<PAGE> 1
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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, 1996
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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<PAGE> 2
PART I Financial Information
<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,
1996 1995
------------------ ------------------
<S> <C> <C>
INVESTMENTS:
Fixed maturity securities available for sale, at estimated fair value
(amortized cost: 1996 - $3,477,454; 1995 - $3,648,983) $ 3,549,678 $ 3,807,870
Equity securities available for sale, at estimated fair value
(cost: 1996 - $15,224; 1995 - $19,683) 18,011 21,433
Mortgage loans on real estate 116,364 121,248
Real estate held for sale 8,054 5,874
Policy loans on insurance contracts 1,049,219 1,039,267
------------------ ------------------
Total Investments 4,741,326 4,995,692
CASH AND CASH EQUIVALENTS 156,586 48,924
ACCRUED INVESTMENT INCOME 93,774 91,942
DEFERRED POLICY ACQUISITION COSTS 376,473 372,418
FEDERAL INCOME TAXES - DEFERRED 9,563 2,222
REINSURANCE RECEIVABLES 2,195 1,552
OTHER ASSETS 77,740 54,900
SEPARATE ACCOUNTS ASSETS 6,951,361 6,834,353
------------------ ------------------
TOTAL ASSETS $ 12,409,018 $ 12,402,003
================== ==================
</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,
1996 1995
------------------ ------------------
<S> <C> <C>
LIABILITIES:
POLICY LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 4,696,853 $ 4,851,718
Claims and claims settlement expenses 35,245 29,812
------------------ ------------------
Total policy liabilities and accruals 4,732,098 4,881,530
OTHER POLICYHOLDER FUNDS 11,143 13,607
LIABILITY FOR GUARANTY FUND ASSESSMENTS 19,696 21,144
OTHER LIABILITIES 81,083 53,566
FEDERAL INCOME TAXES - CURRENT 10,134 7,033
AFFILIATED PAYABLES - NET 6,352 2,429
SEPARATE ACCOUNTS LIABILITIES 6,947,754 6,825,857
------------------ ------------------
Total Liabilities 11,808,260 11,805,166
------------------ ------------------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value - 200,000 shares
authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 501,455 501,455
Retained earnings 96,919 76,482
Net unrealized investment gain 384 16,900
------------------ ------------------
Total Stockholder's Equity 600,758 596,837
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 12,409,018 $ 12,402,003
================== ==================
</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,
---------------------------------------
1996 1995
------------------ ------------------
<S> <C> <C>
REVENUES:
Investment revenue:
Net investment income $ 86,909 $ 97,580
Net realized investment gains (losses) 6,728 (62)
Policy charge revenue 38,958 34,090
------------------ ------------------
Total Revenues 132,595 131,608
------------------ ------------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 61,598 68,356
Market value adjustment expense 3,631 218
Policy benefits (net of reinsurance recoveries: 1996 - $2,113;
1995 - $1,834) 5,529 4,768
Reinsurance premium ceded 3,761 3,428
Amortization of deferred policy acquisition costs 16,944 17,298
Insurance expenses and taxes 12,008 10,249
------------------ ------------------
Total Benefits and Expenses 103,471 104,317
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Earnings Before Federal Income Tax Provision 29,124 27,291
FEDERAL INCOME TAX PROVISION:
Current 7,134 8,323
Deferred 1,553 1,225
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Total Federal Income Tax Provision 8,687 9,548
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NET EARNINGS $ 20,437 $ 17,743
================== ==================
</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 gain (loss) equity
---------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 2,000 $ 535,450 $ 66,005 $ (43,884) $ 559,571
Dividend to Parent 0 (33,995) (66,005) 0 (100,000)
Net earnings 0 0 76,482 0 76,482
Net unrealized investment gain 0 0 0 60,784 60,784
---------- ---------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1995 2,000 501,455 76,482 16,900 596,837
Net earnings 0 0 20,437 0 20,437
Net unrealized investment loss 0 0 0 (16,516) (16,516)
---------- ---------- ---------- ----------- -------------
BALANCE, MARCH 31, 1996 $ 2,000 $ 501,455 $ 96,919 $ 384 $ 600,758
========== ========== ========== =========== =============
</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,
---------------------------------------
1996 1995
------------------ ------------------
<C> <C>
OPERATING ACTIVITIES:
Net earnings $ 20,437 $ 17,743
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred policy acquisition costs 16,944 17,298
Capitalization of policy acquisition costs (10,371) (15,772)
Depreciation, accretion and amortization of investments (1,336) (1,777)
Net realized investment (gains) losses (6,728) 62
Interest credited to policyholders' account balances 61,598 68,356
Provision for deferred Federal income tax 1,553 1,225
Cash and cash equivalents provided (used) by changes in
operating assets and liabilities:
Accrued investment income (1,832) (3,369)
Claims and claims settlement expenses 5,433 648
Federal income taxes - current 3,101 8,323
Other policyholder funds (2,464) (7,156)
Liability for guaranty fund assessments (1,448) (1,714)
Affiliated payables 3,923 7,002
Policy loans (9,952) (6,749)
Other, net 4,032 1,203
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Net cash and cash equivalents provided by operating activities 82,890 85,323
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INVESTING ACTIVITIES:
Fixed maturity securities sold 328,197 263,924
Fixed maturity securities matured 154,340 108,699
Fixed maturity securities purchased (303,767) (294,374)
Equity securities available for sale sold 6,452 0
Equity securities available for sale purchased (1,641) 0
Mortgage loans on real estate principal payments received 275 10,107
Real estate held for sale sold 2,857 3,457
Investment in Separate Accounts (226) (185)
Recapture of investment in Separate Accounts 5,323 3,056
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Net cash and cash equivalents provided by investing activities 191,810 94,684
------------------ ------------------
</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,
---------------------------------------
1996 1995
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<C> <C>
FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 121,566 160,199
Withdrawals (includes transfers to/from Separate Accounts) (288,604) (319,920)
------------------ ------------------
Net cash and cash equivalents used by financing activities (167,038) (159,721)
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NET INCREASE IN CASH AND
CASH EQUIVALENTS 107,662 20,286
CASH AND CASH EQUIVALENTS:
Beginning of year 48,924 139,087
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End of period $ 156,586 $ 159,373
================== ==================
Supplementary Disclosure of Cash Flow Information:
Cash paid for:
Federal income taxes $ 4,033 $ 0
Intercompany interest $ 295 $ 273
</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)
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, 1996 and
1995 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 1995 Annual Report on Form 10-K ("1995 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, 1996 and December 31, 1995, was
$331 million and $304 million, respectively. For the three
months ended March 31, 1996 and 1995, statutory net income was
$20 million and $26 million, respectively.
NOTE 3. INVESTMENTS:
The Company's investments in debt and equity securities are
classified as available for sale and are recorded at fair value.
The Company is required to adjust deferred policy acquisition
costs and certain policyholder liabilities associated with
investments classified as available for sale. These adjustments
are recorded in stockholder's equity and assume that the
unrealized gain or loss on available for sale securities was
realized. These investments primarily support in-force, universal
life-type contracts. The following reconciles the net unrealized
investment gain recorded in stockholder's equity at March 31,
1996 and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
(In Thousands)
Assets:
Fixed maturity securities available for sale $ 72,225 $ 158,887
Equity securities available for sale 2,786 1,750
Deferred policy acquisition costs (6,413) (17,041)
Federal income taxes - deferred (207) (9,100)
Separate Account Assets 0 (164)
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68,391 134,332
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Liabilities:
Policyholders' account balances 68,007 117,432
------------------ ---------------
Stockholder's equity:
Net unrealized investment gain $ 384 $ 16,900
================== ===============
</TABLE>
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 1995
Financial Statements and Notes to Financial Statements and the
Management's Discussion and Analysis of Financial Condition and
Results of Operations filed in the 1995 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 1996 and 1995 were $122 million and $160
million, respectively. Investor demand experienced a shift to
variable annuity products from fixed rate interest products
during the first quarter of 1996 as compared to the first quarter
1995. During the first quarter 1996, interest rates were
approximately 170 basis points, on average, lower than for the
first quarter 1995. Management attributes the shift in investor
demand from fixed rate interest products to variable products to
the low interest rate environment and the generally rising equity
markets during the preceding year. The Company's modified
guaranteed annuity product, a fixed interest rate product,
experienced a $59 million (95%) decline in sales during the first
quarter of 1996 as compared to the same period during 1995.
Partially offsetting this decline in sales, variable annuity
deposits received during the first quarter of 1996 increased $28
million (38%) to $98 million as compared to the same period in
1995.
To fund all business activities, the Company maintains a high
quality and liquid investment portfolio. As of March 31, 1996,
the Company's assets included $3.1 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, 1996, approximately $233 million (6.6%) 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, 1996 and 1995, the
Company reported net earnings of $20 million and $18 million,
respectively.
Net investment income and interest credited to policyholders'
account balances for the three months ended March 31, 1996 as
compared to the same period in 1995 have declined by
approximately $11 million and $7 million, respectively, resulting
in a $4 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 gains (losses) increased approximately $7
million during the current quarter as compared to the same period
during 1995. The change in realized investment gains (losses) is
attributable to an increase of sales in the modified guaranteed
annuity investment portfolio to fund an increase in surrender
activity of the product and to normal sales activity from the
available for sale portfolios. The realized investment gains on
the sales activity reflects the declines in the interest rate
environment.
Policy charge revenue increased approximately $5 million during
the current three month period as compared to the same period in
1995. The 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 modified guaranteed 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. The
market value adjustment expense has increased $3 million during
the current three month period as compared to the same period
during 1995 primarily as a result increased surrender activity
attributable to the interest rate environment during 1996 as
compared to 1995. The market value adjustment expense generally
changes in an inverse relationship with the movement of interest
rates.
Policy benefits increased approximately $1 million from $5
million for the first three months of 1995 to $6 million for the
current three month period. This increase is primarily
attributable to normal reserve increases for the mortality
component of the Company's variable annuity product reflecting
the growth in contracts in-force.
Insurance expenses and taxes increased $2 million during the
current three month period as compared to the same period in
1995. Approximately $1 million of this increase is attributable
to an increase in non-capitalizable commission expense paid on in-
force life and annuity contracts. Additionally, $1 million of the
increase was attributable to a reduction in the amount of
expenses which were capitalized reflecting the decline in sales
volume of the Company's annuity products.
I-1
<PAGE> 3
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 5. Other Information.
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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 14, 1996
I-3
<PAGE> 5
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-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 3,549,678
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 18,011
<MORTGAGE> 116,364
<REAL-ESTATE> 8,054
<TOTAL-INVEST> 4,741,326
<CASH> 156,586
<RECOVER-REINSURE> 2,195
<DEFERRED-ACQUISITION> 376,473
<TOTAL-ASSETS> 12,409,018
<POLICY-LOSSES> 35,245
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 11,143
<POLICY-HOLDER-FUNDS> 4,696,853
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,000
<OTHER-SE> 598,758
<TOTAL-LIABILITY-AND-EQUITY> 12,409,018
0
<INVESTMENT-INCOME> 86,909
<INVESTMENT-GAINS> 6,728
<OTHER-INCOME> 38,958
<BENEFITS> 5,529
<UNDERWRITING-AMORTIZATION> 16,944
<UNDERWRITING-OTHER> 12,008
<INCOME-PRETAX> 29,124
<INCOME-TAX> 8,687
<INCOME-CONTINUING> 20,437
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,437
<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>
