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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, 1994
Commission File Nos. 33-26322; 33-46827; 33-52254; 33-60290; 33-58303
MERRILL LYNCH LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
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Arkansas 91-1325756
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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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 Registrant's registration
statement on Form S-1, filed March 30, 1995, pursuant to the Securities Act of
1933, File No. 33-58303 -- incorporated by reference into Parts I and II of
this report on Form 10-K; and Exhibits.
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 Registrant's
registration statement, filed March 30, 1995, pursuant to the Securities Act of
1933, File No. 33-58303 (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 23, 1994, the Registrant paid a $37,221,000
ordinary dividend and a $112,779,000 extraordinary dividend to MLIG. On
December 20, 1993, the Registrant paid a $44,988,000 ordinary dividend and a
$75,012,000 extraordinary dividend to MLIG. The extraordinary dividends were
paid pursuant to approval granted by the Arkansas Insurance Commissioner. 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 extraordinary dividends
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on its common stock is restricted. See Note 6 to the Registrant's financial
statements.
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 sub-caption "Results of
Operations" 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 27, 1995.
b. Balance Sheets at December 31, 1994 and 1993.
c. Statements of Earnings for the Years Ended December
31, 1994, 1993 and 1992.
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d. Statements of Stockholder's Equity for the Years
Ended December 31, 1994, 1993 and 1992.
e. Statements of Cash Flows for the Years Ended December
31, 1994, 1993 and 1992.
f. Notes to Financial Statements for the Years Ended
December 31, 1994, 1993 and 1992.
(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
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reference to Exhibit 3(d) to the Registrant's
registration statement on Form S-1, File No.
33-46827, filed March 30, 1992.)
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.)
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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.)
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
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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.)
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.)
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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 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.)
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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.)
4.17 Group Modified Guaranteed Annuity Contract,
ML-AY-361/94. (Incorporated by reference to
Exhibit 4(a)(2), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration statement on Form S- 1,
File No. 33-60290.)
4.18 Individual Certificate, ML-AY-362/94.
(Incorporated by reference to Exhibit 4(b)(4),
filed December 7, 1994, as part of Post-Effective
Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33-60290.)
4.19 Individual Tax-Sheltered Annuity Certificate,
ML-AY-372/94. (Incorporated by reference to
Exhibit 4(c)(3), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration statement on Form S- 1,
File No. 33-60290.)
4.20 Qualified Retirement Plan Certificate,
ML-AY-373/94. (Incorporated by reference to
Exhibit 4(d)(3), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration statement on Form S- 1,
File No. 33-60290.)
4.21 Individual Retirement Annuity Certificate,
ML-AY-374/94. (Incorporated by reference to
Exhibit 4(e)(5), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration statement on Form S- 1,
File No. 33-60290.)
4.22 Individual Retirement Account Certificate,
ML-AY-375/94. (Incorporated by reference to
Exhibit 4(f)(3), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration statement on Form S- 1,
File No. 33-60290.)
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4.23 Section 457 Deferred Compensation Plan
Certificate, ML-AY-376/94. (Incorporated by
reference to Exhibit 4(g)(3), filed December 7,
1994, as part of Post-Effective Amendment No. 3 to
the Registrant's registration statement on Form
S-1, File No. 33-60290.)
4.24 Qualified Plan Endorsement, ML-AY-448/94.
(Incorporated by reference to Exhibit 4(m)(3),
filed December 7, 1994, as part of Post-Effective
Amendment No. 3 to the Registrant's registration
statement on Form S-1, File No. 33- 60290.)
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
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 among Merrill Lynch
Insurance Group, Inc., Family Life Insurance
Company and Merrill Lynch Life Insurance Company.
(Incorporated by reference to Exhibit 10(c)(2) to
Post-Effective Amendment No. 1 to the Registrant's
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
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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)
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.)
24.1 Power of attorney of Joseph E. Crowne.
(Incorporated by reference to Exhibit 24(a) to the
Registrant's registration statement on Form S-1,
File No. 33-58303, filed March 30, 1995.)
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24.2 Power of attorney of David M. Dunford.
(Incorporated by reference to Exhibit 24(b) to the
Registrant's registration statement on Form S-1,
File No. 33-58303, filed March 30, 1995.)
24.3 Power of attorney of John C.R. Hele.
(Incorporated by reference to Exhibit 24(c) to the
Registrant's registration statement on Form S-1,
File No. 33-58303, filed March 30, 1995.)
24.4 Power of attorney of Allen N. Jones.
(Incorporated by reference to Exhibit 24(d) to the
Registrant's registration statement on Form S-1,
File No. 33-58303, filed March 30, 1995.)
24.5 Power of attorney of Barry G. Skolnick.
(Incorporated by reference to Exhibit 24(e) to the
Registrant's registration statement on Form S-1,
File No. 33-58303, filed March 30, 1995.)
24.6 Power of attorney of Anthony J. Vespa.
(Incorporated by reference to Exhibit 24(f) to the
Registrant's registration statement on Form S-1,
File No. 33-58303, filed March 30, 1995.)
28.1 Preliminary prospectus contained Registrant's
registration statement, filed March 30, 1995,
pursuant to the Securities Act of 1933, File No.
33-58303.
(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, 1994.
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INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . .
Balance Sheets at December 31, 1994 and 1993 . . . . . . . . . .
Statements of Earnings for the Years Ended December 31,
1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . .
Statements of Stockholder's Equity for the Years Ended
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . .
Statements of Cash Flows for the Years Ended December 31,
1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements for the Years Ended December 31,
1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . .
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, 1994
and 1993, and the related statements of earnings, stockholder's
equity, and cash flows for each of the three years in the period
ended December 31, 1994. 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 provide 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, 1994 and 1993, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1994 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
Accounting Standards No. 115.
/s/ Deloitte & Touche LLP
February 27, 1995
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MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
(Dollars in Thousands)
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ASSETS 1994 1993
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INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1994 - $4,014,272; 1993 - $5,369,236) $ 3,867,833 $ 5,597,359
Fixed maturity securities held for trading, at estimated fair value
(amortized cost: 1993 - $140,635) 0 144,035
Equity securities available for sale, at estimated fair value
(cost: 1994 - $15,946; 1993 - $24,424) 16,777 24,970
Equity securities held for trading, at estimated fair value
(cost: 1993 - $19,694) 0 20,585
Mortgage loans on real estate 149,249 191,214
Real estate available for sale
(accumulated depreciation: 1994 - $515; 1993 - $850) 12,955 29,761
Policy loans on insurance contracts 985,213 924,579
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Total Investments 5,032,027 6,932,503
CASH AND CASH EQUIVALENTS 139,087 122,218
ACCRUED INVESTMENT INCOME 95,133 120,337
DEFERRED POLICY ACQUISITION COSTS 466,334 318,903
FEDERAL INCOME TAXES - DEFERRED 38,919 16,878
REINSURANCE RECEIVABLES 1,832 1,190
RECEIVABLES FROM AFFILIATES - NET 3,113 789
OTHER ASSETS 28,656 21,481
SEPARATE ACCOUNTS ASSETS 5,798,973 4,715,278
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TOTAL ASSETS $11,604,074 $12,249,577
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See notes to financial statements.
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LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1993
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LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 5,148,971 $ 6,691,811
Claims and claims settlement expenses 26,177 20,295
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Total policy liabilities and accruals 5,175,148 6,712,106
OTHER POLICYHOLDER FUNDS 21,221 28,768
LIABILITY FOR GUARANTY FUND ASSESSMENTS 24,774 28,083
OTHER LIABILITIES 36,775 68,165
FEDERAL INCOME TAXES - CURRENT 2,274 10,122
SEPARATE ACCOUNTS LIABILITIES 5,784,311 4,715,278
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Total Liabilities 11,044,503 11,562,522
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STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 535,450 637,590
Retained earnings 66,005 47,860
Net unrealized investment loss (43,884) (395)
------------ ------------
Total Stockholder's Equity 559,571 687,055
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $11,604,074 $12,249,577
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MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Dollars in Thousands)
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<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 433,536 $ 586,461 $ 712,739
Net realized investment gains (losses) (14,543) 63,052 (29,639)
Policy charge revenue 126,284 95,684 81,653
------------ ------------ ------------
Total Revenues 545,277 745,197 764,753
------------ ------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 313,585 454,671 546,979
Market value adjustment expense 6,307 30,816 6,229
Policy benefits (net of reinsurance recoveries: 1994 - $6,338;
1993 - $6,004; 1992 - $5,555) 16,858 17,030 12,066
Reinsurance premium ceded 13,909 12,665 12,457
Amortization of deferred policy acquisition costs 69,662 109,456 88,795
Insurance expenses and taxes 35,073 47,784 72,560
------------ ------------ ------------
Total Benefits and Expenses 455,394 672,422 739,086
------------ ------------ ------------
Earnings Before Federal Income Tax Provision 89,883 72,775 25,667
------------ ------------ ------------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 22,503 20,112 28,549
Deferred 1,375 4,803 (19,913)
------------ ------------ ------------
Total Federal Income Tax Provision 23,878 24,915 8,636
------------ ------------ ------------
NET EARNINGS $ 66,005 $ 47,860 $ 17,031
============ ============ ============
</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, 1994, 1993 AND 1992
(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, 1992 $ 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 (3,279) (3,279)
------------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1993 2,000 637,590 47,860 ( 395) 687,055
Dividend to Parent (102,140) (47,860) (150,000)
Net earnings 66,005 66,005
Net unrealized investment loss (43,489) (43,489)
------------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1994 $ 2,000 $ 535,450 $ 66,005 $ (43,884) $ 559,571
============= =========== =========== ============ =============
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, 1994, 1993 AND 1992
(Dollars in Thousands)
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 66,005 $ 47,860 $ 17,031
Adjustments to reconcile net earnings to net
cash and cash equivalents provided (used)
by operating activities:
Amortization of deferred policy acquisition
costs 69,662 109,456 88,795
Capitalization of policy acquisition costs (108,829) (91,189) (39,146)
Depreciation and amortization (4,516) 1,142 (16,033)
Net realized investment (gains) losses 14,543 (63,052) 29,639
Interest credited to policyholders' account balances 313,585 454,671 546,979
Provision for deferred Federal income tax 1,375 4,803 (19,913)
Cash and cash equivalents provided (used) by
changes in operating assets and liabilities:
Accrued investment income 25,204 18,460 6,018
Receivables from affiliates - net (2,324) (3,427) (20,027)
Policy liabilities and accruals 5,882 12,730 7,775
Federal income taxes - current (7,848) (19,888) 14,955
Other policyholder funds (7,547) 14,131 12,826
Liability for guaranty fund assessments (3,309) 979 16,439
Policy loans (60,634) (90,118) (126,925)
Investment trading securities 11,352 (145,972) 0
Other, net (39,206) 49,424 (6,269)
-------------- -------------- --------------
Net cash and cash equivalents provided
by operating activities 273,395 300,010 512,144
-------------- -------------- --------------
</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, 1994, 1993 AND 1992
(Concluded) (Dollars In Thousands)
==============================================================================
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Fixed maturity securities sold 845,227 571,337 1,281,705
Fixed maturity securities matured 1,323,705 2,776,992 2,206,447
Fixed maturity securities purchased (676,976) (1,866,857) (2,806,416)
Equity securities available for sale purchased (1,998) (8,983) (17,843)
Equity securities available for sale sold 18,868 6,451 44,188
Mortgage loans on real estate principal payments received 32,341 35,561 8,548
Mortgage loans on real estate acquired 0 (674) (853)
Real estate available for sale - improvements acquired (1,060) 0 (340)
Real estate available for sale sold 25,346 7,408 178
Interest rate swaps sold 0 0 2,302
Recapture of investment in Separate Accounts 0 29,389 0
Investment in Separate Accounts (15,212) (20,000) (3,841)
-------------- -------------- --------------
Net cash and cash equivalents provided
by investing activities 1,550,241 1,530,624 714,075
-------------- -------------- --------------
FINANCING ACTIVITIES:
Dividend paid to parent (150,000) (120,000) 0
Affiliated notes payable 0 0 (83,200)
Policyholders' account balances:
Deposits 966,861 814,314 217,410
Withdrawals (net of transfers to/from Separate Accounts) (2,623,628) (2,574,854) (1,338,034)
-------------- -------------- --------------
Net cash and cash equivalents used
by financing activities (1,806,767) (1,880,540) (1,203,824)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 16,869 (49,906) 22,395
CASH AND CASH EQUIVALENTS
Beginning of year 122,218 172,124 149,729
-------------- -------------- --------------
End of year $ 139,087 $ 122,218 $ 172,124
============== ============== ==============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 30,351 $ 40,000 $ 13,594
Intercompany interest $ 679 $ 737 $ 5,409
</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
(Dollars in Thousands)
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 non-participating 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 retail network of
Merrill Lynch Pierce, Fenner & Smith, Inc. ("MLPF&S"), a wholly
owned subsidiary of Merrill Lynch & Co..
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 4.00% - 8.30%
Interest sensitive deferred annuities 2.78% - 8.58%
Immediate annuities 4.00% - 10.00%
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.
Reinsurance: 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. The maximum amount of mortality risk
retained by the Company is approximately $500 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 $912 that can be
drawn upon for delinquent reinsurance recoverables.
<PAGE>
As of December 31, 1994, the Company had life insurance in-
force which was ceded to other life insurance companies of
$2,027,303.
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 are 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 an unaffiliated insurer. 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,:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 139,647 $ 150,450 $ 160,235
Capitalized amounts 12,517 6,987 6,060
Interest accrued 12,582 13,136 15,401
Amortization (31,358) (30,926) (31,246)
----------- ----------- -----------
Ending balance $ 133,388 $ 139,647 $ 150,450
=========== =========== ===========
</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.
1995 $17,840
1996 16,056
1997 12,488
1998 8,925
1999 8,399
Investments: Effective December 31, 1993, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"). In compliance with SFAS No. 115,
the Company, at December 31, 1993, 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. If a decline in value of a security
is determined by
<PAGE>
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 represented securities that were managed
with an investment objective to maximize total return
subject to the Company's quality guidelines. Investments in
this portfolio consisted primarily of marketable fixed
maturity and equity investments. These securities were
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 permits 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 has not utilized this
classification since the adoption of SFAS No. 115.
During 1994, the Company ceased utilizing the trading
securities classification. All securities that were classified
as trading securities on November 1, 1994 were transferred to
the available for sale classification at their respective
estimated fair values on that date. The difference between the
market value at November 1, 1994 and par value will be
amortized into income based on the Company's premium
amortization and discount accrual policies.
In compliance with a Securities and Exchange Commissions
("SEC") staff announcement, the Company has recorded certain
adjustments to deferred policy acquisition costs and
policyholders' account balances in connection 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
stockholder's equity. The following reconciles the net
unrealized investment gain (loss) as of December 31,:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale $(146,439) $ 228,123
Equity securities available for sale 831 546
Deferred policy acquisition costs 72,220 (36,044)
Federal income taxes - deferred 23,629 213
Separate Account Assets (549) 0
----------- -----------
(50,308) 192,838
----------- -----------
Liabilities:
Policyholders' account balances (6,424) 193,233
----------- -----------
Stockholder's equity:
Net unrealized investment loss $ (43,884) $ (395)
=========== ===========
</TABLE>
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. For
equity securities, dividends are recognized on the ex-dividend
date. 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
<PAGE>
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.
During 1994, the Company adopted SFAS No. 119, "Disclosure
about Derivative Financial Instruments and Fair Value of
Financial Instruments" ("SFAS No. 119"). SFAS No. 119 requires
increased disclosures regarding derivative financial
instruments. SFAS No. 119 defines derivative financial
instruments as futures, forward, swap and option contracts or
other financial instruments with similar characteristics. As of
December 31, 1994, the Company holds only interest rate swap
contracts.
The Company has outstanding certain interest rate swap
contracts which are carried at estimated fair value and
recorded as a component of fixed maturity securities available
for sale. Interest income, realized gains and losses and
unrealized gains and losses are recorded on the same basis as
fixed maturity securities available for sale.
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 recognizes income from mortgage loans on real
estate based on the cash payment interest rate of the loan,
which may be different from the accrual interest rate of the
loan for certain outstanding mortgage loans. The Company will
recognize a realized gain at the date of the satisfaction of
the loan at contractual terms for loans where there is a
difference between the cash payment interest rate and the
accrual interest rate. For all loans the Company stops accruing
income when an interest payment default either occurs or is
probable.
The Company has previously made commercial mortgage loans
collateralized by real estate and direct investments in
commercial 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 vacancy rates in excess of
historical averages, 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. 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") which was amended during 1994 by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures". SFAS No. 114, as amended,
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 or losses. SFAS No.
114, as amended, 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, as amended, would be immaterial.
<PAGE>
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. 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.
Federal Income Taxes: The results of 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.
The Company accounts for Federal Income Taxes in compliance
with 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.
Separate Accounts: The Separate Accounts are established in
conformity with Arkansas insurance law, the Company's
domiciliary state, and are generally not 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.
Postretirement Benefits Other Than Pensions: The Company
accounts for postretirement benefits in compliance with 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.
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.
Reclassifications: To facilitate comparisons with the current
year, certain amounts in the prior years have been
reclassified.
<PAGE>
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments which approximates
the estimated fair value of these financial instruments as of
December 31 are:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale:
Securities (1) $ 3,866,886 $ 5,593,042
Interest rate swaps (2) 947 4,317
------------ ------------
Total fixed maturity securities available for sale 3,867,833 5,597,359
------------ ------------
Fixed maturity securities held for trading (1) 0 144,035
Equity securities available for sale (1) 16,777 24,970
Equity securities held for trading (1) 0 20,585
Mortgage loans on real estate (3) 149,249 191,214
Policy loans on insurance contracts (4) 985,213 924,579
Cash and cash equivalents (5) 139,087 122,218
Receivables from affiliates - net (6) 3,113 789
Separate accounts assets (7) 5,798,973 4,715,278
------------ ------------
Total financial instruments recorded as assets $10,960,245 $11,741,027
============ ============
</TABLE>
(1) 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, 1994 and 1993, securities
without a readily ascertainable market value, having an
amortized cost of approximately $564,665 and $773,965, had
an estimated fair value of approximately $564,682 and
$819,866, respectively.
(2) Estimated fair values for the Company's interest rate
swaps are based on a discounted cashflow approach.
(3) The estimated fair value of mortgage loans on real estate
approximates the carrying value. See Note 1 for a
discussion of the Company's valuation process.
(4) 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.
(5) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(6) The fair value of the Company's receivables from
affiliates is estimated at carrying value. These
borrowings are payable on demand and accrue a variable
interest rate based on LIBOR.
(7) Assets held in the Separate Accounts are carried at quoted
market values.
<PAGE>
NOTE 3. INVESTMENTS
The amortized cost (cost for equity securities) and estimated
fair value of investments in fixed maturity securities and
equity securities as of December 31 are:
<TABLE>
<CAPTION>
1994
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate debt $ 2,795,543 $ 20,378 $ 133,534 $ 2,682,387
Mortgage-backed securities 1,070,430 5,772 35,624 1,040,578
U.S. Government and agencies 139,513 1,059 4,392 136,180
Municipals 4,588 115 0 4,703
Foreign governments 4,198 0 213 3,985
------------ ----------- ----------- ------------
Total fixed maturity securities
available for sale $ 4,014,272 $ 27,324 $ 173,763 $ 3,867,833
============ =========== =========== ============
Equity securities available for sale:
Common stocks $ 8,489 $ 641 $ 632 $ 8,498
Non-redeemable preferred stocks 7,457 1,092 270 8,279
------------ ----------- ----------- ------------
Total equity securities available for sale $ 15,946 $ 1,733 $ 902 $ 16,777
============ =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
1993
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate debt $ 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. Government and agencies 159,329 10,887 126 170,090
Municipals 12,912 922 0 13,834
------------ ----------- ----------- ------------
Total fixed maturity securities
available for sale $ 5,369,236 $ 250,687 $ 22,564 $ 5,597,399
============ =========== =========== ============
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>
The amortized cost and estimated fair value of fixed maturity
securities available for sale at December 31, 1994 by
contractual maturity are shown below:
<PAGE>
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 101,138 $ 102,400
Due after one year through five years 1,323,119 1,282,668
Due after five years through ten years 1,249,759 1,183,803
Due after ten years 269,826 258,384
------------ ------------
2,943,842 2,827,255
Mortgage-backed securities 1,070,430 1,040,578
Total fixed maturity securities ------------ ------------
available for sale $ 4,014,272 $ 3,867,833
============ ============
</TABLE>
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 may differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
The amortized cost and estimated fair value of fixed maturity
securities available for sale at December 31, 1994 by rating
agency equivalent are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
AAA $ 995,888 $ 964,385
AA 630,459 614,948
A 857,103 821,906
BBB 1,245,045 1,190,554
Non-investment grade 285,777 276,040
------------ ------------
$ 4,014,227 $ 3,867,833
============ ============
</TABLE>
The Company has entered 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, 1994 and 1993 was
approximately $30,000 and $149,250, respectively. The Company
has outstanding at December 31, 1994 three interest rate swap
contracts for which the Company pays the six month LIBOR
interest rate and receives a weighted average 9.8%. The
outstanding interest rate swap contracts at December 31, 1994
will expire at various times during 1996. The average unexpired
term at December 31, 1994 and 1993 was 1.2 years and 3.2 years,
respectively. All three interest rate swap contracts were with
investment grade counterparties at December 31, 1994.
There are no outstanding matched swaps in a loss position at
December 31, 1994 and 1993. During 1994, 1993 and 1992, a net
investment gain of approximately $470, $0 and $2,302,
respectively, was recorded in connection with interest rate
swap activity.
During 1994, 1993 and 1992, the Company did not enter into
either matched or unmatched interest rate swap arrangements and
did not act as an intermediary or broker in interest rate
swaps.
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,:
<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Proceeds $ 2,168,932 $ 3,348,329 $ 3,488,152
Realized investment gains 8,398 71,599 51,925
Realized investment losses 9,823 4,126 36,018
</TABLE>
During 1994, the Company ceased utilizing the trading
securities classification. At the date of this action, the
securities classified as trading were transferred to the
available for sale portfolio at their estimated fair value. The
estimated fair value of fixed maturity securities and equity
securities transferred at the date of transfer was $134,984 and
$6,989, respectively. At the date of transfer, amortized cost
exceeded estimated fair value by $2,995. During 1994 and 1993,
approximately $(7,285) and $4,291, respectively, of unrealized
holding gains (losses) from investment trading securities were
recorded in net realized investment gains/(losses).
The Company had investment securities of $26,651 and $28,702
held on deposit with insurance regulatory authorities at
December 31, 1994 and 1993, respectively.
At December 31, 1994, the Company retained $14,662 in the
Separate Accounts, including unrealized losses of $549. The
investments in the Separate Accounts are 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's investment in mortgage loans on real estate are
principally collateralized by commercial real estate. At
December 31, 1994, the largest concentrations of commercial
real estate mortgage loans, as measured by the outstanding
principal balance, are for properties located in California
($53,282 or 28%), Illinois ($28,294 or 15%) and Rhode Island
($19,769 or 10%).
The carrying value and established valuation allowances of
impaired mortgage loans on real estate as of December 31, 1994
and 1993 are shown below:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Carrying value $71,973 $63,952
Valuation allowance 40,070 45,924
</TABLE>
For the years ended December 31, 1994 and 1993, $4,652 and
$29,555, 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>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities $ 368,023 $ 511,655 $ 652,136
Equity securities 2,408 4,143 4,813
Mortgage loans on real estate 15,014 20,342 25,954
Real estate available for sale 406 32 1,004
Policy loans on insurance contracts 50,232 46,129 40,843
Other 5,489 11,135 5,924
---------- ---------- ----------
Gross investment income 441,572 593,436 730,674
Less expenses (8,036) (6,975) (17,935)
---------- ---------- ----------
Net investment income $ 433,536 $ 586,461 $ 712,739
========== ========== ==========
</TABLE>
<PAGE>
Net realized investment gains (losses), including changes in
valuation allowances, for the years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities available for sale $ (1,425) $ 67,473 $ 15,907
Fixed maturity securities held for trading (11,889) 5,562 0
Equity securities available for sale 1,490 22 (3,051)
Equity securities held for trading (580) 2,587 0
Mortgage loans on real estate (4,967) (9,310) (42,997)
Real estate available for sale 2,828 (4,733) (1,800)
Other 0 1,451 2,302
---------- ---------- ----------
Net realized investment gains (losses) $ (14,543) $ 63,052 $ (29,639)
========== ========== ==========
</TABLE>
The following is a reconciliation of the change in valuation
allowances which have been deducted in arriving at investment
carrying values, as presented in the balance sheet, and changes
thereto of the following classifications of investments for the
years ended December 31,:
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to Write - End
of Year Operations Downs of Year
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage loans on real estate:
1994 $ 45,924 $ 4,966 $ 10,820 $ 40,070
1993 55,610 9,310 18,996 45,924
1992 14,413 42,997 1,800 55,610
Real estate available for sale:
1994 7,628 0 1,862 5,766
1993 4,300 3,328 0 7,628
1992 4,500 1,800 2,000 4,300
</TABLE>
The Company held investments at December 31, 1994 of $20,391
which have been non-income producing for the preceding twelve
months.
The Company has restructured the terms of certain of its
investments in fixed maturity securities and mortgage loans on
real estate during 1994 and 1993. 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>
1994 1993
-------- --------
<S> <C> <C>
Fixed maturity securities:
Amortized cost $ 1,134 $ 3,743
Expected income 189 916
Actual income 112 103
Equity interest received 28 1,833
Mortgage loans on real estate:
Amortized cost less valuation allowance 49,595 79,624
Expected income 4,673 6,859
Actual income 3,725 5,076
</TABLE>
During 1994, the Company committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1994 no funds had been advanced towards the
Company's $10,000 commitment to the limited partnership.
NOTE 4. FEDERAL INCOME TAXES
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 years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ---------
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate $ 31,459 $ 25,471 $ 8,726
Increase (decrease) in income taxes resulting from:
Federal tax rate increase (631)
Dividend received deduction (7,363) (28) (33)
Other (218) 103 (57)
---------- ---------- ---------
Federal income tax provision $ 23,878 $ 24,915 $ 8,636
========== ========== =========
</TABLE>
The Federal statutory rate for 1994, 1993 and 1992 was 35%, 35%
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 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ---------
<S> <C> <C> <C>
Deferred policy acquisition costs $ 6,416 $ (9,030) $(17,633)
Policyholders' account balances 5,322 6,433 21,301
Estimated liability for guaranty fund assessments (153) (1,066) (2,735)
Investment adjustments 3,276 7,941 (21,875)
Other (13,486) 525 1,029
Deferred Federal income tax ---------- ---------- ---------
provision (benefit) $ 1,375 $ 4,803 $(19,913)
========== ========== =========
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 31, are
determined as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 94,153 $ 99,475
Net unrealized investment losses 23,629 213
Investment adjustments 16,320 19,596
Estimated liability for guaranty fund assessments 7,580 7,427
---------- ----------
Total deferred tax asset 141,682 126,711
---------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs 99,041 92,625
Other 3,722 17,208
---------- ----------
Total deferred tax liability 102,763 109,833
---------- ----------
Net deferred tax asset $ 38,919 $ 16,878
========== ==========
</TABLE>
The Company anticipates that all deferred tax assets will be
realized, therefore no valuation allowance has been provided.
NOTE 5. 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 $44,176, $55,843 and $63,300 for the years ended
December 31, 1994, 1993 and 1992, respectively. The Company is
allocated interest expense on its accounts payable to MLIG
which approximates the daily Federal funds rate. Total
intercompany interest paid was $679, $737 and $5,409 for 1994,
1993 and 1992, 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. Charges attributable to this agreement and
allocated to the Company by MLIG were $2,732, $2,800 and $3,700
for the years ended December 31, 1994, 1993 and 1992,
respectively.
During 1994, the Company and MLAM entered into an agreement
pursuant to which MLAM paid to the Company a fee in an amount
equal to a portion of the annual gross investment advisory fees
received by MLAM from Merrill Lynch Series Fund, Inc. ("Series
Fund") and Merrill Lynch Variable Series Funds, Inc. ("Variable
Series Funds"). The Company invests in the various mutual fund
portfolios of the Series Fund and the Variable Series Funds in
connection with the variable life insurance and variable
annuities the Company has in-force. The Company received $12,600
of revenue as a result of this agreement during 1994.
The Company has a general agency agreement with Merrill Lynch
Life Agency Inc. ("MLLA") whereby registered representatives of
MLPF&S who are the 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 $84,231, $67,102 and $25,158 for
1994, 1993 and 1992, 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
<PAGE>
transaction. 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 was approximately $4,025.
The Company has entered into certain interest rate swap
contracts with Merrill Lynch Capital Services, Inc. ("MLCS")
with a guarantee from Merrill Lynch & Co.. As of December 31,
1994 and 1993, the notional amount of interest rate swap
contracts outstanding were $10,000 and $109,250, respectively.
During 1994 the Company and MLCS terminated certain interest
rate swap contracts resulting in the Company paying a net
consideration of $2,043. Net interest received from these
interest rate swap contracts was $2,096, $6,876, and $9,849 for
the years ended December 31, 1994, 1993 and 1992, respectively.
(See Note 3)
During 1993 and 1992, the Company allowed the recapture of
certain policies previously indemnity reinsured by the Company
from Family Life Insurance Company. 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 and $2,000 of policy reserves during 1993 and 1992,
respectively. During 1994 certain adjustments to the 1993
assumption reinsurance transactions resulted in a transfer of
$9,299 of policy reserves from ML Life to the Company.
NOTE 6. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
During 1994 and 1993, the Company paid dividends of $150,000
and $120,000, respectively, to MLIG. Of these stockholder's
dividends, $112,779 and $75,012, respectively, were
extraordinary dividends as defined by Arkansas Insurance Law
and were paid pursuant to approval granted by the Arkansas
Insurance Commissioner.
At December 31, 1994 and 1993, approximately $26,243 and
$37,221, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1994 and 1993, was $264,432 and $374,209,
respectively.
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,
1994, 1993 and 1992 was $42,382, $45,604 and $60,140,
respectively.
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.
<PAGE>
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, 1994 and 1993, based on the RBC formula, the
Company's total adjusted capital level was 270% and 279%,
respectively, of the basic RBC level.
NOTE 7. 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 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, 1994 and 1993, the Company has established an
estimated liability for future guaranty fund assessments of
$24,774 and $28,083 respectively. The Company regularly
monitors public information regarding insurer insolvencies and
will adjust its estimated liability when 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> 14
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)
/s/ Joseph E. Crowne
Date: March 29, 1995 By:
------------------------------------
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
--------- ----- ----
<S> <C> <C>
*
--------------------- Chairman of the Board, President March 29, 1995
Anthony J. Vespa and Chief Executive Officer --------------
/s/ Joseph E. Crowne
--------------------- Director, Senior Vice President, March 29, 1995
Joseph E. Crowne Chief Financial Officer, Chief --------------
Actuary and Treasurer
/s/ Barry G. Skolnick
--------------------- Director, Senior Vice President March 29, 1995
Barry G. Skolnick and General Counsel* --------------
*
--------------------- Director and Senior Vice March 29, 1995
David M. Dunford President --------------
*
--------------------- Director and Senior Vice March 29, 1995
John C.R. Hele President --------------
*
--------------------- Director March 29, 1995
Allen N. Jones --------------
</TABLE>
*Signing in his own capacity and as Attorney-in-Fact.
<PAGE> 15
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.
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Location
----------- ----------- --------
<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>
- E-1 -
<PAGE> 17
<TABLE>
<S> <C> <C>
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>
- E-2 -
<PAGE> 18
<TABLE>
<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>
- E-3 -
<PAGE> 19
<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>
- E-4 -
<PAGE> 20
<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>
- E-5 -
<PAGE> 21
<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.
4.15 Annuity Application for Incorporated by reference
</TABLE>
- E-6 -
<PAGE> 22
<TABLE>
<S> <C> <C>
Individual Certificate Under Modified to Exhibit 4.15 to the Registrant's
Guaranteed Annuity Contract. 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.
4.17 Group Modified Guarantee Annuity Contract. Incorporated by reference to Exhibit
4.(a)(2), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration statement on
Form S-1, File No. 33-60290.
4.18 Individual Contract. Incorporated by reference to Exhibit
4.(b)(4), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration statement on
Form S-1, File No. 33-60290.
4.19 Individual Tax-Sheltered Annuity Incorporated by reference to Exhibit
Certificate. 4.(c)(3), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration statement on
Form S-1, File No. 33-60290.
4.20 Qualified Retirement Plan Certificate. Incorporated by reference to Exhibit
4.(d)(3), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration
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statement on Form S-1, File No. 33-60290.
4.21 Individual Retirement Annuity Certificate. Incorporated by reference to Exhibit
4.(e)(5), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration statement on
Form S-1, File No. 33-60290.
4.22 Individual Retirement Account Certificate. Incorporated by reference to Exhibit
4.(f)(3), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration statement on
Form S-1, File No. 33-60290.
4.23 Section 457 Deferred Compensation Plan Incorporated by reference to Exhibit
Certificate. 4.(g)(3), filed December 7, 1994, as part
of Post-Effective Amendment No. 3 to the
Registrant's registration statement on
Form S-1, File No. 33-60290.
Incorporated by reference to Exhibit
4.(m)(3), filed December 7, 1994, as part
Qualified Plan Endorsement. of Post-Effective Amendment No. 3 to the
4.24 Registrant's registration statement on
Form S-1, File No. 33-60290.
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 filed February 23, 1989, as
</TABLE>
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<PAGE> 24
<TABLE>
<S> <C> <C>
and Merrill Lynch Life Agency, Inc. 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 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 among Incorporated by reference to Exhibit
Merrill Lynch Insurance Group, Family Life 10(c)(2) to Post-Effective Amendment No. 1
Insurance Company and Merrill Lynch Life to the Registrant's registration statement
Insurance Company. on Form S-1, File No. 33-60290, filed
March 31, 1994.
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.
</TABLE>
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<TABLE>
<S> <C> <C>
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.
24.1 Power of attorney of Joseph E. Crowne. Incorporated by reference to Exhibit 24(a)
to the Registrant's registration statement
on Form S-1, File No. 33-58303, filed
March 30, 1995.
24.2 Power of attorney of David M. Dunford. Incorporated by reference to Exhibit 24(b)
to the Registrant's registration statement
on Form S-1, File No. 33-58303, filed
March 30, 1995.
24.3 Power of attorney of John C.R. Hele. Incorporated by reference to Exhibit 24(c)
to the Registrant's registration statement
on Form S-1, File No. 33-58303, filed
March 30, 1995.
</TABLE>
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<PAGE> 26
<TABLE>
<S> <C> <C>
24.4 Power of attorney of Allen N. Jones. Incorporated by reference to Exhibit 24(d)
to the Registrant's registration statement
on Form S-1, File No. 33-58303, filed
March 30, 1995.
24.5 Power of attorney of Barry G. Skolnick. Incorporated by reference to Exhibit 24(e)
to the Registrant's registration statement
on Form S-1, File No. 33-58303, filed
March 30, 1995.
24.6 Power of Attorney of Anthony J. Vespa. Incorporated by reference to Exhibit 24(f)
to the Registrant's registration statement
on Form S-1, File No. 58303, filed March
30, 1995.
28.1 Preliminary prospectus contained in Exhibit 28.1
Registrant's registration statement, filed
March 30, 1995, pursuant to the Securities
Act of 1933, File No. 33-58303.
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PROSPECTUS
MAY 1, 1995
MERRILL LYNCH ASSET I (SM)
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.
THE PURCHASE OF THIS CONTRACT INVOLVES CERTAIN RISKS. BECAUSE IT IS A MODIFIED
GUARANTEED ANNUITY, THE CONTRACT AND CERTIFICATES ARE SUBJECT TO A MARKET VALUE
ADJUSTMENT IF, PRIOR TO THE END OF A SELECTED GUARANTEE PERIOD, FUNDS ARE
WITHDRAWN OR THE CERTIFICATE IS SURRENDERED, THE CERTIFICATE IS ANNUITIZED OR A
DEATH BENEFIT BECOMES PAYABLE. OTHER THAN IN CERTAIN SITUATIONS, SUCH AS PAYMENT
OF A DEATH BENEFIT, A MARKET VALUE ADJUSTMENT COULD HAVE THE EFFECT OF
DECREASING THE ACCOUNT VALUE. THEREFORE, UNDER ANY OF THE CONDITIONS DESCRIBED
ABOVE, PARTICIPANTS COULD LOSE A SUBSTANTIAL PORTION OF THE MONEY THEY HAVE
INVESTED. PARTICIPANTS SHOULD CONSIDER THEIR INCOME NEEDS BEFORE PURCHASING A
CERTIFICATE.
ALL WITHDRAWALS FROM AND SURRENDERS OF A CERTIFICATE ARE SUBJECT TO TAX, AND IF
TAKEN BEFORE AGE 59 1/2, MAY ALSO BE SUBJECT TO A 10% FEDERAL PENALTY TAX.
PARTICIPANTS SHOULD NOTE THAT THIS IS AN INTEGRATED ANNUITY CONTRACT FOR
INTERNAL REVENUE CODE PURPOSES. THEREFORE, IN DETERMINING THE EXTENT TO WHICH A
WITHDRAWAL IS SUBJECT TO TAX, THE ENTIRE ACCOUNT VALUE, NOT JUST THE VALUE OF
THE SUBACCOUNT FROM WHICH THE WITHDRAWAL IS MADE, WILL BE TAKEN INTO
CONSIDERATION.
------------------------
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.
------------------------
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TABLE OF CONTENTS
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PAGE
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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................................................ 8
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.............................................................. 15
DISTRIBUTION OF THE CONTRACTS.......................................................... 16
FEDERAL TAX CONSIDERATIONS............................................................. 16
PREMIUM TAXES.......................................................................... 21
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 PROVISIONS............................. 21
MORE INFORMATION ABOUT MERRILL LYNCH LIFE INSURANCE COMPANY............................ 22
A. HISTORY AND BUSINESS.......................................................... 22
B. SELECTED FINANCIAL DATA....................................................... 23
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................... 23
D. REINSURANCE................................................................... 30
E. CONTRACT OWNER ACCOUNT BALANCES............................................... 30
F. INVESTMENTS................................................................... 30
G. COMPETITION................................................................... 31
H. CERTAIN AGREEMENTS............................................................ 31
I. EMPLOYEES..................................................................... 31
J. PROPERTIES.................................................................... 31
K. STATE REGULATION.............................................................. 32
DIRECTORS AND EXECUTIVE OFFICERS....................................................... 33
EXECUTIVE COMPENSATION................................................................. 34
LEGAL PROCEEDINGS...................................................................... 36
LEGAL MATTERS.......................................................................... 36
EXPERTS................................................................................ 36
REGISTRATION STATEMENT................................................................. 36
FINANCIAL STATEMENTS OF MERRILL LYNCH LIFE INSURANCE COMPANY........................... 37
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> 3
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 generally applied at the
annuity date. 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> 4
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.
Renewal Date: The last day of each current Guarantee Period which is also the
first day of any new Guarantee Period to which subaccount value is transferred.
Interest will be credited to the current Guarantee Period until the business day
prior to the Renewal Date. Interest will be credited to any Guarantee Period to
which subaccount value is transferred beginning as of the Renewal Date.
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> 5
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.
On the Renewal Date, 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 timely 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
Renewal Date. 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, currently, upon
annuitization. Premium taxes, if any, will be deducted from the net account
value at the annuity date. In those jurisdictions that do not allow an insurance
company to reduce its current taxable premium income by the amount of any
withdrawal, surrender or death benefit paid, Merrill Lynch Life will also deduct
a charge for these taxes on any withdrawal, surrender or death benefit effected
under a certificate once regulatory approval has been obtained.
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 to any subaccount if
the annuity date is prior to the end of the Guarantee Period
5
<PAGE> 6
for that subaccount. For Certificates issued prior to January 9, 1995, and for
Certificates issued on or after that date but before state approvals are
obtained, a Market Value Adjustment will not be applied at the annuity date 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. In addition, a Market Value Adjustment 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. Currently, withdrawal charges do
not apply upon annuitization. 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 ($3,500 for certain qualified certificates), 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 18. 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 are subject to tax and prior to age
59 1/2 may also be subject to a 10% federal penalty tax. (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.
6
<PAGE> 7
FREE LOOK RIGHT
When the participant receives the Certificate, 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.
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
7
<PAGE> 8
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 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. 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
On each subaccount's Renewal Date, 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. The amount transferred will be
credited with the interest rate in effect on the Renewal Date for the subaccount
to which the amount is transferred. 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 Renewal Date. Prior to
the Renewal Date, 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. Under
current administrative procedures, if instructions are not received by the fifth
business day after the Renewal Date, 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 until the fifth
business day after the Renewal Date. If it has been chosen, as of the Renewal
Date 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
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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, 1996, that the participant's annuity date is on
August 1, 2001, 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, 2001. 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, 2001. If the participant's 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 participant or annuitant upon written notice
received at Merrill Lynch Life's Service Center before the annuity date.
Withdrawals are subject to tax, and prior to age 59 1/2 may also be subject to a
10% federal 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.
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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.
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 Renewal Date, a Market Value Adjustment
will be made.
Second, a Market Value Adjustment will be applied at the annuity date to any
subaccount if the annuity date is prior to the end of the Guarantee Period for
that subaccount. For Certificates issued prior to January 9, 1995, and for
Certificates issued on or after that date but before state approvals are
obtained, a Market Value Adjustment will not be applied at the annuity date 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. Participants should refer to their Certificates to determine when a
Market Value Adjustment will be applied.
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
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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
4.75 years, the interpolated guaranteed interest rate will be equal to the sum
of one-fourth of the four year rate and three-fourths of the five year rate. If
the four year rate were 5.5% and the five year rate were 5.7%, the interpolated
rate would be 5.65%, 5.5% times .25 plus 5.7% times .75.
The amount of the market value adjustment is determined from the following
formula:
1 + B n/365
A X [ 1- ( -------- ) ]
1 + C
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 (if n/365 is less than 1, we will assume B is
equal to the rate for a one-year Guarantee Period), "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
1,734 days (4.75 years) remaining in the Guarantee Period and a guaranteed
interest rate of 5.4%. Assume also that the guaranteed interest rates currently
offered for Guarantee Periods of 4 and 5 years are 5.5% and 5.7%, respectively.
"B" is equal to 5.65%, the sum of 5.7% times .75 and 5.5% times .25. To
calculate the Market Value Adjustment Merrill Lynch Life divides the sum of 1
and "B", 1.0565, by the sum of 1 and the guaranteed interest rate for the
affected subaccount, 1.054. The resulting figure, 1.0023719, is then taken to
the "n"/365 power, or 4.75 (1,734/365), which is 1.0113168. 1.0113168 is
subtracted from 1 and the resulting figure, -.0113168, is multiplied by the
amount of the withdrawal, $20,000, to give -$226.34. 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 5.15%, instead of 5.65%,
the Market Value Adjustment would have been +$224.33, 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 -$1,483.75, -$2,454.32 and
-$3,459.19, 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 -$118.81 or
-$71.20, 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 on the Renewal Date where
prior written notice was received at Merrill Lynch Life's Service Center. The
charge is equal to six months of simple interest computed on the amount
withdrawn based on the guaranteed interest rate of the subaccount from which the
withdrawal is made. Thus, if the guaranteed interest rate is 6% per year, the
withdrawal charge will be 3%. 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 amount withdrawn is the net account value.
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For a partial withdrawal, the withdrawal charge will be deducted from the
remaining value of the subaccounts from which the withdrawal was made. For a
full withdrawal, the withdrawal charge is reflected in the net account value
distributed to the participant. Currently withdrawal charges do not apply upon
annuitization. However, Merrill Lynch Life reserves the right to apply the
withdrawal charge on annuitization to any subaccount if the annuity date is
prior to the end of the Guarantee Period for that subaccount. Withdrawal charges
also 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 5.6%,
the other with a Guarantee Period of three years and a guaranteed interest rate
of 5.45%, and each having a subaccount value of $5,000. Assume further that the
participant directs that the partial 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 22.20% 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 $888 (22.2% of $4,000) and the
withdrawal charge of $112 (.056% 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, $81.75
(5.45% divided by 2 times $3,000), resulting in a remaining subaccount value of
$1,408.25.
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"). 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 (i.e., 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. If no annuity option is chosen by the 60th day
following receipt of the certified death certificate, Merrill Lynch Life
reserves the right to automatically pay the death benefit in a lump sum.
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 participant and
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.
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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 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. Currently, withdrawal charges
do not apply upon annuitization. Current annuity 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. For Certificates issued prior to January
9, 1995, and for Certificates issued on or after that date but before state
approvals are obtained, a Market Value Adjustment will not be applied at the
annuity date 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.
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.
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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.
*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 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" projected forward to 1995 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
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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.
Misstatement of Age or Sex. If the age or sex of an annuitant is misstated,
annuity payments will be adjusted to reflect the correct age and sex. Any amount
overpaid as the result of such misstatement will be deducted from the next
payments due. Any amount underpaid will be paid in full with the next payment
due.
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 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. Merrill Lynch Life will not be
liable for following telephone instructions that it reasonably believes to be
genuine. 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.
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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.
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 2.0% of each premium. In addition, the maximum
compensation paid to the Financial Consultant for each reinvestment is 1.8% 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 4.5% 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 3.2% 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
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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.
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.
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FEDERAL TAXES
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.
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.
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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.
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. Possible Changes in Taxation
In past years, legislation has been proposed that would have adversely modified
the federal taxation of certain annuities. For example, one such proposal would
have changed the tax treatment of non-qualified annuities that did not have
"substantial life contingencies" by taxing income as it is credited to the
annuity. Although, as of the date of this prospectus, Congress is not actively
considering any legislation regarding the taxation of annuities, there is always
the possibility that the tax treatment of annuities could change by legislation
or other means (such as Internal Revenue Service regulation, revenue rulings,
judicial decisions, etc.). Moreover, it is also possible that any change could
be retroactive (that is, effective prior to the date of the change).
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j. 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 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.
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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 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. In those jurisdictions that do not allow
an insurance company to reduce its current taxable premium income by the amount
of any withdrawal, surrender or death benefit paid, Merrill Lynch Life will also
deduct a charge for these taxes on any withdrawal, surrender or death benefit
effected under a Certificate once regulatory approval has been obtained.
Participants should refer to their Certificates. Premium tax rates vary from
jurisdiction to jurisdiction and currently range from 0% to 5%.
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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
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.
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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"), a joint venture
between Merrill Lynch and The Equitable Life Assurance Society of the United
States ("the Equitable"), on July 31, 1986, and in October 1989, Merrill Lynch
purchased the remaining interest in TFG from the Equitable 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 1994, life insurance and annuity sales were
made in all states Merrill Lynch Life was licensed in, with the largest
concentration in Florida, 16%, Texas, 11%, and California, 10%, 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, 1994, approximately 11,054 agents affiliated
with Merrill Lynch Life Agencies were authorized to act for Merrill Lynch Life.
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,
----------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Investment Income................ $ 433,536 $ 586,461 $ 712,739 $ 787,603 $ 465,866
Earnings Before Federal Income Tax... $ 89,883 $ 72,775 $ 25,667 $ 14,068 $ 39,784
Net Earnings......................... $ 66,005 $ 47,860 $ 17,031 $ 11,608 $ 23,977
Total Assets......................... $11,604,074 $12,249,577 $11,783,961 $12,241,054 $8,806,682**
Stockholder's Equity................. $ 559,571 $ 687,055 $ 762,474 $ 741,314 $ 648,452
</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.
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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. The
legal barriers which have historically excluded the banking industry from the
sale of insurance and annuity products are in the process of being removed
through both legislative and judicial processes. Competition remains keen as
innovative products are introduced to the marketplace by both traditional and
non-traditional competitors.
Interest rates that had fallen over the previous three years reaching
historically low levels during the first quarter of 1994, significantly
increased during the last three quarters of 1994. The equity markets have seen
significant price volatility during 1994 with ending values approximating those
at December 31, 1993. During 1994, the increasing interest rate environment
resulted in a reduction of debt refinancings in both the institutional and
individual sectors. There has been a significant reduction in the use of the
call feature on corporate bonds and reduced principal repayments of mortgage
backed securities. The increase in interest rates and, to a certain extent, the
lengthening of the duration of callable corporate bonds and mortgage backed
securities, has resulted in a general decline in the market value of fixed
maturity securities portfolios.
Within the insurance industry, variable life insurance and variable annuity
sales continued to be strong during 1994. The increase in the marginal
individual income tax rates during 1993 has benefited the insurance industry as
individual investors seek tax advantaged investment options. However, with the
increase in interest rates and the volatility in the equity markets, individual
investors looking to satisfy retirement and estate planning needs through tax
advantaged investments have shown increased interest in traditional interest
sensitive insurance products.
Summary
Merrill Lynch Life sells variable and interest sensitive life insurance and
annuity products through Merrill Lynch & Co.'s retail network. Merrill Lynch
Life competes for Merrill Lynch & Co.'s clients' life insurance and annuity
business with non-affiliated insurers whose products are also sold through
Merrill Lynch & Co.'s retail network as well as insurers who solicit this
business directly. The product lines which Merrill Lynch Life offers are highly
competitive with most major life insurers offering similar products. Merrill
Lynch Life competes with these insurers by integrating its products into Merrill
Lynch & Co.'s planning based financial management program. Merrill Lynch Life
also seeks to provide superior customer service and financial management to
promote the competitiveness of its products. Merrill Lynch Life's customer
service centers have established standards of performance that are monitored on
a regular basis. Managers and employees in the customer service centers are
periodically evaluated based on their performance in meeting these standards.
Merrill Lynch Life's financial management is based on conservative investment
and liability management and regular monitoring of its risk profile.
Merrill Lynch Life has strategically placed its marketing emphasis on the sale
of variable annuities, modified guaranteed annuities and variable life insurance
products. These products primarily address the retirement and estate planning
needs of Merrill Lynch & Co.'s clients.
Both interest sensitive and variable deferred annuities currently provide
certain tax advantages which similar non-insurance investments do not possess.
Congress and the President of the United States have the ability to limit or
eliminate this tax advantage. Such actions could have significant consequences
on both the insurance industry and particularly Merrill Lynch Life in being able
to compete with non-insurance investment products.
Merrill Lynch Life's variable annuity product provides tax deferred savings with
the opportunity for diversified investing in a wide selection of underlying
mutual fund portfolios. Sales of the variable annuity product have increased
substantially since its introduction during the first quarter of 1992. Deposits
received from the sales of this product were $1.528 billion, $1.348 billion and
$169 million for 1994, 1993 and 1992, respectively. A significant portion of the
deposits received from sales of the variable annuity product were a result of
tax-free
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<PAGE> 25
exchanges from Merrill Lynch Life's fixed rate annuity products. For 1994, 1993
and 1992, approximately $763 million, $649 million and $80 million,
respectively, of deposits were a result of tax-free exchanges.
Merrill Lynch Life's modified guaranteed annuity product provides a guaranteed
fixed interest crediting rate for a period selected by the contract owner but
imposes a market value adjustment for withdrawals prior to the expiration of the
guarantee period. During 1994, as a result of the increasing interest rate
environment, there was renewed interest in the modified guaranteed annuity
product. Deposits received from the sales of this product were $319 million,
$153 million and $323 million for 1994, 1993 and 1992, respectively. For 1994,
1993 and 1992, approximately $209 million, $70 million and $239 million,
respectively, of deposits were a result of tax-free exchanges from Merrill Lynch
Life's fixed rate annuity products.
Merrill Lynch Life offers two primary types of variable life insurance. These
products allow the policyholder to allocate the cash value of the policy
indirectly to underlying diversified mutual fund portfolios. The first type of
variable life insurance product provides limited life insurance protection with
maximum cash value accumulation. The second type of variable life insurance
product adopts a universal life design and is primarily utilized in the clients'
estate planning strategies. The variable life insurance products were first
introduced during the fourth quarter of 1992. Sales of both products during
1994, 1993 and 1992 were approximately $63 million, $32 million and $3 million,
respectively.
During 1995, Merrill Lynch Life is anticipating a significant decrease in sales
volume of its variable annuity product due to an expected reduction in tax-free
exchanges from the fixed rate annuity products. It is anticipated that modified
guaranteed annuity sales will continue to increase reflecting renewed investor
demand for fixed interest products resulting from the current interest rate
environment. Current initiatives for the more effective utilization of variable
life insurance in the estate and retirement planning of Merrill Lynch & Co.'s
clients are also anticipated to enhance variable life insurance sales over the
long term.
During 1994, 1993 and 1992, Merrill Lynch Life had approximately $1.892 billion,
$1.269 billion and $1.300 billion, respectively, of fixed rate deferred
annuities that 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 also offered
those contract owners electing to surrender the opportunity to exchange their
contract for either a variable annuity or modified guaranteed annuity contract
issued by Merrill Lynch Life. The following table summarizes the contract
owners' selections for 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
--------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Renewed with an adjustment to the applicable
interest crediting rate...................... $ 309 16% $ 273 22% $ 195 15%
Exchanged into either the variable annuity
product or the modified guaranteed annuity
product...................................... 854 45% 453 36% 325 25%
Surrendered.................................... 729 39% 543 42% 780 60%
------ ----- ------ ----- ------ -----
Total.......................................... $1,892 100% $1,269 100% $1,300 100%
====== ===== ====== ===== ====== =====
</TABLE>
The rates of renewal, exchange and surrender experienced are consistent with
management's expectations. For 1995 and 1996, fixed rate deferred annuity
liabilities that will reach the expiration of their interest rate guarantee
period will decline significantly from the 1993 and 1994 levels to $453 million
and $193 million, respectively.
As described above, 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, many 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
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<PAGE> 26
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 that 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. In implementing this plan,
Merrill Lynch Life paid a $150 million and a $120 million dividend during 1994
and 1993, respectively, to MLIG.
On November 1, 1994, Merrill Lynch Life ceased utilizing the trading securities
classification as defined by Statement of Financial Accounting Standards 115
"Accounting for Certain Investments in Debt and Equity Securities". All
securities that were held on that date and had been classified as trading were
reclassified to available-for-sale at their estimated fair value. Fixed maturity
securities and equity securities reclassified at November 1, 1994 had a fair
value of $135 million and $7 million, respectively. Merrill Lynch Life recorded
net realized and unrealized investment gains (losses) related to this portfolio
of $(12) million and $8 million during the ten months ended October 31, 1994 and
the twelve months December 31, 1993, respectively.
Financial Condition
At December 31, 1994, Merrill Lynch Life's assets were $11.604 billion, or $646
million lower than the $12.250 billion at December 31, 1993. As previously
discussed, Merrill Lynch Life experienced significant increases in both contract
owner withdrawals and deposits; the excess of withdrawals over deposits during
1994 being the primary cause of the reduction in assets. Merrill Lynch Life
continued to concentrate its marketing emphasis on the sale of variable products
resulting in the reallocation of assets from the general account to the separate
account. As of December 31, 1994 and 1993, Merrill Lynch Life's percentage of
separate accounts assets to total assets was 50% and 38%, respectively. Merrill
Lynch Life anticipates that the percentage of separate accounts assets to total
assets will continue to increase.
As a result of the rising interest rate environment during 1994, Merrill Lynch
Life has experienced a reduction in the fair value of its available-for-sale
investment portfolios. At December 31, 1993 the unrealized gain recorded for the
fixed maturity securities available-for-sale portfolio was $228 million as
compared to a $146 million unrealized loss at December 31, 1994. After
adjustment of deferred policy acquisition costs, deferred federal income taxes
and policyholders' account balances the net increase in unrealized investment
losses during 1994 was $43 million.
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. The following schedule identifies
Merrill Lynch Life's general account invested assets by type:
<TABLE>
<S> <C>
Investment Grade Fixed Maturity Securities........................................... 72%
Policy Loans......................................................................... 20%
Non-Investment Grade Fixed Maturity Securities....................................... 5%
Mortgages Loans on Real Estate....................................................... 3%
Equity Securities.................................................................... 0%
Real Estate.......................................................................... 0%
-----
100%
=====
</TABLE>
Merrill Lynch Life's investment in collateralized mortgage obligations ("CMO")
and mortgage backed securities ("MBS") had a carrying value of $1.041 billion as
of December 31, 1994. At December 31, 1994, approximately 43% 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, 1994 and
1993 approximately $75 million and $174 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 that the investor is
willing to accept. It is this 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 that can be obtained from similarly rated corporate
securities.
During 1993, the historical low interest rate environment resulted in Merrill
Lynch Life experiencing increases in both calls of corporate bonds and
accelerated principal repayments of mortgage backed securities. However,
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<PAGE> 27
during 1994, as a result of the increasing interest rate environment, calls and
principal repayments declined significantly. During 1994 and 1993 approximately
$967 million and $2.077 billion, respectively, of proceeds from disposal of
fixed maturity securities was attributable to calls and mortgage backed security
repayments. This represented 45% and 62% for 1994 and 1993, respectively, of the
proceeds from disposal of fixed maturity securities. The net cash inflows from
the investment portfolios, including interest, calls, repayments and maturities,
were generally reinvested at lower yields during 1993 and higher yields during
1994, than the investments from which the cash inflows were generated.
During 1994 and 1993, Merrill Lynch Life foreclosed on two and eight commercial
mortgage loans, respectively, with carrying values of $5 million and $30
million. The carrying values approximate the fair values of the properties.
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 collateralized 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
collaterallized 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. Management anticipates that approximately $72 million of Merrill
Lynch Life's investment in mortgage loans as of December 31, 1994 will be either
restructured or foreclosed upon on or before the expiration of the loan term.
Merrill Lynch Life continues to carry reserves for potential losses from
mortgage loans.
During 1994, Merrill Lynch Life sold six real estate properties with a carrying
value of $22 million for a realized gain of $3 million.
As of December 31, 1994, Merrill Lynch Life had 90,160 life insurance and
annuity contracts in-force with interest rate guarantees. The estimated average
rate of interest credited on behalf of contract owners was 5.58% during 1994.
The liabilities related to insurance contracts with interest rate guarantees
were supported by invested assets with an estimated effective yield of 7.99%
during 1994.
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, 1994 and 1993, Merrill Lynch Life had accrued an
estimated liability for future guaranty fund assessments of $25 million and $28
million, respectively. Merrill Lynch Life regularly monitors public information
regarding insurer insolvencies and will adjust its estimated liability where
appropriate. (See Note 7 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.
Merrill Lynch Life anticipates a significant reduction in liquidity requirements
for funding of contractual obligations as compared to the requirements of the
previous three years. This is a result of the significant decline in the amount
of fixed rate deferred annuities that will reach the expiration of their
interest rate guarantee periods during 1995 as compared to 1992 through 1994.
However, the level of anticipated sales of Merrill Lynch Life's variable life
and annuity products will require that Merrill Lynch Life maintain substantial
liquidity levels for the funding of sales commissions and other underwriting
expenses. Merrill Lynch Life anticipates funding all its cash requirements
utilizing cash from operations, normal investment maturities and anticipated
calls and repayments, consistent with prior years. As of December 31, 1994,
Merrill Lynch Life's assets included $3.158 billion of cash, short-term
investments and investment grade publicly traded fixed maturity securities that
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
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<PAGE> 28
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 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 that 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 6 of the Notes to Financial
Statements for a complete explanation of these levels.) As of December 31, 1994
and 1993, based on the RBC formula, Merrill Lynch Life's total adjusted capital
level was in excess 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
exceed 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.
1994 compared to 1993
Merrill Lynch Life recorded net earnings of $66 million and $48 million for 1994
and 1993, respectively.
Net investment income and interest credited to policyholders' account balances
for 1994 as compared to 1993 have declined by approximately $153 million and
$141 million, respectively, resulting in a $12 million reduction in interest
spread. The reductions in net investment income, interest credited to
policyholders' account balances and interest spread are primarily attributable
to the reduction in fixed rate contracts in-force.
Merrill Lynch Life experienced net realized investment losses of $15 million
during 1994 as compared to net realized investment gains of $63 million during
1993. During 1994, there was significant volatility in the debt markets with
ending values generally being lower at December 31, 1994 than they were at
December 31, 1993. Reflecting the general declines in value, Merrill Lynch
Life's trading portfolios experienced $12 million of realized and unrealized
losses during the first ten months of 1994 as compared to $8 million of realized
and unrealized gains during 1993. As well, dispositions in the available for
sale portfolios resulted in substantially reduced net realized investment gains
during 1994 as compared to the same period during 1993. During 1994 and 1993,
Merrill Lynch Life established $5 million and $13 million, respectively, of
valuation allowances for mortgage loans on real estate and real estate available
for sale. Merrill Lynch Life sold real estate investments resulting in realized
gains (losses) of $3 million and $(2) million during 1994 and 1993,
respectively.
Policy charge revenue increased approximately $31 million during the current
year as compared to 1993. During 1994, the Company and MLAM entered into an
agreement pursuant to which MLAM paid to the Company a fee in an amount equal to
a portion of the annual gross investment advisory fees received by MLAM from
Merrill Lynch Series Fund, Inc. ("Series Fund") and Merrill Lynch Variable
Series Funds, Inc. ("Variable Series Funds"). The Company invests in the various
mutual fund portfolios of the Series Fund and the Variable Series Funds in
connection with the variable life insurance and variable annuities the Company
has in-force. The Company received $13 million of revenue as a result of this
agreement during
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<PAGE> 29
1994. The remaining increase is primarily attributable to the 85% increase in
policyholders' account balances, as compared to December 31, 1993, of the
variable annuity product.
The market value adjustment expense is attributable to Merrill Lynch Life's
modified guaranteed annuity product. This contract provision results in a market
value adjustment to the cash surrender value of those contracts that are
surrendered before the expiration of their interest rate guarantee period. Due
to the current lower level of interest rates as compared to the average
guaranteed interest rate of the in-force contracts, this market value adjustment
generally has resulted in an expense to Merrill Lynch Life. Merrill Lynch Life's
modified guaranteed annuity has experienced a decrease in surrenders during 1994
as compared to 1993. The decrease in surrender activity and the recent rise in
interest rates has resulted in the $25 million decrease in the market value
adjustment expense.
Reinsurance premium ceded increased approximately $1 million from $13 million
during 1993 to $14 million for the current period. This increase is primarily
attributable to the increase in average attained age of Merrill Lynch Life's
life insurance policyholders. As the average age of the policyholders increases,
the cost to Merrill Lynch Life of reinsurance increases.
Amortization of deferred policy acquisition costs declined $40 million during
the current period as compared with 1993. Merrill Lynch Life adjusts the
amortization of deferred policy acquisition costs based on realized investment
gains recognized on normal dispositions in Merrill Lynch Life's investment
portfolios. The decline in realized investment gains during the current period
as compared to 1993 contributed to the reduction in amortization of deferred
acquisition costs. Additionally, contributing to the decrease in amortization is
a decline in fixed annuity contracts in-force partially offset by the increase
in the variable annuity contracts in-force.
Insurance expenses and taxes decreased $13 million during the current period as
compared to 1993. Approximately $4 million of the decrease was attributable to a
period to period reduction in the amount of allowances established for future
assessments related to the rehabilitation of insolvent and/or impaired life
insurance companies. The remaining reduction in expenses is attributable to
operational efficiencies and the completion during 1993 of certain policy
administration system enhancements.
Merrill Lynch Life's effective federal income tax rate decreased from 34% during
1993 to 27% for 1994 principally as a result of recording an adjustment to prior
years' tax liabilities during the current period.
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 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 was 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 that 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 modified guaranteed annuity product. The
investment trading portfolio contributed $8.0 million of investment gains during
1993. During 1993 and 1992 Merrill Lynch Life established $13 million and $45
million, respectively, of valuation allowances for mortgage loans on real estate
and real estate available for sale. The remaining 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.
Merrill Lynch Life's modified guaranteed annuity has experienced an increase in
surrenders during 1993 as 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
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<PAGE> 30
$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 that guarantees a minimum death benefit. Merrill Lynch Life
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.
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 1994.
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
approximately $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.
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<PAGE> 31
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, 1994 invested assets
supporting Contract guarantees consisted of $3,868 million of fixed maturity
securities available for sale, $985 million of policy loans, $149 million of
mortgage loans on real estate, $17 million of equity securities available for
sale, and $13 million of real estate.
At December 31, 1994, Merrill Lynch Life's assets included $3,158 million of
cash, short-term investments and investment grade publicly traded fixed maturity
securities supporting Contract guarantees.
At December 31, 1994, approximately $1,191 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, 1994, approximately $276 million (7.1%) of Merrill Lynch Life's
fixed maturity securities 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.
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 1,800 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 $2.7 million, $2.8 million and $3.7 million during the
years ended December 31, 1994, 1993 and 1992, 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 $44.2 million, $55.8 million and $63.3
million for the years ended December 31, 1994, 1993 and 1992, 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 $84.2 million,
$67.1 million and $25.2 million during the years ended December 31, 1994, 1993
and 1992, respectively. (See "Distribution of the Contracts" on page 16.)
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<PAGE> 32
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 also perform services for affiliates of
Merrill Lynch Life, and their salaries are allocated among Merrill Lynch Life
and such affiliates. (See "Directors and Executive Officers" on page 35.)
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. Merrill Lynch
Insurance Group Services, Inc. ("MLIGS"), an affiliate of MLIG, owns office
space in Jacksonville, Florida. 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.
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 adopted 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. Insurance
companies are required to calculate their risk-based capital in accordance with
this formula and to include the results in their Annual Statement. It is
anticipated that these 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" on page 27.
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
32
<PAGE> 33
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 7 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.
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 (53)........................ Chairman of the Board, President, and Chief
Executive Officer
Joseph E. Crowne (48)........................ Director, Senior Vice President, Chief
Financial Officer, Chief Actuary, and
Treasurer
Barry G. Skolnick (43)....................... Director, Senior Vice President, General
Counsel, and Secretary
David M. Dunford (46)........................ Director, Senior Vice President, and Chief
Investment Officer
John C. R. Hele (36)......................... Director and Senior Vice President
Allen N. Jones (52).......................... Director
Robert J. Boucher (49)....................... 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 January 1994. Since February 1994, he has
held the position of Senior Vice President of Merrill Lynch, Pierce, Fenner &
Smith Incorporated. 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
33
<PAGE> 34
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, 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 also perform
services for affiliates of Merrill Lynch Life, and the salaries of all such
individuals are allocated among Merrill Lynch Life and such affiliates.
COMPENSATION TABLES AND OTHER INFORMATION
The following tables set forth information with respect to the 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, 1994 paid by Merrill Lynch Life exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION(1)
-------------------------- -----------------------------------
AWARDS PAYOUTS
----------------------- ---------
RESTRICTED LONG-TERM
STOCK SECURITIES INCENTIVE ALL
AWARDS UNDERLYING PLAN OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (2)(3)(4) OPTIONS PAYOUTS COMPENSATION
------------------------------ ---- ------- ------ --------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa 1994 $ 63,469 $267,383 $48,615 5,445 $ 0 7,292(6)
Chairman of the Board, President
and Chief Executive Officer
(Since February 1994)
Joseph E. Crowne 1994 111,150 177,840 33,345 1,245 0 5,002(6)
Senior Vice President, Chief 1993 109,800 219,600 32,940 1,017 0 5,766
Actuary and Chief Financial 1992 134,195 200,601 39,619 794 0 1,621
Officer 0
David M. Dunford 1994 162,575 157,930 34,838 1,301 0 4,181(6)
Senior Vice President, Chief 1993 159,950 173,660 41,130 1,270 0 5,143
Investment Officer 1992 160,650 131,779 39,471 791 0 2,636
0
Robert J. Boucher 1994 112,625 193,715 40,545 1,514 0 5,406(6)
Senior Vice President, Variable 1993 107,000 192,600 38,520 1,190 0 6,583
Life Administration (Since May 1992 69,404 119,930 39,520 792 0 2,139
1992)
Barry G. Skolnick 1994 101,010 132,090 55,361 2,067 0(5) 4,662(6)
Senior Vice President, General 1993 84,150 153,000 51,638 1,591 0 5,701
Counsel 1992 81,167 88,269 49,604 986 12,018 2,491
</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 1995 for performance in
1994, in February 1994 for performance in 1993 and in February 1993 for
performance in 1992. 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, 1995, the effective date of the
grant for performance in 1994, was $37.25. Shares and units granted in
February 1995 vest three years following grant and are restricted from
transferability for an additional two years after vesting. Shares and units
granted in February 1994 have a four year vesting period, but may vest at
the end of the 1995 or
34
<PAGE> 35
1996 fiscal year based upon the achievement of a cumulative return on
equity of 60%. Shares and units granted in February 1993 vested following
the end of the 1994 fiscal year based upon the achievement of a cumulative
return on equity of 45%.
(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.
(4) The number and value of Restricted Shares and Restricted Units held by
executive officers named in the table as of December 31, 1994 are as
follows: Mr. Vespa (0 shares and 0 units); Mr. Crowne (973 shares and 972
units--$68,440); Mr. Dunford (1,065 shares and 1,064 units--$74,914); Mr.
Boucher (1,035 shares and 1,034 units--$72,803); and Mr. Skolnick (1,337
shares and 1,337 units--$94,091). These amounts do not include Restricted
Shares and Restricted Units awarded in 1995 for performance in 1994.
(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 1994 consist of the following: (i) contributions made in
1994 by Merrill Lynch Life to accounts of employees under the 401(k)
Savings and Investment Plan--Mr. Vespa ($608), Mr. Dunford ($1,394), Mr.
Boucher ($1,352) and Mr. Skolnick ($1,166); (ii) allocations made in 1994
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. Vespa ($6,684), Mr. Crowne
($2,223), Mr. Dunford ($2,787), Mr. Boucher ($4,054) and Mr. Skolnick
($3,496); and (iii) contributions made in 1994 to account of employee under
the Employee Stock Purchase Plan--Mr. Crowne ($2,779).
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
%
OF
TOTAL
OPTIONS
NUMBER GRANTED
OF TO
SECURITIES EMPLOYEES EXERCISE GRANT
UNDERLYING IN PRICE DATE
FISCAL OPTIONS FISCAL ($ PER EXPIRATION PRESENT
NAME YEAR(1) GRANTED YEAR SHARE) DATE(2) VALUE(3)
----------------------------- ---- -------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa............. 1994 5,445 .10% $35.1875 1/26/2005 $52,020
Joseph E. Crowne............. 1994 1,245 .02% $35.1875 1/26/2005 11,894
David M. Dunford............. 1994 1,301 .02% $35.1875 1/26/2005 12,429
Robert J. Boucher............ 1994 1,514 .03% $35.1875 1/26/2005 14,464
Barry G. Skolnick............ 1994 2,067 .04% $35.1875 1/26/2005 19,747
</TABLE>
---------------
(1) Reflects awards made in January 1995 for performance in 1994. Does not
include awards made in January 1994 for performance in 1993; these awards
were reflected in Merrill Lynch Life's Prospectus for the Contracts dated
May 1, 1994.
(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 ($35.1875) 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 25, 1995, the date of grant. The
assumptions used for the variables in the model were: 25% volatility (which
is the volatility of the Common Stock for the 36 months preceding grant); a
7.91% risk-free rate of return (which is the yield as of the date of grant
on a U.S. Treasury Strip (zero-coupon bond) maturing in February 2005 as
quoted in The Wall Street Journal); a 2.6% 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-marketability 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.
35
<PAGE> 36
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
SHARES AT FISCAL AT FISCAL
ACQUIRED YEAR-END YEAR-END(1)
ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------ -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Vespa.............. 0 $ 0 0 0 0 $ 0
Joseph E. Crowne.............. 0 0 1,252 3,076 5,979 7,517
David M. Dunford.............. 0 0 5,591 7,652 78,366 79,899
Robert J. Boucher............. 0 0 540 2,584 1,645 3,179
Barry G. Skolnick............. 0 0 1,941 4,516 20,762 22,676
</TABLE>
---------------
(1) This valuation represents the difference between $35.75, the closing price
of Merrill Lynch & Co. Common Stock on December 30, 1994 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 as of December 31, 1994 and 1993
and for each of the three years in the period ended December 31, 1994 included
in this Prospectus have been audited by Deloitte & Touche LLP, 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 LLP's principal business address
is Two World Financial Center, New York, New York 10281-1433.
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.
36
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, 1994
and 1993, and the related statements of earnings, stockholder's
equity, and cash flows for each of the three years in the period
ended December 31, 1994. 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 provide 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, 1994 and 1993, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1994 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
Accounting Standards No. 115.
/s/ Deloitte & Touche LLP
February 27, 1995
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
(Dollars in Thousands)
===============================================================================
<TABLE>
<CAPTION>
ASSETS 1994 1993
------------ ------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1994 - $4,014,272; 1993 - $5,369,236) $ 3,867,833 $ 5,597,359
Fixed maturity securities held for trading, at estimated fair value
(amortized cost: 1993 - $140,635) 0 144,035
Equity securities available for sale, at estimated fair value
(cost: 1994 - $15,946; 1993 - $24,424) 16,777 24,970
Equity securities held for trading, at estimated fair value
(cost: 1993 - $19,694) 0 20,585
Mortgage loans on real estate 149,249 191,214
Real estate available for sale
(accumulated depreciation: 1994 - $515; 1993 - $850) 12,955 29,761
Policy loans on insurance contracts 985,213 924,579
------------ ------------
Total Investments 5,032,027 6,932,503
CASH AND CASH EQUIVALENTS 139,087 122,218
ACCRUED INVESTMENT INCOME 95,133 120,337
DEFERRED POLICY ACQUISITION COSTS 466,334 318,903
FEDERAL INCOME TAXES - DEFERRED 38,919 16,878
REINSURANCE RECEIVABLES 1,832 1,190
RECEIVABLES FROM AFFILIATES - NET 3,113 789
OTHER ASSETS 28,656 21,481
SEPARATE ACCOUNTS ASSETS 5,798,973 4,715,278
------------ ------------
TOTAL ASSETS $11,604,074 $12,249,577
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
==============================================================================
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1993
------------ ------------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 5,148,971 $ 6,691,811
Claims and claims settlement expenses 26,177 20,295
------------ ------------
Total policy liabilities and accruals 5,175,148 6,712,106
OTHER POLICYHOLDER FUNDS 21,221 28,768
LIABILITY FOR GUARANTY FUND ASSESSMENTS 24,774 28,083
OTHER LIABILITIES 36,775 68,165
FEDERAL INCOME TAXES - CURRENT 2,274 10,122
SEPARATE ACCOUNTS LIABILITIES 5,784,311 4,715,278
------------ ------------
Total Liabilities 11,044,503 11,562,522
------------ ------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 535,450 637,590
Retained earnings 66,005 47,860
Net unrealized investment loss (43,884) (395)
------------ ------------
Total Stockholder's Equity 559,571 687,055
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $11,604,074 $12,249,577
============ ============
</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, 1994, 1993 AND 1992
(Dollars in Thousands)
==============================================================================
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 433,536 $ 586,461 $ 712,739
Net realized investment gains (losses) (14,543) 63,052 (29,639)
Policy charge revenue 126,284 95,684 81,653
------------ ------------ ------------
Total Revenues 545,277 745,197 764,753
------------ ------------ ------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 313,585 454,671 546,979
Market value adjustment expense 6,307 30,816 6,229
Policy benefits (net of reinsurance recoveries: 1994 - $6,338;
1993 - $6,004; 1992 - $5,555) 16,858 17,030 12,066
Reinsurance premium ceded 13,909 12,665 12,457
Amortization of deferred policy acquisition costs 69,662 109,456 88,795
Insurance expenses and taxes 35,073 47,784 72,560
------------ ------------ ------------
Total Benefits and Expenses 455,394 672,422 739,086
------------ ------------ ------------
Earnings Before Federal Income Tax Provision 89,883 72,775 25,667
------------ ------------ ------------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 22,503 20,112 28,549
Deferred 1,375 4,803 (19,913)
------------ ------------ ------------
Total Federal Income Tax Provision 23,878 24,915 8,636
------------ ------------ ------------
NET EARNINGS $ 66,005 $ 47,860 $ 17,031
============ ============ ============
</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, 1994, 1993 AND 1992
(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, 1992 $ 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 (3,279) (3,279)
------------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1993 2,000 637,590 47,860 ( 395) 687,055
Dividend to Parent (102,140) (47,860) (150,000)
Net earnings 66,005 66,005
Net unrealized investment loss (43,489) (43,489)
------------- ----------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 1994 $ 2,000 $ 535,450 $ 66,005 $ (43,884) $ 559,571
============= =========== =========== ============ =============
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, 1994, 1993 AND 1992
(Dollars in Thousands)
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 66,005 $ 47,860 $ 17,031
Adjustments to reconcile net earnings to net
cash and cash equivalents provided (used)
by operating activities:
Amortization of deferred policy acquisition
costs 69,662 109,456 88,795
Capitalization of policy acquisition costs (108,829) (91,189) (39,146)
Depreciation and amortization (4,516) 1,142 (16,033)
Net realized investment (gains) losses 14,543 (63,052) 29,639
Interest credited to policyholders' account balances 313,585 454,671 546,979
Provision for deferred Federal income tax 1,375 4,803 (19,913)
Cash and cash equivalents provided (used) by
changes in operating assets and liabilities:
Accrued investment income 25,204 18,460 6,018
Receivables from affiliates - net (2,324) (3,427) (20,027)
Policy liabilities and accruals 5,882 12,730 7,775
Federal income taxes - current (7,848) (19,888) 14,955
Other policyholder funds (7,547) 14,131 12,826
Liability for guaranty fund assessments (3,309) 979 16,439
Policy loans (60,634) (90,118) (126,925)
Investment trading securities 11,352 (145,972) 0
Other, net (39,206) 49,424 (6,269)
-------------- -------------- --------------
Net cash and cash equivalents provided
by operating activities 273,395 300,010 512,144
-------------- -------------- --------------
</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, 1994, 1993 AND 1992
(Concluded) (Dollars In Thousands)
==============================================================================
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Fixed maturity securities sold 845,227 571,337 1,281,705
Fixed maturity securities matured 1,323,705 2,776,992 2,206,447
Fixed maturity securities purchased (676,976) (1,866,857) (2,806,416)
Equity securities available for sale purchased (1,998) (8,983) (17,843)
Equity securities available for sale sold 18,868 6,451 44,188
Mortgage loans on real estate principal payments received 32,341 35,561 8,548
Mortgage loans on real estate acquired 0 (674) (853)
Real estate available for sale - improvements acquired (1,060) 0 (340)
Real estate available for sale sold 25,346 7,408 178
Interest rate swaps sold 0 0 2,302
Recapture of investment in Separate Accounts 0 29,389 0
Investment in Separate Accounts (15,212) (20,000) (3,841)
-------------- -------------- --------------
Net cash and cash equivalents provided
by investing activities 1,550,241 1,530,624 714,075
-------------- -------------- --------------
FINANCING ACTIVITIES:
Dividend paid to parent (150,000) (120,000) 0
Affiliated notes payable 0 0 (83,200)
Policyholders' account balances:
Deposits 966,861 814,314 217,410
Withdrawals (net of transfers to/from Separate Accounts) (2,623,628) (2,574,854) (1,338,034)
-------------- -------------- --------------
Net cash and cash equivalents used
by financing activities (1,806,767) (1,880,540) (1,203,824)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 16,869 (49,906) 22,395
CASH AND CASH EQUIVALENTS
Beginning of year 122,218 172,124 149,729
-------------- -------------- --------------
End of year $ 139,087 $ 122,218 $ 172,124
============== ============== ==============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 30,351 $ 40,000 $ 13,594
Intercompany interest $ 679 $ 737 $ 5,409
</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
(Dollars in Thousands)
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 non-participating 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 retail network of
Merrill Lynch Pierce, Fenner & Smith, Inc. ("MLPF&S"), a wholly
owned subsidiary of Merrill Lynch & Co..
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 4.00% - 8.30%
Interest sensitive deferred annuities 2.78% - 8.58%
Immediate annuities 4.00% - 10.00%
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.
Reinsurance: 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. The maximum amount of mortality risk
retained by the Company is approximately $500 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 $912 that can be
drawn upon for delinquent reinsurance recoverables.
<PAGE>
As of December 31, 1994, the Company had life insurance in-
force which was ceded to other life insurance companies of
$2,027,303.
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 are 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 an unaffiliated insurer. 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,:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 139,647 $ 150,450 $ 160,235
Capitalized amounts 12,517 6,987 6,060
Interest accrued 12,582 13,136 15,401
Amortization (31,358) (30,926) (31,246)
----------- ----------- -----------
Ending balance $ 133,388 $ 139,647 $ 150,450
=========== =========== ===========
</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.
1995 $17,840
1996 16,056
1997 12,488
1998 8,925
1999 8,399
Investments: Effective December 31, 1993, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"). In compliance with SFAS No. 115,
the Company, at December 31, 1993, 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. If a decline in value of a security
is determined by
<PAGE>
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 represented securities that were managed
with an investment objective to maximize total return
subject to the Company's quality guidelines. Investments in
this portfolio consisted primarily of marketable fixed
maturity and equity investments. These securities were
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 permits 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 has not utilized this
classification since the adoption of SFAS No. 115.
During 1994, the Company ceased utilizing the trading
securities classification. All securities that were classified
as trading securities on November 1, 1994 were transferred to
the available for sale classification at their respective
estimated fair values on that date. The difference between the
market value at November 1, 1994 and par value will be
amortized into income based on the Company's premium
amortization and discount accrual policies.
In compliance with a Securities and Exchange Commissions
("SEC") staff announcement, the Company has recorded certain
adjustments to deferred policy acquisition costs and
policyholders' account balances in connection 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
stockholder's equity. The following reconciles the net
unrealized investment gain (loss) as of December 31,:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale $(146,439) $ 228,123
Equity securities available for sale 831 546
Deferred policy acquisition costs 72,220 (36,044)
Federal income taxes - deferred 23,629 213
Separate Account Assets (549) 0
----------- -----------
(50,308) 192,838
----------- -----------
Liabilities:
Policyholders' account balances (6,424) 193,233
----------- -----------
Stockholder's equity:
Net unrealized investment loss $ (43,884) $ (395)
=========== ===========
</TABLE>
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. For
equity securities, dividends are recognized on the ex-dividend
date. 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
<PAGE>
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.
During 1994, the Company adopted SFAS No. 119, "Disclosure
about Derivative Financial Instruments and Fair Value of
Financial Instruments" ("SFAS No. 119"). SFAS No. 119 requires
increased disclosures regarding derivative financial
instruments. SFAS No. 119 defines derivative financial
instruments as futures, forward, swap and option contracts or
other financial instruments with similar characteristics. As of
December 31, 1994, the Company holds only interest rate swap
contracts.
The Company has outstanding certain interest rate swap
contracts which are carried at estimated fair value and
recorded as a component of fixed maturity securities available
for sale. Interest income, realized gains and losses and
unrealized gains and losses are recorded on the same basis as
fixed maturity securities available for sale.
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 recognizes income from mortgage loans on real
estate based on the cash payment interest rate of the loan,
which may be different from the accrual interest rate of the
loan for certain outstanding mortgage loans. The Company will
recognize a realized gain at the date of the satisfaction of
the loan at contractual terms for loans where there is a
difference between the cash payment interest rate and the
accrual interest rate. For all loans the Company stops accruing
income when an interest payment default either occurs or is
probable.
The Company has previously made commercial mortgage loans
collateralized by real estate and direct investments in
commercial 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 vacancy rates in excess of
historical averages, 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. 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") which was amended during 1994 by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures". SFAS No. 114, as amended,
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 or losses. SFAS No.
114, as amended, 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, as amended, would be immaterial.
<PAGE>
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. 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.
Federal Income Taxes: The results of 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.
The Company accounts for Federal Income Taxes in compliance
with 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.
Separate Accounts: The Separate Accounts are established in
conformity with Arkansas insurance law, the Company's
domiciliary state, and are generally not 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.
Postretirement Benefits Other Than Pensions: The Company
accounts for postretirement benefits in compliance with 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.
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.
Reclassifications: To facilitate comparisons with the current
year, certain amounts in the prior years have been
reclassified.
<PAGE>
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments which approximates
the estimated fair value of these financial instruments as of
December 31 are:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Assets:
Fixed maturity securities available for sale:
Securities (1) $ 3,866,886 $ 5,593,042
Interest rate swaps (2) 947 4,317
------------ ------------
Total fixed maturity securities available for sale 3,867,833 5,597,359
------------ ------------
Fixed maturity securities held for trading (1) 0 144,035
Equity securities available for sale (1) 16,777 24,970
Equity securities held for trading (1) 0 20,585
Mortgage loans on real estate (3) 149,249 191,214
Policy loans on insurance contracts (4) 985,213 924,579
Cash and cash equivalents (5) 139,087 122,218
Receivables from affiliates - net (6) 3,113 789
Separate accounts assets (7) 5,798,973 4,715,278
------------ ------------
Total financial instruments recorded as assets $10,960,245 $11,741,027
============ ============
</TABLE>
(1) 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, 1994 and 1993, securities
without a readily ascertainable market value, having an
amortized cost of approximately $564,665 and $773,965, had
an estimated fair value of approximately $564,682 and
$819,866, respectively.
(2) Estimated fair values for the Company's interest rate
swaps are based on a discounted cashflow approach.
(3) The estimated fair value of mortgage loans on real estate
approximates the carrying value. See Note 1 for a
discussion of the Company's valuation process.
(4) 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.
(5) The estimated fair value of cash and cash equivalents
approximates the carrying value.
(6) The fair value of the Company's receivables from
affiliates is estimated at carrying value. These
borrowings are payable on demand and accrue a variable
interest rate based on LIBOR.
(7) Assets held in the Separate Accounts are carried at quoted
market values.
<PAGE>
NOTE 3. INVESTMENTS
The amortized cost (cost for equity securities) and estimated
fair value of investments in fixed maturity securities and
equity securities as of December 31 are:
<TABLE>
<CAPTION>
1994
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate debt $ 2,795,543 $ 20,378 $ 133,534 $ 2,682,387
Mortgage-backed securities 1,070,430 5,772 35,624 1,040,578
U.S. Government and agencies 139,513 1,059 4,392 136,180
Municipals 4,588 115 0 4,703
Foreign governments 4,198 0 213 3,985
------------ ----------- ----------- ------------
Total fixed maturity securities
available for sale $ 4,014,272 $ 27,324 $ 173,763 $ 3,867,833
============ =========== =========== ============
Equity securities available for sale:
Common stocks $ 8,489 $ 641 $ 632 $ 8,498
Non-redeemable preferred stocks 7,457 1,092 270 8,279
------------ ----------- ----------- ------------
Total equity securities available for sale $ 15,946 $ 1,733 $ 902 $ 16,777
============ =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
1993
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed maturity securities available for sale:
Corporate debt $ 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. Government and agencies 159,329 10,887 126 170,090
Municipals 12,912 922 0 13,834
------------ ----------- ----------- ------------
Total fixed maturity securities
available for sale $ 5,369,236 $ 250,687 $ 22,564 $ 5,597,399
============ =========== =========== ============
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>
The amortized cost and estimated fair value of fixed maturity
securities available for sale at December 31, 1994 by
contractual maturity are shown below:
<PAGE>
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Fixed maturity securities available for sale:
Due in one year or less $ 101,138 $ 102,400
Due after one year through five years 1,323,119 1,282,668
Due after five years through ten years 1,249,759 1,183,803
Due after ten years 269,826 258,384
------------ ------------
2,943,842 2,827,255
Mortgage-backed securities 1,070,430 1,040,578
Total fixed maturity securities ------------ ------------
available for sale $ 4,014,272 $ 3,867,833
============ ============
</TABLE>
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 may differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
The amortized cost and estimated fair value of fixed maturity
securities available for sale at December 31, 1994 by rating
agency equivalent are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
AAA $ 995,888 $ 964,385
AA 630,459 614,948
A 857,103 821,906
BBB 1,245,045 1,190,554
Non-investment grade 285,777 276,040
------------ ------------
$ 4,014,227 $ 3,867,833
============ ============
</TABLE>
The Company has entered 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, 1994 and 1993 was
approximately $30,000 and $149,250, respectively. The Company
has outstanding at December 31, 1994 three interest rate swap
contracts for which the Company pays the six month LIBOR
interest rate and receives a weighted average 9.8%. The
outstanding interest rate swap contracts at December 31, 1994
will expire at various times during 1996. The average unexpired
term at December 31, 1994 and 1993 was 1.2 years and 3.2 years,
respectively. All three interest rate swap contracts were with
investment grade counterparties at December 31, 1994.
There are no outstanding matched swaps in a loss position at
December 31, 1994 and 1993. During 1994, 1993 and 1992, a net
investment gain of approximately $470, $0 and $2,302,
respectively, was recorded in connection with interest rate
swap activity.
During 1994, 1993 and 1992, the Company did not enter into
either matched or unmatched interest rate swap arrangements and
did not act as an intermediary or broker in interest rate
swaps.
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,:
<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Proceeds $ 2,168,932 $ 3,348,329 $ 3,488,152
Realized investment gains 8,398 71,599 51,925
Realized investment losses 9,823 4,126 36,018
</TABLE>
During 1994, the Company ceased utilizing the trading
securities classification. At the date of this action, the
securities classified as trading were transferred to the
available for sale portfolio at their estimated fair value. The
estimated fair value of fixed maturity securities and equity
securities transferred at the date of transfer was $134,984 and
$6,989, respectively. At the date of transfer, amortized cost
exceeded estimated fair value by $2,995. During 1994 and 1993,
approximately $(7,285) and $4,291, respectively, of unrealized
holding gains (losses) from investment trading securities were
recorded in net realized investment gains/(losses).
The Company had investment securities of $26,651 and $28,702
held on deposit with insurance regulatory authorities at
December 31, 1994 and 1993, respectively.
At December 31, 1994, the Company retained $14,662 in the
Separate Accounts, including unrealized losses of $549. The
investments in the Separate Accounts are 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's investment in mortgage loans on real estate are
principally collateralized by commercial real estate. At
December 31, 1994, the largest concentrations of commercial
real estate mortgage loans, as measured by the outstanding
principal balance, are for properties located in California
($53,282 or 28%), Illinois ($28,294 or 15%) and Rhode Island
($19,769 or 10%).
The carrying value and established valuation allowances of
impaired mortgage loans on real estate as of December 31, 1994
and 1993 are shown below:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Carrying value $71,973 $63,952
Valuation allowance 40,070 45,924
</TABLE>
For the years ended December 31, 1994 and 1993, $4,652 and
$29,555, 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>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities $ 368,023 $ 511,655 $ 652,136
Equity securities 2,408 4,143 4,813
Mortgage loans on real estate 15,014 20,342 25,954
Real estate available for sale 406 32 1,004
Policy loans on insurance contracts 50,232 46,129 40,843
Other 5,489 11,135 5,924
---------- ---------- ----------
Gross investment income 441,572 593,436 730,674
Less expenses (8,036) (6,975) (17,935)
---------- ---------- ----------
Net investment income $ 433,536 $ 586,461 $ 712,739
========== ========== ==========
</TABLE>
<PAGE>
Net realized investment gains (losses), including changes in
valuation allowances, for the years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities available for sale $ (1,425) $ 67,473 $ 15,907
Fixed maturity securities held for trading (11,889) 5,562 0
Equity securities available for sale 1,490 22 (3,051)
Equity securities held for trading (580) 2,587 0
Mortgage loans on real estate (4,967) (9,310) (42,997)
Real estate available for sale 2,828 (4,733) (1,800)
Other 0 1,451 2,302
---------- ---------- ----------
Net realized investment gains (losses) $ (14,543) $ 63,052 $ (29,639)
========== ========== ==========
</TABLE>
The following is a reconciliation of the change in valuation
allowances which have been deducted in arriving at investment
carrying values, as presented in the balance sheet, and changes
thereto of the following classifications of investments for the
years ended December 31,:
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to Write - End
of Year Operations Downs of Year
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage loans on real estate:
1994 $ 45,924 $ 4,966 $ 10,820 $ 40,070
1993 55,610 9,310 18,996 45,924
1992 14,413 42,997 1,800 55,610
Real estate available for sale:
1994 7,628 0 1,862 5,766
1993 4,300 3,328 0 7,628
1992 4,500 1,800 2,000 4,300
</TABLE>
The Company held investments at December 31, 1994 of $20,391
which have been non-income producing for the preceding twelve
months.
The Company has restructured the terms of certain of its
investments in fixed maturity securities and mortgage loans on
real estate during 1994 and 1993. 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>
1994 1993
-------- --------
<S> <C> <C>
Fixed maturity securities:
Amortized cost $ 1,134 $ 3,743
Expected income 189 916
Actual income 112 103
Equity interest received 28 1,833
Mortgage loans on real estate:
Amortized cost less valuation allowance 49,595 79,624
Expected income 4,673 6,859
Actual income 3,725 5,076
</TABLE>
During 1994, the Company committed to participate in a limited
partnership that invests in leveraged transactions. As of
December 31, 1994 no funds had been advanced towards the
Company's $10,000 commitment to the limited partnership.
NOTE 4. FEDERAL INCOME TAXES
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 years ended December 31,:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ---------
<S> <C> <C> <C>
Provision for income taxes computed at Federal
statutory rate $ 31,459 $ 25,471 $ 8,726
Increase (decrease) in income taxes resulting from:
Federal tax rate increase (631)
Dividend received deduction (7,363) (28) (33)
Other (218) 103 (57)
---------- ---------- ---------
Federal income tax provision $ 23,878 $ 24,915 $ 8,636
========== ========== =========
</TABLE>
The Federal statutory rate for 1994, 1993 and 1992 was 35%, 35%
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 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ---------
<S> <C> <C> <C>
Deferred policy acquisition costs $ 6,416 $ (9,030) $(17,633)
Policyholders' account balances 5,322 6,433 21,301
Estimated liability for guaranty fund assessments (153) (1,066) (2,735)
Investment adjustments 3,276 7,941 (21,875)
Other (13,486) 525 1,029
Deferred Federal income tax ---------- ---------- ---------
provision (benefit) $ 1,375 $ 4,803 $(19,913)
========== ========== =========
</TABLE>
<PAGE>
Deferred tax assets and liabilities as of December 31, are
determined as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Deferred tax assets:
Policyholders' account balances $ 94,153 $ 99,475
Net unrealized investment losses 23,629 213
Investment adjustments 16,320 19,596
Estimated liability for guaranty fund assessments 7,580 7,427
---------- ----------
Total deferred tax asset 141,682 126,711
---------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs 99,041 92,625
Other 3,722 17,208
---------- ----------
Total deferred tax liability 102,763 109,833
---------- ----------
Net deferred tax asset $ 38,919 $ 16,878
========== ==========
</TABLE>
The Company anticipates that all deferred tax assets will be
realized, therefore no valuation allowance has been provided.
NOTE 5. 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 $44,176, $55,843 and $63,300 for the years ended
December 31, 1994, 1993 and 1992, respectively. The Company is
allocated interest expense on its accounts payable to MLIG
which approximates the daily Federal funds rate. Total
intercompany interest paid was $679, $737 and $5,409 for 1994,
1993 and 1992, 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. Charges attributable to this agreement and
allocated to the Company by MLIG were $2,732, $2,800 and $3,700
for the years ended December 31, 1994, 1993 and 1992,
respectively.
During 1994, the Company and MLAM entered into an agreement
pursuant to which MLAM paid to the Company a fee in an amount
equal to a portion of the annual gross investment advisory fees
received by MLAM from Merrill Lynch Series Fund, Inc. ("Series
Fund") and Merrill Lynch Variable Series Funds, Inc. ("Variable
Series Funds"). The Company invests in the various mutual fund
portfolios of the Series Fund and the Variable Series Funds in
connection with the variable life insurance and variable
annuities the Company has in-force. The Company received $12,600
of revenue as a result of this agreement during 1994.
The Company has a general agency agreement with Merrill Lynch
Life Agency Inc. ("MLLA") whereby registered representatives of
MLPF&S who are the 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 $84,231, $67,102 and $25,158 for
1994, 1993 and 1992, 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
<PAGE>
transaction. 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 was approximately $4,025.
The Company has entered into certain interest rate swap
contracts with Merrill Lynch Capital Services, Inc. ("MLCS")
with a guarantee from Merrill Lynch & Co.. As of December 31,
1994 and 1993, the notional amount of interest rate swap
contracts outstanding were $10,000 and $109,250, respectively.
During 1994 the Company and MLCS terminated certain interest
rate swap contracts resulting in the Company paying a net
consideration of $2,043. Net interest received from these
interest rate swap contracts was $2,096, $6,876, and $9,849 for
the years ended December 31, 1994, 1993 and 1992, respectively.
(See Note 3)
During 1993 and 1992, the Company allowed the recapture of
certain policies previously indemnity reinsured by the Company
from Family Life Insurance Company. 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 and $2,000 of policy reserves during 1993 and 1992,
respectively. During 1994 certain adjustments to the 1993
assumption reinsurance transactions resulted in a transfer of
$9,299 of policy reserves from ML Life to the Company.
NOTE 6. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
During 1994 and 1993, the Company paid dividends of $150,000
and $120,000, respectively, to MLIG. Of these stockholder's
dividends, $112,779 and $75,012, respectively, were
extraordinary dividends as defined by Arkansas Insurance Law
and were paid pursuant to approval granted by the Arkansas
Insurance Commissioner.
At December 31, 1994 and 1993, approximately $26,243 and
$37,221, respectively, of stockholder's equity was available
for distribution to MLIG. Statutory capital and surplus at
December 31, 1994 and 1993, was $264,432 and $374,209,
respectively.
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,
1994, 1993 and 1992 was $42,382, $45,604 and $60,140,
respectively.
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.
<PAGE>
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, 1994 and 1993, based on the RBC formula, the
Company's total adjusted capital level was 270% and 279%,
respectively, of the basic RBC level.
NOTE 7. 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 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, 1994 and 1993, the Company has established an
estimated liability for future guaranty fund assessments of
$24,774 and $28,083 respectively. The Company regularly
monitors public information regarding insurer insolvencies and
will adjust its estimated liability when 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> 37
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 6.0%. Table 2 assumes the premium is allocated to
a subaccount with a 5 year Guarantee Period with a guaranteed rate of 5.60%. The
Market Value Adjustments are based on interpolated current interest rates
(defined in the Contract as "B") of 4.0%, 6.0% and 8.0% in the 10 year guarantee
table (see Table 1 below) and 3.60%, 5.60% and 7.60% 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>
----------------------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT INTEREST RATES OF:
----------------------------------------------------------------------------------------------------------
4.0% 6.0% 8.0%
--------------------------------- -------------------------------- --------------------------------
MARKET MARKET MARKET
END OF SUB- 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
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,600 1,914 364 12,150 -0- 309 10,291 (1,601) 262 8,737
2 11,236 1,787 379 12,644 -0- 327 10,909 (1,521) 283 9,432
3 11,910 1,643 395 13,158 -0- 347 11,563 (1,423) 305 10,181
4 12,625 1,479 411 13,693 -0- 368 12,257 (1,304) 330 10,991
5 13,382 1,294 427 14,249 -0- 390 12,992 (1,162) 356 11,864
6 14,185 1,088 445 14,828 -0- 413 13,772 (994) 384 12,807
7 15,036 857 463 15,430 -0- 438 14,598 (797) 415 13,824
8 15,938 600 482 16,057 -0- 464 15,474 (568) 448 14,922
9 16,895 315 501 16,709 -0- 492 16,403 (304) 483 16,108
10 17,908 -0- -0- 17,908 -0- -0- 17,908 -0- -0- 17,908
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 2
<TABLE>
---------------------------------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENTS, WITHDRAWAL CHARGES AND NET SUBACCOUNT VALUE BASED ON
INTERPOLATED CURRENT INTEREST RATES OF:
---------------------------------------------------------------------------------------------------------
3.6% 5.6% 7.6%
---------------------------------- ---------------------------------- ---------------------------------
MARKET MARKET MARKET
END OF SUB- 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
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,560 815 310 11,065 -0- 288 10,272 (744) 267 9,548
2 11,151 639 321 11,470 -0- 304 10,848 (595) 288 10,269
3 11,776 446 333 11,889 -0- 321 11,455 (422) 309 11,044
4 12,435 233 345 12,324 -0- 339 12,097 (225) 333 11,878
5 13,132 -0- -0- 13,132 -0- -0- 13,132 -0- -0- 13,132
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE> 38
The formulas used in determining the amounts shown in the above tables are as
follows:
<TABLE>
<S> <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
