 11,113 $ 9,835 $ 335,916
============ ============ ============ ============
Equity securities available for sale:
Common stocks $ 12,980 $ 762 $ 0 $ 13,742
Non-redeemable preferred stocks 18,618 826 0 19,444
------------ ------------ ------------ ------------
Total equity securities available for sale $ 31,598 $ 1,588 $ 0 $ 33,186
============ ============ ============ ============
</TABLE>
For publicly traded securities, the estimated fair value is
determined using quoted market prices. For securities without
a readily ascertainable market value, the Company has
determined an estimated fair value using a discounted cash flow
approach, including provision for credit risk, based upon the
assumption that such securities will be held to maturity. Such
estimated fair values do not necessarily represent the values
for which these securities could have been sold at the dates of
the balance sheets. At December 31, 1993 and 1992,
respectively, securities without a readily ascertainable market
value, having an amortized cost less valuation allowances of
approximately $773,965,000 and $992,340,000, had an estimated
fair value of approximately $819,866,000 and $1,064,915,000,
respectively.
The amortized cost less valuation allowances and estimated fair
value of fixed maturity securities available for sale at
December 31, 1993 by contractual maturity are shown below:
<TABLE>
<CAPTION>
Amortized
Cost less Estimated
Valuation Fair
Allowances Value
------------ ------------
(In Thousands)
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 293,809 $ 299,884
Due after one year through five years 1,162,162 1,207,307
Due after five years through ten years 1,499,057 1,585,524
Due after ten years 398,880 413,669
------------ ------------
3,353,908 3,506,384
Mortgage-backed securities 2,015,328 2,090,975
------------ ------------
Total fixed maturity securities
available for sale $ 5,369,236 $ 5,597,359
============ ============
</TABLE>
<PAGE>
Fixed maturity securities not due at a single maturity date
have been included in the preceding table in the year of final
maturity. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
The Company's investment in mortgage loans on real estate
consists principally of loans collateralized by commercial real
estate. The largest concentrations of commercial real estate
mortgage loans are for properties located in California
($53,795,000 or 24%), Illinois ($28,294,000 or 13%) and
Pennsylvania ($27,558,000 or 12%).
For the years ended December 31, 1993 and 1992, $29,555,000 and
$3,126,000, respectively, of real estate was acquired in
satisfaction of debt.
Net investment income arose from the following sources for the
years ended December 31,:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Fixed maturity securities $ 511,655 $ 652,136 $ 715,102
Equity securities 4,143 4,813 2,852
Mortgage loans on real estate 20,342 25,954 32,827
Real estate available for sale 32 1,004 310
Policy loans on insurance contracts 46,129 40,843 34,366
Other 11,135 5,924 13,015
------------ ------------ ------------
Gross investment income 593,436 730,674 798,472
Less expenses (6,975) (17,935) (10,869)
------------ ------------ ------------
Net investment income $ 586,461 $ 712,739 $ 787,603
============ ============ ============
</TABLE>
Net realized investment gains (losses), including changes in
valuation allowances, determined by specific identification for
the years ended December 31,:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Fixed maturity securities available for sale $ 67,473 $ 15,907 $ (12,689)
Fixed maturity securities held for trading 5,562 0 0
Equity securities available for sale 22 (3,051) (804)
Equity securities held for trading 2,587 0 0
Mortgage loans on real estate (9,310) (42,997) (12,913)
Real estate available for sale (4,733) (1,800) 3,224
Other 1,451 2,302 1,225
------------ ------------ ------------
Net realized investment gains (losses) $ 63,052 $ (29,639) $ (21,957)
============ ============ ============
</TABLE>
<PAGE>
Valuation allowances have been established to reflect other than
temporary declines in estimated fair value of the following
classification of investments as of December 31,:
<TABLE>
<CAPTION>
1993 1992
---- ----
(In Thousands)
<S> <C> <C>
Fixed maturity securities to be held to maturity $ 0 $ 19,711
Fixed maturity securities available for sale 850 0
Equity securities available for sale 0 210
Mortgage loans on real estate 45,924 55,610
Real estate available for sale 20,797 5,600
------------ ------------
$ 67,571 $ 81,131
============ ============
</TABLE>
Proceeds, gains and losses from the sale or maturity of fixed
maturity securities available for sale and held to maturity for
the years ended December 31,:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Proceeds $ 3,348,329 $ 3,488,152 $ 4,752,232
Realized investment gains 71,599 51,925 88,230
Realized investment losses 4,126 25,732 91,745
</TABLE>
Approximately $4,291,000 of unrealized holding gains from
investment trading securities were recorded in net realized
investment gains during 1993.
The Company held investments at December 31, 1993 of
$22,672,000 which have been non-income producing for the
preceding twelve months.
The Company had investment securities of $28,702,000 and
$19,030,000 held on deposit with insurance regulatory
authorities at December 31, 1993 and 1992, respectively.
At December 31, 1992, the Company retained $9,741,000 in the
Separate Accounts, including unrealized gains of $1,504,000.
The investments in the Separate Accounts were for the purpose
of providing original funding of certain mutual funds available
as investment options to variable life and annuity
policyholders. No funds were retained in the Separate Accounts
at December 31, 1993.
The Company has restructured the terms of certain of its
investments in fixed maturity securities and mortgage loans on
real estate during 1993 and 1992. The following table provides
the amortized cost less valuation allowances immediately prior
to restructuring, gross interest income that would have been
earned had the loans been current per their original terms
("Expected Income"), gross interest income recorded during the
year ("Actual Income") and equity interests which were received
in the restructuring:
<PAGE>
<TABLE>
<CAPTION>
1993 1992
---- ----
(In Thousands)
<S> <C> <C>
Fixed maturity securities:
Amortized cost less valuation allowances $ 3,743 $ 13,148
Expected income 916 2,781
Actual income 103 1,011
Equity interest received 1,833 2,003
Mortgage loans on real estate:
Amortized cost less valuation allowance $ 79,624 $ 0
Expected income 6,859 0
Actual income 5,076 0
</TABLE>
NOTE 3. FEDERAL INCOME TAXES
The Company's operating results (excluding Tandem prior to
September 30, 1991) are consolidated with those of MLIG. MLIG
and the Company are included in Merrill Lynch & Co.'s
consolidated Federal income tax returns. It is the policy of
Merrill Lynch & Co. to allocate the tax associated with such
operating results to its respective subsidiaries on a separate
company basis. The Company has the intent to pay accumulated
Federal income tax to MLIG upon request. For the nine months
ended September 30, 1991, Tandem filed a separate Federal
income tax return.
The following is a reconciliation of the provision for income
taxes based on income before income taxes, computed using the
Federal statutory tax rate, with the provision for income taxes
for the three years ended December 31,:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate $ 25,471 $ 8,726 $ 4,783
Increase (decrease) in income taxes resulting from:
Federal tax rate increase (631)
Recognition of prior year capital loss tax
benefits (2,219)
Other 75 (90) (104)
------------ ------------ ------------
Federal income tax provision $ 24,915 $ 8,636 $ 2,460
============ ============ ============
</TABLE>
The Federal statutory rate for 1993, 1992 and 1991 was 35%, 34%
and 34%, respectively.
The Company provides for deferred income taxes resulting from
temporary differences which arise from recording certain
transactions in different years for income tax reporting
purposes than for financial reporting purposes. The sources of
these differences and the tax effect of each were as follows:
<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Deferred policy acquisition costs $ (9,030) $ (17,633) $ (32,834)
Policyholders' account balances 6,433 21,301 (6,282)
Estimated liability for guaranty fund assessments (1,066) (2,735) (3,626)
Investment adjustments 7,941 (21,875) 2,437
Other 525 1,029 (154)
------------ ------------ ------------
Deferred Federal income tax
provision (benefit) $ 4,803 $ (19,913) $ (40,459)
============ ============ ============
</TABLE>
Deferred tax assets and liabilities as of December 31, are
determined as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 99,475 $ 105,908
Investment adjustments 19,596 27,537
Estimated liability for guaranty fund assessments 7,427 6,361
------------ ------------
Total deferred tax asset 126,498 139,806
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs 92,625 101,655
Net unrealized investment gain (loss) (213) 1,486
Other 17,208 16,683
------------ ------------
Total deferred tax liability 109,620 119,824
------------ ------------
Net deferred tax asset $ 16,878 $ 19,982
============ ============
</TABLE>
The Company anticipates that all deferred tax assets will be
realized, therefore no valuation allowance has been provided.
Federal income taxes paid (recovered) totaled $40,000,000,
$13,594,000 and $(1,560,000) in 1993, 1992 and 1991,
respectively.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company and MLIG are parties to a service agreement whereby
MLIG has agreed to provide certain data processing, legal,
actuarial, management, advertising and other services to the
Company. Expenses incurred by MLIG in relation to this service
agreement are reimbursed by the Company on an allocated cost
basis. Charges billed to the Company by MLIG pursuant to the
agreement were $55,843,000, $63,300,000 and $78,306,000 for the
years ended December 31, 1993, 1992 and 1991, respectively.
The Company and Merrill Lynch Asset Management, L.P. ("MLAM")
are parties to a service agreement whereby MLAM has agreed to
provide certain invested asset management to the Company. The
Company pays a fee to MLAM for these services, through the MLIG
service agreement.
The Company has a general agency agreement with Merrill Lynch
Life Agency Inc. ("MLLA") whereby registered representatives of
Merrill Lynch, Pierce, Fenner and Smith, Inc. ("MLPF&S") who
are the
<PAGE>
Company's licensed insurance agents, solicit
applications for contracts to be issued by the Company. MLLA
is paid commissions for the contracts sold by such agents.
Commissions paid to MLLA were approximately $67,102,000,
$25,158,000 and $27,974,000 for 1993, 1992 and 1991,
respectively. Substantially all of these commissions were
capitalized as deferred policy acquisition costs and are being
amortized in accordance with the policy discussed in Note 1.
In connection with the acquisition of a block of variable life
insurance business from Monarch Life Insurance Company
("Monarch Life"), the Company borrowed funds from Merrill Lynch
& Co. to partially finance the transaction. As of December 31,
1991, the outstanding balance of these loans was approximately
$83,200,000. These loans were repaid during 1992. Interest
was calculated on these loans at LIBOR plus 150 basis points.
Intercompany interest paid on these loans during 1992 and 1991
was approximately $4,025,000 and $6,300,000, respectively.
The Company and Merrill Lynch Trust Company ("ML Trust") were
parties to an agreement whereby the Company retained ML Trust
to hold certain invested assets upon the terms and conditions
of the agreement. ML Trust was paid a fee based on its current
fee schedule. This agreement was terminated during 1993.
The Company has entered into certain other marketing and
administrative service agreements with affiliates in connection
with the variable life and annuity policies it sells.
During 1993, 1992 and 1991, the Company allowed the recapture
of certain policies previously indemnity reinsured by the
Company from Family Life. Simultaneously with the recapture,
the Company's affiliate, ML Life Insurance Company of New York
("ML Life"), assumption reinsured these policies. These
transactions resulted in the transfer of approximately
$11,900,000 $2,000,000 $19,200,000 of policy reserves during
1993, 1992 and 1991, respectively.
The fair value of the Company's payables to affiliates is
estimated at carrying value. These borrowings are payable on
demand and bear a variable interest rate based on LIBOR.
Total intercompany interest paid was $737,000, $5,409,000 and
$8,567,000 for 1993, 1992 and 1991, respectively.
NOTE 5. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
On December 20, 1993, the Company paid a $44,988,000 ordinary
dividend and a $75,012,000 extraordinary dividend to MLIG. The
Company received approval from the Arkansas Insurance
Commissioner prior to the declaration and payment of the
extraordinary dividend.
At December 31, 1993 and 1992, approximately $37,221,000 and
$44,988,000, respectively, of retained earnings was available
for distribution to the Company's stockholder. Statutory
capital and surplus at December 31, 1993 and 1992, was
$374,209,000 and $451,888,000, respectively.
During 1991, MLIG contributed capital to the Company of
$82,396,000. The contribution was made to support the
underwriting of additional insurance premiums and deposits. No
contributions were received during 1993 and 1992.
Applicable insurance department regulations require that the
Company report its accounts in accordance with statutory
accounting practices. Statutory accounting practices primarily
differ from the principles utilized in these financial statements
by charging policy acquisition costs to expense as incurred,
establishing future policy benefit reserves using different
actuarial assumptions, not providing for deferred taxes and
valuing securities on a different basis. The Company's
statutory net income for the years ended December 31, 1993,
1992 and 1991 was $45,604,000, $60,140,000 and $65,771,000,
respectively.
<PAGE>
The National Association of Insurance Commissioners ("NAIC")
has developed and implemented effective December 31,
1993, the Risk Based Capital ("RBC") adequacy monitoring
system. The RBC calculates the amount of adjusted capital which
a life insurance company should have based upon that company's
risk profile. The NAIC has established four different levels of
regulatory action with respect to the RBC adequacy monitoring
system. Each of these levels may be triggered if an insurer's
total adjusted capital is less than a corresponding level of
RBC. These levels are as follows:
For companies with capital levels which are below 100% of
the basic RBC level (company action level) calculated for
that company, the company must submit to the domiciliary
insurance commissioner, and implement, an approved plan to
increase adjusted capital to at least 100% of the basic
RBC.
For companies with capital levels which are below 75% of
the basic RBC level calculated for that company, the
company must submit to an examination by the domiciliary
insurance department and as a result of the findings of the
examination, corrective orders may be issued.
For companies with capital levels which are below 50% of
the basic RBC level (authorized control level) calculated
for that company, the domiciliary insurance commissioner
will have the authority to place the company into
conservatorship or liquidation.
For companies with capital levels which are below 35% of
the basic RBC level calculated for that company, the
domiciliary insurance commissioner will be required to
place the company into conservatorship or liquidation.
As of December 31, 1993, based on the RBC formula, the
Company's total adjusted capital level was 279% of the basic
RBC level.
NOTE 6. REINSURANCE AGREEMENTS
On December 28, 1990, the Company entered into an indemnity
reinsurance agreement with Family Life, in which the Company
100% coinsured substantially all of Family Life's general
account interest-sensitive life and annuity business, and
modified coinsured all of the separate account variable annuity
business. As of December 31, 1993, substantially all of this
business has been assumption reinsured by the Company and an
affiliate.
On December 31, 1990, the Company and an affiliate entered into
a 100% reinsurance agreement with respect to all variable life
policies issued by Monarch Life and sold through the Merrill
Lynch & Co. retail network. As a result of the indemnity
provisions of the agreement, the Company became obligated to
reimburse Monarch Life for its net amount at risk with regard
to the reinsured policies. At the date of acquisition, assets
of approximately $553,000,000 supporting general account
reserves, on a statutory accounting basis, were transferred
from Monarch Life to the Company. This agreement provides for
contingent ceding commission payments to Monarch Life dependent
upon the lapse rate during the five years ending in 1995 and
mortality experience during the ten years ending in 2000. To
date, the Company has paid approximately $225,900,000 to
Monarch Life under the terms of the agreement. As of December
31, 1993, the Company has accrued $7,673,000 for such payments.
On various dates during 1992 and 1991, the Company and an
affiliate assumption reinsured substantially all such policies,
wherever permitted by appropriate regulatory authorities. Upon
assumption, the policy liabilities and the underlying assets of
approximately $2,625,000,000 were transferred to the Merrill
Lynch Life Variable Life Separate Account II. As a result of
the assumptions, the Company became directly obligated to the
policyholders, rather than to Monarch Life. Certain contract
owners of the reinsured policies elected to remain with Monarch
Life as permitted under certain
<PAGE>
state insurance laws. Assets
and liabilities of those policies not assumption reinsured by
the Company or its affiliate have remained with Monarch Life.
The Company and its affiliate have indemnified Monarch Life
against its net amount at risk on such policies. As of
December 31, 1993, approximately 10 life insurance policies
with $1,499,000 life insurance in force remain under the
indemnity provisions of the reinsurance agreement.
During 1992, the Company, and its affiliates, entered into an
agreement with Monarch Life for the purchase, transfer or
assignment of certain services and assets owned, licensed or
leased by Monarch Life. Additionally, the Company along with
its affiliates were allowed to actively solicit the employment
of individuals employed by Monarch Life, who are required to
service the Company's and its affiliates' variable life
insurance policies and Monarch Life's variable life insurance
policies. In consideration of this, the Company and its
affiliate, ML Life, transferred title to Monarch Life certain
telecommunications equipment owned by Merrill Lynch Insurance
Group Services, Inc., an affiliate of the Company, with a net
book value of $1,753,000. The Company agreed to service
Monarch Life's variable life insurance policies for a period of
five years at an annual rate of $100 per policy. Monarch Life
has an option to terminate the service agreement upon proper
notification.
NOTE 7. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts for the
purpose of minimizing exposure to fluctuations in interest
rates of specific assets held. The notional amount of such
swaps outstanding at December 31, 1993 and 1992 was
approximately $155,082,000 and $197,024,000 respectively. The
average unexpired term at December 31, 1993 and 1992 was 3.2
and 3.5 years, respectively.
The current amount at risk, on a present value basis, of
terminating or replacing at current market rates all
outstanding matched swaps in a loss position at December 31,
1993 and 1992 was $0 and $0, respectively. During 1992 and
1991, a net investment gain of approximately $2,302,000 and
$4,750,000, respectively, was recorded in connection with
interest rate swap activity. The Company did not realize net
investment gains (losses) from interest rate swap activity
during 1993.
During 1993, 1992 and 1991, the Company did not enter into
unmatched interest rate swap arrangements and did not act as an
intermediary or broker in interest rate swaps.
Estimated fair values for the Company's interest rate swaps are
based on broker quotes. At December 31, 1993 and 1992, the
estimated fair value for these contracts was $4,317,000 and
$10,551,000, respectively.
NOTE 8. SALE OF FAMILY LIFE INSURANCE COMPANY
On June 12, 1991, MLIG sold Family Life to a non-affiliated
entity. Prior to closing, MLIG transferred to affiliates of
Family Life, to the extent permitted by law, all assets and
liabilities of Family Life that were not related to Family
Life's mortgage protection life insurance business. Certain
life insurance and annuity products sold through the retail
network of Merrill Lynch & Co. and underwritten by Family Life
have been or will be assumption reinsured by the Company or its
affiliate in those jurisdictions in which the Company or its
affiliate has the authority to do so. (See Note 6)
NOTE 9. COMMITMENTS AND CONTINGENCIES
State insurance laws generally require that all life insurers
who are licensed to transact business within a state become
members of the state's life insurance guaranty association.
These associations have been established for the protection of
policyholders from loss (within specified limits) as a result
of the insolvency of an insurer. At the time an insolvency
occurs, the guaranty association assesses the remaining members
of the association an amount sufficient to satisfy the
insolvent insurer's policyholder obligations (within specified
limits). During 1991, and to a lesser extent 1992, there were
certain highly
<PAGE>
publicized life insurance insolvencies. The
Company has utilized public information to estimate what future
assessments it will incur as a result of these insolvencies.
At December 31, 1993 and 1992, the Company had accrued an
estimated liability for future guaranty fund assessments of
$28,083,000 and $27,104,000, respectively. The Company
regularly monitors public information regarding insurer
insolvencies and will adjust its estimated liability where
appropriate.
In the normal course of business, the Company is subject to
various claims and assessments. Management believes the
settlement of these matters would not have a material effect on
the financial position or results of operations of the Company.
* * * * * *
<PAGE> 38
APPENDIX
The tables below are designed to show the impact of the Market Value Adjustment
and withdrawal charge on a single premium of $10,000. Table 1 assumes the
premium is allocated to a subaccount with a 10 year Guarantee Period with a
guaranteed rate of interest of 5.25%. Table 2 assumes the premium is allocated
to a subaccount with a 5 year Guarantee Period with a guaranteed rate of 4.50%.
The Market Value Adjustments are based on interpolated current interest rates
(defined in the Contract as "B") of 3.25%, 5.25% and 7.25% in the 10 year
guarantee table (see Table 1 below) and 2.50%, 4.50% and 6.50% in the 5 year
guarantee table (see Table 2 below). The net subaccount values shown in the
tables are the maximum amount available as cash withdrawals. Although the
withdrawal charge is in each case a fixed percentage of the amount withdrawn,
the amount of the charge for withdrawals made at the end of each year varies as
a result of the Market Value Adjustment. Values shown in the tables have been
rounded to the nearest dollar, and therefore the figures under the net
subaccount value columns may not precisely equal amounts set forth in the
subaccount value, plus the Market Value Adjustment, less the withdrawal charge
columns.
TABLE 1
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT INTEREST RATES OF:
---------------------------------------------------------------------------------------------------------
3.25% 5.25% 7.25%
- --------------------------------------------------------------------------------------------------------------------------------
MARKET MARKET
END OF SUB- MARKET VALUE WITH- NET SUB- VALUE WITH- NET SUB- VALUE WITH- NET SUB-
CERTIFICATE ACCOUNT ADJUST- DRAWAL ACCOUNT ADJUST- DRAWAL ACCOUNT ADJUST- DRAWAL ACCOUNT
YEAR VALUE MENT CHARGE VALUE MENT CHARGE VALUE MENT CHARGE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
1 10,525 1,924 318 12,130 -0- 269 10,256 (1,605) 228 8,692
2 11,078 1,783 329 12,532 -0- 283 10,794 (1,514) 245 9,318
3 11,659 1,627 340 12,946 -0- 298 11,361 (1,407) 262 9,990
4 12,271 1,454 351 13,374 -0- 314 11,957 (1,281) 281 10,710
5 12,915 1,264 363 13,817 -0- 330 12,585 (1,133) 301 11,481
6 13,594 1,054 375 14,273 -0- 348 13,246 (963) 323 12,308
7 14,307 825 387 14,745 -0- 366 13,941 (767) 346 13,194
8 15,058 573 400 15,232 -0- 385 14,673 (543) 371 14,144
9 15,849 299 413 15,735 -0- 405 15,444 (288) 398 15,163
10 16,681 -0- -0- 16,681 -0- -0- 16,681 -0- -0- 16,681
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 2
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT INTEREST RATES OF:
---------------------------------------------------------------------------------------------------------
2.50% 4.50% 6.50%
- --------------------------------------------------------------------------------------------------------------------------------
MARKET MARKET
END OF SUB- MARKET VALUE WITH- NET SUB- VALUE WITH- NET SUB- VALUE WITH- NET SUB-
CERTIFICATE ACCOUNT ADJUST- DRAWAL ACCOUNT ADJUST- DRAWAL ACCOUNT ADJUST- DRAWAL ACCOUNT
YEAR VALUE MENT CHARGE VALUE MENT CHARGE VALUE MENT CHARGE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
1 10,450 820 248 11,022 -0- 230 10,220 (748) 214 9,489
2 10,920 637 254 11,303 -0- 240 10,680 (591) 227 10,102
3 11,412 439 261 11,590 -0- 251 11,161 (416) 242 10,754
4 11,925 227 267 11,885 -0- 262 11,663 (219) 258 11,448
5 12,462 -0- -0- 12,462 -0- -0- 12,462 -0- -0- 12,462
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE> 39
The formulas used in determining the amounts shown in the above tables are as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Subaccount Value
--------------------------------------------------------------------
Guaranteed Interest Rate 1 + Current Interest Rate
(1) Net Subaccount Value = ( ------------------------- ) + ( ----------------------------- ) n/365
2 1 + Guaranteed Interest Rate
</TABLE>
Where "n" is the number of days remaining in the Guaranteed Period of the
subaccount, but not less than 365.
<TABLE>
<S> <C>
Guaranteed Interest Rate
(2) Withdrawal Charge = Net Subaccount Value X ---------------------------
2
1 + Current Interest Rate
(3) Market Value Adjustment = Net Subaccount Value X [ 1 - ( ------------------------------ ) n/365 ]
1 + Guaranteed Interest Rate
</TABLE>
(4) "n" is the number of days remaining in the Guarantee Period of the
subaccount, but not less than 365.
A-2
