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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED MARCH 31, 1995
COMMISSION FILE NUMBER 33-26322; 33-46827; 33-52254; 33-60290; 33-58303
MERRILL LYNCH LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
ARKANSAS 91-1325756
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
(609) 282-1429
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON 200,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A)
AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I Financial Information
I-1
<PAGE> 3
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Dollars in Thousands) (Unaudited)
==============================================================================
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1995 1994
-------------- --------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1995 - $3,937,111; 1994 - $4,014,272) $ 3,894,825 $ 3,867,833
Equity securities available for sale, at estimated fair value
(cost: 1995 - $15,946; 1994 - $15,946) 17,821 16,777
Mortgage loans on real estate 137,842 149,249
Real estate available for sale 11,427 12,955
Policy loans on insurance contracts 991,962 985,213
-------------- --------------
Total Investments 5,053,877 5,032,027
CASH AND CASH EQUIVALENTS 159,373 139,087
ACCRUED INVESTMENT INCOME 98,502 95,133
DEFERRED POLICY ACQUISITION COSTS 424,352 466,334
FEDERAL INCOME TAXES - DEFERRED 30,446 38,919
REINSURANCE RECEIVABLES 2,273 1,832
RECEIVABLES FROM AFFILIATES - NET 0 3,113
OTHER ASSETS 28,643 28,656
SEPARATE ACCOUNTS ASSETS 5,959,667 5,798,973
-------------- --------------
TOTAL ASSETS $ 11,757,133 $ 11,604,074
============== ==============
</TABLE>
See notes to financial statements. (Continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
(Concluded) (Dollars in Thousands) (Unaudited)
==============================================================================
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY March 31, December 31,
1995 1994
-------------- --------------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 5,101,317 $ 5,148,971
Claims and claims settlement expenses 26,825 26,177
-------------- --------------
Total policy liabilities and accruals 5,128,142 5,175,148
OTHER POLICYHOLDER FUNDS 14,065 21,221
LIABILITY FOR GUARANTY FUND ASSESSMENTS 23,060 24,774
OTHER LIABILITIES 38,405 36,775
FEDERAL INCOME TAXES - CURRENT 10,597 2,274
AFFILIATED PAYABLES 3,889 0
SEPARATE ACCOUNTS LIABILITIES 5,948,196 5,784,311
-------------- --------------
Total Liabilities 11,166,354 11,044,503
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 535,450 535,450
Retained earnings 83,748 66,005
Net unrealized investment loss (30,419) (43,884)
-------------- --------------
Total Stockholder's Equity 590,779 559,571
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 11,757,133 $ 11,604,074
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
(Dollars in Thousands) (Unaudited)
==============================================================================
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 97,580 $ 122,479
Net realized investment losses (62) (4,623)
Policy charge revenue 34,090 25,719
-------------- --------------
Total Revenues 131,608 143,575
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BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 68,356 91,060
Market value adjustment expense 218 4,731
Policy benefits (net of reinsurance recoveries: 1995 - $1,834;
1994 - $1,505) 4,768 3,666
Reinsurance premium ceded 3,428 3,563
Amortization of deferred policy acquisition costs 17,298 19,413
Insurance expenses and taxes 10,249 9,493
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Total Benefits and Expenses 104,317 131,926
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Earnings Before Federal Income Tax Provision 27,291 11,649
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 8,323 8,974
Deferred 1,225 (4,981)
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Total Federal Income Tax Provision 9,548 3,993
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NET EARNINGS $ 17,743 $ 7,656
============== ==============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands) (Unaudited)
==============================================================================
<TABLE>
<CAPTION>
Net
Additional unrealized Total
Common paid-in Retained investment stockholder's
stock capital earnings loss equity
---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 2,000 $ 637,590 $ 47,860 $ (395) $ 687,055
Dividend to Parent 0 (102,140) (47,860) 0 (150,000)
Net earnings 0 0 66,005 0 66,005
Net unrealized investment loss 0 0 0 (43,489) (43,489)
---------- ---------- ---------- ---------- -------------
BALANCE, DECEMBER 31, 1994 2,000 535,450 66,005 (43,884) 559,571
Net earnings 0 0 17,743 0 17,743
Net unrealized investment gain 0 0 0 13,465 13,465
---------- ---------- ---------- ---------- -------------
BALANCE, MARCH 31, 1995 $ 2,000 $ 535,450 $ 83,748 $ (30,419) $ 590,779
========== ========== ========== ========== =============
</TABLE>
See notes to financial statements.
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Unaudited)
==============================================================================
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1995 1994
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<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 17,743 $ 7,656
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 17,298 19,413
Capitalization of policy acquisition costs (15,772) (30,763)
Depreciation and amortization (1,777) (1,516)
Net realized investment losses 62 4,623
Interest credited to policyholders' account balances 68,356 91,060
Provision (benefit) for deferred Federal income tax 1,225 (4,981)
Cash and cash equivalents provided (used) by changes in
operating assets and liabilities:
Accrued investment income (3,369) (228)
Claims and claims settlement expenses 648 4,096
Federal income taxes - current 8,323 8,974
Other policyholder funds (7,156) (6,831)
Liability for guaranty fund assessments (1,714) (2,272)
Receivable / payable from affiliates - net 7,002 (293)
Change in policy loans (6,749) (11,448)
Change in investment trading securities 0 2,563
Other, net 1,203 (9,623)
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Net cash and cash equivalents provided by operating
activities 85,323 70,430
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INVESTING ACTIVITIES:
Fixed maturity securities sold 263,924 142,473
Fixed maturity securities matured 108,699 502,891
Fixed maturity securities purchased (294,374) (245,474)
Equity securities available for sale sold 0 6,768
Mortgage loans on real estate principal payments received 10,107 0
Real estate available for sale - improvements acquired 0 (271)
Real estate available for sale sold 3,457 0
Investment in Separate Accounts (185) 0
Recapture of investment in Separate Accounts 3,056 0
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Net cash and cash equivalents provided by investing
activities 94,684 406,387
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</TABLE>
See notes to financial statements (continued)
<PAGE>
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
(Concluded) (Dollars in Thousands) (Unaudited)
==============================================================================
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 160,199 290,789
Withdrawals (includes transfers to Separate Accounts) (319,920) (811,327)
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Net cash and cash equivalents used by financing activities (159,721) (520,538)
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 20,286 (43,721)
CASH AND CASH EQUIVALENTS:
Beginning of year 139,087 122,218
-------------- --------------
End of period $ 159,373 $ 78,497
============== ==============
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 0 $ 0
Intercompany interest $ 273 $ 199
</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 (UNAUDITED)
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NOTE 1: BASIS OF PRESENTATION:
Merrill Lynch Life Insurance Company (the "Company") is a wholly-
owned subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG").
The Company is an indirect wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch & Co."). The Company sells life
insurance and annuity products, including variable life insurance
and variable annuities.
The condensed financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, the unaudited financial statements presented herein
include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial
position and the results of operations in accordance with
generally accepted accounting principles for the periods
presented. Results for the three months ended March 31, 1995 and
1994 are not necessarily indicative of annual results. These
unaudited financial statements should be read in conjunction with
the financial statements and the notes thereto included in the
Company's 1994 Annual Report on Form 10-K ("1994 Report").
NOTE 2. STATUTORY ACCOUNTING PRACTICES:
The Company maintains its statutory accounting records in
conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of Arkansas and the
National Association of Insurance Commissioners. Statutory
capital and surplus at March 31, 1995 and December 31, 1994, was
$296.4 million and $264.4 million, respectively. For the three
months ended March 31, 1995 and 1994, statutory net income was
$26.5 million and $1.7 million, respectively.
NOTE 3. ACCOUNTING CHANGES:
In the first quarter of 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". SFAS No. 114 establishes accounting standards for
creditors to measure the impairment of certain loans. SFAS No.
118 amends SFAS No. 114 to allow creditors to use existing
methods for recognizing interest income on an impaired loan,
rather than the method originally required by SFAS No. 114. The
impact of these pronouncements on the Company's financial
statements as of March 31, 1995 was not material.
Item 2 Management's Narrative Analysis of the Results of
Operations
This Management's Narrative Analysis of the Results of Operations
should be read in conjunction with the accompanying unaudited
financial statements and notes thereto, in addition to the 1994
Financial Statements and Notes to Financial Statements and the
Management's Discussion and Analysis of Financial Condition and
Results of Operations filed in the 1994 Report.
Business Overview
The Company's earnings are principally derived from two sources;
the net investment income from investment of fixed rate life
insurance and annuity contract owner deposits less interest
credited to contract owners, commonly known as spread, and fees
charged to variable life insurance and variable annuity contract
owners. The costs associated with acquiring contract owner
deposits are amortized over the period in which the Company
anticipates holding those funds. In addition, the Company incurs
expenses associated with the maintenance of in-force contracts.
New life insurance premiums and annuity deposits received in the
first three months of 1995 and 1994 were $160 million and $291
million, respectively. During the first quarter of 1995, investor
demand continued to shift from variable annuity products to fixed
rate interest products contributing to the declines in variable
annuity sales for both the industry and the Company. Variable
annuity deposits received during the first quarter of 1995
decreased $195 million to $70 million as compared to the same
period in 1994. However, modified guaranteed annuity sales
increased $58 million from $4 million during the first quarter
1994 to $62 million during the first quarter 1995. The decline in
total life insurance and annuity deposits received during the
first three months of 1995 as compared to the same period in 1994
is reflective of increased competition by non-affiliated insurers
whose products are also sold through Merrill Lynch & Co.'s retail
distribution network.
During 1995, approximately $453 million of fixed deferred annuity
liabilities will reach the expiration of their interest rate
guarantee period. During the first three months of 1995,
approximately $170 million of these fixed deferred annuity
liabilities reached the expiration of their interest rate
guarantee period. At the expiration of an interest rate guarantee
period, the contract owner has an option to either surrender the
contract without incurring a surrender charge, or to "renew" with
an adjustment of the interest crediting rate to the prevailing
rate at the time of renewal. The Company has offered those
contract owners electing to surrender the opportunity to exchange
their contract for either a variable annuity or market value
adjusted annuity contract. The following table summarizes the
contract owners' selections for the first three months of 1995
and 1994:
<PAGE>
<TABLE>
<CAPTION>
1995 1994
---------------- ---------------
Amount % Amount %
------- ----- ------- -----
(Dollars in Millions)
<S> <C> <C> <C> <C>
Renewed with an adjustment to the
applicable interest crediting rate $ 37 22% $ 92 18%
Exchanged into either the variable annuity
product or the market value adjusted
annuity product offered by the Company 65 39% 238 47%
Surrendered 68 39% 175 35%
------- ---- ------- ----
Total $ 170 100% $ 505 100%
======= ==== ======= ====
</TABLE>
The rates of renewal, exchange and surrender experienced are
consistent with management's expectations.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of March 31, 1995,
the Company's assets included $3.328 billion of cash, short-term
investments and investment grade publicly traded fixed maturity
securities that could be liquidated if funds were required.
As of March 31, 1995, approximately $296 million (7.6%) of the
Company's fixed maturity securities were considered non-
investment grade. The Company defines non-investment grade as
unsecured corporate debt obligations which do not have a rating
equivalent to Standard and Poor's BBB or higher (or similar
rating agency), and are not guaranteed by an agency of the
federal government. Non-investment grade securities are
speculative and are subject to significantly greater risks
related to the creditworthiness of the issuers and the liquidity
of the market for such securities. The Company carefully selects,
and closely monitors, such investments.
Results of Operations
For the three month periods ended March 31, 1995 and 1994, the
Company reported net earnings of $18 million and $8 million,
respectively.
Net investment income and interest credited to policyholders'
account balances for the three months ended March 31, 1995 as
compared to the same period in 1994 have declined by
approximately $25 million and $23 million, respectively,
resulting in a $2 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.
Net realized investment losses decreased approximately $5 million
during the current quarter as compared to the same period during
1994. During the first quarter 1994, the Company's trading
portfolios experienced $7 million of realized and unrealized
losses. The Company ceased utilizing the trading portfolios
during the fourth quarter 1994. The remaining change in realized
investment losses is primarily attributable to normal sales
activity from the available for sale portfolios.
Policy charge revenue increased approximately $8 million during
the current three month period as compared to the same period in
1994. During the fourth quarter 1994, the Company and Merrill
Lynch Asset Management, L.P. ("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 $3
million of revenue as a result of this agreement during the first
quarter 1995. The remaining increase in policy charge revenue is
primarily attributable to the increase in policyholders' account
balances of the variable annuity product.
The market value adjustment expense is attributable to the
Company's market value adjusted annuity product. This contract
provision results in a market value adjustment to the cash
surrender value of those contracts which are surrendered before
the expiration of their interest rate guarantee period. Due to
the current lower level of interest rates as compared to the
average guaranteed interest rate of the inforce contracts, this
market value adjustment generally has resulted in an expense to
the Company. The Company's market value adjusted annuity has
experienced a decrease in surrenders during the first three
months of 1995 as compared to the same period during 1994. The
decrease in surrender activity and the recent rise in interest
rates has resulted in the $4 million decrease in the market value
adjustment expense.
Policy benefits increased approximately $1 million from $4
million for the first three months of 1994 to $5 million for the
current three month period. This increase is primarily
attributable to an increase in mortality claims during the
current three month period as compared to the same period during
1994.
Amortization of deferred policy acquisition costs declined $2
million during the current period as compared to the same period
during 1994. The decrease in amortization is primarily
attributable to a decline in fixed annuity contracts in-force
partially offset by the increase in the variable annuity
contracts in-force.
Insurance expenses and taxes increased $1 million during the
current three month period as compared to the same period in
1994. This increase is primarily attributable to an increase in
non-capitalizable commission expense paid on in-force life and
annuity contracts.
<PAGE>
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PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Financial Data Schedule.
(b) Reports on Form 8-K.
None.
I-2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY
/s/ JOSEPH E. CROWNE
-----------------------------------------
Joseph E. Crowne
Senior Vice President and
Chief Financial Officer
Date: May 12, 1995
I-3
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EXHIBIT INDEX
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Exhibit
No. Description
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27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 3,894,825
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 17,821
<MORTGAGE> 137,842
<REAL-ESTATE> 11,427
<TOTAL-INVEST> 5,053,877
<CASH> 159,373
<RECOVER-REINSURE> 2,273
<DEFERRED-ACQUISITION> 424,352
<TOTAL-ASSETS> 11,757,133
<POLICY-LOSSES> 26,825
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 14,065
<POLICY-HOLDER-FUNDS> 5,101,317
<NOTES-PAYABLE> 0
<COMMON> 2,000
0
0
<OTHER-SE> 588,779
<TOTAL-LIABILITY-AND-EQUITY> 11,757,133
0
<INVESTMENT-INCOME> 97,580
<INVESTMENT-GAINS> (62)
<OTHER-INCOME> 34,090
<BENEFITS> 4,768
<UNDERWRITING-AMORTIZATION> 17,298
<UNDERWRITING-OTHER> 10,249
<INCOME-PRETAX> 27,291
<INCOME-TAX> 9,548
<INCOME-CONTINUING> 17,743
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,743
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
